The Brazil Fund, Inc.
Semiannual Report
June 30, 1997
A closed-end investment company seeking long-term capital appreciation through
investment primarily in the equity securities of Brazilian issuers.
<PAGE>
The Brazil Fund, Inc.
Investment objective and policies
o long-term capital appreciation through investment primarily in equity
securities of Brazilian issuers
Investment characteristics
o closed-end investment company investing in a broad spectrum of Brazilian
industries
o a vehicle for international diversification through participation in the
Brazilian economy
General Information
Executive offices
The Brazil Fund, Inc.
345 Park Avenue
New York, NY 10154
For Fund information: 1-800-349-4281
Transfer agent, registrar and dividend
reinvestment plan agent
For account information: 1-800-426-5523
The First National Bank of Boston
Attn. Investor Relations Department
P.O. Box 8200
Boston, MA 02266-8200
Custodian
Brown Brothers Harriman & Co.
Legal counsel
Debevoise & Plimpton
Independent Accountants
Price Waterhouse LLP
New York Stock Exchange Symbol -- BZF
Contents
In Brief 3
Letter to Shareholders 3
Investment Summary 6
Portfolio Summary 7
Investment Portfolio 8
Financial Statements 11
Financial Highlights 14
Notes to Financial Statements 15
Report of Independent Accountants 18
Dividend Reinvestment
and Cash Purchase Plan 19
Investment Manager and Administrator 21
Directors and Officers 22
- --------------------------------------------------------------------------------
This report is sent to the shareholders of The Brazil Fund, Inc. for their
information. It is not a prospectus, circular, or representation intended for
use in the purchase or sale of shares of the Fund or of any securities mentioned
in the report.
- --------------------------------------------------------------------------------
2
<PAGE>
In Brief
o The Brazil Fund, Inc. posted a 41.47% total return based on net asset value
for the six months ended June 30, 1997, reflecting continued strong growth in
Brazilian securities prices.
o The Fund's substantial investments in the telecommunications, electric
utility, and petroleum industries made solid gains during the period, and the
Fund selectively reduced its investments in a number of private sector
companies where valuations appeared too generous relative to core earnings
power.
o The outstanding success of the Real Plan, launched in July 1994, was
evidenced by the soaring market capitalization of the Sao Paulo Stock
Exchange and a dramatic reduction in Brazil's inflation rate.
Letter to Shareholders
Dear Shareholders:
The Brazil Fund, Inc. achieved a 41.47% total investment return for the six
months ended June 30, 1997. The Fund's strong performance reflects the
combination of an increase in the Fund's net asset value from $25.75 per share
at the beginning of the year to $35.71 per share on June 30, and a $0.49 per
share distribution on March 31. The Fund's share price on the New York Stock
Exchange rose from $22.25 to $30.75 for a total return of 40.98% for the six
month period. As of the close of the period, the discount of share price to net
asset value was 13.9%. For the six-month period, the Sao Paulo Stock Exchange
Index rose 72.3% in dollar terms.
The Real Plan celebrated its third anniversary on June 30. The political and
economic landscape has changed dramatically since the Plan was introduced by
then Minister of Finance and now President, Fernando Henrique Cardoso. At the
end of June 1994 -- the eve of the Real Plan's launch -- the market value of the
Sao Paulo Stock Exchange was $106 billion. Three years later, the market
capitalization had soared to $316 billion. Driving this explosive growth in
wealth has been the Plan's success in purging stifling rates of inflation from
the economy without recourse to wage-price controls or other gimmicks, restoring
the business community's confidence in Brazil's ability to compete and grow in
the global marketplace, and reducing the heavy hand of government intervention
in financial and other markets.
At the company level, the increase in investor wealth has been equally dramatic.
This is seen in the following table showing the change in stock market value
over the past three years for three of the Fund's major investments.
Market Value ($ billions)
June 30, 1994 June 30, 1997
------------- -------------
Telebras $11.2 $46.6
Eletrobras 11.1 30.4
Petrobras 7.9 26.4
Telebras currently enjoys the highest market value of all stocks traded on Latin
American exchanges. Its $46.6 billion capitalization, in fact, is well in excess
of the market value of the entire Brazilian stock market at the time the Brazil
Fund was launched in March 1988.
