------------------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
------------------------------
Semi-Annual Report
April 30, 1997
<PAGE>
- -----------------
Kleinwort
Benson
Australian Report to Shareholders
Income Fund, Inc.
- -----------------
- --------------------------------------------------------------------------------
First Half Highlights
o Fund's monthly distribution maintained at $0.065 per share through December
1997.
o Australian cash rates reduced by the Reserve Bank of Australia from 6.5% to
6% in December (and to 5.5% in May).
o Australian underlying inflation remains low at 2.1% for the twelve months
ended March 1997.
o A$/US$ exchange rate at April 30, 1997 was 0.78.
o Yield spread between Australian and US 10 year government bonds was 110
basis points at April 30, 1997.
- --------------------------------------------------------------------------------
To Our Shareholders,
Following a strong year in 1995/96, the total value of the Fund decreased
moderately over the six months ended April 30, 1997, against a background of
weakening bond prices in Australia and a slightly weaker Australian dollar. The
currency did rise slightly in trade-weighted terms, but under performed a rising
US dollar which was bolstered by strong economic growth and rising short-term
interest rates. The New Zealand dollar also declined against the US dollar while
appreciating in trade-weighted terms and the New Zealand bond market softened
over the period as well.
Over the first half of its fiscal year, the Fund continued to meet its
primary objective of providing a high level of income. At April 30, 1997, the
Fund's closing market price was $9.00, a discount of 9.91% to its net
value asset of $9.99.
The monthly dividend was maintained at US$0.065 per share which provides a
current dividend yield of 8.67% based on the Fund's stock price at April 30,
1997. The income yield remains superior to that available on comparable US cash
and bond investments. For the six months ended April 30, 1997, the Fund's total
return based on net asset value, assuming reinvestment of dividends, was flat at
0.00%, while on a market value basis the Fund gained 3.27%, reflecting a
narrowing of the Fund's discount to net asset value. A further analysis of the
Fund's performance since inception is provided on page three of this report.
On May 23, 1997, the Fund announced that it would continue to pay a monthly
distribution of $0.065 per share through December 1997. Despite the combination
of a slightly weaker Australian dollar and lower interest rates in Australia,
the net income earned by the Fund remained at a level which would support the
monthly dividend of $0.065 per share. Accordingly, the monthly distributions are
expected to be paid from ordinary income, however these distributions may be
modestly supplemented by capital gains and/or a non-taxable return of capital
should weakness in the currency persist.
- ------------------
MARKET SUMMARY
- ------------------
Economic growth in Australia slowed in late 1996 from the pace seen earlier
in the year, but offered some signs in the first part of 1997 that growth might
be accelerating again. Inflation remained firmly under control and well within
the
<PAGE>
- -----------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -----------------
Reserve Bank of Australia's target range. The benign inflationary background
allowed the Reserve Bank to reduce cash rates from 6.5% to 6% in early December.
Since the end of the period under review, the cash rate was further reduced, to
5.5%, based on weaker than expected economic data. The New Zealand economy
remained slow over late 1996 and early 1997, and although 1996 fourth quarter
growth was boosted by the export sector, the domestic economy displayed no
growth over the quarter. Inflation responded to the weak domestic economy, and
short-term interest rates fell by 2% to 7%, over the period under review.
The Australian and New Zealand bond markets declined over the six months to
April 1997, largely as a result of upwards revisions to expectations for global
economic growth. After having declined sharply over 1996, the yield premium of
Australian and New Zealand bonds over their US counterparts was little changed
over the period. The Fund maintained its Australian bond exposure, with the
average maturity slightly less than that of the market, and the diversification
to New Zealand was also maintained. The Australian and New Zealand dollars were
relatively volatile over the first half of the Fund's financial year and both
ending the period slightly lower against the US dollar. A more comprehensive
review of recent developments in the Australian and New Zealand economies, debt
and foreign exchange markets is detailed in the Economic Review.
