[GRAPHIC OMITTED]
===================
Kleinwort
Benson
Australian
Income Fund, Inc.
===================
Annual Report
October 31, 1998
<PAGE>
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Kleinwort
Benson
Australian
Income Fund, Inc.
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Report to Shareholders
- --------------------------------------------------------------------------------
Fourth-Quarter Highlights
o 1998 year-end distribution set at $0.191 per share.
o Monthly dividend rate set at $0.04 per share for January - May 1999.
o Australian dollar ended at US$0.625 versus US$0.70 at the beginning of the
fiscal year.
o Australian underlying inflation remains low at 1.6% for the 12 months
ended September 1998.
- --------------------------------------------------------------------------------
To Our Shareholders,
During the year ended October 31, 1998, the total value of the Fund
declined in US dollar terms. Australian and New Zealand bonds performed well,
but as in the last financial year, both the Australian and the New Zealand
dollars declined in value against the US dollar. These currency developments are
described in more detail below. The Fund's exposure to the Australian bond
market was maintained over the first half of the period under review, and was
increased when Australian bond yields temporarily rose on the back of global
credit concerns. The portfolio maintained its exposure to New Zealand bonds,
which outperformed their Australian counterparts, but suffered from the
performance of the New Zealand dollar. The Fund continued to concentrate
investment in securities free from withholding tax, although this benefit was
balanced by the underperfomance of such securities relative to government bonds,
again on global credit concerns. At October 31, 1998, the Fund's closing market
price was $6.625, a discount of 20.85% to its net asset value of $8.37.
For the year ended October 31, 1998, the Fund ended with a total return on
net asset value (with income reinvested) of -4.45%. The monthly dividend was
reduced to US$0.045 per share as a result of the falling yields on Australian
and New Zealand securities over recent years and the decline in the value of
both currencies in US dollar terms. As a result, the Fund generated a current
income yield of 4.5% (based on the income distributions of US$0.54 per share for
fiscal year). This income return was comparable to US cash and bond investments,
and may be compared to the yield on the Salomon Brothers U.S. Bond Index of
4.7%.
A further analysis of the Fund's performance since inception is provided
on page 3.
- -----------------------
MARKET SUMMARY
- -----------------------
A more detailed review of the developments in the economies of Australia
and New Zealand can be found in the Economic Review section. The Australian
economy started 1998 with a strong momentum, and grew reasonably well as the
year progressed. However, the collapse of Asian economic growth did overshadow
this strength and there were signs of weakness later in the period. The New
Zealand economy did not have a solid domestic activity level and entered an
official recession over the first half of the year. The major impact of the
downturn in Asian growth was to drive both the Australian and New Zealand
dollars lower over the year under review.
Australian inflation did rise slightly over the period under review, after
the dramatic reductions of
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
the previous year, but remained close to historically low levels. This subdued
price environment, coupled with the potentially weak export markets encouraged
the Reserve Bank of Australia to keep official short term interest rates steady,
despite robust growth. The level of New Zealand core inflation was reasonably
stable and remained in the centre of the Reserve Bank's 0-3% target band. The
New Zealand economic downturn prompted a significant easing of monetary policy,
with the Reserve Bank of New Zealand allowing short rates to decline from 7.5%
to below 4%. New Zealand short rates did rise to over 10% in the first half of
1998, given the Reserve Bank's efforts to balance the effect of a collapsing
trade-weighted New Zealand dollar, but a more stable currency and economic
recession promoted a sharp fall in rates towards the end of the period.
The Australian bond market performed well over the year with ten-year bond
yields declining from 6.19% at the beginning of November 1997 to end the period
at just below 5% in October 1998. Domestic fundamentals were supportive, as in
the last financial year, but the main factor in the bond market improvement was
a global move into bonds and away from riskier assets considered likely to
suffer from global deflation. The yield premium over US Treasury securities was
stable at close to nil, until the demand for Treasuries in the financial
turbulence of the latter part of the year increased this premium to 0.5%. The
New Zealand bond market also performed well over the year, with ten-year yields
declining from 6.7% to 5.4% over the period under review. Yields did peak at
7.1% late in 1997, but expectations of falling short-term rates and a positive
environment for global bonds led to a sharp rally over 1998.
