THE AUSTRIA FUND
ALLIANCE CAPITAL
ANNUAL REPORT
AUGUST 31, 1998
LETTER TO SHAREHOLDERS THE AUSTRIA FUND
_______________________________________________________________________________
October 26, 1998
Dear Shareholder:
This annual report provides an update of The Austria Fund's performance and
market activity for the period ended August 31, 1998.
INVESTMENT RESULTS
The following table shows how your Fund performed compared to its benchmark,
the Credit Aktien Index, for the three, six and 12-month periods ended August
31, 1998. As you can see, both your Fund and its benchmark performed poorly
over the three-month period ended August 31, 1998, mainly due to the global
financial crisis.
Your Fund outperformed its benchmark over the three-month period due to an
underweighting in the banking sector which performed poorly relative to the
benchmark. Over the longer 12-month time frame, your Fund performed well,
posting returns of 10.78% at net asset value, while the benchmark declined
slightly. While the global financial crisis has had a negative effect on
current returns, we remain optimistic about Austria's long-term performance and
believe that the Fund remains well positioned to take advantage of future
market advances.
INVESTMENT RESULTS*
Period Ended August 31, 1998
TOTAL RETURNS
---------------------------------------
3 MONTHS 6 MONTHS 12 MONTHS
-------- -------- ---------
THE AUSTRIA FUND -20.01% -3.28% 10.78%
CREDIT AKTIEN INDEX -26.01% -12.94% -0.71%
* THE FUND'S INVESTMENT RESULTS ARE CUMULATIVE TOTAL RETURNS FOR THE PERIOD
AND ARE BASED ON THE NET ASSET VALUE AS OF AUGUST 31, 1998. ALL FEES AND
EXPENSES RELATED TO THE OPERATION OF THE FUND HAVE BEEN DEDUCTED. RETURNS FOR
THE FUND INCLUDE THE REINVESTMENT OF ANY DISTRIBUTIONS PAID DURING THE PERIOD.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE CREDIT AKTIEN INDEX IS A CAPITALIZATION-WEIGHTED INDEX COMPRISED OF 25
DOMESTIC COMPANIES ON THE VIENNA STOCK EXCHANGE. THE INDEX IS UNMANAGED AND
REFLECTS NO FEES OR EXPENSES. AN INVESTOR CANNOT INVEST DIRECTLY IN THE INDEX.
ECONOMIC REVIEW
Austria has not been immune to the turmoil in global markets. The stock market
has weakened considerably over the period under review as first the Russian
crisis and the subsequent hedge fund problems have led to a severe squeeze in
global liquidity. Austrian banks, with their long-standing trading links to
Russia and Eastern Europe, have been particularly hard hit by the emerging
markets crisis.
However, the underlying macroeconomic situation in Austria remains quite
favorable. We continue to estimate Gross Domestic Product growth of around 3%
in 1998 and some slight decline below 3% in 1999. However, our forecasts for
next year are highly dependent upon the world's governments and central banks
being able to avoid the recessionary implications of a global credit crunch.
The Austrian Central Bank, alongside its counterparts in the rest of Europe, is
experiencing considerable pressure to cut interest rates in this environment.
Given that inflation remains particularly low in Austria, we continue to
estimate a Consumer Price Index rise of only 1.1% for 1998. Subsequently, we
are hopeful that some positive response in terms of monetary policy will be
forthcoming.
The Austrian stock market has continued to underperform the European averages
over the course of 1998. This underperformance has again been primarily driven
by a lack of interest on behalf of local investors in the Austrian market. We
remain hopeful that the abolition of anonymous savings accounts will increase
investor interest in owning equities. At the same time, the shift towards a
defined contribution pension fund system and away from a "pay-as-you-go"
philosophy will also attract funds to the domestic stock market. It is
noticeable that many companies have already, and substantially more intend to,
remove pension liabilities from their balance sheets.
The Austrian stock market offers the greatest value in Europe today, with an
estimated firm value to cash flow ratio of only 4.8 times earnings for 1998. It
also
1
THE AUSTRIA FUND
_______________________________________________________________________________
offers better than average prospects in terms of earnings per share growth.
Given these two factors, we consider that there remain compelling reasons for a
revaluation of the Austrian stock market. Clearly investors will have to feel
more confident about global, economic and liquidity prospects, but when this
happens, we believe Austria could be a major beneficiary in terms of relative
performance.