The Australian and New Zealand bond markets have improved since the end of
the Fund's half year based on expectations of lower Australian inflation, and
this rally has been assisted by strength in the US Treasury market. While the
pace of growth of the Australian economy may lead to concerns in the bond
market, particularly over the level of wage inflation, the continued progress on
CPI inflation in Australia and New Zealand should counteract any weakness in
these bond markets. The currency outlook will depend to a large extent on global
growth and its effect on commodity prices as well as on the scope for further
easing of monetary policy in Australia and New Zealand.
On behalf of the Board of Directors,
/s/ Robert Cotton
Sir Robert Cotton
Chairman
/s/ David M. Felder
David M. Felder
President
May 23, 1997
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
At April 30, 1997 the average maturity of the Fund's portfolio was 5.5
years, with an average duration of 4.0 years. The current yield to maturity
was 7.4%. 79% of the portfolio was invested in securities rated AAA with
the remaining 21% in AA rated securities.
- --------------------------------------------------------------------------------
2
<PAGE>
-----------------
Kleinwort
Benson
Australian Performance from Inception through April 30, 1997
Income Fund, Inc.
----------------- (Unaudited)
Growth of a Hypothetical $10,000 Investment
[THE FOLLOWING TABLE WAS DEPICTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
Australian Fund Net Fund U.S.
Index Asset Value Market Value Index
---------- ----------- ------------ -----
11/86 10,000 10,000 10,000 10,000
4/87 11,592 11,193 10,358 9,875
4/88 15,204 14,526 12,826 10,468
4/89 16,478 15,447 14,206 11,249
4/90 17,599 16,178 14,297 12,215
4/91 23,151 20,823 17,979 14,002
4/92 26,661 23,536 22,130 15,473
4/93 29,103 25,320 23,254 17,683
4/94 30,218 26,383 22,880 17,867
4/95 32,064 27,673 23,491 19,024
4/96 39,349 33,183 28,633 20,594
4/97 44,094 36,501 31,130 21,933
Since its inception in 1986, the Fund has achieved an average annualized return
on market value of 11.52%, on the basis noted below. On a net asset value basis,
which measures the performance of the Fund's underlying portfolio, the average
return has been 13.24%. Both the market and net asset value performance measures
have outpaced the Salomon Brothers US Government Bond Index which has averaged
7.83%. The Salomon Brothers Australian Government Bond Index has averaged 15.31%
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 ad
justing for these expenses, which have averaged 2.26% since inception, the Fund
has also outperformed the Australian index.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Annualized 10 Since
Performance 6 Months* 1 Year 3 Years 5 Years Years Inception+
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fund Market Value(1) 3.27% 8.72% 10.81% 7.06% 11.63% 11.52%
- ------------------------------------------------------------------------------------------------------------
Fund Net Asset Value(2) 0.00% 10.00% 11.43% 9.17% 12.55% 13.24%
- ------------------------------------------------------------------------------------------------------------
Salomon Brothers US Gov't Bond Index(3) 1.21% 6.50% 7.07% 7.23% 8.31% 7.83%
- ------------------------------------------------------------------------------------------------------------
Salomon Brothers Australian Gov't Bond Index(4) 0.74% 12.06% 13.42% 10.59% 14.29% 15.31%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
+ 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 Economic Review
Income Fund, Inc.
- -----------------
- -------------------
ECONOMIC REVIEW
- -------------------
Data released during the first part of 1997 confirmed that the US economy
had grown rapidly in late 1996 and that this strength had continued into the
current year. As we entered 1997, economic activity was supported by a robust
consumer sector, and despite continued low inflation, the Federal Reserve
increased official US short-term interest rates by 0.25% to 5.5%. In Europe, UK
activity remained firm while in Germany and France there were some signs of a
recovery. In Japan, growth proceeded slowly. Inflation remained low in all G7
countries ranging from approximately 3% in the US and UK, to just 0.5% in Japan.
