As filed with the Securities and Exchange Commission
on June 30, 2000
Securities Act File No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. |_|
THE LATIN AMERICA EQUITY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue, 16th Floor, New York, New York 10017
(Address of Principal Executive Offices: Number,
Street, City, State, Zip Code)
(212) 875-3500
(Registrant's Area Code and Telephone Number)
-------------
Hal Liebes, Esq., Senior Vice President
The Latin America Equity Fund, Inc.
466 Lexington Avenue, 16th Floor
New York, New York 10017
(Name and Address of Agent for Service)
with copies to:
Daniel Schloendorn, Esq.
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
<PAGE>
Approximate Date of Proposed Public Offering:
As soon as practicable after
this Registration Statement becomes effective
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
===============================================================================
PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT (1) OFFERING PRICE (1) FEE
-------------------------------------------------------------------------------
Common Stock
($0.001 par
value) 6,494,056 $12.2166 $79,355,284.53 $20,944.52
===============================================================================
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended,
based on the average of the high and low sales prices reported on the New
York Stock Exchange on June 26, 2000.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
<PAGE>
THE LATIN AMERICA EQUITY FUND, INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
o Cover Sheet
o Contents of Registration Statement
o Form N-14 Cross Reference Sheet
o Letter to Shareholders of The Latin America Equity Fund, Inc.
o Letter to Shareholders of The Latin America Investment Fund, Inc.
o Notice of Special Meeting of Shareholders of The Latin America Equity
Fund, Inc.
o Notice of Special Meeting of Shareholders of The Latin America Investment
Fund, Inc.
o Part A - Proxy Statement/Prospectus
o Part B - Statement of Additional Information
o Part C - Other Information
o Signature Page
o Exhibits
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART A Item No. and Caption Proxy Statement/Prospectus Caption
--------------------------- ----------------------------------
<S> <C> <C>
1. Beginning of Registration Statement Cover Page
and Outside Front Cover Page of
Prospectus
2. Beginning and Outside Back Cover Page Cover Page; Table of Contents
of Prospectus Contents
3. Fee Table, Synopsis Information, and Synopsis; Risk Factors and Special
Risk Factors Considerations; Comparison of
Investment Objectives and Policies
4. Information about the Transactions Synopsis - The Proposed Merger;
Information about the Merger;
Additional Information about the Funds
5. Information about the Registrant Synopsis; Risk Factors and Special
Considerations; Comparison of
Investment Objectives and Policies;
Additional Information about the Funds
6. Information about the Company Being Synopsis; Risk Factors and Special
Acquired Considerations; Comparison of
Investment Objectives and Policies;
Additional Information about the Funds
7. Voting Information Notice of Meeting of Shareholders;
General; Required Vote
8. Interest of Certain Persons and Experts Additional Information about the Funds
9. Additional Information Required for (Not Applicable)
Reoffering by Persons Deemed to be
Underwriters
<CAPTION>
PART B Item No. and Caption Statement of Additional Information Caption
--------------------------- -------------------------------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. Additional Information about the Comparison of Risk Factors and
Registrant Special Considerations (in Part A);
Comparison of Investment Objectives
and Policies; Additional Information
about the Funds (in Part A); Tax
Considerations
13. Additional Information about the Comparison of Risk Factors and
Company Being Acquired Special Considerations (in Part A);
Comparison of Investment Objectives
and Policies; Additional Information
about the Funds (in Part A); Tax
Considerations
14. Financial Statements Financial Statements
<CAPTION>
PART C
------
<S> <C>
15 - 17 Information required to be included
in Part C is set forth under the
appropriate Item, so numbered, in
Part C of this Registration Statement.
</TABLE>
<PAGE>
PART A
INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
<PAGE>
THE LATIN AMERICA EQUITY FUND, INC.
466 Lexington Avenue, 16th Floor
New York, New York 10017
_______, 2000
Dear Shareholder:
We are pleased to invite you to a special meeting of shareholders of The
Latin America Equity Fund, Inc., a Maryland corporation. The Latin America
Equity Fund, Inc. is sometimes referred to as "LAQ" or the "Fund."
The special meeting is scheduled to be held at 10:00 a.m., Eastern time,
on Friday, September 15, 2000, at the offices of Credit Suisse Asset Management,
LLC, 466 Lexington Avenue, 16th Floor, New York, New York 10017. Shareholders
who are unable to attend this meeting are strongly encouraged to vote by proxy,
which is customary in corporate meetings of this kind. A Proxy
Statement/Prospectus regarding the meeting, a proxy card(s) for your vote at the
meeting and an envelope - postage prepaid - in which to return your proxy card
are enclosed. At the special meeting you will be asked to vote on four matters.
First, you will be asked to vote on a Merger Agreement and Plan of
Reorganization, or the Merger Agreement, whereby The Latin America Investment
Fund, Inc., sometimes referred to as "LAM," will merge with and into LAQ in
accordance with the Maryland General Corporation Law. As a result of the merger:
o LAM will no longer exist,
o LAQ will be the surviving corporation, and
o each share of common stock of LAM will convert into an equivalent
dollar amount (to the nearest one ten-thousandth of one cent) of
full shares of common stock of LAQ, based on the net asset value per
share of each fund.
LAQ will not issue any fractional shares to LAM shareholders. LAQ's
transfer agent will aggregate all fractional shares, sell the resulting full
shares on the New York Stock Exchange at the current market price for the shares
and remit the cash proceeds to shareholders of LAM. The currently issued and
outstanding shares of LAQ will remain issued and outstanding.
Both LAQ and LAM are closed-end, non-diversified management investment
companies listed on the New York Stock Exchange. The funds have substantially
similar investment objectives and invest primarily in the same markets. Both
funds seek long-term capital appreciation by investing primarily in Latin
American securities. While LAM invests in Latin America debt and equity
securities, LAQ generally invests in Latin American equity securities. The
current investment objective and policies of LAQ will continue unchanged if the
merger occurs and, as such, LAQ generally will not invest in Latin American debt
securities after the merger.
<PAGE>
The Board of Directors of LAQ believes that combining the two funds will
benefit Fund shareholders by providing the potential for:
o economies of scale,
o greater investment flexibility,
o a lower operating expense ratio,
o improved diversification of portfolio equity holdings enabling LAQ
to mitigate risks, and
o enhanced market liquidity of LAQ's shares.
The proposed merger and investment policies of the funds are described in
more detail in the combined Proxy Statement/Prospectus.
Second, you will be asked to approve a new investment advisory agreement
with Credit Suisse Asset Management, LLC, or CSAM. The new investment advisory
agreement will be substantially the same as the current investment advisory
agreement except for changes in the calculation of the investment advisory fees.
Currently, the investment advisory fees are based on LAQ's average weekly net
assets. Under the new investment advisory agreement, investment advisory fees
will instead be based on the lower of the average weekly stock price (market
value) of LAQ's outstanding shares or the Fund's average weekly net assets. By
revising the fee structure, LAQ is expected to:
o reduce investment advisory fees, thereby lowering its overall
expense ratio, and
o more closely align the interests of CSAM with shareholder interests
which are aimed at enhancing LAQ's market value.
Third, you will be asked to vote to approve a new investment sub-advisory
agreement with LAQ's Chilean sub-adviser, Celfin Servicios Financieros S.A. The
new investment sub-advisory agreement will be substantially the same as the
current investment sub-advisory agreement except for changes in the calculation
of the investment sub-advisory fees comporting with the changes described above.
Fourth, you will be asked to vote upon a shareholder proposal to terminate
the current investment advisory agreement with CSAM unless, within 45 days after
passage of this proposal, LAQ's Board of Directors presents for shareholder
approval and supports a proposal to open-end LAQ or otherwise permit LAQ
shareholders to redeem their shares at net asset value.
THE BOARD OF DIRECTORS OF YOUR FUND BELIEVES THAT THE PROPOSED MERGER, THE
NEW INVESTMENT ADVISORY AGREEMENT AND THE NEW INVESTMENT SUB-ADVISORY AGREEMENT
ARE IN THE BEST INTERESTS OF THE SHAREHOLDERS AND RECOMMENDS THAT YOU READ THE
ENCLOSED MATERIALS CAREFULLY AND THEN VOTE "FOR" PROPOSALS 1, 2 AND 3. THE BOARD
OF DIRECTORS BELIEVES THAT TERMINATING THE INVESTMENT ADVISORY AGREEMENT WITH
CSAM IS NOT IN THE BEST INTERESTS OF THE SHAREHOLDERS AND RECOMMENDS THAT YOU
VOTE "AGAINST" PROPOSAL 4.
<PAGE>
Please note that LAM intends to make a tender offer to acquire up to 50%
of its shares of common stock at a price per share equal to 95% of LAM's net
asset value per share as of the end of the tender offer period, and prior to the
consummation of the merger. This tender offer will not occur unless the
shareholders of both funds approve the Merger Agreement and all other conditions
to the consummation of the merger are satisfied or waived.
Your vote is important. PLEASE TAKE A MOMENT NOW TO SIGN AND RETURN YOUR
PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. If we do not receive
your signed proxy card(s) after a reasonable amount of time, you may receive a
telephone call from our proxy solicitor, Shareholder Communications Corporation,
reminding you to vote your shares.
Respectfully,
William W. Priest, Jr.
Chairman of the Board of Directors
YOU ARE URGED TO SIGN THE PROXY CARD(S) AND RETURN THE CARD(S) IN THE
POSTAGE-PAID ENVELOPE TO ENSURE A QUORUM AT THE MEETING. YOUR VOTE IS IMPORTANT
REGARDLESS OF THE SIZE OF YOUR SHAREHOLDINGS.
<PAGE>
THE LATIN AMERICA INVESTMENT FUND, INC.
466 Lexington Avenue, 16th Floor
New York, New York 10017
_______, 2000
Dear Shareholder:
We are pleased to invite you to a special meeting of shareholders of The
Latin America Investment Fund, Inc., a Maryland corporation. The Latin America
Investment Fund, Inc. is sometimes referred to as "LAM" or the "Fund."
The special meeting is scheduled to be held at 11:00 a.m., Eastern time,
on Friday, September 15, 2000, at the offices of Credit Suisse Asset Management,
LLC, 466 Lexington Avenue, 16th Floor, New York, New York 10017. Shareholders
who are unable to attend this meeting are strongly encouraged to vote by proxy,
which is customary in corporate meetings of this kind. A Proxy
Statement/Prospectus regarding the meeting, a proxy card(s) for your vote at the
meeting and an envelope - postage prepaid - in which to return your proxy card
are enclosed. At the special meeting you will be asked to vote on two matters.
First, you will be asked to vote on a Merger Agreement and Plan of
Reorganization, or the Merger Agreement, whereby LAM will merge with and into
The Latin America Equity Fund, Inc., sometimes referred to as "LAQ," in
accordance with the Maryland General Corporation Law. As a result of the merger:
o LAM will no longer exist,
o LAQ will be the surviving corporation, and
o each share of common stock of LAM will convert into an equivalent
dollar amount (to the nearest one ten-thousandth of one cent) of
full shares of common stock of LAQ, based on the net asset value per
share of each fund.
LAQ will not issue any fractional shares to LAM shareholders. LAQ's
transfer agent will aggregate all fractional shares, sell the resulting full
shares on the New York Stock Exchange at the current market price for the shares
and remit the cash proceeds to LAM's shareholders.
The currently issued and outstanding shares of LAQ will remain issued and
outstanding. Although the LAQ shares received in the merger will have the same
total net asset value as the LAM shares you held immediately before the merger
(disregarding fractional shares), their stock price (market value) will be less
than that of your LAM shares, assuming current market discount levels persist.
Like LAM, LAQ is a closed-end, non-diversified management investment
company listed on the New York Stock Exchange. The investment objective of both
funds is long-term capital appreciation. While LAM seeks this objective by
investing primarily in Latin American debt and equity securities, LAQ generally
invests in Latin American equity securities. The current
<PAGE>
investment objective and policies of LAQ will continue unchanged if the merger
occurs and, as such, LAQ generally will not invest in Latin American debt
securities after the merger.
The Board of Directors of LAM believes that combining the two funds will
benefit Fund shareholders by providing the potential for:
o economies of scale,
o greater investment flexibility,
o a lower operating expense ratio,
o improved diversification of portfolio equity holdings enabling LAQ
to mitigate risks, and
o enhanced market liquidity of LAQ's shares.
The proposed merger and the investment policies of the funds are described
in more detail in the combined Proxy Statement/Prospectus.
Second, you will be asked to vote upon a shareholder proposal to terminate
the current investment advisory agreement with Credit Suisse Asset Management,
LLC, or CSAM, unless, within 45 days after passage of this proposal, LAM's Board
of Directors presents for shareholder approval and supports a proposal to
open-end LAM or otherwise permit LAM shareholders to redeem their shares at net
asset value.
Please note that LAM intends to make a tender offer, or Tender Offer, to
acquire up to 50% of its shares of common stock at a price per share equal to
95% of LAM's net asset value per share as of the end of the tender offer period,
and prior to the consummation of the merger. The Tender Offer will not occur
unless the shareholders of both funds approve the Merger Agreement and all other
conditions to the consummation of the merger are satisfied or waived. A separate
shareholder vote on the Tender Offer is not required and is not being solicited.
An Offer to Purchase and a related Letter of Transmittal will be mailed to LAM
shareholders in the near future. The Tender Offer will only be made by these
materials. Shareholders are urged to read carefully these materials when they
are received as they will contain important information regarding the Tender
Offer. The offer to purchase shares will not be made to, and tenders pursuant to
the Offer to Purchase will not be accepted from or on behalf of, shareholders in
any jurisdiction in which making or accepting the offer to purchase would
violate that jurisdiction's laws.
LAQ shareholders are also being asked to approve a new investment advisory
agreement with CSAM and a new investment sub-advisory agreement with LAQ's
Chilean sub-adviser, Celfin Servicios Financieros S.A. The new agreements will
be substantially the same as the current agreements except for changes in the
calculation of the investment advisory and sub-advisory fees. Currently, the
investment advisory and sub-advisory fees are based on LAQ's average weekly net
assets. Under the new agreements, investment advisory and sub-advisory fees will
instead be based on the lower of the average weekly stock price (market value)
of LAQ's outstanding shares or the Fund's average weekly net assets. By revising
the fee structures, LAQ is expected to:
<PAGE>
o reduce investment advisory fees, thereby lowering its overall
expense ratio, and
o more closely align the interests of CSAM with the interests of LAQ
shareholders which are aimed at enhancing LAQ's market value.
If the Merger Agreement is approved and concluded, as shareholders of LAQ
you will benefit from the advisory and sub-advisory fee structure changes. You
are not being asked to vote separately on these matters.
THE BOARD OF DIRECTORS OF YOUR FUND BELIEVES THAT THE PROPOSED MERGER IS
IN THE BEST INTERESTS OF THE SHAREHOLDERS AND RECOMMENDS THAT YOU READ THE
ENCLOSED MATERIALS CAREFULLY AND THEN VOTE "FOR" THE MERGER PROPOSAL. THE BOARD
OF DIRECTORS BELIEVES THAT TERMINATING THE INVESTMENT ADVISORY AGREEMENT WITH
CSAM IS NOT IN THE BEST INTERESTS OF THE SHAREHOLDERS AND RECOMMENDS THAT YOU
VOTE "AGAINST" THE SHAREHOLDER PROPOSAL.
Your vote is important. PLEASE TAKE A MOMENT NOW TO SIGN AND RETURN YOUR
PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. If we do not receive
your signed proxy card(s) after a reasonable amount of time, you may receive a
telephone call from our proxy solicitor, Shareholder Communications Corporation,
reminding you to vote your shares.
Respectfully,
William W. Priest, Jr.
Chairman of the Board of Directors
YOU ARE URGED TO SIGN THE PROXY CARD(S) AND RETURN THE CARD(S) IN THE
POSTAGE-PAID ENVELOPE TO ENSURE A QUORUM AT THE MEETING. YOUR VOTE IS IMPORTANT
REGARDLESS OF THE SIZE OF YOUR SHAREHOLDINGS.
<PAGE>
THE LATIN AMERICA EQUITY FUND, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of The Latin America Equity Fund, Inc.:
Please take notice that a special meeting of shareholders of The Latin
America Equity Fund, Inc. (sometimes referred to as "LAQ"), a Maryland
corporation, will be held at the offices of Credit Suisse Asset Management, LLC,
466 Lexington Avenue, 16th Floor, New York, New York 10017, on Friday, September
15, 2000, at 10:00 a.m., Eastern time, for the following purposes:
1. To consider and vote upon the approval of a Merger Agreement and Plan of
Reorganization dated June ___, 2000 whereby The Latin America Investment
Fund, Inc. (sometimes referred to as "LAM"), a Maryland corporation, will
merge with and into LAQ in accordance with the Maryland General
Corporation Law;
2. To consider and vote upon the approval of a new investment advisory
agreement with Credit Suisse Asset Management, LLC;
3. To consider and vote upon the approval of a new investment sub-advisory
agreement with Celfin Servicios Financieros S.A.; and
4. To consider and vote upon a shareholder proposal to terminate the current
investment advisory agreement with Credit Suisse Asset Management, LLC.
The appointed proxies will vote on any other business that may properly
come before the special meeting or any adjournments thereof.
Holders of record of shares of common stock of LAQ at the close of
business on June 30, 2000 are entitled to vote at the special meeting and at any
postponements or adjournments thereof. LAM shareholders must approve the merger
as well.
The persons named as proxies may propose one or more adjournments of the
special meeting if the necessary quorum to transact business or the vote
required to approve or reject any proposal is not obtained at the meeting. Any
such adjournment will require the affirmative vote of the holders of a majority
of LAQ's shares present in person or by proxy at the special meeting. The
persons named as proxies will vote those proxies which they are entitled to vote
on any such proposal in accordance with their best judgment in the interest of
LAQ.
The enclosed proxy is being solicited on behalf of the Board of Directors
of LAQ.
By Order of the Board of Directors,
Michael A. Pignataro, Chief Financial Officer and Secretary
________, 2000
IMPORTANT -- WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD(S) AND RETURN
THE CARD(S) IN THE ENCLOSED ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE AND IS
INTENDED FOR YOUR CONVENIENCE. YOUR
<PAGE>
PROMPT RETURN OF THE ENCLOSED PROXY CARD(S) MAY SAVE THE NECESSITY AND EXPENSE
OF FURTHER SOLICITATIONS TO ENSURE A QUORUM AT THE MEETING. IF YOU CAN ATTEND
THE MEETING AND WISH TO VOTE YOUR SHARES IN PERSON AT THAT TIME, YOU WILL BE
ABLE TO DO SO.
<PAGE>
THE LATIN AMERICA INVESTMENT FUND, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of The Latin America Investment Fund, Inc.:
Please take notice that a special meeting of shareholders of The Latin
America Investment Fund, Inc. (sometimes referred to as "LAM"), a Maryland
corporation, will be held at the offices of Credit Suisse Asset Management, LLC,
466 Lexington Avenue, 16th Floor, New York, New York 10017, on Friday, September
15, 2000, at 11:00 a.m., Eastern time, for the following purposes:
1. To consider and vote upon the approval of a Merger Agreement and Plan of
Reorganization dated June ___, 2000 whereby LAM will merge with and into
The Latin America Equity Fund, Inc. (sometimes referred to as "LAQ"), a
Maryland corporation, in accordance with the Maryland General Corporation
Law; and
2. To consider and vote upon a shareholder proposal to terminate the current
investment advisory agreement with Credit Suisse Asset Management, LLC.
The appointed proxies will vote on any other business that may properly
come before the special meeting or any adjournments thereof.
Holders of record of shares of common stock of LAM at the close of
business on June 30, 2000 are entitled to vote at the special meeting and at any
postponements or adjournments thereof. LAQ shareholders must approve the merger
as well.