FUND STRATEGY
We continue to maintain your portfolio in a broad, fully invested position with
an emphasis on companies which offer better than average long-term growth
prospects. In this regard, we maintain significant positions in sectors such as
technology where we feel the Austrian market offers some unique opportunities
unavailable in the rest of the world. We continue to underweight banks and
insurance relative to our benchmark indices, although prices in this sector are
beginning to look oversold.
REPURCHASE PROGRAM ANNOUNCED
On October 15, 1998, the Fund's Board of Directors authorized the Fund's
repurchase of its own shares, for the purposes of enhancing shareholder values
and reducing the discount at which the Fund's shares trade from their net asset
value. Repurchases will be at such times and in such amounts as Fund management
believes will further the foregoing objectives, subject to Board review.
Thank you for your continued interest and participation in The Austria Fund. We
look forward to reporting to you again on developments in the Austrian market
and on your Fund's investment results in the future.
Sincerely,
Dave H. Williams
Chairman and President
Mark H. Breedon
Vice President
2
TEN LARGEST HOLDINGS
AUGUST 31, 1998 THE AUSTRIA FUND
_______________________________________________________________________________
PERCENT OF
COMPANY U.S. $ VALUE NET ASSETS
- -------------------------------------------------------------------------------
Bank Austria AG (common and new shares) $18,271,058 12.7%
Erste Bank Der Oesterreichischen Sparkassen AG 15,255,984 10.6
OMV AG 13,329,965 9.3
EVN AG 12,323,190 8.6
Austria Tabakwerke AG 10,240,334 7.1
VA Technologie AG 6,355,734 4.4
Topcall International AG 6,170,678 4.3
Schoeller-Bleckmann Oilfield Equipment AG 5,333,483 3.7
Scala Business Solutions NV 5,050,647 3.5
Bau Holdings AG (common and new shares) 4,879,418 3.4
$97,210,491 67.6%
3
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1998 THE AUSTRIA FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
COMMON AND PREFERRED STOCKS-99.6%
COMMON STOCKS-97.1%
FINANCIAL SERVICES-26.7%
BANKING-23.3%
Bank Austria AG (a) 300,000 $ 16,485,311
Prt Ctf new (a) 34,800 1,785,747
Erste Bank Der Oesterreichischen
Sparkassen AG 275,000 15,255,984
-----------
33,527,042
INSURANCE-3.4%
Generali Holding Vienna AG 10,055 2,112,625
Wiener Staedtische Allgemeine
Versicherung AG 22,000 2,780,522
-----------
4,893,147
-----------
38,420,189
BASIC INDUSTRIES-24.1%
ENERGY-9.2%
OMV AG 128,860 13,329,965
TECHNOLOGY-14.9%
Austria Mikro Systeme International AG 63,233 2,457,853
E-Pub Services (b) 37,570 4,098,660
S & T System Integration & Technology
Distribution AG (b) 15,945 2,577,042
Scala Business Solutions NV (b) 500,000 5,050,647
SEZ Holdings AG Cl. A (c) 5,775 1,041,623
Topcall International AG 23,000 6,170,678
-----------
21,396,503
-----------
34,726,468
CAPITAL GOODS-19.0%
ENGINEERING & CONSTRUCTION-14.2%
Bau Holdings AG 89,069 4,678,503
new 3,900 200,915
Schoeller-Bleckmann
Oilfield Equipment AG 60,000 5,333,483
VA Technologie AG 65,000 6,355,734
Weinerberger Baustoff Industrie AG 20,000 3,903,140
-----------
20,471,775
MACHINERY-0.9%
Austria Haustechnik AG (b) 40,000 1,341,452
PAPER & FOREST PRODUCTS-2.8%
Mayr-Melnhof Karton AG 77,800 3,979,699
STEEL-1.1%
Voest-Alpine Stahl AG 49,500 1,544,043
-----------
27,336,969
CONSUMER PRODUCTS & SERVICES-16.7%
AIRLINES-2.5%
Austrian Airlines 70,000 2,452,190
Flughafen Wien AG 29,800 1,143,871
-----------
3,596,061
ENTERTAINMENT & LEISURE-0.9%
Premier Telesports (b) 69,000 1,226,701
FOOD & BEVERAGES-6.2%
BBAG Oesterreichische
Brau-Beteiligungs AG 53,568 2,934,959
Brau-Union Goess- Reininghaus
Osterreichische Brau AG 60,000 3,224,333
4
THE AUSTRIA FUND
_______________________________________________________________________________
COMPANY SHARES U.S. $ VALUE
- -------------------------------------------------------------------------
Do & Co Restaurants and
Catering AG (b) 50,000 $ 2,080,866
Royal Tokaj Wine Co., Ltd. (b)(d)(e) 267,428 672,434
-----------