A Dramatic Reduction in Inflation
The Real Plan's most significant achievement has been its victory over
inflation. The annual rate of consumer price inflation was almost 1,100% in
1994. It will be 6% this year, according to official government estimates. The
6% inflation forecast already reflects the pressure of recent increases in
telephone tariffs, electric energy, oil products, and public transportation,
which in turn suggests that additional reductions in the consumer inflation rate
3
<PAGE>
will be achieved beyond the current year. There is very little evidence of
inflation pressures being generated by the private sector, given the subdued
pricing environment for a wide range of prices for non-tradeable goods and
services.
Most governments in Latin America are today placing a priority on suppressing
inflation even at the expense of short-term economic growth. Brazil is no
exception. Since the start of the Real Plan, the economy's highest rate of
growth was achieved in 1994, when the gross domestic product grew at 6.0%.
Growth was 4.2% in 1995 and 2.9% last year. Brazil has clearly grown at a rate
below its potential, and there has been some increase in unemployment as a
consequence. On the other hand, a slowing pace of economic expansion has
dampened demand and kept inflationary pressure in check. The collapse of the
inflation "tax" led to a dramatic gain in real disposable income for the vast
majority of workers, and this outcome is probably a major reason why the Plan
enjoys widespread public backing.
Brazil has a $775 billion economy which will grow this year at approximately
4.0%, according to the semi-official Institute of Applied Economic Research.
Agriculture will be the strongest sector, with projected growth of 6.4%.
Industrial growth will approach 3.9%, and the services sector is estimated to
grow 3.4%.
The Cardoso Administration has relied mainly on high real interest rates and a
strong foreign exchange rate to pursue its battle against inflation. These are
comparatively blunt instruments with which to root out inflation from a large
and complex society such as Brazil's. A more flexible range of policy tools
would likely have achieved similar results but at a lower social and economic
cost. As we have seen, however, the pace of reform in Brazil is a function of
the pace at which consensus can be built in Congress on ways and means of
overcoming structural and other impediments to price stability and efficient
government. The democratic process has not been short-circuited in order to
achieve a quick economic "fix."
As the reform process has been dragged out by Congress, however, financial
markets have had time to become nervous at the growing trade and current account
deficits, the persistence of a relatively high public sector borrowing
requirement, and an overvalued exchange rate. The trade deficit this year will
be about $11 billion, twice 1996's level, and the current account deficit will
amount to $30-$35 billion, or slightly more than 4.0% of GDP.
Open Economy and Privatization Receive a Warm Reception
Brazil's imbalances in its current accounts are not expected to provoke a
financial crisis similar to the Mexican devaluation in 1994 or the recent
currency crises affecting several southeast Asian economies. Brazil's commitment
to an open economy and the privatization of important infrastructure holdings
have been warmly received by the global financial community. Money is flooding
Brazil as companies around the world expand their industrial presence in the
local economy, arrange strategic alliances, or acquire stakes in recently
privatized companies. The creditworthiness of Brazilian borrowers has been
upgraded, allowing borrowers to take down hard currency loans at low fixed
interest rates and comparatively long maturities.
Foreign direct investment will exceed $15 billion this year, and this money and
other long-term funds will comfortably finance the current account deficit.
Foreign exchange reserves remain high at $60 billion, obviating any need for a
currency adjustment beyond that being managed by the Central Bank. The worst of
the country's banking crisis has been experienced, and the speculative capital
flows which could undermine policy simply do not exist. Finally, the fact that
the Real is now being devalued at a slightly higher rate than inflation means
that the overvalued component of the exchange rate is steadily coming down. The
Brazilian experience, in this regard, is similar to that of Argentina, where the
4
<PAGE>
elimination of inflation -- rather than a devaluation -- corrected an overvalued
exchange rate.
The business landscape has also changed under the impetus of the Real Plan. The
Brazilian government is no longer in the railroad or mining business. By the end
of next year, it may also have exited the telephone business. The petroleum
industry has been thrown open to global competition, and a growing number of
state governments are selling off assets such as electric companies and banks.
Asset sales, moreover, have frequently occurred at prices well above minimum
expectations, and the repricing upwards by investors of Brazilian assets has
been an integral part of this year's bull market.
Valuations Discount Higher Earning Power
For many stocks, we believe that the reappraisal of Brazilian risk by investors
has led to valuations which are now beginning to discount most of the higher
earnings power that will emerge only in future years. This seems to be
especially true of the stocks of companies closely associated with
privatizations and restructurings. The Fund's substantial investments in the
telecommunications, electric utility, and petroleum industries have been the
main beneficiaries of this process.