As noted above, the Australian and New Zealand dollars both declined in
value against the US dollar over the Fund's year. The fall on both currencies
was exaggerated by hedge fund selling activity. The reasons for the downturn are
more fully discussed below. The Australian and New Zealand dollars both troughed
in late August 1998 and have recovered ground since that time, but both ended
the year substantially below late 1997 levels. The Australian dollar fell from
just over US$0.70 to just under US$0.63 over the Fund's year under review. The
New Zealand currency fell slightly further, from US$0.62 in November 1997 to
US$0.53 at the end of October 1998. Both currencies declined, although to a
lesser extent, in trade-weighted terms.
- -----------------------------
ADVANCE NOTICE BY-LAW
- -----------------------------
Effective December 4, 1998, the Fund's Board of Directors adopted a by-law
amendment requiring advance notice of any proposals to be made in person at
stockholders' meetings. For annual meetings, the notice must be given not more
than 120 days and not less than 90 days before the anniversary date of the
previous year's meeting. For annual meetings held earlier or later than 30 days
from the anniversary date of the prior year's meeting, stockholder proposals
must be notified within 10 days of the first public announcement of the date
(or, if later, 90 days before the meeting). The notice must be given to the
Fund's corporate secretary. The 1998 annual meeting was April 2, 1998. The 1999
annual meeting date will be either on April 2, 1999 or later.
For special stockholders' meetings, stockholder proposals must be notified to
the Fund within 10 days of the first public announcement of the meeting date.
2
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
The advance notice provision was adopted to permit the Fund's stockholders and
directors to consider every stockholder proposal on an informed basis and in an
organized fashion, taking into account the interests of all affected
constituencies. The new by-law does not affect any notice periods for
stockholder proposals to be included in the Fund's proxy statements under rules
of the Securities and Exchange Commission. Copies of the new by-law have been
filed with the Securities and Exchange Commission and are available from its
public reference facilities.
On behalf of the Board of Directors,
/s/ Sir Robert Cotton
Sir Robert Cotton
Chairman
/s/ David M. Felder
David M. Felder
President
December 8, 1998
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PORTFOLIO SUMMARY
At October 31, 1998, the average maturity of the Fund's Portfolio was 5.9 years
with an average duration of 4.5 years and a current yield to maturity of 5.3%.
Securities rated AAA comprised 77% of the portfolio with the remaining 23% in
AA-rated securities.
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3
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Performance from Inception through October 31, 1998
(Unaudited)
Growth of a Hypothetical $10,000 Investment
[The following table was represented as a line chart
in the printed material.]
Fund Net
Australian Index Asset Value Fund Market Value U.S. Index
---------------- ----------- ----------------- ----------
11/86 10000 10000 10000 10000
7/87 11592 11193 10358 9875
7/88 15204 14526 12826 10468
7/89 16478 15447 14206 11249
7/90 17599 16178 14297 12215
7/91 23151 20823 17979 14002
7/92 26661 23536 22130 15473
7/93 29103 25320 23254 17683
7/94 30218 26383 22880 17867
7/95 32064 27673 23491 19024
7/96 39349 33183 28633 20594
7/97 44094 36501 31130 21933
7/98 40455 32460 26735 24953
Since its inception in 1986, the Fund has achieved an average annualized return
on market value of 8.44%, 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 10.96%. Both the market and net asset value performance measures
have outpaced the Salomon Brothers US Government Bond Index which has averaged
8.43%. The Salomon Brothers Australian Government Bond Index has averaged 13.07%
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 2.19% 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) -12.50% -1.53% 2.38% 5.99% 8.44%
- ----------------------------------------------------------------------------------------
Fund Net Asset Value(2) -4.45% 3.42% 6.13% 8.07% 10.96%
- ----------------------------------------------------------------------------------------
Salomon Brothers US Gov't
Bond Index(3) 11.55% 8.40% 7.03% 9.07% 8.43%
- ----------------------------------------------------------------------------------------
Salomon Brothers Australian
Gov't Bond Index(3) -2.43% 5.84% 7.91% 9.91% 13.07%
- ----------------------------------------------------------------------------------------
</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) 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
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Economic Review
- -----------------------
ECONOMIC REVIEW
- -----------------------
The US economy did start to slow over 1998 from the robust pace seen in
the previous year and there were further signs of weakness as the year
progressed. The main global focus was the slowdown in Asia and the related
collapse in Russia, which combined to force equity markets lower and to induce
fears of global deflation in the summer of 1998. The European economies
continued to experience reasonable growth, but the Japanese economy offered few
signs of recovery, and its banking crisis still lacked a concrete solution.
