================================================================================
Kleinwort
Benson
Australian
Income Fund, Inc.
================================================================================
Annual Report
October 31, 1997
<PAGE>
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Kleinwort
Benson
Australian Report to Shareholders
Income Fund, Inc.
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- --------------------------------------------------------------------------------
Highlights
o 1997 year-end extra distribution set at $0.093 per share.
o Monthly dividend rate set at $0.05 per share for January - May 1998.
o Australian underlying inflation remains low at 1.5% for the 12 months
ended September 1997.
o Australian cash rates reduced three times during fiscal 1997, from 6.5% to
5.0%.
o The Australian bond market outperformed the US market in local terms
during the fiscal year, with the spread between Australian and US ten year
government bond yields dropping to near zero at October 1997 from 100
basis points at October 1996.
o A$/US$ exchange rate at October 1997 was 0.703, compared with 0.793 in
October 1996.
- --------------------------------------------------------------------------------
To Our Shareholders,
During the year ended October 31, 1997, the total return of the Fund was
marginally negative, against a background of rising bond prices but a weakening
of the Australian dollar against the US dollar. The Australian bond market was
bolstered by a very low level of domestic inflation, but the resulting
reductions in short-term interest rates led to weakness in the currency. The
Fund's exposure to the New Zealand bond market, which was increased over the
period, was subject to similar conditions, with bond prices rising and the New
Zealand dollar declining. At October 31, 1997, the Fund's closing market price
was $8.3125, a discount of 12.59% to its net asset value of $9.51.
The Fund's net asset value and market prices both moved lower over the
year as the decline in the Australian and New Zealand currencies more than
offset the stronger local bond markets. When the reinvestment of distributions
is factored in, however, the Fund's total return on net asset value for the year
ended October 31, 1997, was only modestly negative at -0.95%. The total return
on a market value basis, also with distributions reinvested, was slightly better
at -0.38%. A further analysis of the Fund's performance is provided on page four
of this report.
The Fund's monthly distribution was maintained at $0.065 per share
throughout the fiscal year, although as discussed in the Fund's April 1997
interim report, the weaker Australian dollar resulted in a reduction in the
Fund's net income and as a result the last distribution for fiscal 1997, which
was paid on November 17, 1997, included $0.027 per share of long-term capital
gains.
On January 15, 1998, the Fund will make its final distribution in respect
of calendar 1997, in the amount of $0.158 per share, which will include the
regular $0.065 (comprised of $0.045 of income and $0.02 of long-term capital
gains) plus additional long-term capital gains of $0.093. On December 8, 1997,
the Fund's Board of Directors set the monthly distribution for the five-month
period of January through May 1998 (payable in February through June) at $0.05
per share. This change reflects the strong bond market performance in Australia,
which has moved yields lower, as well as the weaker Australian and New Zealand
dollars and is the first reduction in the Fund's dividend rate since 1993.
<PAGE>
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Since the Fund was launched in 1986, it has built a strong performance
record, adhering to its conservative mandate of investing only in high quality
(AAA and AA rated) securities and not leveraging its portfolio. The Fund has
also maintained a conservative position on distributions to shareholders and the
Board has reaffirmed that policy by choosing to reduce the monthly distribution
rate to $0.05 per share for the first part of 1998, rather than make a smaller
reduction now and then face the possibility of a further cut later in the year
if the weakness in the Australian dollar were to persist. While the 1998
distribution rate will be the lowest the Fund has paid, it should be viewed in
the context of the lower interest rate and inflation rate environment that
exists not only in Australia but also in the US and throughout global developed
markets. Based on the $0.05 monthly dividend rate and the Fund's closing market
price on December 10, 1997, of $7.6875, the Fund's annualized dividend yield
would be 7.80% which remains superior to the yields available on comparably
rated US$ securities. Accordingly, the Fund continues to provide a solid real
rate of income for its US shareholders and will benefit from any appreciation of
the Australian dollar, which is at its lowest level since 1993.
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MARKET SUMMARY
- ---------------------------
A detailed review of the main developments in the Australian and New
Zealand economies over the last year can be found in the Economic Review
section. In summary, economic growth in both Australia and New Zealand was
subdued over the first half of 1997, with a recovery in Australian growth later
in the year. Inflation figures were generally lower than expected in both
countries, and short-term interest rates were reduced over the period.