8,912,592
TOBACCO-7.1%
Austria Tabakwerke AG 174,787 10,240,334
-----------
23,975,688
UTILITIES-10.0%
ELECTRIC & GAS-10.0%
Burgenland Holdings AG 60,000 2,036,906
EVN AG 89,440 12,323,190
-----------
14,360,096
CONSUMER MANUFACTURING-0.6%
AUTO & RELATED-0.6%
Pankl Racing Systems AG (b) 2,500 850,529
Total Common Stocks
(cost $131,165,333) 139,669,939
PREFERRED STOCKS-2.5%
CONSUMER PRODUCTS & SERVICES-2.0%
RETAIL-2.0%
BauMax Vertiebs AG 147,000 2,862,868
FINANCIAL SERVICES-0.5%
INSURANCE-0.5%
Generali Holding Vienna AG 4,507 713,856
Total Preferred Stocks
(cost $4,820,663) 3,576,724
TOTAL INVESTMENTS-99.6%
(cost $135,985,996) 143,246,663
Other assets less liabilities-0.4% 577,388
NET ASSETS-100% $ 143,824,051
(a) Security represents investment in an affiliate.
(b) Non-income producing security.
(c) Swiss Franc denominated security.
(d) Restricted and illiquid security, valued at fair value. (See Notes A & E).
(e) British Pound denominated security.
See notes to financial statements.
5
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998 THE AUSTRIA FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $135,985,996) $143,246,663
Foreign cash, at value (cost $527,241) 541,263
Cash 195,350
Foreign taxes receivable 326,258
Total assets 144,309,534
LIABILITIES
Management fee payable 128,440
Sub-advisory fee payable 27,599
Accrued expenses 329,444
Total liabilities 485,483
NET ASSETS $143,824,051
COMPOSITION OF NET ASSETS
Capital stock, at par $117,030
Additional paid-in capital 124,329,574
Accumulated net investment loss (621,239)
Accumulated net realized gain on investments and foreign
currency transactions 12,719,876
Net unrealized appreciation of investments and foreign
currency denominated assets and liabilities 7,278,810
$143,824,051
NET ASSET VALUE PER SHARE (based on 11,703,031 shares
outstanding) $12.29
See notes to financial statements.
6
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1998 THE AUSTRIA FUND
_______________________________________________________________________________
INVESTMENT INCOME
Dividends--unaffiliated issuers (net of
foreign taxes withheld of $352,126) $2,348,431
Dividends--affiliated issuers (net of
foreign taxes withheld of $29,309) 205,164
Interest 85,290 $ 2,638,885
EXPENSES
Management fee 1,483,662
Sub-advisory fee 318,592
Custodian 411,569
Audit and legal 197,243
Directors' fees and expenses 157,355
Printing 43,154
Transfer agency 24,053
Registration fee 19,682
Miscellaneous 27,831
Total expenses 2,683,141
Net investment loss (44,256)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain on investment transactions-
unaffiliated issuers 18,635,573
Net realized gain on investment transactions-
affiliated issuers 7,713,432
Net realized loss on foreign currency
transactions (609,351)
Net change in unrealized appreciation
(depreciation) of:
Investments (12,496,813)
Foreign currency denominated assets
and liabilities 65,315
Net gain on investments and foreign
currency transactions 13,308,156
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 13,263,900
See notes to financial statements.
7
STATEMENT OF CHANGES IN NET ASSETS THE AUSTRIA FUND
_______________________________________________________________________________
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1998 1997
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income (loss) $ (44,256) $ 97,501
Net realized gain on investments and
foreign currency transactions 25,739,654 9,003,847
Net change in unrealized appreciation of
investments and foreign
currency denominated assets and liabilities (12,431,498) 7,829,782
Net increase in net assets from operations 13,263,900 16,931,130
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income -0- (97,501)
Distributions in excess of net investment
income (11,911,211) (1,423,893)
Net realized gain on investments and
foreign currency transactions (4,271,606) -0-
Total increase (decrease) (2,918,917) 15,409,736
NET ASSETS
Beginning of year 146,742,968 131,333,232
End of year $143,824,051 $146,742,968
See notes to financial statements.