The persons named as proxies may propose one or more adjournments of the
special meeting if the necessary quorum to transact business or the vote
required to approve or reject any proposal is not obtained at the meeting. Any
such adjournment will require the affirmative vote of the holders of a majority
of LAM's shares present in person or by proxy at the special meeting. The
persons named as proxies will vote those proxies which they are entitled to vote
on any such proposal in accordance with their best judgment in the interest of
LAM.
The enclosed proxy is being solicited on behalf of the Board of Directors
of LAM.
By Order of the Board of Directors,
Michael A. Pignataro, Chief Financial Officer and Secretary
________, 2000
IMPORTANT -- WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD(S) AND RETURN
THE CARD(S) IN THE ENCLOSED ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE AND IS
INTENDED FOR YOUR CONVENIENCE. YOUR PROMPT RETURN OF THE ENCLOSED PROXY CARD(S)
MAY SAVE THE NECESSITY AND EXPENSE OF FURTHER SOLICITATIONS TO ENSURE A QUORUM
AT THE MEETING. IF YOU CAN ATTEND THE MEETING AND WISH TO VOTE YOUR SHARES IN
PERSON AT THAT TIME, YOU WILL BE ABLE TO DO SO.
<PAGE>
SUBJECT TO COMPLETION - DATED JUNE 30, 2000
THE LATIN AMERICA INVESTMENT FUND, INC.
466 LEXINGTON AVENUE, 16th FLOOR
NEW YORK, NEW YORK 10017
(212) 875-3500
TO BE MERGED WITH AND INTO
THE LATIN AMERICA EQUITY FUND, INC.
466 LEXINGTON AVENUE, 16th FLOOR
NEW YORK, NEW YORK 10017
(212) 875-3500
PROXY STATEMENT
MEETINGS OF SHAREHOLDERS
TO BE HELD SEPTEMBER 15, 2000
THE LATIN AMERICA EQUITY FUND, INC. PROSPECTUS
This Proxy Statement/Prospectus is being furnished to shareholders of the
Latin America Investment Fund and the Latin America Equity Fund for use at a
special meeting of shareholders of each Fund to be held on Friday, September 15,
2000 at 10:00 a.m., Eastern time, with respect to the Latin America Equity Fund,
and at 11:00 a.m., Eastern time, with respect to the Latin America Investment
Fund, and at any and all postponements or adjournments thereof. The Latin
America Equity Fund is sometimes referred to in this Proxy Statement/Prospectus
as "LAQ," the Latin America Investment Fund is sometimes referred to in this
Proxy Statement/Prospectus as "LAM" and LAQ and LAM are sometimes collectively
referred to as the "Funds" and individually, as the context may require, as the
"Fund." The approximate mailing date of this Proxy Statement/Prospectus is
August 4, 2000.
Purpose of the Special Meetings. At the special meetings, shareholders of
the Funds will be asked to approve a Merger Agreement and Plan of Reorganization
dated June , 2000 whereby LAM will merge with and into LAQ, in accordance with
the Maryland General Corporation Law. The Merger Agreement and Plan of
Reorganization is referred to in this Proxy Statement/Prospectus as the "Plan."
Specifics of the Proposed Merger. As a result of the merger:
o LAM will no longer exist,
o LAQ will be the surviving corporation, and
o each share of common stock of LAM will convert into an equivalent
dollar amount (to the nearest one ten-thousandth of one cent) of
full shares of common stock of LAQ, based on the net asset value per
share of each Fund.
<PAGE>
LAQ will not issue any fractional shares to LAM shareholders. LAQ's
transfer agent will aggregate all fractional shares, sell the resulting full
shares on the New York Stock Exchange, or the NYSE, at the current market price
for the shares and remit the cash proceeds to LAM shareholders in proportion to
their fractional shares. The currently issued and outstanding shares of LAQ will
remain issued and outstanding. LAM shareholders will recognize no gain or loss
as a result of the merger, except with respect to any cash proceeds received
from the sale of fractional LAQ shares. These shareholders will be treated for
federal income tax purposes as if they received fractional share interests and
then sold such interests for cash.
In connection with the merger, LAQ will issue that number of shares that
have an aggregate net asset value equal to the aggregate net asset value of the
outstanding shares of LAM (disregarding fractional shares).
Each LAM shareholder, in connection with the merger, will receive full
shares of LAQ having an aggregate net asset value (disregarding fractional
shares) equal to the aggregate net asset value of the shareholder's LAM shares
before the merger. While the total net asset value of shares received by each
LAM shareholder in the merger (disregarding fractional shares) will be the same
as before the merger, the market value of LAQ shares that a LAM shareholder
receives in the merger will be less than the market value of LAM shares that
such shareholder owns immediately before the merger, assuming current market
discount levels persist.
LAM Tender Offer. The Board of Directors of LAM has determined that it is
in the best interests of that Fund to make a tender offer, which is referred to
in this Proxy Statement/Prospectus as the "Tender Offer," to acquire up to 50%
of its shares of common stock at a price per share equal to 95% of its net asset
value per share as of the end of the tender offer period. The Tender Offer will
be conditioned upon the approval of the Plan by the shareholders of both Funds
and will not occur unless these approvals are obtained and all other conditions
to the consummation of the merger are satisfied or waived. The Tender Offer will
be made pursuant to an Offer to Purchase that is being sent to the shareholders
of record of LAM as of ____ __, 2000. For more information about the Tender
Offer, see "Information About The Merger -- History of The Latin America
Investment Fund's Discount."
Future LAQ Tender Offers. The Board of Directors of LAQ has approved the
overall terms of a self-tender program that the Fund intends to launch in the
calendar year 2001, which terms include the following: (i) the Fund will make a
tender offer to acquire at least 15% of its outstanding shares during each
calendar year of the program; and (ii) the per share purchase price will be at
least 95% of the Fund's net asset value per share. Implementation of the program
is conditioned on approval of the merger.
Information About The Funds. The Funds are closed-end, non-diversified
management investment companies with substantially similar investment
objectives. Both Funds seek to achieve long-term capital appreciation by
investing primarily in Latin American securities. While LAM invests in Latin
American debt and equity securities, LAQ generally invests in Latin American
equity securities. The current investment objective and policies of LAQ will
continue unchanged if the merger occurs, and as such, LAQ generally will not
invest in Latin American debt securities after the merger, although it reserves
the right to invest up to 20% of its assets in debt obligations of corporate and
governmental issuers.
2
<PAGE>
The terms and conditions of the merger and related transactions are more
fully described in this Proxy Statement/Prospectus and in the Plan, a copy of
which is attached as Exhibit A.
This Proxy Statement/Prospectus serves as a prospectus for shares of LAQ
under the Securities Act of 1933, which is referred to in this Proxy
Statement/Prospectus as the "Securities Act," in connection with the issuance of
LAQ common shares in the merger.
Assuming the shareholders of the Funds approve the merger, the Funds will
jointly file articles of merger, or the Articles of Merger, with the State
Department of Assessments and Taxation of Maryland, or the Department. The
merger will become effective when the Department accepts for record the Articles
of Merger or at such later time, which may not exceed 30 days after the Articles
of Merger are accepted for record, as specified in the Articles of Merger. The
date when the Articles of Merger are accepted for record, or the later date, is
referred to in this Proxy Statement/Prospectus as the "Effective Date." LAM, as
soon as practicable after the Effective Date, will terminate its registration
under the Investment Company Act of 1940, which is referred to in this Proxy
Statement/Prospectus as the "Investment Company Act."
You should retain this Proxy Statement/Prospectus for future reference as
it sets forth concisely information about LAQ and LAM that you should know
before voting on the proposals described below.
A Statement of Additional Information, which is referred to in this Proxy
Statement/Prospectus as the "SAI," dated _______, 2000, which contains
additional information about the merger and the Funds has been filed with the
Securities and Exchange Commission, or SEC. The SAI and the financial statements
of each Fund for the fiscal year ended December 31, 1999 are incorporated by
reference into this Proxy Statement/Prospectus. A copy of these documents is
available upon request and without charge by writing to Shareholder
Communications Corporation, 17 State Street, New York, New York 10004, or by
calling 1-(800) 403-7916. You may ask questions about the Funds by calling
1-(800) 403-7916. LAQ has provided the information included in this Proxy
Statement/Prospectus regarding that Fund. LAM has provided the information
included in this Proxy Statement/Prospectus regarding that Fund.
LAQ's shares of common stock are listed on the NYSE under the symbol
"LAQ". LAM's shares of common stock are listed on the NYSE under the symbol
"LAM". After the Effective Date, shares of common stock of LAQ will continue to
be listed on the NYSE under the symbol "LAQ". Reports, proxy materials and other
information concerning each Fund may be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005.
The SEC has not approved or disapproved these securities or determined if
this Proxy Statement/Prospectus is truthful or complete. To state otherwise is a
crime.
The date of this Proxy Statement/Prospectus is ________, 2000
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TABLE OF CONTENTS
Page
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GENERAL......................................................................6
PROPOSAL 1 (BOTH FUNDS): APPROVAL OF THE MERGER AGREEMENT AND PLAN OF
REORGANIZATION PURSUANT TO WHICH THE LATIN AMERICA INVESTMENT FUND WILL
MERGE WITH AND INTO THE LATIN AMERICA EQUITY FUND............................8
SYNOPSIS..............................................................10
EXPENSE TABLE.........................................................17
FINANCIAL HIGHLIGHTS..................................................20
RISK FACTORS AND SPECIAL CONSIDERATIONS...............................25
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES......................37
UNITED STATES FEDERAL INCOME TAXES....................................44
INFORMATION ABOUT THE MERGER..........................................46
ADDITIONAL INFORMATION ABOUT THE FUNDS................................54
MANAGEMENT OF THE FUNDS...............................................65
EXPERTS...............................................................76
REQUIRED VOTE.........................................................76
LEGAL PROCEEDINGS.....................................................76
LEGAL OPINIONS........................................................76
PROPOSAL 2 (LATIN AMERICA EQUITY FUND SHAREHOLDERS ONLY): APPROVAL OF
NEW INVESTMENT ADVISORY AGREEMENT...........................................77
BACKGROUND............................................................77
BOARD RECOMMENDATION..................................................77
BOARD CONSIDERATIONS; REASONS FOR THE NEW INVESTMENT ADVISORY
AGREEMENT.............................................................78
INFORMATION CONCERNING CREDIT SUISSE GROUP AND CSAM...................78
DESCRIPTION OF CURRENT INVESTMENT ADVISORY AGREEMENT..................78
THE NEW INVESTMENT ADVISORY AGREEMENT.................................80
DIFFERENCES BETWEEN THE CURRENT AND THE NEW INVESTMENT ADVISORY
AGREEMENT.............................................................80
REQUIRED SHAREHOLDER VOTE.............................................81
4
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PROPOSAL 3 (LATIN AMERICA EQUITY FUND SHAREHOLDERS ONLY): APPROVAL OF
NEW INVESTMENT SUB-ADVISORY AGREEMENT.......................................82
BACKGROUND............................................................82
BOARD RECOMMENDATION..................................................82
BOARD CONSIDERATIONS; REASONS FOR THE NEW INVESTMENT SUB-ADVISORY
AGREEMENT.............................................................82
INFORMATION CONCERNING CELFIN.........................................83
DESCRIPTION OF CURRENT INVESTMENT SUB-ADVISORY AGREEMENT..............83
THE NEW INVESTMENT SUB-ADVISORY AGREEMENT.............................84
DIFFERENCES BETWEEN THE CURRENT AND THE NEW INVESTMENT
SUB-ADVISORY AGREEMENT................................................84
REQUIRED SHAREHOLDER VOTE.............................................85
PROPOSAL 4 (BOTH FUNDS): SHAREHOLDER PROPOSAL TO TERMINATE EACH FUND'S
INVESTMENT ADVISORY AGREEMENT WITH CSAM.....................................86
BACKGROUND............................................................86
SHAREHOLDER PROPOSAL..................................................86
SUPPORTING STATEMENTS.................................................86
REQUIRED SHAREHOLDER VOTE.............................................87
OPPOSING STATEMENT OF THE BOARDS OF DIRECTORS.........................87
ADDITIONAL INFORMATION......................................................89
EXHIBIT A - FORM OF MERGER AGREEMENT AND PLAN OF REORGANIZATION............A-1
EXHIBIT B - FORM OF NEW CSAM INVESTMENT ADVISORY AGREEMENT.................B-1
EXHIBIT C - FORM OF NEW CELFIN INVESTMENT SUB-ADVISORY AGREEMENT...........C-1
5
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GENERAL
This Proxy Statement/Prospectus is furnished to the shareholders of the
Funds in connection with the solicitation of proxies on behalf of the Boards of
Directors of LAQ and LAM. The Board of Directors of each Fund is soliciting
proxies for use at the special meetings. The mailing address for both Funds is
466 Lexington Avenue, 16th Floor, New York, New York 10017.
This Proxy Statement/Prospectus, the Notice of Meeting to Shareholders and
the proxy card(s) are first being mailed to shareholders on or about August 4,
2000 or as soon as practicable thereafter. Any shareholder who gives a proxy has
the power to revoke the proxy either:
o by mail, addressed to the Secretary of the respective Fund, at the
Fund's mailing address, or
o in person at the special meeting
by executing a superseding proxy or by submitting a notice of revocation to the
respective Fund. All properly executed proxies received in time for the special
meeting will be voted as specified in the proxy or, if no specification is made,
in favor of each proposal for that Fund referred to in the Proxy
Statement/Prospectus.
Shareholders of LAQ and LAM will be asked to vote on Proposal 1 -- the
approval of the Plan -- and Proposal 4 -- a shareholder proposal to terminate
the current investment advisory agreement with Credit Suisse Asset Management,
LLC, or CSAM. Shareholders of LAQ will also be asked to vote on Proposal 2 --
the approval of the new investment advisory agreement that provides for a
reduced advisory fee to CSAM -- and Proposal 3 -- the approval of the new
investment sub-advisory agreement that provides for a reduced sub-advisory fee
to Celfin Servicios Financieros S.A., LAQ's Chilean sub-adviser.
The presence, either in person or by proxy, of the holders of a majority
of the outstanding shares of common stock entitled to vote at a meeting of a
Fund, will constitute a quorum for the transaction of business by such Fund. For
purposes of determining the presence of a quorum for transacting business at a
meeting, abstentions and broker "non-votes" will be treated as shares that are
present. Broker non-votes are proxies received by the Funds from brokers or
nominees, indicating that the broker or nominee has neither received
instructions from the beneficial owner or other persons entitled to vote nor has
the discretionary power to vote on a particular matter. Shareholders are urged
to forward their voting instructions promptly.
Proposal 1 requires the affirmative vote of a majority of the outstanding
shares of common stock of each Fund.
Proposals 2, 3 and 4 to be submitted at the special meeting of
shareholders of LAQ and Proposal 2 to be submitted at the special meeting of
shareholders of LAM require the affirmative vote of a "majority of outstanding
voting securities" of LAQ and LAM, respectively. A "majority of outstanding
voting securities" is defined under the Investment Company Act to mean the
lesser of
o 67% of the shares of a fund's common stock represented at a meeting
at which more than 50% of the outstanding shares of that fund's
common stock are represented, or
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o more than 50% of the outstanding shares of common stock.
Abstentions and broker non-votes will have the effect of a "no" vote for
each of the proposals to be submitted at either special meeting.
Proxy solicitations will be made primarily by mail, but solicitations may
also be made by telephone, telegraph or personal interviews conducted by
officers or employees of the Funds, CSAM, the investment adviser to the Funds,
Bear Stearns Funds Management Inc., the U.S. administrator to the Funds, or
Shareholder Communications Corporation, a proxy solicitation firm retained by
each Fund and entitled to receive a fee of approximately $7,500 per Fund and
reimbursements for its reasonable expenses. The Funds will bear costs of
solicitation, including:
o printing and mailing of this Proxy Statement/Prospectus and
accompanying material,
o the reimbursement of brokerage firms and others for their expenses
in forwarding solicitation material to the beneficial owners of each
Fund's shares,
o payment to Shareholder Communications Corporation, for its services
in soliciting proxies, and
o supplementary solicitations to submit proxies.
Only shareholders of record of each Fund at the close of business on June
30, 2000, the Record Date, are entitled to vote. An outstanding share of each
Fund is entitled to one vote on all matters voted upon at a special meeting for
that Fund. As of June 30, 2000, there were ________ shares of LAQ outstanding,
and ________ shares of LAM outstanding.
LAQ and LAM provide periodic reports to all of their shareholders. These
reports highlight relevant information including investment results and a review
of portfolio changes for each Fund. You may receive a copy of the most recent
annual report for LAQ or LAM and a copy of any more recent interim report,
without charge, by calling 1-(800)-403-7916 or writing to Shareholder
Communications Corporation, 17 State Street, New York, New York 10004.
The Boards of Directors of the Funds know of no business other than the
proposals described above which will be presented for consideration at the
special meetings. If any other matter is properly presented, it is the intention
of the persons named in the enclosed proxy to vote on that matter in their
discretion.
7
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PROPOSAL 1 (BOTH FUNDS): APPROVAL OF THE MERGER AGREEMENT AND PLAN OF
REORGANIZATION PURSUANT TO WHICH THE LATIN AMERICA INVESTMENT FUND WILL MERGE
WITH AND INTO THE LATIN AMERICA EQUITY FUND
On May 8, 2000, the Boards of Directors of LAQ and LAM, including a
majority of the directors of each Fund who are not "interested persons" of the
respective Fund, or the Non-interested Directors, unanimously:
o declared the merger of LAM with and into LAQ advisable,
o approved entering into the Plan, and
o recommended that the Plan be approved by the shareholders of each
Fund.
For more information about the merger, see "Information about the Merger."
The Plan is subject to the approval of the shareholders of both Funds and
certain other conditions. It provides for the merger, which is referred to in
this Proxy Statement/Prospectus as the "Merger," of LAM with and into LAQ, both
Maryland corporations, in accordance with the Maryland General Corporation Law,
or MGCL. As a result of the Merger:
o LAM will no longer exist,
o LAQ will be the surviving corporation, and
o each share of common stock of LAM will convert into an equivalent
dollar amount (to the nearest one ten-thousandth of one cent) of
full shares of common stock of LAQ, based on the net asset value per
share of each Fund calculated at 4:00 p.m. on the business day
preceding the Effective Date.
LAQ will not issue any fractional shares to LAM shareholders. LAQ's
transfer agent will aggregate all fractional shares, sell the resulting full
shares on the NYSE at the current market price for the shares and remit the cash
proceeds to shareholders of LAM in proportion to their fractional shares. LAQ's
shares outstanding as of the Effective Date will remain issued and outstanding.
In connection with the Merger, LAQ will issue that number of shares that have an
aggregate net asset value equal to the aggregate net asset value of the
outstanding shares of LAM (disregarding fractional shares). LAM will terminate
its registration under the Investment Company Act after the Merger.
In addition, as a consequence of the Merger, each shareholder of LAM will
become a shareholder of LAQ. On the Effective Date, each shareholder of LAM will
receive full shares of common stock of LAQ having an aggregate net asset value
(disregarding fractional shares) equal to the aggregate net asset value of such
shareholder's shares held in LAM as of the close of business on the Business Day
preceding the Effective Date. A "Business Day" is any day on which the NYSE is
open for trading.
A copy of the Plan is attached to this Proxy Statement/Prospectus as
Exhibit A, and the description of the Plan included in this Prospectus/Proxy
Statement is qualified in its entirety by reference to Exhibit A.
8
<PAGE>
The following provides a more detailed discussion about the Merger, each
Fund and additional information that you may find helpful in deciding how to
vote on the Merger Agreement.