Australian inflation declined to its lowest level on record over the year
under review, and ongoing weakness in economic activity, particularly in the
labor market, encouraged the Reserve Bank of Australia ("RBA") to loosen
monetary policy. Consequently, short-term interest rates were reduced in three
0.5% steps from 6.5% to 5% during the year. Short-term interest rates in New
Zealand ended the year 1% lower at 8%, but the range was more volatile. A
downturn in inflation and a weak domestic economy led to a sharp reduction from
9% to below 7% over the first half of 1997. However, given the accompanying fall
in the New Zealand dollar, the Reserve Bank of New Zealand ("RBNZ") decided that
interest rates had fallen too far and directed them up to 8.5%. However as the
weakness in the economy continued, rates moved lower, to 8%, by the end of
October.
The Australian bond market performed particularly well over the year. The
persistent decline of the inflation rate and an accommodative monetary stance
from the RBA created a very positive fundamental background for bonds. While the
first half of the fiscal year was characterized by falling global bond prices,
in the latter part of the year rallying global bonds combined with positive
domestic fundamentals to move the Australian bond market sharply higher. Having
started the period at 7.5%, Australian ten year yields peaked at 8% before
declining to near 6% by the end of October. New Zealand bond markets followed a
similar pattern, while slightly underperforming their Australian
2
<PAGE>
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
counterparts. Ten year yields rose to 8.2% from 7.25% in the first half of the
fiscal year, before declining to 6.75% at the end of October.
The Australian and New Zealand dollars declined over the year under
review, driven lower by expectations of falling interest rates in both
countries, over a period when interest rates globally were either stable or
rising. In addition, towards the end of the period the turmoil in South East
Asian currency and asset markets led to fears over activity in the export
markets, further turning sentiment against the Australian and New Zealand
dollars. The Australian dollar fell from US$0.793 to US$0.703, while the New
Zealand dollar fell from US$0.708 to US$0.623. Since the end of the Fund's
fiscal year, the Australian and New Zealand currencies have weakened further to
approximately US$0.67 and US$0.60, respectively.
The Fund maintained its exposure to the Australian and New Zealand bond
markets, concentrating on debt instruments such as eurobonds, which are not
subject to the domestic Australian 10% withholding tax. During the second half
of the fiscal year, when the New Zealand market had lagged the rise in the
Australian bond market, the percentage of the Fund invested in New Zealand
dollar bonds was increased from just below 5% to just under 15%. The average
maturity and duration of the Fund's portfolio were reduced marginally over the
period, as with the Australian bond market rallying sharply, a slightly more
cautious approach was felt to be warranted.
On behalf of the Board of Directors,
/s/ Robert Cotton
Sir Robert Cotton
Chairman
/s/ David M. Felder
David M. Felder
President
December 12, 1997
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
At October 31, 1997, the average maturity of the portfolio was 4.9 years,
with an average duration of 3.8 years and a current yield to maturity of
5.9%. Securities rated AAA comprised 82% of the portfolio with the
remaining 18% in AA rated securities.
- --------------------------------------------------------------------------------
3
<PAGE>
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Kleinwort
Benson
Australian Performance from Inception through October 31, 1997
Income Fund, Inc. (Unaudited)
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Growth of a Hypothetical $10,000 Investment
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
11/86 10/87 10/88 10/89 10/90 10/91 10/92 10/93 10/94 10/95 10/96 10/97
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Australian Index $10,000 $11,687 $16,812 $17,137 $20,426 $25,846 $26,021 $29,557 $30,145 $36,488 $43,779 $44,341
Fund Net Asset Value $10,000 $11,102 $15,889 $15,993 $18,470 $23,178 $22,775 $25,656 $26,482 $31,231 $36,508 $36,162
Fund Market Value $10,000 $ 9,165 $14,679 $15,010 $14,664 $20,969 $21,388 $23,363 $23,776 $27,518 $30,144 $30,035
U.S. Index $10,000 $10,041 $11,007 $12,359 $13,075 $14,965 $16,527 $18,687 $17,864 $20,601 $21,669 $23,530
</TABLE>
Since its inception in 1986, the Fund has achieved an average annualized return
on market value of 10.60%, 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 12.50%. Both the market and net asset value performance measures
have outpaced the Salomon Brothers US Government Bond Index which has averaged
8.15%. The Salomon Brothers Australian Government Bond Index has averaged 14.61%
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 2.25% since inception, the
Fund has also outperformed the Australian index.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Annualized 10 Since
Performance 1 Year 3 Years 5 Years Years Inception+
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fund Market Value(1) -0.38% 8.09% 7.02% 12.60% 10.60%
- ------------------------------------------------------------------------------------------------------
Fund Net Asset Value(2) -0.95% 10.94% 9.69% 12.53% 12.50%
- ------------------------------------------------------------------------------------------------------
Salomon Brothers US Gov't Bond Index(3) 8.59% 9.62% 7.32% 8.89% 8.15%
- ------------------------------------------------------------------------------------------------------
Salomon Brothers Australian Gov't Bond Index(4) 1.29% 13.73% 11.27% 14.27% 14.61%
- ------------------------------------------------------------------------------------------------------
</TABLE>
+ Fund commenced operations November 28, 1986.
