(Graphic)
Invests primarily in equity securities of Australian
companies listed on The Australian Stock Exchange.
(Icon) Aberdeen Australia Equity Fund, Inc.
Annual Report
October 31, 2001
Letter to Shareholders
December 21, 2001
Dear Shareholder,
We present this Annual Report which covers the activities
of Aberdeen Australia Equity Fund, Inc. (the "Fund") for
the year ended October 31, 2001. Included in this report is
a review of the Australian economy and investment markets,
together with an overview of the Fund's investments
prepared by the Investment Manager, Aberdeen Asset Managers
(C.I.) Limited.
Quarterly Distribution Rate
A cash distribution for the current quarter of 15.25 cents
per share was paid on October 12, 2001.
For the 12 months ended October 31, 2001, the Fund paid a
total of 67.5 cents per share, which equates to an
annualized cash distribution rate of 12.8%, based upon the
share price of $5.29 as of October 31, 2001.
Since all distributions are paid after deducting applicable
withholding taxes, the effective distribution rate may be
higher for those US investors who are able to claim a tax
credit.
The Fund makes quarterly distributions at an annual rate of
not less than 9% of the rolling average of the Fund's prior
four quarter-end Net Asset Values ("NAV"). On December 11,
2001, the Board of Directors declared a quarterly
distribution of 14.75 cents per share. Consistent with the
Fund's distribution policy, the Board of Directors intends
to review the distribution policy at its next regularly
scheduled meeting in March 2002.
Net Asset Value Performance
For the year ended October 31, 2001, the Fund's total
return based on NAV decreased by 2.3% after expenses
(assuming reinvestment of distributions) compared with a
0.5% increase, in US dollar terms, in the Benchmark
(S&P/ASX 200 Accumulation Index).
Share Price Performance
The Fund's share price fell 10.0% over the year, from $5.88
on October 31, 2000 to
ALL AMOUNTS ARE U.S. DOLLARS UNLESS OTHERWISE STATED.
2. Aberdeen Australia Equity Fund, Inc.
Letter to Shareholders (continued)
$5.29 on October 31, 2001. The Fund's NAV per share was
$5.97 on October 31, 2001, representing a discount to the
share price of 11.4%, compared with a discount of 14.3% on
October 31, 2000.
Buy-Back Program
On March 19, 2001 the Fund announced the approval of a
share buy-back program. Purchases of shares under this
program commenced on June 6, 2001, and as of the date of
this report 34,700 shares have been repurchased.
For information about the Fund, including weekly updates of
share prices, NAV and details of recent distributions,
please contact Aberdeen Asset Management, Investor
Relations, by:
Calling toll free on 1-800-522-5465 in the United States,
E-mailing at InvestorRelations@aberdeen-asset.com, or
Visiting the website at www.aberdeen-asset.com/usa
For information about the Aberdeen Group, visit the
Aberdeen website at www.aberdeen-asset.com.
Yours sincerely,
Hugh Young
Chairman and President
ALL AMOUNTS ARE U.S. DOLLARS UNLESS OTHERWISE STATED.
Aberdeen Australia Equity Fund, Inc. 3
Your Board's policy is to provide investors with a stable
quarterly distribution out of current income, supplemented
by realized capital gains and, to the extent necessary,
paid-in capital.
The Fund is subject to U.S. corporate, tax and securities
laws. Under U.S. tax accounting rules, the amount of
distributable income for each fiscal period depends on the
actual exchange rates during the entire year between the US
dollar and the currencies in which Fund assets are
denominated and on the aggregate gains and losses realized
by the Fund during the entire year.
Therefore, the exact amount of distributable income for
each fiscal year can only be determined as of the end of
the Fund's fiscal year, October 31. However, under the U.S.
Investment Company Act of 1940, the Fund is required to
indicate the source of each distribution to shareholders.
This estimated distribution composition may vary from
quarter to quarter because it may be materially impacted by
future realized gains and losses on securities and
fluctuations in the value of the currencies in which Fund
assets are denominated.
The distributions for the fiscal year ended October 31,
2001 were entirely comprised of return of paid-in capital.
In January 2002, a Form 1099 DIV will be sent to
shareholders, which will state the amount and composition
of distributions and provide information with respect to
their appropriate tax treatment.
4 Aberdeen Australia Equity Fund, Inc.
Dividend Reinvestment and Cash Purchase Plan
We invite you to participate in the Fund's Dividend
Reinvestment and Cash Purchase Plan ("the Plan"), which
allows you to automatically reinvest your distributions in
shares of the Fund's common stock at favorable commission
rates. Distributions made under the Plan are taxable to the
same extent as are cash distributions. The Plan also
enables you to make additional cash investments in shares
of at least $100 per month. Under this arrangement, the
State Street Bank & Trust Company (the "Plan Agent") will
purchase shares for you on the stock exchange or otherwise
on the open market on or about the 15th of each month,
unless shares of the Fund are trading at a premium, in
which case, the Fund will issue additional shares.
As a Participant in the Plan, you will have the convenience
of:
Automatic reinvestment - the Plan Agent will automatically
reinvest your distributions, allowing you to gradually grow
your holdings in the Fund;
Lower costs - shares are purchased on your behalf under the
Plan at low brokerage rates. Brokerage on share purchases
is currently 2 cents per share;
Convenience - the Plan Agent will hold your shares in non-
certificated form and will provide a detailed record of
your holdings at the end of each distribution period.
To request a brochure containing information on the Plan,
together with an authorization form, please contact the
Plan Agent, State Street Bank & Trust Company, P.O. Box
8200, Boston, MA 02266 or toll free on 1-800-451-6788.
