[GRAPHIC OMITTED]
=====================
Kleinwort
Benson
Australian
Income Fund, Inc.
=====================
Semi-Annual Report
April 30, 1998
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Report to Shareholders
- --------------------------------------------------------------------------------
Report Highlights
o Positive Australian bond returns offset by currency weakness over the
period.
o Australian dollar ended April at US$0.65 versus US$0.685 in January and
US$0.70 at the beginning of the fiscal year.
o Australian underlying inflation remains low at 1.5% for the year to March
1998.
- --------------------------------------------------------------------------------
To Our Shareholders,
Over the six months ended April 30, 1998, the value of the Fund declined
due to the weakness in the Australian and New Zealand dollars against the US
dollar. The Australian bond market, where the majority of the Fund's assets
remain invested, performed well over the period and while the New Zealand bond
market did not perform particularly well in capital terms, the Fund's
investments in short-term New Zealand dollar bonds provided a high level of
income relative to both Australian and US fixed income securities. The Fund
continued to invest in the Australian and New Zealand eurobond markets,
benefiting from returns free of withholding tax and from attractive income
premiums over similar Australian and New Zealand securities issued domestically.
At April 30, 1998, the Fund's closing market price was $7.375, a discount of
13.94% to its net asset value of $8.57.
For the six months ended April 30, 1998, the Fund's total return on net
asset value (with distributions reinvested) was -5.47%. The return on market
value (also with distributions reinvested) was slightly worse at -6.39%,
reflecting a widening of the discount to net asset value over the period. Based
on the monthly distribution rate during the period of $0.05 per share and the
Fund's closing market price on April 30, 1998, the Fund's distribution yield was
8.14%. This income yield was superior to that available to comparably rated US
cash and bond investments. A further analysis of the Fund's performance since
inception is provided on page three of this report.
At the May 28, 1998 meeting of the Fund's Board of Directors, the Board
determined to reduce the Fund's monthly distribution rate for the months of June
through November 1998 to $0.045 per share, This step was deemed prudent in view
of the current net investment income yield on the Fund's portfolio and the
weakness of the Australian dollar versus the US dollar. Even at this reduced
rate the Fund's distributions are expected to exceed its net investment income
and a portion of monthly distributions will most likely represent a non-taxable
return of capital or, to the extent permitted by applicable regulations,
realized capital gains. Based on the new monthly distribution rate of $0.045 per
share and the Fund's closing market price on April 30, 1998, the Fund's
distribution yield was 7.32%.
- -------------------------
MARKET SUMMARY
- -------------------------
Recent developments in the Australian and New Zealand economies and debt
and foreign exchange markets are covered in more detail in the Economic Review
section of this report. In summary, the Australian economy grew at a robust pace
over the period, driven by domestic demand, while concerns over the external
sector intensified as the Asian
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
financial crisis continued. Inflation appeared to have stopped declining, but
remained at historically low levels over the period, allowing the Reserve Bank
of Australia to maintain cash rates at 5%. The New Zealand economy remained weak
over the second half of 1997, with both domestic and external conditions
subdued. Inflation remained at low levels, with very few signs of inflationary
pressure emerging despite a sharp weakening of the New Zealand dollar. This
decline in the currency prompted the Reserve Bank of New Zealand to move
interest rates higher, in order to slow the loosening of monetary conditions.
The US Treasury market set a mildly positive tone for global bond markets
over the first half of the Fund's financial year. Australian bonds improved
against a background of the expected deflationary effect of events in Asia and
continued low domestic inflation. New Zealand bonds performed less well, partly
as a result of concerns over the size of the New Zealand current account
deficit, which is one of the largest by percentage of GDP in the OECD. The
increase in short-term interest rates also hampered the New Zealand bond market,
which was little changed over the period despite continued low inflation. Both
the Australian and New Zealand dollars declined against the US dollar over late
1997 and early 1998, as the decline in Asian currencies helped pushed the
Australian and New Zealand dollars down. Current account concerns and lower
commodity prices were also factors in both cases.
On behalf of the Board of Directors,
/s/ Sir Robert Cotton
Sir Robert Cotton
Chairman
/s/ David M. Felder
David M. Felder
President
May 28, 1998
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
At April 30, 1998, the average maturity of the Fund's Portfolio was 5.1 years,
with an average duration of 4.0 years and a current yield to maturity of 6.1 %.
Securities rated AAA comprised 76% of the portfolio, with the remaining 24% in
AA rated securities.
- --------------------------------------------------------------------------------
2
<PAGE>
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Performance from Inception through April 30, 1998
(Unaudited)
Growth of a Hypothetical $10,000 Investment
[GRAPHIC OMITTED]
[The following information was represented as a line chart
in the printed material.]