(1) Based on market value per share, adjusted for rights offerings, and
assumes reinvestment of all distributions at reinvestment plan prices.
(2) Based on net asset value per share, adjusted for rights offerings, and
assumes reinvestment of all distributions at the ex-dividend date net
asset value. This measures the performance of the underlying Fund
portfolio and may not be indicative of returns to investors.
(3)(4) The Salomon Brothers US and Australian Government Bond Indices are US$
based unmanaged indices.
Please remember that past performance may not be indicative of future
results.
4
<PAGE>
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Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -------------------
- ---------------------------
ECONOMIC REVIEW
- ---------------------------
Global Background
Economic growth in the US continued at a robust pace over the year under
review, while European economies continued to recover and the Japanese economy
remained subdued. Inflation was stable in Europe and Japan, and declined
throughout the year in the United States. Against this economic background,
global bond prices improved over the year, although US and European bonds were
hampered early in 1997 by concerns over the pace of US activity and fears that
declines in inflation would be reversed. Bonds recovered strongly in the second
half of the year, when it became clear that stronger activity was not leading to
higher inflation.
Australia
Economic growth in Australia was weak in late 1996 and early 1997, at only
1.9% for the year to March 1997, with a rise of 0.7% in the March quarter. There
was an acceleration in growth over the second quarter of 1997, with GDP(A), the
average measure of Australian economic growth, expanding at 1.2% over the
quarter, leading to annual growth of 3.2%. The housing sector recovered strongly
in the second quarter, and the consumer sector contributed more to growth than
weak retail sales figures had suggested. More recent indicators of activity in
the third quarter suggest that this increase in general activity will continue.
Price deflators released with the GDP figures have been consistent with the
declines in CPI figures seen over the year.
Retail Sales were weak going into 1997 and bottomed at an annual rise of
just 0.7% in the year to December 1996. A weak labor market and low consumer
confidence kept sales in check and retail sales figures remained low and
volatile through the first half of 1997. In recent months there has been an
improvement, with sales rising 3.1% over the September quarter, following a fall
of 0.3% in the June quarter of 1997. Consumer confidence figures were consistent
with these sales releases. The Westpac consumer confidence index fell from a
peak of 109.5 in November 1996 to a low of 100 in June of 1997, despite
declining cash rates over the period, with the labor market showing no signs of
recovery. In September and October, however, the index recovered, finishing the
period at 104.9. The effect of the Asian currency turmoil has been hard to
gauge, and may affect confidence going forward.
The Australian labor market was the focus of much political attention over
the year under review, with an apparent upturn in economic activity failing to
reduce the unemployment rate. Total employment rose by 70,000 over the year, not
enough to reduce unemployment, which hovered around the 8.7% level for most of
the period. There was some evidence of a strengthening trend at the end of the
Fund's year, but the labor market direction remains unclear. Forward indicators,
such as the ANZ job advertisement series, began to suggest improvements in the
second half of 1997, but there have been doubts expressed over whether these
indicators are particularly relevant. The weakness of the labor market has
ensured that the recovery remains uncertain, and has been a major factor in RBA
reductions in cash rates.
5
<PAGE>
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Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -------------------
The inflation performance of the Australian economy has been the major
driving force behind the strength of the bond market. Headline CPI has been
dampened significantly by declines in mortgage rates over the year, but the
Treasury underlying rate, which excludes such factors, has also fallen sharply.
Headline CPI has declined steadily from 5.1% in the year to December 1995 to
- -0.3% in the year to September 1997. The Treasury underlying rate fell to 1.5%
in the year to September, the lowest level on record and close to the bottom end
of the RBA's 2-3% target band. There has been a large split between inflation in
the service sector and that in the goods markets, which is subject to more
international competition. Service sector inflation has been running at around
4% per year, and much of the reductions in CPI have been a result of lower goods
prices, caused by a high Australian dollar in recent years. The reductions in
the currency over the recent past may therefore remove a major inflation
restraint.
