<PAGE>
PROSPECTUS
[LOGO]
4,060,000 SHARES
THE BRAZIL FUND, INC.
COMMON STOCK
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The Brazil Fund, Inc. (the "Fund") is issuing to its shareholders of record
(the "Record Date Shareholders") as of the close of business on November 20,
1995 (the "Record Date") transferable rights (the "Rights") entitling the
holders thereof to subscribe for an aggregate of 4,060,000 shares (the
"Shares") of the Fund's common stock (the "Common Stock") at the rate of one
share of Common Stock for each three Rights held and entitling such Record
Date Shareholders to subscribe, subject to certain limitations and subject to
allotment, for any Shares not acquired by exercise of primary subscription
Rights (the foregoing being referred to hereinafter as the "Offer"). Each
Record Date Shareholder is being issued one Right for each full share of
Common Stock owned on the Record Date. No fractional Rights or Shares will be
issued. The Rights are transferable and are expected to be listed for trading
on the New York Stock Exchange (the "NYSE"). The Shares are expected to be
listed on the NYSE and admitted to trading but not listed on the Chicago Stock
Exchange (the "CSE"). See "The Offer." THE SUBSCRIPTION PRICE PER SHARE (the
"Subscription Price") will be $15.75.
THE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON DECEMBER 15, 1995
UNLESS EXTENDED AS DESCRIBED HEREIN.
The Fund is a non-diversified, closed-end management investment company,
commenced operations in 1988 and, as of November 16, 1995, had net assets of
$270,837,340. The Fund's investment objective is to seek long-term capital
appreciation through investment in securities, primarily equity securities, of
Brazilian issuers. It is the policy of the Fund normally to invest at least
70% of the Fund's net assets in common and preferred stocks of companies
registered with the Brazilian Securities Commission and listed on the
Brazilian stock exchanges or traded in over-the-counter markets. No assurance
can be given that the Fund's investment objective will be realized. Investment
in Brazil involves certain special considerations, such as restrictions on
foreign investment and repatriation of capital, fluctuations of currency
exchange rates, and political and economic risks, that are not normally
involved in investments in the United States and which may be deemed to
involve speculative risks. SEE "INVESTMENT OBJECTIVE AND POLICIES," "RISK
FACTORS AND SPECIAL CONSIDERATIONS" AND ANNEX A, "THE FEDERATIVE REPUBLIC OF
BRAZIL."
Scudder, Stevens & Clark, Inc. (the "Manager") manages the Fund. Banco Icatu
S.A. (the "Brazilian Adviser") acts as Brazilian adviser to the Manager. Banco
de Boston S.A. (the "Brazilian Administrator") acts as Brazilian
administrator. The address of the Fund is 345 Park Avenue, New York, New York
10154, and its telephone number is (212) 326-6200. All questions relating to
the Offer should be directed to the Information Agent, Georgeson & Company
Inc., toll free at (800) 223-2064 or collect at (212) 509-6240.
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The Fund's currently outstanding shares of Common Stock are, and the Shares
offered hereby will be, listed on the NYSE under the symbol "BZF" and admitted
to trading but not listed on the CSE under the symbol "BZF." The Rights will
trade on the NYSE under the symbol "BZF-RT." The Fund announced the Offer
before the opening of trading on the NYSE on October 13, 1995. The net asset
value per share of Common Stock at the close of business on October 12, 1995
and November 17, 1995 was $25.93 and $22.56, respectively, and the last sale
price of the Common Stock on the NYSE Composite Tape on those dates was $25.25
and $20.875, respectively.
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As a result of the terms of the Offer, Record Date Shareholders who do not
fully exercise their Rights should expect that they will, upon the completion
of the Offer, own a smaller proportional interest in the Fund than would
otherwise be the case. An immediate substantial dilution of the aggregate net
asset value of the shares of Common Stock owned by Record Date Shareholders
who do not fully exercise their Rights is likely to be experienced as a result
of the Offer. SEE "THE OFFER" AND "RISK FACTORS AND SPECIAL CONSIDERATIONS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<TABLE>
<CAPTION>
SUBSCRIPTION PRICE SALES LOAD(1) PROCEEDS TO FUND (2)
- -----------------------------------------------------------------
<S> <C> <C> <C>
Per Share $15.75 $.55125 $15.19875
- -----------------------------------------------------------------
Total $63,945,000 $2,238,075 $61,706,925
- -----------------------------------------------------------------
</TABLE>
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(1) In connection with the Offer, the Fund has agreed to pay to Smith Barney
Inc. (the "Dealer Manager") and other broker-dealers included in the
selling group to be formed and managed by the Dealer Manager ("Selling
Group Members") a fee of 2.50% of the Subscription Price for each Share
either issued upon the exercise of Rights as a result of their soliciting
efforts or purchased from the Dealer Manager for sale to the public.
Certain other broker-dealers that have executed and delivered a Soliciting
Dealer Agreement and have solicited the exercise of Rights will receive
fees for their soliciting efforts of .50% of the Subscription Price,
subject generally to a maximum fee based upon the number of shares of
Common Stock held by each such broker-dealer through The Depository Trust
Company on the Record Date. The Fund will pay to the Dealer Manager a fee
for financial advisory and marketing services in connection with the Offer
equal to 1.00% of the aggregate Subscription Price. The Fund has agreed to
indemnify the Dealer Manager against certain liabilities under the
Securities Act of 1933, as amended. See "The Offer--Distribution
Arrangements." The total sales load shown in the table assumes that the
exercise of all Rights was solicited by a Selling Group Member.
(2) Before deduction of expenses incurred by the Fund, estimated at $660,000,
including up to an aggregate of $100,000 to be paid to the Dealer Manager
in reimbursement of its expenses.
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Prior to the Expiration Date, the Dealer Manager may offer Shares of Common
Stock, including Shares acquired through the purchase and exercise of Rights,
at prices it sets from time to time. Each price when set will not exceed the
greater of the last sale or current asked price of the Common Stock on the
NYSE plus commission, and an offering price set in any calendar day will not
be increased more than once during that day. Because the Dealer Manager will
determine the price, it may realize profits or losses independent of any fees
referred to under "The Offer--Distribution Arrangements."
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This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus and to retain it for future reference. A Statement of
Additional Information, dated November 20, 1995 (the "SAI"), containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission (the "Commission"), and is incorporated by reference in
its entirety into this Prospectus. A copy of the SAI may be obtained without
charge by calling the Fund's Information Agent, Georgeson & Company Inc., toll
free at (800) 223-2064 or collect at (212) 509-6240. The table of contents of
the SAI is on page 51 of this Prospectus.
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SMITH BARNEY INC.
The date of this Prospectus is November 20, 1995.
<PAGE>
In this Prospectus, unless otherwise specified, all references to "billion"
are to one thousand million, to "Dollars," "US$" or "$" are to United States
Dollars and to "Real" (plural "Reais") or "R$" are to Brazilian Reais. On
November 16, 1995, the Real-Dollar exchange rate (sell side) in the commercial
exchange market, as published by the Central Bank of Brazil, was R$ 0.962 =
$1.00. No representation can be made as to whether the Real or Dollar amounts
in this Prospectus could have been or could be converted into Reais or
Dollars, as the case may be, at such rates, at any other rates or at all. See
Annex A, "The Federative Republic of Brazil--Balance of Payments and Foreign
Trade" and "--Foreign Exchange" for information regarding the rates of
exchange between the Real and the Dollar for the five years prior to the date
of this Prospectus. Reference should be made to "Risk Factors and Special
Considerations--Currency Fluctuations" for a better understanding of the
effect on the Fund of the fluctuation of the exchange rate between the Real
and the Dollar and the significance, in Dollar terms, of amounts set forth in
this Prospectus in Reais and of amounts in comparison based on, or computed by
reference to, such currency.
On July 1, 1994, the Real replaced the Cruzeiro Real as the lawful currency
of Brazil, with each Real exchangeable for 2,750.00 Cruzeiros Reais. The
Cruzeiro Real had replaced the Cruzeiro as the lawful currency of Brazil on
August 1, 1993, with each Cruzeiro Real exchangeable for 1,000 Cruzeiros. The
Cruzeiro had replaced the Cruzado Novo as the lawful currency of Brazil under
the Collor Plan of March 15, 1990, with each Cruzeiro exchangeable for one
Cruzado Novo. The Cruzado Novo had replaced the Cruzado as the lawful currency
of Brazil under the Summer Plan of January 16, 1989, with each Cruzado Novo
exchangeable for 1,000 Cruzados. The Cruzado had replaced the Cruzeiro as the
lawful currency of Brazil under the Cruzado Plan of February 28, 1986, with
each Cruzado exchangeable for 1,000 pre-Cruzado Plan Cruzeiros.
Brazil has in the past experienced high rates of inflation. As measured by
the General Price Index--Domestic Supply (a national price index based on a
weighting of three other indexes), annualized inflation for the nine months
ended September 30, 1995 was 17.3%. Annual inflation was 1,094% for 1994,
2,709% for 1993 and 1,158% for 1992. Such high levels of inflation, together
with the devaluation of the Brazilian currency in relation to the U.S. Dollar,
render comparisons of year-to-year financial performance and U.S. Dollar
translations less meaningful. Accordingly, the effects of inflationary
distortions should be considered by the readers of all financial information
contained herein. Except as indicated herein, the exchange rates used herein
to convert pre-Cruzado Plan Cruzeiro, Cruzado, Cruzado Novo, post-Cruzado Plan
Cruzeiro, Cruzeiro Real or Real amounts into U.S. Dollars for a particular
period were the commercial rates of exchange recorded by the Central Bank in
effect at the end of such period. These conversions are provided solely for
the convenience of readers of this Prospectus and should not be construed as
implying that the Brazilian currency amounts represent or have been or could
be converted into U.S. Dollars at such rates.
Certain numbers in this Prospectus have been rounded for ease of
presentation. Since most calculations have been made on unrounded figures, the
sum of the component figures in many of the tables presented may not precisely
equal the totals shown.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the United States
Securities and Exchange Commission (the "Commission"). Such reports and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and the Commission's regional offices at 7 World Trade Center, New York, New
York 10048 and 14th Floor, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Fund's shares of Common Stock are listed and/or admitted to trading
on the stock exchanges referred to on the cover page of this Prospectus, and
reports and other information concerning the Fund can be inspected at such
exchanges.
2
<PAGE>
A Registration Statement on Form N-2 (the "Registration Statement") relating
to the Shares has been filed by the Fund with the Commission. This Prospectus
does not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. For further
information with respect to the Fund and the Shares offered hereby, reference
is made to the Registration Statement, of which this Prospectus and the
Statement of Additional Information ("SAI") incorporated herein by reference
constitute a part. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof
may be obtained from the Commission upon the payment of certain fees
prescribed by the Commission.
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IN CONNECTION WITH THIS OFFERING, THE DEALER MANAGER MAY EFFECT TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE RIGHTS AND THE COMMON
STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, ANY OTHER
EXCHANGES ON WHICH THE COMMON STOCK AND/OR THE RIGHTS HAVE BEEN ADMITTED TO
TRADING PRIVILEGES, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
EXPENSE INFORMATION
The following table sets forth certain fees and expenses of the Fund.
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<S> <C>
Sales Load (as a percentage of offering price)(1)(2).................... 3.50%
Dividend Reinvestment and Cash Purchase Plan Fees....................... (3)
</TABLE>
ANNUAL FUND OPERATING EXPENSES: Expenses paid by the Fund before it
distributes its net investment income, expressed as a percentage of the Fund's
net assets (based on estimated expenses for the fiscal year ending December
31, 1995).
<TABLE>
<S> <C>
Management Fees......................................................... 1.15%
Other expenses.......................................................... .44%
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Total Annual Fund Operating Expenses...................................... 1.59%
====
</TABLE>
EXAMPLE:(4)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Based on the level of total Fund operating
expenses listed above, the total expenses
relating to a $1,000 investment in the Fund
at the end of each period, assuming a 5%
annual return, are listed below............. $16 $50 $87 $189
=== === === ====
</TABLE>
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(1) The Fund has agreed to pay to the Dealer Manager and each Selling Group
Member fees equal to 2.50% of the Subscription Price for each Share either
issued upon the exercise of Rights as a result of their soliciting efforts
or purchased from the Dealer Manager for sale to the public. Certain other
broker-dealers that have executed and delivered a Soliciting Dealer
Agreement and have solicited the exercise of Rights will receive fees for
their soliciting efforts of up to .50% of the Subscription Price, subject
generally to a maximum fee based upon the number of shares of Common Stock
held by each such broker-dealer through The Depository Trust Company on
the Record Date. The Fund will pay to the Dealer Manager a fee for
financial advisory and marketing services in connection with the Offer
equal to 1.00% of the aggregate Subscription Price. These fees will be
borne by all of the Fund's shareholders, including those who do not
exercise their Rights. The total sales load shown in the table assumes
that the exercise of all Rights was solicited by Selling Group Members.
See "The Offer--Distribution Arrangements."
(2) Does not include expenses of the Fund incurred in connection with the
Offer, estimated at $660,000.
(3) There is no charge to participants for reinvesting dividends and capital
gains distributions (the Plan Agent's fees are paid by the Fund).
Participants are charged a $1.00 service fee for each voluntary cash
investment and a pro rata share of brokerage commissions on all open
market purchases.
(4) The Example assumes reinvestment of all dividends and distributions at net
asset value, reflects all recurring and non-recurring fees including the
Sales Load and other expenses of the Fund incurred in connection with the
Offer, assumes that the percentage amounts listed under "Annual Fund
Operating Expenses" remain the same each year, and assumes that all of the
Rights are exercised.
The purpose of the foregoing table and example is to assist Rights holders
in understanding the various costs and expenses that an investor in the Fund
bears, directly or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURN. ACTUAL FUND EXPENSES AND
RETURN VARY FROM YEAR TO YEAR AND MAY BE HIGHER OR LOWER THAN THOSE SHOWN. In
addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in the Fund's Dividend
Reinvestment and Cash Purchase Plan may receive shares issued at a price or
value different from net asset value. See "Dividends and Distributions;
Dividend Reinvestment and Cash Purchase Plan."
The figures provided under "Other Expenses" are based upon estimated amounts
for the current fiscal year. The Manager has agreed not to charge a portion of
its fee such that the effective investment management fee with respect to net
assets in excess of $300,000,000 is 1.075%. For more complete descriptions of
certain of the Fund's costs and expenses, see "Investment Advisers and
Administrator."
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information ("SAI") that is incorporated herein by reference.
Investors should carefully consider information set forth under the heading
"Risk Factors and Special Considerations."
THE OFFER
The Brazil Fund, Inc. (the "Fund") is issuing to its shareholders of record
(the "Record Date Shareholders") as of the close of business on November 20,
1995 (the "Record Date") transferable rights (the "Rights") to subscribe for an
aggregate of 4,060,000 shares (the "Shares") of the Fund's common stock (the
"Common Stock"). Each Record Date Shareholder is being issued one Right for
each full share of Common Stock owned on the Record Date. For purposes of
determining the number of Shares a Record Date Shareholder may acquire pursuant
to the Offer (as defined below), broker-dealers whose Shares are held of record
by Cede & Co. ("Cede"), as nominee for The Depository Trust Company ("DTC"), or
by any other depository or nominee will be deemed to be the holders of the
Rights that are issued to Cede or such other depository or nominee on their
behalf. The Rights entitle the Record Date Shareholder to acquire at the
Subscription Price (as hereinafter defined) one Share for each three Rights
held. No fractional Rights or Shares will be issued. Any Record Date
Shareholder who is issued fewer than three Rights may subscribe, at the
Subscription Price, for one full Share during the Subscription Period, which
commences on the date of this Prospectus and ends at 5:00 p.m., New York City
time, on December 15, 1995 unless extended by the Fund (the "Expiration Date").
The Rights are evidenced by subscription certificates ("Subscription
Certificates") which will be mailed to Record Date Shareholders (except as
discussed below under "Foreign Restrictions"). A Record Date Shareholder's
right to acquire during the Subscription Period at the Subscription Price one
Share for each three Rights held is hereinafter referred to as the "Primary
Subscription." Holders of Rights acquired during the Subscription Period
("Rights Holders") may also purchase Shares in the Primary Subscription. All
Rights may be exercised immediately upon receipt and until 5:00 p.m., New York
City time, on the Expiration Date. (Record Date Shareholders and Rights Holders
purchasing Shares in the Primary Subscription are hereinafter referred to as
"Exercising Rights Holders.")
As a result of the terms of the Offer, Record Date Shareholders who do not
fully exercise their Rights should expect that they will, upon the completion
of the Offer, own a smaller proportional interest in the Fund than would
otherwise be the case. An immediate substantial dilution of the aggregate net
asset value of the shares of Common Stock owned by Record Date Shareholders who
do not fully exercise their Rights is likely to be experienced as a result of
the Offer. See "Risk Factors and Special Considerations--Special
Considerations."
OVER-SUBSCRIPTION PRIVILEGE
Any Record Date Shareholder who fully exercises all Rights issued to him
(other than those Rights which cannot be exercised because they represent the
right to acquire less than one Share) is entitled to subscribe for Shares which
were not otherwise subscribed for by others on Primary Subscription (the "Over-
Subscription Privilege" and, together with the Primary Subscription, the
"Offer"). Shares acquired pursuant to the Over-Subscription Privilege are
subject to allotment, which is more fully discussed under "The Offer--Over-
Subscription Privilege."
SUBSCRIPTION PRICE
The Subscription Price per Share (the "Subscription Price") is $15.75.
5
<PAGE>
SOLICITING FEES
The Fund has agreed to pay to Smith Barney Inc. (the "Dealer Manager") and
other broker-dealers included in the selling group to be formed and managed by
the Dealer Manager ("Selling Group Members") fees equal to 2.50% of the
Subscription Price for Shares either issued upon the exercise of Rights as a
result of their soliciting efforts or purchased from the Dealer Manager for
sale to the public. Certain other broker-dealers that have executed and
delivered a Soliciting Dealer Agreement and have solicited the exercise of
Rights will receive fees for their soliciting efforts of up to .50% of the
Subscription Price, subject generally to a maximum fee based upon the number of
shares of Common Stock held by each such broker-dealer through DTC on the
Record Date.
INFORMATION AGENT
The Information Agent for the Offer is:
Georgeson & Company Inc.
Wall Street Plaza
New York, New York 10005
Toll Free: (800) 223-2064
or
Call Collect: (212) 509-6240
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
----- ----
<S> <C>
Record Date............................... November 20, 1995
Subscription Period....................... November 20, 1995--December 15, 1995
Expiration Date........................... December 15, 1995 (unless extended)
Subscription Certificates and Payment for
Shares Due............................... December 15, 1995
Notices of Guaranteed Delivery Due........ December 15, 1995
Subscription Certificates and Payment Due
Pursuant to Notice of Guaranteed Deliv-
ery...................................... December 20, 1995
Confirmation Date......................... December 27, 1995
</TABLE>
EXERCISING RIGHTS
Rights will be evidenced by Subscription Certificates (see Appendix B) and
may be exercised by completing a Subscription Certificate and delivering it,
together with payment, either by means of a notice of guaranteed delivery or a
check, to State Street Bank and Trust Company, Boston, Massachusetts (the
"Subscription Agent"). Exercising Rights Holders will have no right to rescind
a purchase after the Subscription Agent has received payment, either by means
of a notice of guaranteed delivery or a check. See "The Offer--Exercise of
Rights" and "The Offer--Payment for Shares."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights are
expected to be listed for trading on the New York Stock Exchange (the "NYSE"),
and the Shares are expected to be listed for trading on the NYSE and admitted
for trading but not listed on the Chicago Stock Exchange (the "CSE"). The Fund
has used its best efforts to ensure that an adequate trading market for the
Rights will exist, although no assurance can be given
6
<PAGE>
that a market for the Rights will develop. Trading in the Rights on the NYSE
may be conducted until the close of trading on the NYSE on the last Business
Day (as defined below) prior to the Expiration Date. The Fund expects that a
market for the Rights will develop and that the value of the Rights, if any,
will be reflected by the market price. Rights may be sold by individual holders
or may be submitted to the Subscription Agent for sale by or to the Dealer
Manager. Any Rights to be submitted by the Subscription Agent to the Dealer
Manager for purchase or sale must be received by the Subscription Agent at or
prior to 5:00 p.m., New York City time, on December 13, 1995, two Business Days
prior to the Expiration Date, due to normal settlement procedures. Trading of
the Rights on the NYSE will be conducted on a when-issued basis commencing on
November 20, 1995 and thereafter on a regular way basis from November 22, 1995
until and including the last Business Day prior to the Expiration Date. If the
Subscription Agent receives Rights for sale in a timely manner, it will either
sell the Rights to the Dealer Manager or the Dealer Manager will use its best
efforts to sell the Rights on the NYSE. The Dealer Manager will also either
purchase or attempt to sell any Rights submitted to it by the Subscription
Agent that a Record Date Shareholder is unable to exercise because such Rights
represent the right to subscribe for less than one Share. Any commissions will
be paid by the selling Record Date Shareholder. Neither the Fund nor the
Subscription Agent nor the Dealer Manager will be responsible if Rights cannot
be sold and none of them has guaranteed any minimum sale price for the Rights.
For purposes of this Prospectus, a "Business Day" shall mean any day on which
trading is conducted on the NYSE. Record Date Shareholders are urged to obtain
a recent trading price for the Rights on the NYSE from their broker, bank,
financial adviser or the financial press. Inquiries by Exercising Rights
Holders should be directed to the Information Agent.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (for these purposes the
United States includes its territories and possessions and the District of
Columbia) (such shareholders being referred to hereinafter as "Foreign Record
Date Shareholders"). The Rights to which such Subscription Certificates relate
will be held by the Subscription Agent for such Foreign Record Date
Shareholders' accounts until instructions are received to exercise, sell or
transfer the Rights. If no instructions have been received by 12:00 noon, New
York City time, on December 13, 1995, two Business Days prior to the Expiration
Date, the Rights of those Foreign Record Date Shareholders will be transferred
by the Subscription Agent to the Dealer Manager who will either purchase the
Rights or will use its best efforts to sell the Rights on the NYSE. The net
proceeds from the purchase or sale of those Rights by the Dealer Manager will
be remitted to the Foreign Record Date Shareholders.
USE OF PROCEEDS
The net proceeds of the Offer will be invested in accordance with the
policies set forth under "Investment Objective and Policies." The Board of
Directors of the Fund has determined that it would be in the best interests of
the Fund and its shareholders to increase the assets of the Fund available for
investment so that the Fund will be in a better position to take advantage of
investment opportunities that the Fund anticipates in Brazil. In addition, the
Offer affords existing shareholders the opportunity to purchase additional
shares of the Fund's Common Stock at a price that may be below market value
and/or net asset value without incurring the transaction costs associated with
open-market purchases. See "The Offer--Purpose of the Offer."
INFORMATION REGARDING THE FUND
The Fund is a non-diversified, closed-end management investment company
designed to facilitate international diversification for U.S. and other
investors who desire to participate in the Brazilian securities markets. The
investment objective of the Fund is to seek long-term capital appreciation
through investment in securities, primarily equity securities, of Brazilian
issuers. It is the policy of the Fund normally to invest at least 70% of its
net assets in common and preferred stocks of companies registered with the
Brazilian Securities Commission and listed on the Brazilian stock exchanges or
traded in over-the-counter markets. The Fund's
7
<PAGE>
investment objective is subject to certain investment policies and restrictions
described under "Investment Objective and Policies" in this Prospectus and
"Investment Restrictions" in the SAI.
INFORMATION REGARDING THE MANAGER, THE BRAZILIAN ADVISER AND THE BRAZILIAN
ADMINISTRATOR
Scudder, Stevens & Clark, Inc. (the "Manager"), a leading global investment
manager, acts as investment adviser to and manager of the Fund. As of December
31, 1994, the Manager and its affiliates had over $90 billion of assets under
their supervision, of which more than $22 billion was invested in non-U.S.
securities. Banco Icatu S.A. (the "Brazilian Adviser") acts as Brazilian
adviser to the Manager. Banco de Boston S.A. (the "Brazilian Administrator")
acts as Brazilian administrator for the Fund. See "Investment Advisers and
Administrator."
Under the Investment Advisory, Management and Administration Agreement
between the Manager and the Fund, the Manager receives a monthly fee at an
annual rate equal to 1.175% of the Fund's average weekly net assets. The
Manager has agreed not to charge a portion of its fee such that the effective
rate with respect to net assets in excess of $300,000,000 is 1.075%. A portion
of the Manager's fee is paid by the Manager to the Brazilian Adviser. See
"Investment Advisers and Administrator."
INFORMATION REGARDING THE CUSTODIAN
Brown Brothers Harriman & Co. acts as custodian for the Fund. See
"Custodian."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Dilution. An immediate substantial dilution of the aggregate net asset value
of the shares of Common Stock owned by Record Date Shareholders who do not
fully exercise their Rights is likely to be experienced as a result of the
Offer because the Subscription Price is likely to be less than the Fund's then-
net asset value per share, and the number of shares outstanding after the Offer
is likely to increase in a greater percentage than the percentage increase in
the Fund's assets. In addition, as a result of the terms of the Offer, Record
Date Shareholders who do not fully exercise their Rights should expect that
they will, at the completion of the Offer, own a smaller proportional interest
in the Fund than would otherwise be the case. Although it is not possible to
state precisely the amount of such a decrease in value, because it is not known
at this time what the net asset value per share will be at the Expiration Date,
such dilution could be substantial. For example, assuming that all Rights are
exercised and that the Subscription Price of $15.75 is 30.19% below the Fund's
net asset value of $22.56 per share on November 17, 1995, the Fund's net asset
value per share would be reduced by approximately $1.88 per share.
Unrealized Appreciation. As of November 16, 1995, there was approximately
$145 million of net unrealized appreciation in the Fund's net assets of
approximately $271 million; if realized and distributed, or deemed distributed,
such gains would, in general, be taxable to shareholders, including holders at
that time of Shares acquired upon the exercise of the Rights. See "Taxation" in
this Prospectus and "Taxation--United States Federal Income Taxes--General,"
"--Distributions" and "--Non-U.S. Shareholders" in the SAI.
Investments in Brazil. Investing in securities of Brazilian companies and of
the government (the "Government") of the Federative Republic of Brazil
("Brazil") involves certain considerations not typically associated with
investing in securities of United States companies or the United States
government, including (1) investment and repatriation controls, which could
affect the Fund's ability to operate, and to qualify for the favorable tax
treatment afforded to regulated investment companies for U.S. Federal income
tax purposes, (2) fluctuations in the rate of exchange between the Real and the
Dollar, (3) the greater price volatility and lesser liquidity that characterize
Brazilian securities markets, as compared with U.S. markets, (4) Brazil's
difficulties since the 1980s in complying with its debt and debt service
obligations, (5) the effect that a trade deficit could have on economic
stability and the Government's economic policy, (6) high rates of inflation,
(7) governmental
8
<PAGE>
involvement in and influence on the private sector, (8) the sustainability of
the Plano Real and the failure of previous stabilization plans, (9) Brazilian
accounting, auditing and financial standards and requirements, which differ
from those in the United States, and (10) political and other considerations,
including changes in applicable Brazilian tax laws. See generally "Risk Factors
and Special Considerations."
Non-Diversified Status. The Fund is classified as a "non-diversified"
investment company under the U.S. Investment Company Act of 1940, as amended
(the "1940 Act"), which means that the Fund is not limited by the 1940 Act as
to the percentage of its assets that may be invested in the securities of a
single issuer. As a non-diversified investment company, the Fund may invest in
a smaller number of issuers, and, as a result, may be subject to greater risk
with respect to portfolio securities.
Discount from Net Asset Value. Shares of closed-end investment companies
frequently trade at a discount from net asset value. Since the Fund's
commencement of operations in 1988, the Fund's shares have traded at different
times at a discount and at a premium in relation to net asset value. The Fund
cannot predict whether the Common Stock will in the future trade at a premium
or discount to net asset value. The risk of the Common Stock trading at a
discount is a risk separate from the risk of a decline in the Fund's net asset
value. See "Market and Net Asset Value Information" in this Prospectus and "Net
Asset Value" in the SAI.
Charter Provisions. Certain anti-takeover provisions will make a change in
the Fund's business or management more difficult without the approval of the
Fund's Board of Directors and may have the effect of depriving stockholders of
an opportunity to sell their shares at a premium above the prevailing market
price. See "Common Stock--Special Voting Provisions."
9
<PAGE>
FINANCIAL HIGHLIGHTS
This table presents selected data for a share of the Fund's Common Stock
outstanding throughout each period and other performance information derived
from the Fund's financial statements, which have been audited by Price
Waterhouse LLP, independent accountants, and from market price data. This
information should be read in conjunction with the Financial Statements and
Notes thereto as of June 30, 1995 and the related Report of Independent
Accountants which appear in the SAI.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
FOR THE PERIOD
APRIL 8, 1988
SIX MONTHS (COMMENCEMENT
ENDED OF OPERATIONS) TO
JUNE 30, DECEMBER 31,
PER SHARE OPERATING PERFORMANCES 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------- ---------- ------ ------ ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of Period.......... $31.10 $20.98 $14.12 $13.80 $ 5.97 $18.85 $12.90 $11.54(d)
Net Investment Income
(Loss)(a).............. .26 (.17) .10 .19 .95 1.32 .88 .42
Net Realized and
Unrealized Gain (Loss)
on Investment
Transactions(a)........ (6.65) 12.75 7.58 .79 6.88 (14.08) 8.25 1.63
Total From Investment Op-
erations................ (6.39) 12.58 7.68 .98 7.83 (12.76) 9.13 2.05
Less Distributions From:
Net Investment Income... -- -- (.08) -- -- (.12) (.89) (.41)
Net Realized Gains on
Investments............ (.24) (2.46) (.74) (.66) -- -- (1.36) (.28)
Paid-in Capital......... -- -- -- -- -- -- (.93) --
Total Distributions...... (.24) (2.46) (.82) (.66) -- (.12) (3.18) (.69)
Net Asset Value, End of
Period.................. $24.47 $31.10 $20.98 $14.12 $13.80 $ 5.97 $18.85 $12.90
Market Value, End of Pe-
riod.................... $25.13 $33.00 $21.13 $13.63 $14.75 $ 6.63 $12.88 $ 7.88
TOTAL INVESTMENT RETURN
Per Share Market Value
(%)..................... (23.10)** 69.81 60.89 (3.91) 122.64 (47.98) 105.82 (31.25)
Per Share Net Asset Value
(%)(b).................. (20.50)** 61.09 54.19 6.43 131.16 (67.98) 83.96 21.99
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
($ millions)............ 297 377 254 171 167 72 227 155
Ratio of Operating Ex-
penses to Average Net
Assets (%)(c)........... 1.67* 1.71 1.84 2.22 2.15 2.25 2.01 1.90*
Ratio of Net Investment
Income (Loss) to Average
Net Assets (%).......... 2.02* (.58) .56 1.13 8.13 11.27 4.76 4.70*
Portfolio Turnover Rate
(%)..................... 9.91* 5.76 4.67 7.94 12.69 4.31 14.02 .74*
</TABLE>
- --------
(a) Realized and unrealized currency losses on the Fund's interest-bearing
accounts amounted to $.31, $.86 and $2.96 per share in 1992, 1991 and 1990
respectively, of which $1.27 per share was included in net investment
income in 1990.
(b) Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Fund
during each period, and assumes dividends and capital gains distributions,
if any, were reinvested. These percentages are not an indication of the
performance of a shareholder's investment in the Fund based on market
value due to differences between the market price of the stock and the net
asset value of the Fund during each period.
(c) For the years ended December 31, 1993, 1992, 1990 and 1989 the ratio of
expenses, including the Brazilian repatriation tax, to average net assets
was 2.22%, 2.39%, 2.56% and 3.00%, respectively.
(d) Beginning per share amount reflects $12.50 initial public offering price
net of underwriting discount and offering expenses ($.96 per share).
*Annualized.
**Not annualized.
10
<PAGE>
MARKET AND NET ASSET VALUE INFORMATION
The Fund's outstanding Common Stock is, and the Shares will be, listed on
the NYSE and admitted to trading but not listed on the CSE. The Fund's shares
commenced trading on the NYSE on March 31, 1988 and on the CSE on May 28,
1988. The following table shows for the periods indicated (1) the high and low
sales prices for transactions in the Fund's shares on the NYSE Composite Tape,
(2) the net asset value as determined on the date closest to each quotation
and (3) the discount or premium to net asset value (expressed as a percentage)
represented by the quotation.
<TABLE>
<CAPTION>
HIGH SALES NET ASSET PREMIUM LOW SALES NET ASSET PREMIUM
PERIOD PRICE VALUE (DISCOUNT) PRICE VALUE (DISCOUNT)
------ ---------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jan. 1--March 31, 1993.. $16.50 $16.82 (1.9)% $13.38 $14.70 (9.0)%
April 1--June 30, 1993.. 18.88 19.35 (2.4) 14.25 16.02 (11.0)
July 1--Sep. 30, 1993... 20.88 22.66 (7.9) 15.88 17.94 (11.5)
Oct. 1--Dec. 31, 1993... 22.00 20.83 5.6 17.63 20.70 (14.8)
Jan. 1--March 31, 1994.. 31.75 29.78 6.6 19.75 20.98 (5.9)
April 1--June 30, 1994.. 25.63 27.05 (5.2) 18.75 19.07 (1.7)
July 1--Sep. 30, 1994... 36.13 37.44 (3.5) 23.25 22.38 3.9
Oct. 1--Dec. 31, 1994... 36.88 35.83 2.9 30.38 30.59 (0.7)
Jan. 1--March 31, 1995.. 32.88 31.09 5.8 19.00 22.42 (15.3)
April 1--June 30, 1995.. 29.13 26.26 10.9 22.75 22.36 1.7
July 1--September 30,
1995................... 28.75 26.13 10.0 24.88 24.43 1.8
</TABLE>
Since commencement of the Fund's operations in 1988, the Fund's shares have
traded in the market above, at and below net asset value. Since 1993, the
Fund's shares have generally traded at a slight discount to net asset value.
Shares of closed-end investment companies frequently trade at a discount to
net asset value. The Fund cannot predict whether the Fund's shares will in the
future trade at a premium or discount to net asset value, or the level of such
premium or discount. On November 17, 1995, the last price of the Fund's shares
on the NYSE Composite Tape was $20.875, which represented a discount of 7.47%
below the net asset value per share of $22.56.
THE FUND
The Fund, incorporated in Maryland on September 25, 1987, is a non-
diversified, closed-end investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund was the first
vehicle for investing in Brazilian securities to be registered for public
offering in the United States.
The Fund's investment objective is long-term capital appreciation through
investment in securities, primarily equity securities, of Brazilian issuers.
The Fund's policy is normally to invest at least 70% of its total assets in
common and preferred stocks of companies registered with the Brazilian
Securities Commission and listed on the Brazilian stock exchanges (the "Stock
Exchanges") or traded in Brazilian over-the-counter markets. The Fund is
designed to be a vehicle for international investment by United States and
other investors who desire to participate in the Brazilian securities market.
The Fund's Manager is Scudder, Stevens & Clark, Inc., a United States
investment counsel firm. Banco Icatu S.A. acts as Brazilian Adviser to the
Manager, and Banco de Boston S.A. acts as Brazilian Administrator. See
"Investment Advisers and Administrator."
As of November 16, 1995, the Fund's net asset value was $270,837,340. As of
November 16, 1995, 97.85% of the Fund's investments consisted of Brazilian
common and preferred stocks, with the balance invested in short-term
investments.
11
<PAGE>
THE OFFER
TERMS OF THE OFFER
The Fund is issuing Rights to subscribe for the Shares to Record Date
Shareholders. Each Record Date Shareholder is being issued one transferable
Right for each share of Common Stock owned on the Record Date. For purposes of
determining the maximum number of Shares an Exercising Rights Holder may
acquire pursuant to the Offer, broker-dealers whose Shares are held of record
by Cede or by any other depository or nominee will be deemed to be the holders
of the Rights that are issued to Cede or such other depository or nominee on
their behalf. No fractional Rights or Shares will be issued. The Rights
entitle the holders thereof to acquire at the Subscription Price one Share for
each three Rights held (the "Primary Subscription"). Any Record Date
Shareholder who is issued fewer than three Rights may subscribe, at the
Subscription Price, for one full Share. The Rights are evidenced by
Subscription Certificates which will be mailed to Record Date Shareholders,
except that Subscription Certificates will not be mailed to Foreign Record
Date Shareholders. The Rights to which such Subscription Certificates relate
will be held by the Subscription Agent for such Foreign Record Date
Shareholders' accounts until instructions are received to exercise, sell or
transfer the Rights. If no instructions have been received by 12:00 noon, New
York City time, on December 13, 1995, two Business Days prior to the
Expiration Date, the Rights of those Foreign Record Date Shareholders will be
transferred by the Subscription Agent to the Dealer Manager, who will either
purchase the Rights or use its best efforts to sell the Rights on the NYSE.
The net proceeds from the purchase or sale of those Rights by the Dealer
Manager will be remitted to the Foreign Record Date Shareholders. See "Sale of
Rights--Sales through Subscription Agent and Dealer Manager."
Completed Subscription Certificates may be delivered to State Street Bank
and Trust Company (the "Subscription Agent") at any time during the
Subscription Period, which commences on the date of this Prospectus and ends
at 5:00 p.m., New York City time, on December 15, 1995, the Expiration Date
(unless extended by the Fund). Parties that purchase Rights prior to the
Expiration Date ("Rights Holders") may also purchase Shares in the Primary
Subscription. All Rights may be exercised immediately upon receipt and until
5:00 p.m. on the Expiration Date.
Any Record Date Shareholder who fully exercises all Rights initially issued
to him (other than those Rights which cannot be exercised because they
represent the right to acquire less than one Share) is entitled to subscribe
for Shares which were not otherwise subscribed for by Exercising Rights
Holders in the Primary Subscription. Record Date Shareholders such as broker-
dealers, banks, and other professional intermediaries, who hold shares on
behalf of clients, may participate in the Over-Subscription Privilege for a
client if the client fully exercises all Rights attributable to him. Shares
acquired pursuant to the Over-Subscription Privilege may be subject to
allotment, which is more fully discussed below under "Over-Subscription
Privilege."
Rights will be evidenced by Subscription Certificates (see Appendix B) and
may be exercised by completing a Subscription Certificate and delivering it,
together with payment, either by means of a notice of guaranteed delivery or a
check, to the Subscription Agent. The method by which Rights may be exercised
and Shares paid for is set forth below in "Exercise of Rights" and "Payment
for Shares." An Exercising Rights Holder will have no right to rescind a
purchase after the Subscription Agent has received payment, either by means of
a notice of guaranteed delivery or a check. See "Payment for Shares" below.
Shares issued pursuant to an exercise of Rights will be listed on the NYSE and
admitted to trading but not listed on the CSE.
The Rights are transferable until the Expiration Date and will be admitted
for trading on the NYSE. Assuming a market exists for the Rights, the Rights
may be purchased and sold through usual brokerage channels, or delivered at or
before 5:00 p.m., New York City time, on December 13, 1995, to the
Subscription Agent for sale through or to the Dealer Manager. The Fund has
used its best efforts to ensure that an adequate trading market for the Rights
will exist, although no assurance can be given that a market for the Rights
will develop. Trading in the Rights on the NYSE may be conducted until and
including the close of trading on the last NYSE trading day prior to the
Expiration Date. The method by which Rights may be transferred is set forth
12
<PAGE>
below in "Sale of Rights." The underlying Shares will also be admitted for
trading on the NYSE. Since fractional Shares will not be issued, Record Date
Shareholders who receive fewer than three Rights will be entitled to purchase
one Share. Record Date Shareholders who, after exercising their Rights, are
left with fewer than three Rights, will be unable to exercise such Rights and
will not be entitled to receive any cash, from the Fund, in lieu of such
remaining Rights. However, the Subscription Agent will automatically request
the Dealer Manager either to purchase or to attempt to sell the number of
Rights which a Record Date Shareholder is unable to exercise for such reason
after return of a completed and fully exercised Subscription Certificate to
the Subscription Agent at or before 5:00 p.m., New York City time, on December
13, 1995, and the Subscription Agent will remit the proceeds of any such
purchase or sale, net of commissions, to the Record Date Shareholder.
The distribution to Record Date Shareholders of transferable Rights which
themselves may have intrinsic value will also afford non-participating Record
Date Shareholders the potential of receiving a cash payment upon sale of such
Rights, which may be viewed as compensation for the possible dilution of their
interest in the Fund.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interests of the Fund and its shareholders to increase the assets of the
Fund available for investment so that the Fund will be in a better position to
take advantage of investment opportunities in Brazil. The Fund believes that
the proceeds of the Offer will permit it to take advantage of the new
investment opportunities that the Fund anticipates in Brazil without having to
sell existing portfolio holdings, which would, in general, cause gains
recognized by the Fund on appreciated positions to become taxable to
shareholders. In addition, the Offer affords existing shareholders the
opportunity to purchase additional shares of the Fund's Common Stock at a
price that may be below market value and/or net asset value without incurring
the transaction costs associated with open-market purchases.