Aberdeen Australia Equity Fund, Inc. 5
Report of the Investment Manager
Investment Strategy
As the subdued economic climate continues and earnings
downgrades continue to affect most companies previously
perceived as growth companies, the Fund's investment focus
remains on defensive stocks. Cyclical stocks are still
suffering from the economic downturn, however, they are
expected to provide the main source of outperformance in
the Fund's portfolio once the economy rebounds.
Portfolio Composition
The following chart summarizes the composition of the
Fund's portfolio, expressed as a percentage of net assets.
On October 31, 2001, the Fund held 77% of its net assets in
industrial stocks, 14% in resource stocks, and 9% in short-
term investments.
(Bar graph)
Aberdeen Australia Equity Fund, Inc.
Asset Allocation to October 31, 2001
Distribution Policy
For the fiscal year ended October 31, 2001 a total of 67.5
cents per share was paid to shareholders. This equates to
an annualized cash distribution rate of 12.8%, based on the
share price of $5.29 at October 31, 2001.
6. Aberdeen Australia Equity Fund, Inc.
Selected Equity Holdings
The following notes highlight the Fund's top ten long-term
holdings at October 31, 2001.
7.7% of net assets
National Australia Bank Ltd is an international financial
services group operating in Australia, New Zealand, Europe,
Asia and the US. NAB is Australia's largest banking group
based on global assets at March 31, 2001 of approximately
A$404 billion. The Group offers banking services, credit
and access card facilities, leasing, housing and general
finance, international and investment banking, mortgage
servicing, portfolio management, life insurance, custodian,
trustee and nominee services. The bank reported a net
profit for the 2001 fiscal year of A$2,088 million, down
39% from the previous corresponding period, due to the
Homeside US write downs.
The Manager intends to maintain a neutral position in the
stock.
7.4% of net assets
BHP Billiton Ltd is a global natural resource company with
industry leading, or near leading positions in aluminium,
metallurgical coal, seaborne steaming coal, copper, ferro-
alloys, iron ore and titanium minerals. The group also has
substantial interests in oil, gas, LNG, nickel, diamonds
and silver. Its main areas of operation are oil in
Australia, the Gulf of Mexico and UK; global copper
production, iron ore mining and processing in Australia and
South America; coal mining in Australia and steel
production in Australia. Its spin-off company, OneSteel
Ltd., has reduced BHP's steel business to a concentration
in flat products. BHP Billiton made a net profit of A$2,950
million for the 2000/2001 fiscal year, up 27% from the
previous corresponding period.
The Manager intends to maintain an overweight position in
the stock.
7.3% of net assets
News Corporation Ltd is a leading media company with
worldwide operations covering print and film media;
broadcast, cable and satellite TV; and book, newspaper and
magazine publishing. It also has a range of other
interests including online and digital media, sports teams
and music publishing. It produces film and television
entertainment through the Fox brand name and also has
significant
Aberdeen Australia Equity Fund, Inc. 7
Selected Equity Holdings (continued)
interests in several major broadcast platforms such as B-
Sky-B in the UK and the Fox TV network in the US. News
Corporation Ltd's new media interests include online
counterparts to FOX news and sport and investments in
various Internet ventures such as New Interactive in
Australia. News Corporation Ltd. reported a net loss of
A$745 million after one-time charges for the 2000/2001
fiscal year.
The Manager intends to maintain an underweight position in
the stock.
6.8% of net assets
Australia & New Zealand Banking Group Ltd is one of
Australia's four largest banks, with assets of A$181
billion. The Bank operates through 16 specialist business
units and provides general banking, mortgage lending,
leasing, hire purchase, investment banking, portfolio
management, stockbrokerage, and executor and trustee
services. ANZ also provides corporate and institutional
banking services in 11 Asian countries and retail banking
services in nine countries in the Pacific region. ANZ
reported a net profit for the 2001 fiscal year of A$1,870
million, up 7% from the previous corresponding period, with
the cost to income ratio down to 48.3%.
The Manager intends to maintain an overweight position in
the stock.
6.5% of net assets
Westpac Banking Corporation Ltd is ranked as a leading bank
in both Australia and New Zealand, providing retail,
commercial and institutional banking services together with
investment management, insurance and financial services.
Management remains focused on optimizing its domestic
banking business and integrating recent acquisitions. In
addition to its commitment to its already sizeable share of
the small and medium enterprise market, Westpac has
launched an online banking service to provide its customers
with an inexpensive and convenient method of banking. The
company announced a net profit after tax for the 2001
fiscal year of A$1,903 million, up 11% from the previous
corresponding period, with earnings per share growth of
16%.
The Manager intends to maintain an overweight position in
the stock.
5.4% of net assets
Commonwealth Bank of Australia provides a wide range of
banking, financial and related services primarily in
Australia. CBA is Australia's largest retail bank,
8 Aberdeen Australia Equity Fund, Inc.
Selected Equity Holdings (continued)
providing a full range of financial services to over 7
million retail customers in Australia, and is a leading
provider of home loans in Australia, with over 23% of
market share. CBA (including Colonial Bank) is Australia's
largest fund manager, with A$101 billion in funds under
management as of June 30, 2001. CBA's net profit for the
2000/2001 fiscal year was A$2,398 million, up 40% from the
previous year.
The Manager intends to maintain an underweight position in
the stock.
4.6% of net assets
QBE Insurance Group Ltd is an international insurance and
reinsurance group and underwrites most forms of commercial,
industrial and individual insurance policies. The Group is
also involved in the management of seven Lloyd's
syndicates, together with the management of workers
compensation plans in New South Wales. QBE Insurance Group
reported a net profit for the first half of the 2001
calendar year of A$122 million, up 54% from the profit
reported for the previous corresponding period.