Wage inflation had been a major concern for the RBA throughout 1996, and
there was evidence of an easing in wages during 1997. However, wage rates are
still running at high levels when compared to the weakness in the labor market.
Average weekly ordinary time earnings rose 3.9% in the year to November 1996,
and this rate had fallen to 3.5% in the quarter to May 1997. The year to August
1997 saw average wage rates pick up to 4.4%, but there were signs of a slowing
in the new enterprise bargaining agreements. These deals cover an increasing
proportion of the workforce and have been consistently high, their introduction
being used to secure "one off" settlements.
New Zealand
Economic growth in New Zealand continued to be weak over the period under
review, with the economy actually contracting in the March quarter of 1997.
Growth did rebound to a level of 1.2% in the June quarter, but was still only
2.4% for the year to June. The manufacturing and consumer sectors of the economy
showed strong growth in the June quarter, but construction was weaker over the
period. The consumption growth figures do not appear consistent with more
coincident indicators of the consumer sector, which suggest a marked weakening
of the sector over the summer of 1997. Over the year to September 1997, retail
sales rose by just 0.4%, and sales fell 0.5% over the September quarter,
highlighting a worsening trend. Despite some loosening over the period, fiscal
policy remained relatively tight and combined with rising unemployment to keep
consumer sentiment down. The Colmar Brunton survey of consumer sentiment which
measures the balance of consumers positive or negative about economic prospects
recorded a sharp downturn in confidence throughout 1997. The index moved firmly
into negative territory over the year, implying a majority of respondents were
negative on economic prospects in New Zealand.
New Zealand CPI declined consistently over 1997, in both underlying and
headline terms. After rising 2.6% in the year to December 1996, headline CPI
fell to 1% in the year to September 1997. The underlying rate was reported at
1.8% for the year to September, but remains well within the RBNZ target band.
There were signs over the year that house prices, which have been an
inflationary concern for
6
<PAGE>
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Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -------------------
some time, were starting to ease. The inflation improvement was set against a
background of a slightly weaker labor market. The rate of unemployment rose from
5.9% in the December quarter of 1996 to 6.7% in the June quarter of 1997. When
productivity gains are accounted for, wage rises remained consistent with low
inflation.
The National/NZ First coalition held together over the year, despite
popular support for NZ First dwindling to below 5%. The policy of relaxing
fiscal policy was continued, but conditions remained restrictive overall. Given
the healthy state of New Zealand public finances, the bond market was not
particularly concerned by a relaxation of the fiscal stance and there is some
comfort in the fact that liquidity will not be reduced by a shrinking supply of
government debt. In October it was announced that Prime Minister Jim Bolger
would be replaced by National's Jenny Shipley at the end of November. No major
shifts in policy are expected as a result.
Debt Markets
The Australian bond market performed very well over the Fund's fiscal
year, driven by a marked improvement in the inflation rate. However, the first
half of the year was characterized by a sell-off in the US Treasury market,
which set a negative tone for global bonds. Australian bonds did not escape the
pessimism over a possible acceleration in world growth and, from a level of 7.5%
in late 1996, Australian ten year bond yields rose to a peak of 8% in early
April 1997. The remainder of the period under review saw the bond market rally
sharply. Official short-term interest rates were reduced to 5%, and the release
of consistently falling inflation figures, combined with ongoing weakness in the
labor market, led investors to believe that rates would fall further. Market
sentiment in the US also improved sharply as fears of inflation subsided. These
factors combined to drive the Australian bond market higher, and the ten year
bond yield ended October at 6%. The yield premium available on Australian ten
year bonds over their US counterparts declined over the year from 1% to almost
zero.
The New Zealand bond market improved during the year, but suffered along
with the Australian market in the first half of the period. Ten year yields
began the Fund's year at 7.25%, and rose to over 8% in early April, against a
background of rising global bond yields. As in Australia, the second half of the
period under review was dominated by positive sentiment over improved inflation
outcomes and a more positive international background emanating from the US
Treasury market. The New Zealand bond market rallied, with ten year yields
ending the period at 6.75%. The improvement in New Zealand bonds was slightly
less marked than that in the Australian market and there was some confusion over
monetary policy. While short rates fell over the period as a whole, they were
increased for a period in the summer, when the RBNZ felt that rates had moved
too low.
Australian and New Zealand Dollars
The Australian dollar weakened significantly against the US dollar over
the fiscal year, from US$0.793 to US$0.703. In trade weighted terms the currency
fell only 2.5% reflecting the weakness of
7
<PAGE>
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Kleinwort
Benson
Australian Economic Review
Income Fund, Inc.