Australian Index Fund Net Asset Value Fund Market Value U.S. Index
11/86 10000 10000 10000 10000
4/87 11592 11193 10358 9875
4/88 15204 14526 12826 10468
4/89 16478 15447 14206 11249
4/90 17599 16178 14297 12215
4/91 23151 20823 17979 14002
4/92 26661 23536 22130 15473
4/93 29103 25320 23254 17683
4/94 30218 26383 22880 17867
4/95 32064 27673 23491 19024
4/96 39349 33183 28633 20594
4/97 44094 36501 31130 21933
4/98 42344 34176 28113 24380
Since its inception in 1986, the Fund has achieved an average annualized return
on market value of 9.48%, 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 11.37%. Both the market and net asset value performance measures
have outpaced the Salomon Brothers US Government Bond Index which has averaged
8.12%. The Salomon Brothers Australian Government Bond Index has averaged 13.48%
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 2.21% since inception, the
Fund has also outperformed the Australian index.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Annualized 6 10 Since
Performance Months* 1 Year 3 Years 5 Years Years Inception+
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fund Market Value(1) -6.39% -9.69% 6.17% 3.87% 8.16% 9.48%
- ----------------------------------------------------------------------------------------
Fund Net Asset Value(2) -5.47% -6.37% 7.29% 6.18% 8.93% 11.37%
- ----------------------------------------------------------------------------------------
Salomon Brothers US Gov't
Bond Index(3) 3.60% 11.16% 8.62% 6.63% 8.92% 8.12%
- ----------------------------------------------------------------------------------------
Salomon Brothers Australian
Gov't Bond Index(4) -4.49% -3.97% 9.71% 7.79% 10.79% 13.48%
- ----------------------------------------------------------------------------------------
</TABLE>
* Not Annualized.
+ Fund commenced operations November 28, 1986.
(1) Based on market value per share, adjusted for rights offerings, and
assumes reinvestment of all distributions at reinvestment plan
prices.
(2) Based on net asset value per share, adjusted for rights offerings,
and assumes reinvestment of all distributions at the ex-dividend
date net asset value. This measures the performance of the
underlying Fund portfolio and may not be indicative of returns to
investors.
(3)(4) The Salomon Brothers US and Australian Government Bond Indices are
US$ based unmanaged indices.
Please remember that past performance may not be indicative of future results.
3
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Economic Review
- ---------------------------
ECONOMIC REVIEW
- ---------------------------
Global Background
The US economy remained robust in late 1997 and through the first quarter
of 1998, with American consumers driving an acceleration in economic activity.
Exports were weak, reflecting the economic slowdown in South East Asia, but
domestic growth kept unemployment on a downward trend. The Japanese economy
continued to languish, despite government efforts to stimulate demand. There
were further signs of stronger growth in Europe, although stubbornly high
unemployment persisted, and progress towards the EMU project continued smoothly.
Inflation remained low, and indeed continued to fall, across the world's major
economies, despite the level of growth in the US. Global bond markets improved
over the six month period against a background of likely deflationary effects
from the Asian financial crisis. The yield on the US Treasury long bond fell
from 6.2% at the beginning of November to 5.95% at the end of April. Japanese
bonds performed slightly less well and German bonds outperformed their US
counterparts.
Australia
Australian GDP growth slowed over the fourth quarter from the pace
recorded over the earlier part of the year. GDP(A) rose 0.5% over the fourth
quarter, after a rise of 1.1 % in the third quarter of the year, to be up 3.6%
over 1997 as a whole. Domestic spending remained reasonably robust, but a large
proportion of this consumption was imported, and thus production in Australia
was more subdued. In addition, there was a decline in exports over the second
half of 1997, consistent with the drop in Asian economic activity. In
particular, all sectors of the economy dependent on tourism suffered towards the
end of the year and over the first part of 1998. The GDP data revealed an
encouraging improvement in productivity, explaining some of the observed
divergence between wage growth and inflation.
Retail Sales slowed slightly over the year end, but remained at firm
levels, indicating the ongoing strength of the domestic economy. The trend
measure of sales rose 4.3% in the year to March 1998, having peaked at 4.9% in
the year to November 1997. The car sales data have shown particular strength in
recent months, in response to lower interest rates. Monthly sales data remained
volatile, highlighting seasonal adjustment difficulties over the year end.
Consumer confidence in April 1998 was little changed from the level recorded in
October 1997. According to the Westpac consumer sentiment index, confidence rose
into the start of 1998, before falling back sharply in March 1998 on fears over
the effect of Asian troubles on Australia.