Inflation remained subdued across the world's major economies; therefore bond
markets performed well. US Treasury bonds and German bonds performed
particularly well as money flowed into these markets from equities and other
risky assets.
Australia
Economic growth in Australia was strong over late 1997 and the first half
of 1998. GDP(A), the average measure of GDP, expanded by 5% in the year to March
1998, and slowed to a robust 3.9% in the year to June 1998. There was some
weakness in sectors exposed to the collapse in Asian markets, with tourism
virtually drying up in the early part of the year. However, the domestic economy
was strong and there was evidence that the export markets of Asia had, to some
extent, been replaced by European and US market gains. The growth was driven by
the domestic service sector and by an increase in the level of stocks, and
sectors reliant on commodity prices, such as mining, contracted sharply. Again,
the level of the GDP price deflators released with the growth figures was
consistent with the low levels of inflation reported in the CPI figures.
The domestic consumer sector remained resilient in the face of slower
growth abroad, and this was displayed in both the retail sales and the consumer
confidence figures. The Westpac index of consumer confidence rose from 102.6 in
October 1997 to 109 in February 1998, and although it fell sharply over the
remainder of the year, it was little changed in September 1998 from its October
1997 level. The level of current confidence generally surprised forecasters by
its strength with the perceived threat of the Asian crisis being assessed by
consumers as a problem for the future. Retail sales figures, although slower
than those observed in early 1997, were volatile, but still oscillated around an
annual growth rate of 4.5% over the period. There was evidence that expansions
in turnover were at the expense of margins, and the inability of retailers to
pass on higher import costs also highlighted the continued competitive
marketplace.
The Australian labour market, which in the Fund's last financial year had
been the focus of public concern did improve over late 1997 and 1998. The rate
of unemployment fell from 8.4% in October 1997 to 8.1% in September 1998.
However, there was still concern that the robust level of economic growth was
not being translated into more solid employment growth. Total employment did
rise by 193,000 from October 1997 to September 1998, but there is a trend
increase in the participation rate, so the entire rise is not given to reducing
unemployment. The ANZ job advertisements survey releases were consistent with a
drift lower in the unemployment rate.
The Australian inflation rate did stabilise after the significant
reductions observed over the course of 1997, but prices remained subdued. The
Treasury
5
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Economic Review
underlying rate of inflation rose slightly from 1.5% in the quarter to September
to 1.6% in the year to September 1998. The Headline rate of inflation did rise
from the negative figures experienced at the end of 1997, as a result of the
interest rate reductions at that time. Headline CPI rose from -0.2% in the year
to December 1997, to 1.3% in the year to September 1998. There was little
evidence of any increase in inflation over the period as a result of the
weakness in the Australian dollar. The Australian retailers were unable to pass
the cost of higher import prices because of a very competitive domestic market.
The inflation rate remained slightly below the Reserve Bank of Australia's 2-3%
target range. Wage inflation continued to run above the level of CPI inflation,
with average weekly ordinary time earnings increasing by 4.1% over the year to
August 1998. However, this remained below the Reserve Bank's informal 4.5%
ceiling, and productivity gains explain why this wage inflation has not passed
through into price inflation.
New Zealand
The New Zealand economy entered an official recession over the first half
of 1998 with the production measure of GDP falling 1% over the March quarter and
0.8% over the June quarter. According to this measure the economy shrank by 1.2%
over the year to June 1998. Investment was weak, perhaps reflecting the
relatively slow reduction of interest rates in the face of economic weakness,
and commodity-related sectors were particularly weak. There was also the
depressant effect of a drought on the farm-sector output. Retail sales continue
to be weak and in trend terms have been flat for the past two years. More
recently, survey evidence suggested that business confidence did improve over
the third quarter of 1998, but this represents a modest pickup from low levels.
Consumer confidence fell sharply, reaching a trough in May 1998 with a net 31%
of Colmar Brunton survey respondents expecting economic conditions to
deteriorate over the next twelve months. Sentiment has improved since, but in
October 1998 there was still a balance of consumers negative on economic
prospects.
New Zealand headline CPI inflation did increase over the period under
review, but core CPI was little changed, and remained well within the Reserve
Bank of New Zealand's 0-3% target band. Core CPI inflation was 1.8% over the
year to September 1997 and had fallen slightly to 1.7% over the year to
September 1998. There was some evidence of a passthrough of inflation from the
lower currency level because, unlike the Australian dollar, the New Zealand
dollar fell significantly in trade-weighted terms. However, this was mitigated
by a decline in housing related costs over the period. House price inflation,
particularly in the Auckland area, has been a problem for the New Zealand
economy for several years, but the Fund's last financial year brought a reversal
of this trend. Having peaked at 170 in November 1997, the index of median house
prices fell to 164 in September 1998.