Many industry groups have participated in this year's rising stock market, and
the Fund has also selectively reduced its investments in a number of private
sector companies where valuations appeared too generous relative to core earning
power. Major purchases have included the integrated electric utility Cia.
Paranaense de Energia; Banco Bradesco, the largest private sector financial
institution in Brazil; Industrias Klabin de Papel e Celulose, an integrated
forest products company; and Usinas Siderurgicas de Minas Gerais, one of the
lowest cost producers of flat steel product in the world.
We believe the longer-term opportunities for the equity investor in Brazil
continue to be positive. Thank you for investing with The Brazil Fund.
Respectfully,
/s/Nicholas Bratt /s/Juris Padegs
Nicholas Bratt Juris Padegs
President Chairman of the Board
5
<PAGE>
THE BRAZIL FUND, INC.
INVESTMENT SUMMARY AS OF JUNE 30, 1997
- -----------------------------------------------------------------
HISTORICAL
INFORMATION TOTAL RETURN (%)
LIFE OF FUND ----------------------------------------------------------------
MARKET VALUE NET ASSET VALUE (a) INDEX (b)
------------------- -------------------- -------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
------------------- -------------------- -------------------
CURRENT QUARTER 24.87 - 20.28 - 36.74 -
FISCAL YEAR TO DATE 40.98 - 41.47 - 72.30 -
ONE YEAR 36.33 36.33 43.88 43.88 93.92 93.92
THREE YEAR 67.17 18.68 108.18 27.69 222.07 47.68
FIVE YEAR 153.29 20.43 252.99 28.69 629.36 48.80
LIFE OF FUND* 388.08 18.73 513.96 21.72 1126.45 32.10
- -----------------------------------------------------------------
PER SHARE INFORMATION AND RETURNS (a)
YEARLY PERIODS ENDED JUNE 30
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) with the exact
data points listed in the table below.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988* 1989 1990 1991 1992 1993 1994 1995 1996 1997
-----------------------------------------------------------------------------------------
NET ASSET VALUE... $ 11.72 $ 16.42 $ 9.90 $ 14.03 $ 14.27 $ 18.44 $ 22.38 $ 24.47 $ 26.27 $ 35.71
INCOME DIVIDENDS.. $ - $ .41 $ 1.01 $ - $ - $ - $ .08 $ - $ .30 $ .61
CAPITAL GAINS
AND OTHER
DISTRIBUTIONS..... $ - $ .39 $ 2.18 $ - $ .28 $ .53 $ .93 $ 2.36 $ .81 $ .75
TOTAL RETURN (%).. 1.56 54.68 -24.15 41.72 3.01 33.96 26.58 18.36 22.24 43.88
</TABLE>
(a) Total investment returns reflect changes in net asset value per share
during each period and assume that 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 price.
(b) Sao Paulo Stock Exchange Index ($).
* The Fund commenced operations on April 8, 1988.
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE OF THE
FUND.
6
<PAGE>
THE BRAZIL FUND, INC.
PORTFOLIO SUMMARY AS OF JUNE 30, 1997
- ---------------------------------------------------------------------------
DIVERSIFICATION
Equity Securities 96%
Cash Equivalents 4%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the
above table.
- ---------------------------------------------------------------------------
SECTORS
Sector breakdown of the Fund's equity securities
Telecommunications 21%
Utilities 17%
Banking 12%
Petroleum 11%
Food and Beverage 10%
Forest Products 7%
Iron and Steel 4%
Mining 4%
Chemicals 4%
Other 10%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the
above table.
- ---------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
1. Telecomunicacoes Brasileiras S.A.
2. Petroleo Brasileiro S/A
3. Telecomunicacoes de Sao Paulo S.A.
4. Banco Itau S.A.
5. Companhia Cervejaria Brahma
6. Centrais Eletricas Brasileiras S/A
7. Companhia Energetica de Minas Gerais
8. Banco Bradesco S.A
9. Companhia Vale do Rio Doce
10. Usinas Siderurgicas de Minas Gerais S/A
7
<PAGE>
THE BRAZIL FUND, INC.