8
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998 THE AUSTRIA FUND
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
The Austria Fund, Inc. (the "Fund") was incorporated in the State of Maryland
on December 5, 1988 as a non-diversified, closed-end management investment
company. The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to make
certain estimates and assumptions that affect the reported amounts of assets
and liabilities in the financial statements and amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund.
1. SECURITY VALUATION
Portfolio securities traded on a national securities ex-change or on a foreign
securities exchange (other than foreign securities exchanges whose operations
are similar to those of the United States over-the-counter market) are
generally valued at the last reported sales price, or if no sale occurred, at
the mean of the closing bid and asked prices on that day. Readily marketable
securities traded in the over-the-counter market, securities listed on a
foreign securities exchange whose operations are similar to the U.S.
over-the-counter market, and securities listed on a national securities
exchange whose primary market is believed to be over-the-counter, are valued at
the mean of the current bid and asked prices. U.S. government and fixed income
securities which mature in 60 days or less are valued at amortized cost, unless
this method does not represent fair value. Securities for which current market
quotations are not readily available are valued at their fair value as
determined in good faith by, or in accordance with procedures adopted by, the
Board of Directors. Fixed income securities may be valued on the basis of
prices obtained from a pricing service when such prices are believed to reflect
the fair market value of such securities.
2. CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at the mean of the quoted bid and asked price of the respective
currency against the U.S. dollar on the valuation date. Purchases and sales of
portfolio securities are translated into U.S. dollars at the rates of exchange
prevailing when such securities were acquired or sold. Income and expenses are
translated at rates of exchange prevailing when accrued.
Net realized gain or loss on foreign currency transactions represents net
foreign exchange gains and losses from the holding of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
security transactions, gains or losses arising from the closing of forward
exchange currency contracts and the difference between the amounts of
dividends, interest and foreign taxes receivable recorded on the Fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized currency gains and losses from valuing foreign currency denominated
assets and liabilities at period end exchange rates are reflected as a
component of net unrealized appreciation of investments and foreign currency
denominated assets and liabilities. The Fund does not isolate that portion of
the results of operations arising as a result of changes in the foreign
exchange rates from the fluctuations arising from changes in the market prices
of securities during the year.
The exchange rate for the Austrian Schilling at August 31, 1998 was ATS 12.37
to U.S. $1.00.
3. TAXES
It is the Fund's policy to meet the requirements of the U.S. Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for U.S. income or excise taxes are
required. Withholding taxes on foreign interest and dividends have been
provided for in accordance with the applicable tax requirements.
4. INVESTMENT INCOME AND INVESTMENT TRANSACTIONS
Dividend income is recorded on the ex-dividend date or as soon as the Fund is
informed of the dividend. Interest income is accrued daily. Investment
transactions are accounted for on the date securities are purchased or sold.
Realized and unrealized gains and losses from investment and currency
transactions are calculated on the identified cost basis. The Fund accretes
discounts on short-term securities as adjustments to interest income.
9
NOTES TO FINANCIAL STATEMENTS (CONTINUED) THE AUSTRIA FUND
_______________________________________________________________________________
5. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income and capital gains distributions are determined in accordance with
federal tax regulations which may differ from those determined in accordance
with generally accepted accounting principles. To the extent these differences
are permanent, such amounts are reclassified within the capital accounts based
on their federal tax basis treatment; temporary differences do not require such
reclassification. During the current fiscal year, permanent differences,
primarily due to foreign currency transactions and distributions in excess of
net investment income, resulted in a net increase in accumulated net investment
loss and a corresponding decrease in accumulated net realized gain on
investments and foreign currency transactions. This reclassification had no
effect on net assets.
NOTE B: MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an Investment Management and Administration Agreement, the
Fund pays Alliance Capital Management L.P. (the "Investment Manager") a fee,
calculated weekly and paid monthly, at an annual rate of 1% of the Fund's
average weekly net assets up to $50 million and .90 of 1% of the Fund's average
weekly net assets in excess of $50 million.
Under the terms of a Shareholder Inquiry Agency Agreement with Alliance Fund
Services, Inc. ("AFS"), an affiliate of the Investment Manager, the Fund
reimburses AFS for costs relating to servicing phone inquiries for the Fund.