Debt Markets
The Australia bond market performed well over the period under review
against a background of continued low domestic inflation, stable official
short-term rates, and a positive global bond market environment. The yield on
Australian ten-year government bonds fell from 6.19% at the end of October 1997
to 5.6% at the end of July 1998. The final months of the Fund's financial year
saw great volatility in the Australian bond market. Fears
6
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Economic Review
that the Reserve Bank would have to raise rates to protect the currency and a
transfer of funds from all markets to the US and German bond markets drove
Australian ten-year yields up to 6%. When order returned to global financial
markets, Australian bonds rallied sharply, with ten-year yields ending the Fund
year at just below 5%. The yield premium on Australian ten-year bonds over their
US counterparts remained stable at close to zero over the first half of the
period, before widening very briefly to over 1% at the height of global
financial concern. This move proved to be transitory with the premium declining
to 0.5% at the end of October, and indeed declining further since the Fund's
year end.
The New Zealand bond market also improved over the period under review, as
the positive global environment described above combined with a depressed New
Zealand economy and falling short-term interest rates. Cash rates peaked at 10%
in March 1998 as the Reserve Bank of New Zealand attempted to balance the
monetary easing being introduced by a rapidly falling trade-weighted exchange
rate. However, by the summer of 1998, it became clear that the economy was in
recession and cash rates fell sharply to end the period at just below 4%. The
yield on ten-year New Zealand bonds began the period at 6.7% and peaked at 7.35%
in mid-December 1997 on the back of concerns over the nation's widening current
account deficit. Yields then declined steadily over the remainder of the period
to end October 1998 at 5.4%.
Australian and New Zealand Dollars
The Australian dollar declined significantly in value against the US
currency over the period under review. There were several reasons for the
devaluation. The US dollar displayed continued strength over the period,
especially against Asian currencies in the first half of 1998. The Asian
slowdown led to concerns over Australian export markets. Although exporters were
relatively successful in redirecting goods to Europe and the US, sentiment
toward the Australian dollar weakened. The liquidity of the Australian dollar
led to heavy hedge fund selling of the currency as a proxy for less liquid Asian
markets. The rapid decline of global commodity prices also forced the Australian
currency lower. A degree of the devaluation in the Australian dollar over the
first half of 1998 was reversed in the latter months of the period, as a result
of a reversal in the trends noted above that had led to its weakness. Commodity
prices improved and the yen in particular strengthened considerably against the
US dollar. However, over the Fund's financial year the Australian dollar
weakened against the US dollar from US$0.70 to US$0.63.
The New Zealand currency also fell over the period, against the US dollar
and in trade-weighted terms. The New Zealand dollar was undermined by many of
the same factors as those that lowered the Australian dollar, principally the
fall against the US dollar of many of its trading partners' currencies. The New
Zealand dollar also staged a recovery late in the period under review, but fell
over the year from US$0.62 to US$0.53. The currency fell in trade-weighted terms
from 63.2 to 55.8 over the Fund's financial year. The New Zealand current
account deficit, which had been a major concern at the end of 1997, improved
slightly over the March and June quarters of 1998.