The Australian labor market improved over the period under review, with
the rate of unemployment falling from 8.4% in October 1997 to 7.9% in April
1998. Total employment increased by an average of 18,000 over the six months to
April, and gains were evenly split between full-time and part-time employment.
The rate of growth of official employment failed to reach the strength predicted
by such leading indicators as the ANZ job advertisements survey. The ANZ survey
for April moved to its highest level since March 1995, although some doubt has
been cast on the validity of this measure given alterations to the way in which
positions are advertised.
Inflation in Australia continued to run at historically low levels, below
the lower end of the Reserve Bank of Australia's 2-3% target range. CPI figures
for the March quarter of 1998 were in line with market expectations, with the
Treasury underlying rate rising 1.5% over the year to March. This did represent
an increase from a rise of 1.4% in the year to December 1997, largely as a
result of weak car and food prices being reversed over the first
4
<PAGE>
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Economic Review
quarter of the year. The headline CPI was still down on year ago levels,
reflecting the reduction in mortgage rates (the effect of which is excluded from
the underlying inflation rate) over the year. There was no significant boost to
inflation from the decline in the Australian dollar, a feature that may well
impact future inflation levels.
Wage inflation figures released over the period gave an uncertain picture
of the trend in wage growth. Average weekly ordinary time earnings rose 3.7% in
the year to November 1997, after rising 4.4% in the year to August 1997.
However, wage growth then increased to 3.9% in the year to February 1998. While
this rate was below the Reserve Bank's level of concern, it is unusual that wage
inflation has not been dragged lower by failing CPI inflation over the last two
years. The Industrial Relations Committee made a slightly higher than expected
safety net wage award, but this should not add more than 0.6% to average
earnings over the coming year.
The Australian Balance of Payments became the focus of market attention
over the period under review. The current account deficit widened to A$5.7
billion in the December quarter of 1997, from A$4.7 billion in the September
quarter. Deterioration in the trade balance, a result of the strong domestic
demand and weak export markets, had begun in the September quarter, but was
masked by significant Reserve Bank of Australia gold sales. The collapse of
trade to the Asian region, and Korea in particular, led to fears that the
current account deficit could expand to problematic levels.
New Zealand
New Zealand economic growth remained subdued over the period under review.
The annualized pace of GDP growth fell from 2.9% in the June quarter of 1997 to
2.4% in the September quarter, and again to 2.1% in the final quarter of the
year. Growth in the December quarter was driven almost entirely by primary
industry output and by inventory accumulation, with survey evidence that the
majority of inventory accumulation was involuntary. The service and
manufacturing sectors of the economy recorded very low growth over the December
quarter, consistent with manufacturing surveys. Retail Sales data remained weak
in the first quarter of 1998, suggesting a small contribution from domestic
demand in first quarter GDP.
The New Zealand labor market was reasonably resilient in the face of
declining activity. Employment rose 0.4% over the December quarter of 1997, the
majority of which was represented by gains in full-time employment. The rate of
unemployment declined marginally from 6.8% to 6.7% over the quarter. These
figures were not entirely consistent with leading and anecdotal employment
indicators, which suggested a weaker labor market. Consumer confidence
deteriorated over the early part of 1998, with economic activity slowing and
concerns over the effect of the Asian currency crisis intensifying. The Colmar
Brunton Survey reported a net 5% of households pessimistic on the outlook for
the economy in the December quarter of 1997. In the first quarter of 1998 this
had risen to a net 17% of households pessimistic.
New Zealand inflation was slightly below expectations over the period
under review. CPI ex-credit services rose 1.6% in the year to December 1997, and
by 1.7% in the year to March 1998. The major positive influence on inflation was
a rise in food prices, but this was offset by falling clothing and transport
prices. There was a further improvement in the previously stubborn non-tradable
goods inflation over the period. However, the weakness of the currency does not
seem to have fed into higher tradable goods inflation, with importers unable to
pass on price rises to weak domestic consumers. Despite showing some strength
over the March quarter of 1998, inflation in the housing sector has
5
<PAGE>
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Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Economic Review
slowed markedly from the level observed over recent years, particularly in the
Auckland area.
The New Zealand current account continued to deteriorate over the second
half of 1997 and became a major concern for fixed income investors while also
dampening sentiment towards the New Zealand dollar. The current account deficit
widened from 6.7% to 7.8% over the second half of 1997. The trade balance
deteriorated over the first quarter of 1998, and there are fears that current
account data for the March quarter will show a further deterioration.