The Fund reimbursed AFS $310 during the year ended August 31, 1998.
Under a Sub-Advisory Agreement, the Fund will pay BAI Fondaberatung Ges.m.b.H.
(the "Sub-Adviser") a fee, calculated weekly and paid monthly, at an annual
rate of .20 of 1% of the Fund's average weekly net assets.
Brokerage commissions paid on investment transactions for the year ended August
31, 1998 amounted to $281,368, of which $7,943 was paid to Bank Austria, and
$34,338 was paid to Creditanstalt Investment Bank Vienna, affiliates of the
Sub-Adviser.
NOTE C: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term and U.S.
government securities) aggregated $64,032,173 and $80,871,076 respectively, for
the year ended August 31, 1998. There were no purchases or sales of U.S.
government or government agency obligations for the year ended August 31, 1998.
At August 31, 1998, the cost of investments for federal income tax purposes was
substantially the same as the cost for financial reporting purposes.
Accordingly, gross unrealized appreciation of investments was $21,267,788 and
gross unrealized depreciation of investments was $14,007,121 resulting in net
unrealized appreciation of $7,260,667 (excluding foreign currency transactions).
During the year ended August 31, 1998, the Fund utilized the entire capital
loss carryforward.
The Fund incurred and elected to defer post October currency losses of $621,239
for the year ended August 31, 1998.
FORWARD EXCHANGE CURRENCY CONTRACTS
The Fund enters into forward exchange currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings and to hedge certain firm purchase and sale commitments denominated in
foreign currencies. A forward exchange currency contract is a commitment to
purchase or sell a foreign currency on a future date at a negotiated forward
rate. The gain or loss arising from the difference between the original
contracts and the closing of such contracts is included in net realized gains
or losses on foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the Fund.
Risks may arise from the potential inability of a counterparty to meet the
terms of a contract and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
10
THE AUSTRIA FUND
_______________________________________________________________________________
The Fund's custodian will place and maintain liquid assets in a segregated
account of the Fund having a value equal to the aggregate amount of the Fund's
commitments under forward exchange currency contracts entered into.
At August 31, 1998, the Fund had no outstanding forward exchange currency
contracts.
NOTE D: CAPITAL STOCK
There are 100,000,000 shares of $.01 par value common stock authorized, of
which 11,703,031 shares were outstanding at August 31, 1998.
NOTE E: RESTRICTED AND ILLIQUID SECURITY
DATE ACQUIRED U.S. $ COST
------------- -----------
Royal Tokaj Wine Co., Ltd. 7/28/94 $425,666
The security shown above is restricted as to resale and has been valued at fair
value in accordance with the procedures described in Note A.
The value of the security at August 31, 1998 was $672,434 representing .47% of
total net assets.
NOTE F: CONCENTRATION OF RISK
Investment in the Fund's shares requires consideration of certain factors that
are not typically associated with investments in U.S. equity securities such as
currency fluctuations, potential price volatility, lower liquidity, and
concentration of the Austrian equities market and limitations on the
concentration of investment in the equity of securities of companies in certain
industry sectors. The possibility of political and economic instability of
government supervision and regulation of the market may further affect the
Fund's investments.
NOTE G: MANAGED DISTRIBUTION POLICY
On December 4, 1997, the Fund's Board of Directors approved a managed
distribution policy contemplating the distribution to the Fund's stockholders
on a quarterly basis of at least 2.5% (approximately 10% annualized) of the
Fund's total net assets.