The US bond market peaked in early December 1996, before reacting negatively to
stronger economic data, with long bond yields increasing to above 7% in the
Spring of 1997. The weakness in the US market impacted on Europe which had
rallied at the start of the year in response to modest economic growth and
continued low inflation. Japanese bonds continued to rally, underpinned by
continued official support for the market and low interest rates and inflation.
The US dollar continued to appreciate against the DM and the Yen over the
period.
Australia
Australian GDP growth for the final quarter of 1996 was 0.5%, to be 3.1%
over the previous year. Growth was broadly in line with market expecta tions
represented a slowing from a rate of 3.3% for the year to September 1996.
However, there was evidence in the GDP figures of ongoing strength in business
investment and a growing re covery in the construction sector. Retail Sales,
discussed in more detail below, were weak in December before re bound ing in
early 1997, suggesting that an unusually high proportion of Christmas activity
may be reflected in the first quarter GDP figures. The price deflators released
in the GDP figures confirmed the benign inflationary back ground indicated by
CPI releases.
Real retail sales fell 1.3% over the December quarter, to be only 0.1%
higher than in the December quarter of 1995, but have shown some recovery in
early 1997. After falling 1% in December, retail sales rose 2.7% in January and
0.8% in February, to be 3.3% above year ago levels. These figures did represent
a marked slowdown from the annual rises of 8% seen at the start of 1996, but
indicated that the trough in sales probably occurred in late 1996. Strength in
sales has broadened to cover sectors which had been suffering ad verse trading
conditions throughout 1996. Consumer con fidence has been volatile but the
Westpac confidence index rose to 105.4 in April 1997, after having been at
around 100 at the start of the period under review, and there is anecdotal
evidence that consumer sentiment has been bolstered by mortgage rate reductions
over 1996.
Australian employment grew strongly in late 1996, before weakening in
February and March of 1997, leaving total employment virtually unchanged over
the period. The rate of unemployment has been stable at around 8.7% since the
summer of 1996. There was some evidence that the labor market is set to tighten
moderately, with both the Australian Bureau of Statistics and the ANZ Bank
reporting increases in their Job Advertisement indices. In addition, hours
worked per employee rose strongly in early 1997, often a precursor to employment
growth.
The 1997 March quarter CPI release was slightly higher than market
expectations at 1.3% year-on-year, but represents a fall from the 1.5% December
quarter release, and confirmed the continued downtrend in headline inflation.
The Treasury underlying measure was 2.1% year-on-year in the March quarter,
unchanged from the December
4
<PAGE>
- -----------------
Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -----------------
release. One of the main restraining influences on inflation were prices for
auto-related products, which have benefited from the strength of the Australian
dollar against the Yen. The low headline rate reflects falling mortgage rates
over 1996, and indeed Australian mortgage lenders have been more frequent and
aggressive than the Reserve Bank in cutting rates, given increasing competition
in the mortgage market.
The Reserve Bank has been consistently asserting that wage pressures are the
main risk to the inflation outlook in Australia, and there was mixed evidence in
this area. Average weekly ordinary time earnings for the quarter to February
1997 were up 4.7% year on year, after a rise of 3.9% in the quarter to November
1996. The Reserve Bank targets a level of 4.5% as consistent with its inflation
target and will have been concerned about the latest figures. Wage increases
from enterprise bargaining agreements, which cover approximately one-third of
the Australian workforce, slowed in late 1996, but are still running at close to
the 4.5% level. However, there was more encouraging news for wage inflation when
the Industrial Relations Council specifically acknowledged the Reserve Bank's
call for restraint for the first time by setting only a modest increase in the
basic safety net component of wages.
The Australian current account deficit deteri orated over the second half of
1996, before recovering slightly in December. The deficit seemed on target for
the government prediction of an A$20bn (3.75% GDP) deficit for fiscal year
1996/97, but monthly deficit figures have been discontinued and March quarter
figures are not yet available. The trade balance trended downwards over the
period under review, which has raised concerns given that trade led the
improvement of the current account over 1995/96.