- -------------------
the Japanese Yen. There were several reasons behind the sharp drop against the
US dollar. The major reason was a series of downward revisions to economic
activity figures in Australia and subsequent reductions in short-term interest
rates. These cuts arrived at a time when interest rates in major global
economies were either stable or rising. There was also a fall in the gold price
over the period, driven by central bank sales, and the Australian dollar is
still highly sensitive to the price of gold. Towards the end of the period, the
Australian currency was negatively impacted by the financial and economic
turmoil in South East Asian countries, many of which are important export
markets for Australia.
The New Zealand dollar also fell over the period, both against the US
dollar and in trade weighted terms. Having started the year at US$0.708, the New
Zealand currency fell to US$0.623, with the majority of the weakness occurring
in the second half of the period. Ongoing weakness in the New Zealand economy
led to falling short-term interest rates, and the decline in the currency is
consistent with the RBNZ's desire for a lower exchange rate. The New Zealand
dollar was also hampered by weak commodity prices and, towards the end of the
period, by the South East Asian currency crisis. There was also concern over the
deterioration in the current account balance, which left New Zealand with a
deficit of 6.3% of GDP.
8
<PAGE>
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Kleinwort
Benson
Australian Portfolio of Investments and Cash on Deposit
Income Fund, Inc. October 31, 1997
- -------------------
<TABLE>
<CAPTION>
Long-Term Investments -- 96.6%
Principal Amount Value (US$)
- ---------------- ----------
<S> <C> <C> <C>
Australian Government and Semi-Government Bonds -- 64.9%
Australian Government Bonds -- 13.9%
A$12,000,000 Commonwealth Government Bond 12% due 11/15/01.................... $10,412,123
6,000,000 Commonwealth Government Bond 10% due 2/15/06..................... 5,332,182
-----------
15,744,305
-----------
Government and Semi-Government Bonds with Eurobond Structure -- 43.5%
A$ 2,000,000 State Bank of South Australia 9.50% due 10/15/02.................. 1,605,168
5,000,000 Australian Industrial Development Corp. 9.25% due 2/17/03................... 4,019,531
1,300,000 State Bank of New South Wales 9.25% due 2/18/03................... 1,044,785
3,300,000 Export Finance & Insurance Corp. 9% due 3/26/03...................... 2,622,999
16,450,000 Queensland Treasury Corp. 8% due 5/14/03...................... 12,751,338
2,750,000 State Bank of South Australia 10.50% due 6/23/03.................. 2,330,878
2,500,000 Australian Industrial Development Corp. 8.75% due 7/20/04................... 1,998,215
22,400,000 Queensland Treasury Corp. 6.5% due 6/14/05.................... 16,163,160
2,200,000 Treasury Corp. of Victoria 9% due 6/27/05...................... 1,806,004
1,000,000 Commonwealth Bank of Australia 9% due 8/15/05...................... 818,625
6,000,000 New South Wales Treasury Corp. 6.5% due 5/1/06..................... 4,314,439
-----------
49,475,142
-----------
Other Semi-Government Bonds -- 7.5%
A$ 6,500,000 Western Australia Treasury Corp. 12.5% due 4/1/98.................... 4,741,034
4,000,000 Victorian Public Finance Authority 12.5% due 10/15/03.................. 3,739,265
-----------
8,480,299
-----------
Total Australian Government and Semi-Government Bonds-- (Cost $67,149,910)........................... 73,699,746
-----------
Australian Eurobonds -- 14.5%
A$ 5,800,000 Toyota Motor Credit Corp. 10.75% due 3/6/98................... 4,154,064
2,500,000 Unilever Australia Ltd. 12% due 4/8/98...................... 1,808,126
3,500,000 DSL Finance N.V. 10.25% due 4/7/00................... 2,711,524
6,000,000 Morgan Guaranty Trust Co. 8% due 4/18/01...................... 4,508,283
2,000,000 Bayerische Vereinsbank AG 8.75% due 5/17/01................... 1,532,649
2,000,000 Bayerische Vereinsbank AG 10.25% due 10/28/04................. 1,719,882
-----------
Total Australian Eurobonds -- (Cost $17,000,816) .................................... 16,434,528
-----------
Australian Corporate Bond -- 2.7%
A$ 4,000,000 National Australia Bank 12% due 7/15/99-- (Cost $3,184,257) 3,120,630
-----------
New Zealand Bonds -- 14.5%
NZ$ 5,000,000 Province of Alberta 8.00% due 10/30/98.................. 3,112,098
2,500,000 General Electric Capital Corp. 8.75% due 5/21/99................... 1,575,196
4,000,000 European Investment Bank 8.50% due 5/30/01................... 2,573,412
7,000,000 New Zealand Government Bond 10% due 3/15/02..................... 4,880,094
7,000,000 Federal National Mortgage Association 7.25% due 6/20/02................... 4,369,490
-----------
Total New Zealand Bonds -- (Cost $17,330,122) .................................... 16,510,290
-----------
Total Long-Term Investments -- (Cost $104,665,105) .................................... 109,765,194
-----------
Cash on Deposit -- 1.2%
A$ 1,886,964 Brown Brothers Harriman & Co., upon demand at 3.4375%........................... 1,327,008
US$ 59,629 Brown Brothers Harriman & Co., upon demand at 4.50%............................. 59,629
-----------
Total Cash on Deposit -- (Cost $1,428,982) .................................... 1,386,637
-----------
Total Portfolio of Investments and Cash on Deposit -- 1.2% (Cost $106,094,087)....................... 111,151,831
Other Assets less Liabilities -- 2.2% .................................... 2,487,197
-----------
Net Assets -- 100.0% .................................... $113,639,028
===========
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
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Kleinwort
Benson
Australian Statements of Assets and Liabilities
Income Fund, Inc.