The Manager intends to maintain an overweight position in
the stock.
4.4% of net assets
AMP Limited is a leading international financial services
business, providing wealth creation and protection products
and services to around 8 million customers worldwide.
Principal activities of the Group include retirement
savings, funds management, life and general insurance,
financial planning and banking services. AMP operates in 16
countries worldwide and has a significant presence in
Australia, NZ and the UK. At June 30, 2001, AMP had assets
under management of A$291 billion, and reported a net
profit for the first half of the 2001 calendar year of
A$403 million.
The Manager intends to maintain an overweight position in
the stock.
3.9% of net assets
Telstra Corporation Ltd is Australia's largest
telecommunications and information services company,
providing products and services that cover all aspects of
the telecommunications industry in Australia. Telstra
Corporation is the national universal service provider,
ensuring that telephone services are reasonably accessible
to all people in Australia. The Company is 50.1% owned by
the Australian
Aberdeen Australia Equity Fund, Inc. 9
Selected Equity Holdings (continued)
Government. Telstra is Australia's largest provider of
internet services and mobile telecommunications services,
with over 1 million online customers, and over 4.1 million
MobileNet customers. Telstra provides pay-TV services
through Foxtel, and Telstra Saturn (representing the merged
operations of Telstra and Austar United Communications),
and has formed a strategic alliance with Vodafone,
developing integrated products and services across its
fixed and mobile networks. Telstra reported a net profit
for the 2000/2001 fiscal year of A$4.1 billion, up 10% from
the previous corresponding period.
The Manager intends to maintain an underweight position in
the stock.
3.9% of net assets
Foster's Brewing Group Ltd is an international brewer,
marketer and distributor of beer, wine and spirits. FGL
also owns and operates pubs and retail liquor outlets
across Australia. Carlton and United Breweries accounts for
56% of the Australian beer market, producing, marketing and
distributing a range of prominent brands, including Fosters
Victoria Bitter, Crown Lager, Carlton, Matilda Bay and
Cascade. FGL beers are produced in 9 countries, and
distributed in over 150 countries, worldwide. Beringer
Blass Wine Estates has approximately 3,500 hectares under
vine in Australia and holds around 25% of the Australian
wine market. The division operates 14 wineries in
Australia, 7 in coastal California, and has joint ventures
in Chile and New Zealand. Recently, the company reported a
net profit for the 12 months ended June 30, 2001 of A$465.2
million, up 9% from the previous corresponding period.
The Manager intends to maintain an overweight position in
the stock.
The Manager's intentions with respect to maintaining
certain weighted positions in stock are expressed as of the
date of this report, and the Manager reserves the right to
change such intentions.
The Fund may invest between 25% and 35% of its total assets
in the securities of any one industry sector if, at the
time of the investment, that industry sector represents 20%
or more of the S&P/ASX 200 Accumulation Index.
As of October 31, 2001, the Fund had 31.5% of its assets
invested in the Banking and Finance Sector. At that date,
the Sector represented 24.5% of the S&P/ASX 200
Accumulation Index.
10. Aberdeen Australia Equity Fund, Inc.
Market Review and Outlook
Economy
During 2001, the Australian economy has undergone a
sectoral rotation, with domestic interest rate sensitive
sectors showing clear signs of improvement, while the pace
of export growth has decreased as a result of a weaker
global economy.
The terrorist action against the US on September 11 is
likely to deepen and extend the current global economic
downturn, initially expected to bottom later this year,
into 2002. Global policy response to the current crisis on
US and global economic activity has been swift, however,
with many global central banks following the lead of the US
Federal Reserve by providing the necessary liquidity
injection to help stimulate a recovery in economic
performance.
The Reserve Bank of Australia (the "RBA") cut interest
rates by 25 basis points in early September directly
following the attacks, and by a further 25 basis points in
October. This has brought the RBA's cumulative easing to a
total of 1.75% since early February. The RBA's current
official view on domestic growth is that Australia's growth
will most likely be quite solid in the near term,
outperforming its global counterparts. This assessment
clearly indicates that further easing of monetary policy
will be determined by developments in the global economic
climate and its implications for Australia.
Stock Market
In the wake of the September 11 terrorist attacks in the
United States, equity markets globally experienced heavy
falls over the September quarter. Many share markets had
already been under selling pressure as data releases
confirmed a significant slowdown in the US and global
economies. The decline in the Australian share market was
the sharpest seen since the 1990 Iraqi invasion of Kuwait,
with investor uncertainty escalating over the impact of the
attacks on the US financial sector, US trade, and on global
consumer confidence.
The Australian share market recovered to pre-September 11
levels by the end of October, following a similar recovery
in US markets. Sectors that performed best over the month
of October included resources, banks and media. Cuts to US
and Australian interest rates provided a boost to
confidence, as did local economic data which remained
resilient against a deteriorating global backdrop. Banking
stocks were among the Fund's stronger performers, with
Commonwealth Bank, National
Aberdeen Australia Equity Fund, Inc. 11
Australia Bank and Westpac Banking Corporation all rising
strongly. With the outlook for the economy appearing
uncertain, investors have been attracted by the sector's
defensive qualities and expectations of continued double
digit growth in earnings per share. Westpac's earnings
announcement in early November, showing an 11% increase in
profit for the year ending September 30, 2001, underlined
the sector's durability.
Currency
The significant depreciation of the Australian dollar has
been the most effective economic response to the new threat
to global growth. A weaker Australian dollar directly
benefits the export and tourism sectors, those sectors
likely to be affected by a softer external environment.