New Zealand
The production based measure of New Zealand GDP rose by 0.7% over the
December quarter of 1996, giving an increase of 2.9% over the year. While this
represents a rise from the growth rate of 2.7% for the year to September 1996, a
large part of the increase came from the export sector while the domestic
economy remained relatively weak. Consu mer spending was flat and domestic
investment spending fell over the quarter. Retail Sales and consumer confidence
figures for early 1997 gave little indication that growth was poised to increase
in the March 1997 quarter. Retail Sales did increase in January by 0.1%, but
these figures are volatile and the increase was against the underlying trend.
The key to the as yet unreleased growth figures for the March quarter is
whether the strong export performance was maintained. Most of this strength had
come in primary commodities, due to climatic conditions, and the durability of
export strength is therefore questionable. The unemployment rate fell to 5.9% in
December 1996, from 6.3% in September, as a result of a sharp drop in the
participation rate, but total employment actually fell by 0.5% over the quarter.
The participation rate is very volatile and the employment figure is usually a
better guide to activity, suggesting that the labor market remained sluggish
towards the end of the year.
Inflation responded to slack domestic economic conditions over the latter
half of 1996 and CPI fell 0.3% over the March 1996 quarter to be 1.8% above year
ago levels, after a rise of 2.6% in the year to December 1996. The underlying
rate, which does not include the restraining influence of lower interest costs,
rose 2% in the year to March 1997, after 2.4% in the year to December 1996.
Again, there was a
5
<PAGE>
- -----------------
Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -----------------
marked difference between subdued tradable goods prices, held down by the
continued appreciation of the currency in trade-weighted terms, and the
non-tradable sector. The housing sector, which has been the main inflation
concern for some time, did not add significantly to prices in the March quarter,
but buildings approvals and housing turnover figures both indicated that the
housing market remains buoyant.
Debt Markets
The low inflation of the latter half of 1996 allowed the Reserve Bank of
Australia to reduce cash rates from 7% to 6% over the last quarter of 1996, and
despite market expectations of a further cut, rates remained at 6%. The
Australian bond market was closely tied to the declining US market over the
period under review, with Australian ten-year yields rising from 7.3% in
November 1996 to 7.8% at the end of April 1997. In recent months there were
periods of domestic concern, particularly over wage inflation, but the ten-year
yield premium over US Treasuries ended the period little changed at just over
1%.
The downturn of inflation in New Zealand and the weakness of the domestic
economy allowed short rates in New Zealand to fall substantially over the
period, from 9% to 7%. The longer maturities in the bond market were subject to
the same factors affecting the Australian market, principally the sell-off in
the US Treasury market. Yields on New Zealand ten-year bonds started the period
at just above 7.2% and peaked at 8.2% in early April, before dipping to 7.8% at
the end of the period. The decline in cash rates, combined with an increase in
longer-term rates brought about a positively sloped yield curve in New Zealand.
Australian and New Zealand Dollars
The Australian dollar was reasonably volatile over the period under review,
despite ending at a level only slightly below its starting value. The currency
started the period at US$0.79 and rose rapidly to a peak of US$0.81 on improving
base metals prices, strong Japanese demand for Australian dollar bonds and
speculative buying. However, falling interest rates in Australia over the final
quarter of 1996 and the specter of US Fed funds rate hikes combined to undermine
the currency, and it fell to a low of US$0.76 at the start of February 1997.
This decline was exacerbated by weakness in the gold price, a key Australian
export commodity. In the second half of the period, signs of stronger growth and
wage inflation reduced expectations of further Australian interest rate cuts,
and the currency recovered to end the period at US$0.78. In trade-weighted terms
the currency continued to appreciate during the end of 1996 and the start of
1997, reflecting strength against the Yen and the DM.