11
FINANCIAL HIGHLIGHTS THE AUSTRIA FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.54 $11.22 $9.99 $11.03 $9.62
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) -0- .01 (.02) -0- (.05)
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 1.13 1.44 1.25 (.11) 1.55
Net increase (decrease) in net
asset value from operations 1.13 1.45 1.23 (.11) 1.50
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income -0- (.01) -0- (.02) (.01)
Distributions in excess of net
investment income (1.02) (.12) -0- -0- (.06)
Distributions from net realized
gains on investments and foreign
currency transactions (.36) -0- -0- -0- (.02)
Total dividends and distributions (1.38) (.13) -0- (.02) (.09)
CAPITAL SHARE TRANSACTIONS
Dilutive effect of rights offering -0- -0- -0- (.86) -0-
Offering costs charged to additional
paid-in capital -0- -0- -0- (.05) -0-
Total capital share transactions -0- -0- -0- (.91) -0-
Net asset value, end of year $12.29 $12.54 $11.22 $9.99 $11.03
Market value, end of year $9.00 $9.56 $8.50 $8.25 $10.88
TOTAL RETURN(A)
Total investment return based on:
Market value 6.38% 14.10% 3.03% (21.51)% 8.37%
Net asset value 10.78% 13.35% 12.31% (9.15)% 15.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(000's omitted) $143,824 $146,743 $131,333 $116,936 $91,121
Ratio of expenses to average
net assets 1.68% 1.71% 1.83% 1.71% 1.87%
Ratio of net investment income
(loss) to average net assets (.03)% .07% (.15)% .02% (.51)%
Portfolio turnover rate 42% 19% 39% 27% 36%
</TABLE>
(a) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day of
each period reported. Dividends and distributions, if any, are assumed, for
purposes of this calculation, to be reinvested at prices obtained under the
Fund's dividend reinvestment plan. Generally, total investment return based on
net asset value will be higher than total investment return based on market
value in periods where there is an increase in the discount or a decrease in
the premium of the market value to the net asset value from the beginning to
the end of such periods. Conversely, total investment return based on the net
asset value will be lower than total total investment return based on market
value in periods where there is a decrease in the discount or an increase in
the premium of the market value to the net asset value from the beginning to
the end of such periods.
12
REPORT OF INDEPENDENT ACCOUNTANTS THE AUSTRIA FUND
_______________________________________________________________________________
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE AUSTRIA FUND, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the 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 Austria Fund, Inc. (the
"Fund") at August 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the
period then ended, 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 August 31, 1998 by correspondence with the custodian, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
October 16, 1998
TAX INFORMATION (UNAUDITED)
_______________________________________________________________________________
In order to meet certain requirements of the Internal Revenue Code we are
advising you that $4,271,606 of the capital gain distributions paid by the Fund
during the fiscal year August 31, 1998 is subject to maximum tax rates of 20%.
In addition, the Fund intends to make an election under Internal Revenue Code
Section 853 to pass through foreign taxes paid by the Fund to its shareholders.
The total amount of foreign taxes that may be passed through to the
shareholders for the fiscal year ended August 31, 1998 is $381,435. The gross
foreign source income for information reporting purposes is $381,435.
Shareholders should not use the above information to prepare their tax returns.
The information necessary to complete your income tax returns will be included
with your Form 1099 DIV which will be sent to you separately in January 1999.
13
ADDITIONAL INFORMATION THE AUSTRIA FUND
_______________________________________________________________________________
Shareholders whose shares are registered in their own names may elect to be
participants in the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
pursuant to which dividends and capital gain distributions to shareholders will
be paid in or reinvested in additional shares of the Fund (the "Dividend
Shares"). State Street Bank and Trust Company (the "Agent") will act as agent
for participants under the Plan. Shareholders whose shares are held in the name
of a broker or nominee should contact such broker or nominee to determine
whether or how they may participate in the Plan.
A shareholder who has elected to participate in the Plan may withdraw from the
Plan at any time. There will be no penalty for withdrawal from the Plan and
shareholders who have previously withdrawn from the Plan may rejoin it at any
time. Changes in elections must be in writing and should include the
shareholder's name and address as they appear on the share certificate. An
election to withdraw from the Plan will, until such election is changed, be
deemed to be an election by a shareholder to take all subsequent distributions
in cash. An election will only be effective for a distribution declared and
having a record date of at least ten days after the date on which the election
is received.
Commencing not more than five business days before the dividend payment date,
purchases of the Fund's shares may be made by the agent, on behalf of the
participants in the Plan, from time to time to satisfy dividend reinvestments
under the Plan. Such purchases by the Agent on or before the dividend payment
date may be made on the New York Stock Exchange (the "Exchange") or elsewhere
at any time when the price plus estimated commissions of the Fund's Common
Stock on the Exchange is lower than the Fund's most recently calculated net
asset value per share.