INVESTMENT PORTFOLIO AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
================================================================================================================
Industry Shares Company Value ($)
- ----------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES 95.5%
<S> <C> <C> <C> <C>
BANKING 11.2% 2,523,692,307 (pfd.) Banco Bradesco S.A. ....................... 25,433,830
69,024,208 (pfd.) Banco Itau S.A. ........................... 38,980,790
----------
64,414,620
----------
CHEMICALS 3.5% 55,812,000 (voting) Companhia Petroquimica do Sul S.A. ........ 2,229,162
6,020,846 (voting) S/A White Martins ......................... 17,616,259
----------
19,845,421
----------
CONSTRUCTION 0.7% 575,630,000 (voting) Odebrecht S.A. (b) ........................ 4,170,457
----------
CONTAINERS 0.3% 3,354,000 (pfd.) Dixie Toga S.A. ........................... 1,806,911
----------
ELECTRICAL EQUIPMENT 2.4% 6,113,800 (pfd.) Empresa Brasileira de Compressores S.A. ... 2,669,038
16,256,600 (pfd.) Weg S.A. .................................. 11,173,959
----------
13,842,997
----------
FINANCE 0.9% 5,641,000 (pfd.) Investimentos Itausa S/A .................. 5,187,247
----------
FOOD AND BEVERAGE 9.7% 586,466,740 (pfd.) Cia Hering* ............................... 6,809,246
50,097,913 (pfd.) Companhia Cervejaria Brahma ............... 38,157,430
10,528,430 (pfd.) Sadia Concordia S/A ....................... 10,952,853
----------
55,919,529
----------
FOREST PRODUCTS 6.3% 7,953,599 (pfd.) Aracruz Celulose S.A. "B"* ................ 16,105,186
3,520,600 (pfd.) Companhia Suzano de Papel e Celulose S.A. . 9,319,812
11,010,740 (pfd.) Industrias Klabin de Papel e Celulo ....... 10,738,693
----------
36,163,691
----------
GLASS 1.1% 2,330,236 (voting) Companhia Vidraria Santa Marina ........... 6,428,387
----------
IRON AND STEEL 4.1% 3,691,800 (pfd.) Companhia Siderurgica Paulista* ........... 2,160,351
100,100,000 (pfd.) Companhia Siderurgica de Tubarao "B"* ..... 1,393,739
1,801,410 (pfd.) Usinas Siderurgicas de Minas Gerais S/A ... 20,062,146
----------
23,616,236
----------
MINING 3.8% 922,104 (pfd.) Companhia Vale do Rio Doce ................ 20,598,738
53,211,004 (voting) S.A. Mineracao da Trindade ................ 1,532,671
----------
22,131,409
----------
PETROLEUM 10.4% 215,739,999 (pfd) Petroleo Brasileiro S/A ................... 59,918,649
----------
RETAILING 1.1% 427,287,800 (voting) Lojas Americanas S.A.* .................... 6,072,361
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================
Industry Shares Company Value ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TELECOMMUNICATIONS 20.0% 400,256,600 (pfd.) Telecomunicacoes Brasileiras S.A. .......... 60,711,409
130,212,067 (pfd.) Telecomunicacoes de Sao Paulo S.A. ......... 42,573,516
15,242,900 (pfd.) Telecomunicacoes do Para ................... 11,326,695
------------
114,611,620
------------
TEXTILES AND APPAREL 0.5% 52,929,600 (pfd.) Sao Paulo Alpargatas S.A. .................. 3,047,164
------------
TOBACCO 3.0% 1,657,543 (voting) Souza Cruz S.A. ............................ 17,474,562
------------
UTILITIES 16.5% 61,000,000 (pfd.) Centrais Eletricas Brasileiras S/A "B" ..... 36,432,287
2,354,921 (pfd.) Centrais Eletricas de Santa Catarina S.A. .. 3,259,179
585,740,952 (pfd.) Companhia Energetica de Minas Gerais ....... 30,195,637
40,100,000 (voting) Companhia Energetica de Sao Paulo* ......... 2,611,007
229,400,000 (pfd.) Companhia Paranaense de Energia ............ 4,261,564
675,242,700 (voting) Companhia Paranaense de Energia ............ 11,603,186
38,270,000 (voting) Companhia Paulista de Forca e Luz* ......... 6,434,023
------------
94,796,883
------------
TOTAL EQUITY SECURITIES
(Cost $182,763,358) ..............549,448,144
------------
Principal Amount $
- ---------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 4.5%
25,718,000 Repurchase Agreement with Donaldson,
Lufkin & Jenrette, dated 6/30/97 at
5.9%, to be repurchased at $25,722,215
on 7/1/97, collateralized by a
$25,059,000 U.S. Treasury Note, 7.25%,
2/15/98 (Cost $25,718,000) ............... 25,718,000
------------
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $208,481,358) (a) ..................575,166,144
============
</TABLE>
* Non-income producing security.