The New Zealand dollar also fell slightly against the US dollar, but
continued to appreciate in trade-weighted terms. The currency started the period
at US$0.71 and remained broadly stable through mid-January 1997, supported by
heavy demand for high yielding New Zealand dollar assets. However, the ongoing
weakness in the domestic economy and falling inflation allowed short rates to
fall significantly, eroding the yield advantage of short-term New Zealand dollar
assets. The New Zealand dollar fell to US$0.695 over the remainder of the
period. This decline was broadly in line with the Reserve Bank of New Zealand's
(RBNZ) stated medium-term aim of a lower currency level, but towards the end of
the April the RBNZ indicated that monetary conditions were loose enough at that
time, which helped stabilize the currency. The current account deficit remained
a negative for the New Zealand dollar, widening to 4.2% of GDP in the December
quarter 1996, from 3.9% in the September quarter.
6
<PAGE>
- -----------------
Kleinwort
Benson
Australian Portfolio of Investments and Cash on Deposit
Income Fund, Inc.
- ----------------- April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Long-Term Investments -- 96.2%
Principal Amount Value (US$)
- ---------------- ----------
<S> <C> <C> <C>
Australian Government and Semi-Government Bonds -- 64.6%
Australian Government Bonds -- 17.7%
A$ 6,000,000 Commonwealth Government Bond 12.5% due 9/15/97 ................. $ 4,779,092
12,000,000 Commonwealth Government Bond 12% due 11/15/01 .................. 11,083,384
6,000,000 Commonwealth Government Bond 10% due 2/15/06 ................... 5,330,150
-----------
................................... 21,192,626
-----------
Government and Semi-Government Bonds with Eurobond Structure -- 39.2%
A$ 2,000,000 State Bank of South Australia 9.50% due 10/15/02 ................ 1,675,243
5,000,000 Australian Industrial Development Corp. 9.25% due 2/17/03 ................. 4,156,406
1,300,000 State Bank of New South Wales 9.25% due 2/18/03 ................. 1,078,770
16,450,000 Queensland Treasury Corp. 8% due 5/14/03 .................... 13,090,106
2,750,000 State Bank of South Australia 10.50% due 6/23/03 ................ 2,405,327
1,400,000 South Australian Finance Authority 7.75% due 6/30/03 ................. 1,096,921
22,400,000 Queensland Treasury Corp. 6.5% due 6/14/05 .................. 16,027,652
2,200,000 Treasury Corp. of Victoria 9% due 6/27/05 .................... 1,812,743
1,000,000 Commonwealth Bank of Australia 9% due 8/15/05 .................... 820,558
6,500,000 New South Wales Treasury Corp. 6.5% due 5/1/06 ................... 4,585,643
-----------
................................... 46,749,369
-----------
Other Semi-Government Bonds -- 7.7%
A$ 6,500,000 Western Australia Treasury Corp. 12.5% due 4/1/98 .................. 5,355,374
4,000,000 Victorian Public Finance Authority 12.5% due 10/15/03 ................ 3,881,750
-----------
................................... 9,237,124
-----------
Total Australian Government and Semi-Government Bonds -- (Cost $68,499,952) ......................... 77,179,119
-----------
Eurobonds -- 24.3%
A$ 5,800,000 Toyota Motor Credit Corp. 10.75% due 3/6/98 ................. 4,681,213
2,500,000 Unilever Australia Ltd. 12% due 4/8/98 .................... 2,045,527
3,500,000 DSL Finance N.V. 10.25% due 4/7/00 ................. 2,942,210
6,000,000 Morgan Guaranty Trust Co. 8% due 4/18/01 .................... 4,771,278
2,000,000 Bayerische Vereinsbank AG 8.75% due 5/17/01 ................. 1,630,401
3,300,000 Export Finance & Insurance Corp. 9% due 3/26/03 .................... 2,712,680
2,000,000 Bayerische Vereinsbank AG 10.25% due 10/28/04 ............... 1,740,547
5,000,000 KFW International Finance 9.125% due 7/26/05 ................ 4,139,366
5,000,000 Eurofima 9.875% due 1/17/07 ................ 4,364,119
-----------
Total Eurobonds -- (Cost $27,478,887) ............................................................... 29,027,341
-----------
Australian Corporate Bond -- 2.9%
A$ 4,000,000 National Australia Bank 12% due 7/15/99 -- (Cost $3,163,999) 3,451,398
-----------
New Zealand Government Bond -- 4.4%
NZ$ 7,000,000 New Zealand Government Bond 10% due 3/15/02 -- (Cost $5,312,951) 5,276,007
-----------
Total Long-Term Investments -- (Cost $104,455,789) .................................................. 114,933,865
-----------
Cash on Deposit -- 2.0%
A$ 3,014,589 Brown Brothers Harriman & Co., upon demand at 4.6875% ....................... 2,350,927
US$ 12,096 Brown Brothers Harriman & Co., upon demand at 4.25% ......................... 12,096
-----------
Total Cash on Deposit -- (Cost $2,362,885) .......................................................... 2,363,023
-----------
Total Portfolio of Investments and Cash on Deposit -- 98.2% (Cost $106,818,674) ..................... 117,296,888
Other Assets less Liabilities -- 1.8% ............................................................... 2,112,083
-----------
Net Assets -- 100.0% ................................................................................ $119,408,971
===========
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
- -----------------
Kleinwort
Benson
Australian Statements of Assets and Liabilities
Income Fund, Inc.
- -----------------
<TABLE>