7
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Portfolio of Investments
October 31, 1998
<TABLE>
<CAPTION>
Long-Term Investments -- 97.7%
Principal Amount Value (US$)
- ---------------- -----------
<S> <C> <C> <C>
Australian Government and Semi-Government Bonds -- 66.0%
Eurobonds -- 44.1%
A$ 2,000,000 State Bank of South Australia 9.5% due 10/15/02 ................ $ 1,442,598
5,000,000 Australian Industrial Development Corp. 9.25% due 2/17/03 ................ 3,601,493
1,300,000 State Bank of New South Wales 9.25% due 2/18/03 ................ 935,414
3,300,000 Export Finance & Insurance Corp. 9% due 3/26/03 ................... 2,361,015
2,750,000 State Bank of South Australia 10.5% due 6/23/03 ................ 2,079,338
1,500,000 South Australian Government Bond 7.25% due 9/22/03 ................ 1,014,670
2,500,000 Australian Industrial Development Corp 8.75% due 7/20/04 ................ 1,817,894
22,400,000 Queensland Treasury Corp. 6.5% due 6/14/05 ................. 15,019,886
2,200,000 Treasury Corp. of Victoria 9% due 6/27/05 ................... 1,647,410
1,000,000 Commonwealth Bank of Australia 9% due 8/15/05 ................... 740,075
6,000,000 New South Wales Treasury Corp. 6.5% due 5/01/06 ................. 4,017,980
14,500,000 Queensland Treasury Corp. 8% due 7/14/09 ................... 9,480,175
------------
44,157,948
------------
Domestic Bonds -- 21.9%
A$ 10,000,000 Commonwealth Government Bond 12% due 11/15/01 ................. 7,580,468
7,000,000 Western Australia Treasury Corp. 8% due 7/15/03 ................... 4,928,221
4,000,000 Victoria Public Finance Authority 12.5% due 10/15/03 ............... 3,315,226
7,500,000 Commonwealth Government Bond 8.75% due 8/15/08 ................ 6,039,915
------------
21,863,830
------------
Total Australian Government and Semi-Government Bonds -- (Cost $64,251,457) 66,021,778
------------
Australian Eurobonds -- 16.4%
A$ 3,500,000 DSL Finance N.V. 10.25% due 4/7/00 ................ 2,343,325
6,000,000 Morgan Guaranty Trust Co. 8% due 4/18/01 ................... 4,007,863
2,000,000 Bayerische Vereinsbank 8.75% due 5/17/01 ................ 1,361,024
5,000,000 Nederlande Waterschapshank N.V. 7% due 3/15/02 ................... 3,310,558
4,000,000 National Australia Bank 7% due 7/23/04 ................... 2,689,368
3,500,000 Bayerische Vereinsbank 10.25% due 10/28/04 .............. 2,671,271
------------
Total Australian Eurobonds -- (Cost $18,292,895) 16,383,409
------------
New Zealand Eurobonds -- 12.3%
NZ$ 2,500,000 General Electric Capital Corp. 8.75% due 5/21/99 ................ 1,345,446
4,000,000 European Investment Bank 8.5% due 5/30/01 ................. 2,237,164
2,000,000 KFW International Finance 7.5% due 11/08/01 ................ 1,085,969
3,000,000 KFW International Finance 7.625% due 4/29/02 ............... 1,642,791
7,000,000 Federal National Mortgage Association (US) 7.25% due 6/20/02 ................ 3,821,503
4,400,000 I.B.R.D. 5.5% due 11/03/08 ................ 2,207,787
------------
Total New Zealand Eurobonds -- (Cost $13,736,794) 12,340,660
------------
New Zealand Government Bond -- 3.0%
NZ$ 5,000,000 New Zealand Government Bond 7% due 7/15/09--(Cost $2,583,642) 2,986,032
------------
Total Portfolio of Investments -- 97.7% (Cost $98,864,788) 97,731,879
------------
Other Assets less Liabilities -- 2.3% 2,315,006
------------
Net Assets -- 100.0% $100,046,885
============
</TABLE>
See Notes to Financial Statements.
8
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
October 31, 1998 October 31, 1997
---------------- ----------------
<S> <C> <C>
ASSETS:
Investments, at value (cost $98,864,788 and $104,665,105,
respectively) ................................................. $ 97,731,879 $ 109,765,194
Cash on deposit:
Foreign currency (cost $3,265,545 and $1,369,353, respectively) 3,270,877 1,327,008
US dollars .................................................... 14,711 59,629
Receivable for securities sold .................................. 2,179,814 --
Interest receivable ............................................. 2,788,798 3,545,878
Other assets .................................................... 14,577 11,637
------------- -------------
Total assets ................................................ 106,000,656 114,709,346
------------- -------------
LIABILITIES:
Payable for securities purchased ................................ 5,105,157 --
Dividends payable ............................................... 537,955 777,047
Investment advisory fee payable ................................. 57,806 67,022
Directors' fees and expenses payable ............................ 23,341 6,669
Other accrued expenses .......................................... 229,512 219,580
------------- -------------
Total liabilities ........................................... 5,953,771 1,070,318
------------- -------------
Net assets................................................... $ 100,046,885 $ 113,639,028
============= =============
NET ASSETS:
Net assets were comprised of:
Common stock, at $0.001 par ................................... $ 11,955 $ 11,955
Paid-in capital ............................................... 98,820,740 107,429,899
------------- -------------
98,832,695 107,441,854
Accumulated undistributed net investment income ................. -- (29,034)
Accumulated net realized gain on investment and
foreign currency transactions ................................. 2,281,942 1,348,352
Net unrealized appreciation (depreciation) on investments
and foreign currencies ........................................ (1,067,752) 4,877,856
------------- -------------
Net assets................................................... $ 100,046,885 $ 113,639,028
============= =============
Shares of common stock issued and outstanding .................. 11,954,566 11,954,566
------------- -------------
Net asset value per share....................................... $8.37 $9.51
===== =====
</TABLE>
See Notes to Financial Statements.