- -------------------
<TABLE>
<CAPTION>
October 31, 1997 October 31, 1996
---------------- ----------------
<S> <C> <C>
ASSETS:
Investments, at value (cost $104,665,105 and $103,690,192, respectively) $109,765,194 $120,143,986
Cash on deposit:
Foreign currency (cost $1,369,353 and $6,189,889, respectively) .... 1,327,008 6,193,541
US dollars ......................................................... 59,629 673,993
Interest receivable .................................................... 3,545,878 4,002,771
Accounts receivable for rights offering proceeds ....................... -- 286,910
Other assets ........................................................... 11,637 13,312
------------- -------------
Total assets ....................................................... 114,709,346 131,314,513
------------- -------------
LIABILITIES:
Accounts payable for securities purchased .............................. -- 5,796,750
Dividends payable ...................................................... 777,047 621,637
Investment advisory fee payable ........................................ 67,022 --
Directors' fees and expenses payable ................................... 6,669 14,580
Other accrued expenses ................................................. 219,580 380,397
------------- -------------
Total liabilities .................................................. 1,070,318 6,813,364
------------- -------------
Net assets ......................................................... $113,639,028 $124,501,149
============= =============
NET ASSETS:
Net assets were comprised of:
Common stock, at $0.001 par .......................................... $ 11,95 $11,955
Paid-in capital ...................................................... 107,429,899 107,903,518
------------- -------------
107,441,854 107,915,473
Accumulated undistributed net investment income ........................ (29,034) 634,699
Accumulated net realized gain (loss) on investment and
foreign currency transactions ........................................ 1,348,352 (515,017)
Net unrealized appreciation on investments and foreign currencies ...... 4,877,856 16,465,994
------------- -------------
Net assets ......................................................... $113,639,028 $124,501,149
============= =============
Shares of common stock issued and outstanding .......................... 11,954,566 11,954,566
------------- -------------
Net asset value per share .............................................. $9.51 $10.41
===== ======
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
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Kleinwort
Benson
Australian Statements of Operations
Income Fund, Inc.
- -------------------
<TABLE>
<CAPTION>
Fiscal year Fiscal year
ended ended
October 31, October 31,
1997 1996
------------ ------------
<S> <C> <C>
NET INVESTMENT INCOME:
Investment Income:
Interest and discount earned (net of foreign withholding taxes of
$342,974 and $399,472, respectively) .......................... $10,024,856 $9,287,931
------------ ------------
Expenses:
Investment advisory fees ........................................ 830,282 688,599
Custodian fees .................................................. 228,636 200,324
Directors' fees and expenses .................................... 114,420 92,362
Audit and tax services .......................................... 45,670 49,560
Printing ........................................................ 37,055 45,136
Transfer agent fees ............................................. 35,150 37,946
Postage ......................................................... 27,375 27,888
Legal ........................................................... 20,075 20,130
Stock exchange listing fee ...................................... 18,854 16,170
Insurance ....................................................... 4,168 4,528
Miscellaneous ................................................... 10,655 17,777
------------ ------------
Total operating expenses ........................................ 1,372,340 1,200,420
------------ ------------
Net investment income* .......................................... 8,652,516 8,087,511
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investment transactions* ........................................ 2,113,561 195,999
Foreign currency transactions** ................................. (473,746) 1,644,129
------------ ------------
Total net realized gain (loss) .................................. 1,639,815 1,840,128
------------ ------------
Change in unrealized appreciation (depreciation) on:
Investments* .................................................... 853,558 3,858,862
Foreign currency denominated assets and liabilities** ........... (12,441,696) 2,095,175
------------ ------------
Total net change in unrealized appreciation (depreciation) ...... (11,588,138) 5,954,037
------------ ------------
Net realized and unrealized gain (loss) on investments and
foreign currencies ............................................ (9,948,323) 7,794,165
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ........................................... $(1,295,807) $15,881,676
============ ============
</TABLE>
* Net increase in net assets before foreign currency gain (loss) was
$11,619,635 and $12,142,372, respectively.