Debt Markets
The Reserve Bank of Australia left official interest rates unchanged at
5.0% over the period, with Asian related weakness balanced by strength in the
domestic economy. Over the first three months of 1998, there were growing
expectations of a cut in rates, but despite continued low inflation, Reserve
Bank policy remained on hold. The Australian bond market improved over the
period, with the yield on ten year government bonds falling from 6.2% in early
November 1997 to 5.8% in April 1998. While the market drew support from a
generally positive US Treasury market, the main support came from the predicted
deflationary effect of the Asian financial crisis on the Australian economy. The
yield premium on Australian ten year bonds over their US Treasury counterparts
declined from 25 basis points to close to zero over the period.
The weakness of the New Zealand dollar at the start of 1998 led the
Reserve Bank of New Zealand to raise short-term interest rates in order to slow
the easing in monetary conditions. Short-term rates rose from below 7.5% in late
1997 to 9% at the end of April. The increases in short-term rates hampered the
progress of longer bonds, and the yield on ten year maturities rose slightly
from 6.65% to 6.8% over the period, having peaked at 7.4%. In addition, there
were concerns over the size of the New Zealand current account deficit, despite
domestic bond fundamentals remaining supportive.
Australian and New Zealand Dollars
The Australian dollar was volatile over the period under review, ending
lower against the US dollar but little changed in trade-weighted terms. The
currency declined sharply from US$0.70 to just above US$0.55 over the last two
months of 1997. There were two major factors in the Australian dollar's fall.
Firstly, was a sharp decline in the currencies of Australia's Asian trading
partners, chiefly South Korea and Japan. In addition, the price of gold, still a
key export commodity, was in trend decline, along with commodity prices in
general. The reversal of these trends over early 1998 allowed the Australian
dollar to recover to US$0.69, but the decline continued over the remainder of
the period, with the Asian concerns nearly returning and concerns over the
Australian current account emerging. The currency finished April just over
US$0.65, but has weakened slightly further during May.
The New Zealand dollar was also weak against the US dollar over the period
under review and declined in tradeweighted terms as well. The currency fell from
US$0.63 at the start of November to just above US$0.55 at the end of April 1998.
The New Zealand currency has been subject to many of the same pressures as the
Australian dollar in recent months, as while it is less exposed to the gold
price, the New Zealand economy has close links with the Asian region. In
addition, the level of the New Zealand current account deficit undermined
foreign confidence in the New Zealand dollar. The weakness in the domestic
economy led to expectations that interest rates would fall in the medium term,
so the increase in short rates was viewed as temporary, and gave little support
to the currency. During this period, the New Zealand dollar has declined
relative to the Australian dollar.
6
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Portfolio of Investments and Cash on Deposit
<TABLE>
<CAPTION>
April 30, 1998
(Unaudited)
Long-Term Investments -- 97.1%
Principal Amount Value (US$)
- ---------------- -----------
<S> <C> <C> <C>
Australian Government and Semi-Government Bonds -- 66.7%
Eurobonds -- 45.9%
A$ 2,000,000 State Bank of South Australia 9.5% due 10/15/02 ...... $ 1,481,442
5,000,000 Australian Industrial Development 9.25% due 2/17/03 ...... 3,704,258
Corp.
1,300,000 State Bank of New South Wales 9.25% due 2/18/03 ...... 962,174
3,300,000 Export Finance & Insurance Corp. 9% due 3/26/03 ......... 2,423,716
16,450,000 Queensland Treasury Corp. 8% due 5/14/03 ......... 11,821,134
2,750,000 State Bank of South Australia 10.5% due 6/23/03 ...... 2,142,811
1,500,000 South Australian Government Bond 7.25% due 9/22/03 ...... 1,032,861
2,500,000 Australian Industrial Development 8.75% due 7/20/04 ...... 1,855,390
Corp.