The Manager and the Brazilian Adviser will benefit from the Offer because
their fees are based on the average daily net assets of the Fund. It is not
possible to state precisely the amount of additional compensation the Manager
and the Brazilian Adviser will receive as a result of the Offer because it is
not known how many Shares will be subscribed for and because the proceeds of
the Offer will be invested in additional portfolio securities which will
fluctuate in value. However, in the event that all the Rights are exercised in
full and net proceeds of the Offer are $61,046,925, the Manager and the
Brazilian Adviser would receive additional annual advisory fees (net, in the
case of the Manager, of the Brazilian Adviser's fee, which is paid by the
Manager) of $653,763 and $28,032, respectively, based on the amount of such
proceeds. Three of the Fund's seven Directors who voted to authorize the Offer
are "interested persons" of the Fund as that term is defined in the 1940 Act.
These three Directors could benefit indirectly from the Offer because of their
affiliations with the Manager. See "Investment Advisers and Administrator" in
this Prospectus and "Directors and Officers" in the SAI.
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which
may or may not be similar to the Offer. Any such future rights offering will
be made in accordance with the 1940 Act.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for by Exercising Rights Holders will be offered, by
means of the Over-Subscription Privilege, to the Record Date Shareholders who
have exercised all exercisable Rights issued to them and who wish to acquire
more than the number of Shares for which the Rights issued to them are
exercisable. Record Date Shareholders such as broker-dealers, banks, and other
professional intermediaries, who hold shares on behalf of clients, may
participate in the Over-Subscription Privilege for a client if the client
fully exercises all Rights attributable to him. Record Date Shareholders
should indicate on their Subscription Certificates how many Shares they are
willing to acquire pursuant to the Over-Subscription Privilege. If sufficient
Shares remain, all over-subscriptions will be honored in full.
If subscriptions for Shares pursuant to the Over-Subscription Privilege
exceed the Shares available, the available Shares will be allocated among
those who over-subscribe based on the number of Rights originally
13
<PAGE>
issued to them by the Fund. The percentage of remaining Shares each over-
subscribing Record Date Shareholder may acquire may be rounded up or down to
result in delivery of whole Shares. The allocation process may involve a
series of allocations in order to ensure that the total number of Shares
available for over-subscription is distributed on a pro rata basis (except to
the extent that individual Record Date Shareholders request fewer shares
pursuant to the Over-Subscription Privilege than would otherwise be their pro
rata allocation).
The Fund will not offer or sell any Shares which are not subscribed for
pursuant to the Primary Subscription or the Over-Subscription Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Rights
will be $15.75. The Fund does not have the right to withdraw the Offer after
the Rights have been distributed.
The Fund announced the Offer before the opening of trading on the NYSE on
October 13, 1995. The net asset value per share of Common Stock at the close
of business on October 12, 1995 and on November 17, 1995 was $25.93 and $22.56
respectively, and the last reported sale price of a share of the Fund's Common
Stock on the NYSE Composite Tape on those dates was $25.25 and $20.875,
respectively. The Subscription Price of $15.75 is approximately a 30.2%
discount to the Fund's net asset value per share on November 17, 1995.
Information about the Fund's net asset value may be obtained by calling the
Information Agent at (800) 223-2064 (toll free) or (212) 509-6240 (collect).
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on December 15,
1995, the Expiration Date (unless extended by the Fund). Rights will expire on
the Expiration Date and thereafter may not be exercised.
SUBSCRIPTION AGENT
The Subscription Agent, State Street Bank and Trust Company, will receive
for its administrative, processing, invoicing and other services as
Subscription Agent a fee estimated to be $58,150, including reimbursement for
all out-of-pocket expenses related to the Offer. Questions regarding the
Subscription Certificates should be directed to State Street Bank and Trust
Company, Corporate Reorganization Department, P.O. Box 9061, Boston,
Massachusetts 02205-8606 (telephone (800) 426-5523). Shareholders may also
consult their brokers or nominees. Signed Subscription Certificates (see
Appendix B) should be sent to State Street Bank and Trust Company, by one of
the methods described below:
(1) BY MAIL: Corporate Reorganization
Department P.O. Box 9061
Boston, MA 02205-8686
(2) BY HAND: 225 Franklin St.
Concourse Level
Boston, MA 02110
or
61 Broadway
Concourse Level
New York, NY 10006
(3) BY OVERNIGHT COURIER: 500 Victory Road
MB 2
Marina Bay North
Quincy, MA 02171
14
<PAGE>
(4) BY FACSIMILE (TELECOPIER): (617) 774-4519, with the original
Subscription Certificate to be sent by
mail, hand or overnight courier. Confirm
facsimile by telephone to (617) 774-4511.
DELIVERY BY METHODS OTHER THAN THOSE STATED ABOVE WILL NOT CONSTITUTE GOOD
DELIVERY.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
Georgeson & Company Inc.
Wall Street Plaza
New York, New York 10005
Toll Free: (800) 223-2064
or
Call Collect: (212) 509-6240
The Information Agent will receive a fee estimated to be $45,000, and
reimbursement for all out-of-pocket expenses related to the Offer.
SALES OF RIGHTS
Sales through Subscription Agent and Dealer Manager. Record Date
Shareholders who do not wish to exercise any or all of their Rights may
instruct the Subscription Agent to sell any unexercised rights through or to
the Dealer Manager. Subscription Certificates representing the Rights to be
sold by or to the Dealer Manager must be received by the Subscription Agent
prior to 5:00 p.m., New York City time, on December 13, 1995. Upon the timely
receipt by the Subscription Agent of appropriate instructions to sell Rights,
the Subscription Agent will either sell the Rights to the Dealer Manager or
the Dealer Manager will use its best efforts to sell the Rights and the
Subscription Agent will remit the proceeds of the purchase or sale, net of
commissions, to the Record Date Shareholders. Rights may be sold through or to
the Dealer Manager on the NYSE or otherwise. If the Rights can be sold, sales
of such Rights will be deemed to have been effected at the weighted-average
price received by the Dealer Manager on the day such Rights are sold. The sale
price of any Rights sold to the Dealer Manager will be based on the then
current market price for the Rights, less amounts comparable to the usual and
customary brokerage fees. The selling Record Date Shareholder will pay all
brokerage commissions incurred by the Dealer Manager. The Dealer Manager will
also either purchase or attempt to sell all Rights which remain unclaimed as a
result of Subscription Certificates being returned by the postal authorities
to the Subscription Agent as undeliverable as of the fourth Business Day prior
to the Expiration Date. Such sales will be made net of commissions on behalf
of the non-claiming Record Date Shareholders. The Subscription Agent will hold
the proceeds from those purchases or sales for the benefit of non-claiming
Record Date Shareholders until such proceeds are either claimed or escheat.
There can be no assurance that the Dealer Manager will purchase or will be
able to complete the sale of any such Rights and neither the Fund nor the
Subscription Agent nor the Dealer Manager has guaranteed any minimum sales
price for the Rights.
Other Transfers. The Rights evidenced by a Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the instructions accompanying the Subscription Certificate. A
portion of the Rights evidenced by a single Subscription Certificate (but not
fractional Rights) may be transferred by delivering to the Subscription Agent
a Subscription Certificate properly endorsed for transfer, with instructions
to register such portion of the Rights evidenced thereby in the name of the
transferee and to issue a new Subscription Certificate to the transferee
evidencing such transferred Rights. In such event, a new Subscription
Certificate evidencing the balance of the Rights will be issued to the Record
Date Shareholder or, if the Record Date Shareholder so instructs, to an
additional transferee.
15
<PAGE>
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five Business Days prior to the Expiration Date
for (i) the transfer instructions to be received and processed by the
Subscription Agent; (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred
Rights, and to the transferor with respect to retained Rights, if any; and
(iii) the Rights evidenced by such new Subscription Certificate to be
exercised or sold by the recipients thereof. Neither the Fund nor the
Subscription Agent nor the Dealer Manager shall have any liability to a
transferee or transferor of Rights if Subscription Certificates are not
received in time for exercise or sale prior to the Expiration Date.
Except for the fees charged by the Subscription Agent and Dealer Manager
(which will be paid by the Fund), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection
with the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of such commissions, fees or expenses will
be paid by the Fund, the Subscription Agent or the Dealer Manager.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription (but not the Over-
Subscription Privilege) may be effected through, the facilities of DTC (Rights
exercised through DTC are referred to as "DTC Exercised Rights"). The holder
of a DTC Exercised Right who was a Record Date Shareholder may exercise the
Over-Subscription Privilege in respect of such DTC Exercised Right by properly
executing and delivering to the Subscription Agent, at or prior to 5:00 p.m.,
New York City time, on the Expiration Date, a Nominee Holder Over-Subscription
Exercise Form (see Appendix D), together with payment of the Subscription
Price for the number of Shares for which the Over-Subscription Privilege is to
be exercised. Copies of the Nominee Holder Over-Subscription Exercise Form may
be obtained from the Subscription Agent.
EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the reverse side of the
Subscription Certificate which accompanies this Prospectus and mailing it in
the envelope provided, or otherwise delivering the completed and signed
Subscription Certificate to the Subscription Agent, together with payment for
the Shares as described below under "Payment of Shares." Completed
Subscription Certificates must be received by the Subscription Agent prior to
5:00 p.m., New York City time, on the Expiration Date (unless payment is
effected by means of a notice of guaranteed delivery as described below under
"Payment of Shares") at the offices of the Subscription Agent at the address
set forth above. Rights may also be exercised through an Exercising Rights
Holder's broker, who may charge a fee in connection with such exercise.
Nominees who hold shares of Common Stock for the account of others, such as
brokers, trustees or depositories for securities, should notify the respective
beneficial owners of such shares of Common Stock as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the nominee
should complete the Subscription Certificate and submit it to the Subscription
Agent with the proper payment. In addition, beneficial owners of Common Stock
or Rights held through such a nominee should contact the nominee and request
the nominee to effect transactions in accordance with the beneficial owner's
instructions.
A Record Date Shareholder who is issued fewer than three Rights may
subscribe, at the Subscription Price, for one full Share. Fractional Shares
will not be issued, and Record Date Shareholders who, upon exercising their
Rights, are left with fewer than three Rights will not be able to exercise
such remaining Rights. However, the Dealer Manager will automatically either
purchase or attempt to sell the number of Rights which a Record Date
Shareholder is unable to exercise for this reason after the return of a
completed and signed Subscription certificate received by the Subscription
Agent on or before 5:00 p.m., New York City time, on December 13, 1995, and
the Subscription Agent will remit the proceeds of such purchase or sale net of
commissions to such Record Date Shareholder.
16
<PAGE>
EXERCISE OF THE OVER-SUBSCRIPTION PRIVILEGE
Record Date Shareholders who fully exercise all Rights held by them on the
Expiration Date may participate in the Over-Subscription Privilege by
indicating on their Subscription Certificate the number of Shares they are
willing to acquire pursuant thereto. There is no limit on the number of Shares
for which Record Date Shareholders may seek to subscribe pursuant to the Over-
Subscription Privilege. If sufficient Shares remain after the Primary
Subscription, all over-subscriptions will be honored in full; otherwise, the
number of Shares issued to each Record Date Shareholder participating in the
Over-Subscription Privilege will be allocated as described above under "Over-
Subscription Privilege."
Banks, brokers and other nominee holders of Rights will be required to
certify to the Fund, before any Over-Subscription Privilege may be exercised
as to any particular beneficial owner, as to (i) the aggregate number of
Rights exercised pursuant to the Primary Subscription, (ii) the number of
Shares subscribed for pursuant to the Over-Subscription Privilege by such
beneficial owner, and (iii) that such beneficial owner's Primary Subscription
was exercised in full.
PAYMENT FOR SHARES
Exercising Rights Holders who acquire Shares in the Primary Subscription and
Record Date Shareholders who acquire Shares pursuant to the Over-Subscription
Privilege may choose between the following methods of payment:
(1) An Exercising Rights Holder may send the Subscription Certificate
together with payment for the Shares acquired in the Primary Subscription
and any additional Shares subscribed for pursuant to the Over-Subscription
Privilege (for Record Date Shareholders) to the Subscription Agent.
Subscriptions will be accepted when payment, together with the executed
Subscription Certificate, is received by the Subscription Agent; such
payment and Subscription Certificates are to be received by the
Subscription Agent no later than 5:00 p.m., New York City time, on the
Expiration Date. The Subscription Agent will deposit all checks received by
it for the purchase of Shares into a segregated interest-bearing account of
the Fund (the interest from which will belong to the Fund) pending
proration and distribution of Shares. A PAYMENT PURSUANT TO THIS METHOD
MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN
THE UNITED STATES, MUST BE PAYABLE TO THE BRAZIL FUND, INC. AND MUST
ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED.
(2) Alternatively, a subscription will be accepted by the Subscription
Agent if, prior to 5:00 p.m., New York City time, on the Expiration Date,
the Subscription Agent has received a notice of guaranteed delivery (see
Appendix C) by facsimile (telecopy) or otherwise from a bank, a trust
company, or a NYSE member guaranteeing delivery of (i) payment of the full
Subscription Price for the Shares subscribed for on Primary Subscription
and any additional Shares subscribed for pursuant to the Over-Subscription
Privilege (for Record Date Shareholders), and (ii) a properly completed and
executed Subscription Certificate. The Subscription Agent will not honor a
notice of guaranteed delivery unless a properly completed and executed
Subscription Certificate and full payment for the Shares is received by the
Subscription Agent by the close of business on the third Business Day after
the Expiration Date (the "Protect Period").
Within five Business Days following the Protect Period (the "Confirmation
Date"), the Subscription Agent will send to each Exercising Rights Holder for
whom a notice of guaranteed delivery has been received (or, if the shares are
held by Cede or any other depository or nominee, to Cede or such other
depository or nominee), the share certificates representing the Shares
purchased pursuant to the Primary Subscription (and, if applicable, the Over-
Subscription Privilege), along with a letter explaining the allocation of
Shares pursuant to the Over-Subscription Privilege. Any excess payment to be
refunded by the Fund to a Record Date Shareholder who is not allocated the
full amount of Shares subscribed for pursuant to the Over-Subscription
Privilege will be mailed
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by the Subscription Agent. An Exercising Rights Holder will have no right to
rescind a purchase after the Subscription Agent has received payment, either
by means of a notice of guaranteed delivery or a check.
DELIVERY OF SHARE CERTIFICATES
Certificates representing Shares purchased pursuant to the Primary
Subscription will be delivered to Exercising Rights Holders as soon as
practicable after the corresponding Rights have been validly exercised and
full payment for such Shares has been received and cleared. Certificates
representing Shares purchased pursuant to the Over-Subscription Privilege will
be delivered to Record Date Shareholders as soon as practicable after the
Expiration Date and all allocations have been effected. Shares purchased by
participants in the Fund's Dividend Reinvestment and Cash Purchase Plan (the
"Plan") will be held by the Plan Agent in uncertificated form. See "Dividends
and Distributions; Dividend Reimbursement and Cash Purchase Plan."
DISTRIBUTION ARRANGEMENTS
The Dealer Manager is Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013. Under the terms and subject to the conditions contained in a
Dealer Manager Agreement dated the date of this Prospectus, the Dealer Manager
provides marketing assistance and financial advisory services in connection
with the Offer and will solicit the exercise of Rights by Record Date
Shareholders. In addition, the Dealer Manager has agreed with the Fund to form
and manage the Selling Group Members to (a) solicit the exercise of Rights and
(b) sell to the public Shares purchased by the Dealer Manager from the Fund as
a result of the purchase and exercise of Rights by the Dealer Manager. The
Fund has agreed to pay the Dealer Manager a fee equal to 1.00% of the
aggregate Subscription Price for the Shares (which, if all Shares are
subscribed for, will result in a fee of $639,450) for its marketing and
financial advisory services, including advice with respect to the
advisability, timing, size and Subscription Price of the Offer and the
coordination of soliciting efforts among soliciting dealers, the Subscription
Agent and the Information Agent. The Fund has also agreed to reimburse the
Dealer Manager for its out-of-pocket expenses in connection with the offer up
to an aggregate of $100,000.
Pursuant to the Dealer Manager Agreement, the Fund has agreed to pay fees
equal to 2.50% of the Subscription Price to the Dealer Manager and each
Selling Group Member for each Share issued upon the exercise of Rights as a
result of the Dealer Manager's or Selling Group Member's soliciting efforts or
purchased by the Dealer Manager for sale to the public by the Dealer Manager
or such Selling Group Member, and to the Dealer Manager for each Share either
issued upon the exercise of Rights but for which no dealer designation was
made on the related Subscription Certificate or for which no other securities
dealer is receiving soliciting fees due to the maximum fee which is payable to
a securities dealer who is not a Selling Group Member.
The Fund has also agreed that, with respect to Rights exercised not as a
result of the selling or soliciting efforts of the Selling Group Members, the
Fund will pay a Soliciting Dealer Fee equal to .50% of the Subscription Price
to each securities dealer who is not a Selling Group Member but who is a
member of the National Association of Securities Dealers, Inc. and who has
executed and delivered a Soliciting Dealer Agreement and solicited the
exercise of such Rights, subject generally to a maximum fee based upon the
number of shares of Common Stock held by such dealer through DTC on the Record
Date.
In addition, the Fund will indemnify the Dealer Manager with respect to
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. The Dealer Manager Agreement also provides that, in rendering the
services contemplated by the Dealer Manager Agreement, the Dealer Manager will
not be subject to any liability to the Fund except in instances involving the
Dealer Manager's gross negligence or willful misconduct, or for any act or
omission on the part of any broker-dealer (other than the Dealer Manager or
any of its affiliates) or any other person.
Under applicable law, during the Subscription Period, the Dealer Manager may
bid for and purchase Rights for certain purposes. Those purchases would be
subject to certain price and volume limitations when the Common Stock is being
stabilized by the Dealer Manager or when the Dealer Manager acquires the
Rights
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<PAGE>
without an offsetting short position in the Common Stock. Those limitations
provide, among other things, that, subject to certain exceptions, not more
than one bid to purchase Rights may be maintained in any one market at the
same price at the same time and that the initial bid for or purchase of Rights
may not be made at a price higher than the highest current independent bid
price on the NYSE. Any bid price may not be increased, subject to certain
exceptions, unless the Dealer Manager has not purchased any Rights for a full
Business Day or the independent bid price for those Rights on the NYSE has
exceeded the bid price for a full Business Day.
From the date of this Prospectus, the Dealer Manager and Selling Group
Members may offer and sell shares of Common Stock at prices the Dealer Manager
sets from time to time, which prices may be higher than the Subscription
Price. Prior to the Expiration Date, each of those prices when set will not
exceed the higher of the last sale price or current asked price of the Common
Stock on the NYSE, plus, in each case, an amount equal to an exchange
commission, and any offering price set on any calendar day will not be
increased more than once during that day. Any offering by the Dealer Manager
or any Selling Group Members may include Shares acquired or to be acquired
through the exercise of the Rights. As a result of those offerings, the Dealer
Manager and Selling Group Members may realize profits or losses independent of
the Dealer Manager's financial advisory fee and any Soliciting Fees they
receive.
U.S. FEDERAL INCOME TAX CONSEQUENCES; BRAZILIAN TAX CONSEQUENCES
The U.S. Federal income tax consequences to Record Date Shareholders and
Rights Holders with respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Shareholders will not
result in taxable income nor will Record Date Shareholders or Rights
Holders realize taxable income as a result of the exercise of the
Rights.
2. The basis of a Right received by a Record Date Shareholder who
exercises or sells the Right will be zero if the fair market value of
the Right immediately after issuance is less than 15% of the fair
market value of the Common Stock with regard to which the Right is
issued (unless the Record Date Shareholder elects to allocate the basis
of the Common Stock between the Right and the Common Stock based upon
their respective fair market values immediately after the Right is
issued). If the fair market value immediately after issuance of a Right
received by a Record Date Shareholder who exercises or sells the Right
is 15% or more of the fair market value of the Common Stock with regard
to which it is issued, the basis of the Right will be a portion of the
basis of the Common Stock, based upon the respective fair market values
of the Right and the Common Stock immediately after the Right is
issued. In the case of a Record Date Shareholder who receives a Right
and who allows the Right to expire, the basis of the Right will be
zero. In the case of a Rights Holder who purchases a Right in the
market, the basis of the Right will be the purchase price for the
Right.
3. The holding period of a Right received by a Record Date
Shareholder includes the holding period of the Common Stock.
4. Any gain or loss on the sale of a Right will be treated as a
capital gain or loss if the Right is a capital asset in the hands of
the seller. Such a capital gain or loss will be long- or short-term,
depending on how long the Right has been held, in accordance with
paragraph 3 above. If a Right is allowed to expire, there will be no
loss realized unless the Right was acquired by purchase, in which case
there will be a loss equal to the basis of the Right.
5. If a Right is exercised by the Record Date Shareholder or Rights
Holder, the basis of the Common Stock received will include the basis
of the Right (see paragraph 2 above) and the amount paid upon exercise
of the Right.
6. If a Right is exercised, the holding period of the Common Stock
acquired begins on the date the Right is exercised.
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<PAGE>
7. Gain recognized by a non-U.S. shareholder on the sale of a Right
will be taxed in the same manner as gain recognized on the sale of
Common Stock. See "Taxation--United States Federal Income Taxes--Non-
U.S. Shareholders" in the SAI.
Proceeds from the sale of a Right may be subject to withholding of U.S.
taxes at the rate of 31% unless the seller's certified U.S. taxpayer
identification number (or certificate regarding foreign status) is on file
with the Subscription Agent and the seller is not otherwise subject to U.S.
backup withholding. The 31% withholding tax is not an additional tax. Any
amount withheld may be credited against the seller's U.S. Federal income tax
liability.
The foregoing is only a summary of the applicable U.S. Federal income tax
law and does not include any state, local or non-U.S. tax consequences with
respect to the Offer. Investors should consult their tax advisers regarding
specific questions as to U.S. Federal, state, local and non-U.S. taxes.
Under Brazilian law:
1. The issuance of the Rights by the Fund is not a taxable event and
will not result in the imposition of any Brazilian tax on either the
Fund or its shareholders.
2. The exercise of the Rights by the Record Date Shareholders or
Rights Holders and the purchase of additional shares of the Fund's
Common Stock as a result thereof are not taxable events and will not
result in the imposition of any Brazilian tax on either the Fund or its
shareholders.
3. Any gain on the sale of a Right will not result in the imposition
of any Brazilian tax on a shareholder not domiciled in Brazil.
* * *
See "Taxation" in this Prospectus and in the SAI for a discussion of the tax
treatment of the Fund and its shareholders.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the Commission's registration form, undertaken
to suspend the Offer until it amends this Prospectus if, subsequent to the
effective date of the Fund's Registration Statement, the Fund's net asset
value declines more than 10% from its net asset value as of that date.
USE OF PROCEEDS
The net proceeds of the Offer, assuming that all of the Rights are
exercised, are estimated at approximately $61,046,925 after deducting expenses
payable by the Fund of approximately $660,000. There can be no assurance that
all of the Rights will be exercised. The net proceeds of the Offer will be
used by the Fund for investment in accordance with its investment objective
and policies. See "Investment Objective and Policies." The Fund expects that
it will invest the proceeds in a manner designed to avoid disruption of
trading on the Stock Exchanges by investing in Brazilian securities over such
period of time and in such amounts as are intended to minimize market impact.
The Manager currently expects that investment of the proceeds should be
substantially completed within six months of the closing of the Offer. Pending
investment, the proceeds will be temporarily invested in short-term debt
securities of the type described under "Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation through investment in securities, primarily equity securities, of
Brazilian issuers. This objective may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities. As used
in this Prospectus, "a
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<PAGE>
majority of the Fund's outstanding voting securities" means the lesser of (i)
67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented, or (ii) more than 50% of the outstanding
shares.
In pursuing its investment objective, the Fund is subject to restrictions
with respect to its portfolio of investments held in Brazil (the "Portfolio"),
which restrictions at present are imposed by regulations (the "Regulations")
promulgated by the Brazilian National Monetary Council (the "Monetary
Council"). See "Investment Restrictions" for a summary of all restrictions in
the Regulations relating to the composition of the Portfolio. In addition, the
Fund is subject to restrictions imposed by the U.S. Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company. See "Taxation--United States Income Taxes" in the SAI.
It is the policy of the Fund normally to invest at least 70% of its total
assets in common and preferred stocks of companies registered with the
Brazilian Securities Commission and listed on the Stock Exchanges or traded in
over-the-counter markets. The Fund may only invest in the over-the-counter
market organized by entities accredited by the Brazilian Securities
Commission. As no entities have yet been so accredited, the Fund is not
currently permitted to invest in Brazil's over-the-counter market. It is
expected that the balance of the Fund's assets normally will be invested in
short-term investments. Pending investment in Brazilian securities, the Fund
will invest the net proceeds of the Offer in Dollar-denominated money market
instruments of United States issuers, such as: short-term (less than 12 months
to maturity) obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities; finance company and corporate commercial paper,
in each case rated Prime 1 by Moody's Investors Service, Inc. or A or better
by Standard & Poor's or, if unrated, of comparable quality as determined by
the Manager; short-term obligations (including certificates of deposit and
banker's acceptances) of U.S. banks, including foreign branches of such banks,
that are members of the Federal Reserve System and savings associations that
are members of the Federal Home Loan Bank System; and related repurchase
agreements. As current income is not an investment objective of the Fund, the
income earned on such debt securities will be incidental to achieving the
Fund's investment objective of long-term capital appreciation. The Manager may
invest in short-term debt securities for reserves for anticipated expenditures
and for temporary defensive purposes. Under the Regulations currently in
effect, however, in general, the Fund is not permitted to invest in most debt
securities. See "Certain Investment Practices."
The Commission has stated that a fund that includes the name of a country in
its name should have an investment policy requiring it to invest under normal
market conditions at least 65% of its total assets in issuers either organized
under the laws of that country, for which the principal trading market is in
that country, or which derive at least 50% of their revenues or profits from
goods produced or sold, investments made, or services performed in that
country, or which have at least 50% of their assets situated in that country.
The Fund intends to comply with these guidelines, which are consistent with
the Fund's investment policy.
The Fund invests its assets in a broad spectrum of Brazilian industries. See
"The Brazilian Securities Market--The Secondary Market." In selecting
industries and companies for investment, the Manager considers overall growth
prospects, competitive position in domestic and export markets, technology,
research and development, productivity, labor costs, raw material costs and
sources, profit margins, return on investment, capital resources, government
regulation, management, price of the securities and other factors. See
"Foreign Investment and Exchange Controls in Brazil" for a description of
restrictions on foreign investments in some sectors of Brazilian economic
activity. The Fund invests principally in securities of established companies,
although investments may be made in securities of new or little-known
companies.
For temporary defensive purposes, the Fund may depart from its investment
policy. During periods in which changes in Brazilian market, economic or
political conditions warrant, the Fund may reduce its position in equity
securities and increase its position in debt securities or in short-term
indebtedness, or hold cash. The Regulations require, however, that investments
in Brazilian common and preferred stocks, as a percentage of the total value
of the investments in the Portfolio, be at least 35% on any day and should be
at least 70% on average, as tested over a 720-day period. These requirements
may limit the Fund's ability to make defensive investments during a
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<PAGE>
period in which the Fund's Manager believes that such investments are
warranted. The Fund has received confirmation from the Brazilian Securities
Commission that the Fund will have one year from the date the Offer was
approved by the Brazilian Securities Commission to adapt its portfolio to meet
these requirements. See "Foreign Investment and Exchange Controls" in this
Prospectus and "Investment Restrictions" in the SAI. The Regulations also
currently prevent the Fund from investing in most debt securities. See
"Certain Investment Practices."
Since the Fund is a non-diversified company, there is no investment
restriction on the percentage of the Fund's total assets that may be invested
at any time in the securities of any issuer other than the diversification
requirements under the Fund's investment restrictions, which prevent the Fund
from purchasing a security that would result in more than 25% of the Fund's
assets being invested in a single industry or more than 10% in a single
issuer, the diversification requirements applicable to the Portfolio under the
Regulations, and the diversification requirements applicable to regulated
investment companies under the Code. See "Investment Restrictions" below, and
"Taxation--United States Federal Income Taxes--General" in the SAI. While the
relatively greater concentration in securities of fewer issuers permitted to
the Fund reduces diversification of risk and could result in greater
fluctuation in the prices of the Fund's portfolio securities, it also reflects
the Brazilian securities market in that securities of relatively few companies
account for a greater share of the capitalization of the market than is the
case in the United States. See "The Brazilian Securities Market--The Secondary
Markets."
The Fund intends to purchase and hold securities for long-term capital
appreciation and does not expect to trade in securities for short-term gain.
The annual portfolio turnover rate for the years ended December 31, 1993 and
1994 was 4.67% and 5.76%, respectively, and the annualized portfolio turnover
rate for the nine-month period ended September 30, 1995 was 9.13%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the Fund's
portfolio securities. For purposes of this calculation, portfolio securities
exclude all securities having a maturity when purchased of one year or less.
CERTAIN INVESTMENT PRACTICES
The Fund's investment policies permit it to enter into futures and forward
contracts for foreign currency, futures contracts on stock indices, options on
stock indices, futures contracts on gold and other precious metals and certain
repurchase agreements and to write call options on stocks. Under current U.S.
law, the Fund may not enter into futures contracts on Brazilian stock indexes.
Due to recent changes to the Regulations introduced by the Monetary Council,
the Fund is currently prevented from trading in derivatives on the options,
futures and forward markets, even for the purpose of hedging positions taken
by the Fund in the cash market, and from acquiring fixed-income securities
(with the exception of (i) Agrarian Debt Notes (notes issued by the National
Treasury in order to finance the Government's expropriation of areas subject
to land reform), (ii) Brazilian Development Fund ("BDF") obligations (bonds
issued by the BDF to finance investments in Brazil to foster domestic
development) ("BDF Bonds"), and (iii) debentures of Siderurgia Brasileira
S.A., a joint-stock company in which the Government is the majority
shareholder and which engaged in activities related to the steel production
sector).
Under Resolution No. 1289 of March 20, 1987 ("Resolution 1289"), which
governs investment companies, funds and portfolios (such as the Fund), the
Fund was authorized to carry out transactions on the futures markets on
foreign exchange rates, share indices and options thereof. Moreover, the
Regulations also authorized the Fund to enter into repurchase agreements with
respect to Government securities. However, on June 30, 1992, the Monetary
Council issued Resolution No. 1935 ("Resolution 1935"), restricting
transactions in derivatives carried out by investment companies, funds and
portfolios under Resolution 1289 to the exclusive purpose of performing
hedging transactions for the cash positions taken by these investment
companies, funds and portfolios up to the limit of such positions.
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<PAGE>
On December 17, 1993, the Monetary Council issued Resolution No. 2034
("Resolution 2034") which prevented investment companies, funds and portfolios
under Resolution 1289 from investing their funds in: (i) fixed-income
securities, (ii) transactions on derivative markets other than for the hedging
of spot positions, up to the amount thereof, and (iii) derivative transactions
providing for fixed income streams.
On August 10, 1995, the Monetary Council, by means of Resolution No. 2188,
revoked Resolution 1935, and amended Resolution 2034 so that investment
companies, funds and portfolios (such as the Fund) regulated by Resolution
1289 cannot enter into transactions in the derivatives market, purchase fixed
income securities (except for those referred to in clauses (i), (ii), (iii)
and (iv) of the next paragraph), or enter into transactions providing for
fixed income streams.
Accordingly, the Fund's assets may be invested in securities issued by
publicly-held corporations (with the exception of fixed-income securities) and
(i) Agrarian Debt Notes, (ii) BDF Bonds, (iii) debentures issued by Siderurgia
Brasileira S.A., and (iv) other forms of investment expressly and jointly
authorized by both the Brazilian Securities Commission and the Central Bank.
Certain provisions of the Code applicable to investment companies may limit
the extent to which the Fund may enter into, and derive income from, forward
and futures contracts (including futures contracts on gold and other
commodities) and may also affect the character and timing of income, gain or
loss recognized by the Fund from such transactions. See "Taxation--United
States Federal Income Taxes" in the SAI.
For information about certain transactions involving futures contracts,
forward contracts and repurchase agreements that the Fund has typically
entered into until very recently but that are not currently permitted under
the changes to the Regulations mentioned above, see "Certain Investment
Practices" in the SAI. For information regarding certain investment
restrictions applicable to the Fund, see "Investment Restrictions" in the SAI.
FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN BRAZIL
FOREIGN INVESTMENT CONTROL
While current Brazilian law provides that foreign capital invested in Brazil
will receive the same legal treatment as domestic capital, there are
nonetheless certain limitations and controls that generally affect foreign
investors in Brazil. All foreign investments must be registered with the
Central Bank, which issues a Certificate of Registration of the foreign
currency value of such investment. Without such registration, no remittances
of dividends or profits may be made abroad, nor may any part of the original
investment be repatriated.
Upon the granting of the Fund's authorization by the Brazilian Securities
Commission and the initial entry into Brazil of the Fund's capital, the
Central Bank issued a Certificate of Registration. The Central Bank will be
required to amend such Certificate upon each additional entry (including the
entry of the proceeds of this offering) or any repatriation of the Fund's
capital.
The Brazilian Securities Commission has authorized the issuance of up to
five million Shares by the Fund, and has provided that the Fund has until
October 31, 1996 to remit into Brazil the net proceeds of the Offer, to adapt
its portfolio (as increased by the proceeds of the Offer) to the limits and
requirements of the applicable Regulations requiring that at least 70% of the
investments in the Fund's portfolio be represented by shares issued by
publicly held companies acquired on the Stock Exchanges or an over-the-counter
market organized by an entity authorized by the Brazilian Securities
Commission, or in an underwriting, and that the remaining funds be held
available or else invested in (i) Agrarian Debt Notes, (ii) BDF Bonds, (iii)
debentures issued by Siderurgia Brasileira S.A., and (iv) other forms of
investment expressly authorized by both the Brazilian Securities Commission
and the Central Bank.
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Under current Brazilian law, the Fund is permitted to repatriate income
received from dividends and interest earned on, and net capital gains from,
the Portfolio. Under the Fund's authorization from the Brazilian Securities
Commission, the Fund may also repatriate capital, but only: to enable the Fund
to distribute all of its income and capital gains (as computed for U.S.
Federal income tax purposes); to pay expenses incurred outside of Brazil; to
repay borrowings made for temporary or emergency purposes; and to enable the
Fund to distribute its assets in connection with the termination of the Fund,
provided that the Fund's dissolution has been approved by holders of at least
two-thirds of the Fund's shares.
In certain sectors of Brazilian economic activity, foreign (and, in some
cases, private domestic) capital participation is prohibited or restricted.
There are currently very few publicly held companies in such sectors and, in
most cases, only foreign investment in preferred shares of such companies is
permitted. Accordingly, under current law and given the current universe of
listed companies, these restrictions result in the Fund's being prohibited
from buying voting common (but not preferred) shares of Petrobras (the
Government oil monopoly) and the Banco do Brasil. The ownership by non-
Brazilians of voting shares, or securities convertible into voting shares, of
certain companies may be restricted by such companies' by-laws.
Under current Brazilian law, whenever there occurs a serious imbalance in
Brazil's balance of payments or serious reasons to foresee the imminence of
such an imbalance, the Monetary Council may, for a limited period, (i)
determine that all or a portion of foreign currency exchange transactions be
made only through the Central Bank, (ii) prohibit capital repatriation
remittances, and (iii) limit profit remittances abroad to 10% per annum of
capital and reinvested capital. This power has been exercised in a limited
manner only twice--for approximately eight months beginning in mid-1983 and
for approximately eleven months from June 1989 to May 1990. During those
periods, remittances of capital and profits could only be made subject to the
authorization of the Central Bank and delays not exceeding eight months were
experienced by foreign investors, although interest was paid for the periods
of the delays. Such restrictions, however, have not affected the Fund, which
was expressly exempted by Comunicado DECAM n. 1,169, issued by the Central
Bank on July 11, 1989. Such relief was expressly limited to the restrictions
imposed in 1989. If similar restrictions are imposed in the future, there can
be no assurance that the Fund would be able to obtain similar relief from the
Central Bank. There can be no assurance that restrictions could not be imposed
in the future, nor as to the duration of such restrictions if imposed. The
Fund's Brazilian counsel has advised that, while the Brazilian statute does
not define the term "limited period," the term denotes a period of time not in
excess of the period during which conditions exist that warrant restrictions
on remittances, namely, a serious imbalance in Brazil's balance of payments or
serious reasons to foresee the imminence of such an imbalance. Under present
economic and political conditions in Brazil, the Manager does not believe that
the restrictions referred to above will have a significant impact on the
Fund's ability to operate, although there can be no assurance that
restrictions could not be imposed in the future, nor as to the duration of
such restrictions if imposed.
If for any reason the Fund were unable to distribute substantially all of
its net investment income (including net short-term capital gains) and net
long-term capital gains (as defined for U.S. tax purposes) within applicable
time periods, the Fund could be subject to U.S. Federal income and excise
taxes which would not otherwise be incurred and might cease to qualify for the
favorable tax treatment afforded to regulated investment companies under the
Code, in which case it would become subject to U.S. Federal income tax on all
of its income and gains. See "Taxation--United States Income Taxes" in the
SAI.
BRAZILIAN EXCHANGE MARKETS
For some time Brazil had only the official market, where exchange rates were
administered by the Central Bank. Initially, rates were set at a fixed level
for rather long periods, often followed by large devaluations, which would
cause substantial distortions in the economy.
This system was followed by mini-devaluations, where the exchange rate set
by the Central Bank varied on a daily basis, somewhat pegged to inflation.
This system did not fully prevent distortions, as often the
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accumulated daily devaluations were lower than real inflation for a given
period, and periodic maxi-devaluations were subsequently effected.
In 1988, the floating rate market, also known as the tourism exchange
market, was created, where rates are freely negotiated. Use of this market was
initially restricted to a fairly small number of transactions.
In 1990, the former official market was allowed to trade at freely floating
rates as well, thus becoming today's free rate exchange market. This market is
usually referred to as the commercial exchange market.
Consequently, Brazil currently has two officially approved and supervised
foreign exchange markets, both of them trading at freely floating rates:
(a) the commercial exchange market, valid for transactions previously
approved by the Central Bank, primarily involving foreign trade, foreign
currency financing and foreign investment (such as the Fund's investments);
and
(b) the tourism exchange market, valid for tourism and for a variety of
other transactions that can be conducted on a general basis, without prior
Central Bank approval for specific transactions, such as purchases of
software, payment of tuition and payment of medical expenses, among others,
on a continually expanding list. See Annex A, "The Federative Republic of
Brazil--Foreign Exchange."
RISK FACTORS AND SPECIAL CONSIDERATIONS
INVESTMENT AND REPATRIATION CONTROLS
Direct portfolio investment by foreign investment companies in the Brazilian
securities market requires authorization by, and is subject to the control of,
the Brazilian Securities Commission. In addition, conversion of Reais into
foreign exchange, transfer of funds from Brazil to foreign countries and
repatriation of foreign capital invested in Brazil are controlled by and
subject to reporting and prior approval of the Central Bank pursuant to
foreign exchange control laws and regulations and may be subject to
substantial delays which could affect the ability of the Fund to operate. In
January 1990, it was necessary for the Fund to borrow funds to make certain
dividend payments because of such delays. The Fund is unable to predict
whether such delays will occur in the future, and the effect of such delays,
if any, on the Fund.
The Fund has obtained authorization from the Brazilian Securities Commission
to invest in Brazilian securities, subject to certain restrictions summarized
in this Prospectus. Under current Brazilian law, the Fund is permitted to
repatriate income received from dividends and interest earned on, and net
realized capital gains from, its investments in Brazilian securities. Under
its authorization, the Fund may also repatriate capital, but only to the
extent necessary to distribute income and capital gains (as computed for U.S.
Federal income tax purposes), to pay expenses incurred outside of Brazil, to
repay borrowings made for temporary or emergency purposes, and in connection
with the termination of the Fund. Under current Brazilian law, whenever there
occurs a serious imbalance in Brazil's balance of payments or serious reasons
to foresee the imminence of such an imbalance, the Monetary Council may, for a
limited period, impose restrictions on foreign capital remittances abroad.
While the limited period for which such restrictions may be imposed is not
defined in the Brazilian statute, the Fund's Brazilian counsel has advised
that the limited period refers to a period of time not in excess of the period
during which conditions exist that warrant restrictions on remittances,
namely, a serious imbalance in Brazil's balance of payments or serious reasons
to foresee the imminence of such an imbalance. See "Foreign Investment and
Exchange Controls in Brazil."
Under present economic and political conditions in Brazil, the Manager does
not believe that the delays, controls and restrictions referred to above will
have a significant impact on the Fund's ability to operate. As a result of the
imposition of restrictions in 1983, delays not exceeding eight months were
experienced by foreign investors in remitting capital and profits. Similar
restrictions were again imposed on June 30, 1989, and lasted for a period of
eleven months. Such restrictions, however, did not affect the Fund, which was
expressly exempted
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by Comunicado DECAM n. 1,169, issued by the Central Bank on July 11, 1989.