9
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Statement of Operations
<TABLE>
<CAPTION>
Fiscal year Fiscal year
ended ended
October 31, October 31,
1998 1997
------------ ------------
<S> <C> <C>
NET INVESTMENT INCOME:
Investment Income:
Interest and discount earned (net of foreign withholding taxes of
$233,487 and $342,974, respectively) .......................... $ 7,544,594 $ 10,024,856
------------ ------------
Expenses:
Investment advisory fees ........................................ 706,840 830,282
Custodian fees .................................................. 185,392 228,636
Directors' fees and expenses .................................... 116,795 114,420
Audit and tax services .......................................... 51,475 45,670
Printing ........................................................ 36,920 37,055
Transfer agent fees ............................................. 36,920 35,150
Postage ......................................................... 31,950 27,375
Legal ........................................................... 22,010 20,075
Stock exchange listing fee ...................................... 21,932 18,854
Miscellaneous ................................................... 11,995 10,655
Insurance ....................................................... 2,048 4,168
------------ ------------
Total operating expenses ........................................ 1,224,277 1,372,340
------------ ------------
Net investment income* .......................................... 6,320,317 8,652,516
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investment transactions* ........................................ 2,644,183 2,113,561
Foreign currency transactions** ................................. (8,266,748) (473,746)
------------ ------------
Total net realized gain (loss) .................................. (5,622,565) 1,639,815
------------ ------------
Change in unrealized appreciation (depreciation) on:
Investments* .................................................... (2,462,722) 853,558
Foreign currency denominated assets and liabilities** ........... (3,482,886) (12,441,696)
------------ ------------
Total net change in unrealized appreciation (depreciation) ...... (5,945,608) (11,588,138)
------------ ------------
Net realized and unrealized gain (loss) on investments and
foreign currencies ............................................ (11,568,173) (9,948,323)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ....................................... $ (5,247,856) $ (1,295,807)
============ ============
</TABLE>
* Net increase in net assets before foreign currency gain (loss) was
$6,501,778 and $11,619,635, respectively.
** Net realized and unrealized foreign currency gain (loss) was ($11,749,634)
and ($12,915,442), respectively.
See Notes to Financial Statements.
10
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Fiscal year Fiscal year
ended ended
October 31, October 31,
1998 1997
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ......................................... $ 6,320,317 $ 8,652,516
Net realized gain (loss) on investments and
foreign currency transactions ............................... (5,622,565) 1,639,815
Change in unrealized appreciation (depreciation) on investments
and foreign currency denominated assets and liabilities ..... (5,945,608) (11,588,138)
------------- -------------
Net increase (decrease) in net assets resulting from operations (5,247,856) (1,295,807)
------------- -------------
Distributions to shareholders:
From net investment income .................................... (6,455,466)* (9,360,426)
From net realized gain on investments and
foreign currency transactions ............................... (1,888,821)* (322,773)
------------- -------------
Net decrease in net assets resulting from
distributions to shareholders ............................... (8,344,287) (9,683,199)
------------- -------------
Capital stock transactions:
Credit for reversal of unused offering expense accrual ........ -- 116,885
------------- -------------
Net increase in net assets from capital stock transactions .... -- 116,885
------------- -------------
Total increase (decrease) in net assets ..................... (13,592,143) (10,862,121)
------------- -------------
NET ASSETS:
Beginning of period ........................................... 113,639,028 124,501,149
------------- -------------
End of period (including accumulated undistributed
net investment income of ($0) and ($29,034), respectively) .. $ 100,046,885 $ 113,639,028
============= =============
</TABLE>
* The Fund redesignated $537,955 from Distributions from net investment
income to Distributions from net realized gain on investments and foreign
currency transactions.
See Notes to Financial Statements.