The widening of the differential between Australian and US
interest rates has continued through 2001, reaching levels
not seen since the mid 1990's. The Investment Manager
expects that this should be a key source of support to the
Australian currency in the near term, as will the
likelihood of stronger growth momentum in the domestic
economy relative to the US.
The Australian dollar has fluctuated over the year, closing
at US$0.50 on October 31, 2001.
Aberdeen Asset Managers (C.I.) Limited
December 2001
12 Aberdeen Australia Equity Fund, Inc.
Portfolio of Investments
October 31, 2001
Value
Shares Description (US$)
----------------------------------------------------
LONG-TERM INVESTMENTS--91.2%
Common and Preferred Stocks--91.2%
Diversified Industries--15.1%
432,181 D Billabong International
Limited $ 1,722,996
487,201 BRL Hardy Limited 2,636,462
331,016 Foodland Associated
Limited 1,900,721
1,625,440 Foster's Brewing Group
Limited 3,959,951
405,813 Leighton Holdings
Limited 2,019,789
1,322,462 Pacifica Group Limited 2,029,863
557,946 PaperlinX Limited 1,176,495
--------------
15,446,277
--------------
Resources and Mining--14.5%
1,685,780 BHP Billiton Limited 7,575,933
3,052,999 M.I.M. Holdings Limited 1,505,693
208,600 Rio Tinto Limited 3,360,134
513,316 WMC Limited 2,410,184
--------------
14,851,944
--------------
Services--61.6%
496,800 AMP Limited 4,512,763
980,000 Aristocrat Leisure
Limited 3,230,362
773,000 Australia & New Zealand
Banking Group Limited 6,939,978
494,000 Australian Gas & Light
Company Limited 2,207,617
425,259 Brambles Industries
Limited 2,331,014
368,339 Commonwealth Bank of
Australia 5,523,925
973,145 ISIS Communications
Limited* 17,630
95,000 Macquarie Bank Limited 1,809,752
511,650 National Australia Bank
Limited 7,871,404
500,000 News Corporation
Limited 3,442,230
687,000 News Corporation
Limited, Voting
Preferred Stock $ 4,072,040
362,809 D QBE Insurance Group
Limited 4,752,827
280,000 D ResMed, Inc.* 1,648,788
1,201,753 Stockford Limited* 184,459
1,125,984 TAB Queensland Limited 1,705,621
1,137,000 Telecom Corporation of
New Zealand Limited 2,162,898
1,591,866 Telstra Corporation
Limited 3,981,500
898,000 Westpac Banking
Corporation Limited 6,688,394
--------------
63,083,202
--------------
Total common and
preferred stocks (cost
$99,716,452) 93,381,423
--------------
Rights
243,801 QBE Insurance Group
Limited, expiring
11/20/01 (cost $0) 0
--------------
Total long-term
investments
(cost $99,716,452) 93,381,423
--------------
Principal
Amount
(000)
---------
SHORT-TERM INVESTMENTS--8.8%
Demand Deposits--8.5%
A$
4,686 Banque Nationale de
Paris,
4.50%, 11/1/01 2,358,083
12,620 Dresdner Bank AG,
4.30%, 11/1/01 6,350,854
455 DD State Street Bank &
Trust Company,
3.00%, 11/1/01 229
--------------
Total demand deposits
(cost US$8,851,512) 8,709,166
--------------
See Notes to Financial Statements. Aberdeen Australia Equity Fund, Inc. 13
Portfolio of Investments (continued)
October 31, 2001
Principal
Amount Value
(000) Description (US$)
-------------------------------------------------
Repurchase Agreement--0.3%
US$
303 State Street Bank & Trust
Company, 2.48%, dated
10/31/01, due 11/1/01 in
the amount of $303,021
(cost $303,000;
collateralized by
$220,000 U.S. Treasury
Bonds, due 8/15/17; value
including accrued
interest $314,079) $ 303,000
------------
Total short-term
investments
(cost US$9,154,512) 9,012,166
------------
--------------------------------------------------------------------------------
Total Investments--100.0% (cost $108,870,964) 102,393,589
Liabilities in excess of other assets (32,095)
--------------------------------------------------------------------------------
Net assets--100% $102,361,494
============
------------------------------
* Non-income producing security.
D Portion of security on loan.
DD Figure is actual and not rounded to thousands.