Such relief was expressly limited to the restrictions imposed in 1989. If
similar restrictions were to be imposed in the future, there can be no
assurance that the Fund would be able to obtain similar relief from the
Central Bank. If the Fund were unable to distribute substantially all of its
net investment income (including short-term capital gains) within applicable
time periods, the Fund could be subject to U.S. Federal income and excise
taxes which would not otherwise be incurred and might cease to qualify for the
favorable tax treatment afforded to regulated investment companies for U.S.
Federal income tax purposes, in which case it would become subject to U.S.
Federal income tax on all of its income and gains. See "Foreign Investment and
Exchange Controls in Brazil--Foreign Investment Control" in this Prospectus
and "Taxation--United States Income Taxes" in the SAI.
CURRENCY FLUCTUATIONS
The Fund invests in securities denominated in Reais and most of the Fund's
income is received or realized in Reais, although the Fund is required to
compute and distribute its income in Dollars. Accordingly, changes in the
value of the Real against the Dollar will result in corresponding changes in
the Dollar value of the Fund's assets denominated in Reais and will change the
Dollar value of income and gains derived in Reais. Historically, over long
periods of time the rate of devaluation of Brazilian currencies relative to
the Dollar has resulted in a rate of appreciation of the Dollar relative to
such currencies that has correlated roughly with the rate of inflation, as
calculated by the General Price Index ("GPI"), in Brazil. Over the five years
ended December 31, 1994, the Dollar appreciated at an average annual rate of
1,054% relative to the Real, while annual inflation averaged 1,210%. See "--
Inflation" below and Annex A, "The Federative Republic of Brazil--The
Economy--Prices," "--Balance of Payments and Foreign Trade" and "--Foreign
Exchange." Under the Plano Real, the Real has experienced greater stability
against foreign currencies than have previous Brazilian currencies. In the
twelve months following its introduction, the Real appreciated against the
Dollar 8.5% point-to-point, while prices increased 52%. However, appreciation
of the Real can have negative consequences for Brazil's trade balance and can
create pressures to devalue the Real, which would tend to increase exports,
but also to increase inflation. In March 1995, the Central Bank formalized a
floating band exchange rate in the commercial exchange rate market. The band
that was established and subsequent changes of the band have had the effect of
devaluing the Real. See Annex A, "The Federative Republic of Brazil--Foreign
Exchange."
In view of these factors, it is difficult to predict what effect currency
fluctuations may have on the results of operations of the Fund in the future.
Furthermore, there can be no assurance that the Brazilian monetary authorities
will not change their policies with respect to the exchange rate of the Real
or that the Government will not take action to replace the Real as Brazil's
currency.
In addition to changes in value due to currency fluctuations, the Fund has
in the past incurred currency conversion costs in connection with investments
in Brazil and distributions of income from such investments.
MARKET ILLIQUIDITY AND VOLATILITY
The Brazilian securities market is one of the largest (on the basis of
market capitalization and annual trading volume) of the emerging securities
markets; however, it is substantially smaller and less liquid than the United
States securities market. The aggregate market value as of August 31, 1995 of
the equity securities listed on the Sao Paulo Stock Exchange (the "BOVESPA"),
on which over 90% of the listed companies are listed, was approximately R$ 149
billion (US$ 157 billion). The public float of such securities was
substantially less, because in many companies a substantial percentage of the
shares is owned by the Government or by private controlling stockholders. The
average daily trading volume of transactions on all Stock Exchanges for the 12
months ended July 31, 1995 was approximately US$ 430 million, approximately
86% of which occurred on the BOVESPA. As of October 20, in 1995, approximately
65% of the cash market trading value on the BOVESPA reflected trading in the
securities of 25 of the most actively traded companies. These are among the
factors that have caused the Brazilian securities market to have substantially
greater price volatility and lesser liquidity than is usual in the United
States. Because of this lesser liquidity, it may be more difficult for the
Fund to purchase and sell portfolio positions than would be the case in the
United States.
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Historically, the Government's attempts to deal with inflation since 1986 by
implementing various plans have failed to provide a long-term solution for
controlling Brazil's high rate of inflation. The plans and subsequent measures
to counteract each plan's failure have contributed to greater than normal
price and volume volatility of the Brazilian securities markets over the past
five years. In addition, the Brazilian securities markets have in the past
been affected by the trading of significant blocks of securities by large
investors, by shifts in investor preferences from equity securities to
alternative investments in response to Brazilian government policy changes,
and by large dispositions of securities resulting from the failure of
investors to meet margin calls when due. In 1989, the Stock Exchanges closed
briefly following a large settlement failure. See "The Brazilian Securities
Market--The Brazilian Stock Exchanges."
Movements of stock prices in a highly inflationary country are best
interpreted in inflation-adjusted terms. On an inflation-adjusted basis,
quarterly changes in the Sao Paulo Stock Exchange Index of stock prices (the
"IBOVESPA") ranged between +48% and -35% in 1992, +35% and +1% in 1993 and
+35% and -26% in 1994. See "The Brazilian Securities Market--Background and
Development."
The Fund's net assets after the Offer will represent approximately .21% of
the aggregate market value of equity securities listed on the BOVESPA at
August 31, 1995. The Fund's initial investment of the net proceeds of the
Offer, and the anticipation of such investment, could have an adverse impact
on prices paid by the Fund for its portfolio securities, and the relatively
small trading volume may affect the rate at which the Fund can invest in
Brazilian securities. In addition to investments by the Fund, it is possible
that there will be additional substantial foreign investment in Brazil from
other sources. The Fund expects to invest the proceeds in Brazilian securities
over such period of time and in such amounts as are intended to minimize
market impact. The length of time over which the Brazilian Securities
Commission has allowed the Fund to invest the proceeds of this offering (one
year from the date of the Brazilian Securities Commission's approval of the
Offer) is also designed to avoid such adverse impact. See "The Brazilian
Securities Market--Foreign Investment and the Fund."
Brazilian disclosure and regulatory standards are in many respects less
stringent than U.S. standards, and there is a lower level of monitoring and
regulation of the market and of investors therein. In addition, commissions
and other transaction costs on Brazilian Stock Exchanges are generally higher
than in the United States.
EXTERNAL DEBT RECORD
During the 1980's and into the 1990's, Brazil defaulted on and rescheduled
loans from commercial banks and official creditors. From time to time, Brazil
has been in arrears with respect to Paris Club obligations, primarily
guarantees of import financings for state companies in the electricity sector.
During the period from 1982 until the implementation of a Brady Plan-style
external debt restructuring in April 1994, Brazil failed to make payments on
certain of its external indebtedness from commercial banks as originally
scheduled, and, in February 1987, declared a moratorium on principal and
interest payments on external indebtedness to commercial banks. In April 1994,
Brazil concluded Brady Plan-type debt restructuring agreements with its
private sector creditors that should facilitate Brazil's ability to comply
with such obligations in the future. However, no assurances can be made in
this respect. See Annex A, "The Federative Republic of Brazil--Public Debt."
BALANCE OF PAYMENTS
Although Brazil has traditionally experienced a trade surplus, the current
account has generally been in deficit as interest and service payments have
offset the trade surplus. Between November 1994 and June 1995, however, Brazil
recorded a trade deficit. The appreciation of the Real from July through
December 1994, the liberalization of imports and the recovery of domestic
demand all contributed to the trade deficit. Meanwhile, following the
liquidity crisis experienced by Mexico beginning in December 1994, Brazil
experienced a decrease in the level of inflows of foreign capital to finance
the deficit. The declines in foreign investment and the continued monthly
trade deficits led to a decrease in international reserves from $38.8 billion
at December 31,
27
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1994 to $31.9 billion on April 30, 1995. Since then, the trade deficit has
narrowed and turned into a surplus in August and September. Meanwhile, net
foreign capital inflows have increased; consequently, reserves have increased
sharply. According to the Central Bank, international reserves were $48.7
billion as of September 30, 1995. There can be no assurance that Brazil's
balance of payments will not significantly change in the future. See Annex A,
"The Federative Republic of Brazil--Balance of Payments and Foreign Trade" and
"--Foreign Exchange."
INFLATION
Throughout the 1980's and into the early 1990's, Brazil experienced very
high rates of inflation. Annual inflation for 1994 was 1,094%; for 1993,
2,709%; and for 1992, 1,158%. In response to past inflationary pressures, the
Government has imposed wage and price controls and implemented freezes on
certain bank, money market and savings accounts. Inflation and rapid
fluctuation in inflation rates have had very negative effects on the Brazilian
economy and securities market.
Although inflation has decreased significantly since the introduction of the
Plano Real, inflationary pressures persist, generated in part by changes in
the Real-Dollar exchange rate, strong GDP growth, high levels of consumption
and price increases in non-tradeable goods. Monthly inflation rates in 1995
(through September) have fluctuated between -1.08% and 2.62%. Brazil
experienced 2.62% inflation for the month of June 1995 (equivalent to 36.39%
per annum), the highest level since August 1994. Although the Government has
responded to the surge in consumer demand and the increasing trade deficit
with a variety of measures to restrict credit, to provide export incentives
and to increase temporarily import tariffs on selected goods, average monthly
inflation for the period from January through September 1995 was 1.34%
(equivalent to 17.3% per annum), which is above the inflation level in most
European countries. Since the introduction of the Plano Real, the inflation
rate has been held down in part by the Government's freeze of certain prices,
such as telephone tariffs, electricity rates and the price of certain
petroleum products. See Annex A, "The Federative Republic of Brazil--The
Economy--The Plano Real" and "--Prices." The Government recently raised
tariffs on electricity. Other prices are also expected to rise, which may lead
to demands for higher wages. Moreover, the credit constraint needed to assist
in controlling inflation may depress economic growth. There can be no
assurance that the rate of inflation in Brazil will not significantly change
in the future.
In addition, Brazilian banks have come under pressure from declining
earnings related to reduced inflation, and from high levels of non-performing
loans. See Annex A, "The Federative Republic of Brazil--The Financial System."
GOVERNMENTAL PARTICIPATION IN THE ECONOMY
The Government exercises substantial influence over many aspects of the
private sector by legislation and regulation, including regulation of prices
and wages. See Annex A, "The Federative Republic of Brazil--The Economy--The
Plano Real" and "--Prices." In addition, the Government owns or controls many
Brazilian companies, and owns a majority of the voting stock of seven of the
ten largest publicly held Brazilian companies (in terms of market
capitalization as of October 20, 1995).
Brazil's 1988 constitution mandates a Government monopoly of certain key
sectors, including the petroleum, telecommunications and gas-distribution.
Since 1991, the Brazilian Government has undertaken a privatization program in
which over 30 state enterprises have been sold for an aggregate amount of
approximately $8.6 billion. Since August 1995, the Congress has approved
constitutional amendments permitting private competition in the State's gas-
distribution and telecommunications sectors, as well as an amendment to loosen
the Government's monopoly in the petroleum sector. There can be no assurance
that additional privatization will occur at a similar rate or at all. See
Annex A, "The Federative Republic of Brazil--The Economy--State-Controlled
Enterprises."
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SUSTAINABILITY OF PLANO REAL
Prior to the introduction of the Real as Brazil's official currency in July
1994 pursuant to the Plano Real, Brazil's economic performance had been
characterized by macroeconomic instability, including extremely high rates of
inflation and significant and sudden currency devaluations. Pre-Plano Real
stabilization efforts, which included wage and price controls and unilateral
modifications of the terms of financial contracts, failed to contain inflation
for any extended period. While the current Plano Real does not use such
measures, there can be no assurance that such measures will not be imposed in
the future or of the effect of any such measures on the performance of
securities in the Fund's portfolio.
The Plano Real has succeeded to date in sharply reducing inflation, which
declined from a monthly rate of 46.58% (equivalent to 9,738% per annum) in
June 1994 to -1.08% in September 1995. The continued success of the Plano
Real, however, depends in part on the ability of the Government to maintain
fiscal restraint and a tight monetary policy in the face of both domestic and
international economic pressures, as well as on the ability of the Government
to implement longer-term structural reforms, such as reform of the tax and
social security systems, transfer of certain federal spending responsibilities
to State governments and privatization of major enterprises. Some of these
reforms require constitutional amendments to be implemented. Amendments to the
Constitution require a three-fifths vote of each House of Congress in two
separate rounds. President Fernando Henrique Cardoso's party does not alone
have sufficient votes to ensure passage of such amendments. Although the
Chamber of Deputies and the Senate have voted in favor of several important
amendments, the ability of the Cardoso Government to continue to obtain
favorable votes required to effect constitutional reforms depends upon a
coalition among a variety of political parties with varying degrees of stated
commitment to these measures. See Annex A, "The Federative Republic of
Brazil--The Economy--The Plano Real."
REPORTING STANDARDS
Brazilian accounting, auditing and financial standards and requirements
differ, in some cases significantly, from comparable U.S. standards and
requirements. In particular, the assets and profits appearing on the financial
statements of a Brazilian company may not reflect its financial position or
results of operations in the way they would be reflected had such financial
statements been prepared in accordance with U.S. generally accepted accounting
principles. In addition, inflation accounting rules in Brazil require that
certain assets and liabilities be restated on the company's balance sheet in
order to express items in terms of currency of constant purchasing power. For
information regarding possible changes to inflation accounting rules, see
Annex A, "The Federative Republic of Brazil--Brazilian Corporate Taxes."
Inflation accounting may indirectly generate losses or profits. Consequently,
data concerning Brazilian securities shown elsewhere in this Prospectus may be
materially affected by restatements for inflation and may not accurately
reflect the true conditions of such companies and the Brazilian securities
market. There is substantially less publicly available information about
Brazilian companies than there is about U.S. companies.
POLITICAL AND OTHER CONSIDERATIONS
Brazilian politics have been marked by high levels of uncertainty since the
country returned to democratic rule in 1985 after 20 years of military
government. Corruption scandals, the death of a president-elect and the
impeachment of a sitting president, as well as a political party system marked
by the fragmentation of political power among many parties, have limited the
ability of Government institutions to develop coherent and consistent policies
to confront the problems facing the Brazilian economy. Furthermore, the
Government's ability to control its budget is limited by constitutionally
required reallocations of public resources from the federal Government to the
Brazilian States. Although the Cardoso administration and its economic
policies have enjoyed broad political support, there can be no assurance that
it or subsequent administrations will continue to implement current policies
in their present form. See Annex A, "The Federative Republic of Brazil--
General Information--Politics and Governmental Organization."
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Brazilian companies are currently subject to numerous corporate taxes. While
tax reform by means of a constitutional amendment has been proposed, there can
be no assurance that such reform will occur. See Annex A, "The Federative
Republic of Brazil--Brazilian Corporate Taxes." Also, the Brazilian taxation
regime applicable to the Fund is subject to change. See "Taxation--Brazilian
Taxation" in this Prospectus and "Taxation--Brazilian Taxes" in the SAI.
SPECIAL CONSIDERATIONS RELATING TO THE OFFER
Dilution. An immediate substantial dilution of the aggregate net asset value
of the shares owned by Record Date Shareholders who do not fully exercise
their Rights is likely to be experienced as a result of the Offer because the
Subscription Price is likely to be less than the Fund's then-net asset value
per share, and the number of shares outstanding after the Offer is likely to
increase in a greater percentage than the increase in the size of the Fund's
assets. In addition, as a result of the terms of the Offer, Record Date
Shareholders who do not fully exercise their Rights should expect that they
will, at the completion of the Offer, own a smaller proportional interest in
the Fund than would otherwise be the case. Although it is not possible to
state precisely the amount of such a decrease in value, because it is not
known at this time what the net asset value per share will be at the
Expiration Date, such dilution could be substantial. For example, assuming
that all Rights are exercised and that the Subscription Price of $15.75 is
30.19% below the Fund's net asset value of $22.56 per share on November 17,
1995, the Fund's net asset value per share would be reduced by approximately
$1.88 per share. The distribution to Record Date Shareholders of transferable
Rights which themselves may have intrinsic value will afford non-participating
Record Date Shareholders the potential of receiving a cash payment upon sale
of such Rights, which may be viewed as compensation for the possible dilution
of their interest in the Fund. No assurance can be given, however, that a
market for the Rights will develop or as to the value, if any, that such
Rights will have.
Unrealized Appreciation. As of November 16, 1995, there was approximately
$145 million of net unrealized appreciation in the Fund's net assets of
approximately $271 million; if realized and distributed, or deemed
distributed, such gains would, in general, be taxable to shareholders,
including holders at that time of Shares acquired upon exercise of the Rights.
See "Taxation--United States Federal Income Taxes--General," "--Distributions"
and "--Non-U.S. Shareholders" in the SAI.
POSSIBLE CHANGE OF CONTROL OF FUND AS A RESULT OF THE OFFER
The Offer could result in a change of control of the Fund, if existing
shareholders do not exercise their Rights. The 1940 Act provides that a person
that beneficially owns 25% of the voting securities of an investment company
is presumed to control such company. Currently, to the Fund's knowledge, no
person beneficially owns 25% of the Fund's Common Stock, its only class of
voting securities. Because the Rights are transferable, and because there is
an Over-Subscription Privilege, it is possible that either an existing
shareholder of the Fund or a person not currently a shareholder could own 25%
or more of the Fund's Common Stock upon completion of the Offer and thus have
presumptive control of the Fund. Control of the Fund could enable a person to
exercise substantial influence over the management of the Fund and its
investment decisions.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act as to the
percentage of its assets that may be invested in the securities of a single
issuer. As a non-diversified investment company, the Fund may invest in a
smaller number of issuers, and, as a result, may be subject to greater risk
with respect to its portfolio securities. However, the Fund has complied and
intends to continue to comply with the diversification requirements imposed by
the Code for regulated investment companies. See "Taxation--United States
Federal Income Taxes" in the SAI.
TRANSACTION COSTS
The Fund's transaction costs are higher than the transaction costs for the
typical investment company investing in U.S. securities. In addition to
incurring transaction costs associated with converting currency to and
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from Reais and Dollars, the Fund incurs brokerage costs on its portfolio
transactions at commission rates that are generally uniform and higher than in
the United States. See "Portfolio Transactions and Brokerage" in the SAI.
DISCOUNT FROM NET ASSET VALUE
The shares of the Fund may trade at a discount from net asset value. This is
characteristic of shares of a closed-end fund and is a risk separate and
distinct from the risk of a decline in the net asset value as a result of a
fund's investment activities. In some cases, however, shares of closed-end
funds may trade at a premium. The Fund's shares have traded in the market
above, at and below net asset value since the commencement of the Fund's
operations. Since 1993, the Fund's shares have generally traded at a slight
discount to net asset value. See "Market and Net Asset Value Information."
THE BRAZILIAN SECURITIES MARKET
BACKGROUND AND DEVELOPMENT
The Brazilian stock market, which dates from the mid-nineteenth century, is
one of the largest equity securities markets in the developing world, as
measured by market capitalization. As of December 31, 1994, the market
capitalization of the approximately 540 companies listed on the BOVESPA was
approximately US$ 190 billion. Participation by foreign investors in the
Brazilian securities market has been relatively low, partly as a result of
complex registration and fiscal regulations. This regulatory structure has
recently been changed to facilitate access to this market by foreign
investors. See "Foreign Investment and the Fund."
In 1964, Brazil introduced a system of monetary correction and indexation
for companies to adjust their financial statements to account for the effects
of inflation, and, in 1964 and 1965, laws were passed to regulate the capital
markets and thereby increase investor confidence. In the 1960's, the
Government also introduced various tax incentives to encourage the development
of pools of capital investing in the securities market. As a result, by the
late 1960's, institutional participation in the Brazilian stock market had
substantially increased. The period of the 1960's and 1970's, which was a
period of significant growth in the economy and in corporate profits, also saw
a significant increase in the number of new issues of securities and in
trading.
As growth in demand for shares outpaced growth in supply, there was a
speculative boom in 1971, which was followed by a sharp decline, as a
consequence of which the stock market experienced a difficult time between
1972 and 1975.
In 1976, the Government began new efforts to stimulate interest and
confidence in the market. The Government adopted a new corporation law that is
generally similar to those in the United States. Among other things, the law
imposes reporting and accounting requirements (including adjustments for
inflation and monetary correction) and specifies the duties of care of
management and the responsibility of controlling shareholders. Also in 1976,
legislation was passed creating the Brazilian Securities Commission with the
dual objective of regulating the securities market and encouraging the
development of that market. Other measures, beginning in 1974, included an
attempt to attract foreign investors through special investment companies.
Total equity capital raised in Brazil reached US$ 1,187 million in 1987 and
has fluctuated widely since then. In 1992, 1993 and 1994, respectively, the
amount of equity capital raised was US$ 943 million, US$ 841 million and US$
2,541 million. As of July 31, 1995, US$ 1,088 million in equity capital had
been raised during the year.
Institutional participation in the Brazilian securities market is
significant. From January 1994 through August 1995, for example, a monthly
average of approximately 18% of the value of all trades of equity securities
on the BOVESPA represented trades for public and private companies, pension
funds, mutual funds, insurance companies and investment companies.
THE BRAZILIAN STOCK EXCHANGES
The Fund's policy is normally to invest at least 70% of its total assets in
common and preferred stocks listed on the Stock Exchanges or traded in over-
the-counter markets organized by entities accredited by the
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Brazilian Securities Commission. Currently no entities have been so
accredited. In 1994, approximately 580 companies were listed on Brazil's nine
stock exchanges. The vast majority of such companies are listed on both the
BOVESPA and the Rio de Janeiro Stock Exchange (the "Rio Exchange"), which are
by far Brazil's most important stock exchanges. For the twelve months ended
July 31, 1995, the BOVESPA accounted for approximately 86% of the daily
trading volume on the Stock Exchanges. The Rio Exchange was organized in 1845
and currently has 75 member brokerage firms, with an additional 8 non-member
(but authorized) brokerage firms. The BOVESPA was founded in 1890 and today
has 96 member and non-member (but authorized) brokerage firms. Substantially
all of the Fund's transactions in common and preferred stocks have been
conducted on the BOVESPA and Rio Exchange. Both Stock Exchanges are owned by
their member firms, not by the Government.
On both the Rio Exchange and the BOVESPA, trades are effected through both
the floor bidding and electronic systems. On the Rio Exchange, electronic
trades are effected through the National Electronic Trading System ("SENN"), a
computerized system inaugurated in 1991, which links the Rio Exchange
electronically with seven small regional exchanges. On the BOVESPA, trades are
effected through the Electronic Trading System introduced in 1990, linking
brokerage firms in any part of the country with the BOVESPA.
The shares of a company listed on any of the Stock Exchanges may be traded
on any other exchange. Typically, the shares of certain companies are much
more actively traded on one of the two major stock exchanges than on the
other. For example, the stocks of Government-controlled companies (with the
exception of Petrobras) tend to be more actively traded on the Rio Exchange,
while those of the private sector companies are more typically traded on the
BOVESPA. Although any of the outstanding shares of an exchange-listed company
may trade on any Brazilian stock exchange, in most cases, less than half of
the listed shares are actually available for trading by the public, the
remainder being held by small groups of controlling persons who rarely trade
their shares. For this reason, data showing the total market capitalization of
the Stock Exchanges may give an exaggerated view of the size of the Brazilian
equity securities market.
Stocks, options thereon and stock forward and futures contracts are traded
on both the BOVESPA and the Rio Exchange. Sellers of stock options must
deposit initial margin with the Stock Exchanges in an amount equal to two
times the amount of the premium of the option (or such greater amount as the
Stock Exchanges establish from time to time), and are required to make
payments of variation margin.
For the year ended December 31, 1994 and for 1995 (through August), forward
transactions in stocks accounted for a monthly average of approximately .15%
and .44%, respectively, of the combined value of trading on the BOVESPA. A
forward contract for a stock involves an agreement by the seller to make
delivery of an agreed-upon quantity of shares of a particular stock at an
agreed-upon price on a date that is 30, 60, 90, 120, 150 or 180 days following
the date of the contract. Unlike the case of stock futures contracts, the size
of a stock forward contract is not standardized, and there is virtually no
secondary market for stock forward contracts. Participants in both the stock
forward contract and stock futures contract markets must deposit margin in an
amount that, under current Brazilian Securities Commission regulations, is
fixed by the Stock Exchanges but may not be less than 20% of the value of the
contract. Variation margin is also collected pursuant to Stock Exchange rules.
At present, both the Regulations and the U.S. Commodity Exchange Act do not
permit the Fund to enter into stock futures contracts.
Most of the market capitalization and most of the trading volume of the
Stock Exchanges consist of preferred stock, rather than common stock.
Preferred stock in Brazil typically is non-voting. Dividends on preferred
stock are generally paid in an amount at least equal to a stated minimum rate,
expressed as a percentage of net profits of the issuing company. If a company
distributes additional profits after paying the holders of its common shares
an amount equal to the per share minimum amount previously paid to holders of
its preferred stock, the holders of its common and preferred stocks typically
share equally on a per share basis in such additional profits.
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The value of all cash transactions effected on the BOVESPA and the Rio
Exchange during the years 1993 and 1994, and the daily trading averages of
each exchange, are shown in the following table, together with the total
number of companies listed on each exchange and the market values of such
companies at the end of each year.
VALUE OF ALL CASH TRANSACTIONS EFFECTED
AND DAILY TRADING AVERAGES ON THE BOVESPA
(MILLIONS OF US$)
<TABLE>
<CAPTION>
1994 1993
-------- -------
<S> <C> <C>
Value of Total Shares Traded
Annual Total................................................ $ 91,827 $52,111
Daily Average............................................... 360 157
Value of Cash Trades
Annual Total................................................ 62,865 32,871
Daily Average............................................... 245 113
Market Value End of Year...................................... 189,058 99,430
Companies Listed End of Year.................................. 544 550
</TABLE>
Both exchanges publish stock price indexes. The IBOVESPA currently consists
of 54 stocks that represent an aggregate value of approximately 66% of the
cash volume traded on that exchange in the previous twelve months. The index
is reevaluated every four months based on the previous twelve months' trading.
The Rio Index currently includes 44 stocks weighted to reflect market values.
The Fund is unable to predict whether further economic reforms or
modifications to the existing policies of the Brazilian Government may
adversely affect the liquidity of the Brazilian stock market in the future.
THE PRIMARY MARKETS
Equity Market. Over the past decade, Brazil has had one of the most active
primary equity markets in the developing world. The volume of new issues has
fluctuated widely from year to year, depending on market conditions. There has
been increasing participation of institutional investors, particularly pension
funds, in the new issues market. The following table indicates the growth of
the primary equity market over the past several years.
GROWTH OF THE PRIMARY EQUITY MARKET IN BRAZIL
<TABLE>
<CAPTION>
TOTAL EQUITY TOTAL EQUITY
NUMBER OF CAPITAL RAISED IN CAPITAL RAISED IN
YEAR NEW ISSUES MILLIONS OF R$(1) MILLIONS OF US$
- ---- ---------- ----------------- -----------------
<S> <C> <C> <C>
1992............................. 28 R$ 1.03 $ 942.72
1993............................. 24 48.68 841.13
1994............................. 48 1,768.53 2,590.65
1995(2).......................... 15 960.37 1,087.62
</TABLE>
- --------
(1) Figures not adjusted for inflation; prior currencies converted into Reais.
On July 1, 1994 the Real replaced the Cruzeiro Real at the rate of R$ 1.00
= CR$ 2,750, and on August 1, 1993 the Cruzeiro Real replaced the Cruzeiro
at a rate of CR$ 1.00 = C$ 1,000.
(2) Through July 31.
Source: Brazilian Securities Commission
33
<PAGE>
New issues may be underwritten only by investment banks, brokerage firms
("corretoras") and securities dealers ("distribuidoras") and are required to
be previously registered with the Brazilian Securities Commission, which
reviews the issuer's compliance with regulatory and disclosure procedures.
Shares can be issued with or without a par value, and the offering price may
be of any value (except below par) as long as it is satisfactorily justified
by the company, taking into account market quotations and the net worth and
profit expectations of the company, and would not result in any unjustified
dilution of the interests of existing shareholders.
Brazilian legislation provides for preemptive rights to existing
shareholders to subscribe for an offering of shares in proportion to their
holdings within not less than 30 days after the announcement of approval of a
capital increase by shareholders.
Since April 1992, no bearer securities are permitted to be traded on the
Stock Exchanges.
Debt Securities Market. Corporate bonds are sold through public offerings,
as well as by private placements, and the same regulations and procedures for
new issues of stocks are applicable to corporate bonds. Corporate bonds
typically have maturities of three to five years, subject to periodic
renegotiation of terms.
The Government typically sells its debt instruments in primary offerings
through auctions in which certain financial institutions having the requisite
minimum capital are eligible to bid.
Under the Regulations as currently in effect, the Fund is generally not
permitted to invest in either Government or corporate debt securities. See
"Certain Investment Practices." For a further description of Government debt
securities, see "The Secondary Markets--Debt Securities Market."
THE SECONDARY MARKETS
Equity Market. Equity securities may be traded on the Stock Exchanges or on
the over-the-counter market. Trades on the Stock Exchanges are effected
through brokerage firms (member firms) acting as brokers or as principals.
Information regarding listed securities (quotations, trading volume, financial
data, stock price indexes, etc.) is available through a network of computer
terminals located in offices of brokerage firms, investment banks, securities
dealers, institutional investors and others.
The over-the-counter market is much smaller than the stock exchange market
for listed securities. While listed securities may be traded only on Stock
Exchanges, there is a growing over-the-counter market for unlisted stocks that
is maintained by securities dealers that are not members of any of the Stock
Exchanges, investment banks and brokerage firms. Regulations were enacted by
the Brazilian Securities Commission in the beginning of 1985 with respect to
the over-the-counter market that require the disclosure of all transactions
executed in that market. Brazilian companies with securities traded on the
over-the-counter market must be registered with the Brazilian Securities
Commission and are subject to the same disclosure and periodic reporting
requirements as listed companies.
Under the Regulations, the Fund is not permitted to buy shares on the over-
the-counter market (except that the Fund may subscribe for shares offered in a
primary or secondary public offering), but would be permitted to do so if the
Brazilian Securities Commission authorizes one or more entities to organize
that market. The Brazilian Securities Commission has under consideration
regulations with respect to the procedures for such authorization.
34
<PAGE>
The trading volume on the Stock Exchanges is presented in the following
table:
TRADING VOLUME ON THE STOCK EXCHANGES
(MILLIONS OF US$)(1)
<TABLE>
<CAPTION>
CASH FORWARD FUTURES OPTIONS
YEAR MARKET MARKET MARKET(2) MARKET(3) TOTAL(4)
- ---- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1986....................... $18,718.40 $3,500.50 $87.90 $ 7,411.20 $29,901.10
1987....................... 6,393.70 412.40 48.10 3,094.40 10,044.80
1988....................... 12,655.70 301.20 0.00 4,706.80 17,878.40
1989....................... 14,030.40 273.30 0.00 2,092.30 17,193.10
1990....................... 4,988.90 81.70 0.00 450.80 5,617.60
1991(5).................... 3,031.00 21.30 0.00 563.00 3,615.30
1992....................... 18,122.45 NA NA 2,697.99 23,754.34
1993....................... 27,701.55 NA NA 6,265.59 39,590.75
1994....................... 65,192.27 NA NA 19,264.76 98,409.23
1995(6).................... 27,933.83 NA NA 8,180.54 40,526.30
</TABLE>
- --------
(1) Conversion based on average annual exchange rates.
(2) Based on aggregate contract values.
(3) Based on aggregate value of premiums and the purchase price of securities
delivered upon exercise of contracts.
(4) Total includes transactions in regional development shares, not shown
separately.
(5) Through June 30. Data for the second half of the year are not available.
(6) Through June 30.
Source: Brazilian Securities Commission; BOVESPA; Rio Exchange
For an original listing on a Stock Exchange, a company must be previously
registered with the Brazilian Securities Commission. The Stock Exchanges
currently impose no requirements with respect to the company's size, capital,
number of shares outstanding or earnings for listing.
Brokerage fees are charged directly by member firms according to marginal
rates which apply to transactions effected on any Stock Exchange. Such rates
descend on a sliding scale and currently range from 2% to 0.5% of the value of
the securities traded. Transactions of a value below a specified amount are
charged a flat fee. Brokerage fees may be increased or reduced by 100% of the
rate set out in the sliding scale, upon agreement between the parties. The
Fund, as an investment company, is eligible for a 50% discount from posted
commission rates and currently receives such a discount on commissions.
35
<PAGE>
The following table shows changes in the IBOVESPA, as (1) measured in
Brazilian currency terms, (2) adjusted for inflation, and (3) measured in U.S.
Dollars.
PERCENTAGE CHANGES IN THE IBOVESPA(1)
<TABLE>
<CAPTION>
ADJUSTED FOR IN U.S.
PERIOD UNADJUSTED (%) INFLATION (%)(2) DOLLARS (%)(3)
------ -------------- ---------------- --------------
<S> <C> <C> <C>
Dec. 85-Dec. 86................. 40% -15% -1%
Dec. 86-Dec. 87................. 36% -74% -72%
Dec. 87-Dec. 88................. 2577% 135% 154%
Dec. 88-Dec. 89................. 1778% 0% 25%
Dec. 89-Dec. 90................. 308% -74% -73%
Dec. 90-Dec. 91................. 2278% 310% 282%
Dec. 91-Dec. 92................. 1029% -10% -3%
Dec. 92-Dec. 93................. 5413% 96% 110%
Dec. 93-Dec. 94................. 1052% 14% 59%
</TABLE>
- --------
(1) Changes are computed from end-of-month to end-of-month.
(2) Adjusted by GPI-DS.
(3) Adjusted by using changes in the exchange rate at end-of-month.
Source: BOVESPA and Central Bank
The following tables show certain financial and other information for the
year ended December 31, 1994 (unless otherwise indicated) for the 25 companies
that were most actively traded on the BOVESPA in 1994. Trading in the equity
securities of these companies accounted for approximately 61% and 65% of the
market capitalization on the BOVESPA for 1994 and 1995 (through October 20),
respectively.
MOST ACTIVELY TRADED COMPANIES ON THE BOVESPA
(MILLIONS OF US$)
<TABLE>
<CAPTION>
NET INCOME SHAREHOLDER'S TOTAL
ISSUER SALES AFTER TAX EQUITY ASSETS
------ ------ ---------- ------------- --------
<S> <C> <C> <C> <C>
ACESITA............................... $ 713 $ 79 $ 847 $ 1,249
ARACRUZ............................... 638 314 2,024 3,255
BANCO DO BRASIL....................... NA 128 6,800 86,108
BR DISTRIBUIDORA...................... 6,821 151 892 1,343
BRADESCO.............................. NA 527 4,335 21,640
BRAHMA................................ 981 139 1,108 1,691
BRASMOTOR(1).......................... 2,001 71 479 1,553
CEMIG................................. 1,706 697 7,097 10,010
CESP.................................. 3,081 396 11,743 21,714
COPENE................................ 1,233 137 2,718 3,867
COPESUL............................... 663 21 987 1,167
CPFL.................................. 1,209 22 2,257 2,989
CSN................................... 2,209 154 5,500 6,886
CST................................... 889 241 2,883 3,704
CVRD.................................. 2,871 645 9,707 12,454
ELETROBRAS(1)......................... 5,889 1,856 64,806 100,187
ITAU ................................. NA 378 3,043 16,484
LIGHT................................. 1,520 144 6,528 7,851
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
NET INCOME SHAREHOLDER'S TOTAL
ISSUER SALES AFTER TAX EQUITY ASSETS
------ ------- ---------- ------------- ------
<S> <C> <C> <C> <C>
PARANAPANEMA(1)........................ 216 (13) 564 607
PETROBRAS.............................. 16,315 1,413 18,906 28,107
PETROLEO IPIRANGA(1)................... 3,697 134 537 860
SADIA CONCORDIA........................ 2,446 50 503 1,287
TELEBRAS(1)............................ 7,780 562 21,562 32,539
TELESP................................. 2,183 283 7,299 10,360
USIMINAS............................... 1,832 345 2,444 3,949
</TABLE>
- --------
(1) Figures reported on a consolidated basis
Source: BOVESPA
<TABLE>
<CAPTION>
AMOUNT TRADED AMOUNT TRADED MARKET VALUE
IN 1994 IN 1995(2) AT END OF YEAR
(MILLIONS OF US$) (MILLIONS OF US$) (MILLIONS OF US$)
---------------------- --------------------- -----------------
PERCENTAGE
PERCENTAGE OF
ISSUER VALUE OF TOTAL(1) VALUE TOTAL(1) 1994 1995(3)
------ ---------- ----------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ACESITA................. $ 419.24 0.48% $ 185.86 0.31% $ 1,163 $ 974
ARACRUZ................. 362.82 0.41% 620.91 1.05% 2,192 2,107
BANCO DO BRASIL......... 822.81 0.94% 353.58 0.60% 2,035 1,698
BR DISTRIBUIDORA........ 425.09 0.49% 125.90 0.21% 1,545 943
BRADESCO................ 761.68 0.87% 549.70 0.93% 5,190 5,842
BRAHMA.................. 387.37 0.44% 349.71 0.59% 2,232 2,725
BRASMOTOR............... 311.44 0.36% 183.72 0.31% 1,075 672
CEMIG................... 1,531.22 1.75% 831.35 1.40% 3,080 2,987
CESP.................... 526.82 0.60% 271.76 0.46% 4,254 3,118
COPENE.................. 331.12 0.38% 240.79 0.41% 1,563 998
COPESUL................. 179.79 0.21% 95.79 0.16% 886 648
CPFL.................... 237.25 0.27% 111.35 0.19% 1,688 992
CSN..................... 914.27 1.05% 403.42 0.61% 2,681 1,700
CST..................... 449.70 0.51% 291.49 0.49% 1,102 9,279
CVRD.................... 3,232.31 3.70% 1,085.70 3.34% 9,279 8,081
ELETROBRAS.............. 8,856.63 10.13% 5,172.11 8.71% 18,635 16,085
ITAU.................... 291.09 0.33% 261.46 0.44% 3,373 3,488
LIGHT................... 438.02 0.50% 208.72 0.35% 3,750 3,295
PARANAPANEMA............ 225.94 0.20% 60.59 0.10% 326 248
PETROBRAS............... 5,418.84 6.20% 2,771.87 4.67% 13,703 9,995
PETROLEO IPIRANGA....... 187.21 0.21% 153.04 0.20% 925 510
SADIA CONCORDIA......... 275.05 0.31% 128.37 0.22% 916 676
TELEBRAS................ 24,480.40 28.00% 21,156.77 35.63% 14,275 13,932
TELESP.................. 1,146.21 1.31% 728.65 1.23% 7,280 7,632
USIMINAS................ 1,193.21 1.36% 1,202.22 2.16% 3,026 2,204
Total of 25 companies... 53,405.52 61.00% 38,605.85 65.00% 106,174 92,424
Total volume of BOVESPA. 87,441.94 100.00% 59,374.34 100.00% 126,662 105,457
</TABLE>
- --------
(1) Percentages represent percentage of all stocks traded on the BOVESPA.
(2) As of October 20.
(3) As of October 25.
Source: BOVESPA
37
<PAGE>
DEBT SECURITIES MARKET
As noted above, bonds--whether public or corporate--are not generally listed
on the Stock Exchanges. Secondary transactions in bonds are generally made on
the over-the-counter market directly between market intermediaries and
investors, most of whom are institutional. In addition to corporate debentures
and commercial paper, the secondary market for debt investments includes
forward export contracts and export notes.
State and municipal bonds, as well as corporate debentures and certificates
of deposit, are also traded over-the-counter.
The secondary market for public sector bonds has been active and liquid.
Such bonds are also used in repurchase agreements.
In addition, some Brazilian companies have successfully accessed the debt
securities markets outside of Brazil. The issuance and distribution of such
debt securities is generally subject to prior authorization by the Central
Bank. The Government has sought to regulate the use of such debt securities as
flexibly as possible, subject to the limitations set forth by current
legislation.
FUTURES MARKET
There is only one major commodity futures exchange in Brazil, the Bolsa de
Mercadorias & Futuros ("BM&F") in Sao Paulo. The BM&F resulted from the merger
in May 1991 of the Bolsa Mercantil & Futuros and the Bolsa de Mercadorias de
Sao Paulo. Its contracts include gold, cattle, coffee, cotton, the U.S.
Dollar, inter-financial certificates of deposits ("CDI") and the IBOVESPA.
The authority to regulate the futures market in Brazil has been given to the
Brazilian Securities Commission in the case of futures contracts on stocks and
stock indexes, and, in the case of all futures contracts, to the Monetary
Council, which regulates through the Central Bank. Stock options and forwards
are traded on the Stock Exchanges, while all other futures contracts are
traded on the Brazilian commodity futures exchanges. The Stock Exchanges could
in the future develop markets for stock index futures contracts.