<CAPTION>
April 30, 1997 October 31, 1996
-------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS:
Investments, at value (cost $104,455,789 and $103,690,192,
respectively) ....................................................... $114,933,865 $120,143,986
Cash on deposit:
Foreign currency (cost $2,350,789 and $6,189,889, respectively).... 2,350,927 6,193,541
US dollars ........................................................ 12,096 673,993
Interest receivable ................................................... 3,270,926 4,002,771
Accounts receivable for rights offering proceeds ...................... -- 286,910
Prepaid expenses ...................................................... 5,915 5,995
Other assets .......................................................... 7,317 7,317
------------ ------------
Total assets ...................................................... 120,581,046 131,314,513
------------ ------------
LIABILITIES:
Accounts payable for securities purchased ............................. -- 5,796,750
Dividends payable ..................................................... 777,047 621,637
Investment advisory fee payable ....................................... 68,580 --
Directors' fees and expenses payable .................................. 6,511 14,580
Other accrued expenses ................................................ 319,937 380,397
------------ ------------
Total liabilities ................................................. 1,172,075 6,813,364
------------ ------------
Net assets ........................................................ $119,408,971 $124,501,149
============ ============
NET ASSETS:
Net assets were comprised of:
Common stock, at $0.001 par ......................................... $ 11,955 $ 11,955
Paid-in capital ..................................................... 107,903,518 107,903,518
------------ ------------
107,915,473 107,915,473
Accumulated undistributed net investment income ....................... 114,246 634,699
Accumulated net realized gain (loss) on investment and
foreign currency transactions ....................................... 914,589 (515,017)
Net unrealized appreciation on investments and foreign currencies ..... 10,464,663 16,465,994
------------ ------------
Net assets ........................................................ $119,408,971 $124,501,149
============ ============
Shares of common stock issued and outstanding ......................... 11,954,566 11,954,566
------------ ------------
Net asset value per share ............................................. $9.99 $10.41
===== ======
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- -----------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -----------------
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six months ended April 30,
1997 1996
---- ----
<S> <C> <C>
NET INVESTMENT INCOME:
Investment Income:
Interest and discount earned (net of foreign withholding taxes
of $178,922 and $200,398, respectively) ........................ $ 5,202,693 $ 4,544,769
----------- -----------
Expenses:
Investment advisory fees ......................................... 421,292 335,761
Custodian fees ................................................... 117,839 96,413
Directors' fees and expenses ..................................... 55,748 45,874
Audit and tax services ........................................... 28,598 24,120
Transfer agent fees .............................................. 19,910 23,842
Printing ......................................................... 19,367 17,472
Postage .......................................................... 13,575 12,376
Stock exchange listing fee ....................................... 10,684 8,084
Legal ............................................................ 9,955 10,010
Insurance ........................................................ 1,810 2,184
Miscellaneous .................................................... 3,450 7,820
----------- -----------
Total operating expenses ......................................... 702,228 583,956
----------- -----------
Net investment income* ........................................... 4,500,465 3,960,813
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain on:
Investment transactions* ......................................... 481,739 7,297
Foreign currency transactions** .................................. 947,867 550,346
----------- -----------
Total net realized gain .......................................... 1,429,606 557,643
----------- -----------
Change in unrealized appreciation (depreciation) on:
Investments* ..................................................... (3,210,367) (918,435)
Foreign currency denominated assets and liabilities** ............ (2,790,964) 2,241,223
----------- -----------
Total net unrealized appreciation ................................ (6,001,331) 1,322,788
----------- -----------
Net realized and unrealized gain (loss) on investments and
foreign currencies ............................................. (4,571,725) 1,880,431
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ......................................... $ (71,260) $ 5,841,244
=========== ===========
</TABLE>
* Net increase in net assets before foreign currency gain (loss) was
$1,771,837 and $3,049,675, respectively.