9
<PAGE>
SYNOPSIS
This summary highlights important information included in this Proxy
Statement/Prospectus. This summary is qualified by reference to the more
complete information included elsewhere in this Proxy Statement/Prospectus and
the Plan. Shareholders of the Funds should read this entire Proxy
Statement/Prospectus carefully.
The Proposed Merger. The Boards of Directors of LAQ and LAM, including the
Non-interested Directors of each Fund, have unanimously approved the Plan. The
Plan provides for the merger of LAM with and into LAQ. The Merger is expected to
be consummated shortly after completion of the Tender Offer. As a result of the
Merger:
o each share of common stock of LAM will convert into an equivalent
dollar amount (to the nearest one ten-thousandth of one cent) of
full shares of common stock of LAQ, based on the net asset value per
share of each Fund calculated at 4:00 pm on the Business Day
preceding the Effective Date,
o each shareholder of LAM will become a shareholder of LAQ and will
receive, on the Effective Date, that number of full shares of common
stock of LAQ having an aggregate net asset value (disregarding
fractional shares) equal to the aggregate net asset value of such
shareholder's shares held in LAM as of the close of business on the
Business Day preceding the Effective Date; and
o LAQ will not issue any fractional shares to LAM shareholders.
The Board of Directors of LAM has determined that it is in the best
interests of that Fund to make a Tender Offer to acquire up to 50% of its shares
of common stock at a price per share equal to 95% of its net asset value per
share as of the end of the Tender Offer period. The Tender Offer will be
conditioned upon the approval of the Plan by the shareholders of both Funds and
will not occur unless these approvals are obtained and all other conditions to
the consummation of the Merger are satisfied or waived. For more information
about the Tender Offer, see "Information About the Merger -- History of the
Latin America Investment Fund's Discount."
In addition, the Board of Directors of LAQ has approved a self-tender
program that the Fund intends to launch in the calendar year 2001. The overall
terms of the self-tender program include the following:
o LAQ will make a tender offer to acquire at least 15% of its
outstanding shares during each calendar year of the program, and
o the per share purchase price will be at least 95% of the Fund's net
asset value per share.
The implementation of this program is conditioned on the approval of the
Merger. For more information about this program, see "Additional Information
About The Funds - Discount to Net Asset Value."
10
<PAGE>
For the reasons set forth below under "Information about the Merger -
Reasons for the Merger," the Boards of Directors of LAQ and LAM, including the
Non-interested Directors of each Fund, have unanimously concluded that:
o the Merger is in the best interests of each respective Fund, and
o the interests of existing shareholders of each respective Fund will
not be diluted as a result of the transactions contemplated by the
Plan.
Accordingly, the Board of Directors of each Fund recommends approval of
the Merger. If the Merger is not approved, each Fund will continue as a separate
investment company, and the Board of Directors of each Fund will consider such
other alternatives as it determines to be in the best interests of its
shareholders.
The Merger is subject to the receipt of regulatory approvals. These
approvals have been requested, although there can be no assurance when or if
they will be obtained.
Form of Organization. Both Funds are closed-end, non-diversified
management investment companies registered under the Investment Company Act. LAQ
was organized as a Maryland corporation in 1991 and LAM was organized as a
Maryland corporation in 1990. Each Fund's Board of Directors is responsible for
the management of the business and affairs of each Fund, including the
supervision of the duties performed by each Fund's investment manager.
Investment Objectives and Policies. Each Fund seeks long-term capital
appreciation as its objective. LAQ seeks its objective by investing primarily in
Latin American equity securities. For a description of Latin American equity
securities, see "Comparison of Investment Objectives and Policies." LAM seeks
its objective by investing primarily in Latin American debt and equity
securities. Under normal conditions, LAQ invests at least 80% of its total
assets in Latin American equity securities, while LAM invests at least 65% of
its total assets in Latin American debt and equity securities. Each Fund's
investment objective and the investment policies in the previous sentence are
fundamental, and can only be changed with the approval of the holders of a
majority of each Fund's outstanding voting securities as defined under the
Investment Company Act. Although both Funds intend to focus their investments in
listed equity securities, LAQ may invest up to 10% of its assets in, and LAM may
invest up to 25% of its assets in, unlisted equity securities, including
investments in new and early stage companies. LAQ may also invest up to 20% of
its assets in corporate and government debt securities of Latin American
issuers, including up to 15% of its assets in Sovereign Debt. For a definition
of Sovereign Debt, see "Comparison of Investment Objectives and Policies." LAM
may invest up to 30% of its assets in Sovereign Debt, which, like LAQ, it may
hold and trade or convert into equity or other investments under the debt
conversion programs of certain Latin American countries. Both Funds may also
hold local currency-denominated debt securities of corporate and governmental
issuers and securities deemed to be Temporary Investments. For a definition of
Temporary Investments, see "Comparison of Investment Objectives and Policies."
The preceding summary of the Funds' investment objectives and certain
policies should be considered in conjunction with the discussion below under
"Risk Factors and Special Considerations" and "Comparison of Investment
Objectives and Policies."
11
<PAGE>
Fees and Expenses--The Latin America Equity Fund. CSAM, formerly known as
BEA Associates, serves as LAQ's investment adviser with respect to all
investments. As compensation for its advisory services, CSAM is contractually
entitled to receive from the Fund an annual fee, calculated weekly and paid
quarterly, equal to:
o 1.25% of the first $100 million of the Fund's average weekly net
assets,
o 1.15% of the next $50 million of the Fund's average weekly net
assets, and
o 1.05% of the Fund's average weekly net assets in excess of $150
million.
Because LAQ no longer uses sub-advisers in Argentina, Brazil or Mexico, CSAM has
agreed to waive its portion of the advisory fee previously payable to these
former sub-advisers, which aggregates approximately 0.25% of the Fund's average
weekly net assets invested in these countries.
For the year ended December 31, 1999, CSAM earned $1,237,005 for advisory
services, of which CSAM waived $75,649. CSAM also provides certain
administrative services to the Fund and is reimbursed by the Fund for costs
incurred on behalf of the Fund (up to $20,000 per annum). For the year ended
December 31, 1999, CSAM was reimbursed $12,029 for administrative services
rendered to the Fund.
On July __, 2000, LAQ's Board of Directors approved a new investment
advisory agreement with CSAM, subject to shareholder approval. The new
investment advisory agreement with CSAM will be substantially similar to the
Fund's current investment advisory agreement except that the calculation of the
investment advisory fees will be based on the lower of the average weekly market
value of LAQ's outstanding shares or LAQ's average weekly net asset value. LAQ
shareholders are being asked to approve the new investment advisory agreement.
CSAM has voluntarily agreed to waive any advisory fees in excess of the
foregoing amounts, commencing July 1, 2000 and continuing through the date of
LAQ's special meeting of shareholders. For more information about the new
investment advisory agreement, see "Proposal 2 (Latin America Equity Fund
Shareholders Only): Approval of New Investment Advisory Agreement."
Celfin Servicios Financieros S.A., or Celfin, formerly known as Celsius
Agente de Valores Limitada, serves as LAQ's investment sub-adviser with respect
to Chilean investments. In return for its services, Celfin receives a fee, out
of the advisory fee payable to CSAM, computed weekly and paid quarterly at an
annual rate of 0.25% of the Fund's average weekly net assets invested in Chilean
securities. For the year ended December 31, 1999, Celfin earned $15,164 for
sub-advisory services.
On July __, 2000, LAQ's Board of Directors approved a new investment
sub-advisory agreement with Celfin, subject to shareholder approval. The new
investment sub-advisory agreement with Celfin will be substantially similar to
the Fund's current investment sub-advisory agreement except that the calculation
of the investment sub-advisory fees will be reduced by the discount from net
asset value at which LAQ's outstanding shares are trading. LAQ shareholders are
being asked to approve the new investment sub-advisory agreement. Celfin has
voluntarily agreed to waive any sub-advisory fees in excess of the foregoing
amounts, commencing July 1, 2000 and continuing through the date of LAQ's
special meeting of shareholders. For more information about the new investment
sub-advisory agreement, see "Proposal 3 (Latin America Equity Fund Shareholders
Only): Approval of New Investment Sub-Advisory Agreement."
12
<PAGE>
Bear Stearns Funds Management Inc., or BSFM, serves as LAQ's U.S.
administrator. The Fund pays BSFM a monthly fee for its services. This fee is
computed weekly at an annual rate of 0.10% of the first $100 million of the
Fund's average weekly net assets and 0.08% of amounts in excess of $100 million.
For the year ended December 31, 1999, BSFM earned $93,319 for administrative
services.
BEA Administration, Administradora de Fondos de Inversion de Capital
Extranjero S.A., or AFICE, serves as LAQ's Chilean administrator. For its
services, AFICE receives an annual fee from the Fund equal to the greater of
2,000 U.F.'s (approximately $58,000 at December 31, 1999) or 0.10% of the Fund's
average weekly net assets invested in Chilean securities. AFICE also receives
an annual reimbursement for out-of-pocket expenses not to exceed 500 U.F.'s.
These fees are paid by AFICE to Celfin for certain administrative services. An
accounting fee is also paid to Celfin which is calculated and paid quarterly at
an annual rate of 205.32 U.F.'s (approximately $6,000 at December 31, 1999). A
U.F. is a daily indexed, peso-denominated accounting unit designed to take
account of the Chilean inflation rate. For the year ended December 31, 1999,
Celfin earned $73,800 and $7,300 for administration and accounting services,
respectively.
For the fiscal year ended December 31, 1999, LAQ's total expense ratio was
2.14%, and is currently 2.30% based on an estimate of operating expenses for the
first six months of 2000. The Fund's total expense ratio is the ratio of total
annual operating expenses to average net assets, net of fee waivers and
including taxes.
Fees and Expenses--The Latin America Investment Fund. CSAM also serves as
LAM's investment adviser with respect to all investments other than Sovereign
Debt. As compensation for its advisory services, CSAM is contractually entitled
to receive from the Fund an annual fee, calculated weekly and paid quarterly,
equal to:
o 1.0625% of the first $100 million of the Fund's average weekly net
assets,
o 0.9775% of the next $50 million of the Fund's average weekly net
assets, and
o 0.8925% of the Fund's average weekly net assets in excess of $150
million.
Because LAM no longer uses sub-advisers in Brazil or Mexico, CSAM has agreed to
waive its portion of the advisory fee previously payable to these former
sub-advisers, which aggregates approximately 0.102% of the Fund's average weekly
net assets invested in these countries.
For the year ended December 31, 1999, CSAM earned $1,012,087 for advisory
services, of which CSAM waived $97,269. CSAM also provides certain
administrative services to the Fund and is reimbursed by the Fund for costs
incurred on behalf of the Fund (up to $20,000 per annum). For the year ended
December 1999, the Fund reimbursed CSAM $14,001 for administrative services
rendered to the Fund.
LAM's Board of Directors recently approved a proposal by CSAM to base the
investment advisory fees on the lower of the average weekly market value of the
Fund's outstanding shares or the Fund's average weekly net asset value. This new
fee structure became effective on July 1, 2000 through a voluntary fee waiver by
CSAM. If the Merger does not occur, LAM's Board of Directors will submit a new
investment advisory agreement, reflecting the change in fee calculation, at the
next
13
<PAGE>
shareholders' meeting. For information regarding submission of a new investment
advisory agreement containing a similar new fee structure to LAQ shareholders
reflecting the same change, see "Proposal 2 (Latin America Equity Fund
Shareholders Only): Approval of a New Investment Advisory Agreement."
Salomon Brothers Asset Management Inc, or SBAM, serves as LAM's investment
adviser with respect to Sovereign Debt. In return for its services, SBAM is
contractually entitled to receive an annual fee, calculated weekly and paid
quarterly, equal to:
o 0.1875% of the first $100 million of the Fund's average weekly net
assets,
o 0.1725% of the next $50 million of the Fund's average weekly net
assets, and
o 0.1575% of the Fund's average weekly net assets in excess of $150
million.
Because LAM no longer uses sub-advisers in Brazil or Mexico, SBAM has agreed to
waive its portion of the advisory fee previously payable to these former
sub-advisers, which aggregates approximately 0.018% of the Fund's average weekly
net assets invested in these countries. For the year ended December 31, 1999,
SBAM's advisory fees amounted to $178,603, of which $17,165 was waived by SBAM.
SBAM will not serve as an investment adviser to LAQ if the Merger is
consummated.
Celfin serves as LAM's sub-adviser with respect to Chilean investments. In
return for its services, Celfin receives a fee, out of the advisory fees payable
to CSAM and SBAM, computed weekly and paid quarterly at an annual rate of 0.05%
of the Fund's average weekly net assets. For the year ended December 31, 1999,
these sub-advisory fees amounted to $47,684.
LAM's Board of Directors recently approved a proposal by Celfin to base
the investment sub-advisory fees on the lower of the average weekly market value
of LAM's outstanding shares or the Fund's average weekly net asset value. This
new fee structure became effective on July 1, 2000 through a voluntary fee
waiver by Celfin. If the Merger does not occur, LAM's Board of Directors will
submit a new investment sub-advisory agreement, reflecting the change in fee
calculation, at the next shareholders' meeting. For information regarding
submission of a new investment sub-advisory agreement containing a similar new
fee structure to LAQ shareholders reflecting the same change, see "Proposal 3
(Latin America Equity Fund Shareholders Only): Approval of a New Investment
Sub-Advisory Agreement."
BSFM also serves as LAM's U.S. administrator. The Fund pays BSFM a monthly
fee that is computed weekly at an annual rate of 0.10% of the first $100 million
of the Fund's average weekly net assets and 0.08% of amounts in excess of $100
million. For the year ended December 31, 1999, BSFM earned $95,101 for
administrative services.
AFICE also serves as LAM's Chilean administrator. For its services, AFICE
is paid an annual fee by the Fund equal to the greater of 2,000 U.F.'s
(approximately $58,000 at December 31, 1999) or 0.10% of the Fund's average
weekly net assets invested in Chilean securities. AFICE also receives an annual
reimbursement for out-of-pocket expenses not to exceed 500 U.F.'s. Such fees are
paid by AFICE to Celfin for certain administrative services. An accounting fee
is also paid to Celfin, which is calculated and paid quarterly at an annual rate
of 205.32 U.F.'s (approximately $6,000 at December 31, 1999).
14
<PAGE>
For the year ended December 31, 1999, Celfin earned $66,411 for administrative
services and $5,942 for accounting services.
For the fiscal year ended December 31, 1999, LAM's total expense ratio was
1.89%, and is currently 2.12% based on an estimate of operating expenses for the
first six months of 2000. The Fund's total expense ratio is the ratio of total
annual operating expenses to the average net assets, net of fee waivers and
including taxes.
The expense ratio of LAQ is projected to be approximately 1.90% after
giving effect to the Merger and assuming that the new investment advisory and
sub-advisory agreements are approved and the Tender Offer is fully subscribed.
The actual expense ratios for LAQ for the current and future fiscal years, if
the Merger occurs, may be higher or lower than this projection and depend upon
LAQ's performance, general stock market and economic conditions, net asset
levels, stock price and other factors.
See "Expense Table" below for the current expenses of each Fund and pro
forma expenses following the Merger.
Unrealized Capital Gains. As of May 31, 2000, LAQ had approximately
$1,140,258 of unrealized capital gains, representing approximately 1.20% of its
net asset value. As of that same date, LAM had approximately $4,724,929 of
unrealized capital gains, representing approximately 4.65% of its net asset
value. As of May 31, 2000, LAQ had approximately $26,333,554 of capital loss
carryforwards. LAM had approximately $17,249,584 of capital loss carryforwards
as of that same date.
Both Funds will pay their shareholders a cash distribution of
substantially all undistributed 2000 net investment income prior to the
Effective Date. It is expected that any undistributed realized net capital
gains, including any that LAM may realize as a result of disposing of portfolio
securities to raise funds to finance the Tender Offer, will be offset through
the utilization of capital loss carryforwards prior to the Effective Date.
Federal Income Tax Consequences of the Merger. As a condition to the
closing of the Merger, both Funds will receive an opinion of Willkie Farr &
Gallagher, counsel to the Funds and CSAM, stating that the Merger will
constitute a tax-free reorganization within the meaning of Section 368(a)(1) of
the Internal Revenue Code of 1986, or the Code. Accordingly, neither LAM, LAQ
nor the shareholders of either Fund will recognize any gain or loss as a result
of the Merger, except with respect to the shareholders of LAM who receive cash
proceeds from the sale of fractional share interests. These shareholders will be
treated for federal income tax purposes as if they received such fractional
share interests and then sold such interests for cash. The holding period and
the aggregate tax basis of LAQ shares (including fractional share interests)
received by a LAM shareholder will be the same as the holding period and
aggregate tax basis of the shares of LAM previously held by the shareholder. The
holding period and the aggregate tax basis of the assets received by LAQ in the
Merger will be the same as the holding period and the tax basis of such assets
in the hands of LAM immediately before the Merger. For more information about
the tax consequences of the Merger, see "Information about the Merger - Tax
Considerations."
Discount from Net Asset Value. Shares of closed-end funds frequently trade
at a market price that is less than the value of the fund's net assets. The
possibility that shares of LAQ will trade at a
15
<PAGE>
discount from its net asset value is a risk separate and distinct from the risk
that the Fund's net asset value will decrease. Except for limited periods of
time, LAQ's shares have traded in the market at a discount, and, as of May 15,
2000, the last trading day immediately before the announcement of the Merger and
the Tender Offer, and July __, 2000, traded at a market price discount of 24.77%
and _____%, respectively. Similarly, LAM shares have traded in the market at a
discount and, as of those same dates, traded at a market price discount of
23.46% and _____%, respectively.
Recently, LAM's market discount has narrowed substantially. Management
believes that this narrowing is largely attributable to market activity
following the announcement of the Tender Offer and other initiatives described
in this Proxy Statement/Prospectus. In contrast, as of the date of this Proxy
Statement/Prospectus, LAQ's market discount remains at or near higher historical
levels. If this pattern continues, the total market value of LAQ shares issued
to LAM shareholders on the Effective Date will be less than the total market
value of LAM shares outstanding immediately prior to the Effective Date,
although their total net asset values will be the same (disregarding fractional
shares). While the current disparity of market discounts would cause LAM
shareholders to receive shares in the Merger with a lower aggregate market
value, shareholders should consider that, over time, there has not been a
significant disparity between the two Fund's market discount levels.
Accordingly, the Boards' recommendations are based on long-term average market
discount levels. In other words, the initiatives described in this Proxy
Statement/Prospectus have led to a situation that the Boards believe is a
temporary aberration, but which could cause a LAM shareholder to receive assets
(LAQ shares) that are less valuable, from a market value perspective only, than
the assets (LAM shares) owned immediately prior to the transaction. Over time,
the deviations in market discounts between the Funds have not been significant,
and, although there can be no assurance, the Board of Directors of LAQ believes
that the initiatives described in this Proxy Statement/Prospectus should have
the effect of reducing the discount at which LAQ shares trade. The discount
level of the Funds may be different at the time the Merger occurs. For more
information, see "Additional Information about the Funds - Discount to Net Asset
Value."
Expenses of the Merger. In evaluating the proposed Merger, CSAM has
estimated the amount of expenses the Funds would incur, including NYSE listing
fees, SEC registration fees, financial adviser fees, legal and accounting fees
and proxy solicitation and distribution costs and expenses incurred in
connection with the Tender Offer. The estimated total expenses pertaining to the
Merger and the Tender Offer are $_____. The aggregate amount of estimated
expenses of the Merger will be allocated equally between the Funds, including
the SEC registration fees and the fees for listing additional shares of LAQ on
the NYSE. However, LAM will be responsible for the estimated expenses of the
Tender Offer, and each Fund will be responsible for its pro rata share of the
financial advisory fees. This pro rata share will be based on a fraction, the
numerator of which is the net assets of the respective Fund as of February 1,
2000 and the denominator of which is the net assets, as of such date, of all the
closed-end funds advised by CSAM who have engaged PaineWebber Incorporated, or
PaineWebber, as the financial adviser.