14 Aberdeen Australia Equity Fund, Inc. See Notes to Financial Statements.
Statement of Assets and Liabilities
October 31, 2001
Assets
Investments, at value (cost $108,870,964).......................... $102,393,589
Foreign currency, at value (cost $195,591)......................... 194,857
Cash............................................................... 230
Dividends and interest receivable.................................. 3,048
Other assets....................................................... 89,244
------------
Total assets................................................... 102,680,968
------------
Liabilities
Accrued expenses and other liabilities............................. 237,553
Investment management fee payable.................................. 77,574
Administration fee payable......................................... 3,893
Foreign withholding tax payable.................................... 454
------------
Total liabilities.............................................. 319,474
------------
Net Assets......................................................... $102,361,494
------------
------------
Net assets were comprised of:
Common stock, $.01 par value................................... $ 171,568
Paid-in capital in excess of par............................... 138,196,572
------------
138,368,140
Undistributed net investment income............................ 34,742
Accumulated net realized loss on investments................... (2,782,682)
Net unrealized appreciation on investments..................... 6,037,138
Accumulated net realized and unrealized foreign exchange
losses......................................................... (39,295,844)
------------
Net assets..................................................... $102,361,494
------------
------------
Net asset value per share:
($102,361,494 / 17,156,798 shares of common stock issued
and outstanding)................................................. $5.97
------------
------------
See Notes to Financial Statements. Aberdeen Australia Equity Fund, Inc. 15
Statement of Operations
Year Ended October 31, 2001
Net Investment Income
Income
Dividends (net of foreign withholding taxes of $61,503).... $ 3,625,598
Interest................................................... 456,273
Income from securities loaned, net......................... 28,071
------------------
Total income............................................... 4,109,942
------------------
Expenses
Investment management fee.................................. 1,105,354
Directors' fees and expenses............................... 205,000
Custodian's fees and expenses.............................. 184,000
Reports to Shareholders.................................... 169,000
Legal fees and expenses.................................... 120,000
Investor relations fees and expenses....................... 74,000
Independent accountant's fees and expenses................. 70,000
Administration fee......................................... 57,525
Transfer agent's fees and expenses......................... 49,000
Insurance expense.......................................... 29,000
Miscellaneous.............................................. 9,522
------------------
Total operating expenses................................... 2,072,401
------------------
Net investment income........................................ 2,037,541
------------------
Realized and Unrealized Gains (Losses) on Investments and
Foreign Currencies
Net realized loss on investment transactions................. (2,376,854)
Net decrease in unrealized appreciation on investments....... (618,229)
------------------
Net loss on investments...................................... (2,995,083)
------------------
Net decrease in net assets resulting from operations before
net foreign exchange losses................................ (957,542)
Net realized and unrealized foreign exchange losses.......... (2,829,055)
------------------
Net Decrease In Net Assets Resulting From Operations......... $ (3,786,597)
------------------
------------------
16 Aberdeen Australia Equity Fund, Inc. See Notes to Financial Statements.
Statement of Changes in Net Assets
Year Ended October 31,
----------------------------------------
2001 2000
------------------ ------------------
Increase (Decrease) in Net Assets
Operations
Net investment income.................. $ 2,037,541 $ 2,383,135
Net realized gain (loss) on investment
transactions......................... (2,376,854) 8,667,309
Net decrease in unrealized appreciation
on investments....................... (618,229) (3,190,914)
------------------ ------------------
Net increase (decrease) in net assets
resulting from operations before net
foreign exchange losses.............. (957,542) 7,859,530
Net realized and unrealized foreign
exchange losses...................... (2,829,055) (26,911,282)
------------------ ------------------
Net decrease in net assets resulting
from operations...................... (3,786,597) (19,051,752)
Dividends to shareholders from net
investment income...................... -- (2,028,314)
Distributions to shareholders from net
realized capital gains................. -- (11,895,151)
Tax return of capital.................... (11,592,876) --
Cost of Fund shares reacquired in
repurchase program (33,200 and 0
shares, respectively).................. (200,299) --
------------------ ------------------
Total decrease........................... (15,579,772) (32,975,217)
Net Assets
Beginning of year........................ 117,941,266 150,916,483
------------------ ------------------
End of year(a)........................... $102,361,494 $117,941,266
------------------ ------------------
------------------ ------------------
------------------------------
(a) Includes undistributed net investment
income of:........................... $ 34,742 $ --
------------------ ------------------
See Notes to Financial Statements. Aberdeen Australia Equity Fund, Inc. 17
Notes to Financial Statements
Aberdeen Australia Equity Fund, Inc. (formerly known as The First Australia
Fund, Inc.) (the 'Fund') is a closed-end, non-diversified management investment
company incorporated in Maryland on September 30, 1985. The Fund's principal
investment objective is long-term capital appreciation through investment
primarily in equity securities of Australian companies listed on The Australian
Stock Exchange. The Fund's secondary investment objective is current income. It
is expected that normally at least 65% of the Fund's total assets will be
invested in equity securities listed on The Australian Stock Exchange and that
current income will be derived primarily from dividends and interest on
Australian corporate and governmental securities. The ability of issuers of debt
securities, including foreign currency balances on deposit with the Fund's
Australian subcustodian bank, held by the Fund to meet their obligations may be
affected by economic or political developments in a specific industry or region.
Note 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 of America using the United
States dollar as both the functional and reporting currency.
Security Valuation:
Investments 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.
Repurchase Agreements:
In connection with transactions in repurchase agreements with United States
financial institutions, it is the Fund's policy that its custodian or designated
subcustodians under triparty repurchase agreements, as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction,
18 Aberdeen Australia Equity Fund, Inc.
Notes to Financial Statements (continued)
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the collateral is valued on a daily basis to determine
its adequacy. If the seller defaults and the value of the collateral declines or
if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.
Foreign Currency Translation:
Australian dollar ('A$') amounts are translated into United States dollars
('US$') on the following basis:
(i) market value of investment securities, other assets and liabilities--at the
exchange rates at the end of the reporting period; and
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
The Fund isolates 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 held at October 31, 2001. Similarly,
the Fund isolates the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of portfolio securities
sold during the reporting period.
Net realized and unrealized foreign exchange losses include realized foreign
exchange gains and losses from sales and maturities of portfolio securities,
sales of foreign currencies, currency gains or losses realized between the trade
and settlement dates on securities transactions, the difference between the
amounts of dividends, interest and foreign withholding taxes recorded on the
Fund's books and the United States dollar equivalent amounts actually received
or paid and changes in unrealized foreign exchange gains and losses in the value
of portfolio securities and other assets and liabilities arising as a result of
changes in the exchange rate. Accumulated net realized and unrealized foreign
exchange losses shown in the composition of net assets at October 31, 2001
represent foreign exchange losses for book purposes that have not yet been
recognized for tax purposes.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin, including
unanticipated movements in the value of the foreign currency relative to the
United States dollar.
The exchange rate at October 31, 2001 was US$0.50 to A$1.00 for the Australian
dollar.