** Net realized and unrealized foreign currency gain (loss) was ($1,843,097)
and $2,791,569, respectively.
See Notes to Financial Statements.
9
<PAGE>
- -----------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -----------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six months Fiscal year
ended ended
April 30, October 31,
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income .............................................. $ 4,500,465 $ 8,087,511
Net realized gain on investment and
foreign currency transactions ...................................... 1,429,606 1,840,128
Change in unrealized appreciation on investments and
foreign currency denominated assets and liabilities ................ (6,001,331) 5,954,037
----------- -----------
Net increase (decrease) in net assets resulting from operations .... (71,260) 15,881,676
----------- -----------
Distributions to shareholders:
From net investment income ......................................... (5,020,918) (8,511,651)
----------- -----------
Capital stock transactions:
Net asset value of shares issued
through rights offerings .......................................... -- 20,741,125
----------- -----------
Total increase (decrease) in net assets ........................... (5,092,178) 28,111,150
----------- -----------
NET ASSETS:
Beginning of period ................................................ 124,501,149 96,389,999
------------ -----------
End of period (including accumulated undistributed
net investment income of $114,246 and $634,699, respectively) ..... $119,408,971 $124,501,149
============ ============
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- -----------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -----------------
Financial Highlights
<TABLE>
<CAPTION>
Six months
ended
April 30, Fiscal year ended October 31,
1997 1996 1995 1994 1993 1992
----------- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value at beginning of period ...... $ 10.41 $ 10.08 $ 9.99 $ 10.45 $ 9.97 $ 11.77
-------- -------- ------- ------- ------- -------
Net investment income ....................... 0.38 0.85 0.84 0.82 0.77 0.92
Net realized and unrealized gain (loss) on
investments and foreign currencies ......... (0.38) 0.79 0.82 (0.48) 0.47 (1.03)
-------- -------- ------- ------- ------- -------
Total increase(decrease) from operations .... 0.00 1.64 1.66 0.34 1.24 (0.11)
-------- -------- ------- ------- ------- -------
Distributions to shareholders:
From net investment income .................. (0.42) (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 ......... (0.42) (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... (0.42) 0.33 0.09 (0.46) 0.48 (1.80)
-------- -------- ------- ------- ------- -------
Net asset value at end of period ............ $ 9.99 $ 10.41 $ 10.08 $ 9.99 $ 10.45 $ 9.97
======== ======== ======= ======= ======= =======
Per share market value at end of period ..... $ 9.00 $ 9.125 $ 9.25 $ 9.125 $ 9.75 $ 9.625
Total investment return(1) .................. 3.27% 9.54% 15.74% 1.77% 9.23% 2.00%
Net asset value return(2) ................... 0.00% 16.90% 17.93% 3.22% 12.65% (1.74)%
Net assets at end of period (in 000's) ...... $119,409 $124,501 $96,390 $71,685 $74,958 $69,564
Number of shares outstanding at
end of period (in 000's) ................... 11,955 11,955 9,564 7,173 7,173 6,979
RATIOS TO AVERAGE NET ASSETS:
Operating expenses .......................... 1.15%* 1.22% 1.32% 1.40% 1.47% 1.48%
Net investment income ....................... 7.44%* 8.22% 8.51% 7.88% 7.45% 8.20%
Portfolio turnover .......................... 12.54% 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.