(a) The cost of the investment portfolio for federal income tax purposes was
$209,818,892. At June 30, 1997, net unrealized appreciation for all
securities based on tax cost was $365,347,252. This consisted of aggregate
gross unrealized appreciation for all securities in which there was an
excess of market value over tax cost of $372,632,216 and aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over market value of $7,284,964.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
THE BRAZIL FUND, INC.
INVESTMENT PORTFOLIO (continued)
================================================================================
(b) Securities valued in good faith by the Valuation Committee of the Board of
Directors at fair value amounted to $4,170,457 (.72% of net assets). Their
values have been estimated by the Board of Directors in the absence of
readily ascertainable market values. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly
from the values that would have been used had a ready market for the
securities existed, and the difference could be material. The cost of these
securities at June 30, 1997 aggregated $2,925,994. These securities may
also have certain restrictions as to resale.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
THE BRAZIL FUND, INC.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997
- --------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Investments, at value (identified cost $208,481,358) ....................... $575,166,144
Cash ....................................................................... 461
Foreign currency holdings, at market (identified cost $1,704,838) .......... 1,704,148
Receivable for investments sold ............................................ 26,594
Dividends and interest receivable .......................................... 4,468,011
Other assets ............................................................... 11,133
------------
Total assets ....................................................... 581,376,491
LIABILITIES
Payables:
Accrued management fee ............................... 480,512
Other accrued expenses ............................... 444,369
----------
Total liabilities .................................................. 924,881
------------
Net assets ................................................................. $580,451,610
============
NET ASSETS
Net assets consist of:
Undistributed net investment income .................................... 6,467,664
Net unrealized appreciation (depreciation) on:
Investment securities .............................................. 366,684,786
Foreign currency related transactions .............................. (23,414)
Accumulated net realized gain .......................................... 21,037,033
Paid-in capital ........................................................ 186,285,541
------------
Net assets, at value ....................................................... $580,451,610
============
NET ASSET VALUE per share ($580,451,610 / 16,256,783 shares of common stock
outstanding, 50,000,000 shares authorized, $.01 par value) ............... $35.71
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
11
<PAGE>
THE BRAZIL FUND, INC.
FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
====================================================================================================
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------
Investment income
Income:
<S> <C> <C>
Dividends (net of withholding tax of $519,866) ............. $ 9,981,003
Interest ................................................... 407,864
-------------
10,388,867
Expenses:
Management fee ............................................. $ 2,671,378
Administrator's fee ........................................ 25,960
Custodian and accounting fees .............................. 685,479
Directors' fees and expenses ............................... 48,467
Legal ...................................................... 95,243
Auditing ................................................... 31,965
Reports to shareholders .................................... 36,534
Services to shareholders ................................... 19,815
Other ...................................................... 21,269 3,636,110
----------- -------------
Net investment income .......................................... 6,752,757
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments ................................................ 22,771,420
Foreign currency denominated
transactions (net of CPMF tax$63,274) .................... (397,854) 22,373,566
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments ................................................ 140,650,762
Foreign currency denominated transactions .................. 22,117 140,672,879
----------- -------------
Net gain on investment transactions ............................ 163,046,445
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............. $ 169,799,202
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
12
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .............................. $ 6,752,757 $ 8,943,021
Net realized gain from investment transactions ..... 22,373,566 12,786,925
Net unrealized appreciation
(depreciation) on investment
transactions during the period .................. 140,672,879 73,880,338
------------- -------------
Net increase (decrease) in net assets
resulting from operations ........................... 169,799,202 95,610,284
------------- -------------
Distributions to shareholders:
From net investment income ......................... (974,775) (8,926,493)
------------- -------------
From net realized gains on investment
transactions ..................................... (6,986,319) (5,193,596)
------------- -------------
Net asset value of shares issued to shareholders
in reinvestment of distributions .................... 631,633 78,763
------------- -------------
INCREASE (DECREASE) IN NET ASSETS ..................... 162,469,741 81,568,958
Net assets at beginning of period ..................... 417,981,869 336,412,911
------------- -------------
NET ASSETS AT END OF PERIOD (including
undistributed net investment income of $6,467,664 and
$752,956, respectively) ............................. $ 580,451,610 $ 417,981,869
============= =============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period ............. 16,229,987 16,226,496
Shares issued to shareholders in reinvestment
of distributions ................................. 26,796 3,491
------------- -------------
Shares outstanding at end of period ................... 16,256,783 16,229,987
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
13
<PAGE>
THE BRAZIL FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
================================================================================================================================
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.