If the Agent determines on the dividend payment date that the shares purchased
as of such date are insufficient to satisfy the dividend reinvestment
requirements, the Agent, on behalf of the participants in the Plan, will obtain
the necessary additional shares as follows. To the extent that outstanding
shares are not available at a cost of less than per share net asset value, the
Agent, on behalf of the participants in the Plan, will accept payment of the
dividend, or the remaining portion thereof, in authorized but unissued shares
of the Fund on the dividend payment date. Such shares will be issued at a per
share price equal to the higher of (1) the net asset value per share on the
payment date, or (2) 95% of the closing market price per share on the payment
date. If the closing sale or offer price, plus estimated commissions, of the
Common Stock on the Exchange on the payment date is less than the Fund's net
asset value per share on such day, then the Agent will purchase additional
outstanding shares on the Exchange or elsewhere. If before the Agent has
completed such purchases, the market price plus commissions exceeds the net
asset value of the Fund's shares, the average per share purchase price paid by
the Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if shares had been issued by the Fund.
The Agent will maintain all shareholders' accounts in the Plan and furnish
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Agent in non-certificated form in the name of
the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund to satisfy the dividend reinvestment requirements. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Agent's open market purchases of shares. In each case, the cost
per share of shares purchased for each shareholder's account will be the
average cost, including brokerage commissions, of any shares purchased in the
open market plus the cost of any shares issued by the Fund.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at a discount of up to 5% from the
current market value. However, if the market price plus the commissions is
below the net asset value, participants will receive distributions in shares
with a net asset value greater than the value of any cash distribution they
would have received on their shares. There may be insufficient shares available
in the market to make distributions in shares at prices below the net
14
THE AUSTRIA FUND
_______________________________________________________________________________
asset value. Also, since the Fund does not redeem its shares, the price on
resale may be more or less than the net asset value.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income taxes that may be payable (or required to be
withheld) on dividends and distributions.
In the case of foreign participants whose dividends are subject to United
States income tax withholding and in the case of any participants subject to
31% federal backup withholding, the Agent will reinvest dividends after
deduction of the amount required to be withheld.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan as applied to any
voluntary cash payments made and any dividend or distribution paid subsequent
to written notice of the change sent to participants in the Plan at least 90
days before the record date for such dividend or distribution. The Plan may
also be amended or terminated by the Agent on at least 90 days' written notice
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable to the Agent by the participants. All
correspondence concerning the Plan should be directed to the Agent at State
Street Bank and Trust Company, P.O. Box 366, Boston, Massachusetts 02101.
Since the filing of the most recent amendment to the Fund's registration
statement with the Securities and Exchange Commission, there have been (i) no
material changes in the Fund's investment objectives or policies, (ii) no
changes to the Fund's charter or by-laws that would delay or prevent a change
of control of the Fund, (iii) no material changes in the principal risk factors
associated with investment in the Fund, and (iv) no change in the person
primarily responsible for the day-to-day management of the Fund's portfolio,
who is Mark H. Breedon, Vice President of the Fund.
YEAR 2000 AND EURO (UNAUDITED)
Many computer systems and applications in use today process transactions using
two digit date fields for the year of the transaction, rather than the full
four digits. If these systems are not modified or replaced, transactions
occurring after 1999 could be processed as year "1900" which could result in
processing inaccuracies and computer system failures. This is commonly known as
the Year 2000 problem. In addition to the Year 2000 problem, the European
Economic and Monetary Union has established a single currency, the Euro
Currency ("Euro") that will replace the national currency of certain European
countries effective January 1, 1999. Computer systems and applications must be
adapted in order to be able to process Euro sensitive information accurately
beginning in 1999. Should any of the computer systems employed by the Fund's
major service providers fail to process Year 2000 or Euro related information
properly, that could have a significant negative impact on the Fund's
operations and the services that are provided to the Fund's shareholders. In
addition, to the extent that the operations of issuers of securities held by
the Fund are impaired by the Year 2000 problem or the Euro, or prices of
securities held by the Fund decline as a result of real or perceived problems
relating to the Year 2000 or the Euro, the value of the Fund's shares may be
materially affected.
With respect to the Year 2000, the Fund has been advised that the Adviser
("Alliance") began to address the Year 2000 issue several years ago in
connection with the replacement or upgrading of certain computer systems and
applications. During 1997, Alliance began a formal Year 2000 initiative, which
established a structured and coordinated process to deal with the Year 2000
issue. Alliance reports that it has completed its assessment of the Year 2000
issues on its domestic and international computer systems and applications.
Currently management of Alliance expects that the required modifications for
the majority of its significant systems and applications that will be in use on
January 1, 2000, will be completed and tested by the end of 1998. Full
integration testing of these systems and testing of interfaces with third-party
suppliers will continue through 1999. At this time, management of Alliance
believes that the costs associated with resolving this issue will not have a
material effect on its operations or on its ability to provide the level of
services it currently provides to the Fund.