** Net realized and unrealized foreign currency gain (loss) was ($12,915,442)
and $3,739,304, respectively.
See Notes to Financial Statements.
11
<PAGE>
- -------------------
Kleinwort
Benson
Australian Statements of Changes in Net Assets
Income Fund, Inc.
- -------------------
<TABLE>
<CAPTION>
Fiscal year Fiscal year
ended ended
October 31, October 31,
1997 1996
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income .......................................... $ 8,652,516 $ 8,087,511
Net realized gain on investment and
foreign currency transactions ................................ 1,639,815 1,840,128
Change in unrealized appreciation on investments and
foreign currency denominated assets and liabilities .......... (11,588,138) 5,954,037
------------- -------------
Net increase (decrease) in net assets resulting from operations (1,295,807) 15,881,676
------------- -------------
Distributions to shareholders:
From net investment income ..................................... (9,360,426) (8,511,651)
From net realized gain on investment and
foreign currency transactions ................................ (322,773) --
------------- -------------
Net decrease in net assets resulting from
distributions to shareholders ................................ (9,683,199) (8,511,651)
------------- -------------
Capital stock transactions:
Net asset value of shares issued
through rights offering ...................................... -- 20,741,125
Credit for reversal of unused offering expense accrual ......... 116,885 --
------------- -------------
Net increase in net assets from capital stock transactions ..... 116,885 20,741,125
------------- -------------
Total increase (decrease) in net assets ...................... (10,862,121) 28,111,150
------------- -------------
NET ASSETS:
Beginning of period ............................................ 124,501,149 96,389,999
------------- -------------
End of period (including accumulated undistributed
net investment income of ($29,034) and $634,699, respectively) $ 113,639,028 $ 124,501,149
============= =============
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
- -------------------
Kleinwort
Benson
Australian Financial Highlights
Income Fund, Inc.
- -------------------
<TABLE>
<CAPTION>
Fiscal years ended October 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <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
------ ------ ------ ------ ------
Net investment income .................... 0.72 0.85 0.84 0.82 0.77
Net realized and unrealized gain (loss) on
investments and foreign currencies ..... (0.82) 0.79 0.82 (0.48) 0.47
------ ------ ------ ------ ------
Total increase(decrease) from operations . (0.10) 1.64 1.66 0.34 1.24
------ ------ ------ ------ ------
Distributions to shareholders:
From net investment income ............... (0.78) (0.89) (0.89) (0.78) (0.74)
From net realized gains on investment
and foreign currency transactions ...... (0.03) -- -- (0.02) --
------ ------ ------ ------ ------
Total distributions to shareholders ...... (0.81) (0.89) (0.89) (0.80) (0.74)
------ ------ ------ ------ ------
Decrease in net assets from capital
stock transactions ..................... -- (0.39) (0.65) -- (0.01)
------ ------ ------ ------ ------
Offering expenses charged to capital ..... 0.01 (0.03) (0.03) -- (0.01)
------ ------ ------ ------ ------
Net increase (decrease) in net asset value (0.90) 0.33 0.09 (0.46) 0.48
------ ------ ------ ------ ------
Net asset value at end of period ......... $9.51 $10.41 $10.08 $9.99 $10.45
====== ====== ====== ====== ======
Per share market value at end of period .. $8.3125 $9.125 $9.25 $9.125 $9.75
Total investment return (1) .............. (0.38)% 9.54% 15.74% 1.77% 9.23%
Net asset value return (2) ............... (0.95)% 16.90% 17.93% 3.22% 12.65%
Net assets at end of period (in 000's) ... $113,639 $124,501 $96,390 $71,685 $74,958
Number of shares outstanding at
end of period (in 000's) ............... 11,955 11,955 9,564 7,173 7,173
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ....................... 1.14% 1.22% 1.32% 1.40% 1.47%
Net investment income .................... 7.21% 8.22% 8.51% 7.88% 7.45%
Portfolio turnover ....................... 26.67% 16.00% 56.55% 13.71% 9.69%
</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 Notes to Financial Statements
Income Fund, Inc. October 31, 1997
- -------------------
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, 1996 and
1997 were US$0.7925 to A$1.00 and US$0.7075 to NZ$1.00, and US$0.7033 to A$1.00
and US$0.6227 to NZ$1.00, respectively.