22,400,000 Queensland Treasury Corp. 6.5% due 6/14/05 ....... 15,096,049
2,200,000 Treasury Corp. of Victoria 9% due 6/27/05 ......... 1,679,896
1,000,000 Commonwealth Bank of Australia 9% due 8/15/05 ......... 758,853
6,000,000 New South Wales Treasury Corp. 6.5% due 5/01/06 ....... 4,028,479
------------
46,987,063
------------
Domestic Bonds -- 20.8%
A$10.000,000 Commonwealth Government Bond 12% due 11/15/01 ....... 7,919,750
7,000,000 Western Australia Treasury Corp. 8% due 7/15/03 ......... 5,030,680
4,000,000 Victorian Public Finance Authority 12.5% due 10/15/03 ..... 3,427,261
6,000,000 Commonwealth Government Bond 10% due 2/15/06 ........ 4,946,312
------------
21,324,003
------------
Total Australian Government and Semi-Government Bonds -- (Cost $67,123,358) 68,311,066
------------
Australian Eurobonds -- 16.5%
A$ 3,500,000 DSL Finance N.V. 10.25% due 4/7/00 ...... 2,475,664
6,000,000 Morgan Guaranty Trust Co. 8% due 4/18/01 ......... 4,151,284
2,000,000 Bayerische Vereinsbank 8.75% due 5/17/01 ...... 1,413,543
5,000,000 Nederlande Waterschapshank N.V. 7% due 3/15/02 ......... 3,405,234
4,000,000 National Australia Bank 7% due 7/23/04 ......... 2,724,292
3,500,000 Bayerische Vereinsbank 10.25% due 10/28/04 .... 2,769,219
------------
Total Australian Eurobonds -- (Cost $18,363,629) 16,939,236
------------
New Zealand Eurobonds -- 12.1%
NZ$ 5,000,000 Province of Alberta 8% due 10/30/98 ........ 2,762,918
2,500,000 General Electric Capital Corp. 8.75% due 5/21/99 ...... 1,390,250
4,000,000 I.B.R.D. 7% due 9/18/00 ......... 2,174,671
4,000,000 European Investment Bank 8.5% due 5/30/01 ....... 2,247,553
7,000,000 Federal National Mortgage Association 7.25% due 6/20/02 ...... 3,824,730
------------
Total New Zealand Eurobonds -- (Cost $14,341,702) 12,400,122
------------
New Zealand Government Bond -- 1.8%
NZ$ 3,000,000 New Zealand Government Bond 10% due 3/15/02 -- 1,810,719
(Cost $2,227,224) ------------
Total Long-Term Investments -- (Cost $102,055,913) 99,461,143
------------
Cash on Deposit -- 0.8%
A$ 1,155,554 Brown Brothers Harriman & Co., upon demand at 3.5625% ......... 753,711
US$ 36,439 Brown Brothers Harriman & Co., upon demand at 4.50% ........... 36,439
------------
Total Cash on Deposit -- (Cost $792,118) ........................................ 790,150
------------
Total Portfolio of Investments and Cash on Deposit-- 97.9% (Cost $102,848,031) .. 100,251,293
Other Assets less Liabilities -- 2.1% ........................ 2,150,671
------------
Net Assets -- 100.0% $102,401,964
============
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Statements of Assets and Liabilities
<TABLE>
<CAPTION>
April 30, 1998 October 31, 1997
-------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS:
Investments, at value (cost $102,055,913 and
$104,655,105,
respectively) ................. $ 99,461,143 $109,765,194
Cash on deposit:
Foreign currency (cost $755,679 and $1,369,353,
respectively) ..................... 753,711 1,327,008
US dollars .......................................... 36,439 59,629
Interest receivable .................................. 2,988,880 3,545,878
Other assets ......................................... 32,923 11,637
------------ ------------
Total assets ........................................ 103,273,096 114,709,346
------------ ------------
LIABILITIES:
Dividends payable .................................... 597,728 777,047
Investment advisory fee payable ...................... 60,230 67,022
Directors' fees and expenses payable ................. 11,203 6,669
Other accrued expenses ............................... 201,971 219,580
...................................................... ------------ ------------
Total liabilities ................................... 871,132 1,070,318
------------ ------------
Net assets .......................................... $102,401,964 $113,639,028
============ ============
NET ASSETS:
Net assets were comprised of:
Common stock, at $0.001 par .......................... $ 11,955 $ 11,955
Paid-in capital ...................................... 107,429,899 107,429,899
------------ ------------
107,441,854 107,441,854
Accumulated net investment loss ...................... (269,167) (29,034)
Accumulated net realized gain (loss) on investment and
foreign currency transactions ....................... (2,065,630) 1,348,352
Net unrealized appreciation (depreciation) on
investments and foreign currencies .................. (2,705,093) 4,877,856
------------ ------------
Net assets .......................................... $102,401,964 $113,639,028
============ ============
Shares of common stock issued and outstanding ........ 11,954,566 11,954,566
------------ ------------
Net asset value per share ............................ $ 8.57 $ 9.51
============ ============
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six months ended April 30,
1998 1997
---- ----
<S> <C> <C>
NET INVESTMENT INCOME:
Investment Income:
Interest and discount earned (net of foreign
withholding taxes of $110,791 and $178,922,
respectively) ...................................... $ 4,103,824 $ 5,202,693
----------- -----------
Expenses:
Investment advisory fees ............................ 370,175 421,292
Custodian fees ...................................... 101,615 117,839
Directors' fees and expenses ........................ 59,549 55,748
Audit and tax services .............................. 26,245 28,598
Transfer agent fees ................................. 18,824 19,910
Printing ............................................ 18,824 19,367
Postage ............................................. 16,290 13,575
Legal ............................................... 11,222 9,955
Stock exchange listing fee .......................... 8,708 10,684
Insurance ........................................... 1,448 1,810
Miscellaneous ....................................... 5,141 3,450
----------- -----------
Total operating expenses ............................ 638,041 702,228
----------- -----------
Net investment income* .............................. 3,465,783 4,500,465
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain (loss) on:
Investment transactions* ............................ 658,774 481,739
Foreign currency transactions** ..................... (2,721,890) 947,867
----------- -----------
Total net realized gain (loss) ...................... (2,063,116) 1,429,606
----------- -----------
Change in unrealized appreciation (depreciation) on:
Investments* ........................................ (2,279,329) (3,210,367)
Foreign currency denominated assets and liabilities** (5,303,620) (2,790,964)
----------- -----------
Total net unrealized appreciation (depreciation) .... (7,582,949) (6,001,331)
----------- -----------
Net realized and unrealized loss on investments and
foreign currencies ................................. (9,646,065) (4,571,725)
----------- -----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS .......................... $ (6,180,282) $ (71,260)
=========== ===========
</TABLE>
* Net increase in net assets before foreign currency gain (loss) was
$1,845,228 and $1,771,837, respectively.