The Brazilian Securities Commission and the Monetary Council have adopted
regulations governing futures and the Stock Exchanges and the commodity
futures exchanges relating to stock index futures and other types of futures
trading. The Stock Exchanges have rules requiring the collection of initial
margin and variation margin on futures contracts, and adjust the amount of
margin required depending on market conditions.
MARKET REGULATION
The Brazilian securities markets are subject to regulation by the Monetary
Council and the Brazilian Securities Commission. The Brazilian Securities
Commission is managed by a board of four Commissioners and one Chairman, all
of whom are appointed by the President of Brazil. It has disciplinary powers
over individuals and institutions, including investors, intermediaries and the
Stock Exchanges. The Stock Exchanges, as self-regulatory organizations, are
considered auxiliary organizations of the Brazilian Securities Commission,
although the Stock Exchanges are owned by member firms and not by the
Brazilian Securities Commission or any other Government agency. In addition,
the Brazilian Securities Commission also has the function of promoting and
supporting the development of the corporate securities market in Brazil.
The activities of the Brazilian Securities Commission are guided by certain
basic principles: the protection of investors; the strengthening of self-
regulation; full disclosure of all material information; the development of
Brazil's securities markets; and the setting of technical and ethical
standards to be observed by all participants in the market.
The licensing and the implementation of the requirements for financial
institutions to operate in the markets are functions of the Central Bank,
which also maintains permanent supervision over such institutions. Exercise
38
<PAGE>
of all professional financial services activities in the corporate securities
markets requires the prior authorization of the Brazilian Securities
Commission.
All companies must register with the Brazilian Securities Commission before
issuing and selling securities to the public. Such registration requires the
disclosure of information about the company, including financial reports,
compliance with statutory norms, corporate activities and controlling
shareholders. The companies must update the information on an annual basis,
and, in addition, file interim and quarterly reports. Moreover, any fact or
event that may materially affect a registered company is required to be
immediately reported by its management to the Brazilian Securities Commission.
Such information is normally also immediately released to the Stock Exchanges
and the public. However, in certain cases, the Brazilian Securities Commission
may authorize the management of a company to postpone its disclosure of such
information until such later time as is deemed to be in the best interests of
the company. Noncompliance with these registration and disclosure rules may
subject the company and its management to penalties provided by law.
The issuance of any type of security to be placed in the public markets must
first be registered with and authorized by the Brazilian Securities
Commission. Responsibility for the reported information rests with both the
issuing company and the lead underwriter.
The over-the-counter market is also regulated by the Brazilian Securities
Commission. In general, if a company's securities are traded over-the-counter,
it is subject to regulations similar to those imposed on listed companies. In
addition, all transactions effected over-the-counter must be reported to the
Brazilian Securities Commission, which, in turn, makes such reports available
to the public.
Directors and officers of a company are required to report their share
ownership in the company's securities at the time they take office, and, as a
general matter, must subsequently report any transactions in the company's
securities to its shareholders.
In addition, "insider trading" is expressly prohibited by the Brazilian
corporation law. This prohibition may be enforced by means of lawsuits brought
by shareholders and by administrative procedures of the Brazilian Securities
Commission. Sanctions for insider trading, however, have been few.
Settlement procedures for trades effected on the Stock Exchanges are
prescribed by the Stock Exchanges. The Fund has not experienced material
delays in effecting settlement, and, based on such experience, the Manager
does not anticipate any material delays in the future.
FOREIGN INVESTMENT AND THE FUND
Foreign investment in Brazilian securities is regulated by exchange control
laws and regulations of the Monetary Council, as well as by laws that restrict
investment by foreigners in particular sectors of the Brazilian economy. See
"Foreign Investment and Exchange Controls in Brazil." Foreign portfolio
investment in the Brazilian securities market is regulated by the Monetary
Council and the Brazilian Securities Commission.
Participation by foreign investors in the Brazilian securities market had
been small in the years prior to the Fund's organization, partly as a result
of applicable restrictions. The Fund was the first publicly offered United
States investment company organized to invest in Brazilian securities.
In an effort to increase foreign investment in Brazil, the Central Bank
implemented Resolution 1289 on March 20, 1987. In the first three Annexes
under Resolution 1289, the following mechanisms for foreign investment in
Brazilian securities were authorized: (i) Foreign Capital Investment
Companies-Annex I (an incorporated legal entity organized in Brazil where the
foreign investor invests through the purchase of shares which are redeemable
at the investor's request after a period of not less than 90 days), (ii)
Foreign Capital Investment Funds-Annex II (an investment fund organized in
Brazil in the form of an "open condominium," where the foreign investor
invests through the purchase of "quotas" in the fund, redeemable upon the
investor's request after a specified period of not less than 90 days), and
(iii) Managed Portfolios of Bonds and Securities-
39
<PAGE>
Annex III (a foreign investment company which may invest directly in Brazilian
securities, subject to certain diversification requirements and other
investment restrictions, including repatriation restrictions). The Fund
invests in the Brazilian securities market under Annex III and was the first
entity to be authorized to do so. According to the Brazilian Securities
Commission, as of June 30, 1995, there were no other entities authorized under
Annex III.
In 1991, the Monetary Council added Annex IV and Annex V to Resolution 1289,
in an effort to promote further foreign capital investment in Brazil.
Annex IV, introduced by the Monetary Council on May 31, 1991 and implemented
on June 3, 1991, extends the favorable treatment regarding organization,
administration and taxation granted to Annex III foreign investment funds to
foreign institutional investors, such as pension funds, financial
institutions, insurance companies and mutual funds. In some respects, the
regulations applicable to Annex IV are more favorable than those applicable to
Annex III. For example, Annex IV is not subject to the portfolio
diversification requirements or repatriation restrictions applicable to Annex
III. As of June 30, 1995, there were approximately 500 entities authorized to
operate under Annex IV.
Annex V, introduced on July 31, 1991, provides still greater flexibility to
foreign investors by permitting foreign investments in Brazilian securities
through the mechanism of American Depository Receipts ("ADRs") and
International Depository Receipts ("IDRs"). The issuance of ADRs and IDRs must
be approved by the Brazilian Securities Commission. The foreign capital is
registered in the name of the foreign issuer of the ADR or IDR and is
permitted to enter and exit Brazil without restriction. The holders of ADRs
and IDRs may request and obtain redemption (i.e., exchange the ADR or IDR for
the underlying security) at any time. In addition, holders of ADRs and IDRs
enjoy the same favorable tax treatment as that applicable to the Fund and to
foreign investors who utilize other permitted mechanisms of access to the
Brazilian securities market. For a discussion of Brazilian withholding taxes
and potential capital gains taxes, see "Taxation--Brazilian Taxation" in this
Prospectus and "Taxation--Brazilian Taxes" in the SAI. Currently, no
withholding tax will be levied on capital gains realized by the Fund and
withholding tax will be levied on dividends received by the holders of ADRs or
IDRs at the rate of 15%.
The development of alternatives to the Fund as a vehicle through which
United States and other foreign investors may invest in Brazilian securities
is one of the factors that may affect whether shares of the Fund trade at a
premium or discount in relation to net asset value. See "Net Asset Value" in
the SAI. This development should also result in broadened investor interest
in, and greater liquidity of, the Brazilian securities market.
INVESTMENT ADVISERS AND ADMINISTRATOR
GENERAL
The Fund's advisory structure reflects a bi-national United States-Brazilian
arrangement for providing investment advice and management to pursue the
Fund's investment objective of long-term capital appreciation through
investing in Brazilian securities. The Fund's Manager is Scudder, Stevens &
Clark, Inc., a United States investment counsel firm. The Brazilian Adviser is
Banco Icatu S.A. The Fund may retain the services of advisers or consultants
with respect to Brazilian securities markets in addition to the Brazilian
Adviser when the Board of Directors determines it to be appropriate. The
Fund's Brazilian Administrator is Banco de Boston S.A.
THE INVESTMENT MANAGER
Scudder, Stevens & Clark, Inc., an investment counsel firm whose address is
345 Park Avenue, New York, New York 10154, acts as investment adviser to and
manager and administrator for the Fund. The Manager is a leading global
investment manager with offices throughout the United States and subsidiaries
in London and Tokyo. The Manager was established in 1919 as a partnership and
was restructured as a Delaware corporation in 1985. The principal source of
the Manager's income is professional fees received from providing continuing
40
<PAGE>
investment advice. The Manager provides investment counsel for many
individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations.
The Manager has been active in international investment for over 40 years
and in emerging markets investment for over 20 years. As of December 31, 1994,
the Manager and its affiliates had in excess of $90 billion in assets under
their supervision, more than $22 billion of which was invested in non-U.S.
securities. As of that date, the Manager's clients included nine closed-end
United States investment companies with assets aggregating over $1.5 billion,
and more than 50 open-end United States investment company portfolios with
assets aggregating over $36 billion. The Manager's investment company clients,
in addition to the Fund, include:
. The Argentina Fund, Inc., which commenced operations in 1991 and invests
primarily in equity securities of Argentine companies.
. The First Iberian Fund, Inc., which commenced operations in 1988 and
invests primarily in equity securities of Spanish and Portuguese
companies.
. The Japan Fund, Inc., which commenced operations in 1962 and invests
primarily in securities of Japanese companies.
. The Korea Fund, Inc., which commenced operations in 1984 and invests
primarily in equity securities of Korean companies.
. The Latin America Dollar Income Fund, Inc., which commenced operations in
1992 and invests primarily in Dollar-denominated debt securities of Latin
American issuers.
. Scudder Greater Europe Growth Fund, which commenced operations in 1994
and invests primarily in equity securities of European companies.
. Scudder International Fund, which was initially incorporated in Canada in
1953 and invests primarily in foreign equity securities.
. Scudder Latin America Fund, which commenced operations in 1992 and
invests in securities of Latin American issuers.
. Scudder New Asia Fund, Inc., which commenced operations in 1987 and
invests primarily in equity securities of Asian companies.
. Scudder New Europe Fund, Inc., which commenced operations in 1990 and
invests primarily in securities of European companies.
. Scudder Pacific Opportunities Fund, which commenced operations in 1992
and invests in equity securities of Pacific Basin companies, excluding
Japan.
. Scudder World Income Opportunities Fund, Inc., which commenced operations
in 1994 and invests primarily in income securities issued by corporate
and sovereign entities throughout the world.
The Manager also provides investment advisory services to the mutual funds
with assets aggregating over $11 billion that comprise the AARP Investment
Program from Scudder. With respect to this Program, the Manager manages a
total of eight investment company portfolios pursuing a variety of investment
objectives, including money market returns, growth, income, growth and income
and tax-free income. The Manager also manages accounts for several large
pension plans.
The Fund is managed by a team of investment professionals who each play an
important part in the Fund's management process. Team members work together to
develop investment strategies and select securities for the Fund's portfolio.
They are supported by the Manager's large staff of economists, research
analysts, traders and other investment specialists who work in the Manager's
offices across the United States and abroad. The Manager believes its team
approach will benefit Fund investors by bringing together many disciplines and
leveraging the Manager's extensive resources.
Lead Portfolio Manager Edmund B. Games, Jr. has set Fund investment strategy
and overseen its daily operation since 1988. Mr. Games joined Scudder's equity
research area in 1960. William F. Truscott, Portfolio
41
<PAGE>
Manager, helps set the portfolio's general investment strategies. Mr.
Truscott, a member of the portfolio's team since 1993, has over 10 years of
experience in the financial industry. Nicholas Bratt, Portfolio Manager, has
been a member of the portfolio team since 1988 and has over 20 years of
experience in worldwide investing. Mr. Bratt, who has been at Scudder since
1976, is the head of Scudder's Global Equity Department.
The Manager maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries,
companies and individual securities. In managing the Fund, the Manager
utilizes reports, statistics and other investment information from a wide
variety of sources, including the Brazilian Adviser and other brokers and
dealers who may execute portfolio transactions for the Fund and for clients of
the Manager or the Brazilian Adviser. Investment decisions, however, are based
primarily on investigations and critical analyses by its own research
specialists and portfolio managers, as well as investigations that may include
visiting companies, touring facilities, and interviewing suppliers and
customers.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Manager. Investment decisions for the Fund and the
Manager's other clients are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment and the size of their
investments generally. Frequently a particular security may be bought or sold
for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling the
security. In addition, purchases or sales of the same security may be made for
two or more clients on the same day. In such event, such transactions will be
allocated among the clients in a manner believed by the Manager to be
equitable to each. In some cases, this procedure could have an adverse effect
on the price or amount of the securities purchased or sold by the Fund.
Purchase and sale orders for the Fund may be combined with those of other
clients of the Manager in the interest of the most favorable net results to
the Fund.
INVESTMENT ADVISORY, MANAGEMENT AND ADMINISTRATION AGREEMENT
On July 25, 1995, the Fund's shareholders approved a new Investment
Advisory, Management and Administration Agreement (the "Agreement") with the
Manager. Under the Agreement, the Manager makes investment decisions, prepares
and makes available research and statistical data and supervises the
acquisition and disposition of securities by the Fund, all in accordance with
the Fund's investment objective and policies and in accordance with guidelines
and directions from the Fund's Board of Directors. The Manager assists the
Fund as it may reasonably request in the conduct of the Fund's business,
subject to the direction and control of the Fund's Board of Directors. The
Manager maintains or causes to be maintained for the Fund all books and
records required to be maintained under the 1940 Act to the extent such books
and records are not maintained or furnished by the Fund's custodian or other
agents, and furnishes or causes to be furnished all required reports or other
information under Brazilian securities laws, supplies the Fund with office
space in New York and furnishes clerical services in the United States related
to research, statistical and investment work. The Manager renders to the Fund
administrative services such as preparing reports to, and meeting materials
for, the Fund's Board of Directors and reports and notices to shareholders,
preparing and making filings with the Commission and other regulatory and
self-regulatory organizations including preliminary and definitive proxy
materials and post-effective amendments to the Fund's registration statement,
providing assistance in certain accounting and tax matters and investor public
relations, monitoring the valuation of portfolio securities, calculation of
net asset value and calculation and payment of distributions to shareholders,
and overseeing arrangements with the Fund's Custodian, including the
maintenance of books and records of the Fund. The Manager also pays the
reasonable salaries, fees and expenses of the Fund's officers and employees
and any fees and expenses of the Fund's directors who are directors, officers
or employees of the Manager, except that the Fund bears travel expenses (or an
appropriate portion of those expenses) of directors and officers of the Fund
who are directors, officers or employees of the Manager to the extent that
such expenses relate to attendance at meetings of the Board of Directors or
any committees of or advisers to the Board. Under the Agreement, the Manager
may render similar services to others.
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Under the Agreement, the Fund pays or causes to be paid all of its other
expenses, including, among other things, the following: organization and
certain offering expenses (including out-of-pocket expenses but not overhead
or employee costs of the Manager or of any one or more organizations retained
by the Fund or by the Manager as a Brazilian administrator or adviser of the
Fund); legal expenses; auditing and accounting expenses; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; stock exchange listing fees; fees, dues and expenses incurred in
connection with membership in investment company trade organizations; fees and
expenses of the Fund's custodian, subcustodians, transfer agents and
registrars; payment for portfolio pricing or valuation services to pricing
agents, accountants, bankers and other specialists, if any; expenses of
preparing share certificates and other expenses in connection with the
issuance, offering, distribution, sale or underwriting of securities issued by
the Fund; expenses relating to investor and public relations; expenses of
registering or qualifying securities of the Fund for sale; freight, insurance
and other charges in connection with the shipment of the Fund's portfolio
securities; brokerage commissions or other costs of acquiring or disposing of
any portfolio securities of the Fund; expenses of preparing and distributing
reports, notices and dividends to shareholders; expenses of the Dividend
Reinvestment and Cash Purchase Plan (except for brokerage expenses paid by
participants in such Plan); costs of stationery; any litigation expenses; and
costs of shareholders' and other meetings.
For its services, the Manager receives a monthly fee at an annual rate of
1.175% of the Fund's average weekly net assets. The Manager has agreed not to
charge a portion of its fee such that the effective rate with respect to net
assets in excess of $300,000,000 is 1.075%. The Fund's investment advisory
fees are higher than those paid by most U.S. investment companies, primarily
because of the Fund's objective of investing in Brazilian securities, the
additional time and expense required of the Manager in pursuing such objective
and the need to enable the Manager to compensate the Brazilian Adviser for its
services. The Manager pays the Brazilian Adviser a monthly fee at an annual
rate of 0.125% of the Fund's average weekly net assets up to and including
$150,000,000, 0.075% on the next $150,000,000, and 0.025% of such net assets
in excess of $300,000,000. See "The Brazilian Adviser." The Manager may retain
the services of others, in addition to the Brazilian Adviser, but at no
additional cost to the Fund in connection with its services to the Fund.
Under the Investment Advisory, Management and Administration Agreement
between the Fund and the Manager that was in effect prior to July 26, 1995,
the Fund agreed to pay the Manager a monthly fee equal to an annual rate of
1.30% of the first $150,000,000 of average weekly net assets of the Fund,
1.25% of such net assets on the next $150,000,000, and 1.20% of such net
assets in excess of $300,000,000. Under the Investment Advisory and Management
Agreement between the Fund and the Manager that was in effect prior to October
20, 1993, the Fund agreed to pay the Manager a monthly fee equal to an annual
rate of 1.25% of the average weekly net assets of the Fund.
During the fiscal years ended December 31, 1992, 1993 and 1994, the fees
paid to the Manager under the prior Agreements amounted to $2,512,544,
$2,761,128 and $4,371,086, respectively. The amount paid in 1994 reflects a
reduction of $55,048, which the Manager agreed to pass through to the Fund as
a result of the Brazilian Adviser waiving approximately half of its fees under
its prior contract as of November 1, 1994.
Under the Agreement, the Manager is permitted to provide investment advisory
services to other clients, including clients which may invest in Brazilian
securities, and, in providing such services, may use information furnished by
the Brazilian Adviser and others. Conversely, information furnished by others
to the Manager in providing services to other clients may be useful to the
Manager in providing services to the Fund.
The Agreement by its terms will remain in effect for a period of two years
from July 26, 1995, and will continue in effect from year to year thereafter
if such continuance is specifically approved, at least annually, by a vote of
a majority of the members of the Board of Directors who are not interested
persons of the Manager, the Brazilian Adviser or the Fund, cast in person at a
meeting called for the purpose of voting on such approval, and by the
affirmative vote of either a majority of the Board of Directors or holders of
a majority of the Fund's outstanding voting securities. The Agreement may be
terminated at any time without payment of penalty by the Board of Directors,
by vote of holders of a majority of the outstanding voting securities of the
Fund, or by the
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Manager on 60 days' written notice (or such longer period as may be required
under the Regulations). The Agreement automatically terminates in the event of
its assignment (as defined under the 1940 Act), but does not terminate upon
assignment to a corporate successor to all or substantially all of the
Manager's business, or a wholly-owned subsidiary of such corporate successor,
provided that such assignment does not result in a change of actual control or
management of the Manager's business.
The Agreement provides that the Manager is not liable for any act or
omission, error of judgment or mistake of law or for any loss suffered by the
Fund in connection with matters to which the Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of the Manager in the performance of its duties or from reckless disregard by
the Manager of its obligations and duties under the Agreement.
THE BRAZILIAN ADVISER
Banco Icatu S.A., whose address is Av. Presidente Wilson, 231 2(degrees)
andar, Rio de Janeiro, Brazil, an investment adviser registered under the
Investment Advisers Act of 1940, acts as Brazilian Adviser to the Manager
pursuant to a Research and Advisory Agreement, dated July 26, 1995, between
the Fund and the Brazilian Adviser (the "Research Agreement"). The Brazilian
Adviser has been in the business of providing investment advisory services
since it was organized in December 1986 under the laws of the Federative
Republic of Brazil. The Brazilian Adviser is a wholly-owned subsidiary of
Icatu Empreendimentos e Participacoes Ltda., Av. Presidente Wilson, 231
2(degrees) andar, Rio de Janeiro, Brazil, whose parent company is Itaborai
Participacoes S.A.
Under the terms of the Research Agreement, the Brazilian Adviser provides
such information, investment recommendations, advice and assistance as the
Manager may, from time to time, reasonably request. The Brazilian Adviser may,
under the terms of the Research Agreement, render similar services to others,
including other investment companies. However, the Brazilian Adviser is
required by the Research Agreement to maintain a separate staff which prepares
and makes specific investment recommendations to the Manager. This information
will be evaluated by the Manager's research department and portfolio managers
in light of their own expertise and information from other sources, in
determining investment decisions for the Fund.
For its services, the Brazilian Adviser receives from the Manager a monthly
fee at the annual rate of 0.125% of the Fund's average weekly net assets up to
and including $150,000,000, 0.075% of such net assets on the next
$150,000,000, and 0.025% of such net assets in excess of $300,000,000. The
Brazilian Adviser has agreed to pay fees and expenses of any officer or
director of the Fund affiliated with it, except that the Fund bears travel
expenses of one director, officer or employee of the Brazilian Adviser or any
of its affiliates who is not a resident in the United States to the extent
that such expenses relate to attendance as a Fund director at meetings of the
Board of Directors in the United States and also bears the travel expenses of
any other director, officer or employee of the Brazilian Adviser or of any of
its affiliates who is a resident in the United States to the extent such
expenses relate to his attendance as a Fund director at meetings of the Board
of Directors held outside of the United States. Under the Research and
Advisory Agreement that was in effect prior to July 26, 1995, the Fund agreed
to pay the Brazilian Adviser a monthly fee equal to an annual rate of 0.25% of
the Fund's average weekly net assets up to and including $150 million, 0.15%
of such net assets on the next $150 million, and 0.05% of such net assets in
excess of $300 million. For the fiscal years ended December 31, 1992, 1993 and
1994, the aggregate fees incurred by the Manager for the services of the
Brazilian Adviser under the Research Agreement amounted to $476,503, $502,028
and $562,796, respectively. The fees incurred in 1994 reflect a reduction of
$55,048 as a result of the Brazilian Adviser waiving approximately half its
fees under its prior contract as of November 1, 1994.
The Research Agreement provides that the Brazilian Adviser will not be
liable for any act or omission in the course of, connected with or arising out
of any services rendered under the Research Agreement except by reason of
willful misfeasance, bad faith or gross negligence on the part of the
Brazilian Adviser in the performance of its duties or from reckless disregard
by the Brazilian Adviser of its obligations and duties under the Research
Agreement.
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Because the Brazilian Adviser is a Brazilian corporation having
substantially all of its assets outside of the United States, it may be
difficult for United States investors to effect service of process upon the
Brazilian Adviser within the United States or to realize judgments of courts
of the United States based upon civil liabilities of the Brazilian Adviser
under the federal securities laws and other laws of the United States. There
is substantial doubt as to the enforceability in Brazil of such civil remedies
and criminal penalties as are afforded by the federal securities laws in the
United States.
The Research Agreement by its terms will remain in effect for a period of
two years from July 26, 1995, and will continue in effect from year to year
thereafter if such continuance is specifically approved at least annually by
the affirmative vote of a majority of the members of the Board of Directors
who are not interested persons of the Fund, the Manager or the Brazilian
Adviser, cast in person at a meeting called for the purpose of voting on such
approval, and by the affirmative vote of either a majority of the Board of
Directors or the holders of a majority of the outstanding voting securities.
The Research Agreement may be terminated at any time without payment of
penalty by the Fund or the Brazilian Adviser on 60 days' written notice (or
such longer period as may be required under the Regulations). The Research
Agreement automatically terminates in the event of the termination of the
Fund's Agreement with the Manager or in the event the Research Agreement is
assigned (as defined under the 1940 Act).
THE BRAZILIAN ADMINISTRATOR
Under the Administration Agreement, dated April 30, 1992, between the
Brazilian Administrator, the Fund and the Manager, the Brazilian Administrator
has agreed to furnish to the Fund and to the Manager such administrative
services and assistance as are required to be furnished by a Brazilian
administrator pursuant to the Regulations and as the Manager, on the Fund's
behalf, may reasonably request, including effecting the registration of the
Fund's foreign capital with the Central Bank, processing remittances of
earnings, capital gains and the return of invested capital, paying the
applicable withholding tax on remittances abroad by the Fund, filing
statements as to the Fund's Portfolio and remittances, and handling the
bookkeeping for the Fund's Portfolio in Brazil.
As compensation for its services under the Administration Agreement, the
Brazilian Administrator is paid by the Fund a quarterly fee in Brazilian
currency equal to approximately $50,000 per year, plus out-of-pocket expenses.
Under the Administration Agreement, the Brazilian Administrator will not be
liable for any act or omission in the course of, connected with or arising out
of any services rendered by it under the agreement, except by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or reckless disregard of its obligations and duties under the
Administration Agreement.
The Administration Agreement by its terms continues in effect, if such
continuance is specifically approved at least annually by the affirmative vote
of the Fund's Board of Directors. The Administration Agreement may be
terminated at any time, without penalty, by the Manager, by the Fund's Board
of Directors or by vote of the holders of a majority of the outstanding voting
securities of the Fund, upon 60 days' written notice, or by the Brazilian
Administrator, but only after written notice to the Fund, the Manager and the
Brazilian Securities Commission of not less than 60 days (or such longer
period as may be required under the Regulations). The Regulations currently
require six months' notice. The Administration Agreement automatically
terminates in the event of its assignment (as defined under the 1940 Act) or
the termination of the Agreement between the Fund and the Manager.
The Regulations reserve to the Brazilian Securities Commission the right to
cancel the authorization of, and approve any successor to, the Brazilian
Administrator. They also provide that, should the authorization to render
services to the Fund be so cancelled, the Manager must apply to the Brazilian
Securities Commission within 15 business days after communication of the
decision to cancel, for authorization to replace the Brazilian Administrator.
Under the Regulations, in such a case, the Brazilian Administrator is obliged
to continue to perform its functions until it is actually replaced.
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DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT
AND CASH PURCHASE PLAN
The Fund intends to distribute to shareholders, at least annually,
substantially all of its net investment income and expects to distribute at
least annually any net long-term capital gains in excess of net short-term
capital losses (including any capital loss carryover). Net investment income
includes dividends, interest and any net short-term capital gains in excess of
net long-term capital losses (including any capital loss carryover), net of
expenses. See "Taxation--United States Federal Income Taxes" in the SAI. The
Fund has declared a dividend payable on November 1, 1995, to shareholders of
record as of October 23, 1995, of $.16 per share from undistributed net
investment income and $.81 per share from undistributed net long-term capital
gains. This distribution represents, as of October 31, 1995, substantially all
of the Fund's (i) undistributed net investment income, less expenses
anticipated through the end of the Fund's fiscal year on December 31, 1995,
and (ii) undistributed net realized long-term capital gains. The distribution
will, in general, be taxable to shareholders. The Fund has also declared a
dividend payable on January 16, 1996 to shareholders of record as of December
29, 1995 of all of its then undistributed net investment income as of December
31, 1995; the dividend will, in general, be taxable to shareholders, including
holders as of the record date of Shares acquired upon exercise of Rights. The
Fund estimates that this dividend will be in the range of $.10 to $.15 per
share (assuming that all of the Rights are exercised). See "Taxation--U.S.
Taxation" in this Prospectus and "Taxation--United States Federal Income
Taxes--General,"--"Distributions" and--"Non-U.S. Shareholders" in the SAI. As
of November 16, 1995, there was approximately $145 million of net unrealized
appreciation in the Fund's net assets of approximately $271 million; if
realized and distributed, or deemed distributed, such gains would, in general,
be taxable to shareholders, including holders at that time of Shares acquired
upon the exercise of the Rights. See "Taxation" in this Prospectus and
"Taxation--United States Federal Income Taxes--General," "--Distributions" and
"--Non-U.S. Shareholders" in the SAI.
Pursuant to the Plan, each shareholder will be deemed to have elected,
unless The First National Bank of Boston, the Plan Agent, is otherwise
instructed in writing, to have all distributions, net of any applicable U.S.
withholding tax, automatically reinvested by the Plan Agent in Fund shares
pursuant to the Plan. Shareholders who elect not to participate in the Plan
will receive all distributions, net of any applicable U.S. withholding tax, in
cash paid by check in Dollars mailed directly to the shareholder by The First
National Bank of Boston, as dividend paying agent. Participants in the Plan
may terminate their accounts under the Plan by written notice to the Plan
Agent. If such notice is received by the Plan Agent not less than ten days
prior to any dividend or distribution record date, the termination will be
effective immediately; otherwise, such termination will be effective on the
first trading day after the payment date of such dividend or distribution. In
the case of shareholders such as banks, brokers or nominees, which hold shares
for others who are the beneficial owners, the Plan Agent will administer the
Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are to participate in
the Plan. A beneficial owner of shares registered in the name of a bank,
broker or other nominee should consult with such nominee as to participation
in the Plan through such nominee.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the directors of the Fund declare an income dividend or a capital
gains distribution payable either in the Fund's Common Stock or in cash, as
shareholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive Common Stock to be issued by the
Fund. If the market price per share on the valuation date equals or exceeds
net asset value per share on that date, the Fund will issue new shares to
participants at net asset value; provided, however, if the net asset value is
less than 95% of the market price on the valuation date, then the Fund will
issue new shares to participants at 95% of the market price. The valuation
date will be the dividend or distribution payment date or, if that date is not
a NYSE trading day, the next preceding trading day. If net asset value exceeds
the market price of Fund shares at such time, participants in the Plan will be
deemed to have elected to receive shares of stock from the Fund, valued at
market price on the valuation date. Participants reinvesting distributions in
additional shares should be treated for U.S. Federal income tax purposes as
receiving a distribution in an amount equal to the fair market value,
determined as of the payment date, of the shares received (regardless of the
net asset value of the shares on the payment date), and should have a cost
basis in
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such shares equal to such fair market value. If the Fund should declare an
income dividend or capital gains distribution payable only in cash, the Plan
Agent will, as agent for the participants, buy Fund shares in the open market,
on the NYSE or elsewhere, for the participants' account on, or shortly after,
the payment date.
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, semi-annually, in any amount from $100 to $3,000, for
investment in the Fund's Common Stock. The Plan Agent will use all such funds
received from participants to purchase Fund shares in the open market on or
about February 15 and August 15. Any voluntary cash payments received more
than thirty days prior to these dates will be returned by the Plan Agent, and
interest will not be paid on any uninvested cash payments. To avoid
unnecessary cash accumulations, and also to allow ample time for receipt and
processing by the Plan Agent, it is suggested that participants send in
voluntary cash payments to be received by the Plan Agent approximately ten
days before February 15 or August 15, as the case may be. A participant may
withdraw a voluntary cash payment by written notice, if the notice is received
by the Plan Agent not less than 48 hours before such payment is to be
invested.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant, and each shareholder's proxy will include
those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of the
reinvestment of dividends and capital gains distributions will be paid by the
Fund. There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains distributions
payable either in stock or in cash. 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 voluntary cash payments made by the
participant or reinvestment of any dividends or capital gains distributions
payable only in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $1.00 for each such purchase for a participant, plus a pro rata share
of the brokerage commissions. Brokerage charges for purchasing small amounts
of stock for individual accounts through the Plan are expected to be less than
the usual brokerage charges for such transactions, because the Plan Agent will
be purchasing stock for all participants in blocks and prorating the lower
commission thus attainable.
The receipt of dividends and distributions under the Plan will not relieve
participants of any income tax (including withholding tax) which may be
payable on such dividends or distributions. See "Taxation--United States
Federal Income Taxes" in the SAI.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the
Plan as applied to any voluntary cash payments made and any dividend or
distribution paid subsequent to notice of the termination sent to the members
of the Plan, in the case of a dividend or distribution, at least 30 days
before the record date for such dividend or distribution. The Plan also may be
amended by the Fund or the Plan Agent, but (except when necessary or
appropriate to comply with applicable laws, rules or policies of a regulatory
authority) only by at least 30 days' written notice to participants in the
Plan. Additional information about the Plan may be obtained from the Plan
Agent, The First National Bank of Boston, Mail Stop 45-02-09, P.O. Box 644,
Boston, MA 02102-0644, telephone number (617) 575-2900.
TAXATION
For a discussion of U.S. Federal income tax consequences and Brazilian tax
consequences to Record Date Shareholders and Rights Holders with respect to
the Offer, see "The Offer--U.S. Federal Income Tax Consequences; Brazilian Tax
Consequences" above. For a discussion of certain other U.S. and Brazilian tax
matters applicable to the Fund and its shareholders, see "Taxation" in the
SAI. Shareholders should consult their tax advisers concerning their own
particular situations, including the potential application of state, local and
non-U.S. taxes to their ownership and disposition of shares of the Fund.
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<PAGE>
U.S. TAXATION
The Fund has qualified and intends to continue to qualify to be treated as a
regulated investment company under the Code for each taxable year, although no
assurance can be given as to meeting the test for such status. The Fund
intends to distribute to its shareholders each year all of its net investment
income as computed for U.S. Federal income tax purposes. Such distributions
will, in general, be taxable to shareholders. Shareholders not subject to tax
on their income will not be required to pay tax on amounts distributed to
them. The Fund will inform shareholders of the amount and nature of
distributions made by the Fund.
The Board of Directors will determine each year whether to distribute any
net long-term capital gains in excess of any net short-term capital losses
(including in such losses any capital loss carryovers from prior years) as
computed for U.S. Federal income tax purposes. The Fund presently expects to
distribute such excess to its shareholders each year.
Dividend distributions paid out of the Fund's net investment income
(including short-term capital gains) will be taxable to a U.S. shareholder as
ordinary income, whether received in cash or reinvested in shares. Dividends
paid by the Fund will not qualify for the deduction (currently 70%) for
dividends received by corporations because the Fund's income is not expected
to consist of dividends paid by U.S. corporations. Distributions of net long-
term capital gains (i.e., capital gains from securities held for more than one
year), if any, are taxable as long-term capital gains, whether received in
cash or reinvested in shares, regardless of how long the shareholder has held
the Fund's shares and are not eligible for the dividends-received deduction.
As of November 16, 1995, there was approximately $145 million of net
unrealized appreciation in the Fund's net assets of approximately $271
million; if realized and distributed, or deemed distributed, such gains would,
in general, be taxable to shareholders, including holders at that time of
Shares acquired upon the exercise of the Rights. See "Taxation--United States
Federal Income Taxes--General," "--Distributions" and "--Non-U.S.
Shareholders" in the SAI. Dividends of net investment income and distributions
of net long-term capital gains paid by the Fund that (i) are declared in
October, November or December, (ii) are payable to holders of record as of a
date in such a month, and (iii) are paid during the following January, will be
treated by shareholders as if received on December 31 of the calendar year in
which declared. See "Dividends and Distributions; Dividend Reinvestment and
Cash Purchase Plan" for a description of dividends declared by the Fund for
payment on November 1, 1995 and January 16, 1996.
The Fund has adopted a Dividend Reinvestment and Cash Purchase Plan.
Shareholders are deemed to have elected to participate in the Plan unless the
Plan Agent is otherwise instructed in writing. Participants in the Plan will
receive dividend and capital gain distributions in shares of the Fund, rather
than in cash, if the Fund's Board of Directors declares that payment may be
made in shares of the Fund or in cash. The Fund contemplates that
distributions will ordinarily be payable in shares or cash. See "Dividends and
Distributions; Dividend Reinvestment and Cash Purchase Plan."
Shareholders reinvesting distributions in additional shares through
participation in the Plan should be treated for U.S. Federal income tax
purposes as receiving a distribution in an amount equal to the fair market
value, determined as of the distribution date, of the shares received (whether
the fair market value is less than or greater than the net asset value of the
shares on the distribution date), and should have a cost basis in such shares
equal to such fair market value.
The Fund expects to be eligible to elect, and will notify shareholders if it
so elects, to "pass-through" to the Fund's shareholders the amount of
Brazilian withholding taxes imposed on dividends and interest. If the Fund
makes such an election, shareholders will be required to include in income
their proportionate shares of such amount. U.S. shareholders may be entitled
to claim a credit or deduction for all or a portion of such amount. However,
non-U.S. shareholders may not be able to claim a credit or deduction with
respect to such amount.
The Fund may be required to withhold for U.S. Federal income tax purposes
31% of all distributions payable to shareholders (not otherwise exempt for
such withholding) who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding.
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BRAZILIAN TAXATION
The Fund will be subject to Brazilian withholding taxes on interest (at a
rate of 10%) and dividends (at a rate of 15%). See "Taxation--Brazilian Taxes"
in the SAI. Capital gains earned by the Fund from its activities in Brazil are
currently exempt from income tax. However, the Brazilian Government has
introduced a bill in the Brazilian Congress which included a proposal whereby
the capital gains realized by Managed Portfolios (such as the Fund) would be
subject to income tax at the following rates: (i) 5%, when earned in the 1996
calendar year; (ii) 10%, when earned in the 1997 calendar year; and (iii) 15%,
when earned from the 1998 calendar year onward. A more recent proposal would
provide an exemption from such taxes for investments with a term of 180 days
or more. Following discussions, the Government agreed to withdraw its original
proposal. No guarantee can be given that capital gains earned by the Fund will
remain exempt from income tax in the future.
COMMON STOCK
The authorized capital stock of the Fund is 50,000,000 shares of Common
Stock ($.01 par value), of which 12,166,496 shares were issued and outstanding
as of November 16, 1995. Shares of the Fund, when issued, are fully paid and
nonassessable. All shares are equal as to earnings, assets and voting
privileges. There are no conversion, preemptive or other subscription rights.
In the event of liquidation, each share of Common Stock is entitled to its
proportion of the Fund's assets after debts and expenses. There are no
cumulative voting rights for the election of directors.
The Fund has no present intention of offering additional shares beyond the
Offer contemplated by this Prospectus, except that additional shares may be
issued under the Dividend Reinvestment and Cash Purchase Plan. See "Dividends
and Distributions; Dividend Reinvestment and Cash Purchase Plan." Other
offerings of its shares, if made, will require approval of the Fund's Board of
Directors and of the Brazilian Securities Commission. Any additional offering
will be subject to the requirements of the 1940 Act that shares may not be
sold at a price below the then current net asset value (exclusive of
underwriting discounts and commissions) except in connection with an offering
to existing shareholders or with the consent of a majority of the Fund's
outstanding shares.
SPECIAL VOTING PROVISIONS
The Fund has provisions in its Articles of Incorporation and By-Laws that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund, to cause it to engage in certain transactions or
to modify its structure. The Board of Directors is divided into three classes.
At the annual meeting of stockholders in each year, the term of one class
expires and directors will be elected to serve in that class for terms of
three years. This provision could delay for up to two years the replacement of
a majority of the Board of Directors. A director may be removed from office
only by a vote of the holders of at least 75% of the shares of the Fund
entitled to be voted on the matter.
As noted above under "Net Asset Value," the conversion of the Fund from a
closed-end to an open-end investment company is currently not permitted under
Brazilian law. If it were permitted, such conversion would require the
affirmative vote of 75% of the directors to authorize such conversion. The
conversion also requires the affirmative vote or consent of the holders of 75%
of the shares of the Fund unless it is approved by a vote of 75% of the
Continuing Directors, in which event such conversion requires the approval of
the holders of a majority of the outstanding shares of the Fund. Even if the
Fund were to be converted into an open-end investment company, it could be
restricted in its ability to redeem its shares (otherwise than in kind)
because of Brazilian restrictions on repatriation of the Fund's capital. See
"Foreign Investment and Exchange Controls in Brazil."
The affirmative votes of 75% of the directors and the holders of 75% of the
shares of the Fund are required to authorize any of the following
transactions:
(i) merger or consolidation of the Fund with or into any other
corporation;
(ii) issuance or transfer of any securities of the Fund to any person or
entity for cash, securities or other property (or combination thereof)
having an aggregate fair market value of $1,000,000 or more
49
<PAGE>
excluding sales of securities in connection with a public offering and
securities issued pursuant to a dividend reinvestment plan adopted by the
Fund or upon the exercise of any stock subscription rights distributed by
the Fund;
(iii) sale, lease, exchange or other disposition to or with any entity or
person of any assets of the Fund having an aggregate fair market value of
$1,000,000 or more except for portfolio transactions effected by the Fund
in the ordinary course of its business.
However, this shareholder vote or consent will not be required with respect
to the foregoing transactions if they are approved by a vote of 75% of the
Continuing Directors or if certain conditions regarding the consideration paid
by such corporation, person or entity are satisfied.
Reference is made to the Articles of Incorporation and By-Laws of the Fund,
on file with the Commission, for the full text of these provisions. See
"Further Information." These provisions could have the effect of depriving
shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. The Board of
Directors has determined that the foregoing voting requirements, which are
generally greater than the minimum requirements under Maryland law and the
1940 Act, are in the best interests of shareholders generally.
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston, 100 Federal Street, Boston, Massachusetts
02110, is the Fund's dividend paying agent and is the transfer agent and
registrar for the Fund's Common Stock.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
is Custodian for the Fund. The Fund's portfolio securities, when invested in
Real-denominated securities, and cash and cash equivalents, when held in
Brazil, are held at the Rio de Janeiro and Sao Paulo branches of The First
National Bank of Boston, acting as Subcustodian.