The expenses of the Merger are expected to result in a reduction in net
asset value per LAQ share of approximately $____, and a reduction in net asset
value per LAM share of approximately $____. The expenses related to the Tender
Offer, estimated at $________, will reduce the net asset value per share of LAM
by approximately $_________.
16
<PAGE>
EXPENSE TABLE
LATIN LATIN PRO FORMA
AMERICA AMERICA POST-MERGER
EQUITY INVESTMENT AND TENDER
FUND FUND OFFER (1)
------- ---------- -----------
SHAREHOLDER
TRANSACTION EXPENSES
------------------------------------
Sales Load (as a percentage of NONE NONE NONE
offering price)
Dividend Reinvestment and Cash $5 (2) $5 (2) $5 (2)
Purchase Plan Fees
ANNUAL FUND OPERATING
EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS) (3)
------------------------------------
Investment Management and 1.51% 1.43% 1.06%(5)
Administration Fees (4)
Interest Payments on Borrowed Funds 0 0 0
Other Expenses 0.71% 0.58% 0.44%
Total Annual Expenses 2.22% 2.01% 2.00%
Fee Waivers (0.08)% (0.12)% (0.05)%
Net Expenses (6) 2.14% 1.89% 1.90%
----------
(1) Assumes that the Tender Offer is fully subscribed.
(2) For cash purchases.
(3) The percentages in the above table expressing annual fund operating
expenses are based on the Funds' operating expenses for the year ended
December 31, 1999. "Other Expenses" include fees for shareholder services,
custody, legal and accounting services, printing costs, the costs involved
in communication with shareholders and the costs of regulatory compliance,
maintaining corporate existence and the listing of the shares of common
stock on the NYSE. These figures do not reflect the expenses of the Merger
or the Tender Offer.
(4) The percentages in the above table expressing investment management and
administration fees reflect the actual amounts paid by each Fund to the
investment advisers before deducting a portion of such fees previously
payable to each Fund's former sub-advisers waived by the current
investment advisers. CSAM is contractually entitled to receive 1.25% of
the first $100 million of LAQ's average weekly net assets and 1.0625% of
the first $100 million of LAM's average weekly net assets. SBAM is
contractually entitled to receive 0.1875% of the first $100 million of
LAM's average weekly net assets. As of July 1, 2000, the investment
advisory and sub-advisory fees paid to CSAM and Celfin by both Funds is
based on the Fund's market capitalization rather than net assets whenever
the stock price is less than net asset value. For more information about
each Fund's investment management and administrative fees, see
"Synopsis-Fees and Expenses - The Latin America Equity Fund" and
"Synopsis-Fees and Expenses-The Latin America Investment Fund."
(5) Assumes approval of Proposals 2 and 3.
(6) Net of waivers to which the current investment advisers have committed.
17
<PAGE>
Example. The purpose of the following example is to help you understand
the costs and expenses you may bear as an investor. This example is based on the
level of total annual operating expenses for each Fund listed in the table above
(before fee waivers for all years, except the first year), the total expenses
relating to a $10,000 investment, assuming a 5% annual return and reinvestment
of all dividends and distributions. Shareholders do not pay these expenses
directly; they are paid by the Funds before they distribute net investment
income to shareholders. This example should not be considered a representation
of future expenses, and actual expenses may be greater or less than those shown.
Federal regulations require the example to assume a 5% annual return, but actual
annual returns will vary.
Latin America Latin America Pro Forma
Equity Fund Investment Fund Post-Merger
----------- --------------- -----------
1 Year $ 217 $ 192 $ 158
3 Years $ 687 $ 619 $ 504
5 Years $1,182 $1,072 $ 875
10 Years $2,548 $2,328 $1,916
Performance. The table below provides performance data for periods ended
December 31, 1999 based on each Fund's net asset value and market value. Past
performance is not a guarantee of future results, and it is not possible to
predict whether or how investment performance will be affected by the Merger.
The eight-year comparison has been included to illustrate the comparative
performance of both Funds during a period which closely approximates the period
during which both Funds were in existence and LAQ was fully invested.
<TABLE>
<CAPTION>
LATIN AMERICA EQUITY FUND LATIN AMERICA INVESTMENT FUND
-------------------------- -----------------------------
AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Net Asset One Year 69.38% 69.38% 58.63% 58.63%
Value
Three Year 15.67% 4.97% 20.25% 6.34%
Five Year 11.42% 2.18% 16.68% 3.13%
Eight Year 92.08% 8.50% 101.84% 9.17%
Since
inception
(1) 115.23% 9.83% 343.94% 17.13%
Market Value One Year 75.65% 75.65% 65.69% 65.69%
Three Year 3.40% 0.03% 8.37% 2.72%
Five Year (15.73)% (2.11)% (6.53)% (1.34)%
Eight Year 52.83% 5.44% 32.98% 3.62%
Since
inception
(1) 48.66% 0.40% 190.92% 12.00%
</TABLE>
----------
18
<PAGE>
(1) LAQ commenced operations on October 30, 1991. LAM commenced operations on
August 1, 1990.
19
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below are intended to help you understand the financial
performance of LAQ and LAM. This information is derived from financial and
accounting records of each Fund.
This information has been audited, except as noted, by
PricewaterhouseCoopers LLP, the Funds' independent auditors, whose reports,
along with the Funds' financial statements, are incorporated herein by reference
and included in the Funds' Annual Reports to Shareholders. The Annual Reports
may be obtained without charge, by writing to Shareholder Communications
Corporation, 17 State Street, New York, New York 10004, or by calling 1-(800)
403-7916.
20
<PAGE>
The Latin America Equity Fund, Inc.
Financial Highlights
================================================================================
--------------------------------------------------------------------------------
The following table includes 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 Years Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period ................ $ 10.06 $ 17.22 $ 16.89 $ 14.93 $ 17.92
--------- --------- --------- --------- ---------
Net investment income ..... 0.06+ 0.15 0.15 0.19 0.06
Net realized and
unrealized gain/(loss) on
investments and foreign
currency related
transactions ............. 6.49 (7.20)++ 1.84 1.83 (2.81)
--------- --------- --------- --------- ---------
Net increase/(decrease) in
net assets resulting from
operations ............... 6.55 (7.05) 1.99 2.02 (2.75)
--------- --------- --------- --------- ---------
Dividends and
distributions to
shareholders:
Net investment income .... -- (0.11) (0.16) (0.06) --
Net realized gain on
investments and foreign
currency related
transactions ............ -- -- (1.50) -- (0.24)
In excess of net
realized gains ......... -- -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and
distributions to
shareholders ............. -- (0.11) (1.66) (0.06) (0.24)
--------- --------- --------- --------- ---------
Anti-dilutive impact due
to capital shares
repurchased .............. 0.43 -- -- -- --
Effect of reduction of
accrued offering costs ... -- -- -- -- --
Dilutive impact due to
capital share rights
offering ................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net asset value, end of
period ................... $ 17.04 $ 10.06 $ 17.22 $ 16.89 $ 14.93
========= ========= ========= ========= =========
Market value, end of period $ 12.625 $ 7.188 $ 13.688 $ 14.000 $ 12.875
========= ========= ========= ========= =========
Total investment return (a) 75.65% (46.63)% 10.29% 9.18% (25.65)%
========= ========= ========= ========= =========
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of period
(000 omitted) ............ $ 123,262 $ 86,676 $ 148,130 $ 145,230 $ 128,377
Ratio of expenses to
average net assets (c) . 2.14% 2.41% 1.89% 1.69% 2.04%
Ratio of expenses to
average net assets,
excluding fee waivers .... 2.22% 2.60% 2.02% 1.80% 2.15%
Ratio of expenses to
average net assets,
excluding taxes .......... 2.05% 1.77% 1.65% -- 1.81%
Ratio of net investment
income to average net
assets ................. 0.46% 1.12% 0.77% 1.16% 0.42%
Portfolio turnover rate ... 161.71% 142.35% 111.83% 43.22% 27.05%
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
For the Period
October 30,
For the Years Ended December 31, 1991* through
-------------------------------------- December 31,
1994 1993 1992 1991
---- ---- ---- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period .................. $ 22.50 $ 14.37 $ 15.44 $ 13.85**
--------- --------- --------- ---------
Net investment income ....... 0.01+ 0.11+ 0.21 0.06
Net realized and unrealized
gain/(loss) on investments
and foreign currency
related transactions ....... 0.96 8.75 0.43 1.60
--------- --------- --------- ---------
Net increase/(decrease) in
net assets resulting from
operations ................. 0.97 8.86 0.64 1.66
--------- --------- --------- ---------
Dividends and distributions
to shareholders:
Net investment income ...... (0.17) -- (0.21) (0.06)
Net realized gain on
investments and foreign
currency related
transactions .............. (3.10) (0.75) (1.32) (0.01)
In excess of net realized
gains .................... -- -- (0.18) --
--------- --------- --------- ---------
Total dividends and
distributions to
shareholders ............... (3.27) (0.75) (1.71) (0.07)
--------- --------- --------- ---------
Anti-dilutive impact due to
capital shares repurchased . -- -- -- --
Effect of reduction of
accrued offering costs ..... -- 0.02 -- --
Dilutive impact due to
capital share rights
offering ................... (2.28) -- -- --
--------- --------- --------- ---------
Net asset value, end of
period ..................... $ 17.92 $ 22.50 $ 14.37 $ 15.44
========= ========= ========= =========
Market value, end of period . $ 17.625 $ 25.625 $ 14.000 $ 13.500
========= ========= ========= =========
Total investment return (a) . (17.78)% 89.35% 16.49% (2.73)%
========= ========= ========= =========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) .............. $ 153,128 $ 135,573 $ 86,359 $ 92,751
Ratio of expenses to average
net assets (c) ............. 1.94% 2.00% 2.20% 2.35%(b)
Ratio of expenses to average
net assets, excluding fee
waivers .................... -- -- -- --
Ratio of expenses to average
net assets, excluding taxes 1.70% -- -- --
Ratio of net investment
income to average net assets 0.04% 0.63% 1.27% 2.46%(b)
Portfolio turnover rate ..... 68.46% 49.48% 68.70% 11.58%
</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 $0.10 per share.
+ Based on average shares outstanding.
++ Includes a $0.01 per share decrease to the Fund's net asset value per
share resulting from the dilutive impact of shares issued pursuant to the
Fund's automatic dividend reinvestment program.
(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 dividends
and distributions, if any, at actual prices pursuant to the Fund's
dividend reinvestment program. Total investment return does not reflect
brokerage commissions or initial underwriting discounts and has not been
annualized.
(b) Annualized.
(c) Ratios reflect actual expenses incurred by the Fund. Amounts are net of
fee waivers and inclusive of taxes.
22
<PAGE>
The Latin America Investment Fund, Inc.
Financial Highlights
================================================================================
--------------------------------------------------------------------------------
The following table includes 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 Years Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period ................ $ 11.49 $ 18.21 $ 19.07 $ 17.09 $ 20.18
--------- --------- --------- --------- ---------
Net investment income ..... 0.59 0.43 0.11 0.28 0.19
Net realized and
unrealized gain/(loss) on
investments and foreign
currency related
transactions ............. 5.44 (6.71)++ 1.66 1.93 (3.09)
--------- --------- --------- --------- ---------
Net increase/(decrease) in
net assets resulting from
operations ............... 6.03 (6.28) 1.77 2.21 (2.90)
--------- --------- --------- --------- ---------
Dividends and
distributions to
shareholders:
Net investment income .... (0.50) (0.45) (0.21) (0.23) --
Net realized gain on
investments and foreign
currency related
transactions ............ -- -- (2.42) -- (0.19)
In excess of net
realized gains ......... -- -- -- -- --
--------- --------- --------- --------- ---------
Total dividends and
distributions to
shareholders ............. (0.50) (0.45) (2.63) (0.23) (0.19)
--------- --------- --------- --------- ---------
Anti-dilutive impact due
to capital shares
repurchased .............. 0.53 0.01 -- -- --
Dilutive impact due to
capital share rights
offering ................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net asset value, end of
period ................... $ 17.55 $ 11.49 $ 18.21 $ 19.07 $ 17.09
========= ========= ========= ========= =========
Market value, end of period $ 13.063 $ 8.188 $ 14.313 $ 15.750 $ 14.750
========= ========= ========= ========= =========
Total investment return (a) 65.69% (39.56)% 8.21% 8.26% (20.34)%
========= ========= ========= ========= =========
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of period
(000 omitted) ............ $ 115,584 $ 91,099 $ 143,358 $ 150,007 $ 134,290
Ratio of expenses to
average net assets (c) ... 1.89% 2.39% 2.46% 1.70% 2.00%
Ratio of expenses to
average net assets,
excluding fee waivers .... 2.01% 2.51% 2.58% 1.82% 2.12%
Ratio of expenses to
average net assets,
excluding taxes .......... 1.85% 1.80% 1.68% -- 1.78%
Ratio of net investment
income to average net
assets ................... 4.33% 2.91% 0.53% 1.47% 1.10%
Portfolio turnover rate ... 115.42% 172.62% 124.98% 50.21% 38.71%
------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
For the
Period
August 1,
For the Years Ended December 31, 1990* through
------------------------------------------------------------- December 31,
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period ...................... $ 25.73 $ 25.36 $ 26.05 $ 14.24 $ 13.64**
--------- --------- --------- --------- ---------
Net investment income ........ 0.09+ 0.08 0.24 0.61 0.29
Net realized and unrealized
gain/(loss) on investments
and foreign currency related
transactions ................ 1.29 10.18 1.51 14.66 0.58
--------- --------- --------- --------- ---------
Net increase/(decrease) in
net assets resulting from
operations .................. 1.38 10.26 1.75 15.27 0.87
--------- --------- --------- --------- ---------
Dividends and distributions
to shareholders:
Net investment income ....... (0.07) (0.22) -- (0.63) (0.27)
Net realized gain on
investments and foreign
currency related
transactions ............... (4.33) (8.61) (2.44) (2.83) --
In excess of net realized
gains ..................... -- (0.04) -- -- --
--------- --------- --------- --------- ---------
Total dividends and
distributions to shareholders (4.40) (8.87) (2.44) (3.46) (0.27)
--------- --------- --------- --------- ---------
Anti-dilutive impact due to
capital shares repurchased .. -- -- -- -- --
Dilutive impact due to
capital share rights offering (2.53) (1.02) -- -- --
--------- --------- --------- --------- ---------
Net asset value, end of period $ 20.18 $ 25.73 $ 25.36 $ 26.05 $ 14.24
========= ========= ========= ========= =========
Market value, end of period .. $ 18.750 $ 31.500 $ 24.375 $ 26.500 $ 11.125
========= ========= ========= ========= =========
Total investment return (a) .. (26.63)% 89.45% 2.35% 167.96% (18.35)%
========= ========= ========= ========= =========
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) ............... $ 156,673 $ 140,458 $ 102,259 $ 104,435 $ 57,081
Ratio of expenses to average
net assets (c) .............. 2.02% 2.06% 2.61% 2.30% 3.27%(b)
Ratio of expenses to average
net assets, excluding fee
waivers ..................... -- -- -- -- --
Ratio of expenses to average
net assets, excluding taxes . 1.72% -- 2.31% -- --
Ratio of net investment
income to average net assets 0.63% 1.45% 1.15% 2.85% 5.10%(b)
Portfolio turnover rate ...... 77.81% 70.17% 55.40% 82.39% 52.49%
</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 $0.31 per share.
+ Based on average shares outstanding.
++ Includes a $0.05 per share decrease to the Fund's net asset value per
share resulting from the dilutive impact of shares issued pursuant to the
Fund's automatic dividend reinvestment program.
(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 dividends
and distributions, if any, at actual prices pursuant to the Fund's
dividend reinvestment program. Total investment return does not reflect
brokerage commissions or initial underwriting discounts and has not been
annualized.
(b) Annualized.
(c) Ratios reflect actual expenses incurred by the Fund. Amounts are net of
fee waivers and inclusive of taxes.
24
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Both LAQ and LAM invest in substantially similar Latin American equity
securities and, accordingly, are subject to substantially the same investment
risks. LAM, however, is subject to additional risks due to its investments in
Latin American debt securities and its ability to invest a larger portion of its
portfolio in lower-rated securities. The investment risks of each of the Funds
are described below.
Investment Controls
Foreign investment in the securities of Latin American issuers is
restricted or controlled to varying degrees. These restrictions or controls at
times may limit or preclude foreign investment in certain Latin American issuers
and increase the costs and expenses of each Fund. For example, certain
countries:
o require governmental approval prior to investments by foreign
persons,
o limit the amount of investment by foreign persons in a particular
company,
o limit investment by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than
the classes available for purchase by domiciliaries of the
countries, and/or
o impose additional taxes on foreign investors.
Certain Latin American countries may also restrict investment
opportunities in issuers in industries deemed important to national interests.
Some countries may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if there is a deterioration in a country's balance of
payments or for other reasons, a country may impose temporary restrictions on
foreign capital remittances abroad.
Delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as restrictions on the Funds' investments could
adversely affect the Funds. Investing in local markets in Latin America may
require the Funds to adopt special procedures, seek local governmental approvals
or take other actions, each of which may involve additional costs to the Funds.
If for any reason the Funds were unable to distribute substantially all of their
investment company taxable income (as defined for U.S. tax purposes) within
applicable time periods, the Funds would cease to qualify for the favorable tax
treatment afforded to regulated investment companies under the Code. For more
information, see "Taxation" in the SAI.
Market Illiquidity; Volatility; Smaller Market Capitalization
The securities markets of Latin American countries are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. At December 31, 1999, the aggregate market capitalizations of
listed equity securities on the major exchanges in Argentina (Buenos Aires
only), Brazil (Sao Paulo only), Chile (Santiago only), Mexico and Venezuela was
approximately US $540.9 billion. By comparison, at December 31, 1999,
25
<PAGE>
the market capitalization for the New York Stock Exchange was approximately US
$12.1 trillion. A limited number of persons may hold a high proportion of the
shares of many Latin American companies, which may limit the number of shares
available for investment by the Funds. A limited number of issuers in most, if
not all, Latin American securities markets may represent a disproportionately
large percentage of market capitalization and trading value. The limited
liquidity of Latin American securities markets may also affect each Fund's
ability to acquire or dispose of securities at the price and time it wishes to
do so. In addition, certain Latin American securities markets, including those
of Argentina, Brazil, Chile and Mexico, are susceptible to the influence of
large investors trading significant blocks of securities or large dispositions
of securities resulting from the failure to meet margin calls when due.
In addition to their smaller size, lesser liquidity and greater
volatility, Latin American securities markets are less developed than U.S.
securities markets. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a low level of
monitoring and regulation of the markets and the activities of investors in such
markets and the enforcement of existing regulations has been extremely limited.
Consequently:
o other market participants' anticipation of the Fund's investing,
o trading by persons with material, non-public information, and
o securities transactions by brokers in anticipation of transactions
by the Funds in particular securities
can effect the prices for investments acquired by the Funds. Commissions and
other transaction costs on most, if not all, Latin American securities exchanges
are generally higher than in the United States.
