<PAGE>
THE PORTUGAL FUND, INC.
[LOGO]
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
February 26, 1996
Dear Shareholders:
We are pleased to report on the activities of The Portugal Fund, Inc. (the
"Fund") for the year ended December 31, 1995.
At December 31, 1995, the Fund had a net asset value per share of $13.29, as
compared to $14.33 per share at December 31, 1994. At December 31, 1995, $56.4
million was invested in Portuguese securities, as compared to $67.7 million at
December 31, 1994.
POLITICAL AND ECONOMIC DEVELOPMENTS
During 1995, Portugal was largely dominated by political events. As we discussed
in our semi-annual report at mid-year, the October general elections were a
major factor in the market, as electoral factors became increasingly important
in driving policy decisions and as investors sought to handicap the eventual
outcome. Once the parliamentary elections were concluded, however, politics
remained in the forefront, and the runup to the January 1996 presidential
elections continued to dominate the news.
As we and many other analysts anticipated, voting in the general elections
resulted in no single party achieving a parliamentary majority. The victorious
Socialist Party, however, came closer to this goal than most observers had
expected, receiving approximately 44% of the popular vote, which put them just a
handful of votes short of an absolute majority in parliament. While this result
put an end to more than a decade of stable centrist government under the Social
Democratic Party (PSD) of Anibal Cavaco Silva, the actual policy impact of
Portugal's electoral move toward the left has so far been slight.
The new prime minister, Antonio Guterres, and his Socialist Party (PS) have
pursued a moderate, center-left approach throughout the campaign and in their
first few months in office. In effect, this has translated into only extremely
subtle policy changes from the previous government. In a significant statement
of consensus-oriented governing, Guterres named eight independents to his
18-member cabinet, including (most importantly) the Finance Minister, which went
to Antonio Sousa Franco, a cost cutter known as much for his integrity as for
his toughness. The Socialist platform, formally restated as a policy program
shortly after the election, is designed to combine economic conservatism with
"greater social justice." Its major planks include strictly controlling
inflation (with an aggressive goal of 3% for 1996), particularly through strict
wage discipline in the public sector. In addition, fiscal controls will remain
tight, with no relaxation in Portugal's often stated commitment to achieve the
fiscal goals for Maastricht (European Union) convergence. The new government's
budget goals call for the fiscal deficit to fall from 5.6% of GDP in 1995 to
4.2% in 1996 and 3% in 1997. While many observers, including ourselves, consider
these goals to be overly ambitious, significant movement in the right direction
during the next two years will probably be enough to keep Portugal on track for
European convergence.
The results of Portugal's presidential election, which occurred in January 1996,
confirmed the electorate's positive response to Guterres' policy of continuity.
The PS candidate for this largely ceremonial post,
1
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Lisbon's mayor Jorge Sampaio, handed Cavaco Silva his second major political
defeat in three months, putting the government, the presidency and most of the
major local governments in the unified hands of the Socialist Party. The January
election effectively postponed the release of the 1996 budget, which is due to
be issued in the near future. It can be expected that the budget will include
sharp spending cuts, the only means for achieving Guterres' fiscal goals in an
atmosphere where tax increases are not politically palatable.
On the economic front, 1995 was a year of gradual and at times difficult
recovery from the 1993-94 recession. In 1994 and early 1995, the recovery was
led by exports, helped along by a declining ESCUDO. During 1995, investment
began to pick up as well, with foreign investment jumping by 23% during the
first nine months of the year. Overall, the economy grew between 2% and 3%
during 1995, as compared with growth of only 0.8% in 1994. Unfortunately, the
growth rate slowed during the latter part of 1995 and unemployment inched up to
a current level of 7.3%. The inflation picture, meanwhile, continues to improve.
In the past two years, Portuguese inflation has declined from a 9% rate in early
1993 to 6% by the mid-point of 1994, 4.5% in early 1995 and a current
year-on-year rate of 3.9%. With inflation declining below the
psychologically-significant 4% level, the government's hand should be
strengthened in upcoming public employee wage negotiations. Inflation is now at
its lowest level in more than a quarter-century and we see no signs of any
resurgence in the near future.
It can be expected that the Bank of Portugal will keep monetary policy rather
tight for the next few years, in an effort to limit the ESCUDO's vulnerability
to speculative attacks. Short-term rates will likely continue to hover 9% to 10%
range, although (as in December 1995) further German rate cuts will allow the
Portuguese central bank to follow suit, maintaining a relatively constant spread
with German yields. If inflation continues to come down, of course, some
reduction of this spread should be possible over the long-term.
Privatization continues to be among the Portuguese government's most important
initiatives, and the Socialist government has in fact vowed to accelerate the
program. During 1995, the government sold off stakes in companies worth 320
billion ESCUDOS, nearly two-thirds of which came through stock market offerings.