** Net realized and unrealized foreign currency loss was ($8,025,510) and
($1,843,097), respectively.
See Notes to Financial Statements.
9
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six months Fiscal year
ended ended
April 30, October 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income .............................................. $ 3,465,783 $ 8,652,516
Net realized gain (loss) on investment and
foreign currency transactions ..................................... (2,063,116) 1,639,815
Change in unrealized appreciation (depreciation) on investments
and foreign currency denominated assets and liabilities ........... (7,582,949) (11,588,138)
------------ ------------
Net decrease in net assets resulting from operations ............... (6,180,282) (1,295,807)
------------ ------------
Distributions to shareholders:
From net investment income ......................................... (3,705,916) (9,360,426)
From net realized gain on investment and
foreign currency transactions ..................................... (1,350,866) (322,773)
------------ ------------
Net decrease in net assets resulting from
distributions to shareholders ..................................... (5,056,782) (9,683,199)
------------ ------------
Capital stock transactions:
Credit for reversal of unused rights offering expense
accrual ........................................................... -- 116,885
------------ ------------
Net increase in net assets from capital stock transactions ......... -- 116,885
------------ ------------
Total decrease in net assets ...................................... (11,237,064) (10,862,121)
------------ ------------
NET ASSETS:
Beginning of period ................................................ 113,639,028 124,501,149
------------ ------------
End of period (including accumulated undistributed
net investment income of ($269,167) and ($29,034),
respectively) ..................................................... $102,401,964 $113,639,028
============ ============
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Financial Highlights
<TABLE>
<CAPTION>
Six months
ended
April 30, Fiscal years ended October 31,
1998 1997 1996 1995 1994 1993
---------- -------- -------- ------- ------- -------
(Unaudited)
<S> <C> <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 $ 9.97
-------- -------- -------- ------- ------- -------
Net investment income ............................... 0.29 0.72 0.85 0.84 0.82 0.77
Net realized and unrealized gain (loss) on
investments and foreign currencies ................. (0.81) (0.82) 0.79 0.82 (0.48) 0.47
-------- -------- -------- ------- ------- -------
Total increase (decrease) from operations ........... (0.52) (0.10) 1.64 1.66 0.34 1.24
-------- -------- -------- ------- ------- -------
Distributions to shareholders:
From net investment income .......................... (0.31) (0.78) (0.89) (0.89) (0.78) (0.74)
From net realized gains on investment
and foreign currency transactions .................. (0.11) (0.03) -- -- (0.02) --
-------- -------- -------- ------- ------- -------
Total distributions to shareholders ................. (0.42) (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 .......... (0.94) (0.90) 0.33 0.09 (0.46) 0.48
-------- -------- -------- ------- ------- -------
Net asset value at end of period .................... $ 8.57 $ 9.51 $ 10.41 $ 10.08 $ 9.99 $ 10.45
======== ======== ======== ======= ======= =======
Per share market value at end of period ............. $ 7.375 $ 8.3125 $ 9.125 $ 9.25 $ 9.125 $ 9.75
Total investment return(1) .......................... (6.39)% (0.38)% 9.54% 15.74% 1.77% 9.23%
Net asset value return(2) ........................... (5.47)% (0.95)% 16.90% 17.93% 3.22% 12.65%
Net assets at end of period (in 000's) .............. $102,402 $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 11,955 9,564 7,173 7,173
RATIOS TO AVERAGE NET ASSETS:
Operating expenses .................................. 1.20% 1.14% 1.22% 1.32% 1.40% 1.47%
Net investment income ............................... 6.58% 7.21% 8.22% 8.51% 7.88% 7.45%
Portfolio turnover .................................. 15.45% 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.