Aberdeen Australia Equity Fund, Inc. 19
Notes to Financial Statements (continued)
Securities Transactions and Investment Income:
Securities transactions are recorded on the trade date. Realized and unrealized
gains and losses from security and currency transactions are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Expenses are recorded on the
accrual basis which may require the use of certain estimates by management. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates.
Dividends and Distributions:
It is the Fund's current policy to pay regular quarterly distributions at an
annual rate, which is a percentage of the rolling average of the Fund's prior
four quarter-end net asset values. The distributions will be made from net
investment income, net realized capital gains and, to any extent necessary,
paid-in capital. Dividends and distributions are recorded on the ex-dividend
date. Income distributions and capital and currency gains distributions are
determined in accordance with income tax regulations, which may differ from
accounting principles generally accepted in the United States of America. These
differences are primarily due to differing treatments for foreign currencies.
Taxes:
For federal income and excise 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 Australian dollars into United States dollars are recognized
for tax purposes.
No provision has been made for United States income taxes because it is the
Fund's policy to continue to meet the requirements of the United States Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable net income and capital gains, if any, to shareholders. Australia
imposes a withholding tax of 15% on certain dividends and 10% on certain
interest.
Securities Lending:
The Fund may lend its securities to qualified institutions. The loans are
secured by collateral at least equal, at all times, to the market value of the
securities loaned. The Fund may bear the risk of delay in recovery of, or even
loss of rights in, the securities loaned should the borrower of the securities
fail financially. The Fund receives compensation for lending its securities in
the form of fees or it retains a portion of interest on the investment of any
cash
20 Aberdeen Australia Equity Fund, Inc.
Notes to Financial Statements (continued)
received as collateral. The Fund also continues to receive interest and
dividends on the securities loaned and any gain or loss in the market price of
the securities loaned that may occur during the term of the loan will be for the
account of the Fund.
Reclassification of Capital Accounts:
The Fund accounts and reports for distributions to shareholders in accordance
with AICPA Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gains, and Return of Capital
Distributions by Investment Companies. During the year ended October 31, 2001,
the Fund decreased distributions in excess of net investment income by
$4,688,369, decreased accumulated net realized losses on investments by
$4,650,723, decreased accumulated realized and unrealized foreign exchange
losses by $4,967,033 and decreased paid-in capital in excess of par by
$14,306,125. Net investment income, net realized gains and net assets were not
affected by this change.
Note 2. Agreements
Aberdeen Asset Managers (C.I.) Limited (formerly known as EquitiLink
International Management Limited) (the 'Investment Manager') serves as
investment manager to the Fund and Aberdeen Asset Management Limited (formerly
known as EquitiLink Australia Limited) (the 'Investment Adviser') serves as
investment adviser to the Fund pursuant to a management agreement and an
advisory agreement, respectively, each dated December 22, 2000. The Investment
Manager and the Investment Adviser are wholly-owned subsidiaries of Aberdeen
Asset Management PLC.
The Investment Manager makes investment decisions on behalf of the Fund on the
basis of recommendations and information furnished to it by the Investment
Adviser, including the selection of and the placement of orders with brokers and
dealers to execute portfolio transactions on behalf of the Fund.
The management agreement provides the Investment Manager with a fee, computed
weekly and payable monthly, at the following annual rates: 1.10% of the Fund's
average weekly net assets up to $50 million, 0.90% of such assets between $50
million and $100 million and 0.70% of such assets in excess of $100 million.
The Investment Manager pays fees to the Investment Adviser for its services
rendered. The Investment Manager informed the Fund that it paid $297,576 to the
Investment Adviser during the year ended October 31, 2001.
Aberdeen Australia Equity Fund, Inc. 21
Notes to Financial Statements (continued)
Prudential Investments LLC (formerly known as Prudential Investments Fund
Management LLC) (the 'Administrator') serves as administrator to the Fund
pursuant to an agreement dated December 11, 1987 which provides the
Administrator with a fee at the annual rate of the greater of $25,000 or 0.05%
of the Fund's average weekly net assets.
Under terms of an Investor Relations Services Agreement, EquitiLink USA, Inc.
(doing business under the name Aberdeen Asset Management ('Aberdeen')), a
wholly-owned subsidiary of the Investment Manager, serves as the Fund's investor
relations services provider. This agreement provides Aberdeen with a monthly
retainer fee of $5,000 plus out of pocket expenses. During the year ended
October 31, 2001, the Fund incurred fees of approximately $60,000 for the
services of Aberdeen. As of October 31, 2001, $5,000 was due to Aberdeen.
Investor relations expenses in the Statement of Operations include certain
out-of-pocket expenses.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended October 31, 2001, aggregated $52,616,183 and $67,433,833,
respectively.
As of October 31, 2001, the Fund had securities on loan with an aggregate market
value of $947,361. As of this date, the collateral held for securities on loan
was comprised of U.S. Treasury securities with an aggregate market value of
$1,040,595.
The United States federal income tax basis of the Fund's investments at October
31, 2001 was $96,565,270 and accordingly, net unrealized appreciation for United
States federal income tax purposes was $5,828,319 (gross unrealized
appreciation--$12,664,990; gross unrealized depreciation--$6,836,671).
For federal income tax purposes, the Fund had a capital loss carryforward as of
October 31, 2001 of approximately $2,467,381 which expires in 2009. Accordingly,
no capital gains distributions are expected to be paid to shareholders until
future net gains have been realized in excess of such carryforward.
Note 4. Capital
There are 20 million shares of $.01 par value common stock authorized. At
October 31, 2001 there were 17,156,798 shares issued and outstanding.
On March 1, 2001, the Board of Directors approved a stock repurchase program.