The new government's plans call for 380 billion ESCUDOS ($2.5 billion) in
privatizations during 1996. Leading offerings in the new year are likely to
feature an additional stake in Cimpor, a cement company, and another tranche of
Portugal Telecom (about a quarter of this company's shares were successfully
offered in mid-1995). Additional privatization deals in 1996 could involve
electrical utilities, the government's oil monopoly and toll-road operator, and
steel and tobacco companies. As a result of the privatization program, which has
been pursued aggressively since the late 1980s, the government's share of GDP
has shrunk to less than 10%, declining by nearly half in less than a decade.
This program has also had a profound effect on the Portuguese equity market,
vastly increasing its capitalization and dramatically expanding its liquidity.
MARKET DEVELOPMENTS AND THE PORTFOLIO
From inception on November 9, 1989 to December 31, 1995, the Morgan Stanley
Capital International ("MSCI") Portugal Index decreased by 28.7% in U.S. dollar
terms. During the same period, the net asset value of the Fund increased by
1.8%, assuming reinvestment of dividends and distributions. During the year
ended December 31, 1995, the MSCI Portugal Index decreased by 2.5% in U.S.
dollar terms, compared to a decrease of 5.9% in the Fund's net asset value,
assuming reinvestment of dividends and distributions.
2
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At present, the Portuguese equity market trades at a price/earnings ratio of
13.7 times estimated 1995 earnings and 11.0 times projected 1996 earnings.
Dividend yield is currently 2.6%. We believe that current valuations, combined
with the prospects for continued economic and earnings growth and low inflation
throughout 1995 and 1996, provide for an encouraging investment outlook for the
Fund in the coming year.
We wish to remind shareholders whose shares are registered in their own names
that they automatically participate in the Fund's dividend reinvestment program.
The automatic Dividend Reinvestment Plan (the "Plan") can be of value to
shareholders in maintaining their proportional ownership interest in the Fund in
an easy and convenient way. A shareholder whose shares are held in the name of a
broker/dealer or nominee should contact that party for details about
participating in the Plan. The Fund also offers shareholders a voluntary Cash
Purchase Plan. The Plan and the Cash Purchase Plan are described on pages 15 and
16 of this report.
We appreciate your interest in the Fund, and would be pleased to respond to your
questions or comments.
Respectfully,
[SIG]
Emilio Bassini
President and Chief Investment Officer*
- ------------------------
*Emilio Bassini, who is a member of the Executive Committee of BEA Associates
and holds the offices of Chief Financial Officer and Executive Director of BEA
Associates, is primarily responsible for management of the Fund's assets. He has
served the Fund in such capacity since the commencement of the Fund's
operations. Mr. Bassini joined BEA Associates (formerly Basic Appraisals, Inc.
and BEA Associates, Inc.) in 1984. Mr. Bassini is a Director, Chairman of the
Board, President and Chief Investment Officer of the Fund and is also a
Director, Chairman of the Board, President and Chief Investment Officer of The
Chile Fund, Inc., The Emerging Markets Infrastructure Fund, Inc., The Emerging
Markets Telecommunications Fund, Inc., The First Israel Fund, Inc., The Latin
America Equity Fund, Inc. and The Latin America Investment Fund, Inc. He is also
a Director, Chairman of the Board, President and Investment Officer of The
Brazilian Equity Fund, Inc., as well as the President and Secretary of The
Indonesia Fund, Inc.
3
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY
AS OF DECEMBER 31, 1995 (unaudited)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Cash and Cash Equivalents 19.9%
Consumer Products 10.2%
Foodstuffs, Beverages and
Tobacco 17.0%
Construction and Public Works 14.4%
Forest Products and Paper 9.0%
Insurance 2.3%
Transport and Warehousing 2.6%
Banks 5.2%
Telecommunications 4.8%
Retail Trade 4.7%
Film Distribution 2.9%
Other 7.0%
</TABLE>
THIS CHART REPRESENTS THE SECTOR ALLOCATION
OF TOTAL NET ASSETS OF THE FUND.