OFFICIAL DOCUMENTS
All of the documents, except Brazilian company annual reports, referred to
herein as the source of statistical information are public official documents
of the Federative Republic of Brazil, its Ministries, the Central Bank of
Brazil, the Brazilian Securities Commission or the Stock Exchanges.
EXPERTS
The financial statements of the Fund included in the SAI have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm, as experts in auditing and
accounting.
VALIDITY OF THE SHARES
The validity of the shares offered hereby will be passed on for the Fund by
Debevoise & Plimpton, New York, New York, and for the Dealer Manager by
Sullivan & Cromwell, New York, New York. Matters of Brazilian law will be
passed on for the Fund and for the Dealer Manager by Pinheiro Neto-Advogados,
Sao Paulo, Brazil.
FURTHER INFORMATION
Further information concerning the Fund and the Fund's Common Stock may be
found in the Registration Statement of which this Prospectus constitutes a
part on file with the Securities and Exchange Commission.
50
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Restrictions.................................................... 2
Certain Investment Practices............................................... 4
Directors and Officers..................................................... 6
Net Asset Value............................................................ 9
Taxation................................................................... 10
Portfolio Transactions and Brokerage....................................... 16
Financial Statements....................................................... F-1
Report of Independent Accountants.......................................... F-2
Report of Independent Accountants.......................................... F-13
</TABLE>
51
<PAGE>
ANNEX A
THE FEDERATIVE REPUBLIC OF BRAZIL
The information in this Annex, except for certain updated information (the
sources for which are indicated) and information concerning Brazilian
corporate taxation, has been extracted from the Offering Circular of the
Federative Republic of Brazil ("Brazil"), dated July 20, 1995, distributed in
connection with the offering of Brazil's DM1,000,000,000 9% Notes due 1997.
Information presenting historical data has not been updated, except where
otherwise noted. This Annex is general and summary in nature and is provided
for illustrative purposes only. It does not purport to be an authoritative
political or economic analysis. Furthermore, Brazil's macroeconomic indicators
are not reviewed by the International Monetary Fund. The Government of Brazil
and the Central Bank of Brazil are the sole providers of authoritative
macroeconomic indicators. Brazil's macroeconomic indicators are not released
with the same timeliness and completeness as those of many other countries.
None of the Manager, the Brazilian Adviser, the Brazilian Administrator or the
Dealer Manager has verified the information nor makes any representation as to
its accuracy.
GENERAL INFORMATION
General. Brazil, the fifth largest country in the world, occupies nearly
half the land area of South America and shares a border with every country in
South America except Chile and Ecuador. The official language is Portuguese.
Brazil's population, estimated at December 31, 1994 to be 153.7 million, is
the sixth largest in the world, and, growing at a rate of 1.4% per year, is
expected to reach 163 million by the end of the century. The largest cities in
Brazil are Sao Paulo and Rio de Janeiro, with populations of 9.8 million and
5.5 million, respectively.
Politics and Governmental Organization. From 1964 to 1985, Brazil was
governed by military governments. Brazil's current Constitution was adopted in
October 1988. In December 1989, the country elected a President in the first
direct presidential election since 1960. The Constitution also provided for a
plebiscite in April 1993 in which voters were permitted to consider
alternative systems of government, including a return to monarchy; in that
plebiscite, the Brazilian electorate voted overwhelmingly to maintain the
presidential system of government.
Brazil is a federative republic with broad powers granted to the federal
Government, which is made up of three independent branches: an executive
branch headed by the President; a legislative branch consisting of the
bicameral National Congress; and a judicial branch consisting of the Federal
Supreme Court and lower federal and State courts. The President is elected by
direct vote to serve a four-year term. The President cannot be re-elected. The
President's powers include the right to appoint ministers and key executives
in selected administrative and political posts. The President may issue
provisional measures (medidas provisorias) that can be enforced for a maximum
of 30 days; they remain in force thereafter only if approved by the
legislature within such 30-day period. The prevailing legal view is that the
President may re-issue provisional measures not previously rejected by
Congress. Under the Constitution, certain legislation submitted by the
President must be voted upon by the Congress within 90 days.
The National Congress is composed of the Senate and the Chamber of Deputies,
both of which must approve any statute before it is enacted. The Senate is
composed of 81 senators, each elected for staggered eight-year terms, and the
Chamber of Deputies has 513 deputies, each elected for concurrent four-year
terms. The number of Deputies is based on a proportional representation system
weighted in favor of the less populated States which, as the population
increases in the larger States, assures the smaller States an important role
in the Congress. Currently, twenty different political parties are represented
in the Senate and Chamber of Deputies. As of April 26, 1995, the most
represented party in the Congress, the Partido de Movimento Democratico
Brasileiro (the "PMDB"), held 22 seats in the Senate and 105 seats in the
Chamber of Deputies.
Brazil's current President, Fernando Henrique Cardoso, assumed office on
January 1, 1995 after winning the presidential election with 54.3% of the
total valid votes. President Cardoso's stated program is to provide continuity
to the stabilization program known as the Plano Real by attempting to
implement the structural
A-1
<PAGE>
reforms required to provide long-term fiscal stability and sustainable
economic growth. See "The Economy--The Plano Real." As of April 26, 1995,
President Cardoso's party, the Partido de Social Democracia Brasileira (the
"PSDB"), held 10 seats in the Senate and 64 in the Chamber of Deputies, and
was the third most represented party in the Congress. President Cardoso has
had the cooperation of a coalition of the PSDB and two other parties, neither
of which is the PMDB.
Foreign Relations. Brazil maintains diplomatic and trade relations with
almost every nation in the world and is a member of the International Monetary
Fund (the "IMF"), the World Bank, the General Agreement on Tariffs and Trade
("GATT") and the World Trade Organization.
Regionally, Brazil participates in the Organization of American States (the
"OAS") and in several sub-regional organizations under the OAS. In March 1991,
Brazil, Argentina, Paraguay and Uruguay formally established the Mercado Comum
do Sul ("Mercosul"), a common market organization. See "Balance of Payments
and Foreign Trade--Foreign Trade."
THE ECONOMY
Selected Economic Data. The following table sets forth selected economic
data relating to Brazil for the indicated periods:
SELECTED BRAZILIAN ECONOMIC INDICATORS
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
THE ECONOMY
Gross Domestic Product :
(in bil. of 1994 Reais)........... 329.9 330.7 328.2 341.7 361.1
(in bil. of Dollars)(1)........... 417.1 436.8 449.9 484.9 531.0
Real GDP Growth (decline)(2)........ (4.4)% 0.2% (0.8)% 4.1% 5.7%
Population (mil.)................... 144.7 147.1 149.4 151.6 153.7
GDP Per Capita (in U.S.$)(3)........ 2,882 2,970 3,012 3,199 3,452
Unemployment Rate(4)................ 4.28% 4.83% 5.76% 5.31% 5.06%
General Price Index--Domestic Supply
(% change)(5)...................... 1,476.6% 480.2% 1,158.0% 2,708.6% 1,094.0%
Exchange Rate Adjustment(6)......... 1,397.3% 528.5% 1,059.0% 2,532.5% 613.4%
Exports (in bil. of Dollars)(7)..... 31.4 31.6 35.8 38.6 43.5
Imports (in bil. of Dollars)(7)..... 20.7 21.0 20.6 25.5 33.1
Trade Balance (in bil. of Dollars).. 10.8 10.6 15.2 13.1 10.4
Current Account..................... (3.8) (1.4) 6.1 (0.6) (1.5)
</TABLE>
- --------
(1) Converted to Dollars based on the weighted average exchange rate for each
year.
(2) Calculated based upon constant average 1994 Reais.
(3) Not adjusted for purchasing power parity.
(4) Average annual unemployment rate of the metropolitan regions of Belo
Horizonte, Porto Alegre, Recife, Rio de Janeiro, Salvador and Sao Paulo.
(5) The General Price Index--Domestic Supply ("GPI-DS") is one indicator of
inflation. While many inflation indicators are used in Brazil, the GPI-DS,
calculated by the Getulio Vargas Foundation, an independent research
organization, is one of the most widely utilized indexes.
(6) Year on year percentage appreciation of the Dollar against the Real.
(7) The preliminary export and import figures for 1993 available at December
31, 1994 that appear in this table are the figures that Brazil continues
to use for the purposes of its balance of payments calculations. However,
the revised figures for 1993 show U.S.$ 38.6 billion and U.S.$ 25.5
billion, respectively.
Sources: Fundacao Instituto Brasileiro de Geografia e Estatistica ("IBGE");
Getulio Vargas Foundation; Central Bank
A-2
<PAGE>
Historical Background. From the late 1960's through 1982, Brazil pursued an
import-substitution, high-growth development strategy financed, in large part,
by heavy recourse to foreign borrowings. Foreign debt grew at an accelerated
pace partly in response to the oil shocks of the 1970's, international
interest rates rose sharply in 1979-80 and the resulting accumulated external
debt became one of Brazil's most pressing problems in the decade that
followed. See "Public Debt." The debt crisis of the 1980's and high inflation
substantially depressed real growth in Brazil's gross domestic product
("GDP"), which, according to data reported by the Central Bank, averaged 1.6%
per year from 1980 to 1990. During this period, the public sector's role in
the economy also expanded markedly, with many key economic sectors subject to
Government monopoly or subsidized participation, and significant structural
distortions were introduced through high tariffs and the creation of subsidies
and tax credit incentives. Significant increases in the money supply to
finance a large and growing fiscal deficit further fueled inflationary
pressures, and Brazil experienced high and chronic inflation. See "The
Economy--Prices." Also during this period, indexation of prices became
widespread. Various price indexes were used, each with its own methodology,
based on different baskets of goods or services, such as salaries, rents,
taxes and financial instruments. The practice of widespread indexation in
Brazil diminished the distorting impact of inflation on relative prices, but
also served to sustain and fuel inflationary expectations.
Efforts to address these problems during the late 1980's and early 1990's
were largely unsuccessful. High inflation and the recurrent threat of
hyperinflation during this period prompted the Government to pursue a series
of stabilization plans, but these plans were undermined by a variety of
factors, including political difficulty in implementing planned fiscal
adjustments and the slowness of institutional reforms. The practice of
indexation in the economy also helped to undermine the stabilization measures.
Moreover, these attempts at stabilization relied on mechanisms, such as price
and wage freezes and/or unilateral modifications of the terms of financial
contracts, that were not supported by fiscal and monetary reform. A central
problem during this period was the public sector, which ran operational
deficits averaging more than 5% of GDP during the five-year period from 1985
to 1989, while monetary policy was compromised by the short-term refinancing
of public sector debt. In addition, the 1988 Constitution reallocated public
resources, in particular tax revenues, from the federal Government to the
States and municipalities without a proportional shift of responsibilities to
them, thereby further constraining the effectiveness of the federal
Government's fiscal policy. The ability of the federal Government to dismiss
public sector employees was also limited.
The Plano Real. In December 1993, the Government announced the Plano Real,
aimed at curtailing inflation and building a foundation for sustained economic
growth. President Cardoso, who was Finance Minister at the time, is
acknowledged as the architect of the Plano Real. The Plano Real has utilized
traditional monetary and fiscal means to decrease the money supply and dampen
domestic demand, as well as other initiatives designed to address persistent
deficits in the Government's accounts and backward-looking indexation.
In a fiscal adjustment proposal for 1994, the Government proposed spending
cuts and an increase in tax rates and collections intended to eliminate a
budget deficit originally projected at $22.0 billion. Key elements of the
proposal included (i) cuts in current expenditures and investment through the
transfer of some activities from the federal Government to the States and
municipalities, (ii) a prohibition on sales of public bonds by the Government,
except to refinance existing debt and for certain expenditures and investment,
(iii) new taxes, including a new levy on financial transactions, (iv) recovery
of mandatory Social Security Financing Contributions ("COFINS"), due to
judicial acknowledgement that such contributions were permissible under the
Constitution, and (v) establishment of the Emergency Social Fund ("ESF"),
financed by reductions in constitutionally mandated transfers of federal
Government revenues to the States and municipalities, to provide financing of
social welfare spending by the federal Government. Pursuant to the
constitutional amendment that created the ESF, 20% of Government revenues
otherwise earmarked for specific purposes were released and deposited into the
ESF to ensure financing of social welfare spending by the federal Government
for 1994 and 1995. In adopting this constitutional amendment, however,
Congress did not modify the existing constitutional provisions requiring the
federal Government to share a significant portion of its revenues with States
and municipalities.
A-3
<PAGE>
The Government addressed the problem of indexation in March 1, 1994 by
establishing the Unidade Real de Valor (the Unit of Real Value, or "URV") as a
unit of account. Whereas other financial indexes used at the time were
generally adjusted for inflation on a monthly basis, the URV was adjusted
daily. The introduction of the URV was premised on the theory that a reference
unit with a nominal value corrected frequently and based on the best available
estimate of current inflation would express values more realistically than
traditional indexing methods.
On July 1, 1994, the Government introduced the Real as Brazil's currency. At
that time, the Cruzeiro Real, then worth one URV, was replaced with the Real
at an exchange rate of CR$ 2,750 to R$ 1.00. All contracts denominated in URVs
were automatically converted into Reais at a conversion rate of one to one,
and the URV, together with the Cruzeiro Real, ceased to exist. At the same
time the Government and the Central Bank took a number of steps to control
monetary aggregates through the regulation of credit and the flow of capital
into Brazil. The maturity of consumer credit extended by financial
institutions was restricted to 90 days, reserve requirements were imposed or
increased on different transactions, and other credit restructuring measures
were adopted. Subsequently, in support of the Plano Real, the Government has
also implemented certain other fiscal measures, undertaken efforts to reduce
the public sector's involvement in the economy and implemented a new exchange
rate policy that permits market participants (including the Central Bank) to
set exchange rates for the Real. See "Foreign Exchange" and "The Economy--
State-Controlled Enterprises."
The Plano Real has succeeded in lowering inflation from a monthly rate of
46.6% in June 1994 to -1.08% in September 1995. During the first nine months
of 1995, average monthly inflation was 1.34% and inflation on an annualized
basis was 17.3%. See "The Economy--Prices." The Real has experienced greater
stability against foreign currencies than have previous Brazilian currencies.
Whereas prior Brazilian currencies tended to be devalued in relation to the
Dollar, the Real appreciated from parity with the Dollar on its introduction
to R$ 0.846/US$ 1.00 on December 1, 1994, due largely to the fact that in
Brazil real interest rates were significantly higher than those outside
Brazil. Following a series of adjustments intended to control the flow of
capital into Brazil, at September 30, 1995, the Real-Dollar exchange rate was
R$ 0.954/US$ 1.00. See "Foreign Investment" and "Foreign Exchange."
The continued success of the Plano Real depends on the ability of the
Government to maintain fiscal restraint and a tight monetary policy in the
face of both domestic and international economic pressures as well as on the
ability of the Government to implement longer-term structural reforms, such as
reform of the tax and social security systems, transfer of certain federal
spending responsibilities to State governments and privatization of major
enterprises, some of which reforms require constitutional amendments to be
implemented. See "The Economy--State-Controlled Enterprises."
Gross Domestic Product. Brazil experienced significant rates of growth
during the period from 1968 to 1973; growth in real GDP during that period
averaged over 11% per year and is often referred to as Brazil's "economic
miracle." From 1974 to 1980, the real GDP growth rate declined, but still
averaged over 7% per year. The 1980's, by contrast, were a period of generally
high inflation, low growth and continuing large budget deficits, as the
external debt crisis gave rise to a set of significant economic problems from
which the country has yet to emerge fully. See "The Economy--Historical
Background."
Brazil's economic growth has fluctuated greatly in recent years. The average
real growth rate of GDP during the five-year period from 1990 to 1994 was
1.0%, but real GDP was negative in both 1990, when it declined 4.4%, and 1992,
when it declined 0.8%. During 1993 and 1994, the Brazilian economy recovered
and real GDP grew by 4.1% and 5.7%, respectively. GDP grew by 10.4% during the
first quarter of 1995 and 8.0% in the first half of 1995, as compared with the
same periods in the prior year, and has continued to slow further as
restrictive Government policies have begun to take hold.
A-4
<PAGE>
Prices. The following table sets forth inflation in Brazil for the periods
indicated.
GENERAL PRICE INDEX DOMESTIC SUPPLY (GPI-DS)(1)
<TABLE>
<CAPTION>
GPI-DS
-------------------
TRAILING 12
PERIOD MONTHLY MONTHS
------ ------- -----------
<C> <S> <C> <C>
1980 December............................................. 110%
1981 December............................................. 95
1982 December............................................. 100
1983 December............................................. 211
1984 December............................................. 224
1985 December............................................. 235
1986 December............................................. 65
1987 December............................................. 416
1988 December............................................. 1,038
1989 December............................................. 1,783
1990 December............................................. 1,477
1991 December............................................. 480
1992 December............................................. 1,158
1993 December............................................. 2,709
1994 January.............................................. 42.19% 3,002(2)
February............................................. 42.41 3,392
March................................................ 44.83 3,857
April................................................ 42.46 4,297
May.................................................. 40.95 4,585
June................................................. 46.58 5,154
July(3).............................................. 24.71 4,865
August............................................... 3.34 3,742
September............................................ 1.55 2,748
October.............................................. 2.55 2,061
November............................................. 2.47 1,517
December............................................. 0.57 1,094
1995 January.............................................. 1.36 751
February............................................. 1.15 504
March................................................ 1.81 325
April................................................ 2.30 205
May.................................................. 0.40 117
June................................................. 2.62 52
July................................................. 2.24 25
August............................................... 1.29 22
September............................................ -1.08 19
</TABLE>
- --------
(1) GPI-DS is an index based on a weighting of three other indices: WPI-DS
(60%), the Consumer Price Index ("CPI") (30%), and the National Civil
Construction Index ("NCCI") (10%).
(2) Annual figures for each month from January 1994 represent trailing 12-
month inflation rates.
(3) Inflation calculated by comparing prices in Reais in July with prices in
Cruzeiros Reais in June, converted at a rate of R$ 1.00=CR$ 2,750. An
alternative methodology also commonly used in official and unofficial
sources compares July prices in Reais with prices in URVs, in which case
inflation for July is estimated at 5.47%. Use of this estimate of
inflation results in lower estimates of inflation than are presented in
this table under the heading "Trailing 12 Months" for the period July
1994-June 1995.
Source: Getulio Vargas Foundation and Central Bank
A-5
<PAGE>
Principal Sectors of the Economy.
The following tables show the composition of GDP by major sector and growth
of each sector for the years 1990-1994.
COMPOSITION OF GDP BY SECTOR
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Agriculture.................................. 11.6% 11.5% 12.1% 12.5% 14.3%
Industry..................................... 42.2 38.9 38.1 38.2 37.3
Mining, Oil and Gas........................ 1.8 1.8 1.8 1.8 1.2
Manufacturing.............................. 29.1 26.4 25.4 24.9 22.9
Construction............................... 8.1 7.0 7.1 7.4 7.7
Public Utilities........................... 3.2 3.7 3.9 4.2 5.5
Services..................................... 60.4 58.1 59.5 59.4 57.3
Retail Services............................ 8.1 7.5 7.5 7.6 7.1
Transportation............................. 4.1 3.9 4.1 4.4 4.3
Communications............................. 1.5 1.2 1.6 1.7 1.4
Financial Services......................... 13.9 8.6 9.8 9.8 9.1
Government................................. 13.1 10.4 11.2 11.0 10.4
Other Services............................. 19.7 26.4 25.3 25.0 25.0
Subtotal..................................... 114.1 108.5 109.8 110.1 108.8
Less Financial Intermediation(1)............. 14.1 8.5 9.8 10.1 8.8
Real GDP at Factor Cost...................... 100.0 100.0 100.0 100.0 100.0
</TABLE>
- --------
(1) Interest received less interest paid. Financial intermediation therefore
represents the proportion of GDP attributable to gains from interest rate
differentials such as those that the Brazilian financial sector has
experienced in recent years.
Source: IBGE and Central Bank
REAL GROWTH (DECLINE) AT FACTOR COST BY SECTOR
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real GDP........................................ (4.4)% 0.2% (0.8)% 4.1% 5.7%
Agriculture..................................... (3.7) 2.8 5.4 (1.2) 7.5
Industry........................................ (8.2) (1.8) (3.7) 6.8 7.0
Mining, Oil and Gas........................... 2.7 0.9 0.8 0.6 4.7
Manufacturing................................. (9.5) (2.4) (4.1) 7.9 7.9
Construction.................................. (9.8) (3.5) (6.6) 4.9 3.8
Public Utilities.............................. 1.8 4.3 1.6 3.7 2.3
Services........................................ (0.9) 1.4 0.0 3.5 4.0
Retail Services............................... (7.0) (0.8) (2.4) 7.0 3.9
Transportation................................ (3.1) 2.5 2.4 3.4 3.7
Communications................................ 9.0 19.6 5.7 10.7 13.1
Financial Services............................ (3.1) (8.0) (4.6) (2.2) 2.8
Government.................................... 1.7 1.6 1.5 1.5 1.4
</TABLE>
Source: IBGE and Central Bank
Agriculture's share of GDP was 14.3% in 1994, up from 11.6% in 1990. Brazil
has a well-diversified agricultural sector. It is the world's second largest
producer of sugar and soya, and supplies about 85.0% of the orange juice
concentrate in world markets. Approximately 70% of Brazil's sugar crop is
processed into alcohol for automotive fuel. Brazil's largest single export
crop is soya (beans, bran and oil), with 1994 exports totaling
A-6
<PAGE>
approximately $4.1 billion. In addition, Brazil has been the world's largest
producer of coffee for more than a century. Although the breakdown of the
International Coffee Agreement in July 1989 led to diminished revenues from
coffee exports, coffee exports totaled $2.6 billion during 1994. Although
Brazil is one of the largest exporters of agricultural products, capital
investment in agriculture has been modest. Large-scale mechanization has,
until relatively recently, been confined to the southern States of Sao Paulo,
Parana and Rio Grande do Sul.
The mining, oil and gas industry grew 1.9% annually from 1990 to 1994.
Brazil's proven mineral resources are extensive and have generally remained
steady or expanded in recent years as a result of continuing exploration
activity. Large iron ore and manganese reserves provide important sources of
industrial raw materials and export earnings. Deposits of nickel, tin,
chromite, bauxite, beryllium, copper, lead, tungsten, zinc and gold, as well
as lesser known minerals, continue to be mined.
The service sector's share of GDP decreased from 60.4% in 1990 to 57.3% in
1994. During that period, the sectors that experienced the greatest growth
were communications, which grew by 73%, and transportation, which grew by
9.0%. During 1994, overall growth in the service sector was 4.0%, as a result
of increases in communications (13.1%), retail services (3.9%) and
transportation (3.7%).
Activity in the construction sector increased 4.9% and 3.8% in 1993 and
1994, respectively, following declines of 6.6%, 3.5% and 9.8% in 1992, 1991
and 1990, respectively.
A-7
<PAGE>
The share of the manufacturing sector declined between 1990 and 1992, but
grew by 7.9% in both 1993 and 1994. Additional detail for the manufacturing
sector is shown in the following table which shows the annual changes in
industrial production for the years 1990-1994.
ANNUAL CHANGES IN INDUSTRIAL PRODUCTION (%)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Mining...................... 2.7% 0.9% 0.8% 0.6% 4.7%
Manufacturing Industry...... (9.5) (2.4) (4.1) 7.9 7.9
By Segment
Nonmetallic Minerals...... (11.0) 0.6 (7.7) 4.8 3.0
Metallurgy................ (12.6) (5.7) (0.6) 7.7 10.8
Machinery................. (16.9) (10.3) (9.5) 17.4 21.3
Electronic and
Communications Equipment. (5.5) (6.6) (12.6) 14.9 18.9
Transportation Equipment.. (15.9) (0.2) (2.2) 19.6 13.5
Wood...................... -- -- (1.2) 6.7 (2.6)
Furniture................. -- -- (11.6) 20.7 1.3
Paper and Cardboard....... (6.3) 6.7 (2.0) 4.8 2.7
Rubber.................... (4.4) (1.2) (0.1) 8.5 3.9
Leather and Hides......... -- -- (3.1) 12.9 (4.6)
Chemicals................. (8.1) (7.7) (0.5) 4.4 7.0
Pharmaceutical Products... (9.7) (2.4) (11.2) 12.2 (2.9)
Perfumes, Soaps and
Candles.................. (5.7) 7.0 (0.6) 4.4 2.4
Plastics.................. (15.6) (0.2) (11.3) 7.6 4.1
Textiles.................. (10.1) 2.8 (4.5) (0.5) 3.6
Clothing, Footwear and
Cloth Goods.............. (14.0) (13.2) (7.7) 8.8 (2.7)
Food Products............. 1.8 3.6 (7.4) 8.2 1.6
Beverages................. 2.3 18.0 (16.7) 9.5 10.4
Tobacco................... (1.4) 7.3 17.7 4.4 (14.7)
Total Annual Change in
Industrial Production...... (8.9) (2.6) (3.7) 7.4 7.6
By Category of Use
Capital Goods............. (15.5) (1.3) (6.9) 10.2 18.6
Intermediate Goods........ (8.7) (2.2) (2.4) 5.5 6.5
Consumer Goods............ (5.3) 2.1 (5.4) 10.0 4.4
Durable................. (5.8) 4.7 (13.0) 27.7 15.5
Nondurable.............. (5.2) 1.8 (3.8) 6.7 1.9
</TABLE>
Source: IBGE and Central Bank
State-Controlled Enterprises. The public sector grew very rapidly during the
1970's and continues to play a significant role in Brazil's economy. The
Government, directly or through various state-owned enterprises, owns many
companies and controls a major portion of activities in many of the economy's
major sectors. Furthermore, the 1988 Constitution mandated a Government
monopoly in telecommunications, the pipeline distribution of gas, and the
research and exploration, refining, importation, exportation and
transportation of petroleum. The 1988 Constitution also restricted coastal and
inland shipping to Brazilian vessels on which the captain and two-thirds of
the crew are Brazilian.
A-8
<PAGE>
The following table sets forth selected information for the year ended
December 31, 1994 concerning the state-controlled companies that dominate four
key sectors in Brazil: Petrobras (the production, importation and refining,
but not the distribution of, petroleum), Eletrobras (electricity), Telebras
(telecommunications) and CVRD (mining).
SELECTED STATE OWNED ENTERPRISES(1)
<TABLE>
<CAPTION>
DIRECT AND
INDIRECT
OWNERSHIP OF
GOVERNMENT
------------- TOTAL NET FOREIGN GROSS NET
VOTING TOTAL ASSETS WORTH DEBT SALES INCOME(2)
------ ----- -------- ------- ------- ------- ---------
(MILLIONS OF US$, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Petrobras............. 81.70% 65.98% $ 28,113 $18,855 $3,907 $25,478 $1,433
Eletrobras............ 86.00 79.97 100,187 64,806 9,080 6,201 1,856
Telebras.............. 52.30 23.00 32,539 21,561 866 10,038 661
CVRD.................. 53.39 53.39 13,037 9,707 532 3,858 648
</TABLE>
- --------
(1) Consolidated financial statements, including holdings and subsidiaries,
according to the methodology set forth in "Price and Accounting System"
(Instruction C.V.M. No. 191, dated July 15, 1992).
(2) Converted to U.S. Dollars using the annual average commercial exchange
rate (sell side). Shareholders as a group are entitled to a compulsory
dividend equal to at least 25.0% of adjusted net income for the year.
Source: Secretariat of Planning, Budget and Coordination ("Seplan")
Since 1991, the Government has privatized approximately 30 state-owned
enterprises for an aggregate purchase price of approximately $8.6 billion. The
Cardoso administration has continued this policy and in addition has advocated
constitutional amendments to permit increased private sector participation in
the economy. Constitutional amendments require a three-fifths vote of each
house of the Brazilian Congress in two separate rounds. Since August 1995, the
Congress has approved amendments opening the distribution of gas to the
private sector, allowing foreign-owned shipping in Brazilian rivers and
coastal waters and eliminating the Government monopoly over the
telecommunications sector, opening it to participation by private companies.
On November 8, 1995, the Congress also approved an amendment loosening the
Government monopoly in the petroleum sector. Amendments approving tax,
administrative, political and social security systems reforms are currently
before the Congress.
The Congress has also recently amended the Constitution to remove the
distinction between foreign and Brazilian-owned companies operating in Brazil,
which had restricted the foreign private sector's involvement in Brazil.
Under Brazilian law, private parties can only participate in activities
considered to be "public services" if they are so authorized by the federal
Government. In July 1995, Congress approved a new law permitting private
participation in concessions in the following areas: (i) production,
transmission and distribution of electric power; (ii) transportation; (iii)
sea, river and lake ports; (iv) federal highways, whether or not involving
public works; (v) commercial use of federal barriers, containment, dams, dike
and irrigation works or services, whether or not involving public works; and
(vi) customs and other terminal stations for public use, when not part of a
port or airport, and whether or not involving public works.
In addition to opening up ownership and concessions in public services to
private industry, the Government has sought to reduce the regulation of
economic activity generally. Important developments in this regard include the
establishment of a free foreign exchange market, trade liberalization and the
termination of most price controls. See "Balance of Payments and Foreign
Trade--Foreign Trade" and "Foreign Exchange." The Government has also acted to
deregulate certain segments of the economy, including fuel and oil
derivatives, airlines, shipping and steel, and is considering introducing
measures designed to increase competition in areas such as steel and highway
maintenance and transportation, areas which were previously controlled, in
most cases, by Government enterprises.
A-9
<PAGE>
BALANCE OF PAYMENTS AND FOREIGN TRADE
Background. Since 1990, the Government's economic policies have increased
the importance of the external sector of the economy. Recent reforms directly
affecting the external sector include a reduction in import tariffs and the
elimination of import quotas, the negotiation of the Mercosul free trade
agreement, the liberalization of certain foreign exchange transactions and the
liberalization of foreign investment regulations. See "Foreign Exchange."
From 1989 through 1994, Brazil maintained a surplus in its balance of
payments. During the same period, the foreign reserves maintained by the
Central Bank increased approximately 301%, totalling $38.8 billion at December
31, 1994, which covered approximately 14 months of imports of goods, or 11
months of imports of goods and nonfactor services.
Since January 1994, the Government has implemented a series of measures
designed to control the amount of foreign reserves and inflow of private
capital. Initially, these measures included the introduction of an interest
rate equalization tax and other measures designed to limit the inflow of
private capital that was being attracted by high real interest rates in
Brazil. In October 1994, the Government took additional measures to control
the inflow of capital, including an increase in various investment taxes, the
imposition of a 15.0% reserve requirement on internal credits relating to
advances on foreign exchange contract operations and a reduction of the
maximum term for foreign exchange contracting prior to the shipment of goods.
Following the liquidity crisis in Mexico, which began at the end of December
1994, Brazil's current account deteriorated, leading the Government to reverse
certain measures it had previously taken to limit capital inflows. In January
1995, the Government reestablished the prior maximum term for foreign exchange
contracting prior to the shipment of most goods. The Government also
eliminated the 15.0% reserve requirement on internal credits relating to
advances on foreign exchange contract operations and reestablished the inflow
of foreign resources in the form of long-run advance export payments.
Furthermore, the minimum term for amortization of these transactions was
reduced.
Further steps to encourage capital inflows were taken in March 1995, when
the Government eased certain other restrictions on foreign lending and
investment, including the reduction of certain taxes and other measures. At
that time, the Government also devalued the Real. See "Foreign Exchange."
Early in 1995, declines in foreign investment coupled with a current account
deficit contributed to a decrease in international reserves from $38.8 billion
at December 31, 1994 to $31.9 billion as of April 30, 1995. Subsequently, an
improved trade balance and increasing foreign investments have led to a marked
increase in international reserves, which totalled $48.7 billion as of
September 30, 1995.
A-10
<PAGE>
Balance of Payments. The following table sets forth information regarding
Brazil's balance of payments for each of the years indicated.
BALANCE OF PAYMENTS(1)
<TABLE>
<CAPTION>
1990 1991 1992 1993(2) 1994(2)
-------- -------- -------- -------- --------
(MILLIONS OF US$)
<S> <C> <C> <C> <C> <C>
Current Account.............. $ (3,782) $ (1,407) $ 6,143 $ (637) $ (1,451)
Trade Balance.............. 10,753 10,579 15,239 13,072 10,390
Exports(3)............... 31,414 31,620 35,793 38,783 43,558
Imports(3)............... 20,661 21,041 20,554 25,711 33,168
Services (net)............. (15,369) (13,542) (11,339) (15,362) (14,437)
Interest................. (9,748) (8,621) (7,253) (8,453) (6,397)
Other.................... (5,621) (4,921) (4,086) (6,909) (8,040)
Unilateral Transfers(4).... 834 1,556 2,243 1,653 2,596
Capital Account, Net......... 5,325 752 10,319 10,703 9,241
Direct Investments......... 236 (42) 1,443 (372) 931
Portfolio Investments(5)... 512 3,808 14,466 12,952 54,187
Of which: IDU Bonds...... -- -- 7,100 -- --
Of which: 1994 Restruc-
turing.................. -- -- -- -- 42,612
Other Medium- and Long-Term
Capital................... (5,107) (5,109) 6,637 (2,469) (41,913)
Of which: Refinancing.... 812 -- 11,583 1,190 (39,546)
Other Short-Term Capital... 9,684 2,095 (12,227) 592 (3,964)
Of which: Arrears(6)..... 9,959 5,621 (14,253) 1,133 (5,653)
Errors and Omissions....... (328) 876 (1,386) (862) (446)
Overall Balance.............. $ 1,215 $ 221 $ 15,076 $ 9,204 $ 7,344
Reserves and Related
Items(7).................... (1,215) (221) (15,076) (9,204) (7,344)
Gold....................... (639) 966 (74) (233) (297)
SDRs....................... (10) (2) 12 (1) 2
IMF Position............... -- -- -- -- --
Foreign Exchange........... 168 (595) (14,608) (8,475) (6,920)
Other Holdings............. 7 -- -- -- --
Use of IMF credits......... (741) (590) (406) (495) (129)
Total Official Reserves(8)... 9,973 9,406 23,754 32,211 38,806
</TABLE>
- --------
(1) These figures were calculated in accordance with the methodology set forth
in the IMF Balance of Payments Manual, Fourth Edition.
(2) Preliminary.
(3) The preliminary export and import figures for 1993 available at December
31, 1994 that appear in this table are the figures that the Government
continues to use for the purposes of its balance of payments calculations.
However, the revised figures for 1993 show $38,597 and $25,480,
respectively.
(4) Unilateral transfers consist of transactions without a quid pro quo, many
of which are gifts, and migrant transfers.
(5) Includes bonds, commercial paper and notes.
(6) Represents mainly arrears on interest payments due but not paid on certain
medium- and long-term bank indebtedness.
(7) Negative amounts in these accounts signify increases, and vice versa.
(8) As of December 31.
Source: Central Bank
Foreign Trade. In 1994, Brazil's overall trade flows totalled a record $76.7
billion, representing an increase of 19.7% over 1993. The country's balance of
trade registered a surplus of $10.4 billion in 1994, 20.8%
A-11
<PAGE>
lower than the surplus of the previous year, as imports grew by 30% while
exports grew by only 13%. The growth in imports during 1994 was influenced by
the partial recovery of the domestic economy, as well as the reduction of
tariffs and the elimination of non-tariff restrictions and other factors.
For the nine months ending September 30, in 1995 Brazil had a trade deficit
of $3.4 billion, with imports of $37.6 billion and exports of $34.2 billion.
However, after recording trade deficits for the first six months of the year,
Brazil had a balance in its trade accounts in July and surpluses in August and
September.
Brazil has been lifting import restrictions gradually since 1990, when
quantitative restrictions on imports were abolished. Following a tariff
reduction program, the average duty and maximum tariff in 1989, 35.5% and
85.0%, respectively, were reduced to 14.2% and 40.0%, respectively, as of July
1, 1993. Average tariffs are also being reduced as a result of Brazil's
implementation of a schedule of preferences from its current tariffs
applicable to imports from Mercosul countries. In addition, Brazil is a
signatory of the Final Act of the GATT Uruguay Round, pursuant to which it has
committed to staged reductions in tariffs beginning in 1995 over five years
with respect to industrial products and over ten years with respect to
agricultural products. Nonetheless, tariffs on some goods remain high. In
early 1995 for example, the Government increased tariffs on passenger cars and
utility vehicles to 70.0% until January 1, 1996, when such tariffs are
scheduled to be reduced to 62% to conform with GATT tariff levels.
The following table sets forth certain details regarding Brazil's foreign
trade for the years indicated:
BRAZIL'S FOREIGN TRADE
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995(1)
------ ------ ------ ------ ------ -------
(MILLIONS OF US$)
<S> <C> <C> <C> <C> <C> <C>
Exports............................. 31,414 31,620 35,793 38,597 43,545 34,178
Imports............................. 20,661 21,041 20,554 25,480 33,105 37,634
Trade Balance....................... 10,753 10,579 15,239 13,117 10,440 (3,456)
</TABLE>
- --------
(1) Through September 30.
Source: Central Bank
FOREIGN INVESTMENT
Foreign investment in Brazil has traditionally focused on direct investment
in the manufacturing sector. Beginning in 1991, foreign investment increased
substantially, surpassing the levels reached during the period from 1973 to
1982, before the debt crisis. Since January of 1994, the Government has
continued its policy of regularly taking a variety of measures, including
taxes and regulatory requirements, to facilitate the conduct of monetary
policy and to control the inflow of private capital into Brazil. These
measures and the Government's policy with respect to foreign investment have
shifted according to different economic circumstances. See "Balance of
Payments and Foreign Trade--General."
The following table sets forth information regarding foreign investment in
Brazil for each of the years indicated.
FOREIGN INVESTMENT IN BRAZIL
<TABLE>
<CAPTION>
INFLOWS OUTFLOWS NET INFLOWS
----------------------- ----------------------- ----------------------
PORTFOLIO DIRECT TOTAL PORTFOLIO DIRECT TOTAL PORTFOLIO DIRECT TOTAL
--------- ------ ------ --------- ------ ------ --------- ------ -----
(MILLIONS OF US$)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990.... 171 510 681 67 230 297 104 280 384
1991.... 778 628 1,406 200 123 323 578 505 1,083
1992.... 3,863 1,325 5,188 2,169 169 2,338 1,694 1,176 2,850
1993.... 15,271 1,045 16,316 8,701 580 9,281 2,570 465 7,035
1994.... 25,142 2,356 27,498 17,862 618 18,480 7,280 1,738 9,018
</TABLE>
- --------
Source: Central Bank
A-12
<PAGE>
FOREIGN EXCHANGE
The Brazilian foreign exchange system has been structured to enable the
Government, through the Central Bank, to regulate and control foreign exchange
transactions carried out in Brazil. There are currently two foreign exchange
markets in Brazil: the commercial exchange market, on which most trade and
financial transactions are carried out, and the floating rate market (known as
the "tourism" exchange market). The exchange rate in each market is
established independently, resulting in different rates during some periods,
and all transactions carried out in either of these markets must be conducted
through banks (and other agents, in the case of the tourism exchange market)
authorized and monitored by the Central Bank. See "Foreign Investment and
Exchange Controls in Brazil--Brazilian Exchange Markets."
The commercial exchange rate fluctuates as a function of supply and demand
of market participants, including the Central Bank. The Central Bank may
intervene to stabilize the rate through purchases and sales of Reals. Under
Resolution 2110 of the National Monetary Council, the Central Bank has an
obligation to sell Dollars in foreign exchange markets whenever the Real
reaches parity with the Dollar. In an attempt to encourage fresh capital
inflows and reverse a deterioration in Brazil's current account, in March 1995
the Central Bank announced a currency band system of foreign exchange and set
a Real-Dollar commercial exchange rate band of R$ 0.88 to R$ 0.93 per Dollar.
This rate represented a devaluation of the Real as compared to the exchange
rates of February 1995, when the Real fluctuated between R$ 0.834 to R$ 0.852
per Dollar. See "Balance of Payments and Foreign Trade--General." The current
commercial exchange rate band was set in June of this year when the Central
Bank announced that it would intervene to prevent the commercial exchange rate
from falling below R$ 0.91 per Dollar or rising above R$ 0.99 per Dollar.
The tourism exchange market was established in December 1988 with the
objective of liberalizing certain transactions mainly related to travel,
unilateral transfers, certain services and gold operations. Banks buy and sell
currency in this market at freely negotiated rates. Since its creation, the
premium of the tourism exchange market to the commercial exchange market has
declined. After reaching values higher than 160.0% in 1989, the premium in
relation to the commercial exchange market rate at October 31, 1995 stood at
0.25%. In October 1994, certain limitations on the acquisition of foreign
currency in connection with certain tourist and health care activities,
education, scientific and cultural operations, certain asset transfers,
software acquisitions and transactions involving credit cards were eliminated.
A-13
<PAGE>
The following table sets forth average exchange rates recorded in the
commercial exchange market (sell side) on the last day of the periods
indicated, together with the appreciation of the Dollar relative to the Real
and the inflation rate as measured by the GPI-DS.