* Annualized.
See Notes to Financial Statements.
11
<PAGE>
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Kleinwort
Benson
Australian Notes to Financial Statements
Income Fund, Inc.
- ----------------- April 30, 1997
(Unaudited)
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 ex change 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, 1996 and
April 30, 1997 were US$0.7925 to A$1.00 and US$0.7075 to NZ$1.00, and US$0.7799
to A$1.00 and US$0.6933 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
12
<PAGE>
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Kleinwort
Benson
Australian Notes to Financial Statements (continued)
Income Fund, Inc.
- ----------------- April 30, 1997
(Unaudited)
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, 1996, permanent book and tax basis differences of $7,389 and
$1,606,298 were reclassified from accumulated undistributed net investment
income and accumulated undistributed net capital gains, respectively, to paid-in
capital. These differences relate primarily to redesignation of foreign currency
gains (losses) for tax purposes.
13
<PAGE>
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Kleinwort
Benson
Australian Notes to Financial Statements (continued)
Income Fund, Inc.
- ----------------- April 30, 1997
(Unaudited)
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 six months ended April 30, 1996 and 1997, the Investment Advisor earned
$335,761 and $421,292, respectively, under this agreement.
3. Portfolio Transactions
Purchases of investment securities, other than short-term investments, for the
year ended October 31, 1996 and the six months ended April 30, 1997, aggre gated
$39,158,365 and $14,820,402, respectively. Sales of investment securities, other
than short-term in vestments, totaled $15,418,908 and $15,691,469, respectively,
during these periods. The portfolio of investments at October 31, 1996 was
substantially the same in terms of types of investments to that included herein
for April 30, 1997.
The United States Federal income tax basis of the Fund's investments and foreign
currency cash deposits at October 31, 1996 and April 30, 1997 was as listed
below. During the year ended October 31, 1996, 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.
April 30, 1997 October 31, 1996
-------------- ----------------
Tax cost basis $109,427,169 $115,100,272
============ ============
Unrealized appreciation $ 8,392,724 $ 11,247,098
Unrealized depreciation (535,101) (9,843)
------------ ------------
Net unrealized
appreciation $ 7,857,623 $ 11,237,255
============ ============
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.
14
<PAGE>
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Kleinwort
Benson Dividend Reinvestment and Cash Purchase Plan
Australian Foreign Tax Credits
Income Fund, Inc. Shareholder Meeting Results (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.
Shareholder Meeting Results
The Fund's Annual General Meeting of Share holders was held on February 11,
1997. Issues presented for the approval of shareholders were (1) the election of
one class of three Directors (The Earl of Limerick, Leonard T. Hinde and G.
William Miller); and (2) the ratification of the selection of Price Waterhouse
LLP as Independent Accountants for the Fund for the fiscal year ending October
31, 1997.
The election of Directors and the selection of accountants were approved by
shareholders by large margins. There were 11,954,566 shares eligible to vote at
the meeting and voting results were as follows:
Number of Shares Voted
----------------------
Issue For Against Abstained
- ----- --- ------- ---------
Election of Directors:
The Earl of Limerick 9,834,248 237,293 --
Leonard T. Hinde 9,842,568 228,973 --
G. William Miller 9,876,080 195,461 --
Selection of Indepen-
dent Accountants 9,917,975 49,537 104,029
Other Directors whose term of office continued after the meeting include Sir
Robert C. Cotton, David M. Felder, James J. Foley and Nigel S. MacEwan
15
<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
78 2520-SAR-4/97