- --------------------------------------------------------------------------------
TOP 10 HOLDINGS, BY ISSUER
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT
OF
HOLDING SECTOR NET ASSETS
<C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------
1. Jeronimo Martins
Foodstuffs, Beverages and Tobacco 11.54
- ---------------------------------------------------------------------------------------------------
2. Sonae Investimentos
Consumer Products 10.24
- ---------------------------------------------------------------------------------------------------
3. Corticeira Amorim Industria
Forest Products and Paper 5.36
- ---------------------------------------------------------------------------------------------------
4. Engil Sociedade Gestora de Participacoes
Sociasis Construction and Public Works 5.33
- ---------------------------------------------------------------------------------------------------
5. Portugal Telecom
Telecommunications 4.82
- ---------------------------------------------------------------------------------------------------
6. Semapa Society Investment
Construction and Public Works 4.71
- ---------------------------------------------------------------------------------------------------
7. Unicer-Uniao Cervejeiro
Foodstuffs, Beverages and Tobacco 3.49
- ---------------------------------------------------------------------------------------------------
8. Modelo Continente Hipermercados
Retail Trade 3.13
- ---------------------------------------------------------------------------------------------------
9. Banco Totta and Acores
Banks 3.11
- ---------------------------------------------------------------------------------------------------
10. Soares da Costa
Construction and Public Works 3.08
- ---------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE
NO. OF SHARES DESCRIPTION (NOTE A)
- --------------------------------------------------------------------------------------------- ------------
<C> <S> <C>
EQUITY SECURITIES-80.14%
AUTO-1.32%
69,776 Salvador Caetano Industrias................................................... $ 930,169
------------
BANKS-5.20%
122,902 BPI Sociedade Gestora de Participacoes Sociasis (Registered Nominative)....... 1,469,204
11,118 Banco Totta and Acores (New)Section........................................... 168,939
122,300 Banco Totta and Acores (Ordinary)............................................. 2,021,804
------------
3,659,947
------------
CHEMICALS AND PETROLEUM PRODUCTS-1.00%
8,880 Corporacao Industrial do Norte (New)Section................................... 199,076
22,200 Corporacao Industrial do Norte (Bearer)....................................... 508,073
------------
707,149
------------
CONSTRUCTION AND PUBLIC WORKS-14.44%
82,600 Caima-Ceramica e Servicos+.................................................... 694,894
12,100 Construtora do Tamega......................................................... 38,810
437,831 Engil Sociedade Gestora de Participacoes Sociasis............................. 3,753,584
227,153 Oliva Industrias Metalurgicas+................................................ 136,607
310,000 Semapa Society Investment+.................................................... 3,314,322
190,920 Soares da Costa............................................................... 2,167,493
12,250 Somague+...................................................................... 63,847
------------
10,169,557
------------
CONSUMER PRODUCTS-10.24%
337,300 Sonae Investimentos........................................................... 7,210,138
------------
FILM DISTRIBUTION-2.92%
192,025 Filmes Lusomundo.............................................................. 2,053,008
------------
FOODSTUFFS, BEVERAGES AND TOBACCO-17.00%
99,000 Empresa Madeirense de Tabacos................................................. 992,292
146,500 Jeronimo Martins.............................................................. 8,125,099
45,446 Sumolis Companhia Industrial de Frutas e Bebidas.............................. 400,851
146,946 Unicer-Uniao Cervejeira....................................................... 2,454,770
------------
11,973,012
------------
FOREST PRODUCTS AND PAPER-8.99%
96,050 Companhia de Celulose do Caima................................................ 1,827,570
327,500 Corticeira Amorim Industria................................................... 3,774,969
105,281 Sonae Industria+.............................................................. 728,121
------------
6,330,660
------------
<CAPTION>
VALUE
NO. OF SHARES DESCRIPTION (NOTE A)
- --------------------------------------------------------------------------------------------- ------------
<C> <S> <C>
HOTELS AND RESTAURANTS-0.96%
35,416 Mague-Gestao e Participacoes.................................................. $ 591,870
68,630 Sopete S.A. (Bearer)+......................................................... 87,133
------------
679,003
------------
INSURANCE-2.29%
92,500 Tranquilidade CIA De Seguros.................................................. 1,616,316
------------
INVESTMENT COMPANIES-1.98%
74,000 Investmentos Participacoes e Gestas S.A....................................... 1,391,948
------------
MANUFACTURERS AND DISTRIBUTORS OF METAL PRODUCTS, MACHINERY AND HEAVY
EQUIPMENT-0.60%
63,100 Empresa Fabril de Maquinas Electricas......................................... 425,857
------------
NON-METALLIC MINERAL PRODUCTS-1.08%
20,990 Vista Alegre (Fabrica de Porcelana)........................................... 309,618
32,600 Vista Alegre (Grupo Participaco).............................................. 453,100
------------
762,718
------------
RETAIL TRADE--4.73%
80,365 Modelo Continente Hipermercados............................................... 2,201,729
42,000 Modelo Sociedade Gestora de Participacoes Sociasis............................ 1,128,206
------------
3,329,935
------------
TELECOMMUNICATIONS-4.82%
180,517 Portugal Telecom S.A.+........................................................ 3,395,545
------------
TRANSPORTS AND WAREHOUSING-2.57%
21,700 Barbosa & Almeida S.A......................................................... 645,257
295,100 Lisnave-Estaleiros Navais de Lisboa+.......................................... 828,193
79,957 Tertir Terminais de Portugal+................................................. 336,597
------------
1,810,047
------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL EQUITY SECURITIES
(Cost $55,163,187)
(Notes A, D)............................................................ 80.14% 56,445,009
CASH AND OTHER ASSETS IN EXCESS
OF LIABILITIES.......................................................... 19.86% 13,985,631
----- ------------
NET ASSETS............................................................... 100.00% $ 70,430,640
----- ------------
----- ------------
</TABLE>
- ------------------------------
+ Security is non-income producing.
Section New shares are not entitled to dividends until approximately 90 days
from the date such shares were issued.
See accompanying notes to financial statements.