The stock repurchase program allows the Fund to repurchase up to 10% of its
common stock in the
22 Aberdeen Australia Equity Fund, Inc.
Notes to Financial Statements (continued)
open market during any 12 month period if and when the discount to net asset
value is at least 10%. Through October 31, 2001, there have been 33,200 shares
repurchased and cancelled under this program.
Note 5. Dividends And Distributions
The Board of Directors of the Fund approved on December 11, 2001 a dividend of
$0.1475 per share payable on January 11, 2002 to shareholders of record on
December 31, 2001. Distributions may be comprised of a combination of investment
income, realized capital gains and, to the extent necessary, paid-in capital.
Note 6. Beneficial Ownership; Change of Control
On January 18, 2001, Mira L.P. ('Mira') acquired an aggregate of 2,742,461
shares of common stock of the Fund from EquitiLink Holdings Limited, EquitiLink
Limited, EquitiLink International Management Limited and EquitiLink USA, Inc.
(collectively, the 'Sellers'), pursuant to a Stock Purchase Agreement dated as
of November 10, 2000 by and between Mira and the Sellers. EquitiLink
International Management Limited is the former name of the Fund's Investment
Manager, and EquitiLink USA, Inc., a wholly-owned subsidiary of the Fund's
Investment Manager, continues to act as the Fund's investor relations services
provider pursuant to the agreement referred to in Note 2. At the time of the
execution of the Stock Purchase Agreement, the Sellers were entities then
affiliated with the Fund's Investment Manager. As of October 31, 2001, based
upon filings with the Securities and Exchange Commission as of February 12,
2001, Mira was the beneficial owner of 30.93% of the outstanding shares of the
Fund.
Aberdeen Australia Equity Fund, Inc. 23
Financial Highlights
Year
Ended
October 31, 2001
----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................................... $ 6.86
--------
Net investment income.................................................. .12
Net realized and unrealized gain (loss) on investments and foreign
currencies........................................................... (.33)
--------
Total from investment operations..................................... (.21)
--------
Dividends from net investment income................................... --
Distributions from net capital and currency gains...................... --
Tax return of capital.................................................. (.68)
--------
Total dividends and distributions.................................... (.68)
--------
Capital reduction with respect to issuance of Fund shares.............. --
Increase resulting from Fund share repurchase.......................... --D
--------
Net asset value, end of year........................................... $ 5.97
--------
--------
Market price per share, end of year.................................... $ 5.29
--------
--------
TOTAL INVESTMENT RETURN BASED ON(Pound):
Market value........................................................... 1.06%
Net asset value........................................................ (2.32)%
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets................................ 1.80%
Ratio of net investment income to average net assets................... 1.77%
Portfolio turnover rate................................................ 50%
Net assets, end of year (000 omitted).................................. $102,361
Average net assets (000 omitted)....................................... $115,051
(Pound) Total investment return is calculated assuming a purchase of common
stock on the first day and a sale on the last day of each period
reported. Dividends and distributions are assumed, for purposes of
this calculation, to be reinvested at prices obtained under the Fund's
dividend reinvestment plan. Total investment return does not reflect
brokerage commissions.
D Less than $0.005 per share.
NOTE: Contained above is operating performance for a share of common stock
outstanding, total investment return, ratios to average net assets and
other supplemental data for each of the periods indicated. This
information has been determined based upon financial information
provided in the financial statements and market value data for the
Fund's shares.
24 Aberdeen Australia Equity Fund, Inc. See Notes to Financial Statements.
Financial Highlights (continued)
Year Ended October 31,
---------------------------------------------------
2000 1999 1998 1997
--------- --------- --------- ---------
$ 8.78 $ 8.25 $ 9.35 $ 10.98
--------- --------- --------- ---------
.14 .08 .21 .18
(1.25) 1.26 (.41) (1.45)
--------- --------- --------- ---------
(1.11) 1.34 (.20) (1.27)
--------- --------- --------- ---------
(.12) (.30) (.23) (.17)
(.69) (.51) (.66) (.18)
-- -- -- --
--------- --------- --------- ---------
(.81) (.81) (.89) (.35)
--------- --------- --------- ---------
-- -- (.01) (.01)
-- -- -- --
--------- --------- --------- ---------
$ 6.86 $ 8.78 $ 8.25 $ 9.35
--------- --------- --------- ---------
--------- --------- --------- ---------
$ 5.875 $ 8.00 $ 6.5625 $ 7.44
--------- --------- --------- ---------
--------- --------- --------- ---------
(17.31)% 34.91% (0.38)% (15.17)%
(12.02)% 17.77% (0.34)% (11.37)%
1.66% 2.58% 1.61% 1.39%
1.66% .87% 2.38% 1.68%
120% 143% 180% 270%
$ 117,941 $ 150,916 $ 141,794 $ 159,422
$ 143,801 $ 157,565 $ 149,827 $ 182,588
See Notes to Financial Statements. Aberdeen Australia Equity Fund, Inc. 25
Report of Independent Accountants
To the Shareholders and Board of Directors of
Aberdeen Australia Equity 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 Aberdeen Australia Equity Fund,
Inc. (the 'Fund,' formerly known as The First Australia Fund, Inc.) at October
31, 2001, 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 accounting principles generally accepted in the United States of
America. 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 auditing standards generally accepted in the United States of
America 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, 2001 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 21, 2001
26 Aberdeen Australia Equity Fund, Inc.
Federal Tax Information:
Dividends and Distributions (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (October 31, 2001) as to the federal income tax status of
dividends paid by the Fund during such fiscal year.