11
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Financial Highlights
<TABLE>
<CAPTION>
Fiscal years ended October 31,
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value at beginning of period ... $ 9.51 $ 10.41 $ 10.08 $ 9.99 $ 10.45
-------- -------- -------- ------- -------
Net investment income .................... 0.53 0.72 0.85 0.84 0.82
Net realized and unrealized gain (loss) on
investments and foreign currencies ..... (0.97) (0.82) 0.79 0.82 (0.48)
-------- -------- -------- ------- -------
Total increase (decrease) from operations (0.44) (0.10) 1.64 1.66 0.34
-------- -------- -------- ------- -------
Distributions to shareholders:
From net investment income ............... (0.54) (0.78) (0.89) (0.89) (0.78)
From net realized gains on investment
and foreign currency transactions ...... (0.16) (0.03) -- -- (0.02)
-------- -------- -------- ------- -------
Total distributions to shareholders ...... (0.70) (0.81) (0.89) (0.89) (0.80)
-------- -------- -------- ------- -------
Decrease in net assets from capital
stock transactions ..................... -- -- (0.39) (0.65) --
-------- -------- -------- ------- -------
Offering expenses charged to capital ..... -- 0.01 (0.03) (0.03) --
-------- -------- -------- ------- -------
Net increase (decrease) in net asset value (1.14) (0.90) 0.33 0.09 (0.46)
-------- -------- -------- ------- -------
Net asset value at end of period ......... $ 8.37 $ 9.51 $ 10.41 $ 10.08 $ 9.99
======== ======== ======== ======= =======
Per share market value at end of period .. $ 6.625 $ 8.3125 $ 9.125 $ 9.25 $ 9.125
Total investment return (1) .............. (12.50)% (0.38)% 9.54% 15.74% 1.77%
Net asset value return (2) ............... (4.45)% (0.95)% 16.90% 17.93% 3.22%
Net assets at end of period (in 000's) ... $100,047 $113,639 $124,501 $96,390 $71,685
Number of shares outstanding at
end of period (in 000's) ............... 11,955 11,955 11,955 9,564 7,173
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ....................... 1.21% 1.14% 1.22% 1.32% 1.40%
Net investment income .................... 6.25% 7.21% 8.22% 8.51% 7.88%
Portfolio turnover ....................... 37.05% 26.67% 16.00% 56.55% 13.71%
</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 ex-dividend date net asset value and for rights offering,
assuming full subscription by shareholder.
See Notes to Financial Statements.
12
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Notes to Financial Statements
October 31, 1998
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, 1997 and
1998, were US$0.7033 to A$1.00 and US$0.6227 to NZ$1.00, and US$0.6253 to A$1.00
and US$0.5296 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 that mature in more than 60 days are valued at current
market quotations. Short-term securities that mature in 60 days or less are
valued at amortized cost, if their term to maturity from date of purchase was 60
days or less, or by amortizing their value on the 61st day prior to maturity, if
their original term to maturity exceeded 60 days.
13
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Notes to Financial Statements (continued)
October 31, 1998
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, 1998, permanent book and tax basis differences of $164,183 and
$8,444,975 were reclassified to paid-in capital from 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, 1997, such
reclassifications were $44,177 and $546,327, respectively.
2. Agreements
The Fund's Advisory Agreement with Kleinwort Benson Investment Management
Americas Inc., the Investment Advisor, provides for a fee, computed
14
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Notes to Financial Statements (continued)
October 31, 1998
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. For the years
ended October 31, 1997 and 1998, the Investment Advisor earned $830,282 and
$706,840, respectively, under this agreement. Pursuant to a sub-administration
contract, the Investment Adviser has appointed Dresdner RCM Global Investors LLC
(the "Administrator") to perform all administration and non-investment advisory
affairs of the Fund. The Administrator receives compensation directly from the
Advisor.
3. Portfolio Transactions
Purchases of investment securities, other than short-term investments, for the
years ended October 31, 1997 and 1998, aggregated $30,790,487 and $36,608,281,
respectively. Sales of investment securities, other than short-term investments,
totaled $32,030,698 and $37,573,285, respectively, during these periods. The
portfolio of investments at October 31, 1997, was substantially the same in
terms of types of investments to that included herein for October 31, 1998.
The United States Federal income tax basis of the Fund's investments and foreign
currency cash deposits at October 31, 1997 and 1998, was as listed below. During
the years ended October 31, 1997 and 1998, the Fund utilized capital loss
carryforwards of $508,989 and $0, respectively.