5
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $55,163,187) (Note A) $56,445,009
Cash (Note A) 15,225,024
Prepaid expenses 3,039
-----------
Total Assets 71,673,072
-----------
LIABILITIES:
Payables:
Dividend (Note A) 953,885
Advisory fee (Note B) 183,301
Administration fees (Note B) 12,633
Other accrued expenses 92,613
-----------
Total Liabilities 1,242,432
-----------
NET ASSETS (applicable to 5,299,361 shares of common stock
outstanding) (Note C) $70,430,640
-----------
-----------
NET ASSET VALUE PER SHARE ($70,430,640 DIVIDED BY 5,299,361) $13.29
-----------
-----------
Net assets consist of:
Capital stock, $0.001 par value; 5,299,361 shares issued and
outstanding
(100,000,000 shares authorized) $ 5,299
Paid-in capital 73,066,980
Distribution in excess of net investment income (19,606)
Accumulated net realized loss on investments and foreign currency
related transactions (3,903,855)
Net unrealized appreciation in value of investments and
translation of other assets and liabilities denominated in
foreign currency 1,281,822
-----------
Net assets applicable to shares outstanding $70,430,640
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income (Note A):
Dividends $ 1,578,691
Interest 773,278
Less: Foreign taxes withheld (269,472)
-----------
Total Investment Income 2,082,497
-----------
Expenses:
Investment advisory fees (Note B) 755,909
Custodian fees (Note B) 98,334
Administration fees (Note B) 78,509
Printing 62,575
Audit and legal fees 44,677
Transfer agent fees 33,433
Insurance 32,633
Directors' fees 27,922
Accounting fees 26,395
Other 32,141
-----------
Total Expenses 1,192,528
-----------
Net Investment Income 889,969
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS:
Net realized gain from:
Investments 13,636,205
Foreign currency related transactions 73,263
Net change in unrealized appreciation in value of investments and
translation of other assets and liabilities denominated in foreign
currency (19,132,337)
-----------
Net realized and unrealized loss on investments and foreign currency
related transactions (5,422,869)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,532,900)
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
1995 1994
-------------- -------------
<S> <C> <C>
INCREASE /(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 889,969 $ 329,048
Net realized gain on investments and foreign currency related transactions 13,709,468 1,576,651
Net change in unrealized appreciation in value of investments and
translation of other assets and liabilities denominated in foreign currency (19,132,337) 7,968,046
-------------- -------------
Net increase/(decrease) in net assets resulting from operations (4,532,900) 9,873,745
-------------- -------------
Dividends and distributions to shareholders from:
Net investment income (804,629) (317,918)
Net realized gain on foreign currency related transactions (149,256) --
-------------- -------------
Total dividends and distributions to shareholders (953,885) (317,918)
-------------- -------------
Capital share transactions:
Proceeds from 702 and 89 shares, respectively, issued in reinvestment of
dividends 9,307 1,306
-------------- -------------
Total increase/(decrease) in net assets (5,477,478) 9,557,133
NET ASSETS:
Beginning of year 75,908,118 66,350,985
-------------- -------------
End of year $ 70,430,640 $ 75,908,118
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Contained below is per share operating performance data for a share of common
stock outstanding, total investment return, ratios to average net assets and
other supplemental data for each period indicated. This information has been
derived from information provided in the financial statements and market price
data for the Fund's shares.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, NOVEMBER 9, 1989*
--------------------------------------------------------------------- THROUGH
1995 1994 1993 1992 1991 1990 DECEMBER 31, 1989
---------- ---------- -------- ---------- -------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.33 $ 12.52 $ 8.90 $ 10.77 $ 10.96 $ 13.79 $ 13.79**
---------- ---------- -------- ---------- -------- ---------- -------
Net investment income 0.17 0.06 0.07 0.11 0.13 0.16 0.04
Net realized and unrealized
gain/(loss) on investments and
foreign currency related
transactions (1.03) 1.81 3.55 (1.92) (0.21) (2.87) 0.04
---------- ---------- -------- ---------- -------- ---------- -------
Net increase/(decrease) in net
assets from operations (0.86) 1.87 3.62 (1.81) (0.08) (2.71) 0.08
---------- ---------- -------- ---------- -------- ---------- -------
Dividends and distributions to
shareholders:
From net investment income (0.15) (0.06) -- (0.06) (0.11) (0.12) (0.04)
In excess of net investment income -- -- -- -- -- -- (0.04)
From net realized gain on foreign
currency related transactions (0.03) -- -- -- -- -- --
---------- ---------- -------- ---------- -------- ---------- -------
Total dividends and distributions to
shareholders (0.18) (0.06) -- (0.06) (0.11) (0.12) (0.08)
---------- ---------- -------- ---------- -------- ---------- -------
Net asset value, end of period $ 13.29 $ 14.33 $ 12.52 $ 8.90 $ 10.77 $ 10.96 $ 13.79
---------- ---------- -------- ---------- -------- ---------- -------
---------- ---------- -------- ---------- -------- ---------- -------
Market value, end of period $ 11.125 $ 13.875 $ 14.125 $ 8.000 $ 9.750 $ 9.250 $ 17.000
---------- ---------- -------- ---------- -------- ---------- -------
---------- ---------- -------- ---------- -------- ---------- -------
Total investment return (a) (18.65)% (1.35)% 76.56% (17.34)% 6.58% (44.91)% 22.49%
---------- ---------- -------- ---------- -------- ---------- -------
---------- ---------- -------- ---------- -------- ---------- -------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000
omitted) $70,431 $75,908 $66,351 $47,134 $57,036 $58,084 $73,023
Ratio of expenses to average net
assets 1.58% 1.41% 1.97% 1.92% 1.96% 2.04% 2.26%(b)
Ratio of net investment income to
average net assets 1.18% 0.43% 0.66% 1.07% 1.20% 1.38% 2.03%(b)
Portfolio turnover 35.73% 15.47% 24.47% 39.07% 13.31% 10.09% --
</TABLE>
- ----------------------------------
* Commencement of investment operations.