EXCHANGE RATES, APPRECIATION OF US$ RELATIVE TO REAL AND INFLATION
<TABLE>
<CAPTION>
REAIS PER PCT. APPRECIATION INFLATION
US$ AT END OF US$ CHANGE IN
OF PERIOD(1) RELATIVE TO REAL GPI-DS INDEX
------------ ----------------- ------------
<S> <C> <C> <C>
1990--December...................... 0.000062 1397.3% 1476.6%
1991--December...................... 0.000389 528.5% 480.2%
1992--December...................... 0.004505 1059.0% 1158.0%
1993--December...................... 0.118584 2532.5% 2708.6%
1994--December...................... 0.846000 613.4% 909.6%
1994
January.......................... 0.166785 40.6% 42.2%
February......................... 0.231800 39.0% 42.4%
March............................ 0.332125 43.3% 44.8%
April............................ 0.473556 42.6% 42.5%
May.............................. 0.681916 44.0% 41.0%
June............................. 1.000000 46.6% 46.6%
July............................. 0.940000 -6.0% 24.7%
August........................... 0.889000 -5.4% 3.3%
September........................ 0.853000 -4.0% 1.6%
October.......................... 0.846000 -0.8% 2.6%
November......................... 0.845000 -0.1% 2.5%
December......................... 0.846000 0.1% 0.6%
1995
January.......................... 0.842000 -0.5% 1.4%
February......................... 0.852000 1.2% 1.2%
March............................ 0.896000 5.2% 1.8%
April............................ 0.913000 1.9% 2.3%
May.............................. 0.906000 -0.8% 0.4%
June............................. 0.922000 1.8% 2.6%
July............................. 0.936000 1.6% 2.2%
August........................... 0.95100 1.6% 1.3%
September........................ 0.95400 0.3% -1.1%
</TABLE>
- --------
(1) The average rate on the last day of month in the commercial exchange
market.
Source: Central Bank
PUBLIC DEBT
Public sector debt in Brazil, composed of the internal and external debt of
the federal Government, State and local governments and government-controlled
enterprises, amounted to approximately $266 billion (43.4% of GDP) as of
December 31, 1994. The gross debt of State and local governments constitutes a
significant portion of Brazil's overall public sector debt.
During the period from 1982 to April 1994, Brazil failed to make payments on
certain of its external indebtedness to commercial banks as originally
scheduled, and, in February 1987, declared a moratorium on principal and
interest payments on external indebtedness to commercial banks. However, in
April 1994, Brazil concluded Brady Plan-type debt restructuring agreements
with its private sector debtors. Pursuant to the agreements, interest and
arrearages were capitalized, previously outstanding principal obligations were
reduced
A-14
<PAGE>
by about $4 billion, and the maturity profile of Brazil's public-sector
external debt was lengthened from an average of 6.1 years at December 31, 1993
to an average of 11.4 years at December 31, 1994.
The following table sets forth the external debt outstanding at December 31
for each of the years 1990 through 1994.
<TABLE>
<CAPTION>
EXTERNAL DEBT OUTSTANDING
---------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- --------- --------- ---------
(MILLIONS OF US$)
<S> <C> <C> <C> <C> <C>
Medium and Long Term....... $ 96,546 $ 92,996 $ 110,835 $ 114,270 $ 119,668
Public..................... 78,837 75,423 86,669 83,515 86,864
Private.................... 17,709 17,573 24,166 30,755 32,804
Short Term................. 14,167 14,581 19,798 24,941 28,241
Interest Arrears........... 12,726 16,333 5,316 6,449 386
Total...................... 123,439 123,910 135,949 145,660 148,295
Percent of GDP............. 29.6% 28.4% 30.2% 30.0% 28.4%
</TABLE>
Source: Central Bank
THE FINANCIAL SYSTEM
The Brazilian financial system is composed of (i) the Monetary Council,
which is the highest authority on monetary and financial policies in Brazil
and is in charge of the overall supervision of monetary, credit, budgetary,
fiscal and public debt policies, (ii) the Central Bank, which implements
policies set by the Monetary Council, (iii) the Brazilian Securities
Commission, (iv) public sector financial institutions such as the Banco do
Brasil, Brazil's largest commercial bank (accounting for over 53% of the
Brazilian banking system's total demand deposits and 51% of total assets at
November 30, 1994), and the National Bank for Economic and Social Development
("BNDES"), a development bank that grants financing to the private sector and
implements the federal Government's privatization program, and (v) private
sector financial institutions.
Since the establishment of the Plano Real in July 1994, the Brazilian
banking system has come under considerable pressure. During the highly
inflationary years prior to that time, the financial sector profited from
financial gains derived from investing funds in high yielding, inflation-
adjusted Government instruments and from short-term financial intermediation.
Earnings and return on equity were fairly constant for private sector banks.
The performance of the public sector banks, however, has been less consistent,
reflecting the fact that, in addition to their normal commercial activities,
they also extend credit in accordance with Government economic policy
objectives. Furthermore, the Plano Real and the associated high reserve
requirements on both deposits and loans, limitations on the provisions of
credit, tight money supply and high real interest rates have adversely
affected the operations of Brazilian banks. Banks are suffering high levels of
non-performing loans and are having to make provisions accordingly. Commencing
in August 1994, two large public banks, BANESPA and BANERJ, required support
coordinated by the Central Bank. In August 1995, Banco Economico (a large
private bank principally operating in Bahia State) failed and is now under the
administration of the Central Bank, as are other smaller banks that have also
failed.
BRAZILIAN CORPORATE TAXES
In summary, the current corporate taxes in Brazil are: (i) the Corporate
Income Tax (IRPJ); (ii) the Social Insurance Contribution (CSL); (iii) the
Social Security Financing Contribution (COFINS); (iv) the Social Integration
Program (PIS); (v) the Tax on Distribution of Goods and Services (ICMS); (vi)
the Tax on Manufactured Products (IPI); and (vii) the Tax on Services (ISS).
Corporate Income Tax (IRPJ and IRPJ Surtax)
Corporate income tax is levied at 25% on taxable profits at the end of the
base period. An annual surtax will be assessed as follows: (i) 12% on any
portion of the taxable profit from R$ 180,000.00 to R$ 780,000.00;
A-15
<PAGE>
and (ii) 18% over R$ 780,000.00. The prevailing tax laws establish that, as
from January 1, 1996, the surtax will be calculated at 10% (15% for financial
institutions) on any part of the taxable profit that exceeds R$ 204,000.00.
The taxable profit is determined by deducting such expenses and costs as were
needed to produce the year's income from the gross earnings derived from the
company's regular business and any incidental business. There are also certain
items, expenses and costs that are considered tax-exempt when determining a
company's taxable profit, by virtue of their nature or the amount involved.
Social Insurance Contributions (CSL, PIS and COFINS)
Companies must also pay into Federal Revenue Office coffers 10% of the net
profits before the income tax provision, by way of the Social Contribution on
Profits (CSL). In the case of financial institutions, this percentage will be
30%.
Profit Participation Program (PIS) contributions are levied at 0.75% on
billings of commercial and industrial companies and 5% on income tax for
exclusively service-rendering companies. Financial institutions must pay the
0.75% PIS rate on their gross monthly operating revenues from June 1994
through December 1995.
The Social Security Financing Contribution (COFINS) is levied at 2% on
billings of merchandise and services. Financial institutions need not pay this
tax. Neither PIS nor COFINS is required on export of manufactured products or
of certain inputs.
There is also a social security contribution that is levied on the payroll
at the average rate of 30%. This contribution is paid by the company.
Sales Taxes (IPI and ICMS)
Sales taxes are payable on goods and services. There are two different types
of sales taxes, depending on the nature of the transactions: the Tax on
Manufactured Products (IPI) and the Tax on the Distribution of Goods and
Services (ICMS).
IPI is a federal tax payable on the domestic manufacture of products and the
import of foreign products. It is levied on the manufacturers and/or the
importers of foreign products. IPI rates vary according to the nature of the
products, generally ranging from 0 to 15%. Higher rates apply to nonessential
products such as cigarettes, beverages and cosmetics.
ICMS is payable at all stages of sale, from the manufacturer to the final
consumer, as well as for telecommunications and interstate transport services.
ICMS is levied on the manufacturer and/or the trader. ICMS rates vary from one
state to another: the normal rate is 17% for interstate and interstate
operations, but
depends on the essentiality of the good (e.g., 25% for luxury goods in the
state of Sao Paulo). Exemptions, reductions and tax incentives in respect of
ICMS are granted or cancelled by means of conventions between the states.
Tax on Services (ISS)
The Tax on Services (ISS) is based on lists prepared by each municipality of
taxable services performed by companies or by self-employed persons of
professional status. ISS rates vary from 0.5 to 10% (with a few exceptions),
and the basis for its assessment is the cost of the services.
Tax Reform
A tax reform by means of a constitutional amendment has been proposed,
changing Chapter I of Title VI of the Brazilian Constitution, which deals with
the Brazilian tax system. The reform targets a change in the Brazilian tax
system that will favor Brazil's integration into a competitive global economy,
by reducing the number of taxes, simplifying its tax collection rules, and
disencumbering exports.
A-16
<PAGE>
The proposed reform would extinguish IPI as of January 1, 1998. As from this
date, the federal Government would levy new tax similar to an ICMS surtax.
This tax would have a broader scope than the current IPI. A state rate as well
as a federal rate would be applied to the same tax base. Furthermore, the
reform would seek to cap the ISS rates. Imports of products and services would
be subject to the same state ICMS surtax assessed on products and services
produced in Brazil.
According to the Administration, this tax is not intended to increase the
tax burden but rather to redistribute the burden among taxpayers. The
constitutional tax reform would be followed by drafting of supplementary and
ordinary laws.
Tax Package
The Administration introduced a bill in the Brazilian Congress proposing
various amendments to corporate income tax as of the 1996 tax year. The main
proposals are a decrease in nominal rates, the elimination of monetary
adjustment of financial statements (as part of the measures that have been
taken by the Administration to de-index the economy and conform to the
stabilization program), and the closing of the existing loopholes that allow
companies to legitimately avoid assessment of income tax by tax planning. It
is important to point out however that aside from this proposal, corporate
taxation in Brazil will still be subject to ongoing changes and reform.
A-17
<PAGE>
SAMPLE ONLY
SUBSCRIPTION CERTIFICATE NUMBER: ________
NUMBER OF RIGHTS: ________
CUSIP
NO.: 105759 112
APPENDIX B
[FORM OF SUBSCRIPTION CERTIFICATE]
THE BRAZIL FUND, INC.
SUBSCRIPTION RIGHT FOR SHARES OF COMMON STOCK
This Subscription Certificate represents the number of Rights set forth in
the upper right hand corner of this Form. The registered holder hereof (the
"Holder") is entitled to acquire one (1) share of the Common Stock of The
Brazil Fund, Inc. (the "Fund") for each three (3) Rights held.
To subscribe for shares of Common Stock, the Holder must present to State
Street Bank and Trust Company, Corporate Reorganization Department, P.O. Box
9061, Boston, MA 02205-8686 (the "Subscription Agent"), prior to 5:00 p.m.,
New York City time, on the Expiration Date, either:
(1) a properly completed and executed Subscription Certificate and a
money order or check drawn on a bank located in the United States and
payable to the order of The Brazil Fund, Inc. for an amount equal to the
number of Shares subscribed for in the Primary Subscription (and, if such
Holder is a Record Date Shareholder electing to exercise the Over-
Subscription Privilege, under the Over-Subscription Privilege) multiplied
by the Subscription Price; or
(2) a Notice of Guaranteed Delivery guaranteeing delivery of (i) a
properly completed and executed Subscription Certificate; and (ii) a money
order or check drawn on a bank located in the United States and payable to
the order of The Brazil Fund, Inc. for an amount equal to the number of
Shares subscribed for in the Primary Subscription (and, if such Holder is a
Record Date Shareholder electing to exercise the Over-Subscription
Privilege, pursuant to the Over-Subscription Privilege) multiplied by the
Subscription Price (which certificate and money order or check must then be
delivered by the close of business on the third Business Day after the
Expiration Date (the "Protect Period")).
If the Holder of this certificate is entitled to subscribe for additional
shares pursuant to the Over-Subscription Privilege, Part B of this
Subscription Certificate must be completed to indicate the maximum number of
Shares for which such privilege is being exercised.
Any excess payment to be refunded by the Fund to a Record Date Shareholder
who is not allocated the full amount of Shares subscribed for pursuant to the
Over-Subscription Privilege will be mailed by the Subscription Agent. An
Exercising Rights Holder will have no right to rescind or modify a purchase
after the Subscription Agent has received a properly completed and executed
Subscription Certificate or a Notice of Guaranteed Delivery. Any excess
payment to be refunded by the Fund to a Rights Holder will be mailed by the
Subscription Agent to him as promptly as practicable.
If the Holder does not make payment of any amounts due in respect of Shares
subscribed for, the Fund and the Subscription Agent reserve the right to (i)
find other shareholders or Rights Holders for the subscribed and unpaid for
Shares; (ii) apply any payment actually received by it toward the purchase of
the greatest whole number of Shares which could be acquired by such holder
upon exercise of the Primary Subscription and/or Over-Subscription Privilege;
and/or (iii) exercise any and all other rights and/or remedies to which it may
be entitled, including, without limitation, the right to set-off against
payments actually received by it with respect to such subscribed Shares.
This Subscription Certificate may be transferred, in the same manner and
with the same effect as in the case of a negotiable instrument payable to
specific persons, by duly completing and signing the assignment on the reverse
side hereof. Capitalized terms used but not defined in this Subscription
Certificate shall have the meanings assigned to them in the Prospectus, dated
November 20, 1995, relating to the Rights.
THIS SUBSCRIPTION RIGHT IS TRANSFERABLE AND MAY BE COMBINED OR DIVIDED
(BUT ONLY INTO SUBSCRIPTION CERTIFICATES EVIDENCING A WHOLE NUMBER OF RIGHTS)
AT THE OFFICE OF THE SUBSCRIPTION AGENT
ANY QUESTIONS REGARDING THIS SUBSCRIPTION CERTIFICATE AND THE
OFFER MAY BE DIRECTED TO THE INFORMATION AGENT, GEORGESON & COMPANY INC.
TOLL FREE AT (800) 223-2064 OR COLLECT AT (212) 509-6240
The Brazil Fund, Inc.
State Street Bank and Trust Company,
By: ______________________________________
as Subscription Agent
By: ______________________________________
REGISTERED OWNER: CONTROL NUMBER
B-1
<PAGE>
EXPIRATION DATE: DECEMBER 15, 1995
PLEASE COMPLETE ALL APPLICABLE INFORMATION
<TABLE>
<S> <C> <C> <C>
BY MAIL: BY OVERNIGHT BY HAND:
P.O. Box 9061 COURIER:
Boston, MA 02205-8686 500 Victory Road 225 Franklin Street 61 Broadway
MB2 Concourse Level or Concourse Level
Marina Bay Boston, MA 02110 New York, NY 10006
North Quincy, MA 02171
</TABLE>
SECTION I: TO SUBSCRIBE: I hereby irrevocably subscribe for the dollar amount
of Common Stock indicated as the total of A and B below upon the
terms and conditions specified in the Prospectus related hereto,
receipt of which is acknowledged.
TO SELL: If I have checked either the box on line C or the box on
line D, I authorize the sale of Rights by the Subscription Agent
according to the procedures described in the Prospectus. The check
for the proceeds of sale will be mailed to the address of record.
Please check below:
<TABLE>
<S> <C> <C>
[_] A. Primary Subscription / 3 = .000x $ =$
---------- --------------------- ------------------ ------------------
(Rights (Full Shares of Common (Subscription Price) (Amount Requested)
Exercised) Stock Requested)
[_] B. Over-Subscription Privilege .000 x $ =$ (*)
-------------------------------- ---------------- -----------------
(Full Shares of Common (Subscription Price) (Amount Requested)
Stock Requested)
Amount of Check or Money Order Enclosed (total of A + B) = $
----------------
</TABLE>
Make check payable to the order of "The Brazil Fund, Inc."
(*) The Over-Subscription Privilege can be exercised by Record Date
Shareholders only, as described in the Prospectus.
[_] C. Sell any remaining unexercised Rights
[_] D. Sell all of my Rights
[_] E. The following Broker-Dealer is hereby designated as having been
instrumental in the exercise of the Rights:
[_] Smith Barney Inc. Account #
[_] Other Firm: Account #
-----------------------
- ---------------------------------------- Please provide your telephone number
Signature of Day ( )_______
Subscriber(s)/Seller(s) Evening ( )_______
- ---------------------------------
Social Security Number or
Taxpayer Identification Number
SECTION II: TO TRANSFER RIGHTS: (except pursuant to C and D above)
For value received, _________ of the Rights represented by this Subscription
Certificate are assigned to
- ------------------------------------- -------------------------------------
Social Security Number or Tax ID of Assignee(Print Full Name of Assignee)
- ------------------------------------- -------------------------------------
Signature(s) of Assignee(s) (Print Full Address including postal
Zip Code)
The signature(s) must correspond with the name(s) as written upon the face of
this Subscription Certificate, in every particular, without alteration.
IMPORTANT: For Transfer, a Signature Guarantee must be provided by an eligible
financial institution as defined in Rule 17Ad-15 of the Securities Exchange
Act of 1934, as amended, subject to the standards and procedures adopted by
the issuer.
SIGNATURE GUARANTEED BY:
- -------------------------
For value received, ________ of the Rights represented by this Subscription
Certificate as assigned to
[_] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE DATE
HEREOF AND COMPLETE THE FOLLOWING:
NAME(S) OF REGISTERED OWNER(S):
WINDOW TICKET NUMBER (IF ANY):
DATE OF EXECUTION OF NOTICE OF GUARANTEED DELIVERY:
NAME OF INSTITUTION WHICH GUARANTEED DELIVERY:
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES
UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION NUMBER (OR
CERTIFICATION REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT
AND THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING.
B-2
<PAGE>
APPENDIX C
[Form of Notice of Guaranteed Delivery]
NOTICE OF GUARANTEED DELIVERY OF SUBSCRIPTION RIGHTS AND THE SUBSCRIPTION
PRICE FOR SHARES OF COMMON STOCK OF THE BRAZIL FUND, INC. SUBSCRIBED FOR IN
THE PRIMARY SUBSCRIPTION AND THE OVER-SUBSCRIPTION PRIVILEGE
As set forth in the Prospectus under "The Offer--Payment for Shares," this
form or one substantially equivalent hereto may be used as a means of
effecting subscription and payment for all Shares of The Brazil Fund, Inc.
Common Stock subscribed for in the Primary Subscription and the Over-
Subscription Privilege. Such form may be delivered by hand or sent by
facsimile transmission, overnight courier or mail to the Subscription Agent.
The Subscription Agent is:
STATE STREET BANK AND TRUST COMPANY
Attention: Corporate Reorganization Department
By Mail: By Facsimile:
P.O. Box 9061 (617) 774-4519
Boston, MA 02205-8686 with the original Subscription
Certificate to be sent by mail, hand
or overnight courier. Conform
facsimile by telephone
to (617) 774-4511
By Overnight Courier: By Hand:
500 Victory Road 225 Franklin Street 61 Broadway
MB2 Concourse Level Concourse Level
Marina Bay Boston, MA 02110 New York, NY 10006
North Quincy, MA 02171
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN AS
SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY
The New York Stock Exchange member firm or bank or trust company which
completes this form must communicate the guarantee and the number of Shares
subscribed for (under both the Primary Subscription and the Over-Subscription
Privilege) to the Subscription Agent and must deliver this Notice of
Guaranteed Delivery guaranteeing delivery of (i) payment in full for all
subscribed Shares and (ii) a properly completed and executed Subscription
Certificate (which certificate and full payment must then be delivered by the
close of business on the third business day after the expiration Date, as
defined in the Prospectus) to the Subscription Agent prior to 5:00 p.m., New
York City time, on the Expiration Date (December 15, 1995, unless extended).
Failure to do so will result in a forfeiture of the Rights.
C-1
<PAGE>
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank or
trust company, guarantees delivery to the Subscription Agent by the close of
business (5:00 p.m., New York City time) on the third Business Day after the
Expiration Date (December 15, 1995, unless extended) of (A) a properly
completed and executed Subscription Certificate and (B) payment of the full
Subscription Price for Shares subscribed for in the Primary Subscription and
pursuant to the Over-Subscription Privilege, if applicable, as subscription
for such Shares is indicated herein or in the Subscription Certificate.
_____________________________________ _____________________________________
Number of Shares subscribed for in Number of Shares subscribed for
the Primary Subscription for which pursuant to the Over-Subscription
you are guaranteeing delivery of Privilege for which you are
Rights and payment guaranteeing delivery of Rights and
payment
Number of Rights to be delivered:
Total Subscription Price payment to _____________________________________
be delivered:
Method of Delivery [circle one]
$ ___________________________________
A. Through DTC
B. Direct to Corporation
Please note that if you are guaranteeing for Over-Subscription Shares, and
are a DTC participant, you must also execute and forward to State Street Bank
and Trust Company a Nominee Holder Over-Subscription Exercise Form.
_____________________________________ _____________________________________
Name of Firm Authorized Signature
_____________________________________ _____________________________________
Address Title
_____________________________________ _____________________________________
Zip Code (Type of Print)
_____________________________________ _____________________________________
Name of Regsistered Holder
(If Applicable)
_____________________________________ ____________________________________
Telephone Number Date
PLEASE NOTE THAT IF YOU ARE GUARANTEEING FOR OVER-SUBSCRIPTION SHARES AND ARE
A DTC PARTICIPANT, YOU MUST ALSO EXECUTE AND FORWARD TO THE SUBSCRIPTION AGENT
A NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM.
C-2
<PAGE>
APPENDIX D
[FORM OF NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM]
THE BRAZIL FUND, INC.
RIGHTS OFFERING
NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM
PLEASE COMPLETE ALL APPLICABLE INFORMATION
STATE STREET BANK AND TRUST COMPANY
CORPORATE REORGANIZATION DEPARTMENT
By Mail: By Hand: By Overnight Courier:
225 Franklin Street 500 Victory Road
Concourse Level MB2
P.O. Box 9061 Boston , MA 02101 Marina Bay
Boston, MA 00205-8686 North Quincy, MA 02171
or
61 Broadway
Concourse Level
New York, New York 10006
THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS TO EXERCISE THE OVER-
SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH THE PRIMARY
SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE FACILITIES OF A
COMMON DEPOSITORY. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST BE
EFFECTED BY THE DELIVERY OF THE SUBSCRIPTION CERTIFICATES.
----------------
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE FUND'S
PROSPECTUS DATED NOVEMBER 20, 1995 (THE "PROSPECTUS") AND ARE INCORPORATED
HEREIN BY REFERENCE.COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM
THE FUND.
----------------
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00
P.M., NEW YORK CITY TIME, ON DECEMBER 15, 1995, UNLESS EXTENDED BY THE FUND
(THE "EXPIRATION DATE").
1. The undersigned hereby certifies to the Subscription Agent that it is a
participant in [Name of Depository] (the "Depository") and that it has
either (i) exercised the Primary Subscription right in respect of Rights
and delivered such exercised Rights to the Subscription Agent by means of
transfer to the Depository Account of the Fund or (ii) delivered to the
Subscription Agent a Notice of Guaranteed Delivery in respect of the
exercise of the Primary Subscription Right and will deliver the Rights
called for in such Notice of Guaranteed Delivery to the Subscription Agent
by means of transfer to such Depository Account of the Fund.
2. The undersigned hereby exercises the Over-Subscription Privilege to
purchase, to the extent available, shares of Common Stock and certifies to
the Subscription Agent that such Over-Subscription Privilege is being
exercised for the account or accounts of persons (which may include the
undersigned) on whose behalf all Primary Subscription Rights have been
exercised.(*)
3. The undersigned understands that payment of the Subscription Price of
$15.75 per Share for each share of Common Stock subscribed for pursuant to
the Over-Subscription Privilege must be received by the Subscription Agent
at or before 5:00 p.m., New York City time, on the Expiration Date and
represents that such payment, in the aggregate amount of $ either
(check appropriate box):
[_]has been or is being delivered to the Subscription Agent pursuant to the
Notice of Guaranteed Delivery referred to above or
[_]is being delivered to the Subscription Agent herewith or
[_]has been delivered separately to the Subscription Agent;
and, in the case of funds not delivered pursuant to a Notice of Guaranteed
Delivery, is or was delivered in the manner set forth below (check
appropriate box and complete information relating thereto):
[_]uncertified check
[_]certified check
[_]bank draft
[_]money order
- ------------------------------------- -------------------------------------
Depository Primary Subscription Name of Nominee Holder
Confirmation Number
- ------------------------------------- -------------------------------------
Depository Participant Number Address
-------------------------------------
City State Zip Code
Contact Name_________________________ By:__________________________________
Phone Number:________________________ Name:________________________________
Dated: ________, 1995 Title:_______________________________
* PLEASE COMPLETE THE BENEFICIAL CERTIFICATION ON THE BACK HEREOF CONTAINING
THE RECORD DATE POSITION OF PRIMARY RIGHTS OWNED, THE NUMBER OF PRIMARY
SHARES SUBSCRIBED FOR AND THE NUMBER OF OVER-SUBSCRIPTION SHARES, IF
APPLICABLE, REQUESTED BY EACH SUCH OWNER.
D-1
<PAGE>
THE BRAZIL FUND, INC.
BENEFICIAL OWNER CERTIFICATION
The undersigned, a bank, broker or other nominee holder of Rights ("Rights")
to purchase shares of common Stock, $0.01 par value ("Common Stock"), of The
Brazil Fund, Inc. (the "Fund") pursuant to the Rights offering (the "Offer")
described and provided for in the Fund's Prospectus dated November 20, 1995
(the "Prospectus") hereby certifies to the Fund and to State Street Bank and
Trust Company as Subscription Agent for such Offer, that for each numbered
line filled in below the undersigned has exercised, on behalf of the
beneficial owner thereof (which may be the undersigned), the number of Rights
specified on such line in the Primary Subscription (as defined in the
Prospectus) and such beneficial owner wishes to subscribe for the purchase of
additional shares of Common Stock pursuant to the Over-Subscription Privilege
(as defined in the Prospectus), in the amount set forth in the third column of
such line:
<TABLE>
<CAPTION>
NUMBER OF SHARES REQUESTED
NUMBER OF RIGHTS EXERCISED PURSUANT TO THE
IN THE PRIMARY OVER-
RECORD DATE SHARES SUBSCRIPTION SUBSCRIPTION PRIVILEGE
<S> <C> <C> <C>
1) __________________________ __________________________ __________________________
2) __________________________ __________________________ __________________________
3) __________________________ __________________________ __________________________
4) __________________________ __________________________ __________________________
5) __________________________ __________________________ __________________________
6) __________________________ __________________________ __________________________
7) __________________________ __________________________ __________________________
8) __________________________ __________________________ __________________________
9) __________________________ __________________________ __________________________
10) __________________________ __________________________ __________________________
</TABLE>
- ----------------------------------- ---------------------------------------
Name of Nominee Holder Depository Participant Number
- ----------------------------------- ---------------------------------------
Name: Depository Primary Subscription
Title: Confirmation Number(s)
Dated: ________, 1995
D-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNEC-
TION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND,
THE MANAGER OR THE DEALER MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information... 2
Expense Information..... 4
Prospectus Summary...... 5
Financial Highlights.... 10
Market and Net Asset
Value Information...... 11
The Fund................ 11
The Offer............... 12
Use of Proceeds......... 20
Investment Objective and
Policies............... 20
Certain Investment
Practices.............. 22
Foreign Investment and
Exchange Controls in
Brazil................. 23
Risk Factors and Special
Considerations......... 25
The Brazilian Securities
Market................. 31
Investment Advisers and
Administrator.......... 40
Dividends and
Distributions; Dividend
Reinvestment and Cash
Purchase Plan.......... 46
Taxation................ 47
Common Stock............ 49
Dividend Paying Agent,
Transfer Agent and
Registrar.............. 50
Custodian............... 50
Official Documents...... 50
Experts................. 50
Validity of The Shares.. 50
Further Information..... 50
The Federative Republic
of Brazil.............. A-1
Form of Subscription
Certificate............ B-1
Form of Notice of
Guaranteed Delivery.... C-1
Form of Nominee Holder
Over-Subscription
Exercise Form.......... D-1
</TABLE>
------------
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE BRAZIL FUND, INC.
4,060,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS TO
SUBSCRIBE FOR SUCH SHARES
[LOGO]
--------
PROSPECTUS
NOVEMBER 20, 1995
--------
SMITH BARNEY INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE BRAZIL FUND, INC.
----------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") is not a prospectus and
should be read in conjunction with the Prospectus, dated November 20, 1995 (the
"Prospectus"). This SAI does not include all information that a prospective
investor should consider before purchasing shares of the Fund and investors
should obtain and read the Prospectus prior to purchasing shares. A copy of the
Prospectus may be obtained without charge by calling the Fund's Information
Agent, Georgeson & Company Inc. at (800) 223-2064 or collect at (212) 509-6240.
This SAI incorporates by reference the entire Prospectus. Defined terms used
herein shall have the same meaning as provided in the Prospectus. The date of
this SAI is November 20, 1995.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Restrictions.................................................... 2
Certain Investment Practices............................................... 4
Directors and Officers..................................................... 6
Net Asset Value............................................................ 9
Taxation................................................................... 10
Portfolio Transactions and Brokerage....................................... 16
Financial Statements....................................................... F-1
Report of Independent Accountants.......................................... F-2
Report of Independent Accountants.......................................... F-13
</TABLE>
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are the Fund's only fundamental policies--that
is, policies which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. If a percentage
restriction on investment or use of assets set forth below is adhered to at
the time a transaction is effected, later changes in percentage resulting from
changing values will not be considered a violation.
The Fund may not:
1. Purchase securities on margin, except such short-term credits as may
be necessary for clearance of transactions and the maintenance of margin
with respect to futures and forward contracts.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 5% (taken at the lower of cost or current value) of
its total assets (not including the amount borrowed), and may also pledge
its assets to secure such borrowings. For the purposes of this investment
restriction, collateral arrangements with respect to the writing of options
or the purchase or sale of futures contracts are not deemed a pledge of
assets or the issuance of a senior security.
4. Purchase any security if, as a result, more than 25% of the Fund's
total assets (taken at current value) would be invested in a single
industry. The exercise of stock subscription rights or conversion rights is
not deemed to be a purchase for purposes of this restriction.
5. Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell securities that
are secured by real estate or commodities and securities of companies that
invest or deal in real estate or commodities and may purchase and sell
futures and forward contracts on stock indices, foreign currencies and
precious metals, to the extent permitted under applicable law.
6. Make loans, provided that the Fund may enter into repurchase
agreements (repurchase agreements with a maturity of longer than seven days
together with securities that are not readily marketable being limited to
15% of the Fund's total assets). Brazilian law currently precludes the Fund
from entering into repurchase agreements, as well as lending portfolio
securities unless expressly authorized by the Brazilian Securities
Commission or by the Central Bank, in their respective spheres of
authority. Should the Fund receive such approval from the Central Bank, the
Fund may lend portfolio securities, in an amount not to exceed 25% of the
Fund's total assets and to the extent permitted under applicable Brazilian
law.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under applicable law.
The following additional restrictions are not fundamental policies of the
Fund and may be changed by the Board of Directors.
The Fund may not:
8. Purchase any security (other than obligations of the U.S. government,
its agencies or instrumentalities or of the Government, its agencies or
instrumentalities) if as a result more than 10% of the Fund's total assets
(taken at value) would then be invested in securities of a single issuer.
The exercise of stock subscription rights or conversion rights is not
deemed to be a purchase for purposes of this restriction.
9. Make investments for the purpose of exercising control or management.
10. Participate on a joint and several basis in any trading account in
securities.
As noted above, in addition to the foregoing restrictions, the Fund is
subject to the Regulations and to the Code with respect to its Portfolio. See
"Taxation--United States Federal Income Taxes--General." The investment
restrictions imposed by the Regulations are implemented and interpreted, and
may be supplemented, by the Brazilian Securities Commission and may be amended
by the Monetary Council.
2
<PAGE>
The Regulations require that an average at least 70% of the total
investments in the Portfolio consist of shares of common and preferred stocks
issued by publicly held companies and traded in the Brazilian securities
markets. Such securities may only be acquired on one of the Stock Exchanges or
by subscription or in an over-the-counter market organized by an entity
accredited by the Brazilian Securities Commission. As no entities have yet
been so accredited, the Fund is not currently permitted to invest in Brazil's
over-the-counter market. The Fund is subject not only to the investment
requirements in the Regulations, but also to the Fund's own policy normally to
invest at least 70% of its total assets in common and preferred stocks of
companies registered with the Brazilian Securities Commission and listed on
the Stock Exchanges or traded in the over-the-counter market. See "Investment
Objective and Policies" in the Prospectus.
Subscriptions include the acquisition by the Fund of newly issued shares
acquired through private or public offerings as long as such shares are
registered with the Brazilian Securities Commission for public trading in
Brazil. In addition, according to the opinion of the staff of the Brazilian
Securities Commission, the Fund may acquire such shares offered in a secondary
public offering, even if such a transaction is not effected through a Stock
Exchange.
The balance of the Portfolio, on average no more than 30%, may be invested
in (a) other securities issued by Brazilian publicly held companies
(acquisition of fixed-income securities is currently prohibited), (b) Agrarian
Debt Notes, BDF Bonds, and debentures issued by Siderurgia Brasileira S.A.,
and (c) other investment mechanisms expressly authorized by the Central Bank
and the Brazilian Securities Commission jointly, as is the case of margin
account transactions. At present, the Fund is not allowed to invest in the
debt securities of the Government and of the Central Bank; however, if
permitted to do so in the future, such debt securities would include Treasury
Bonds, Treasury Bills, Central Bank Bonds and Central Bank Bills, described in
"The Brazilian Securities Market--The Secondary Markets--Debt Securities
Market." Treasury Bonds and Bills are direct obligations of the Government,
and Central Bank Bonds and Bills are direct obligations of the Central Bank
and are backed by the full faith and credit of the Government.
The requirement of the Regulations that 70% of the Portfolio consist of
common and preferred stocks is tested against average portfolio positions for
the preceding 720 days. If the Portfolio fails to satisfy the 70% requirement
as of a given date, the requirement will nevertheless be satisfied as of that
date if, within the following 360 days, the test (measured against average
portfolio positions for the preceding 720 days) would be satisfied. On any
day, such equity investments must make up at least 35% of the value of the
Portfolio. A statement of composition and diversification of investments is
submitted monthly to the Brazilian Securities Commission by the Brazilian
Administrator. The Fund has received confirmation from the Brazilian
Securities Commission that the Fund will have one year from the date the Offer
was approved by the Brazilian Securities Commission to adapt its portfolio to
meet these requirements.
Other investment restrictions imposed by the Regulations do not permit the
Fund with respect to its Portfolio to: (a) act as surety, guarantor or co-
obligor in any way, or make loans of any kind (other than the lending of
portfolio securities, which is permitted with the authorization of the
Brazilian Securities Commission or the Central Bank, in their respective
spheres of authority); (b) purchase or sell securities other than those
authorized by the Monetary Council (namely, shares and other securities issued
by publicly held companies that are traded in the Brazilian securities market
(with the exception of fixed-income securities); (c) make investments abroad,
except that, prior to the entry in Brazil of the proceeds of any offering of
Common Stock, Fund assets may be invested in United States Government
securities and money market instruments; or (d) subscribe for or otherwise
acquire shares of investment companies or investment funds. The Regulations
permit the Fund to acquire bonds or securities issued or co-guaranteed by the
Brazilian Administrator or an affiliate thereof only with the approval of all
of the Fund's shareholders.
The Regulations also empower the Brazilian Securities Commission to cancel
the authorization of the Brazilian Administrator if it fails to comply with
applicable law and regulations, and to approve its successor. See "Investment
Advisers and Administrator." In addition, the Fund is required to file with
the Brazilian
3
<PAGE>
Securities Commission specified reports, including period-end reports as to
the Fund's portfolio holdings and equity transactions.
Should any investment restriction imposed by the Regulations or other
Brazilian legal requirements, or by the Code, be removed or liberalized, the
Fund reserves the right to invest accordingly, without shareholder approval,
except to the extent that such investment conflicts with the Fund's investment
objective or the Investment Restrictions contained in paragraphs 1-7 above.
Other restrictions on the Fund may be imposed by general foreign investment
and exchange controls in effect in Brazil. See "Foreign Investment and
Exchange Controls in Brazil" in the Prospectus.
CERTAIN INVESTMENT PRACTICES
Described below are certain transactions that the Fund has typically entered
into until very recently but that are not currently permitted under the
changes to the Regulations. See "Certain Investment Practices" in the
Prospectus. If such restrictions were to be lifted in the future, the Fund
might again engage in such transactions. There can be no assurance, however,
that the Regulations would then allow these transactions to be carried out in
the same fashion as before.
FUTURES CONTRACTS
In Brazil, futures contracts are standardized contracts for the future
delivery of a commodity, security or index at a future date for an agreed
price. Under the Regulations previously in force, the Fund was permitted to
enter into futures contracts only for foreign currency and for stock indexes.
Parties to futures contracts must make a good faith deposit, referred to as
initial margin, that is a percentage of the value of the contract. Subsequent
payments, called "variation margin," will be made on a daily basis as the
price of the underlying commodity or index fluctuates, making the long and
short positions in the futures contracts more or less valuable.
Futures contract positions are typically liquidated by entering into an
offsetting transaction on an exchange. If an offsetting contract is not
entered into prior to the maturity of a contract, the parties must take or
make delivery of the underlying commodity against payment of the agreed price,
except in the case of certain futures contracts, including foreign currency
and stock index contracts, which generally are settled by payments of cash.
Commodity futures exchanges generally impose daily limits on permitted
fluctuations in the price of futures contracts traded thereon. Consequently,
if in the future the Fund were permitted to enter into futures contracts, in a
period of widely fluctuating prices, it might be difficult for the Fund to
liquidate a position. If permitted to enter into futures contracts, the Fund
would continue its practice of entering into a futures contract only if in the
Manager's view a liquid market exists for such contracts. There could,
however, be no assurance that the Fund would be able to close out a contract
in a particular case in a timely manner or at all, in which case the Fund
might suffer a loss.
Under the Regulations previously in force, the Fund was not permitted to
enter into futures contracts if the aggregate amount of initial margin
deposits on the Fund's futures positions exceeded 5% of the value of the
Fund's total assets.
Even if, as in the past, the Fund could enter into futures contracts for
hedging purposes, changes in prices could result in a poorer overall
performance for the Fund than if it had not engaged in any such transaction.
In the case of stock index futures contracts, there could be an imperfect
correlation between the Fund's portfolio holdings of securities denominated in
Reais and futures contracts entered into by the Fund. This imperfect
correlation might prevent the Fund from achieving the intended hedge or expose
the Fund to risk of losses.
If permitted to enter into futures contracts, the Fund does not intend to
enter into futures contracts to protect the value of its portfolio securities
on a regular basis. The Fund also will not enter into such futures contracts
or
4
<PAGE>
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Fund to deliver an amount of currency in excess
of the value of the Fund's portfolio securities or other assets denominated in
that currency. Further, the Fund generally will not enter into a futures
contract with a term of greater than one year.
FUTURES CONTRACTS ON DOLLARS
In the past, the Fund was allowed to enter into futures contracts for
Dollars for hedging purposes. If permitted, the Fund may resume such practice.
For example, when the Fund enters into a contract for the purchase or sale of
a security denominated in Reais, or when the Fund anticipates the receipt in
Reais of dividends or interest payments on such a security that it holds, the
Fund may desire to "lock in" the Dollar price of the security or the Dollar
equivalent of such dividend or interest payment, as the case may be. In
addition, when the Manager believes that the Real may suffer a substantial
decline against the Dollar, the Manager may, if so permitted, enter into a
futures contract to sell, for a fixed amount of Dollars, the amount of Reais
approximating the value of some or all of the Fund's portfolio securities
denominated in Reais.
STOCK INDEX FUTURES CONTRACTS
If permitted under the Regulations, the Fund may seek to hedge all or a
portion of its portfolio investments through the use of stock index futures
contracts. A stock index futures contract is an agreement to take or make
delivery of the securities underlying the index or of an amount of cash equal to
the difference between the value of the index at the beginning and at the end of
the contract period. Settlement of a stock index futures contract is normally by
payment of cash. At present, the Fund is prohibited by the U.S. Commodity
Exchange Act from purchasing or selling Brazilian stock index futures contracts.
The Fund reserves the right to purchase and sell such contracts should such
activities become lawful in the future, as a result of an application by the
Fund or otherwise.
If permitted to trade in stock index futures, the Fund may sell stock index
futures contracts in anticipation of or during a market decline to attempt to
offset the decrease in market value of equity securities in its portfolio that
might otherwise result. When the Fund is not fully invested in stocks and
anticipates a significant market advance, it may purchase stock index futures
to gain rapid market exposure that may partly or entirely offset increases in
the cost of the stocks that it intends to purchase. In a substantial majority
of these transactions, the Fund will purchase such securities upon termination
of the futures position but, under unusual market conditions, a futures
position may be terminated without the corresponding purchase of stocks. No
assurance can be given that the Manager will be able to make successful use of
stock index futures, if permitted to trade in them.