- -------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30, -------------------------------------------------------------
1997(a) 1996(a) 1995(a) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period .......... $ 25.75 $ 20.73 $ 31.10 $ 20.98 $ 14.12 $ 13.80
-------- ------- ------- ------- ------- -------
Net investment income (loss) ............... .42 .55 .38 (.17) .10 .19
Net realized and unrealized gain
(loss) on investment transactions (b) .... 10.03 5.34 (7.63) 12.75 7.58 .79
-------- ------- ------- ------- ------- -------
Total from investment operations .............. 10.45 5.89 (7.25) 12.58 7.68 .98
-------- ------- ------- ------- ------- -------
Less distributions:
From net investment income ................. (.06) (.55) (.30) -- (.08) --
From net realized gains on investments ..... (.43) (.32) (.90) (2.46) (.74) (.66)
In excess of net realized gains
on investments ........................... -- -- (.15) -- -- --
-------- ------- ------- ------- ------- -------
Total distributions ........................... (.49) (1.35) (2.46) (.82) (.66)
-------- ------- ------- ------- ------- -------
Dilution resulting from the rights offering (g) -- -- (1.73) -- -- --
-------- ------- ------- ------- ------- -------
Broker and dealer manager fees and
offering costs (g) .......................... -- -- (.04) -- -- --
-------- ------- ------- ------- ------- -------
Net asset value, end of period ................ $ 35.71 $ 25.75 $ 20.73 $ 31.10 $ 20.98 $ 14.12
======== ======= ======= ======= ======= =======
Market value, end of period ................... $ 30.75 $ 22.25 $ 21.13 $ 33.00 $ 21.13 $ 13.63
======== ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN
Per share market value (%) ................. 40.98** 9.29 (26.37) 69.81 60.89 (3.91)
Per share net asset value (%)(c) ........... 41.47** 28.89(f) (23.31)(f) 61.09 54.19 6.43
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ..... 580 418 336 377 254 171
Ratio of operating expenses net,
to average net assets (%) (d) ............ 1.46* 1.60 1.62 1.71 1.84 2.22
Ratio of operating expenses before
expense reductions,
to average net assets (%) ................ 1.46* 1.62 1.67 1.71 1.84 2.22
Ratio of net investment income (loss)
to average net assets (%) ................ 2.71* 2.22 1.54 (.58) .56 1.13
Portfolio turnover rate (%) ................ 7.36* 8.55 9.65 5.76 4.67 7.94
Average commission rate paid (e) ........... $ .00004 $.00002 $ -- $ -- $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Realized and unrealized currency losses on the Fund's interest bearing
accounts amounted to $.31 per share in 1992.
(c) Total investment returns reflect changes in net asset value per share
during each period and assume that 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 price.
(d) For the years ended December 31, 1993 and 1992 the ratio of expenses net,
including the Brazilian repatriation tax, to average net assets was 2.22%
and 2.39%, respectively.
(e) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years beginning on or after September 1, 1995.
(f) Total returns would have been lower had certain expenses not been reduced.
(g) During the year ended December 31, 1995, the Fund issued 4,060,000 shares
in connection with a rights offering of the Fund's shares.
* Annualized ** Not Annualized
- --------------------------------------------------------------------------------
14
<PAGE>
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 Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
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.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
receives delivery of the underlying securities, the amount of which at the time
of purchase and each subsequent business day is required to be maintained at
such a level that the market value, depending on the maturity of the repurchase
agreement, is equal to at least 100.5% of the repurchase price.