** Initial public offering price of $15.00 per share less underwriting discount
of $1.05 per share and offering expenses of $0.16 per share.
(a) Total investment return at market value is based on the changes in market
price of a share during the period and assumes reinvestment of
distributions, if any, at actual prices pursuant to the Fund's dividend
reinvestment plan. Total investment return does not reflect brokerage
commissions or initial underwriting discounts and has not been annualized.
In addition, such returns have been restated to reflect the reinvestment of
dividends on the ex-dividend date.
(b) Annualized.
See accompanying notes to financial statements.
9
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE A. SIGNIFICANT
ACCOUNTING POLICIES
The Portugal Fund, Inc. (the "Fund") was incorporated in Maryland on August 11,
1989 and commenced operations on November 9, 1989. The Fund is registered under
the Investment Company Act of 1940, as amended, as a closed-end, non-diversified
management investment company. Significant accounting policies are as follows:
PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. All equity securities for which market quotations are
readily available are valued at the last sales price or lacking any sales, at
the closing price last quoted for the securities (but if bid and asked
quotations are available, at the mean between the current bid and asked prices).
Securities that are traded over-the-counter are valued at the mean between the
current bid and the asked prices, if available. All other securities and assets
are valued as determined in good faith by the Board of Directors. Short-term
investments having a maturity of 60 days or less are valued on the basis of
amortized cost. The Board of Directors has established general guidelines for
calculating fair value of non-publicly traded securities. At December 31, 1995,
the Fund held no securities valued in good faith by the Board of Directors. The
net asset value per share of the Fund is calculated weekly, at the end of the
month and at any other times determined by the Board of Directors.
CASH: Deposits held at Brown Brothers Harriman & Co. (Grand Cayman), the
Fund's custodian, in a variable rate account are classified as cash. At December
29, 1995, the interest rate was 4.94% which resets on a daily basis. Amounts are
generally available on the same business day.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on an accrual basis; dividend
income is recorded on the ex-dividend date.
TAXES: No provision is made for U.S. federal income or excise taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
and to make the requisite distributions to its shareholders which will be
sufficient to relieve it from all or substantially all U.S. federal income and
excise taxes.
At December 31, 1995, the Fund had a capital loss carryover for U.S. federal
income tax purposes of $3,383,884 which expires in 2002.
For U.S. federal income tax purposes, realized foreign exchange losses
incurred after October 31, 1995, within the fiscal year, are deemed to arise on
the first day of the following fiscal year. The Fund incurred and elected to
defer such losses of $76,147.
The Fund is subject to withholding taxes of 15%-20% on dividends received from
Portuguese corporations. Capital gains realized by the Fund on the sale of
securities are exempt from Portuguese tax.
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) market value of investment securities, assets and liabilities at the
current rate of exchange; and
(II) purchases and sales of investment securities, income and expenses at the
relevant rates of exchange prevailing on the respective dates of such
transactions.
The Fund does not isolate that portion of gains and losses on investments in
equity securities which is due to changes in the foreign exchange rates from
that which is due to changes in market prices of equity securities. Accordingly,
realized and unrealized foreign currency gains and losses with respect to such
securities are included in the reported net realized and unrealized gains and
losses on investment transactions balances.
The Fund reports certain foreign currency related transactions as components
of realized gains for financial reporting purposes, whereas such components are
treated as ordinary income for U.S. federal income tax purposes.
Net currency gains from valuing foreign currency denominated assets and
liabilities at period end exchange rates are reflected as a component of net
10
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
unrealized appreciation/depreciation on investments, foreign currency holdings,
and other assets and liabilities denominated in foreign currencies.
Net realized foreign exchange gains represent foreign exchange gains and
losses from sales and maturities of debt securities, transactions in foreign
currencies and forward foreign currency contracts, exchange gains or losses
realized between the trade date and settlement dates on security transactions,
and the difference between the amounts of interest and dividends recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received.