FORWARD CONTRACTS ON CURRENCIES
In order to hedge against exchange rate risks, and to the extent permitted
by the Regulations in the future, the Fund may enter into forward contracts to
purchase or sell Dollars. Forward currency contracts involve an obligation to
purchase or sell Dollars for Reais, or Reais for Dollars, for an agreed price
at a specified future date. These contracts are made in an over-the-counter
market conducted directly between currency traders (usually large commercial
banks and other institutions). At present, there is only a small forward
market for foreign currencies in Brazil, and such market is limited to
Dollars.
REPURCHASE AGREEMENTS
Repurchase agreements are contracts under which the seller of a security
agrees at the time of sale to repurchase the security at an agreed-upon price
and date. Such resale price reflects an agreed-upon interest rate effective
for the period the security is held by the purchaser and is unrelated to the
interest rate on the instrument. The staff of the Commission views repurchase
agreements as loans collateralized by the underlying security. If the Fund
enters into a repurchase agreement, the seller will be required to maintain
the value of the securities subject to the repurchase agreement, marked to
market daily, at not less than their repurchase price. Repurchase
5
<PAGE>
agreements may involve risks in the event of insolvency or other default by
the seller, including possible delays and expenses in liquidating the
underlying security, decline in its value and loss of interest. If the Fund
enters into a repurchase agreement, the Manager intends to monitor the
seller's compliance with its obligation to maintain the value of the
securities subject to the repurchase agreement at not less than their
repurchase price, and also to review the creditworthiness of the Fund's
counterparties in such transactions. In the past, the Regulations permitted
the Fund to enter into repurchase agreements in Brazil only with respect to
Government securities.
DIRECTORS AND OFFICERS
The names of the individuals who serve as directors and officers of the Fund
are set forth below, together with their positions and their principal
occupations during at least the past five years and, in the case of the
directors, their ages and their positions with certain other international
organizations and publicly-held companies. The Board of Directors is divided
into three classes, each director serving for a term of three years.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AGE AND CLASS POSITION(S) WITH REGISTRANT DURING PAST FIVE YEARS
---------------------------- --------------------------- -----------------------
<C> <C> <S>
Juris Padegs*(1)............... Chairman of the Managing Director of
Age 63 Board and Scudder, Stevens &
Class of 1998 Director Clark, Inc.; serves on
the boards of 27
additional funds managed
by Scudder, Stevens &
Clark, Inc.
Nicholas Bratt*(1)............. President and Managing Director of
Age 47 Director Scudder, Stevens &
Class of 1996 Clark, Inc.; serves on
the boards of 13
additional funds managed
by Scudder, Stevens &
Clark, Inc.
Roberto Teixeira da Costa...... Director and President, Brasilpar
Brasilpar Consultoria Resident Consultoria Financeira e
Financeira e Servicos Ltda. Brazilian Servicos Ltda.
Alameda Santos, 1357-2 andar Director (financial consulting
01470-900 Sao Paulo, SP, Brazil and asset management);
Age 60 Chairman, CEAL (Latin
Class of 1996 American Businessmen
Council); Director of
seven Brazilian listed
and unlisted companies.
Edgar R. Fiedler............... Director Vice President and
845 Third Avenue Economic Counselor, The
New York, NY 10022 Conference Board, Inc.;
Age 66 Director, The Stanley
Class of 1996 Works (manufacturer of
tools and hardware),
Zurich American
Insurance Company, The
Emerging Mexico Fund,
Inc., Harris Insight
Funds (six directorships
in fund complex); serves
on the boards of seven
additional funds managed
by Scudder, Stevens &
Clark, Inc.
Ronaldo A. da Frota Nogueira... Director and Director and Chief
IMF Editora Ltda. Resident Executive Officer, IMF
Av. Erasmo Braga 227 Grupo 404 Brazilian Editora Ltda. (financial
20020-000 Rio de Janeiro, RJ, Director publisher); serves on
Brazil the boards of three
Age 57 additional funds managed
Class of 1998 by Scudder, Stevens &
Clark, Inc.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AGE AND CLASS POSITION(S) WITH REGISTRANT DURING PAST FIVE YEARS
---------------------------- --------------------------- -----------------------
<C> <C> <S>
Dr. Wilson Nolen............... Director Consultant (1989-
1120 Fifth Avenue present); Director,
New York, NY 10128 Ecohealth, Inc.
Age 68 (biotechnology company);
Class of 1997 serves on the boards of
14 additional funds
managed by Scudder,
Stevens & Clark, Inc.
Edmond D. Villani*(1).......... Director President and Managing
Age 48 Director of Scudder,
Class of 1997 Stevens & Clark, Inc.;
serves on the boards of
15 additional funds
managed by Scudder,
Stevens & Clark, Inc.
Edmund B. Games, Jr.(2)........ Vice President Principal of Scudder,
Stevens & Clark, Inc.
Jerard K. Hartman(1)........... Vice President Managing Director of
Scudder, Stevens &
Clark, Inc.
David S. Lee(2)................ Vice President Managing Director of
Scudder, Stevens &
Clark, Inc.
William F. Truscott (2)........ Vice President Principal of Scudder,
Stevens & Clark, Inc.
Pamela A. McGrath(2)........... Treasurer Principal of Scudder,
Stevens & Clark, Inc.
Kathryn L. Quirk(1)............ Vice President Managing Director of
and Assistant Scudder, Stevens &
Secretary Clark, Inc.
Edward J. O'Connell(1)......... Vice President Principal of Scudder,
and Assistant Stevens & Clark, Inc.
Treasurer
Thomas F. McDonough(2)......... Secretary Principal of Scudder,
Stevens & Clark, Inc.
Coleen Downs Dinneen(2)........ Assistant Vice President of
Secretary Scudder, Stevens &
Clark, Inc.
</TABLE>
- --------
* Directors considered by the Fund and its Counsel to be persons who are
"interested persons," as defined in the 1940 Act, of the Fund, the Manager
or the Brazilian Adviser.
(1) Address: 345 Park Avenue, New York, NY 10154
(2) Address: Two International Place, Boston, MA 02110
The amount of shares in the Fund owned by the Fund's directors and officers
as a group is less than one percent of the Fund's outstanding stock.
The Fund's Board of Directors has an Executive Committee which may exercise
the powers of the Board to conduct the current and ordinary business of the
Fund while the Board is not in session. Currently, Messrs. Villani and Padegs
are members of the Executive Committee.
Scudder is a Delaware corporation. Daniel Pierce, Two International Place,
Boston, Massachusetts, is the Chairman of the Board of Scudder. Edmond D.
Villani, 345 Park Avenue, New York, New York, is the President of Scudder.
Stephen R. Beckwith, 345 Park Avenue, New York, New York, Lynn S. Birdsong,
345 Park Avenue, New York, New York, Nicholas Bratt, 345 Park Avenue, New
York, New York, Linda C. Coughlin, 345 Park Avenue, New York, New York,
Margaret D. Hadzima, Two International Place, Boston, Massachusetts, Jerard K.
Hartman, 345 Park Avenue, New York, New York, Richard A. Holt, Two Prudential
Plaza, 180 North Stetson, Suite 5400, Chicago, Illinois, Dudley H. Ladd, Two
International Place, Boston, Massachusetts, Douglas M. Loudon, 345 Park
Avenue, New York, New York, John T. Packard, 101 California Street, San
Francisco, California, Juris Padegs, 345 Park Avenue, New York, New York, and
Cornelia M. Small, 345 Park Avenue, New York, New York, are the other members
of the Board of Directors of Scudder. The principal occupation of each of the
above named individuals is serving as a Managing Director of Scudder.
7
<PAGE>
All the outstanding voting and nonvoting securities of the Manager are held
of record by Stephen R. Beckwith, Juris Padegs, Daniel Pierce and Edmond D.
Villani as representatives of the beneficial owners of such securities
pursuant to a Security Holders Agreement, under which such representatives
have the right to reallocate shares among the beneficial owners from time to
time, at net book value in cash transactions. All Managing Directors of the
Manager own voting and nonvoting stock; all Principals own nonvoting stock.
The officers of the Fund will conduct and supervise the daily business
operations of the Fund, while the directors, in addition to their functions
set forth under "Investment Advisers and Administrator," will review such
actions and decide on general policy.
The Fund pays each of its directors who is not an affiliated person of the
Manager or the Brazilian Adviser, in addition to certain out-of-pocket
expenses, an annual fee of $6,000 (except for Messrs. Nogueira and da Costa,
who as Resident Brazilian Directors receive an annual fee of $12,000), plus
$750 for each Board of Directors meeting, and $250 for each committee meeting
attended (other than audit committee meetings, for which such directors
receive a fee of $750). For the fiscal year ended December 31, 1994, the
aggregate amount for fees and expenses paid to such directors amounted to
$84,504. For the six months ended June 30, 1995, directors' fees and expenses
amounted to $43,692.
The following Compensation Table provides, in tabular form, the following
data:
Column (1) All Directors who receive compensation from the Fund.
Column (2) Aggregate compensation received by a Director from the Fund.
Columns (3) and (4) Pension or retirement benefits accrued or proposed to
be paid by the Fund. The Fund does not pay such benefits to its Directors.
Column (5) Total compensation received by a Director from the Fund plus
compensation received from all funds managed by Scudder for which a
Director serves. The total number of funds from which a Director receives
such compensation is also provided in column (5). Generally, compensation
received by a Director for serving on the Board of a closed-end fund is
greater than the compensation received by a Director for serving on the
Board of an open-end fund.
COMPENSATION TABLE
FOR THE YEAR ENDED DECEMBER 31, 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
PENSION OF TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM THE FUND AND
NAME OF PERSON, COMPENSATION ACCRUED AS PART OF ANNUAL BENEFITS FUND COMPLEX
POSITION FROM THE FUND FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Roberto Teixeira da Cos- $13,868 N/A N/A $ 13,868
ta, Director........... (1 fund)
Edgar R. Fiedler, Direc- $11,373 N/A N/A $ 30,003*
tor.................... (6 funds)
Ronaldo A. de Frota $16,497 N/A N/A $ 54,997
Nogueira, Director..... (4 funds)
Dr. Wilson Nolen, Direc- $11,373 N/A N/A $ 132,023
tor.................... (15 funds)
</TABLE>
- --------
* As of December 31, 1994, Mr. Fiedler had a total of $183,603 accrued in a
deferred compensation program for serving on the Board of Scudder
Institutional Fund, Inc., which has four active portfolios, and $182,472
accrued in a deferred compensation program for serving on the Board of
Scudder Fund, Inc., which has five active portfolios.
8
<PAGE>
Although the Fund is a Maryland corporation, certain of its directors and
officers are residents of Brazil, and substantially all of the assets of such
persons may be located outside of the United States. As a result, it may be
difficult for United States investors to effect service of process upon such
directors or officers within the United States or to realize judgments of
courts of the United States based upon civil liabilities of such directors or
officers under the federal securities laws and other laws of the United
States. There is substantial doubt as to the enforceability in Brazil of such
civil remedies and criminal penalties as are afforded by the federal
securities laws in the United States. No extradition treaty currently is in
effect between the United States and Brazil which would subject the Fund's
directors and officers to enforcement of the criminal penalties of the federal
securities laws.
The By-Laws of the Fund provide that the Fund will indemnify directors,
officers, employees or agents of the Fund against liabilities and expenses
incurred in connection with litigation in which they may be involved because
of their offices with the Fund to the full extent permitted by law. However,
nothing in the Articles of Incorporation or the By-Laws of the Fund protects
or indemnifies a director, officer, employee or agent against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
To the best of the Fund's knowledge, as of October 31, 1995, no person owned
beneficially more than 5% of the Fund's outstanding shares.
Lino Otto Bohn serves as Honorary Director of the Fund. Honorary Directors
are invited to attend all Board meetings and to participate in Board
discussions, but are not entitled to vote on any matter presented to the
Board. Mr. Bohn had served as Director of the Fund since 1988. Mr. Bohn
retired as Director in 1993 in accordance with the Board of Directors'
retirement policy.
NET ASSET VALUE
The net asset value of shares of the Fund is determined no less frequently
than weekly, on the last business day of each month, and at such other times
as the Board of Directors may determine, by dividing the value of the total
assets of the Fund, less all liabilities, by the total number of shares of
Common Stock outstanding.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent
bid quotation. An equity security which is traded on the National Association
of Securities Dealers Automated Quotation ("NASDAQ") system is valued at its
most recent sale price. Lacking any sales, the security is valued at the high
or "inside" bid quotation. The value of an equity security not quoted on the
NASDAQ System, but traded in another over-the-counter market, is its most
recent sale price. Lacking any sales, the security is valued at the Calculated
Mean. Lacking a Calculated Mean, the security is valued at the most recent bid
quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities
with remaining maturities of sixty days or less are valued by the amortized
cost method, which the Board of Directors believes approximates market value.
If it is not possible to value a particular debt security pursuant to these
valuation methods, the value of such security is the most recent bid quotation
supplied by a bona fide marketmaker. If it is not possible to value a
particular debt security pursuant to the above methods, the Manager may
calculate the price of that debt security taking into account such factors as
the Manager deems appropriate. This valuation method may not be used with
respect to a particular security for longer than ten consecutive trading days,
or for securities with an aggregate value that exceeds 5% of the Fund's net
assets on a particular valuation date.
An exchange-traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the
9
<PAGE>
Calculated Mean. Lacking any Calculated Mean, the options contract is valued
at the most recent bid quotation in the case of a purchased options contract,
or the most recent asked quotation in the case of a written options contract.
An options contract on securities, currencies and other financial instruments
traded over-the-counter is valued at the most recent bid quotation in the case
of a purchased options contract and at the most recent asked quotation in the
case of a written options contract. Futures contracts are valued at the most
recent settlement price. Foreign currency exchange forward contracts are
valued at the value of the underlying currency at the prevailing currency
exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's valuation committee (the "Valuation
Committee"), the value of a portfolio asset as determined in accordance with
these procedures does not represent the fair market value of the portfolio
asset, the value of the portfolio asset is taken to be an amount which, in the
opinion of the Valuation Committee, represents fair market value on the basis
of all available information. The value of other portfolio holdings owned by
the Fund is determined in a manner which, in the discretion of the Valuation
committee, most fairly reflects fair market value of the property on the
valuation date.
Following the valuations of securities or other portfolio assets in terms of
the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets is calculated in terms of
Dollars by converting the Local Currency into Dollars at the prevailing
currency exchange rate on the valuation date.
Under the Fund's Articles of Incorporation, the Fund cannot become an open-
end investment company without the approval of holders of 75% of the
outstanding shares of the Fund (a majority of such shares, if the change is
approved by 75% of the directors unaffiliated with an Interested Party (as
defined in the Fund's Articles of Incorporation) who have served on the Board
of Directors for a period of at least 12 months, or successors to such
directors who similarly are unaffiliated ("Continuing Directors")). Moreover,
the Regulations contemplate that a Managed Portfolio such as the Fund must be
organized as a closed-end investment company, not as an open-end investment
company, and the Fund is limited under Brazilian law in its ability to
repatriate capital. See "Foreign Investment and Exchange Controls in Brazil"
in the Prospectus. Such limitations on repatriation of capital, combined with
U.S. Federal income tax requirements applicable to regulated investment
companies, would as a practical matter make it unlikely that the Fund would be
able to engage in a program of repurchasing its own shares.
TAXATION
For a discussion of the U.S. Federal income tax consequences and the
Brazilian tax consequences to Record Date Shareholders and Rights Holders with
respect to the Offer, see "The Offer--U.S. Federal Income Tax Consequences;
Brazilian Tax Consequences" in the Prospectus.
UNITED STATES FEDERAL INCOME TAXES
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS A SUMMARY INCLUDED
FOR GENERAL INFORMATION PURPOSES ONLY. IT DOES NOT INCLUDE INFORMATION SET
FORTH IN THE PROSPECTUS UNDER "TAXATION--U.S. TAXATION." IN VIEW OF THE
INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT
HIS OR HER OWN TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF
BEING A SHAREHOLDER OF THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF
U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES THEREIN.
10
<PAGE>
General
The Fund has qualified and intends to continue to qualify to be treated as a
regulated investment company under the Code for each taxable year, although no
assurance can be given as to meeting the tests for such status.
To qualify as a regulated investment company, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to stock or securities loans, gains
from the sale or other disposition of stock or securities, and certain other
related income, including, generally, gains from options, futures and forward
contracts and foreign currency gains (under regulations which may be
promulgated, foreign currency gains which are not directly related to the
Fund's principal business of investing in stock or securities may not be
treated as qualifying income for this purpose); (b) derive in each taxable
year less than 30% of its gross income from the sale or other disposition of
stock, securities, options, futures, forward contracts and foreign currencies,
held less than three months (excluding, for this purpose, gains from foreign
currencies (and options, futures and forward contracts on foreign currencies)
that are directly related to the Fund's principal business of investing in
stocks or securities or options or futures thereon); and (c) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the market value of the fund's assets is represented by cash, U.S.
government securities, securities of other regulated investment companies, and
other securities, with such other securities of any one issuer qualifying, for
purposes of this calculation, only if the Fund's investment is limited to an
amount not greater than 5% of the value of the Fund's total assets and not
greater than 10% of the outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. government securities or the
securities of other regulated investment companies) or of any two or more
issuers that the Fund controls and that are determined to be engaged in the
same, similar or related businesses. Corporations owned or controlled by the
Government will be treated as separate issuers for this purpose, except that a
debt obligation of such a corporation may be treated as issued by the
Government if the obligation is backed by the full faith and credit of the
Government. Proposed legislation passed by the House of Representatives would
eliminate the 30% requirement; it is unclear whether, and in what form, such
legislation might be enacted.
As a regulated investment company, the Fund will not be subject to U.S.
Federal income tax on its income and capital gains, if any, that it
distributes to its shareholders, provided it distributes each taxable year at
least 90% of its "investment company taxable income," calculated without the
deduction for dividends paid, as determined for U.S. Federal income tax
purposes ("net investment income"). Net investment income includes dividends,
interest, net short-term capital gains in excess of any net long-term capital
losses and any capital loss carryovers from prior years, net of expenses, and,
net gain or loss on debt securities and futures contracts on debt securities,
to the extent attributable to fluctuations in currency exchange rates, and net
gain or loss on foreign currencies and foreign currency forward contracts.
Dividend income derived by a regulated investment company from its investments
is required to be taken into account for U.S. Federal income tax purposes as
of the ex-dividend date (rather than the payment date, which generally is
later). Accordingly, the Fund, in order to satisfy its distribution
requirements, may be required to make distributions based on earnings that
have been accrued but not yet received. Interest income from discount on
indebtedness held by the Fund will also give rise to such accrued earnings.
The Fund intends to distribute to its shareholders each year all of its net
investment income as computed for U.S. Federal income tax purposes. Brazilian
exchange control or other regulations, which may restrict repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors such as the Fund, may limit the Fund's ability to make sufficient
distributions to satisfy the 90% distribution requirement and the calendar
year distribution requirement described below. See "Risk Factors and Special
Considerations--Currency Conversion and Repatriation" and "Other Taxation."
To the extent that the Fund retains for investment any net long-term capital
gains in excess of any net short-term capital losses (including in such losses
any capital loss carryovers from prior years), as computed for U.S. Federal
income tax purposes, it will be subject to U.S. Federal income tax on the
amount retained at the then current rate, which currently is 35%. If any such
amount is retained, the Fund expects to designate such amount as undistributed
capital gains in a notice to its shareholders who (i) if subject to U.S.
Federal income tax on long-term capital gains, will be required to include in
income for such tax purposes, as long-term capital gains,
11
<PAGE>
their proportionate shares of such undistributed amount, and (ii) will be
entitled to credit their proportionate shares of taxes paid by the Fund on
such undistributed amount against their U.S. Federal income tax liabilities
and to claim refunds to the extent such proportionate shares of the tax exceed
such liabilities. For U.S. Federal income tax purposes, the tax basis of
shares owned by a shareholder of the Fund will be increased by 65% of the
amount of undistributed capital gains included in the shareholder's gross
income.
The Fund will be subject to a non-deductible U.S. Federal 4% excise tax on
amounts not distributed (and not treated as having been distributed) on a
timely basis in accordance with a calendar year distribution requirement. To
avoid application of the excise tax, the Fund intends to make its
distributions in accordance with such requirement. Exchange control or other
regulations referred to above, however, could limit the Fund's ability to
satisfy such requirement.
Distributions
Shareholders subject to U.S. Federal alternative minimum tax will be
required to include distributions from the Fund in alternative minimum taxable
income.
If the fair market value of a shareholder's shares is reduced below the
shareholder's cost for such shares as a result of a distribution by the Fund,
such distribution will be taxable for U.S. Federal income tax purposes even
though from an economic viewpoint it may represent a return of invested
capital. Investors should, therefore, consider the tax implications of buying
shares in the Fund prior to a distribution since the price of shares purchased
at that time may reflect the amount of the forthcoming distribution and the
distribution will nevertheless be taxable to the purchasing shareholder. As of
November 16, 1995, there was approximately $145 million of net unrealized
appreciation in the Fund's net assets of approximately $271 million; if
realized and distributed, or deemed distributed, such gains would, in general,
be taxable to shareholders, including holders at that time of Shares acquired
upon exercise of the Rights. See "General" and "Non-U.S. Shareholders."
Shareholders will be notified as to the U.S. Federal income tax status of
any dividends, distributions and deemed distributions made by the Fund to its
shareholders.
Sale of Shares
Upon the sale or exchange of shares of the Fund, a U.S. shareholder will
realize a taxable gain or loss. Such gain or loss will be a capital gain or
loss if the shares are capital assets in the shareholder's hands, and will be
long-term or short-term depending upon whether the shareholder has held the
shares for more than one year. Under current U.S. Federal income tax law, the
maximum rate for long-term capital gains for individuals is 28% and short-term
capital gains are taxed at the same rate as ordinary income. Any loss realized
on a sale or exchange of Fund shares will be disallowed to the extent that the
shares disposed of are replaced, including, for example, pursuant to the Plan,
within a 61-day period beginning 30 days before and ending 30 days after the
date the shares are disposed of. In such a case, a U.S. shareholder will
adjust the basis of the shares acquired to reflect the disallowed loss. Any
loss realized by a U.S. shareholder on a disposition of Fund shares held by
the shareholder for six months or less will be treated as a long-term capital
loss to the extent of any distributions of net long-term capital gains
received by the shareholder (and any amounts retained by the Fund which were
designated as undistributed capital gains) with respect to such shares.
Non-U.S. Income Taxes
The Fund will be subject to Brazilian income taxes, including withholding
taxes, described below under "Brazilian Taxes." So long as more than 50% in
value of the Fund's total assets at the close of any taxable year in which it
is a regulated investment company consists of stocks or securities of non-U.S.
corporations, the Fund may elect to treat any such non-U.S. Federal taxes paid
by it during such year (to the extent that such taxes are treated as income
taxes under U.S. Federal tax principles) as paid by its shareholders. The Fund
has qualified and expects to continue to qualify for this election annually.
The Fund will notify shareholders in writing each
12
<PAGE>
year if it makes the election and of the amount of non-U.S. income taxes, if
any, to be treated as paid by the shareholders and the amount to be treated by
them as income from non-U.S. sources. If the Fund makes the election,
shareholders will be required to include in income their proportionate shares
of the amount of non-U.S. income taxes paid by the Fund for purposes of
computing their U.S. income tax. U.S. shareholders will be entitled to claim
either a credit (subject to the limitations discussed below) or, if they
itemize their deductions, a deduction for their shares of the non-U.S. income
taxes in computing their U.S. Federal income tax liability. (For the treatment
of non-U.S. shareholders, see "Non-U.S. Shareholders" below.) No deduction
will be permitted for such income taxes in computing the alternative minimum
tax imposed on individuals. Shareholders that are exempt from tax under
Section 501(a) of the Code, such as pension plans, generally will derive no
benefit from the Fund's election to pass through the Fund's non-U.S. income
taxes to its shareholders. However, such shareholders should not ordinarily be
disadvantaged because the amount of additional income they are deemed to
receive generally will not be subject to U.S. Federal income tax. Brazilian
withholding taxes currently imposed on dividends and interest qualify as
income taxes that the Fund may elect to treat as having been paid by its
shareholders, and the Fund believes that the Brazilian capital gains tax, if
imposed on the Fund by Brazil at some future date, should qualify for such
treatment. See "Brazilian Taxes."
Generally, a credit for non-U.S. income taxes is subject to the limitation
that it may not exceed the shareholder's U.S. Federal income tax (determined
without regard to the availability of the credit) attributable to his or her
total non-U.S. source taxable income. For this purpose, the portion of
distributions paid by the Fund from its non-U.S. source income will be treated
as non-U.S. source income. The Fund's gains from the sale of securities will
generally be treated as derived from U.S. sources, unless Brazilian capital
gains tax were to be imposed on such gains and the U.S. and Brazil entered
into a treaty permitting such gains to be treated as derived from a non-U.S.
source, in which case the Fund would expect to elect to treat such gains as so
derived. Additionally, certain currency fluctuation gains and losses,
including fluctuations gains from foreign currency denominated debt
securities, receivables and payables, will be treated as derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
non-U.S. source "passive income," such as the portion of dividends received
from the Fund which qualifies as non-U.S. source income. In addition, the
foreign tax credit is allowed to offset only 90% of the alternative minimum
tax imposed on corporations and individuals. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the non-U.S. income taxes paid by the Fund.
The foregoing is only a general description of the treatment of non-U.S.
income taxes under the U.S. Federal income tax laws. Because the availability
of a credit or deduction depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
Backup Withholding
Corporate shareholders and other shareholders specified in the Code are
exempt from backup withholding. Backup withholding is not an additional tax.
Any amounts withheld may be credited against the shareholder's U.S. Federal
income tax liability.
Non-U.S. Shareholders
U.S. Federal income taxation of a shareholder who, under the Code, is a non-
resident alien individual, a foreign trust or estate, foreign corporation, or
foreign partnership ("non-U.S. shareholder") depends on whether the income
from the Fund is "effectively connected" with a U.S. trade or business carried
on by such shareholder. Ordinarily, income from the Fund will not be treated
as so "effectively connected."
If the income from the Fund is not treated as "effectively connected" with a
U.S. trade or business carried on by the non-U.S. shareholder, dividends of
net investment income (which includes short-term capital gains), whether
received in cash or reinvested in shares, will be subject to a U.S. Federal
income tax of 30% (or lower treaty rate), which tax is generally withheld from
such dividends. See the definition of "net investment income" at "General"
above. Furthermore, such non-U.S. shareholders may be subject to U.S. Federal
income tax at the
13
<PAGE>
rate of 30% (or lower treaty rate) on their income resulting from the Fund's
election (described above) to "pass through" the amount of non-U.S. taxes paid
by the Fund, but may not be able to claim a credit or deduction with respect
to the non-U.S. income taxes treated as having been paid by them.
A non-U.S. shareholder whose income is not treated as "effectively
connected" with a U.S. trade or business generally will not be subject to U.S.
Federal income taxation on distributions of net long-term capital gains,
amounts retained by the Fund which are designated as undistributed capital
gains and any gain realized upon the sale of Fund shares. The Fund will incur
a U.S. Federal income tax liability with respect to amounts retained by it
that are designated as undistributed capital gains. The non-U.S. shareholder
may claim a credit with respect to such taxes paid by the Fund and may claim a
refund where such taxes exceed such shareholder's U.S. Federal income tax
liabilities, but must file a tax return to do so. In addition, if the non-U.S.
shareholder is treated as a non-resident alien individual but is physically
present in the United States for more than 182 days during the taxable year,
then in certain circumstances such distributions of net long-term capital
gains, amounts retained by the Fund which are designated as undistributed
capital gains, and gain from the sale of Fund shares will be subject to a U.S.
Federal income tax of 30% (or lower treaty rate). In the case of a non-U.S.
shareholder who is a non-resident alien individual, the Fund may be required
to withhold U.S. Federal income tax at a rate of 31% of distributions
(including distributions of net long-term capital gains) unless IRS Form W-8
is provided. See "Taxation--U.S. Taxation" in the Prospectus and "Backup
Withholding" above in this SAI.
If the income from the Fund is "effectively connected" with a U.S. trade or
business carried on by a non-U.S. shareholder, then distributions of net
investment income (which includes short-term capital gains), whether received
in cash or reinvested in shares, net long-term capital gains and amounts
otherwise includible in income, such as amounts retained by the Fund which are
designated as undistributed capital gains, and any gains realized upon the
sale of shares of the fund, will be subject to U.S. Federal income tax at the
graduated rates applicable to U.S. taxpayers. Non-U.S. shareholders that are
corporations may also be subject to the branch profits tax.
Transfers of shares of the Fund by gift by a non-U.S. shareholder will
generally not be subject to U.S. Federal gift tax, but the value of shares of
the Fund held by such a shareholder at death will be includible in the
shareholder's gross estate for U.S. Federal estate tax purposes.
The income tax and estate tax consequences to a non-U.S. shareholder
entitled to claim the benefits of an applicable tax treaty may be different
from those described herein. Non-U.S. shareholders may be required to provide
appropriate documentation to establish their entitlement to the benefits of
such a treaty.
Non-U.S. shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in shares
of the Fund.
Foreign Exchange-Related Transactions; Hedging Transactions
Debt securities denominated in foreign currencies (and, in some
circumstances, futures, options, forwards and other similar financial
instruments based on foreign currencies) held by the Fund, and gains or losses
attributable to fluctuations in exchange rates that occur between the time the
Fund accrues income or expense denominated in a foreign currency and the time
the Fund actually collects such income or pays such expense, will be subject
to special rules for determining, among other things, the character and timing
of income, deductions, gain, and loss attributable to foreign exchange gain or
loss. In general, these rules operate to treat as ordinary income or loss (to
be taken into account in computing net investment income) the portion of a
gain or loss so attributable. In addition, the hedging transactions which may
be undertaken by the Fund may result in "straddles" for U.S. Federal income
tax purposes. The straddle rules may affect the character and timing of
income, deduction, gain or loss recognized by the Fund. Certain hedging
transactions may increase the amount of short-term capital gain realized by
the Fund, which is taxed as ordinary income when distributed to shareholders.
These rules may also require the acceleration of the recognition of income or
gain by the Fund before the Fund receives the cash required to make
distributions to shareholders. All of these rules may affect the timing and
amount of distributions to shareholders. The gross income and diversification
requirements
14
<PAGE>
applicable to regulated investment companies, described above, may limit the
extent to which the Fund will be able to engage in transactions in options,
futures currency exchange contracts.
Other Taxation
If the Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies," the Fund may be subject to U.S.
Federal income tax on a portion of any "excess distribution" or gain from the
disposition of such shares even if such income or gain is distributed as a
taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains. Proposed regulations would generally
allow the Fund to elect to mark to market annually all of the stock of passive
foreign investment companies held by the Fund. Gain recognized pursuant to
such election is generally treated as ordinary income subject to the
distribution requirements discussed above. It is unclear, however, whether and
in what form such regulations might be promulgated in final form. If the Fund
were to invest in a passive foreign investment company which the Fund elected
to treat as a "qualified electing fund" under the Code, in lieu of the
foregoing requirements, the Fund would ordinarily be required to include in
income each year a portion of the ordinary earnings and net capital gains of
the qualified electing fund, even if not distributed to the Fund, and such
amounts would be subject to the 90% and calendar year distribution
requirements described above. Proposed legislation would revise the passive
foreign investment company rules in various respects; it is unclear whether
and in what form, such legislation might be enacted.
Distributions from the Fund may be subject to additional U.S. Federal,
state, local and non-U.S. taxes depending on each shareholder's particular
situation. Shareholders should consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund and of
the possible impact of changes in applicable tax laws.
If the Fund did not qualify as a regulated investment company for any
taxable year, (i) it would be subject to U.S. Federal income tax at regular
corporate rates on its taxable income (which would be computed without
deduction for distributions paid to shareholders) and to certain state and
local taxes, (ii) its distributions to shareholders out of its current or
accumulated earnings and profits would be taxable to shareholders as ordinary
dividend income (even if derived from long-term capital gains) and subject to
withholding in the case of non-U.S. shareholders and (iii) non-U.S. income
taxes, and U.S. Federal income taxes paid by the Fund on any undistributed
long-term capital gains, would not "pass through" to shareholders. In
addition, if the Fund failed to qualify for taxation as a regulated investment
company for a period greater than one taxable year, the Fund would be required
to recognize any net built-in gains (the excess of aggregate gains over
aggregate losses that would have been realized if it had been liquidated) if
it were to qualify as a regulated investment company in a later taxable year.
BRAZILIAN TAXES
The following description of certain Brazilian tax matters relating to the
Fund and its shareholders represents the opinion of Brazilian counsel to the
Fund.
Capital gains earned by the Fund from its activities in Brazil are currently
exempt from income tax. However, the Brazilian Government has introduced a
bill in the Brazilian Congress which included a proposal whereby the capital
gains earned by Managed Portfolios (such as the Fund) would be subject to
income tax at the following rates: (i) 5%, when earned in the 1996 calendar
year; (ii) 10%, when earned in the 1997 calendar year; and (iii) 15%, when
earned from the 1998 calendar year onward. A more recent proposal would
provide an exemption from such taxes for investments with a term of 180 days
or more. Following discussions, the Government agreed to withdraw its original
proposal. No guarantee can be given that capital gains earned by the Fund will
remain exempt from income tax in the future.
Under Brazilian Law 8981 of January 20, 1995, a 15% withholding tax is
imposed on distribution of dividends (but not on capital gains) received from
investments in securities at the time the Fund receives the
15
<PAGE>
income. Other income (excluding capital gains), such as interest, is subject
to a 10% withholding tax imposed at the time the Fund earns income.
Upon distribution of income and/or total or partial liquidation of the
investment, the amount attributed to the foreign investor (including capital
gains and income) can be remitted abroad tax-free.
Dividends paid by the Fund outside of Brazil are not subject to any
Brazilian taxes.
Should the Fund contravene any applicable regulations, it could become
subject to Brazilian tax rates applicable to other foreign investors, which
are likely to be less favorable than those described above.
Pursuant to Decree 1591 of August 10, 1995, Reais resulting from the
conversion of foreign currency by the Fund that are used by the Fund to invest
in securities of Brazilian entities are subject to a tax on financial
transactions ("IOF"). Under article four thereof, the Ministry of Finance is
empowered to establish the applicable IOF rate. The IOF tax rate initially was
set at 0%, subsequently increased to 1.0% and on March 10, 1995 reduced to 0%
again. Under Law 8894 of June 21, 1994, such IOF rate may be increased at any
time to a maximum rate of 25%.
There are no other Brazilian taxes (currency gain, estate, sales, transfer,
property, stamp, etc.) applicable to the Fund or its shareholders in
connection with the Fund's proposed activities in Brazil.
PORTFOLIO TRANSACTIONS AND BROKERAGE
To the maximum extent feasible, the Manager places orders for portfolio
transactions through its wholly owned subsidiary, Scudder Investor Services,
Inc. (the "Distributor"), which in turn places orders on behalf of the Fund
with other brokers and dealers. The Distributor receives no commission, fees
or other remuneration from the Fund for this service. Allocation of brokerage
is supervised by the Manager.
The primary objective of the Manager in placing orders for the purchase and
sale of securities for the Fund's portfolio is to obtain the most favorable
net results, taking into account such factors as price, commission (fixed in
the case of transactions on the Stock Exchanges and subject to a 50% discount
for transactions effected by Brazilian brokers), size of order, difficulty of
execution and skill required of the broker/dealer. Orders for agency
transactions may be placed among Brazilian brokers, consistent with this
policy. The Manager reviews on a routine basis commission rates, execution and
settlement services performed, and performs comparisons among the Fund's
brokers and with other brokers.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Manager's practice to place such orders with
brokers and dealers who supply market quotations to the custodian of the Fund
for appraisal purposes, or who supply research, market and statistical
information to the Manager. The term "research, market and statistical
information" includes advice as to the value of securities, the advisability
of investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, and furnishing analyses and
reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of accounts. The Manager is not
authorized when placing portfolio transactions for the Fund to pay a brokerage
commission or transaction cost in excess of that which another broker might
have charged for executing the same transaction solely on account of the
receipt of such research, market or statistical information. The Manager does
not place orders with brokers or dealers on the basis that the broker or
dealer has or has not sold shares of the Fund as part of its initial offering
or the present offering. Except for implementing the policy stated above,
there is no intention to place portfolio transactions with any particular
brokers or dealers or groups thereof. In effecting transactions in over-the-
counter securities, orders are placed with the principal market makers for the
security being traded unless, after exercising care, it appears that more
favorable results are available otherwise.
16
<PAGE>
Although certain research, market and statistical information from brokers
and dealers can be useful to the Fund and to the Manager, such information, in
the Manager's opinion, is only supplementary to the Manager's own research
effort, since the information must still be analyzed, weighed and reviewed by
the Manager's staff. Such information may be useful to the Manager in
providing services to clients other than the Fund, and not all such
information is used by the Manager in connection with the Fund. Conversely,
such information provided to the Manager by brokers and dealers through whom
other clients of the Manager effect securities transactions may be useful to
the Manager in providing services to the Fund.
Consistent with the policy of seeking to obtain the most favorable net
results for the year ended December 31, 1994, the Fund paid brokerage
commissions of $164,469 (100% of the total brokerage commissions) for
transactions placed with brokers and dealers who provided supplementary
research, market and statistical information to the Fund or the Manager. The
amount of such transactions aggregated $64,387,099 (100% of all transactions
subject to brokerage commissions). The balance of the brokerage commissions
for 1994 was not allocated to any particular broker or dealer or with regard
to the above-mentioned or any other special factors.
During the fiscal years ended December 31, 1992 and 1993, the Fund paid
total brokerage commissions of $77,285 and $80,178, respectively.
17
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants, August 16, 1995........................ F-2
Investment Portfolio, June 30, 1995....................................... F-3
Statement of Assets and Liabilities, June 30, 1995........................ F-6
Statement of Operations, for the six months ended June 30, 1995........... F-7
Statements of Changes in net assets for the six months ended June 30, 1995
and year ended
December 31, 1994........................................................ F-8
Financial Highlights for the six months ended June 30, 1995 and for the
years ended
December 31, 1994........................................................ F-9
Notes to Financial Statements, June 30, 1995.............................. F-10
Report of Independent Accountants, February 13, 1995...................... F-13
Investment Portfolio, December 31, 1994................................... F-14
Statement of Assets and Liabilities, December 31, 1994.................... F-17
Statement of Operations, for the year ended December 31, 1994............. F-18
Statements of Changes in net assets for the years ended December 31, 1994
and 1993................................................................. F-19
Financial Highlights for the years ended December 31, 1994................ F-20
Notes to Financial Statements, December 31, 1994.......................... F-21
</TABLE>
F-1
<PAGE>
[LOGO]THE BRAZIL FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and the Board of Directors of The Brazil Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule 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 Brazil Fund,
Inc. (the "Fund") at June 30, 1995, the results of its operations, the changes
in its net assets and the financial highlights for each of the periods
indicated, 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 June 30, 1995 by correspondence with the
custodian and brokers, and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 16, 1995
F-2
<PAGE>
[LOGO]THE BRAZIL FUND, INC.
INVESTMENT PORTFOLIO
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
INDUSTRY SHARES COMPANY VALUE ($)
-------- ------ ------- ----------
<C> <C> <C> <S> <C>
EQUITY SECURITIES 96.0%
AUTO PARTS 0.9% 93,761,800 (pfd.) Metal Leve S.A.
Industria e Comercio... 2,648,351
----------
BANKING 9.9% 671,737,708 (pfd.) Banco Bradesco S.A. .... 5,692,074
76,294,208 (pfd.) Banco Itau S.A. ........ 23,207,364
----------
28,899,438
----------
CHEMICALS 6.4% 28,647,000 (voting) Companhia Petroquimica
do Sul S.A. ........... 1,117,249
5,039,400 (pfd.) COPENE Petroquimica do
Nordeste S.A. "A"...... 3,980,004
1,458,646,800 (voting) Ucar Carbon S.A. ....... 1,774,779
12,833,921,463 (voting) S/A White Martins ...... 11,711,563
----------
18,583,595
----------
CONSTRUCTION 1.5% 4,476,300 (voting) Odebrecht S.A. ......... 2,514,120
1,182,600 (voting) S/A Moinho Santista
Industrias Gerais*..... 1,862,868
----------
4,376,988
----------
ELECTRICAL EQUIPMENT 4.9% 9,042,000 (pfd.) Brasmotor S.A. ......... 1,669,897
5,813,800 (pfd.) Empresa Brasileira de
Compressores S.A.(b)... 3,979,027
610,582 (voting) Pirelli Cabos S.A.*..... 862,310
17,006,600 (pfd.) Weg S.A. ............... 7,759,665
----------
14,270,899
----------
FOOD AND BEVERAGE 12.0% 56,096,254 (pfd.) Companhia Cervejaria
Brahma ................ 18,403,593
1,001,659 (pfd.) Companhia Cervejaria
Brahma
(New (c)) ............. 299,246
6,314,433 (pfd.) Companhia Cervejaria
Brahma Warrants
(expire 9/30/96)* (b) 823,174
14,551,430 (pfd.) Sadia Concordia S/A. ... 13,595,035
1,768,900 (voting) Santista Alimentos
S.A.*.................. 1,345,171
43,281,812 (pfd.) Sementes Agroceres
S/A. .................. 728,808
----------
35,195,027
----------
FOREST PRODUCTS 10.2% 5,733,599 (pfd.) Aracruz Celulose S.A.