11
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Notes to Financial Statements
April 30, 1998
(Unaudited)
The Kleinwort Benson Australian Income Fund, Inc. (the "Fund") was incorporated
in Maryland on August 12, 1986 and is registered as a closed-end,
non-diversified investment company under the Investment Company Act of 1940, as
amended.
1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Basis of Presentation: The financial statements of the Fund are prepared in
accordance with accounting principles generally accepted in the United States
using the United States dollar as both the functional and reporting currency.
(For tax purposes the Fund uses the Australian dollar as its functional currency
- -- see Taxes.) The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
of certain reported amounts in the financial statements. Actual amounts could
differ from those estimates.
Foreign Currency Translation: The books and records of the Fund are maintained
in United States dollars. Australian dollar ("A$") and New Zealand dollar
("NZ$") amounts are translated into United States dollars on the following
basis:
(i) market value of investment securities and other assets and liabilities --
at the current prevailing rate of exchange.
(ii) purchases and sales of investment securities and income and expenses -- at
the rates of 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
April 30, 1998 were US$0.7033 to A$1.00 and US$0.6227 to NZ$1.00, and US$0.6523
to A$1.00 and US$0.5555 to NZ$1.00, respectively.
Investment Valuation: Investment securities are stated at value. Investments for
which market quotations are readily available are valued at the last reported
sales prices. If there is no sales price on the date of valuation, then
investments are valued at the most recently available sales price or at fair
value as determined in good faith by or under the direction of the Fund's Board
of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost, if their term to maturity from date of purchase was 60
days or less, or by
12
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Notes to Financial Statements (continued)
April 30, 1998
(Unaudited)
amortizing their value on the 61st day prior to maturity, if their original term
to maturity exceeded 60 days.
Market and Currency Risk: Foreign security and currency transactions may involve
certain considerations and risks not typically associated with those of domestic
origin as a result of, among other factors, the level of governmental
supervision and regulation of foreign securities markets and the possibility of
political or economic instability. The abilities of the issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic or political developments in a particular country.
Investment Transactions and Investment Income: Investment security transactions
are recorded on the trade date. Realized and unrealized gains and losses on
investments and foreign currencies are calculated on the identified cost basis.
Interest income is recorded on the accrual basis and interest receivable is
reflected in the Statement of Assets and Liabilities net of accrued withholding
taxes. Premiums and discounts on debt securities are amortized over the life of
the security.
Forward Currency Contracts: The Fund may enter into forward currency contracts
in order to hedge its exposure to changes in foreign currency exchange rates on
its foreign portfolio holdings. A forward contract is a commitment to purchase
or sell a foreign currency at a future date at a negotiated forward rate.
Forward currency contracts are valued based on the current forward rate of
exchange. Fluctuations in the value of such contracts are recorded as unrealized
foreign exchange gain or loss; realized gains or losses are included in net
realized gain or loss on foreign currency transactions.
Taxes: For Federal income tax purposes, substantially all of the Fund's
transactions are accounted for using the Australian dollar as the functional
currency. Accordingly, only realized currency gains and losses resulting from
the repatriation of A$ into US$ or NZ$ into A$ or US$ are recognized for tax
purposes.
No provision has been made for United States income taxes because it is the
Fund's policy to meet the requirements of the United States Internal Revenue
Code applicable to regulated investment companies and to distribute, within
allowable time limits, all of its taxable income to shareholders. As the Fund
uses the Australian dollar as its functional currency for tax purposes, there
are character differences between taxable income and net investment income and
net realized gain (loss) on investments and foreign currencies as computed for
financial statement purposes. Australia imposes a withholding tax of 10% on most
interest and discount earned. Eurobonds and New Zealand government bonds are
generally not subject to withholding taxes.
Dividends and Distributions: The Fund declares and pays dividends of net
investment income on a monthly basis. Distributions of net realized capital
gains, if any, are made annually. Dividends and distributions are recorded on
their ex-dividend date. The amount of dividends and distributions from net
investment income and net realized capital gains are determined in accordance
with federal income tax regulations which may differ with generally accepted
accounting principles. These "book/tax" differences are either temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their
tax-basis treatment; temporary differences do not require a reclassification.
At October 31, 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.
13
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Notes to Financial Statements (continued)
April 30, 1998
(Unaudited)
2. Agreements
The Fund's Advisory Agreement with Kleinwort Benson Investment Management
Americas Inc., the Investment Advisor, provides for a fee, computed weekly and
payable monthly, at an annual rate of 0.70% of the Fund's average annual net
assets up to $100,000,000 and at 0.65% thereafter. For the six months ended
April 30, 1997 and 1998, the Investment Advisor earned $421,292 and $370,175,
respectively, under this agreement.