DISTRIBUTIONS OF INCOME AND GAINS: The Fund distributes at least annually to
shareholders, substantially all of its net investment income and net realized
short-term capital gains, if any. The Fund determines annually whether to
distribute any net realized long-term capital gains in excess of net short-term
capital losses, including capital loss carryovers, if any, although it currently
expects to distribute such gains. An additional distribution may be made to the
extent necessary to avoid the payment of a 4% U.S. federal excise tax. Dividends
and distributions to shareholders are recorded by the Fund on the ex-dividend
date.
On December 14, 1995, a distribution in the aggregate amount of $953,885,
equal to $0.18 per share, was declared. The distribution was comprised of $0.15
per share from net investment income and $0.03 per share from net realized
foreign currency gains. The distribution is payable on January 12, 1996 to
shareholders of record as of December 29, 1995.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for U.S.
federal income tax purposes due to U.S. generally accepted accounting
principles/tax differences in the character of income and expense recognition.
OTHER: Securities denominated in currencies other than U.S. dollars are
subject to changes in value due to fluctuations in exchange rates.
Repatriation of both investment income and capital from Portugal is controlled
under regulations, including, in some cases, the need for certain advance
government notification or authority. Foreign investment in Portugal by the Fund
may be subject to the prior authorization from the Minister of Finance, from the
Bank of Portugal or the Portuguese Foreign Trade Institute, depending on the
type of investment or subject to the rules concerning public tender offers.
The Portuguese securities markets are substantially smaller, less liquid and
more volatile than the major securities markets in the United States.
Consequently, acquisition and disposition of securities by the Fund may be
inhibited. A high proportion of the shares of some Portuguese listed companies
are held by a limited number of persons, which may limit the number of shares
available for acquisition by the Fund. Restrictions on foreign ownership could
also restrict the Fund's ability to acquire shares in certain companies.
NOTE B. AGREEMENTS
BEA Associates ("BEA") serves as the Fund's investment adviser. As compensation
for its advisory services, BEA receives from the Fund an annual fee, calculated
weekly and paid quarterly, equal to 1.00% of the Fund's average weekly net
assets. In addition, BEA receives from the Fund an administration fee which
represents a reimbursement of certain Fund expenses. For the year ended December
31, 1995, advisory and administration fees amounted to $755,909 and $4,562,
respectively.
Through June 29, 1995, PFPC Inc. ("PFPC") served as the Fund's U.S.
administrator. The Fund paid PFPC a fee that was computed weekly and paid
quarterly at an annual rate of 0.10% of the value of the Fund's average weekly
net assets, which was subject to a minimum annual fee. For the period January 1,
1995 through June 29, 1995, PFPC earned $40,025 for administrative services.
Effective June 30, 1995, Bear Stearns Funds Management Inc. ("BSFM") serves as
the Fund's U.S. administrator. The Fund pays BSFM a monthly fee that is computed
weekly at an annual rate of 0.09% of the Fund's average weekly net assets. For
the period June 30, 1995 through December 31, 1995, BSFM earned $33,922 for
administrative services.
Through June 13, 1995, Citibank, N.A. served as the custodian for the Fund's
foreign assets and PNC Bank N.A. served as the custodian for the U.S. assets.
11
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Effective June 14, 1995, Brown Brothers Harriman & Co. serves as the custodian
for the Fund's U.S. and foreign assets.
Through September 4, 1995, PNC Bank, N.A. served as the Fund's transfer agent
and registrar. Effective September 5, 1995, The First National Bank of Boston
serves as the Fund's transfer agent and registrar.
NOTE C. CAPITAL STOCK
The authorized capital stock of the Fund is 100,000,000 shares of common stock,
$0.001, par value. Of the 5,299,361 shares outstanding at December 31, 1995, BEA
owned 7,206 shares.
NOTE D. INVESTMENT TRANSACTIONS
For U.S. federal income tax purposes, the cost of securities owned at December
31, 1995 was $55,607,011. Accordingly, the net unrealized appreciation of
investments (including investments denominated in foreign currencies) of
$837,998, was composed of gross appreciation of $12,391,937 for those
investments having an excess of value over cost and gross depreciation of
$11,553,939 for those investments having an excess of cost over value.
For the year ended December 31, 1995, purchases and sales of securities, other
than short-term obligations, were $21,813,814 and $27,614,251, respectively.
NOTE E. CREDIT AGREEMENT
The Fund, along with 15 other U.S. regulated investment companies for which BEA
serves as investment adviser, has a credit agreement with The First National
Bank of Boston. The agreement provides that each fund is permitted to borrow an
amount equal to the lesser of $50,000,000 or 25% of the net assets of the fund.
However, at no time shall the aggregate outstanding principal amount of all
loans to any of the 16 funds exceed $50,000,000. The line of credit will bear
interest at (I) the greater of the bank's prime rate or the Federal Funds
Effective Rate plus 0.50% or (II) the Adjusted Eurodollar Rate plus 1.50%. The
Fund had no amounts outstanding under the credit agreement during the year ended
December 31, 1995.