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, 1996, the Brazilian withholding tax on dividend income was
reduced from 15% to 0%. This rate change applies to dividends paid from a
company's 1996 profits. Dividends paid from pre-1996 profits will continue to be
taxed at 15%.
Effective January 23, 1997, the Fund is also subject to a .20% Contribuicao
Provisoria sobre Movimentacoes Financeiras (CPMF) tax which is
15
<PAGE>
THE BRAZIL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
================================================================================
applied to foreign exchange transactions representing capital inflows or
outflows to the Brazilian market.
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, 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 dividend 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, 1997, purchases and sales of investment
securities (excluding short-term investments) aggregated $17,526,383 and
$39,258,389, respectively.
C. INVESTMENT ADVISORY AGREEMENTS AND
----------------------------------
TRANSACTIONS WITH AFFILIATED PERSONS
------------------------------------
Under the Fund's Investment 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 1.20% per annum of the value of
the Fund's average weekly net assets up to $150 million; 1.05% per annum of the
value of the Fund's average weekly net assets on the next $150 million, and
1.00% per annum of the value of the Fund's weekly net assets in excess of $300
million. For the six months ended June 30, 1997, the fee pursuant to the
management agreement amounted to $2,671,378, which was equivalent to an annual
effective rate of 1.07%.
On June 26, 1997, the Adviser entered into an agreement with The Zurich
Insurance Company ("Zurich"), an international insurance and financial services
organization, pursuant to which Zurich will acquire a majority interest in the
Adviser, and the Adviser will form a new global investment organization by
combining with Zurich's subsidiary, Zurich Kemper Investments, Inc. and change
its name to Scudder Kemper Investments, Inc. Subject to the receipt of the
required regulatory and shareholder approvals, the transaction is expected to
close in the fourth quarter of 1997.
16
<PAGE>
================================================================================
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, 1997, the Administrator fee amounted to $25,960.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible 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, 1997, the amount charged to the Fund by SFAC aggregated $131,743,
of which $23,455 is un paid at June 30, 1997.
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, 1997, Directors' fees and expenses
amounted to $48,467.
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.
17
<PAGE>
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, 1997, 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 a mounts 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, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 15, 1997
18
<PAGE>
Dividend Reinvestment and Cash Purchase Plan
The Plan
The Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan") offers
you an automatic way to reinvest your dividends and capital gain distributions
in shares of the Fund. The Plan also provides for cash investments in Fund
shares of $100 to $3,000 semiannually through The First National Bank of Boston,
the Plan Agent.
Automatic Participation
Each shareholder of record is automatically a participant in the Plan unless
the shareholder has instructed the Plan Agent in writing otherwise. Such a
notice must be received by the Plan Agent not less than 10 days prior to the
record date for a dividend or distribution in order to be effective with respect
to that dividend or distribution. A notice which is not received by that time
will be effective only with respect to subsequent dividends and distributions.
Shareholders who do not participate in the Plan will receive all
distributions in cash paid by check in dollars mailed directly to the
shareholder by The First National Bank of Boston, as dividend paying agent.
Shares Held by a Nominee
If your shares are held in the name of a brokerage firm, bank, or other
nominee as the shareholder of record, please consult your nominee (or any
successor nominee) to determine whether it is participating in the Plan on your
behalf. Many nominees are generally authorized to receive cash dividends unless
they are specifically instructed by a client to reinvest. If you would like your
nominee to participate in the Plan on your behalf, you should give your nominee
instructions to that effect as soon as possible.
Pricing of Dividends and Distributions
If the market price per share on the payment date for the dividend or
distribution or, if that date is not a New York Stock Exchange trading date, the
next preceding trading date (the "Valuation Date") equals or exceeds net asset
value per share on that date, the Fund will issue new shares to participants at
the greater of the following on the Valuation Date: (a) net asset value, or (b)
95% of the market price. If the net asset value exceeds the market price of Fund
shares at such time, participants in the Plan are considered to have elected to
receive shares of stock from the Fund, valued at market price, on the Valuation
Date. In either case, for Federal income tax purposes, the shareholder receives
a distribution equal to the market value on the Valuation Date of new shares
issued. State and local taxes may also apply. If the Fund should declare an
income dividend or net capital gain distribution payable only in cash, the Plan
Agent will, as agent for the participants, buy Fund shares in the open market,
on the New York Stock Exchange or elsewhere, for the participants' account on,
or shortly after, the payment date.