With respect to the Euro, the Fund has been advised that Alliance has
established a project team to assess changes that will be required in
connection with the introduction of the Euro. Alliance reports that its project
team has
15
ADDITIONAL INFORMATION (CONTINUED) THE AUSTRIA FUND
_______________________________________________________________________________
assessed all systems, including those developed or managed internally, as well
as those provided by vendors, in order to determine the modifications that will
be required to process accurately transactions denominated in Euro after 1998.
At this time, management of Alliance expects that the required modifications
for the introduction of the Euro will be completed and tested before the end of
1998. Management of Alliance believes that the costs associated with resolving
this issue will not have a material adverse effect on its operations or on its
ability to provide the level of services it currently provides to the Fund.
The Fund and Alliance have been advised by the Fund's Transfer Agent and
Custodian that they are also in the process of reviewing their systems with the
same goals. As of the date of this report, the Fund and Alliance have no reason
to believe that the Transfer Agent and Custodian will be unable to achieve
these goals.
16
THE AUSTRIA FUND
_______________________________________________________________________________
BOARD OF DIRECTORS
DAVE H. WILLIAMS, CHAIRMAN AND PRESIDENT
JOHN D. CARIFA
WILLIAM H. M. DE GELSEY
DIPL. ING. HELLMUT LONGIN (1)
DIPL. ING. PETER MITTERBAUER (1)
PETER NOWAK (1)
MAG. REINHARD ORTNER (1)
DR. MARIA SCHAUMAYER (1)
ANDRAS SIMOR
DR. REBA W. WILLIAMS
DR. WALTER WOLFSBERGER (1)
OFFICERS
NORMAN S. BERGEL, VICE PRESIDENT
MARK H. BREEDON, VICE PRESIDENT
RUSSELL BRODY, VICE PRESIDENT
EDMUND P. BERGAN, JR., SECRETARY
MARK D. GERSTEN, TREASURER &CHIEF FINANCIAL OFFICER
VINCENT S. NOTO, CONTROLLER
CUSTODIAN
BROWN BROTHERS HARRIMAN &CO.
40 Water Street
Boston, MA 02109
LEGAL COUNSEL
SEWARD &KISSEL
One Battery Park Plaza
New York, NY 10004
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
1177 Avenue of Americas
New York, NY 10036
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
(1) Member of the Audit Committee
Notice is hereby given in accordance with Section 23 (c) of the Investment
Company Act of 1940 that the Fund may purchase at market prices from time to
time shares of its common stock in the open market.
This report, including the financial statements herein, is transmitted to
the shareholders of The Austria Fund for their information. This is not a
prospectus, circular or representation intended for use in the purchases of
shares of the Fund or any securities mentioned in this report.
17
THE AUSTRIA FUND
Summary of General Information
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital appreciation
through investment primarily in the equity securities of Austrian companies.
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the New York Stock
Exchange Composite Transaction section of newspapers under the designation
AustriaFd. The Fund's NYSE trading symbol is "OST". Weekly comparative net
asset value (NAV) and market price information about the Fund is published each
Monday in THE WALL STREET JOURNAL, each Sunday in THE NEW YORK TIMES and each
Saturday in BARRON'S and other newspapers in a table called "Closed-End Funds".
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
A Dividend Reinvestment Plan is available to shareholders in the Fund, which
provides automatic reinvestment of dividends and capital gain distributions in
additional Fund shares. The Plan also allows you to make optional cash
investments in Fund shares through the Plan Agent. If you wish to participate
in the Plan and your shares are held in your name, simply complete and mail the
enrollment form in the brochure. If your shares are held in the name of your
brokerage firm, bank or other nominee, you should ask them whether or how you
can participate in the Plan.
For questions concerning shareholder account information, or if you would like
a brochure describing the Dividend Reinvestment Plan, please call State Street
Bank and Trust Company at 1-800-219-4218.
THE AUSTRIA FUND
1345 Avenue of the Americas
New York, New York 10105
ALLIANCE CAPITAL
R THESE REGISTERED SERVICE MARKS USED UNDER LICENSE FROM THE OWNER, ALLIANCE
CAPITAL MANAGEMENT L.P.
AUSAR