NOTE F. QUARTERLY RESULTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
NET GAIN/(LOSS) NET
ON INVESTMENT INCREASE/
AND FOREIGN (DECREASE)
NET CURRENCY IN NET
INVESTMENT INVESTMENT RELATED ASSETS RESULTING
INCOME INCOME TRANSACTIONS FROM OPERATIONS MARKET PRICE
------------- -------------- ---------------- ------------------ ON NYSE
TOTAL PER TOTAL PER TOTAL PER TOTAL PER ----------------
QUARTER ENDED (000) SHARE (000) SHARE (000) SHARE (000) SHARE HIGH LOW
- ------------------------------------- ------ ----- ------ ------ -------- ------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1995....................... $ 120 $0.02 $ (151) $(0.03) $ 723 $ 0.13 $ 572 $ 0.10 $13.875 $10.875
June 30, 1995........................ 1,497 0.29 1,201 0.23 2,215 0.42 3,416 0.65 14.250 12.375
September 30, 1995................... 175 0.03 (153) (0.03) (5,045) (0.95) (5,197) (0.98) 14.250 11.750
December 31, 1995.................... 290 0.05 (7) -- (3,316) (0.63) (3,324) (0.63) 12.500 11.000
------ ----- ------ ------ -------- ------ -------- --------
Totals............................... $2,082 $0.39 $ 890 $ 0.17 $ (5,423) $(1.03) $ (4,533) $ (0.86)
------ ----- ------ ------ -------- ------ -------- --------
------ ----- ------ ------ -------- ------ -------- --------
March 31, 1994....................... $ 72 $0.01 $ (209) $(0.04) $ 15,347 $ 2.90 $ 15,138 $ 2.86 $15.875 $12.625
June 30, 1994........................ 1,124 0.21 900 0.17 (10,769) (2.03) (9,869) (1.86) 13.875 12.000
September 30, 1994................... 107 0.02 (179) (0.04) 7,338 1.39 7,159 1.35 15.875 11.625
December 31, 1994.................... 104 0.02 (183) (0.03) (2,371) (0.45) (2,554) (0.48) 17.000 13.500
------ ----- ------ ------ -------- ------ -------- --------
Totals............................... $1,407 $0.26 $ 329 $ 0.06 $ 9,545 $ 1.81 $ 9,874 $ 1.87
------ ----- ------ ------ -------- ------ -------- --------
------ ----- ------ ------ -------- ------ -------- --------
</TABLE>
12
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of The Portugal Fund, Inc.
We have audited the accompanying statement of assets and liabilities of The
Portugal Fund, Inc., including the schedule of investments, as of December 31,
1995, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Portugal Fund, Inc. as of December 31, 1995, the results of its operations for
the year then ended, the changes in net assets for each of the two years in the
period then ended, and its financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 16, 1996
13
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS (unaudited)
On April 25, 1995, the annual meeting of shareholders of The Portugal Fund, Inc.
(the "Fund") was held and the following matters were voted upon:
(1) To re-elect two directors to the Board of Directors of the Fund.
<TABLE>
<CAPTION>
NAME OF DIRECTOR VOTES FOR VOTES WITHHELD NON-VOTES
- -------------------------------------------------------------- ---------- -------------- ----------
<S> <C> <C> <C>
Daniel Sigg................................................... 4,061,471 103,319 1,134,571
Martin Torino................................................. 4,060,670 104,120 1,134,571
</TABLE>
In addition to the directors re-elected at the meeting, Emilio Bassini,
James Cattano and Jonathan Lubell continue to serve as directors of the
Fund.
(2) To ratify the selection of Coopers & Lybrand L.L.P. as independent public
accountants for the year ending December 31, 1995.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES WITHHELD NON-VOTES
---------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
4,073,378 67,115 24,297 1,134,571
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAX INFORMATION (unaudited)
The Fund is required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise its shareholders within 60 days of the Fund's fiscal year end
(December 31, 1995) as to the U.S. federal tax status of distributions received
by the Fund's shareholders in respect of such fiscal year. Of the $0.18 per
share dividend and distribution paid in respect of such fiscal year, $0.15 per
share was derived from net investment income and $0.03 per share was from net
realized foreign exchange gains. There were no distributions which would qualify
for the dividend received deduction available to corporate shareholders.
The Fund has made an election under Section 853 to pass through foreign taxes
paid by the Fund to its shareholders. The total amount of foreign taxes that
were passed through to shareholders for the year ending December 31, 1995 were
$269,472, equal to $0.05 per share. This information is given to meet certain
requirements of the Internal Revenue Code of 1986, as amended. Shareholders
should refer to their Form 1099-DIV to determine the amount includable on their
respective tax returns for 1995.
Notification for calendar year 1995 was mailed in January 1996. The notification
reflected the amount to be used by calendar year taxpayers on their U.S. federal
income tax returns along with Form 1099-DIV.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their distribution. They will generally not be entitled to a foreign
tax credit or deduction for the withholding taxes paid by the Fund.
In general, distributions received by tax-exempt recipients (e.g., IRAs and
Keoghs) need not be reported as taxable income for U.S. federal income tax
purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7)
plans) may need this information for their annual information reporting.