Currency Devaluations and Fluctuations
The Funds normally invest principally in securities denominated in
currencies of Latin American countries. The investment advisers of each Fund
generally do not seek to hedge against declines in the value of that Fund's
non-dollar denominated portfolio securities resulting from currency devaluations
or fluctuations. Accordingly, a change in the value of currencies in which each
Fund's investments are denominated against the U.S. dollar will result in a
corresponding change in the U.S. dollar value of each Fund's assets. This change
will also affect each Fund's income and net asset value. The Funds compute
income on the date of its receipt by the respective Fund at the exchange rate in
effect with respect to the relevant currency on that date. Each Fund pays most
expenses and makes distributions necessary to maintain its status as a regulated
investment company for U.S. federal income tax purposes in U.S. dollars. In
order to pay such expenses and make such distributions each Fund may have to
liquidate securities denominated in one or more of the currencies of the Latin
American countries in which each Fund invests. If the value of a currency in
which the securities so liquidated are denominated declines relative to the U.S.
dollar between the time when the income or a dollar-denominated expense item is
accrued and date when the expense is paid or the distribution is made, the Fund
may have to liquidate more investment securities than would otherwise have been
the case. There can be no assurance that the Funds will be able to liquidate
securities for these purposes,
26
<PAGE>
but the Funds are permitted to borrow money to pay expenses outside of Latin
America and to make distributions required to maintain their status as regulated
investment companies for U.S. tax purposes.
Many of the currencies of Latin American countries have experienced steady
devaluations relative to the U.S. dollar, and major adjustments have at times
been made in certain of these currencies. The following table provides, for the
periods and dates indicated, historical exchange rates per U.S. dollar for the
Latin American currencies listed.
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EXCHANGE RATES PER U.S. DOLLAR
Brazilian Mexican
Argentine cruzeiros Chilean new pesos
pesos (1) reals (2) pesos (3)
--------- --------- ----- ---
1990
End of period.......... .55850 .0064 336.86 2.95
Average of period...... .48759 .0025 304.90 2.81
1991
End of period.......... .99850 .0389 374.87 3.07
Average of period...... .95355 .0148 349.22 3.02
1992
End of period.......... .99050 .4505 382.33 3.12
Average of period...... .99064 .1641 362.58 3.09
1993
End of period.......... .99850 .119 431.04 3.1059
Average of period...... .99895 .032 404.17 3.1156
1994
End of period.......... .99950 .846 404.09 5.3250
Average of period...... .99901 .639 420.18 3.3751
1995
End of period.......... 1.00000 .973 407.13 7.6425
Average of period...... .99975 .918 396.77 6.4194
1996
End of period......... .99950 1.039 424.97 7.8509
Average of period..... .99966 1.005 412.27 7.5994
1997
End of period.......... .99950 1.116 439.81 8.0833
Average of period...... .99950 1.078 419.30 7.9185
1998
End of period.......... .99950 1.209 473.77 9.8650
Average of period...... .99950 1.161 460.29 9.1360
1999
End of period.......... .99950 1.789 530.07 9.5143
Average of period...... .99950 1.815 508.78 9.5604
March 31, 2000
End of period.......... .99950 1.747 505.81 9.2331
Average of Period...... .99950 1.742 505.54 9.2959
----------
(1) On January 1, 1992, the Argentine peso replaced the austral at a value of
one Argentine peso per 10,000 australes.
(2) On August 1, 1993, the Brazilian cruzeiro real replaced the cruzeiro at a
value of one Brazilian cruzeiro real per 1,000 cruzeiros.
(3) On January 4, 1993, the Mexican new peso replaced the peso at a value of
one Mexican new peso per 1,000 pesos.
Sources: International Monetary Fund, International Financial Statistics
Yearbook (Washington, D.C., 1999) for 1990-1992 data and International Monetary
Fund, International Financial Statistics (Washington, D.C., May 2000) for 1993 -
March 31, 2000 data.
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Currency Hedging
CSAM generally does not seek to hedge against a decline in the value of
either Fund's non-dollar-denominated portfolio securities resulting from
currency devaluations or fluctuations. The Funds will be subject to risk of
changes in the value of the Latin American currencies in which their assets are
denominated in relation to the U.S. dollar unless they engage in currency
hedging transactions. If suitable hedging instruments are available on a timely
basis and on acceptable terms, CSAM may, in its discretion, hedge all or part of
the value of the Funds' non-dollar-denominated portfolio securities, although it
is not obligated to do so. The Funds may, from time to time, seek to protect,
during the period prior to the remittance, the value of the amount of interest,
dividends and net realized capital gains received or to be received in a local
currency that they intend to remit out of a Latin American country. The Funds
seek this protection by investing in U.S. dollar-denominated debt securities of
the Latin American country and/or participating in the forward currency market
for the purchase of U.S. dollars in that country. There can be no guarantee that
efforts to hedge against a currency devaluation or fluctuation will be effective
or that suitable U.S. dollar-denominated investments will be available at the
time when CSAM wishes to use them to hedge amounts to be remitted. Moreover,
shareholders should be aware that:
o dollar-denominated securities may not be available in some or all
Latin American countries,
o the forward currency market for the purchase of U.S. dollars in
most, if not all, Latin American countries is not highly developed,
and
o in certain Latin American countries no forward market for foreign
currencies currently exists or such market may be closed to
investment by the Funds.
Inflation
Most Latin American countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain Latin American
countries. In an attempt to control inflation, wage and price controls have been
imposed at times in certain countries. The following table shows annual
percentage changes in consumer price indices of Argentina, Brazil, Chile and
Mexico for the periods shown.
CONSUMER PRICE INFLATION: % CHANGE OVER PREVIOUS PERIOD
Argentina Brazil Chile Mexico
--------- ------ ----- ------
1994................ 3.9% 2,075.9% 9.0% 7.1%
1995................ 1.6 66.0 8.2 52.0
1996................ 0.2 15.8 6.6 27.7
1997................ 0.3 6.9 6.0 15.7
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Argentina Brazil Chile Mexico
--------- ------ ----- ------
1998................ 0.7 3.2 4.7 18.6
1999................ (1.2) 4.9 2.3 12.3
----------
Sources: For Argentina: INDEC (Republic of Argentina 1998 Annual Report, Form
18-K Exhibit D); The Economist Intelligence Unit Ltd., February 2000,
EIU Country Risk Service (citing Bloomberg Financial Services).
For Brazil: International Monetary Fund, International Financial
Statistics Yearbook (Washington, D.C., 1999) and International
Monetary Fund, International Financial Statistics (Washington, D.C.,
March 2000).
For Chile: Economic Intelligence Unit, Country Data for Chile; Central
Bank of Chile, "The Central Bank of Chile and the Economy," February
2000.
For Mexico: Bank of Mexico; Instituto Nacional de Estradica Geografia
E Informatica, Mexico.
Economic and Political Risks
The economies of individual Latin American countries may differ favorably
or unfavorably from the U.S. economy in several respects, including:
o general development,
o wealth distribution,
o rate of inflation,
o volatility of the rate of growth of gross domestic product,
o capital reinvestment,
o resource self-sufficiency, and
o balance of payments position
Governments of many Latin American countries have exercised and continue
to exercise substantial influence over many aspects of the private sector. In
some cases, the government owns or controls many companies, including some of
the largest in the country. As a result, government actions in the future could
have a significant effect on economic conditions in a Latin American country,
which, in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in each
Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other developments, such as
military coups, have occurred in the past in certain Latin American countries.
These conditions or events could adversely affect the assets of each Fund held
in particular Latin American countries should they recur. Each Fund may also
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<PAGE>
experience greater difficulty in its ability to protect and enforce its rights
against governmental and private entities in certain Latin American countries.
Since 1982, some Latin American countries, including Argentina, Brazil,
Chile and Mexico, have experienced difficulty servicing their Sovereign Debt
obligations. As a result, some of these countries have entered into agreements
to restructure these debts, in particular commercial bank loans, typically by
rescheduling principal payments, reducing interest rates and principal amounts
and extending new credit to finance interest payments on existing debt. Some
Latin American governmental issuers have not made payments of interest on or
principal of their debt obligations as such payments have come due. Obligations
arising from past restructuring agreements have affected, and those arising from
future restructuring agreements may affect, the economic performance and
political and social stability of certain Latin American countries.
Reporting Standards
Companies in Latin America are subject to accounting, auditing and
financial standards and requirements that differ, in some cases significantly,
from those applicable to U.S. companies. The assets and profits appearing on the
financial statements of a Latin American company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for companies that keep accounting records
in local currency, inflation accounting rules in some Latin American countries
require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the company's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, data concerning Latin
American securities may be materially affected by restatements for inflation and
may not accurately reflect the real conditions of companies and securities
markets. There is often substantially less publicly available information about
Latin American companies and the governments of Latin American countries than
there is about U.S. companies and the U.S. Government. These risks are generally
magnified in the case of investments in non-publicly traded securities.
Taxation
Taxation of dividends, interest and capital gains received by
non-residents varies among Latin American countries and, in some cases, is
comparatively high. In addition, Latin American countries typically have less
well-defined tax laws and procedures and such laws may permit retroactive
taxation so that the Funds could in the future become subject to local tax
liability that the Funds may not have reasonably anticipated in conducting their
investment activities or valuing their assets.
Litigation
The Funds and their shareholders may encounter substantial difficulties in
obtaining and enforcing judgments against non-U.S. resident individuals and
companies.
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<PAGE>
Fraudulent Securities
It is possible, particularly in Latin American markets, that the Funds may
purchase securities that may subsequently be found to be fraudulent or
counterfeit and as a consequence could result in losses.
Settlement Risks
Settlement systems in Latin America markets are generally less well
organized than in developed markets. Supervisory authorities may also be unable
to apply standards which are comparable with those in developed markets. Thus
there may be risks that settlement may be delayed and that cash or securities
belonging to the Funds may be in jeopardy because of failures of or defects in
the systems. In particular, market practice may require that payment shall be
made before receipt of the security which is being purchased or that delivery of
a security must be made before payment is received. In such cases, default by a
broker or bank through whom the relevant transaction is effected might result in
losses for the Funds. The Funds will seek, where possible, to use reputable
financial institutions to reduce this risk. However, there can be no certainty
that the Funds will be able to use banks or brokers with reputable financial
status to reduce this risk. Moreover, there can be no certainty that the Funds
will be successful in eliminating this risk, particularly as banks or brokers
operating in Latin American markets frequently lack the substance or financial
resources of those in more developed countries. There may also be a danger that,
because of uncertainties in the operation of settlement systems in individual
markets, competing claims may arise in respect of securities held by or to be
transferred to the Fund.
Sovereign Debt
Some Latin American countries are among the largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. At times these Latin American countries have declared
moratoria on the payment of principal and/or interest on external debt.
Trading in Sovereign Debt involves a high degree of risk. The issuer of
the Sovereign Debt or governmental authorities that control the repayment of
Sovereign Debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. A sovereign debtor's
willingness or ability to repay principal and interest due in a timely manner
may be affected by, among other factors:
o its cash flow situation,
o the extent of its foreign reserves,
o the availability of sufficient foreign exchange on the date a
payment is due,
o the relative size of the debt service burden to the economy as a
whole,
o the sovereign debtor's policy towards the International Monetary
Fund, or IMF, and
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<PAGE>
o the political constraints to which a sovereign debtor may be
subject.
Sovereign debtors may default on their Sovereign Debt. Sovereign debtors
may also depend on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make these disbursements may be conditioned on a sovereign debtor's
implementation of economic reforms and/or economic performance and the timely
service of the debtor's obligations. Failure to implement such reforms, achieve
such levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties' commitments to lend funds to
the sovereign debtor, which may further impair such debtor's ability or
willingness to timely service its debts.
Holders of Sovereign Debt, including the Funds, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors. No bankruptcy proceeding exists by which Sovereign Debt on
which a sovereign has defaulted may be collected in whole or in part.
The Sovereign Debt instruments in which the Funds may invest involve great
risk and are deemed to be the equivalent in terms of quality to securities rated
below investment grade by Standard & Poor's Ratings Group, or S&P, or Moody's
Investors Service, Inc., or Moody's. These securities are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations and involve
major risk to adverse conditions. Some Sovereign Debt, which may not pay
interest currently or may be in payment default, may be comparable to securities
rated D by S&P or C by Moody's. The Funds may have difficulty disposing of some
Sovereign Debt obligations because there may be a thin trading market for these
securities. Because there is no liquid secondary market for many of these
securities, the Funds anticipate that these securities could be sold only to a
limited number of dealers or institutional investors. The lack of a liquid
secondary market may have an adverse impact on the market price of such
securities and each Fund's ability to dispose of particular issues when
necessary to meet liquidity needs or in response to a specific economic event
such as a deterioration of the creditworthiness of the issuer. The lack of a
liquid secondary market for certain securities also may make it more difficult
for the Funds to obtain accurate market quotations for purposes of valuing each
Fund's portfolio and calculating its net asset value. The market value of lower
quality securities, such as Sovereign Debt, may be less sensitive to interest
rate changes but more sensitive to adverse economic changes than that of higher
quality securities.
Loan Participations and Assignments
The Latin America Equity Fund may invest up to 20% of its assets in
corporate and government debt securities of Latin American issuers including
assignments of and participations in loans. In accordance with this limitation,
the Fund may invest in fixed and floating rate loans arranged through private
negotiations between a borrower and one or more financial institutions
represented in each case by one or more lenders acting as agent of the several
lenders. The agent is frequently the commercial bank that originated the loan on
behalf of the several lenders and is primarily responsible for negotiating the
loan agreement or agreements relating to the loan. In larger transactions it is
common to have several agents,
33
<PAGE>
although only one agent typically has primary responsibility for documentation
and administration of the loan.
The Fund may also invest in participations, or Participations, in loans
and may purchase assignments, or Assignments, of portions of loans from third
parties. It is expected that the majority of the Fund's investments in loans
will be in Assignments and Participations of new loans.
Loan agreements may include various restrictive covenants designed to
limit the activities of the borrower in an effort to protect the right of the
lenders to receive timely payments of interest on and repayment of principal of
the loans. Restrictive covenants in loan agreements may include mandatory
prepayment provisions arising from excess cash flow and typically include
restrictions on dividend payments, specific mandatory minimum financial ratios,
limits on total debt and other financial tests. Breach of the covenants, if not
waived by the lenders, is generally an event of default under the applicable
loan agreement and may give the lenders the right to accelerate principal and
interest payments. The Fund's investment advisers will consider the terms of any
restrictive covenants, as well as the performance history of the loans, in
deciding whether to invest in loans for the Fund's portfolio.
The Fund's investment in Participations typically will result in the Fund
having a contractual relationship only with the lender, not with the borrower.
The Fund normally will have the right to receive payments of principal, interest
and any fees to which it is entitled only from the lender selling the
Participation and only upon receipt by the lender of the payments from the
borrower. In connection with purchasing Participations, the Fund generally will
have no right to enforce compliance by the borrower with the terms of the loan
agreement, nor any rights of set-off against the borrower, and the Fund may not
directly benefit from any collateral supporting the loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the borrower and the lender selling the Participation. In the event of
the insolvency of the Lender selling a Participation, the Fund may be treated as
a general creditor of the lender, and may not benefit from any set-off between
the lender and the borrower. The Fund will acquire Participations only if the
lender interpositioned between the Fund and the borrower is deemed by the Fund's
investment adviser to be creditworthy.
The Fund may also purchase Assignments from lenders under which it will
succeed to all the rights and obligations under the loan agreement of the
assigning lender and become a lender under the loan agreement with the same
rights and obligations as the assigning lender. Assignments are, however,
arranged through private negotiations between potential assignees and potential
assignors, and the rights and obligations acquired by the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning lender. The Fund may have difficulty disposing of Assignments and
Participations because to do so it will have to assign such securities to a
third party. Because there is no liquid market for such securities, the Fund
anticipates that such securities could be sold only to a limited number of
institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and the Fund's ability to dispose
of particular Assignments or Participations when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations also may make it more
difficult for
34
<PAGE>
the Fund to assign a value to these securities for purposes of valuing the
Fund's portfolio and calculating its net asset value.
Investments in Non-Publicly Traded Securities
Although the Funds invest primarily in Latin American equity securities of
publicly traded companies, they may, subject to local investment limitations,
invest in unlisted Latin American equity securities, including investments in
new and early stage companies. Investments in unlisted equity securities may
involve a high degree of business and financial risk and may result in
substantial losses. LAQ may invest up to 10% of its assets, and LAM may invest
up to 25% of its assets, in unlisted equity securities. Currently, no liquid
trading market exists for these investments, and, as such, the Funds may take
longer to liquidate these positions than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the prices
realized on such sales could be less than those originally paid by the Funds.
Further, companies whose securities are not publicly traded may not be subject
to the disclosure and other investor protection requirements applicable to
companies with publicly traded securities.
Operating Expenses
Each Fund's annual operating expenses are higher than those of many other
investment companies of comparable size. However, management of each Fund
believes these operating expenses are comparable to expenses of other closed-end
management investment companies that invest primarily in the securities of
countries in a single geographic region.
Market Value and Net Asset Value
Shares of closed-end investment companies frequently trade at a discount
from net asset value. Trading at a discount is a risk separate and distinct from
the risk that the net asset value of each Fund will decrease. The risk of
purchasing shares of a closed-end fund that might trade at a discount is more
pronounced for shareholders who wish to sell their shares in a relatively short
period of time because for those shareholders, realization of a gain or loss on
their investments is likely to be more dependent upon the existence of a premium
or discount than upon portfolio performance. Although each Fund's shares have at
times been traded in the market above net asset value, since the commencement of
each Fund's operations, each Fund's shares have generally traded in the market
at a discount to net asset value. Neither Fund's shares are subject to
redemption. Investors desiring liquidity may, subject to applicable securities
laws, trade their shares in the Funds on any exchange where such shares are then
listed at the then current market value, which may differ from the then current
net asset value.
Non-Diversified Status
Each Fund is classified as a non-diversified investment company under the
Investment Company Act. Non-diversified investment companies are not limited by
the Investment Company Act in the proportion of assets that may be invested in
the securities of a single issuer. Each Fund, however, is subject to local laws
which limit investments in a single issuer and the diversification requirements
imposed by the Code for qualification as a regulated investment company. As a
non-diversified investment company, each Fund may invest a greater proportion
35
<PAGE>
of its assets in the obligations of a smaller number of issuers and, as a
result, may be subject to greater risk with respect to its portfolio securities.
Charter Provisions
Certain provisions of each Fund's Articles of Incorporation and By-Laws
may inhibit that Fund's possible conversion to open-end status and limit the
ability of other persons to acquire control of the Fund's Board of Directors. In
certain circumstances, these provisions might also inhibit the ability of
shareholders to sell their shares at a premium over prevailing market prices.
36
<PAGE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
Organization. LAQ and LAM are both closed-end, non-diversified management
investment companies registered under the Investment Company Act. Both Funds are
organized as corporations under the laws of the State of Maryland. Each Fund is
managed and advised by CSAM, formerly known as BEA Associates, except that SBAM
manages the debt securities portfolio of LAM. The shares of common stock of each
Fund are listed and trade on the NYSE under the symbols "LAQ" and "LAM",
respectively. After the Merger, LAQ's shares will continue to be traded on the
NYSE under the symbol "LAQ", while LAM's shares will be delisted and LAM will
cease to exist.
The shares of common stock of each Fund have equal non-cumulative voting
rights and equal rights with respect to dividends, assets and dissolution. Each
Fund's shares of common stock are fully paid and non-assessable and have no
preemptive, conversion or other subscription rights. Fluctuations in the market
price of the Fund's shares is the principal investment risk of an investment in
either Fund. Portfolio management, market conditions, investment policies and
other factors affect such fluctuations. Although the investment objectives,
policies and restrictions of the Funds are similar, there are differences
between them, as discussed below. There can be no assurance that either Fund
will achieve its stated objective.
Investment Objectives. Long-term capital appreciation is the principal
investment objective of each Fund. LAQ seeks to achieve this objective by
investing primarily in Latin American equity securities, while LAM seeks to
achieve this objective by investing primarily in Latin American debt and equity
securities. The investment objective is a fundamental policy of each Fund and
cannot be changed without the approval of the holders of a "majority of each
Fund's outstanding voting securities," as defined above under "General."