Voluntary Cash Purchases
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, semiannually, in any amount from $100 to $3,000, for
investment in the Fund's shares. The Plan Agent will use all such monies
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
30 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.
19
<PAGE>
Dividend Reinvestment and Cash Purchase Plan (continued)
Participant Plan Accounts
The Plan Agent maintains all participant accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by participants 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 participant will be able to vote those
shares purchased pursuant to the Plan at a shareholder meeting or by proxy.
No Service Fee to Reinvest
There is no service fee charged to participants for reinvesting dividends or
distributions from net realized capital gains. The Plan Agent's fees for the
handling of the reinvestment of dividends and capital gain distributions will be
paid by the Fund. There will be no brokerage commissions with respect to shares
issued directly by the Fund as a result of dividends or capital gain
distributions payable either in stock or in cash. However, participants will pay
a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of any
dividends or capital gain distributions payable only in cash.
Costs for Cash Purchases
With respect to purchases of Fund shares from voluntary cash payments, the
Plan Agent will charge $1.00 for each such purchase for a participant. Each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases of Fund shares in connection
with voluntary cash payments made by the participant.
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 pro-rating the lower commission thus
attainable.
Amendment or Termination
The Fund and the Plan Agent each reserve the right to terminate the Plan.
Notice of the termination will be sent to the participants of the Plan at least
30 days before the record date for a 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 law, rules or policies of a regulatory
authority) only by giving at least 30 days' written notice to participants in
the Plan.
A participant may terminate his account under the Plan by written notice to
the Plan Agent. If the written notice is received 10 days before the record day
of any distribution, it will be effective immediately. If received after that
date, it will be effective as soon as possible after the reinvestment of the
dividend or distribution.
If a participant elects to sell his shares before the Plan is terminated, the
Plan Agent is authorized to deduct a fee of 5% of the gross proceeds, to a
maximum of $3.50, plus brokerage commissions from the sale transaction.
Plan Agent Address and Telephone Number
You may obtain more detailed information by requesting a copy of the Plan
from the Plan Agent. All correspondence (including notifications) should be
directed to: The Brazil Fund, Inc. Dividend Reinvestment and Cash Purchase Plan,
c/o The First National Bank of Boston, P.O. Box 8209, Boston, MA 02266-8209,
1-800-426-5523.
20
<PAGE>
Investment Manager and Administrator
The investment manager and administrator of The Brazil Fund, Inc. (the
"Fund") is Scudder, Stevens & Clark, Inc., one of the most experienced
investment management and investment counsel firms in the United States.
Established in 1919, the firm provides investment counsel for individuals,
investment companies and institutions. Scudder has offices throughout the United
States and subsidiaries in London and Tokyo.
Scudder has been a leader in international investment management for over 40
years. It manages Scudder International Fund, which was initially incorporated
in Canada in 1953 as the first foreign investment company registered with the
U.S. Securities and Exchange Commission. Scudder's investment company clients
include nine other open-end investment companies which invest primarily in
foreign securities.
In addition to the Fund, Scudder also manages the assets of seven other
closed-end investment companies which invest in foreign securities: The
Argentina Fund, The Korea Fund, The Latin America Dollar Income Fund, Scudder
New Asia Fund, Scudder New Europe Fund, Scudder Spain and Portugal Fund, Inc.,
and Scudder World Income Opportunities Fund are traded on the New York Stock
Exchange.
21
<PAGE>
Directors and Officers
NICHOLAS BRATT*
President and Director
JURIS PADEGS*
Chairman of the Board and Director
EDGAR R. FIEDLER
Director
ROBERTO TEIXEIRA DA COSTA
Director and Resident Brazilian Director
RONALDO A. DA FROTA NOGUEIRA
Director and Resident Brazilian Director
WILSON NOLEN
Director
EDMOND D. VILLANI*
Director
EDMUND B. GAMES, JR.*
Vice President
JERARD K. HARTMAN*
Vice President
DAVID S. LEE*
Vice President
PAMELA A. McGRATH*
Vice President and Treasurer
KATHRYN L. QUIRK*
Vice President and Assistant Secretary
THOMAS F. McDONOUGH*
Vice President and Secretary
EDWARD J. O'CONNELL*
Vice President and Assistant Treasurer
* Scudder, Stevens & Clark, Inc.
22