Shareholders are advised to consult their own tax advisers with respect to the
tax consequences of their investment in the Fund.
14
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DESCRIPTION OF DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN
Pursuant to The Portugal Fund, Inc.'s (the "Fund") Dividend Reinvestment and
Cash Purchase Plan (the "Plan"), each shareholder will be deemed to have
elected, unless the Fund's transfer agent, as the Plan Agent (the "Plan Agent"),
is otherwise instructed by the shareholder in writing, to have all dividends and
distributions, net of any applicable U.S. withholding tax, automatically
reinvested in additional shares of the Fund. Shareholders who do not participate
in the Plan will receive all dividends and distributions in cash, net of any
applicable U.S. withholding tax, paid in dollars by check mailed directly to the
shareholder by the Plan Agent, as dividend-paying agent. Shareholders who do not
wish to have dividends and distributions automatically reinvested should notify
the Plan Agent for the Fund at the address set forth below. Dividends and
distributions with respect to shares registered in the name of a broker-dealer
or other nominee (i.e., in "street name") will be reinvested under the Plan
unless such service is not provided by the broker or nominee or the shareholder
elects to receive dividends and distributions in cash. A shareholder whose
shares are held by the broker or nominee that does not provide a dividend
reinvestment program may be required to have his shares registered in his own
name to participate in the Plan. Investors who own shares of the Fund's common
stock registered in street name should contact the broker or nominee for details
concerning participation in the Plan.
Certain distributions of cash attributable to (a) some of the dividends and
interest amounts paid to the Fund and (b) certain capital gains earned by the
Fund that are derived from securities of certain foreign issuers are subject to
taxes payable by the Fund at the time amounts are remitted. Such taxes, if any,
will be borne by the Fund and allocated to all shareholders in proportion to
their interests in the Fund.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the Board of Directors of the Fund declares an income dividend or a capital
gains distribution payable either in the Fund's common stock or in cash, as
shareholders may have elected, nonparticipants 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
valued at net asset value or, if the net asset value is less than 95% of the
market price on the valuation date, then valued at 95% of the market price. If
net asset value per share on the valuation date exceeds the market price per
share on that date, participants in the Plan will receive shares of stock from
the Fund valued at the market price.
The valuation date is the dividend or distribution payment date or, if that date
is not a New York Stock Exchange trading day, the next preceding trading day. 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 New York Stock Exchange or elsewhere, for the
participants' accounts on, or shortly after, the payment date.
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 common stock. The Plan Agent will use all funds received from
participants to purchase Fund shares in the open market on or about February 15
and August 15 of each year. 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,
15
<PAGE>
THE PORTUGAL FUND, INC.
- ------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DESCRIPTION OF DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN (continued)
it is suggested that participants send in voluntary cash payments to be received
by the Plan Agent approximately 10 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 the payment is to be invested. A participant's tax basis in his shares
acquired through this optional investment right will equal his cash payments to
the Plan, including any cash payments used to pay brokerage commissions
allocable to his acquired shares.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations 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 the name of the
participant and each shareholder's proxy will include those shares purchased
pursuant to the Plan.
In the case of a shareholder, such as a bank, broker or nominee, that holds
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.
There is no charge to participants for reinvesting dividends or capital gains
distributions payable in either stock or cash. The Plan Agent's fees for the
handling of reinvestment of such 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
be charged by the Plan Agent 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 the reinvestment of dividends
or capital gain distributions payable only in cash. 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 obtainable. Brokerage commissions will
vary based on, among other things, the broker selected to effect a particular
purchase and the number of participants on whose behalf such purchase is being
made. The Fund cannot predict, therefore, whether the cost to a participant who
makes a voluntary cash payment will be less than if a participant were to make
an open market purchase of the Fund's common stock on his own behalf.
The receipt of dividends and distributions in the stock under the Plan will not
relieve participants of any income tax (including withholding tax) that may be
payable on such dividends or distributions.
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 at least
30 days before the semiannual contribution date, in the case of voluntary cash
payments, or the record date for dividends or distributions. 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 at least 30 days' written notice to members of the Plan. All
correspondence concerning the Plan should be directed to The First National Bank
of Boston, Investor Relations Department, P.O. Box 644, Mail Stop 45-02-09,
Boston, Massachusetts 02102-0644 or by telephone at 1-800-730-6001.
16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
BEA Associates
New York, New York
ADMINISTRATOR
Bear Stearns Funds Management Inc.
New York, New York
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
Boston, Massachusetts
CUSTODIAN
Brown Brothers Harriman & Co.
Boston, Massachusetts
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
LEGAL COUNSEL
Willkie Farr & Gallagher
New York, New York
This report, including the financial statements herein, is sent to the
shareholders of the Fund 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 this report.
THE PORTUGAL FUND, INC.
-----------------------------
[LOGO]
THE PORTUGAL FUND, INC.
ANNUAL REPORT
DECEMBER 31, 1995