No assurance can be given that either Fund's investment objective will be
achieved.
Comparison of Investment Policies. LAQ's policy under normal market
conditions is the investment of substantially all, and at least 80% of its total
assets, in Latin American equity securities. LAM's policy under normal market
conditions is the investment of substantially all, and at least 65% of its total
assets, in Latin American debt and equity securities. These policies and the
investment limitations are described in the SAI under the caption "Investment
Restrictions" and are fundamental and may not be changed without the approval of
a majority of each Fund's outstanding voting securities. All other policies and
percentage limitations of each Fund as described below may be modified by that
Fund's Board of Directors if, in the reasonable exercise of its business
judgment, it determines that modification is necessary or appropriate to carry
out that Fund's investment objective.
Both Funds define Latin American equity securities as:
o equity securities of companies organized in a Latin American country
or for which the principal trading market is in Latin America,
o equity securities denominated in a Latin American currency issued by
companies to finance operations in Latin America,
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<PAGE>
o equity securities of companies that derive at least 50% of their
revenues primarily from either goods or services produced in Latin
America or sales made in Latin America, and
o Latin American equity securities in the form of depositary shares.
In addition, LAM's definition of Latin American debt securities includes
debt securities that have the characteristics enumerated above for equity
securities as well as securities issued or guaranteed by the government of a
Latin American country, its agencies or instrumentalities, or the central bank
of that country.
For purposes of this Proxy Statement/Prospectus and the SAI, unless
otherwise indicated, Latin America consists of Argentina, Bolivia, Brazil,
Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador,
Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and
Venezuela. The Funds' definition of Latin American securities may also include
securities of companies that have characteristics and business relationships
common to companies in other geographic regions. As a result, the value of the
securities of these companies may reflect economic and market forces in other
regions as well as in Latin America.
LAQ invests primarily in listed equity securities in Argentina, Brazil,
Chile and Mexico, the most developed capital markets in Latin America. Although
the Fund expects, under normal market conditions, to invest at least 80% of its
assets in equity securities in these four countries, the portion of its holdings
in any Latin American country will vary from time to time.
LAM invests primarily in listed securities in Brazil, Chile and Mexico.
The Fund expects, under normal market conditions, to invest at least 65% of its
assets in debt and equity securities in these three countries.
The government of some Latin American countries have been engaged in
"privatization" programs which involve the sale of part or all of their stakes
in government owned or controlled enterprises. CSAM believes that privatizations
may offer shareholders opportunities for significant capital appreciation and
intends to invest assets of each Fund in privatizations in appropriate
circumstances. In certain Latin American countries, the ability of foreign
entities, such as the Funds, to participate in privatizations may be limited by
local law. In addition, the terms on which the Funds may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that Latin American governments will continue to sell companies
currently owned or controlled by them or that privatization programs will be
successful.
LAQ may also invest up to 20% of its assets in corporate and government
debt securities of Latin American issuers, and LAM may invest a substantial
portion of its assets in Latin American debt securities, when CSAM, in the case
of LAQ, or CSAM and SBAM, in the case of LAM, believe that it is appropriate to
do so in order to achieve capital appreciation. Latin American equity securities
in which the Funds may invest consist predominantly of:
o common stock,
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o preferred stock, and
o to a limited extent, convertible securities and warrants.
Latin American debt securities that the Funds may acquire include:
o bonds,
o notes and debentures of any maturity of Latin American governments,
o obligations of Latin American governments' agencies,
instrumentalities and central banks, and
o obligations of banks and other companies of Latin American countries
determined by CSAM to be suitable investments for each Fund
(including repurchase agreements with respect to obligations of the
governments or central banks of Latin American countries).
In addition, LAQ may acquire Assignments of, and Participations in, loans as
such terms are defined under "Risk Factors and Special Considerations--Loan
Participations and Assignments."
CSAM may invest in securities that it determines to be suitable
investments for each Fund regardless of such securities' ratings. LAQ may not,
however, invest more than 15% of its assets, and LAM may not invest more than
30% of its assets, in debt securities that are determined by CSAM to be
comparable to securities rated below investment grade by S&P or Moody's. The
Funds' holdings of lower-quality or unrated debt securities will consist
predominantly of Sovereign Debt, much of which trades at substantial discounts
from face value and which may include Sovereign Debt comparable to securities
rated as low as D by S&P or C by Moody's.
Sovereign Debt are external debt obligations issued or guaranteed by Latin
American governments or governmental entities. The willingness or ability of
such governmental issuer or guarantor to repay principal and interest due in a
timely manner may be affected by, among other factors:
o its cash flow situation,
o the extent of its foreign reserves,
o the availability of sufficient foreign exchange on the date a
payment is due,
o the relative size of the debt service burden as to the economy as a
whole,
o the sovereign debtor's policy towards the IMF, and
o the political constraints to which a sovereign debtor may be
subject.
See "Risk Factors and Special Considerations--Sovereign Debt."
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<PAGE>
Several Latin American countries have adopted debt conversion programs,
pursuant to which investors may use external debt of a country, directly or
indirectly, to make investments in local companies. Both Funds intend to acquire
Sovereign Debt of Latin American issuers to hold and trade in appropriate
circumstances, as well as to use to participate in Latin American debt
conversion programs. The portion of the Latin American Equity Fund's assets
invested in Sovereign Debt is not normally expected to exceed 15% of its total
assets. The portion of LAM's assets invested in Sovereign Debt is not normally
expected to exceed 30% of its total assets.
Temporary Investments. Each of the Funds may, for cash management
purposes, invest up to 25% of its assets in certain short-term instruments and
may, for temporary defensive purposes, invest up to 100% of its assets in
certain short-term instruments.
Each Fund may invest in the following short-term instruments:
o obligations of the U.S. Government, its agencies or
instrumentalities (including repurchase agreements with respect to
these securities),
o bank obligations (including certificates of deposit, time deposits
and bankers' acceptances) of U.S. banks and foreign banks
denominated in any currency,
o floating rate securities and other instruments denominated in any
currency issued by international development agencies, banks and
other financial institutions, governments and their agencies and
instrumentalities, and corporations located in countries that are
members of the Organization for Economic Cooperation and
Development,
o obligations of U.S. corporations that are rated no lower than A-2 by
S&P or P-2 by Moody's or the equivalent by another rating service
or, if unrated, deemed to be of equivalent quality by CSAM, and
o shares of money market funds that are authorized to invest in
short-term instruments described above.
Repurchase agreements are contracts under which the buyer of a security
simultaneously buys and commits to resell the security to the seller at an
agreed upon price and date. The Funds will enter into repurchase agreements
regarding U.S. Government securities with primary government securities dealers
recognized by the Federal Reserve Bank of New York and member banks of the
Federal Reserve System and regarding securities issued by the governments of
Latin American countries, their agencies or instrumentalities, with creditworthy
parties in accordance with established procedures. For a more detailed
description of each Fund's Temporary Investments, see "Investment Objective and
Policies -- Temporary Investments" in the SAI.
Currency Transactions. CSAM generally does not seek to hedge against
declines in the value of the Funds' non-dollar-denominated portfolio securities
resulting from currency devaluations or fluctuations. If suitable hedging
instruments are available on a timely basis and on acceptable terms, CSAM may,
in its discretion, hedge all or part of the value of the Funds'
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non-dollar-denominated portfolio securities, although it is not obligated to do
so. Each Fund will be subject to the risk of changes in value of the Latin
American currencies in which their assets are denominated, unless they engage in
hedging transactions. For a more detailed description of each Fund's currency
transactions, see "Comparison of Investment Objectives and Policies -- Currency
Transactions" in the SAI.
Portfolio Turnover Rate. Neither Fund engages in the trading of securities
for the purpose of realizing short-term profits, but adjusts its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish its investment objective. It is not anticipated that the annual
portfolio turnover rate of LAQ following the Merger will exceed 150%. A high
rate of portfolio turnover involves correspondingly greater brokerage commission
expenses than a lower rate, which expenses must be borne by the Fund and its
shareholders. High portfolio turnover may also result in the realization of
substantial net short-term capital gains and any distributions resulting from
such gains will be taxable at ordinary income rates for U.S. federal income tax
purposes. LAQ's portfolio turnover rates for the fiscal years ended December 31,
1999 and 1998 were 161.71% and 142.35%, respectively. LAM's portfolio turnover
rates for the fiscal years ended December 31, 1999 and 1998 were 115.42% and
172.62%, respectively. The higher LAM portfolio turnover rate for the fiscal
year ended December 31, 1998 is attributable to the Fund's increased investment
in fixed income securities. The portfolio turnover rate is calculated by
dividing the lesser of sales or purchases of portfolio securities by the average
monthly value of the Fund's portfolio securities. For purposes of this
calculation, portfolio securities exclude purchases and sales of debt securities
having a maturity at the date of purchase of one year or less.
Borrowing. Borrowing increases exposure to capital risk, and borrowed
funds are subject to interest costs that may offset or exceed the return earned
on investment of the amounts borrowed. Nevertheless both Funds are authorized to
borrow money from banks for the following reasons:
o for temporary or emergency purposes,
o for such short-term credits as may be necessary for the clearance or
settlement of transactions,
o to finance repurchases of its shares in amounts not exceeding 10%
(taken at the lower of cost or current value) of its total assets
(not including the amount borrowed),
o to pay any dividends required to be distributed to maintain the
Fund's qualification as a regulated investment company under the
Code, or
o to pay Fund expenses outside of Latin America, and not for the
purpose of leveraging.
In no event may borrowings by either Fund exceed 33-1/3% of that Fund's total
assets (not including the amount borrowed). Neither Fund will make additional
investments when borrowings exceed 5% of that Fund's total assets. Either Fund
may pledge its assets to secure
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such borrowings. Collateral arrangements with respect to the writing of options
or the purchase or sale of future contracts or related options or forward
currency contracts are not deemed a pledge of assets or the issuance of a senior
security.
Fundamental Policies. Each Fund has "fundamental" investment policies
which may not be changed without the prior approval of the holders of a majority
of each Fund's outstanding voting securities, and "nonfundamental" investment
policies which may be modified by each Fund's Board of Directors if, in the
reasonable exercise of its business judgment, the Board determines that
modification is necessary or appropriate to carry out that Fund's investment
objective. Following is a description of certain of the Funds' current
fundamental investment policies which are substantially similar:
1. Neither Fund may invest more than 25% of the total value of its
assets in a particular industry. This restriction does not apply to
investments in U.S. Government securities.
2. Neither Fund may issue senior securities, borrow money or pledge
its assets, except that either Fund may borrow from a lender for the
reasons specified above under "--Borrowing."
3. Neither Fund may lend money to other persons except through the
purchase of debt obligations, loans or participation interests in loans,
and the entering into of repurchase agreements or reverse repurchase
agreements consistent with applicable regulatory requirements, in each
case consistent with the Fund's investment objective and policies.
4. Neither Fund may make short sales of securities or maintain a
short position in any security.
5. Neither Fund may purchase securities on margin, except such
short-term credits as may be necessary or routine for the clearance or
settlement of transactions and the maintenance of margin with respect to
forward contracts or other hedging securities.
6. Neither Fund may underwrite securities of other issuers, except
insofar as either Fund may be deemed an underwriter under the Securities
Act in selling portfolio securities.
7. Neither Fund may purchase or sell commodities or real estate,
except that either Fund may invest in securities secured by real estate or
interests in real estate or in securities issued by companies, including
real estate investment trusts, that invest in real estate or interests in
real estate, and may purchase and sell forward contracts on foreign
currencies to the extent permitted under applicable law.
8. Neither Fund may make investments for the purpose of exercising
control over, or management of, the issuers of any securities.
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In addition to the foregoing restrictions, each Fund is subject to
investment limitations, portfolio diversification requirements and other
restrictions imposed by certain Latin American countries in which it invests.
Under the Investment Company Act, neither Fund may:
o invest more than 5% of its total assets in the securities of any one
investment company, nor
o acquire more than 3% of the outstanding voting securities of any
such company.
In addition, the Funds may not invest more than 10% of their total assets
in securities issued by all investment companies. As a shareholder in any
investment company, each Fund will bear its ratable share of that investment
company's expenses, and would remain subject to payment of the company's
advisory, sub-advisory and administrative fees with respect to assets so
invested.
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UNITED STATES FEDERAL INCOME TAXES
The following is a brief summary of certain United States federal income
tax issues that apply to each Fund. Shareholders should consult their own tax
advisers with regard to the federal tax consequences of the purchase, ownership
and disposition of each Fund's shares, as well as tax consequences arising under
the laws of any state, foreign country, or other taxing jurisdiction.
Each Fund has qualified, and intends to continue to qualify and elect to
be treated, as a regulated investment company, or RIC, for each taxable year
under Subchapter M of the Code. A RIC generally is not subject to federal income
tax on income and gains distributed in a timely manner to its shareholders.
Each Fund intends to distribute annually to its shareholders substantially
all of its investment company taxable income. The Board of Directors of each
Fund will determine annually whether to distribute any net realized long-term
capital gains in excess of net realized short-term capital losses, including any
capital loss carryovers. The Funds currently expect to distribute any excess
annually to their shareholders. However, if either Fund retains for investment
an amount equal to its net long-term capital gains in excess of its net
short-term capital losses and capital loss carryovers, it will be subject to a
corporate tax, currently at a rate of 35%, on the amount retained. In that
event, that Fund expects to designate such retained amounts as undistributed
capital gains in a notice to its shareholders who:
o will be required to include in income for United States federal
income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount,
o will be entitled to credit their proportionate shares of the 35% tax
paid by that Fund on the undistributed amount against their United
States federal income tax liabilities, if any, and to claim refunds
to the extent their credits exceed their liabilities, if any, and
o will be entitled to increase their tax basis, for United States
federal income tax purposes, in their shares by an amount equal to
65% of the amount of undistributed capital gains included in the
shareholder's income.
Income received by the Funds from sources within countries other than the
United States may be subject to withholding and other taxes imposed by such
countries, which will reduce the amount available for distribution to
shareholders. If more than 50% of the value of either Fund's total assets at the
close of its taxable year consists of securities of foreign corporations, that
Fund will be eligible and intends to elect to "pass-through" to shareholders the
amount of foreign income and similar taxes it has paid. Pursuant to this
election, shareholders of the electing Fund will be required to include in gross
income (in addition to the full amount of the taxable dividends actually
received) their pro rata share of the foreign taxes paid by that Fund. Each such
shareholder will also be entitled either to deduct (as an itemized deduction)
its pro rata share of foreign taxes in computing its taxable income or to claim
a foreign tax credit against its U.S. federal income tax liability, subject to
limitations. No deduction for foreign taxes may be
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claimed by a shareholder who does not itemize deductions, but such a shareholder
may be eligible to claim the foreign tax credit. The deduction for foreign taxes
is not allowable in computing alternative minimum taxable income. Each
shareholder will be notified within 60 days after the close of that Fund's
taxable year whether the foreign taxes paid by the Fund will "pass through" for
that year.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her foreign
source taxable income. For this purpose, if the pass-through election is made,
the source of each Fund's income flows through to its shareholders. Any gains
from the sale of securities by either Fund will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign currency-denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit), including the foreign source
passive income passed through by each Fund. Because of the limitation,
shareholders taxable in the United States may be unable to claim a credit for
the full amount of their proportionate share of the foreign taxes paid by each
Fund. The foreign tax credit also cannot be used to offset more than 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals.
Shareholders will be notified annually by each Fund as to the United
States federal income tax status of the dividends, distributions and deemed
distributions made by the Fund to its shareholders. Furthermore, shareholders
will also receive, if appropriate, various written notices after the close of
each Fund's taxable year regarding the United States federal income tax status
of certain dividends, distributions and deemed distributions that were paid, or
that are treated as having been paid, by that Fund to its shareholders during
the preceding taxable year. For a more detailed discussion of tax matters
affecting each Fund and its shareholders, including a discussion of Latin
American taxes, see "Taxation" in the SAI.
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INFORMATION ABOUT THE MERGER
General. Under the Plan, LAM will merge with and into LAQ on the Effective
Date. As a result of the Merger and on the Effective Date:
o LAM will no longer exist, and
o LAQ will be the surviving corporation.
LAM will then:
o deregister as an investment company under the Investment Company
Act,
o cease its separate existence under Maryland law,
o remove its shares of common stock from listing on the NYSE, and
o withdraw from registration under the Securities Exchange Act of
1934, or the Securities Exchange Act.
Each share of outstanding stock of LAM will convert into an equivalent
dollar amount of full shares of stock of LAQ, based on the net asset value per
share of each Fund calculated at 4:00 p.m. on the Business Day preceding the
Effective Date. LAQ will not issue any fractional shares to LAM shareholders.
LAQ's transfer agent will aggregate all fractional shares, sell the resulting
full shares on the NYSE at the current market price for the shares and remit the
cash proceeds to shareholders of LAM in proportion to their fractional shares.
No sales charge or fee of any kind will be charged to LAM shareholders in
connection with their receipt of LAQ common stock in the Merger.
The Merger is expected to occur shortly after the completion of the Tender
Offer, or on such later date as the parties may agree in writing. Under Maryland
law, shareholders of a corporation whose shares are traded publicly on a
national securities exchange, such as the Funds' shares, are not entitled to
demand the fair value of their shares upon a merger; therefore, the shareholders
of the Funds will be bound by the terms of the Merger. However, any shareholder
of either Fund may sell his or her shares of common stock at any time prior to
the Merger on the NYSE.
......................................
The Plan may be terminated and the Merger abandoned, whether before or
after approval by the Funds' shareholders, at any time prior to the Effective
Date:
o by the mutual written consent of the Board of Directors of each
Fund, or
o by either Fund if the conditions to that Fund's obligations under
the Plan have not been satisfied or waived.
If the Merger has not been consummated by December 31, 2000, the Plan
automatically terminates on that date, unless a later date is mutually agreed
upon by the Board of Directors of each Fund.
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Reasons for the Merger. The Board of Directors of each Fund considered and
unanimously approved the proposed Merger at separate meetings of each Board held
on May 8, 2000. All of the Directors of each Fund were present at the meeting in
person. For the reasons discussed below, the Board of Directors of each Fund,
including Non-interested Directors of each Fund, after consideration of the
potential benefits of the Merger to the shareholders of that Fund and the
expenses expected to be incurred by that Fund in connection with the Merger,
unanimously determined that:
o the interests of the existing shareholders of that Fund will not be
diluted as a result of the proposed Merger, and
o the proposed Merger is in the best interests of that Fund.
Each Board of Directors has, over the years, discussed the significance of
the existence of the discount to net asset value at which each Fund's shares
have traded on the NYSE and the impact on shareholders of the discount. Each
Board has discussed and considered various alternative strategies to address the
discount, including instituting share repurchases, combining with other funds,
converting to an open-end format, or liquidating. The Directors of each Fund
however, have consistently concluded that it was in the best interests of each
Fund and its shareholders to maintain the current closed-end format, because, in
the view of the Boards and of CSAM, the closed-end format is the most
appropriate investment vehicle for participating in the Latin American equities
markets. In CSAM's view, many attractive equity investment opportunities in
Latin America have been and continue to be found in the small-capitalization and
less liquid sectors of those markets. The Board of Directors of each Fund
believes that the long-term performance of each Fund supports this view.
In the context of each Board's ongoing consideration of the impact of the
market price discount on each Fund and its shareholders, the Non-interested
Directors of each Fund retained PaineWebber, as financial adviser, to assist in
this process and requested that PaineWebber evaluate possible alternatives to
address these concerns and otherwise enhance shareholder value. The Boards
further requested that, in evaluating the possible alternatives, PaineWebber
take into consideration the interests of all shareholders.