The Fund has elected to give the benefit of foreign tax credits to its
shareholders. Accordingly, shareholders who must report their gross income
dividends and distributions in a federal income tax return will be entitled to a
foreign tax credit or an itemized deduction in computing their US income tax
liability. It is generally more advantageous to clam a credit rather than take a
deduction. For the fiscal year ended October 31, 2001 the Fund intends on
passing through approximately $96,900 of ordinary income distributions as a
foreign tax credit.
In January 2002, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV
as to the federal tax status of the dividends and distributions received by you
in calendar year 2001.
Aberdeen Australia Equity Fund, Inc. 27
Other Information (Unaudited)
Dividend Reinvestment and Cash Purchase Plan. Shareholders may elect to have all
distributions of dividends and capital gains automatically reinvested in Fund
shares pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan (the
'Plan'). Generally, shareholders who do not participate in the Plan will receive
distributions in cash paid by check in United States dollars mailed directly to
the shareholders of record (or if the shares are held in street or other nominee
name, then to the nominee) by the custodian, as dividend disbursing agent.
Shareholders who wish to participate in the Plan should contact the Fund at
(800) 451-6788.
State Street Bank & Trust Company (the 'Plan Agent') serves as agent for the
shareholders in administering the Plan. Dividends and capital gains
distributions payable to Plan participants will be promptly invested. If the
Plan declares an income dividend or capital gains distribution payable in stock
to shareholders who are not Plan participants, then Plan participants will
receive that dividend or distribution in newly issued shares on identical terms
and conditions.
In every other case Plan participants will receive shares on the following
basis: If the market price of the Fund's common stock plus any brokerage
commission is equal to or exceeds net asset value, Plan participants will
receive newly issued shares valued at the greater of net asset value or 95% of
current market price. If, on the other hand, the net asset value plus any
brokerage commission exceeds the market price, the Plan Agent will buy shares in
the open market. If the market price plus any applicable brokerage commission
exceeds net asset value before the Plan Agent has completed its purchases, the
Fund will issue new shares to complete the program. All reinvestments are in
full and fractional shares carried to three decimal places.
There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below. The
Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Fund. There will be no brokerage commissions
charged with respect to shares issued directly by the Fund. However, each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases in connection with the
reinvestment of dividends and distributions. The automatic reinvestment of
dividends and distributions will not relieve participants of any federal income
tax that may be payable on such dividends and distributions.
28 Aberdeen Australia Equity Fund, Inc.
Other Information (Unaudited) (continued)
The Plan also allows participants to make optional cash investments of at least
$100 in Fund shares as frequently as monthly through the Plan Agent on the open
market. Participants must pay a service fee of $0.75 for each investment and a
pro rata share of the brokerage commissions.
The Fund reserves the right to amend or terminate the Plan either in full or
partially upon 90 days' written or telephone notice to shareholders of the Fund.
Participants in the Plan may withdraw some or all of their shares from the Plan
upon written notice to the Plan Agent and will receive certificates for whole
shares and cash for fractional shares. In the alternative, by giving proper
notice to the Plan Agent, participants may receive cash in lieu of shares in an
amount which is reduced by brokerage commissions in connection with the sale of
shares and a $2.50 service fee.
All correspondence concerning the Plan should be directed to the Plan Agent,
State Street Bank & Trust Company, P.O. Box 8200, Boston, MA 02266-8200.
Aberdeen Australia Equity Fund, Inc. 29
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Directors Officers
Hugh Young, Chairman Hugh Young, President
Anthony E. Aaronson Christian Pittard, Treasurer and
David L. Elsum Assistant Secretary
Chris Fishwick Roy M. Randall, Secretary
Laurence S. Freedman Michael Karagianis, Assistant
Howard A. Knight Vice President
Neville J. Miles Beverley Hendry, Assistant Treasurer
Peter J. O'Connell Timothy Sullivan, Assistant Treasurer
William J. Potter Simon Bignell, Assistant Treasurer
Sir David Rowe-Ham Jack R. Benintende, Assistant Treasurer
Peter D. Sacks Allan S. Mostoff, Assistant Secretary
John T. Sheehy Margaret A. Bancroft, Assistant Secretary
Sander M. Bieber, Assistant Secretary
This report, including the financial statements herein, is
transmitted to the shareholders of Aberdeen Australia
Equity Fund, Inc. for their general information only. It
does not have regard to the specific investment objectives,
financial situation and the particular needs of any
specific person.
Notice is hereby given in accordance with Section 23(c) of
the Investment Company Act of 1940 that the Fund may
purchase, from time to time, shares of its common stock in
the open market.
Aberdeen Australia Equity Fund, Inc.
Corporate Information
Investment Manager Aberdeen Asset Managers (C.I.) Limited
P.O. Box 578, 17 Bond Street
St. Helier, Jersey, JE4 5XB Channel Islands
Investment Adviser Aberdeen Asset Management Limited
Level 6, 201 Kent Street
Sydney, NSW 2000, Australia
Administrator Prudential Investments LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian & Transfer Agent State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Independent Accountants PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel Dechert
1775 Eye Street N.W.
Washington, DC 20006-2401
Stikeman Elliott
Level 40, Chifley Tower
Two Chifley Square
Sydney, NSW 2000, Australia
Investor Relations Aberdeen Asset Management
45 Broadway, 31st Floor
New York, NY 10006
(800) 522-5465 or (212) 968-8800
InvestorRelations@aberdeen-asset.com
(Icon)
Aberdeen
ASSET MANAGERS
Aberdeen Asset Managers (C.I.) Limited
Shares of the Aberdeen Australia Equity Fund, Inc. are
traded on the American Stock Exchange and on the Pacific
Stock Exchange under the symbol "IAF". Information about
the Fund's net asset value and market price is published
weekly in Barron's and in the Monday edition of The Wall
Street Journal.
003011103