October 31, 1998 October 31, 1997
---------------- ----------------
Tax cost basis $ 89,116,171 $ 99,183,639
============ ============
Unrealized appreciation $ 9,314,574 $ 11,918,136
Unrealized depreciation (149,876) (9,573)
------------ ------------
Net unrealized
appreciation $ 9,164,698 $ 11,908,563
============ ============
4. Capital Stock
There are 100 million shares of $0.001 par value common stock authorized and
11,954,566 such shares outstanding. There were no transactions in the Fund's
capital stock for the year ended October 31, 1998.
15
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Report of Independent Accountants
To the Board of Directors and Shareholders of the Kleinwort Benson Australian
Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the October 31, 1998 portfolio of investments, 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, 1998 and 1997, the
results of its operations and the changes in its net assets for each of the two
years in the period ended October 31, 1998, and the financial highlights for
each of the five years in the period ended October 31, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1998 and 1997
by correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
November 30, 1998
16
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Dividend Reinvestment and Cash Purchase Plan
Foreign Tax Credits
Tax Information (Unaudited)
Dividend Reinvestment and Cash Purchase Plan
The Fund offers to shareholders a Dividend Reinvestment Plan which
provides participants with a prompt and simple way to reinvest their income
dividends and capital gain distributions in additional Fund shares. If you
choose to participate in the Plan, your income dividends and capital gain
distributions will automatically be reinvested in Fund shares at the lower of
market price or net asset value, at up to a 5% discount from market price, on
valuation date. The Plan also includes a Cash Purchase option which provides
Reinvestment Plan participants with the opportunity to make additional cash
investments in Fund shares directly through the Plan Agent.
The Plan is entirely voluntary and, subject to the terms and conditions of
the Plan, you may join or withdraw at any time. A brochure with more
information, including the full terms and conditions, and an application is
available from the Plan Agent, Boston EquiServe, telephone (800) 730-6001.
If you wish to participate and your shares are registered in your name,
simply complete and return the application form. If your shares are held in the
name of a brokerage firm, bank or other nominee, your shares may need to be
re-registered in your own name in order for you to participate. Please consult
your broker to determine what needs to be done to arrange for you to join the
Plan.
Foreign Tax Credits
The Fund will generally elect to treat all foreign taxes paid by it as
having been paid proportionately by its shareholders. As a result, the Form
1099-DIV's issued to shareholders by the Fund will likely include an amount of
foreign taxes paid by the Fund on the behalf of its shareholders. Shareholders
can generally use the foreign tax amount to either claim a deduction or a tax
credit on their U.S. Federal tax return.
The Fund issues its 1099-DIV tax forms in January of each year. In
February, the Fund will inform shareholders of the breakdown between foreign
taxes, dividends and distributions paid for the preceding calendar year.
Shareholders whose shares are held in "street name" should contact their broker
for foreign tax credit reporting information.
Tax Information
In accordance with United States Federal income tax regulations, a summary
for the fiscal year ended October 31, 1998, 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 1998 return should
be based on the Form 1099 which will be provided to you in January 1999. Those
Form 1099's will be based on calendar year tax information which will vary from
that reported below:
Distributions to Shareholders:
Dividends .......................................................... $0.540
Long-term Capital Gains ............................................ 0.158
Foreign Taxes (Australia) .......................................... 0.017
------
Total Distributions ................................................ $0.715
======
Distributions by Source:
Ordinary Income, Foreign Source:
Australia ........................................................ $0.476
New Zealand ...................................................... 0.081
------
Total Foreign Source ............................................. 0.557
Ordinary Income, U.S. Source ....................................... 0.000
------
Total Ordinary Income .............................................. 0.557
Long-term Capital Gains ............................................ 0.158
------
Total Distributions ................................................ $0.715
======
17
<PAGE>
Directors and Officers
Sir Robert C. Cotton
Director and Chairman of the Board
Sydney, Australia
David M. Felder
Director and President
London, England
James J. Foley
Director
Belmont, MA
Leonard T. Hinde
Director
Mosman, 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
Stephen K. West
Director
New York, NY
Robert J. Goldstein
Secretary
San Francisco, CA
Jennie W. Klein
Treasurer
San Francisco, CA
Investment Advisor
Kleinwort Benson Investment
Management Americas Inc.
New York, NY
Kleinwort
Benson
Australian
Income Fund, Inc.
Four Embarcadero Center
Suite 3000
San Francisco, CA 94111
(800) 237-4218
2520-SAR-10/98