The alternatives available to the Funds, including a full range of
alternatives that has been reviewed in the past discussions of the discount
issue, were considered at meetings of each Board of Directors held on February
8, 2000, April 6, 2000 and May 8, 2000. After consideration of these
alternatives, PaineWebber proposed, and the Board of Directors of each Fund
approved, the course of action described below. Morrison & Foerster, counsel to
the Non-interested Directors of the Funds, assisted the Non-interested Directors
in their consideration of these matters. Willkie Farr & Gallagher, counsel for
the Funds and CSAM, also assisted both Funds in their consideration of these
matters.
IN THE JUDGMENT OF THE BOARD OF DIRECTORS OF EACH FUND, THE MERGER SERVES
THE BEST INTERESTS OF EACH FUND AND ITS SHAREHOLDERS.
In deciding to approve the course of action described below, the
Non-interested Directors considered many factors, including, but not limited to,
market information, analyses and advice
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<PAGE>
provided to them by PaineWebber. In addition, in considering the merits of
the proposed Merger, the Boards also considered the larger asset size of the
combined Fund relative to each constituent Fund standing alone, the newly
revised fee structure and the potential for economies of scale that may result
from the larger asset size of the combined Fund. Based on data presented by
PaineWebber and CSAM, the Board of Directors of each Fund believes that a
combination of the Funds may result in a total operating expense ratio that will
be lower than the total operating expense ratio of either Fund currently.
The Boards also considered whether a larger asset base would provide
benefits in portfolio management. After the Merger, LAQ may be better able to
diversify portfolio equity holdings and thereby mitigate risks, while
participating in more equity investment opportunities. In addition, a larger
asset size could result in a more equity liquid trading market for shares of LAQ
than either Fund currently enjoys separately, which might have a positive impact
on the discount at which each Fund's shares have tended to trade. Further, the
Merger itself should focus the attention of a wider circle of securities
analysts on LAQ, and after the Merger, may facilitate securities analysts'
following of this Fund because the Merger may eliminate confusion in the
marketplace that results from two funds with the same objective, similar
policies and similar names managed by the same adviser.
There can be no guarantee that any of these potential beneficial results
will be realized.
The Board of Directors of each Fund, in declaring advisable and
recommending the proposed Merger, also considered the following:
(1) the capabilities and resources of CSAM and its affiliates in the
areas of investment management and shareholder servicing;
(2) expense ratios and information regarding fees and expenses of the
Funds, both currently and on a pro forma basis;
(3) the terms and conditions of the Merger and whether it would result
in dilution of the interests of each Fund and its existing
shareholders;
(4) the compatibility of each Fund's portfolio securities, investment
objective, policies and restrictions;
(5) the tax consequences to each Fund and its shareholders in connection
with the Merger; and
(6) the anticipated expenses of the Merger.
In reviewing issues relating to the structure of the Merger and the
selection of the surviving corporation in the Merger, each Board also considered
information provided to them by CSAM and PaineWebber concerning:
o the comparative performance records of the two Funds,
o public and market perception of the two Funds,
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o the relative size of the two Funds,
o the investment policies, strategies and personnel CSAM intends to
utilize in managing the merged fund, and
o PaineWebber's recommendation that LAQ be the surviving corporation.
In evaluating the comparative fee and expense structures of the two Funds,
the Boards noted that CSAM has agreed, effective July 1, 2000, to voluntarily
waive that portion of the investment advisory fee payable by LAQ to the level
that would be obtained if the fee was based on the average weekly market value
of the Fund's outstanding shares rather than the average weekly net asset value,
whenever the Fund's shares are trading at a discount to net asset value. The
Board of Directors of LAQ recommends that the shareholders of the Fund approve a
new investment advisory agreement and a new investment sub-advisory agreement,
both of which will formalize this new fee calculation. For more information
about the new investment advisory agreement, see "Proposal 2 (Latin America
Equity Fund Shareholders Only): Approval of New Investment Advisory Agreement"
and for more information about the new investment sub-advisory agreement, see
"Proposal 3 (Latin America Equity Shareholders Only): Approval of New Investment
Sub-Advisory Agreement."
Finally, each Board considered the impact of the breakpoint in the
investment advisory fee for LAQ in the context of the surviving Fund's larger
asset base. Assuming the Tender Offer is fully subscribed and based on the
market value of LAQ and the net asset values of each Fund as of June 23, 2000,
the blended investment advisory fee (after fee waiver) using the breakpoint
would be 0.86% of the surviving Fund's average weekly net assets.
Based on the factors discussed above, the Board of Directors of each Fund
concluded that the expenses of the Merger are outweighed by the benefits that
are anticipated to be derived from the Merger. In addition, the Boards of each
Fund, including the Non-interested Directors of each Fund, have unanimously
concluded that:
o the Merger is in the best interests of each respective Fund, and
o the interests of existing shareholders of each respective Fund will
not be diluted as a result of the transactions contemplated by the
Plan.
Terms of the Merger Agreement. The following is a summary of the
significant terms of the Plan. This summary is qualified in its entirety by
reference to the Plan, attached hereto as Exhibit A.
At the Effective Date, each share of common stock of LAM will convert into
an equivalent dollar amount (to the nearest one ten-thousandth of one cent) of
full shares of LAQ common stock, based on the net asset value per share of each
Fund calculated at 4:00 p.m. on the Business Day preceding the Effective Date.
LAQ will not issue any fractional shares to LAM shareholders. LAQ's transfer
agent will aggregate all fractional shares, sell the resulting full shares on
the NYSE at the current market price for the shares and remit the cash proceeds
to shareholders of LAM.
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For purposes of valuing assets in connection with the Merger, the assets
of LAM will be valued pursuant to the principles and procedures consistently
utilized by LAQ, which principles and procedures are also utilized by LAM in
valuing its own assets and determining its own liabilities. As a result, it is
not expected that LAQ's valuation procedures as applied to LAM's portfolio
securities will result in any difference from the valuation that would have
resulted from the application of LAM's valuation procedures to such securities.
The net asset value per share of LAQ common stock will be determined in
accordance with these principles and procedures, and LAQ will certify the
computations involved. The net asset value per share of each Fund will not be
adjusted to take into account differences in unrealized gains and losses.
LAQ will issue separate certificates or share deposit receipts for LAQ
common stock to shareholders of LAM. LAQ will deliver these certificates or
share deposit receipts representing shares of LAQ common stock to Fleet National
Bank c/o EquiServe, L.P., as the transfer agent and registrar for LAQ common
stock. LAQ will not permit any LAM shareholder to receive new certificates
representing shares of LAQ common stock until this shareholder has surrendered
his or her outstanding certificates representing shares of the common stock of
LAM or, in the event of lost certificates, posted adequate bond. LAM will
request its shareholders to surrender their outstanding certificates
representing shares of the common stock of LAM or post adequate bond therefor.
Dividends payable to holders of record of shares of LAQ as of any date after the
Effective Date and prior to the exchange of certificates by any shareholder of
LAM will be paid to such shareholder, without interest; however, such dividends
will not be paid unless and until such shareholder surrenders his or her stock
certificates of LAM for exchange.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON
CONSUMMATION OF THE MERGER, SHAREHOLDERS OF THE LATIN AMERICA INVESTMENT FUND
WILL BE FURNISHED WITH INSTRUCTIONS FOR EXCHANGING THEIR STOCK CERTIFICATES FOR
LATIN AMERICA EQUITY FUND STOCK CERTIFICATES.
No fractional shares of LAQ will be issued to LAM shareholders. In lieu
thereof, LAQ's transfer agent will aggregate all fractional shares of LAQ and
sell the resulting full shares on the NYSE at the current market price for
shares of LAQ for the account of all holders of fractional interests, and each
such holder will receive such holder's pro rata share of the proceeds of such
sale, without interest, upon surrender of such holder's LAM common stock
certificates.
The net asset value of the LAQ shares (disregarding fractional shares)
received by LAM shareholders will be equal to the aggregate net asset value of
the LAM shares exchanged. When fractional shares are taken into consideration,
the net asset value of the LAQ shares received by LAM shareholders will be
slightly lower than the net asset value of the LAM shares exchanged because
fractional shares of LAQ will be sold at the current market price, and not at
the net asset value, for LAQ shares.
The Plan provides, among other things, that the Merger will not take place
without:
o the requisite approval of the shareholders of LAQ and LAM,
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o approval by the SEC of an exemptive application filed by LAQ and LAM
with respect to the Merger, if necessary, and
o effectiveness of a Registration Statement on Form N-14.
The Plan may be terminated at any time prior to the Effective Date by
mutual agreement of each Fund's Board of Directors or by either Fund if the
other has violated a condition of the Plan. The Plan will automatically
terminate after December 31, 2000 if the Merger has not been consummated, unless
such time is extended by mutual agreement of the Board of Directors of each
Fund.
The Plan may be amended, modified or supplemented by mutual agreement of
LAM and LAQ. However, no amendments which would have the effect of changing the
provisions for determining the number of shares issued to LAM shareholders will
be permitted following the special meeting unless those shareholders consent to
the amendment.
Expenses of the Merger. In evaluating the proposed Merger, CSAM has
estimated the amount of expenses the Funds would incur, including NYSE listing
fees, SEC registration fees, financial adviser fees, legal and accounting fees
and proxy and distribution costs and expenses incurred in connection with the
Tender Offer. The estimated total expenses pertaining to the Merger and the
Tender Offer are $______. For more information about the expenses of the Merger,
see "Sypnosis - Expenses of the Merger."
The expenses of the Merger are expected to result in a reduction in net
asset value per LAQ share of approximately $_____, and a reduction in net asset
value per LAM share of approximately $______. The expenses related to the Tender
Offer, estimated at $________, will reduce the net asset value per share of LAM
by approximately $_________.
Tax Considerations. The Plan and Merger are conditioned upon the receipt
by the Funds of an opinion from Willkie Farr & Gallagher, substantially to the
effect that, based upon the facts, assumptions and representations of the
parties, for federal income tax purposes:
o the Merger will constitute a tax-free "reorganization" within the
meaning of Section 368(a)(1) of the Code, and each Fund will be "a
party to a reorganization" within the meaning of Section 368(b) of
the Code,
o no gain or loss will be recognized by either Fund as a result of the
Merger,
o the basis of the assets of LAM in the hands of LAQ will be the same
as the basis of such assets to LAM immediately prior to the Merger,
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o the holding period of the assets of LAM in the hands of LAQ will
include the period during which such assets were held by LAM,
o no gain or loss will be recognized by the shareholders of LAM upon
the conversion of their LAM shares into LAQ common stock except with
respect to cash received upon the sale of fractional share
interests,
o the basis of LAQ shares received by the shareholders of LAM will be
the same as the basis of the shares (including fractional share
interests) of LAM exchanged therefor,
o the holding period of LAQ shares (including fractional share
interests) received by the shareholders of LAM will include the
holding period during which the shares of LAM exchanged therefor
were held, provided that at the time of the exchange the shares of
LAM were held as capital assets in the hands of the shareholders of
LAM, and
o cash received for fractional shares will generate gain or loss to
shareholders receiving such cash.
While LAM is not aware of any adverse state or local tax consequences of
the proposed Merger, it has not requested any ruling or opinion with respect to
such consequences and shareholders may wish to consult their own tax advisers
with respect to such matters.
History of the Latin America Investment Fund's Discount. LAM's shares have
generally traded at a discount to their net asset value per share since shortly
after its commencement of operations. See "Additional Information about the
Funds-Discount to Net Asset Value." The Board of Directors of LAM has considered
a number of actions in response to this discount.
In October 1998, the Board of Directors of LAM engaged in a share
repurchase program of up to 15% of the Fund's outstanding common stock. The
Board authorized another share repurchase program for up to an additional 15% of
the Fund's outstanding common stock in October 1999 after repurchasing the full
amount of shares authorized under the first share repurchase program. Both share
repurchase programs were intended to provide additional liquidity to those
shareholders who elected to sell their shares and to enhance the net asset value
of the shares held by shareholders who maintained their investment.
In May 2000, the Board of Directors of LAM, in recognition of the fact
that the Fund's shares have traded at a discount to their net asset value and
after consulting PaineWebber, determined that it was in the best interests of
the Fund to initiate the Tender Offer to acquire up to 50% of its shares of
common stock at a price per share equal to 95% of the Fund's net asset value per
share as of the end of the Tender Offer period. This Tender Offer is conditioned
upon the approval of the Plan by the shareholders of both Funds and will not
occur if these approvals are not obtained.
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During the past few years, LAM has received several shareholder proposals
expressing concern regarding the discount. In April 2000, both Funds included
the following shareholder proposal from Walter S. Baer in their joint proxy
statement in connection with the 2000 annual meeting of their respective
shareholders:
"RESOLVED: The shareholders request that, within sixty days, the Fund's
Board of Directors present for shareholder approval a program that will permit
shareholders to realize net asset value for their shares."
Mr. Baer stated that shareholders of each Fund had suffered from mediocre
performance and the large discount from net asset value. Mr. Baer cited the
following four programs in which shareholders could redeem shares at net asset
value:
o commence an unlimited, one-time self tender offer at net asset
value,
o convert the Fund to an open-end fund,
o merge the Fund with an open-end fund, or
o liquidate the Fund.
The Funds' joint proxy statement included each Board's recommendation
against Mr. Baer's proposal and an explanation of each Board's reasons for such
recommendation. At the meeting of each Fund's shareholders on May 23, 2000, Mr.
Baer's proposal was approved by a wide margin.
On June 27, 2000, the Board of Directors of LAQ approved the overall terms
of a self-tender program that the Fund intends to launch in the calendar year
2001, which terms include the following: (i) the Fund will make a tender offer
to acquire at least 15% of its outstanding shares during each calendar year of
the program; and (ii) the per share purchase price will be at least 95% of the
Fund's net asset value per share. Implementation of the program is conditioned
on approval and consummation of the Merger.
The Directors have reserved the right to decide on the timing and the
terms of specific tenders, subject to adherence to the terms described above.
The Board of Directors of LAQ intends to continue the self-tender program
indefinitely, subject to changes in economic or market conditions or other
factors. For example, a sustained reduction in the market discount at which the
Fund's shares are trading, a risk of material adverse tax consequences or a risk
of the Fund becoming subject to delisting may lead the Board to conclude in the
future that it is appropriate to suspend the self-tender program. In addition,
the self-tender program is likely to reduce the Fund's asset levels over time.
Absent substantial appreciation in the Fund's portfolio or opportunities to
raise additional funds, this could lead to higher expense ratios, the absence of
reasonable diversification of investment opportunities, or other factors that
adversely affect the Fund and, possibly, the continued viability of the Fund as
a closed-end fund. The Board will re-evaluate the program from time to time in
light of its effects on the Fund.
The Board views this self-tender program as a further enhancement to the
actions previously announced by LAQ to enhance shareholder value, which, in
addition to the proposed Merger, includes the modification of the CSAM
investment advisory agreement pursuant to which the advisory fee will be based
on the Fund's market value (stock price) rather than net asset value whenever
its shares are trading at a discount, and the payment of 50% of the Directors'
annual retainer in shares of the Fund.
53
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUNDS
Description of Securities to be Issued. The authorized stock of LAQ
consists of 100,000,000 shares of common stock, U.S.$0.001 par value. Shares of
LAQ entitle its holders to one vote per share. Holders of LAQ's common stock are
entitled to share equally in dividends authorized by the Fund's Board of
Directors payable to the holders of such common stock and in the net assets of
LAQ available for distribution to holders of such common stock. Shares have
noncumulative voting rights and no conversion, preemptive or other subscription
rights, and are not redeemable. The outstanding shares of common stock of LAQ
are fully paid and non-assessable. In the event of liquidation, each share of
common stock is entitled to its proportion of the Fund's assets after payment of
debts and expenses. LAQ holds shareholder meetings annually.
The following table shows information about the common stock of each Fund
as of June 30, 2000.
(4)
Amount Issued
and
(3) Outstanding
(2) Amount held by Exclusive of
(1) Amount Fund for its Amount Shown
Title of Class Authorized Own Account Under (3)
-------------- ---------- ----------- ---------
LATIN AMERICA Common Stock, 100,000,000 None
EQUITY FUND $0.001 par
value
LATIN AMERICA Common Stock, 100,000,000 None
INVESTMENT FUND $0.001 par
value
The shares of common stock of LAQ and LAM are listed and trade on the NYSE
under the symbols "LAQ" and "LAM", respectively. As of June 30, 2000, the net
asset value of LAQ common stock was $_____, and the market price per share was
$_____. As of that same date, the net asset value of LAM common stock was
$_____, and the market price per share was $_______.
Discount to Net Asset Value. Shares of closed-end investment companies,
such as the Funds, have frequently traded at a discount from net asset value.
This characteristic is a risk separate and distinct from the risk that the
Funds' net asset values may decrease, and this risk may be greater for
shareholders expecting to sell their shares in a relatively short period. THE
SHARES OF COMMON STOCK OF THE FUNDS SHOULD THUS BE VIEWED AS BEING DESIGNED
PRIMARILY FOR LONG-TERM INVESTORS AND SHOULD NOT BE CONSIDERED A VEHICLE FOR
TRADING PURPOSES.
During the period since the inception of the Funds, the common stock of
both Funds has generally traded at a discount to net asset value, and does so
currently. It is not possible to state whether shares of LAQ will trade at a
premium or discount to net asset value following the
54
<PAGE>
Merger, or the extent of any such premium or discount. The Directors of both
Funds have regularly considered, and the Directors of LAQ will continue to
consider, the respective Fund's market price discount and the effect of the
discount on the Fund and its shareholders.
55
<PAGE>
PER SHARE DATA FOR THE LATIN AMERICA EQUITY FUND, INC.
COMMON STOCK TRADED ON THE NYSE
<TABLE>
<CAPTION>
DISCOUNT
MARKET PRICE NET ASSET VALUE AS % OF NAV
----------------------- ------------------- ----------------
PERIOD HIGH LOW HIGH LOW HIGH LOW
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
First Quarter .... $ 14.1250 $ 12.0000 $ 17.31 15.28 20.65 15.17
Second Quarter ... 13.7500 10.1250 17.19 13.21 24.38 18.83
Third Quarter .... 11.6875 5.5625 14.97 8.21 32.37 21.10
Fourth Quarter ... 8.9375 6.4375 11.64 9.19 30.04 21.95
1999
First Quarter .... 8.8750 6.0625 11.46 8.31 28.55 20.36
Second Quarter ... 12.0000 8.8125 14.67 11.44 23.74 16.35
Third Quarter .... 10.6250 8.8125 14.26 12.00 28.02 22.45
Fourth Quarter ... 12.6250 8.4375 17.04 11.52 27.29 22.83
2000
First Quarter .... 14.0625 12.125 19.21 15.94 28.48 22.52
Second Quarter....
Third Quarter ....
(through ____, __,
2000)
</TABLE>
56
<PAGE>
PER SHARE DATA FOR THE LATIN AMERICA INVESTMENT FUND, INC.
COMMON STOCK TRADED ON THE NYSE
<TABLE>
<CAPTION>
DISCOUNT
MARKET PRICE NET ASSET VALUE AS % OF NAV
----------------------- ------------------- -----------------
PERIOD HIGH LOW HIGH LOW HIGH LOW
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
First Quarter .. $ 15.0000 $ 12.8125 $ 18.37 $ 16.43 21.41 15.02
Second Quarter . 14.5625 11.0625 18.27 14.54 24.22 19.48
Third Quarter .. 12.5000 6.1250 16.02 8.87 31.94 21.97
Fourth Quarter . 10.0625 7.2500 13.13 10.53 30.24 22.19
1999
First Quarter .. 10.1250 7.1250 13.00 9.62 26.47 20.92
Second Quarter . 13.0000 10.1250 15.52 13.06 23.52 15.59
Third Quarter .. 11.4375 9.8125 14.81 13.31 28.26 22.52
Fourth Quarter . 13.0625 9.5625 17.55 13.31 28.21 22.63
2000
First Quarter .. 14.3125 12.3125 19.44 16.53 27.74 22.19
Second Quarter .