3. Portfolio Transactions
Purchases of investment securities, other than short-term investments, for the
year ended October 31, 1997 and the six months ended April 30, 1998, aggregated
$30,790,487 and $15,964,829, respectively. Sales of investment securities, other
than short-term investments, totaled $32,030,698 and $16,958,149, 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 April 30, 1998.
The United States Federal income tax basis of the Fund's investments and foreign
currency cash deposits at October 31, 1997 and April 30, 1998 was as listed
below. During the year ended October 31, 1997, the Fund utilized capital loss
carryforwards of $508,989.
April 30, 1998 October 31, 1997
-------------- ----------------
Tax cost basis $91,050,089 $99,183,639
=========== ===========
Unrealized appreciation $ 9,850,483 $11,918,136
Unrealized depreciation (685,718) (9,573)
----------- -----------
Net unrealized
appreciation $ 9,164,765 $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. 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.
14
<PAGE>
- -------------------
Kleinwort
Benson
Australian
Income Fund, Inc.
- -------------------
Dividend Reinvestment and Cash Purchase Plan
Foreign Tax Credits
Shareholder Meeting Results (Unaudited)
Dividend Reinvestment and Cash Purchase Plan
The Fund offers to shareholders a Dividend Reinvestment Plan which
provides participants with a prompt and simple way to reinvest their income
dividends and capital gain distributions in additional Fund shares. If you
choose to participate in the Plan, your income dividends and capital gain
distributions will automatically be reinvested in Fund shares at the lower of
market price or net asset value, at up to a 5% discount from market price, on
valuation date. The Plan also includes a Cash Purchase option which provides
Reinvestment Plan participants with the opportunity to make additional cash
investments in Fund shares directly through the Plan Agent.
The Plan is entirely voluntary and, subject to the terms and conditions of
the Plan, you may join or withdraw at any time. A brochure with more
information, including the full terms and conditions, and an application is
available from the Plan Agent, Boston EquiServe, telephone (800) 730-6001.
If you wish to participate and your shares are registered in your name,
simply complete and return the application form. If your shares are held in the
name of a brokerage firm, bank or other nominee, your shares may need to be
re-registered in your own name in order for you to participate. Please consult
your broker to determine what needs to be done to arrange for you to join the
Plan.
Foreign Tax Credits
The Fund will generally elect to treat all foreign taxes paid by it as
having been paid proportionately by its shareholders. As a result, the Form
1099-DIV's issued to shareholders by the Fund will likely include an amount of
foreign taxes paid by the Fund on the behalf of its shareholders. Shareholders
can generally use the foreign tax amount to either claim a deduction or a tax
credit on their U.S. Federal tax return.
The Fund issues its 1099-DIV tax forms in January of each year. In
February, the Fund will inform shareholders of the breakdown between foreign
taxes, dividends and distributions paid for the preceding calendar year.
Shareholders whose shares are held in "street name" should contact their broker
for foreign tax credit reporting information.
Shareholder Meeting Results
The Fund's Annual General Meeting of Shareholders was held on April 2,
1998. Issues presented for the approval of shareholders were (1) the election of
four Directors and (2) the ratification of the selection of Price Waterhouse LLP
as Independent Accountants for the Fund for the fiscal year ending October 31,
1998.
The election of Directors and the selection of accountants were approved
by shareholders by large margins. There were 11,954,566 shares eligible to vote
at the meeting and voting results were as follows:
Number of Shares Voted
----------------------
Issue For Against Abstained
- ----- --- ------- ---------
Election of Directors:
Sir Robert Cotton 10,756,629 262,063 --
David M. Felder 10,759,301 259,391 --
James J. Foley 10,767,086 251,606 --
Stephen K. West 10,727,559 291,133 --
Selection of Independent
Accountants 10,784,419 64,398 169,875
Other Directors whose term of office continued after the meeting are Leonard T.
Hinde, The Earl of Limerick, G. William Miller and Nigel S. MacEwan.
15
<PAGE>
Directors and Officers
Sir Robert C. Cotton
Director and Chairman of the Board
Sydney, Australia
David M. Felder
Director and President
London, England
James J. Foley
Director
Belmont, MA
Leonard T. Hinde
Director
Cremorne, NSW, Australia
The Earl of Limerick
Director
London, England
Nigel S. MacEwan
Director
Darien, CT
G. William Miller
Director and Deputy Chairman of the Board
Washington, DC
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.
Four Embarcadero Center
Suite 3000
San Francisco, CA 94111
(800) 237-4218
2520-SAR-4/98