Investment Valuation: Investment securities are stated at value. Investments for
which market quotations are readily available are valued at the last reported
sales prices. If there is no sales price on the date of valuation, then
investments are valued at the most recently available sales price or at fair
value as determined in good faith by or under the direction of the Fund's Board
of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost, if their term to maturity from date of purchase was 60
days or less, or by amortizing their value on the 61st day prior to
14
<PAGE>
- -------------------
Kleinwort
Benson
Australian Notes to Financial Statements (continued)
Income Fund, Inc. October 31, 1997
- -------------------
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, 1997, permanent book and tax basis differences of $44,177 and
$546,327 were reclassified from paid-in capital to accumulated undistributed net
investment income and accumulated undistributed net capital gains, respectively.
These differences relate primarily to redesignation of foreign currency gains
(losses) for tax purposes. At October 31, 1996, such reclassifications were
($7,389) and ($1,606,298), respectively.
15
<PAGE>
- -------------------
Kleinwort
Benson
Australian Notes to Financial Statements (continued)
Income Fund, Inc. October 31, 1997
- -------------------
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, 1996 and 1997, the Investment Advisor earned
$688,599 and $830,282, respectively, under this agreement.
3. Portfolio Transactions
Purchases of investment securities, other than short-term investments, for the
years ended October 31, 1996 and 1997, aggregated $39,158,365 and $30,790,487,
respectively. Sales of investment securities, other than short-term investments,
totaled $15,418,908 and $32,030,698, 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 October 31, 1997.
The United States Federal income tax basis of the Fund's investments and foreign
currency cash deposits at October 31, 1996 and 1997 was as listed below. During
the years ended October 31, 1996 and 1997, the Fund utilized capital loss
carryforwards of $233,830 and $508,989, respectively.
October 31, 1997 October 31, 1996
---------------- ----------------
Tax cost basis $ 99,183,639 $ 115,100,272
============= =============
Unrealized appreciation $ 11,918,136 $ 11,247,098
Unrealized depreciation (9,573) (9,843)
------------- -------------
Net unrealized appreciation $ 11,908,563 $ 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 estimated offering
costs of $275,000 were charged to capital. The actual offering costs were
$158,115, with the difference of $116,885 recognized as additional proceeds from
the offering during the fiscal year ended October 31, 1997. This did not result
in the issuance of any additional shares.
16
<PAGE>
- -------------------
Kleinwort
Benson
Australian Report of Independent Accountants
Income Fund, Inc.
- -------------------
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, 1997 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, 1997 and 1996, the results of its operations and the changes in its
net assets for each of the two years in the period ended October 31, 1997, and
the financial highlights for each of the five years in the period ended October
31, 1997, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1997 and 1996 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 25, 1997
17
<PAGE>
- -------------------
Kleinwort
Benson
Australian Dividend Reinvestment and Cash Purchase Plan
Income Fund, Inc. 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, 1997, 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 1997 return should
be based on the Form 1099 which will be provided to you in January 1998. Those
Form 1099's will be based on calendar year tax information which will vary from
that reported below:
Distributions to Shareholders:
Dividends ....................................................... $0.783
Long-term Capital Gains* ........................................ 0.027
Foreign Taxes (Australia) ....................................... 0.031
------
Total Distributions ............................................. $0.841
======
Distributions by Source:
Ordinary Income, Foreign Source:
Australia ..................................................... $0.770
New Zealand ................................................... 0.043
------
Total Foreign Source .......................................... 0.813
Ordinary Income, U.S. Source .................................... 0.001
------
Total Ordinary Income ........................................... 0.814
Long-term Capital Gains* ........................................ 0.027
------
Total Distributions ............................................. $0.841
======
* Of which $0.007 will be taxed at a maximum Federal income tax rate of 20%.
18
<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
New Canaan, CT
G. William Miller
Director and Deputy Chairman of the Board
Washington, DC
Stephen K. West
Director
New York, NY
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
2520-AR-10/97