"B"*................... 13,391,893
2,199,600 (pfd.) Companhia Suzano de
Papel e Celulose....... 11,230,983
3,623,792 (pfd.) Industrias Klabin de
Papel e Celulose S/A. . 5,117,794
----------
29,740,670
----------
GLASS 3.2% 2,270,236 (voting) Companhia Vidraria Santa
Marina................. 9,310,311
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
INVESTMENT PORTFOLIO
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
INDUSTRY SHARES COMPANY VALUE ($)
-------- ------ ------- -----------
<C> <C> <C> <S> <C>
IRON AND STEEL 3.2% 12,911,670 (voting) Companhia Siderurgica
Belgo-Mineira ......... 1,280,647
7,200,000,000 (pfd.) Usinas Siderurgicas de
Minas
Gerais S/A. ........... 8,134,709
-----------
9,415,356
-----------
MINING 6.6% 113,888,000 (pfd.) Companhia Vale do Rio
Doce .................. 17,197,645
10,368,389 (pfd.) S.A. Mineracao da
Trindade .............. 259,069
36,396,800 (voting) S.A. Mineracao da
Trindade .............. 1,779,311
-----------
19,236,025
-----------
PETROLEUM 6.4% 222,739,999 (pfd.) Petroleo Brasileiro
S/A. .................. 18,874,221
-----------
RETAILING 3.8% 15,408,041 (pfd.) Casa Anglo Brasileira
S.A.* ................. 1,456,273
101,031,600 (pfd.) Lojas Americanas S.A. .. 2,250,025
247,237,800 (voting) Lojas Americanas S.A. .. 5,626,977
27,899,465 (pfd.) Mesbla S.A. ............ 1,666,997
-----------
11,000,272
-----------
TELECOMMUNICATIONS 12.4% 511,256,600 (pfd.) Telecomunicacoes
Brasileiras S.A. ...... 16,828,979
7,358,900 (pfd.) Telecomunicacoes do
Parana S.A. ........... 2,046,582
141,212,067 (pfd.) Telecomunicacoes de
Sao Paulo S.A. ........ 17,486,978
-----------
36,362,539
-----------
TEXTILES AND APPAREL 3.2% 457,766,740 (pfd.) Cia. Hering ............ 3,978,418
92,193,348 (pfd.) Cia. Hering Textile (b)
....................... 250,389
32,529,600 (pfd.) Sao Paulo Alpargatas
S.A. .................. 5,124,163
-----------
9,352,970
-----------
TOBACCO 5.0% 1,943,043 (voting) Companhia Souza Cruz
Industria e Comercio .. 14,670,450
-----------
UTILITY 6.4% 19,000,000 (pfd.) Centrais Eletricas
Brasileiras
S/A "B" ............... 5,057,034
540,740,952 (pfd.) Companhia Energetica de
Minas Gerais .......... 10,573,968
45,510,000 (pfd.) Companhia Energetica de
Sao Paulo ............. 1,799,635
217,211,500 (voting) Companhia Paranaense de
Energia................ 1,422,906
-----------
18,853,543
-----------
TOTAL EQUITY SECURITIES
(Cost $120,276,286).... 280,790,655
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
INVESTMENT PORTFOLIO
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($) VALUE ($)
---------- -----------
<C> <C> <S> <C>
REPURCHASE 11,633,000 Repurchase Agreement with Donaldson,
AGREEMENT 4.0% Lufkin & Jenrette, dated 6/30/95 at
6.07%, to be repurchased at
$11,638,884 on 7/3/95,
collateralized by a $11,970,000 U.S.
Treasury Note, 4.75%, 8/31/98 (Cost
$11,633,000)........................ 11,633,000
-----------
TOTAL INVESTMENT PORTFOLIO--100.0%
(Cost $131,909,286) (a) ............ 292,423,655
===========
</TABLE>
- --------
(a) The cost of the investment portfolio for federal income tax purposes was
$131,928,453. At June 30, 1995, net unrealized appreciation for all
securities based on tax cost was $160,495,202. This consisted of aggregate
gross unrealized appreciation for all securities in which there was an
excess of market value over tax cost of $166,401,634 and aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over market value of $5,906,432.
(b) Securities valued in good faith by the Board of Directors. The cost of
these securities at June 30, 1995 aggregated $2,553,185. See Note A of the
Notes to Financial Statements.
(c) New shares issued during 1995, eligible for a pro rata share of 1995
dividends.
* Non-income producing security.
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1995
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (identified cost $131,909,286)
(Notes A and D)........................................ $292,423,655
Cash.................................................... 479
Foreign currency holdings, at market (identified cost
$4,884,225) (Note A)................................... 4,806,423
Receivable for investments sold......................... 65,770
Dividends and interest receivable....................... 666,390
Other assets............................................ 1,768
------------
Total assets........................................ 297,964,485
LIABILITIES
Payables:
Investments purchased................................. $ 86,710
Accrued management fee (Note C)....................... 299,268
Accrued administrator's fee (Note C).................. 8,333
Other accrued expenses (Note C)....................... 388,921
--------
Total liabilities................................... 783,232
------------
Net assets.............................................. $297,181,253
============
NET ASSETS
Net assets consist of:
Undistributed net investment income................... $ 3,143,646
Accumulated net realized gain......................... 10,221,173
Net unrealized appreciation (depreciation) on:
Investments......................................... 160,514,369
Foreign currency denominated transactions........... (83,646)
Common stock.......................................... 121,463
Additional paid-in capital............................ 123,264,248
------------
Net assets.............................................. $297,181,253
============
Net asset value per share ($297,181,253 divided by
12,146,285 shares of common stock outstanding,
50,000,000 shares authorized, $.01 par value).......... $ 24.47
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<S> <C> <C>
Investment income
Income:
Dividends (net of withholding tax of $976,899)
(Note A)..................................... $ 5,404,301
Interest...................................... 329,470
------------
5,733,771
Expenses:
Management fee (Note C)....................... $ 1,813,742
Administrator's fee (Note C).................. 28,660
Custodian and accounting fees (Note C)........ 542,296
Directors' fees and expenses (Note C)......... 43,692
Auditing and tax services..................... 49,250
Reports to shareholders....................... 26,541
Legal......................................... 8,920
Other......................................... 77,024 2,590,125
------------ ------------
Net investment income........................... 3,143,646
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVEST-
MENT TRANSACTIONS
Net realized gain (loss) from:
Investments (Note A).......................... 10,626,743
Foreign currency denominated transactions..... (302,140) 10,324,603
------------
Net unrealized depreciation during the period
on:
Investments................................... (91,018,976)
Foreign currency denominated transactions..... (46,186) (91,065,162)
------------ ------------
Net loss on investment transactions............. (80,740,559)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERA-
TIONS............................................ $(77,596,913)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS JUNE 30, 1995 DECEMBER 31, 1994
- --------------------------------- ---------------- -----------------
<S> <C> <C>
Operations:
Net investment income (loss)................ $ 3,143,646 $ (2,009,799)
Net realized gain from investment transac-
tions...................................... 10,324,603 28,598,195
Net unrealized appreciation (depreciation)
on investment transactions during the
period..................................... (91,065,162) 125,691,549
------------ ------------
Net increase (decrease) in net assets
resulting from operations.................... (77,596,913) 152,279,945
------------ ------------
Distributions to shareholders from net
realized gains from investment transactions
($.24 and $2.46 per share, respectively)..... (2,853,224) (29,783,356)
------------ ------------
Net asset value of shares issued to
shareholders in reinvestment of
distributions................................ 1,109,418 330,047
------------ ------------
INCREASE (DECREASE) IN NET ASSETS............. (79,340,719) 122,826,636
Net assets at beginning of period............. 376,521,972 253,695,336
------------ ------------
NET ASSETS AT END OF PERIOD (including
undistributed net investment income of
$3,143,646 in 1995).......................... $297,181,253 $376,521,972
============ ============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period..... 12,107,722 12,093,826
Shares issued to shareholders in reinvest-
ment of distributions...................... 38,563 13,896
------------ ------------
Shares outstanding at end of period........... 12,146,285 12,107,722
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each period and other performance information dervied from the
financial statements and market price data.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, ---------------------------------------
1995 1994 1993 1992 1991 1990
---------- ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period................ $ 31.10 $20.98 $14.12 $13.80 $ 5.97 $ 18.85
------- ------ ------ ------ ------- -------
Net investment income
(loss)(a).............. .26 (.17) .10 .19 .95 1.32
Net realized and
unrealized gain (loss)
on investment
transactions(a)........ (6.65) 12.75 7.58 .79 6.88 (14.08)
------- ------ ------ ------ ------- -------
Total from investment
operations............... (6.39) 12.58 7.68 .98 7.83 (12.76)
------- ------ ------ ------ ------- -------
Less distributions from:
Net investment income... -- -- (.08) -- -- (.12)
Net realized gains on
investments............ (.24) (2.46) (.74) (.66) -- --
------- ------ ------ ------ ------- -------
Total distributions....... (.24) (2.46) (.82) (.66) -- (.12)
------- ------ ------ ------ ------- -------
Net asset value, end of
period................... $ 24.47 $31.10 $20.98 $14.12 $ 13.80 $ 5.97
======= ====== ====== ====== ======= =======
Market value, end of
period................... $ 25.13 $33.00 $21.13 $13.63 $ 14.75 $ 6.63
======= ====== ====== ====== ======= =======
TOTAL INVESTMENT RETURN
Per share market value
(%).................... (23.10)** 69.81 60.89 (3.91) 122.64 (47.98)
Per share net asset
value (%)(b)........... (20.50)** 61.09 54.19 6.43 131.16 (67.98)
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of
period ($ millions).... 297 377 254 171 167 72
Ratio of operating
expenses to average net
assets (%)(c).......... 1.67* 1.71 1.84 2.22 2.15 2.25
Ratio of net investment
income (loss) to
average net assets (%). 2.02* (.58) .56 1.13 8.13 11.27
Portfolio turnover rate
(%).................... 9.91* 5.76 4.67 7.94 12.69 4.31
</TABLE>
- --------
(a) Realized and unrealized currency losses on the Fund's interest bearing
accounts amounted to $.31, $.86 and $2.96 per share in 1992, 1991 and
1990, respectively, of which $1.27 per share is included in net investment
income in 1990.
(b) Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Fund
during each period, and assumes dividends and capital gains distributions,
if any, were reinvested. These percentages are not an indication of the
performance of a shareholder's investment in the Fund based on market
value due to differences between the market price of the stock and the net
asset value of the Fund during each period.
(c) For the years ended December 31, 1993, 1992 and 1990 the ratio of
expenses, including the Brazilian repatriation tax, to average net assets
was 2.22%, 2.39% and 2.56%, respectively.
* Annualized
** Not annualized
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
NOTES TO FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
The Brazil Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, closed-end management
investment company. The policies described below are followed consistently by
the Fund in the preparation of its financial statements in conformity with
generally accepted accounting principles.
Security Valuation. Portfolio securities which are traded on U.S. or foreign
stock exchanges are valued at the most recent sale price reported on the
exchange on which the security is traded most extensively. If no sale
occurred, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked
quotations, the most recent bid quotation is used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value as determined in good
faith by the Valuation Committee of the Board of Directors. Securities valued
in good faith amounted to $5,052,590 (1.7% of net assets) and are noted in the
Investment Portfolio as of June 30, 1995.
Foreign Currency Translations. The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) values of investment securities, other assets and liabilities at the
daily rate of exchange;
(ii) purchases and sales of investment securities, dividend and interest
income and expenses at the daily rate of exchange prevailing on the
respective dates of such transactions.
The Fund does not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included
with the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
Taxation. The Fund's policy is to comply with the requirements of the
Internal Revenue Code which are applicable to regulated investment companies,
and to distribute all of its taxable income to its shareholders. The Fund
accordingly paid no U.S. federal income taxes, and no federal income tax
provision was required.
The Fund is subject to a 15% withholding tax on dividend and interest
income.
Distribution of Income and Gains. The Fund intends to distribute to
shareholders, at least annually, all of its tax basis net investment income,
any net short-term capital gains in excess of net long-term capital losses
(including any capital loss carryover) and expects to distribute annually any
net long-term capital gains in excess of net short-term capital losses
(including any capital loss carryover), which would be taxable to the Fund if
not distributed. An additional distribution may be made to the extent
necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles.
These differences primarily relate to foreign denominated investments and
certain securities sold at a loss. As a result,
F-10
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
net investment income (loss) and net realized gain (loss) on investment and
foreign currency related transactions for a reporting period may differ
significantly from distributions during such period. Accordingly, the Fund may
periodically make reclassifications among certain of its capital accounts
without impacting the net asset value of the Fund.
Other. Investment security transactions are accounted for on a trade date
basis. Dividend income is recorded on the ex-dividend date. Interest income is
recorded on the accrual basis. Distributions to shareholders are recorded at
the earlier of ex or record date. The Fund uses the identified cost method for
determining realized gain or loss on investments and foreign currency for both
financial and federal income tax reporting purposes.
B. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 1995, purchases and sales of investment
securities (excluding short-term investments) aggregated $15,123,855 and
$26,922,255, respectively.
C. INVESTMENT ADVISORY AGREEMENTS AND TRANSACTIONS WITH AFFILIATED PERSONS
Under the Fund's Investment Advisory and Management Agreement (the
"Management Agreement") with Scudder, Stevens & Clark, Inc. (the "Adviser"),
the Fund agrees to pay the Adviser a monthly fee at an annual rate equal to
1.30% of the first $150,000,000 of the Fund's average weekly net assets, 1.25%
of such assets over $150,000,000 and up to and including $300,000,000, and
1.20% of such assets in excess of $300,000,000. For the six months ended June
30, 1995, the fee pursuant to the Management Agreement amounted to $1,813,742.
The Adviser has entered into a Research and Advisory Agreement (the
"Advisory Agreement") with Banco Icatu S/A (the "Brazilian Adviser"), whereby
the Brazilian Adviser provides such investment advice, research, and
assistance as the Adviser may from time to time reasonably request. Under the
Advisory Agreement, the Adviser pays the Brazilian Adviser a monthly fee,
equal to 0.25% of the first $150,000,000 of the Fund's average weekly net
assets, 0.15% of such assets over $150,000,000 and up to and including
$300,000,000, and 0.05% of such assets over $300,000,000. Additionally, the
Brazilian Adviser has agreed to waive approximately one half of their fees.
The Adviser has agreed to pass this waiver through to the Fund and has reduced
its fees accordingly. For the six months ended June 30, 1995, the fee pursuant
to the Advisory Agreement aggregated $299,142, of which $149,571 was waived
and reflected as a reduction of the management fee.
The Fund and the Adviser entered into an Administration Agreement with Banco
de Boston S.A. ("Banco de Boston"), pursuant to which Banco de Boston acts as
the Fund's Brazilian Administrator. The Fund has agreed to pay Banco de
Boston, for services rendered, an annual fee payable quarterly in Brazilian
currency equal to $50,000 per year plus out of pocket expenses. For the six
months ended June 30, 1995, the Administrator fee amounted to $28,660.
Effective June 6, 1995, Scudder Fund Accounting Corporation ("SFAC"), a
wholly-owned subsidiary of the Adviser, assumed responsibility for determining
the daily net asset value per share and maintaining the portfolio and general
accounting records of the Fund. For the six months ended June 30, 1995, the
amount charged to the Fund by SFAC aggregated $12,744, all of which is unpaid
at June 30, 1995.
The Fund pays each Director not affiliated with the Adviser an annual fee of
$6,000 except for two Directors who, as residents of Brazil, receive a fee of
$12,000, plus specified amounts for each Board of Directors or committee
meeting attended. For the six months ended June 30, 1995, Directors' fees and
expenses amounted to $43,692.
F-11
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
D. FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN BRAZIL
Investing in Brazil may involve considerations not typically associated with
investing in securities issued by domestic companies such as more volatile
prices and less liquid securities.
The Brazilian Government has exercised and continues to exercise substantial
influence over many aspects of the private sector by legislation and
regulation, including regulation of prices and wages.
Brazilian law imposes certain limitations and controls which generally
affect foreign investors in Brazil. The Fund has obtained from the Brazilian
Securities Commission authorization, subject to certain restrictions, to
invest in Brazilian securities. Under current Brazilian law, the Fund may
repatriate income received from dividends and interest earned on, and net
realized capital gains from, its investments in Brazilian securities. Under
its authorization, the Fund may also repatriate capital, but only to the
extent necessary to distribute income and capital gains (as computed for U.S.
federal income tax purposes), to pay expenses incurred outside of Brazil, to
repay borrowings made for temporary or emergency purposes, and in connection
with the termination of the Fund (provided that the Fund's dissolution has
been approved by holders of at least two-thirds of the Fund's shares). Under
current Brazilian law, whenever there occurs a serious imbalance in Brazil's
balance of payments or serious reasons to foresee the imminence of such an
imbalance, Brazil's National Monetary Council may, for a limited period,
impose restrictions on foreign capital remittances abroad. Exchange control
regulations, which may restrict repatriation of investment income, capital or
the proceeds of securities sales by foreign investors, may limit the Fund's
ability to make sufficient distributions, within applicable time periods, to
qualify for the favorable U.S. tax treatment afforded to regulated investment
companies.
The Fund is unable to predict whether further economic reforms or
modifications to the existing policies by the Brazilian Government may
adversely affect the liquidity of the Brazilian stock market in the future.
E. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (000 OMITTED)
<TABLE>
<CAPTION>
NET GAIN (LOSS) NET INCREASE
ON INVESTMENT AND (DECREASE)
FOREIGN CURRENCY IN NET ASSETS
INVESTMENT NET INVESTMENT DENOMINATED RESULTING
INCOME INCOME (LOSS) TRANSACTIONS FROM OPERATIONS
------------ ----------------- ------------------ ------------------
PER PER PER PER
1995 TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE
- ---- ------ ----- -------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31................ $3,337 $.27 $ 2,007 $ .17 $(104,842) $ (8.64) $(102,835) $ (8.47)
June 30................. 2,397 .20 1,137 .09 24,101 1.99 25,238 2.08
------ ---- -------- ------ --------- ------- --------- -------
Totals.................. $5,734 $.47 $ 3,144 $ .26 $ (80,741) $ (6.65) $ (77,597) $ (6.39)
====== ==== ======== ====== ========= ======= ========= =======
<CAPTION>
PER PER PER PER
1994 TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE
- ---- ------ ----- -------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31................ $1,119 $.09 $ (373) $ (.03) $ 83,849 $ 6.93 $ 83,476 $ 6.90
June 30................. 986 .08 (133) (.01) (62,259) (5.15) (62,392) (5.16)
September 30............ 1,017 .09 (503) (.04) 182,768 15.11 182,265 15.07
December 31............. 829 .07 (1,001) (.09) (50,068) (4.14) (51,069) (4.23)
------ ---- -------- ------ --------- ------- --------- -------
Totals.................. $3,951 $.33 $ (2,010) $ (.17) $ 154,290 $12.75 $ 152,280 $12.58
====== ==== ======== ====== ========= ======= ========= =======
</TABLE>
F-12
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and the Board of
Directors of The Brazil Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of The Brazil Fund,
Inc. (the "Fund") at December 31, 1994, the results of its operations, the
changes in its net assets and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 13, 1995
F-13
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
INVESTMENT PORTFOLIO
AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
INDUSTRY SHARES COMPANY VALUE ($)
-------- ------ ------- ----------
<C> <C> <C> <S> <C>
EQUITY SECURITIES 92.8%
AUTO PARTS 1.1%.......... 103,761,800 (pfd.) Metal Leve S.A.
Industria e Comercio... 4,354,071
----------
BANKING 5.4% 77,794,208 (pfd.) Banco Itau S.A. ........ 21,794,332
----------
CHEMICALS 7.8% 21,347,000 (voting) Companhia Petroquimica
do Sul S.A. ........... 1,261,643
11,029,400 (pfd.) COPENE Petroquimica do
Nordeste S.A. "A"...... 9,634,429
182,330,850 (voting) Ucar Carbon S.A. ....... 3,232,816
1,176,720,133 (voting) S/A White Martins....... 17,108,342
----------
31,237,230
----------
CONSTRUCTION 2.2% 4,476,300 (voting) Odebrecht S.A........... 3,783,161
1,182,600 (voting) S/A Moinho Santista
Industrias Gerais*..... 4,892,553
----------
8,675,714
----------
ELECTRICAL EQUIPMENT 5.9% 14,718,000 (pfd.) Brasmotor S.A. ......... 5,967,227
5,613,800 (pfd.) Empresa Brasileira de
Compressores S.A. (b).. 5,175,844
610,582 (voting) Pirelli Cabos S.A.*..... 1,263,024
17,006,600 (pfd.) Weg S.A. (b)............ 11,458,348
----------
23,864,443
----------
FOOD AND BEVERAGE 11.2% 58,096,254 (pfd.) Companhia Cervejaria
Brahma................. 19,149,102
6,314,433 (pfd.) Companhia Cervejaria
Brahma Warrants (expire
9/30/96)*.............. 671,748
1,748,900 (voting) Santista Alimentos
S.A.*.................. 3,597,028
14,551,430 (pfd.) Sadia Concordia S/A. ... 20,296,321
51,481,812 (pfd.) Sementes Agroceres
S/A. .................. 1,399,624
----------
45,113,823
----------
FOREST PRODUCTS 9.0% 4,747,700 (pfd.) Aracruz Celulose S.A.
"B"*................... 12,901,847
2,236,600 (pfd.) Companhia Suzano de
Papel e Celulose S.A. . 15,333,664
5,199,792 (pfd.) Industrias Klabin de
Papel e
Celulose S/A. ......... 7,744,371
----------
35,979,882
----------
GLASS 2.9% 2,310,236 (voting) Companhia Vidraria Santa
Marina................. 11,824,258
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
INVESTMENT PORTFOLIO--(CONTINUED)
AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
INDUSTRY SHARES COMPANY VALUE ($)
-------- ------ ------- -----------
<C> <C> <C> <S> <C>
IRON AND STEEL 5.0% 17,207,708 (pfd.) Companhia Siderugica
Belgo-Mineira.......... 2,379,789
12,911,670 (voting) Companhia Siderugica
Belgo-Mineira.......... 1,839,074
185,600,000 (voting) Companhia Siderugica
Nacional............... 6,329,267
7,000,000,000 (pfd.) Usinas Siderurgicas de
Minas
Gerais S/A............. 9,515,366
-----------
20,063,496
-----------
MINING 7.3% 133,888,000 (pfd.) Companhia Vale do Rio
Doce................... 25,479,868
32,408,536 (pfd.) S.A. Mineracao da
Trindade............... 1,681,720
33,088,000 (voting) S.A. Mineracao da
Trindade............... 1,994,667
-----------
29,156,255
-----------
PETROLEUM 7.7% 245,739,999 (pfd.) Petroleo Brasileiro
S/A. .................. 31,077,686
-----------
RETAILING 4.8% 15,408,041 (pfd.) Casa Anglo Brasileira
S.A.*.................. 3,642,563
119,311,600 (pfd.) Lojas Americanas S.A. .. 3,525,757
242,237,800 (voting) Lojas Americanas S.A. .. 6,731,691
29,909,465 (pfd.) Mesbla S.A. ............ 5,373,805
-----------
19,273,816
-----------
TELECOMMUNICATIONS 11.8% 561,256,600 (pfd.) Telecomunicacoes
Brasileiras S.A. ...... 25,143,765
6,478,900 (pfd.) Telecomunicacoes do
Parana S.A. ........... 2,144,317
141,212,067 (pfd.) Telecomunicacoes de
Sao Paulo S.A. ........ 20,113,539
-----------
47,401,621
-----------
TEXTILES AND APPAREL 3.3% 460,166,740 (pfd.) Cia. Hering............. 7,071,120
32,529,600 (pfd.) Sao Paulo Alpargatas
S.A ................... 6,152,170
-----------
13,223,290
-----------
TOBACCO 4.0% 1,943,043 (voting) Companhia Souza Cruz
Industria e Comercio... 16,077,188
-----------
TRANSPORTATION 0.1% 139,030 (pfd.) Varig S.A.*............. 460,147
-----------
UTILITY 3.3% 145,408,480 (pfd.) Cia. Energetica de Minas
Gerais................. 13,234,578
15,911,500 (voting) Companhia Paranaense
de Energia............. 169,459
13,404,037
-----------
TOTAL EQUITY SECURITIES
(Cost $121,447,944).... 372,981,289
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
INVESTMENT PORTFOLIO--(CONTINUED)
AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL
INDUSTRY AMOUNT ($) COMPANY VALUE ($)
-------- ---------- ------- -----------
<C> <C> <S> <C>
COMMERCIAL PAPER 7.2%
7,000,000 Chevron Oil Finance Co.,
5.48%, 1/5/95............. 7,000,000
21,762,000 CIT Group Holdings Inc.,
6.05%, 1/3/95............. 21,762,000
-----------
TOTAL COMMERCIAL PAPER
(Cost $28,762,000)........ 28,762,000
-----------
TOTAL INVESTMENT
PORTFOLIO--100.0%
(Cost $150,209,944) (a)... 401,743,289
===========
</TABLE>
- --------
(a) The cost of the investment portfolio for federal income tax purposes was
$150,229,111. At December 31, 1994, net unrealized appreciation for all
securities based on tax cost was $251,514,178. This consisted of aggregate
gross unrealized appreciation for all securities in which there was an
excess of market value over tax cost of $251,757,523 and aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over market value of $243,345.
(b) Securities valued in good faith by the Board of Directors. The cost of
these securities at December 31, 1994 aggregated $5,227,974. See Note A of
the Notes to Financial Statements.
* Non-income producing security.
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (identified cost $150,209,944)
(Notes A and D)...................................... $401,743,289
Cash.................................................. 3,102
Foreign currency holdings, at market (identified cost
$882,345) (Note A)................................... 888,603
Dividends and interest receivable..................... 243,342
Other assets.......................................... 1,979
------------
Total assets...................................... 402,880,315
LIABILITIES
Payables:
Dividend Payable.................................... $25,668,371
Accrued management fee (Note C)..................... 405,013
Accrued administrator's fee (Note C)................ 33,333
Other accrued expenses (Note C)..................... 251,626
-----------
Total liabilities................................. 26,358,343
------------
Net assets............................................ $376,521,972
============
NET ASSETS
Net assets consist of:
Accumulated net realized gain....................... $2,749,794
Net unrealized appreciation (depreciation) on:
Investments....................................... 251,533,345
Foreign currency denominated transactions......... (37,460)
Common stock........................................ 121,077
Additional paid-in capital.......................... 122,155,216
------------
Net assets............................................ $376,521,972
============
NET ASSET VALUE per share ($376,521,972 / 12,107,722
shares of common stock outstanding, 50,000,000 shares
authorized, $.01 par value).......................... $ 31.10
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
Investment income
Income:
Dividends (net of withholding tax of $582,727)
(Note A)..................................... $ 3,283,641
Interest...................................... 667,145
------------
3,950,786
Expenses:
Management fee (Note C)....................... $ 4,371,086
Administrator's fee (Note C).................. 52,961
Directors' fees and expenses (Note C)......... 84,504
Custodian fees................................ 1,003,419
Auditing, accounting and tax services......... 85,600
Reports to shareholders....................... 51,917
Legal......................................... 27,069
IPMF tax (Note A)............................. 154,687
Other......................................... 129,342 5,960,585
------------ ------------
Net investment loss............................. (2,009,799)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments (net of IOF tax of $47,046) (Note
A)........................................... 28,912,830
Foreign currency denominated transactions..... (314,635) 28,598,195
------------ ------------
Net unrealized appreciation during the period
on:
Investments................................... 125,676,020
Foreign currency denominated transactions..... 15,529 125,691,549
------------ ------------
Net gain on investment transactions............. 154,289,744
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS....................................... $152,279,945
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss)..................... $ (2,009,799) $ 1,231,789
Net realized gain from investment transactions... 28,598,195 10,570,428
Net unrealized appreciation on investment
transactions during the period.................. 125,691,549 80,936,531
------------ ------------
Net increase in net assets resulting from
operations........................................ 152,279,945 92,738,748
------------ ------------
Distributions to shareholders from:
Net investment income ($.08 per share)........... -- (967,506)
------------ ------------
Net realized gains from investment transactions
($2.46 and $.74 per share, respectively)........ (29,783,356) (8,888,487)
------------ ------------
Net asset value of shares issued to shareholders in
reinvestment of distributions..................... 330,047 181,900
------------ ------------
INCREASE IN NET ASSETS............................. 122,826,636 83,064,655
Net assets at beginning of period.................. 253,695,336 170,630,681
------------ ------------
NET ASSETS AT END OF PERIOD (including accumulated
net investment loss of $39,750 in 1993)........... $376,521,972 $253,695,336
============ ============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period.......... 12,093,826 12,081,227
Shares issued to shareholders in reinvestment of
distributions................................... 13,896 12,599
------------ ------------
Shares outstanding at end of period................ 12,107,722 12,093,826
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements and market price data.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.. $20.98 $14.12 $13.80 $ 5.97 $ 18.85
------ ------ ------ ------- -------
Net investment income (loss)(a)..... (.17) .10 .19 .95 1.32
Net realized and unrealized gain
(loss) on investment
transactions(a).................... 12.75 7.58 .79 6.88 (14.08)
------ ------ ------ ------- -------
Total from investment operations...... 12.58 7.68 .98 7.83 (12.76)
------ ------ ------ ------- -------
Less distributions from:
Net investment income............... -- (.08) -- -- (.12)
Net realized gains on investments... (2.46) (.74) (.66) -- --
------ ------ ------ ------- -------
Total distributions................... (2.46) (.82) (.66) -- (.12)
------ ------ ------ ------- -------
Net asset value, end of period........ $31.10 $20.98 $14.12 $ 13.80 $ 5.97
====== ====== ====== ======= =======
Market value, end of period........... $33.00 $21.13 $13.63 $ 14.75 $ 6.63
====== ====== ====== ======= =======
TOTAL INVESTMENT RETURN
Per share market value (%).......... 69.81 60.89 (3.91) 122.64 (47.98)
Per share net asset value (%)(b).... 61.09 54.19 6.43 131.16 (67.98)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($
millions).......................... 377 254 171 167 72
Ratio of operating expenses to
average net assets (%)(c).......... 1.71 1.84 2.22 2.15 2.25
Ratio of net investment income
(loss) to average net
assets (%)......................... (.58) .56 1.13 8.13 11.27
Portfolio turnover rate (%)......... 5.76 4.67 7.94 12.69 4.31
</TABLE>
- --------
(a) Realized and unrealized currency losses on the Fund's interest bearing
accounts amounted to $.31, $.86 and $2.96 per share in 1992, 1991 and
1990, respectively, of which $1.27 per share is included in net investment
income in 1990.
(b) Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Fund
during each period, and assumes dividends and capital gains distributions,
if any, were reinvested. These percentages are not an indication of the
performance of a shareholder's investment in the Fund based on market
value due to differences between the market price of the stock and the net
asset value of the Fund during each period.
(c) For the years ended December 31, 1993, 1992 and 1990 the ratio of
expenses, including the Brazilian repatriation tax, to average net assets
was 2.22%, 2.39% and 2.56%, respectively.
F-20
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
NOTES TO FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
The Brazil Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, closed-end management
investment company. The policies described below are followed consistently by
the Fund in the preparation of its financial statements in conformity with
generally accepted accounting principles.
Security Valuation. Portfolio securities which are traded on U.S. or foreign
stock exchanges are valued at the most recent sale price reported on the
exchange on which the security is traded most extensively. If no sale
occurred, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked
quotations, the most recent bid quotation is used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value as determined in good
faith by the Valuation Committee of the Board of Directors. Securities valued
in good faith amounted to $16,634,192 (4.4% of net assets) and are noted in
the Investment Portfolio as of December 31, 1994.
Foreign Currency Translations. The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) values of investment securities, other assets and liabilities at the
daily rate of exchange;
(ii) purchases and sales of investment securities, dividend and interest
income and expenses at the daily rate of exchange prevailing on the
respective dates of such transactions.
The Fund does not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included
with the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
Taxation. The Fund's policy is to comply with the requirements of the
Internal Revenue Code which are applicable to regulated investment companies,
and to distribute all of its taxable income to its shareholders. The Fund
accordingly paid no U.S. federal income taxes, and no federal income tax
provision was required.
Effective January 1, 1994, the Fund will be subject to a 15% withholding tax
on dividend and interest income. Prior to January 1, 1994, the Fund had been
subject to a 15% Brazilian repatriation tax with respect to remittances
outside of Brazil of its dividend and interest income net of applicable
expenses. The Fund is also subject to a 0.25% Imposto Provisorio Sobre
Movimentacoes Financieras ("IPMF") tax on debits (withdrawals) for banking
transactions. Effective January 1, 1995, the IPMF tax will no longer be
enforced. Additionally, the Fund is subject to a variable rate Imposto Sobre
Operacoes Financeiras ("IOF") tax which is imposed on the redemption of
certain short-term investments. Effective October 20, 1994, the Fund was no
longer able to hold such short-term investments. Therefore, the Fund was not
subject to the IOF tax subsequent to that date.
Distribution of Income and Gains. The Fund intends to distribute to
shareholders, at least annually, all of its tax basis net investment income,
any net short-term capital gains in excess of net long-term capital losses
(including any capital loss carryover) and expects to distribute annually any
net long-term capital gains in excess of net short-term capital losses
(including any capital loss carryover), which would be taxable to the Fund if
not
F-21
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
distributed. An additional distribution may be made to the extent necessary to
avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles.
These differences primarily relate to foreign denominated investments and
certain securities sold at a loss. As a result, net investment income (loss)
and net realized gain (loss) on investment and foreign currency related
transactions for a reporting period may differ significantly from
distributions during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
Other. Investment security transactions are accounted for on a trade date
basis. Dividend income is recorded on the ex-dividend date. Interest income is
recorded on the accrual basis. Distributions to shareholders are recorded at
the earlier of ex or record date. The Fund uses the identified cost method for
determining realized gain or loss on investments and foreign currency for both
financial and federal income tax reporting purposes.
B. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1994, purchases and sales of investment
securities (excluding short-term investments) aggregated $18,932,956 and
$46,021,425, respectively.
C. INVESTMENT ADVISORY AGREEMENTS AND TRANSACTIONS WITH AFFILIATED PERSONS
Under the Fund's Investment Advisory and Management Agreement (the
"Management Agreement") with Scudder, Stevens & Clark, Inc. (the "Adviser"),
the Fund agrees to pay the Adviser a monthly fee at an annual rate equal to
1.30% of the first $150,000,000 of the Fund's average weekly net assets, 1.25%
of such assets over $150,000,000 and up to and including $300,000,000, and
1.20% of such assets in excess of $300,000,000. For the year ended December
31, 1994, the fee pursuant to the Management Agreement amounted to $4,371,086.
The Adviser has entered into a Research and Advisory Agreement (the
"Advisory Agreement") with Banco Icatu S/A (the "Brazilian Adviser"), whereby
the Brazilian Adviser provides such investment advice, research, and
assistance as the Adviser may from time to time reasonably request. Under the
Advisory Agreement, the Adviser pays the Brazilian Adviser a monthly fee,
equal to 0.25% of the first $150,000,000 of the Fund's average weekly net
assets, 0.15% of such assets over $150,000,000 and up to and including
$300,000,000, and 0.05% of such assets over $300,000,000. Effective November
1, 1994, the Brazilian Adviser has agreed to waive approximately one half of
their fees. The Adviser has agreed to pass this waiver through to the Fund and
has reduced its fees accordingly. For the year ended December 31, 1994, the
fee pursuant to the Advisory Agreement aggregated $617,844, of which $55,048
was waived and reflected as a reduction of the management fee.
The Fund and the Adviser entered into an Administration Agreement with Banco
de Boston S.A. ("Banco de Boston"), pursuant to which Banco de Boston acts as
the Fund's Brazilian Administrator. The Fund has agreed to pay Banco de
Boston, for services rendered, an annual fee payable quarterly in Brazilian
currency equal to $50,000 per year plus out of pocket expenses. For the year
ended December 31, 1994, the Administrator fee amounted to $52,961.
The Fund pays each Director not affiliated with the Adviser an annual fee of
$4,500 except for two Directors who, as residents of Brazil, receive a fee of
$9,000, plus specified amounts for each Board of Directors or committee
meeting attended. Effective August 1, 1994, the Fund pays each Director not
affiliated with the Adviser an annual fee of $6,000 except for two Directors
who, as residents of Brazil, receive a fee of $12,000, plus specified amounts
for each Board of Directors or committee meeting attended. For the year ended
December 31, 1994, Directors' fees and expenses amounted to $84,504, of which
$4,886 is unpaid at December 31, 1994.
F-22
<PAGE>
[LOGO] THE BRAZIL FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
D. FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN BRAZIL
Investing in Brazil may involve considerations not typically associated with
investing in securities issued by domestic companies such as more volatile
prices and less liquid securities.
The Brazilian Government has exercised and continues to exercise substantial
influence over many aspects of the private sector by legislation and
regulation, including regulation of prices and wages.
Brazilian law imposes certain limitations and controls which generally
affect foreign investors in Brazil. The Fund has obtained from the Brazilian
Securities Commission authorization, subject to certain restrictions, to
invest in Brazilian securities. Under current Brazilian law, the Fund may
repatriate income received from dividends and interest earned on, and net
realized capital gain from, its investments in Brazilian securities. Under its
authorization, the Fund may also repatriate capital, but only to the extent
necessary to distribute income and capital gains (as computed for U.S. federal
income tax purposes), to pay expenses incurred outside of Brazil, to repay
borrowings made for temporary or emergency purposes, and in connection with
the termination of the Fund (provided that the Fund's dissolution has been
approved by holders of at least two-thirds of the Fund's shares). Under
current Brazilian law, whenever there occurs a serious imbalance in Brazil's
balance of payments or serious reasons to foresee the imminence of such an
imbalance, Brazil's National Monetary Council may, for a limited period,
impose restrictions on foreign capital remittances abroad. Exchange control
regulations, which may restrict repatriation of investment income, capital or
the proceeds of securities sales by foreign investors, may limit the Fund's
ability to make sufficient distributions, within applicable time periods, to
qualify for the favorable U.S. tax treatment afforded to regulated investment
companies.
The Fund is unable to predict whether further economic reforms or
modifications to the existing policies by the Brazilian Government may
adversely affect the liquidity of the Brazilian stock market in the future.
E. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (000 OMITTED)
<TABLE>
<CAPTION>
NET GAIN (LOSS) NET INCREASE
ON INVESTMENT AND (DECREASE)
FOREIGN CURRENCY IN NET ASSETS
INVESTMENT NET INVESTMENT DENOMINATED RESULTING
INCOME INCOME (LOSS) TRANSACTIONS FROM OPERATIONS
-------------- ----------------- ------------------- ----------------
PER PER PER PER
1994 TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE
- ---- ------- ----- -------- ------- --------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31................ $ 1,119 $ .09 $ (373) $ (.03) $ 83,849 $ 6.93 $ 83,476 $ 6.90
June 30................. 986 .08 (133) (.01) (62,259) (5.15) (62,392) (5.16)
September 30............ 1,017 .09 (503) (.04) 182,768 15.11 182,265 15.07
December 31............. 829 .07 (1,001) (.09) (50,068) (4.14) (51,069) (4.23)
------- ----- -------- ------ --------- ------- -------- ------
Totals................ $ 3,951 $ .33 $ (2,010) $ (.17) $ 154,290 $ 12.75 $152,280 $12.58
======= ===== ======== ====== ========= ======= ======== ======
<CAPTION>
PER PER PER PER
1993 TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE
- ---- ------- ----- -------- ------- --------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31................ $ 1,180 $ .10 $ 245 $ .02 $ 28,741 $ 2.38 $ 28,986 $ 2.40
June 30................. 3,097 .26 1,757 .15 23,242 1.92 24,999 2.07
September 30............ 3,985 .33 2,526 .21 29,066 2.41 31,592 2.62
December 31............. (2,135) (.18) (3,296) (.28) 10,458 .87 7,162 .59
------- ----- -------- ------ --------- ------- -------- ------
Totals................ $ 6,127 $ .51 $ 1,232 $ .10 $ 91,507 $ 7.58 $ 92,739 $ 7.68
======= ===== ======== ====== ========= ======= ======== ======
</TABLE>
F-23