Third Quarter...
(through ____, __,
2000)
</TABLE>
57
<PAGE>
Capitalization. The following table shows on an unaudited basis the
capitalization of LAQ and LAM as of December 31, 1999 and on a pro forma basis
as of that same date giving effect to the Tender Offer and the Merger(1):
<TABLE>
<CAPTION>
(in thousands, except per share values)
LATIN LATIN PRO FORMA
AMERICA AMERICA FOR TENDER
EQUITY INVESTMENT PRO FORMA OFFER AND
FUND FUND ADJUSTMENTS MERGER
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets $123,261,641 $ 115,584,245 $(58,415,482) $180,030,405
Net asset value
per share(2) $ 17.04 $ 17.55 -- $ 17.04
Shares
outstanding(3) 7,235,428 6,587,139 -- 10,566,928
</TABLE>
(1) Assumes that the Tender Offer was fully subscribed and that the Tender
Offer and the Merger each had been consummated on December 31, 1999, and
is for information purposes only. No assurance can be given as to how many
shares of LAQ common stock shareholders of LAM will receive on the date
the Merger takes place, and the foregoing should not be relied upon to
reflect the number of shares of LAQ common stock that actually will be
received on or after such date. Assumes distributions of ordinary income,
and accrual of estimated Tender Offer and Merger expenses of
$______________.
(2) Net asset value per share after Tender Offer- and Merger-related expenses
and distribution of ordinary income.
(3) Assumes the issuance of 3,241,134 shares in exchange for the net assets of
LAM (assuming the Tender Offer is fully subscribed). The number of shares
issued was based on the net asset value of each Fund, net of estimated
Tender Offer and Merger expenses and distributions, on December 31, 1999.
58
<PAGE>
Dividends and Other Distributions. Each Fund intends to distribute
dividends from its net investment income and any net realized capital gains
after utilization of capital loss carryforwards annually to prevent application
of a federal excise tax. An additional distribution may be made if necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year in which it is declared. Dividends
and distributions of each Fund are invested in shares of the Fund at market
value and credited to the shareholder's account on the settlement date which is
usually three Business Days from the purchase date or, at the shareholder's
election, paid in cash.
If the Merger is approved by each Fund's shareholders, then as soon as
practicable before the Effective Date each Fund will pay its shareholders a cash
distribution of all undistributed 2000 net investment income. It is expected
that any undistributed realized net capital gains, including any that LAM may
realize as a result of disposing of portfolio securities to raise funds to
finance the Tender Offer, will be offset through the utilization of capital loss
carryforwards prior to the Effective Date.
Portfolio Valuation. Investments of each Fund are stated at value in each
Fund's financial statements. All 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 at fair value as determined in good faith by each Fund's 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 of each Fund has
established general guidelines for calculating fair value of securities that are
not readily marketable. At May 31, 2000, LAQ held 4.04% of its net assets in
securities valued in good faith by the Board of Directors with an aggregate cost
of $3.2 million and fair value of $3.8 million, and LAM held 3.42% of its net
assets in securities valued in good faith by its Board of Directors with an
aggregate cost of $3.0 million and fair value of $3.5 million. The net asset
value per share of each Fund is calculated on each Business Day.
For purposes of valuing assets in connection with the Merger, the assets
of LAM will be valued pursuant to the principles and procedures consistently
utilized by LAQ, which principles and procedures are also utilized by LAM in
valuing its own assets and determining its own liabilities. As a result, it is
not expected that LAQ's valuation procedures as applied to LAM's portfolio
securities will result in any difference from the valuation that would have
resulted from the application of LAM's valuation procedures to such securities.
Portfolio Transactions. The Funds may utilize Celfin, CS First Boston
Corporation and other affiliates of Credit Suisse, or Salomon Smith Barney Inc.,
an affiliate of SBAM, in connection with the purchase or sale of securities in
accordance with rules or exemptive orders promulgated by the SEC when CSAM
believes that the charge for the transaction does not exceed usual and customary
levels. For a more detailed discussion of each Fund's brokerage allocation
practice, see "Portfolio Transactions" in the SAI.
59
<PAGE>
Dividend Reinvestment and Cash Purchase Plan. Each Fund operates a
Dividend Reinvestment and Cash Purchase Plan, the InvestLinkSM Program, or the
Program, sponsored and administered by Fleet National Bank c/o EquiServe, L.P.,
pursuant to which Fund dividends and distributions, net of any applicable U.S.
withholding tax, are reinvested in shares of the Fund. Fleet National Bank c/o
EquiServe, L.P, serves as the Program Administrator for the shareholders in
administering the Program.
An interested shareholder may join the Program at any time. Purchases of
shares with funds from a participant's cash payment or automatic account
deduction will begin on the next day on which funds are invested. If a
participant selects the dividend reinvestment option, automatic investment of
dividends generally will begin with the next dividend payable after the Program
Administrator receives his enrollment form. Once in the Program, a person will
remain a participant until he terminates his participation or sells all shares
held in his Program account, or his account is terminated by the Program
Administrator. A participant may change his investment options at any time by
requesting a new enrollment form and returning it to the Program Administrator.
A shareholder whose shares are held by a 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 Program. The receipt of
dividends and distributions in stock under the Program will not relieve
participants of any income tax (including withholding tax) that may be payable
on such dividends or distributions.
Certain distributions of cash attributable to (a) some of the dividends
and interest amounts paid to the Funds and (b) certain capital gains earned by
the Funds that are derived from securities of Latin American issuers are subject
to taxes payable by the Funds at the time amounts are remitted. Such taxes will
be borne by the Funds and allocated to all shareholders in proportion to their
interests in the Funds.
If the Board of Directors of a Fund declares an income dividend or a
capital gains distribution payable either in that Fund's common stock or in
cash, as shareholders may have elected, nonparticipants in the Program will
receive cash and participants in the Program will receive shares of common stock
of the Fund purchased on the open market by the Program Administrator. The
number of shares of common stock to be purchased for a participant depends on
the amount of his dividends, cash payments or bank account or payroll
deductions, less applicable fees and commissions, and the purchase price of the
shares. Such purchases will be made by participating brokers as agent for the
participants using normal cash settlement practices. All shares of common stock
purchased through the Program will be allocated to participants as of the
settlement date, which is usually three Business Days from the purchase date.
Participants in the Program also have the option of making additional cash
payments, or bank account deductions, to the Program Administrator for the
purchase of shares of common stock of the Fund, in any amount from $100 up to
$100,000 annually.
A participant will be assessed certain charges in connection with his
participation in the Program. First-time investors will be subject to an initial
service charge which will be deducted
60
<PAGE>
from their initial cash deposit. All optional cash deposit investments will be
subject to a service charge. Sales processed through the Program will have a
service fee deducted from the net proceeds, after brokerage commissions. In
addition to these transaction charges, participants will be assessed per share
processing fees which include brokerage commissions. Participants will not be
charged any fee for reinvesting dividends.
All correspondence concerning the Program should be directed to the
Program Administrator at Fleet National Bank c/o EquiServe, L.P, InvestLink
Program, P.O. Box 8040, Boston, MA 02266-8040. For a more complete description
of the Plan, see "Dividend Reinvestment and Cash Purchase Plan" in the SAI.
Corporate Governance Provisions. Both Funds are Maryland corporations and
in many respects have similar charter and by-law provisions.
Special Voting Provisions and Requirements. The Articles of Incorporation
and By-laws of each Fund contain provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund, to cause it to engage in certain transactions or to modify its structure.
The Board of Directors of each Fund is divided into three classes each having a
term of three years. Each year, the term of one class expires and the successor
or successors elected to such class will serve for a three-year term. This
provision could delay for up to two years the replacement of a majority of the
Board of Directors.
In addition, conversion of either of the Funds from a closed-end to an
open-end investment company requires the affirmative vote of at least 75% of the
directors and of the holders of 75% of the shares of the respective Fund unless
approved by at least 75% of the Continuing Directors (as defined below). If the
conversion is approved by at least 75% of the Continuing Directors, the
affirmative vote of at least 75% of the directors and of the holders of a
majority of the outstanding shares of each Fund will be required to approve such
conversion. Converting to an open-end investment company could restrict the
ability of either Fund to redeem its shares otherwise than in kind due to the
limited depth of the markets for certain securities in which the Funds may
invest. As a result, there can be no assurance that the Funds could realize the
then market value of the portfolio securities the Funds would be required to
liquidate to meet redemption requests.
The affirmative vote of at least 75% of the directors and of the holders
of at least 75% of the shares of either of the Funds is required to authorize
any of the following transactions:
(i) merger, consolidation or share exchange of either of the Funds with
or into any other person;
(ii) issuance or transfer by either of the Funds (in one or a series of
transactions in any 12-month period) of any securities of either of
the Funds to any other person or entity for cash, securities or
other property (or combination thereof) having an aggregate fair
market value of $1,000,000 or more, excluding sales of securities of
the Funds in connection with a public offering, issuances of
securities of either of the Funds pursuant to a dividend
reinvestment plan adopted by the Funds and
61
<PAGE>
issuances of securities of either of the Funds upon the exercise of
any stock subscription rights distributed by either of the Funds;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by either of the Funds (in one or a series of
transactions in any 12-month period) to or with any person of any
assets of either of the Funds having an aggregate fair market value
of $1,000,000 or more, except for portfolio transactions effected by
either of the Funds in the ordinary course of its business
(transactions within clauses (i) and (ii) and this clause (iii) each
being known individually as a "Business Combination");
(iv) any proposal as to the voluntary liquidation or dissolution of
either of the Funds or any amendment to either of the Funds'
Articles of Incorporation to terminate its existence; and
(v) any shareholder proposal as to specific investment decisions made or
to be made with respect to either Funds' assets.
However, with regard to LAQ, in the case of a Business Combination or a
voluntary liquidation proposal as described in clause (iv) above, a 75%
shareholder vote will not be required if the transaction is approved by a vote
of at least 75% of the Continuing Directors or if certain conditions regarding
the consideration paid by the person entering into, or proposing to enter into,
a Business Combination with the Fund and various other requirements are
satisfied. In that event, a majority of the votes entitled to be cast by LAQ
shareholders will be required to approve such transaction if it is a transaction
described in clause (i), a transaction described in clause (iii) that involves
substantially all of that Fund's assets or a transaction described in clause
(iv) and no shareholder vote will be required to approve such transaction if it
is any other Business Combination.
Similarly, with respect to LAM, in the case of a Business Combination or a
voluntary liquidation proposal as described in clause (iv) above, a 75%
shareholder vote will not be required if the transaction is approved by at least
75% of the Continuing Directors, or if certain conditions regarding the
consideration paid by the person entering into, or proposing to enter into, a
Business Combination with the Fund and various other conditions are met. In that
event, a majority of the votes entitled to be cast by its shareholders will be
required to approve certain transactions specified in clauses (i) and (iii) and
a transaction described in clause (iv) above and no shareholder vote is required
to approve certain other transactions described in clause (iii) above or a
transaction described in clause (ii) above.
Each Fund's By-laws contain provisions the effect of which is to prevent
matters, including nominations of directors, from being considered at
shareholders' meetings where the Fund has not received sufficient prior notice
of the matters.
The provisions described above could have the effect of depriving
shareholders of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
either Fund in a tender offer or similar transaction. In the opinion of each
Fund's Board of Directors, however, these provisions offer several possible
advantages, including:
62
<PAGE>
o they may require persons seeking control of either Fund to negotiate
with its management regarding the price to be paid for the shares
required to obtain such control,
o they promote continuity and stability, and
o they enhance each Fund's ability to pursue long-term strategies that
are consistent with its investment objectives.
The Board of Directors of each Fund has determined that the foregoing voting
requirements, which are generally greater than the minimum requirements under
Maryland law and the Investment Company Act, are in the best interests of
shareholders generally.
A "Continuing Director" is any member of the Board of Directors of either
Fund who:
o is not a person or affiliate of a person (other than an investment
company advised by the Fund's initial investment adviser or any of
its affiliates) who enters or proposes to enter into a Business
Combination with either Fund (such person or affiliate, an
"Interested Party"), and
o who has been a member of the Board of Directors of the respective
Fund for period of at least 12 months, or is a successor of a
Continuing Director who is unaffiliated with an Interested Party and
is recommended to succeed a Continuing Director by a majority of the
Continuing Directors then on the Board of Directors of the
respective Fund.
Removal of Directors. Directors of both Funds may be removed, with or
without cause, only by a vote of the holders of 75% of the shares of the
respective Fund entitled to be voted on that matter.
By-Laws. Each Fund's By-laws provide, among other things, that:
o a majority of the outstanding capital stock of such Fund is required
to request a special meeting of shareholders,
o certain advance notice requirements must be met in order for
shareholders to submit proposals at annual meetings and for
nominations by stockholders for election to the Board of Directors,
and
o the power to amend the By-laws is reserved to the Board of
Directors, except as otherwise required by the Investment Company
Act.
The full text of LAQ's Articles of Incorporation and By-Laws are on file
with the SEC and these documents, as may be amended from time to time, will
govern LAQ after the Merger.
Interest of Certain Persons. CSAM may be considered to have a financial
interest in the Merger, arising from the fact that the amount of its management
fee under the advisory agreement between CSAM and LAQ will increase as the
amount of LAQ's assets increases, and
63
<PAGE>
the amount of those assets will increase by virtue of the Merger. However, the
combined assets of both Funds, after giving effect to the Tender Offer (assuming
it is fully subscribed), will be reduced by approximately 24% based on the
Funds' net asset values as of December 31, 1999, and CSAM has agreed to
voluntarily waive a portion of its advisory fee payable by LAQ as described
above under "Information about the Merger - Reasons for the Merger." In
addition, assuming the Tender Offer is fully subscribed and based on the market
value of LAQ and the net asset values of the Funds, the blended investment
advisory fee (after fee waivers), using the breakpoint, would be 0.95% of the
surviving Funds' average weekly net assets after giving effect to the Merger and
would reduce the fee payable by LAQ. Accordingly, CSAM's aggregate advisory fees
will be reduced as a result of the Merger. For more information about the
reduction in CSAM's aggregate advisory fees, see "Proposal 2 (Latin America
Equity Fund Shareholders Only): Approval of New Investment Advisory Agreement."
64
<PAGE>
MANAGEMENT OF THE FUNDS
Directors and Principal Officers. The business and affairs of each Fund
are managed under the direction of that Fund's Board of Directors, and the day
to day operations are conducted through or under the direction of the officers
of that Fund. Although both Funds are Maryland corporations, Martin M. Torino, a
director of each Fund, is a resident of Argentina, and a substantial portion of
his assets is located outside of the United States. Consequently, it may be
difficult for shareholders to enforce, in United States courts, judgments
against him obtained in such courts predicated on the civil liability provisions
of the United States securities laws. In addition, there is doubt as to the
enforceability in Argentine courts of liabilities predicated solely upon the
United States securities laws, whether or not such liabilities are based upon
judgments of courts in the United States.
Directors and Executive Officers of LAQ are as follows:
<TABLE>
<CAPTION>
Shares Beneficially
Name and Address Owned on June 30, 2000 Position with the Fund
---------------- ---------------------- ----------------------
<S> <C> <C>
Dr. Enrique R. Arzac(1)(2) Director
Columbia University Graduate
School of Business
New York, New York 10028
James J. Cattano(1)(2)............. Director
53 Old Field Point Road
Greenwich, Connecticut 06830
George W. Landau(1)(2)............. Director
Two Grove Isle Drive
Coconut Grove, Florida 33133
Martin M. Torino(1)(2) ............ Director
L.N. Alen
986 9th Floor
1001 Buenos Aires, Argentina
William W. Priest, Jr. (1) ........ Chairman of the Board
466 Lexington Avenue
16th Floor
New York, New York 10017
Richard W. Watt(1) ................ President and Director
466 Lexington Avenue
16th Floor
New York, New York 10017
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially
Name and Address Owned on June 30, 2000 Position with the Fund
---------------- ---------------------- ----------------------
<S> <C> <C>
Emily Alejos(1).................... Chief Investment
466 Lexington Avenue Officer
16th Floor
New York, New York 10017
Yarek Aranowicz(1)................. Investment Officer
466 Lexington Avenue
16th Floor
New York, New York 10017
Hal Liebes(1)...................... Senior Vice President
466 Lexington Avenue
16th Floor
New York, New York 10017
Michael A. Pignataro(1)............ Chief Financial
12 East 49th Street Officer and Secretary
Tower 49
New York, New York 10017
</TABLE>
----------
(1) Also serves in the same capacity for LAM.
(2) Indicates Non-interested Directors of LAQ and members of its audit
committee. These directors, along with Mr. Riordan Roett, are also
Non-interested Directors of LAM and members of its audit committee.
Dr. Enrique R. Arzac, 58, is a Professor of Finance and Economics at the
Graduate School of Business, Columbia University (1971-present). Dr. Arzac is
also a Director of nine other CSAM-advised investment companies, and he is a
Director of The Adams Express Company and Petroleum and Resources Corporation.
James J. Cattano, 56, is President of Primary Resource Inc. (an
international trading and chemical processing company specializing in the sale
of agricultural and industrial commodities throughout Latin American markets)
(10/96-present). He was President of Atlantic Fertilizer & Chemical Company (an
international trading company specializing in the sale of agricultural
commodities in Latin American markets) (10/91-10/96) and President of Diamond
Fertilizer & Chemical Corporation, a subsidiary of Norsk Hydro A.S. (a Norwegian
agriculture, oil and gas, light metals and petro-chemical company) (1/84-10/91).
Mr. Cattano is also a Director of four other CSAM-advised investment companies.
George W. Landau, 80, is Senior Advisor, Latin America Group, The Coca
Cola Company (since 1988). Ambassador Landau was President of the Americas
Society and Council of the Americas (7/85-10/93). He was the United States
Ambassador to Venezuela (1982-1985), United States Ambassador to Chile
(1977-1982) and United States Ambassador to Paraguay
66
<PAGE>
(1972-1977). Ambassador Landau is also a Director of five other CSAM-advised
investment companies, and he is a Director of Emigrant Savings Bank and GAM
Funds, Inc.
Martin M. Torino, 50, is Chairman of the Board of Ingenio y Refineria San
Martin Del Tabacal S.A. since August 1996 and the Executive Director of TAU S.A.
(a commodities trading firm) since November 1990. Mr. Torino was President of
DYAT S.A. (10/93-present) and an Executive Vice President of Louis Dreyfus Sugar
Company, Inc. (a commodities trading firm) from 1984 to 1990. Mr. Torino is also
a Director of four other CSAM-advised investment companies.
William W. Priest, Jr., 58, has been Chairman and Managing Director of
CSAM since May 2000. Prior to May 2000, Mr. Priest was Chairman, Chief Executive
Officer and Executive Director of CSAM and Chairman - Management Committee of
CSAM. He is a Director of fifty-five other CSAM-advised investment companies.
Richard W. Watt, 41, has been a Managing Director of CSAM since July 1996.
He was a Senior Vice President of CSAM (8/95-7/96), the Head of Emerging Markets
Investments and Research at Gartmore Investment Limited (11/92-6/95) and a
Director of Kleinwort Benson International Investment (5/87-10/92). He is a
Director of six other CSAM-advised investment companies.
Emily Alejos, 36, has been a Director of CSAM since January 1999. She was
Vice President of CSAM (4/97-1/99) and Vice President of Bankers Trust Co.
(8/93-3/97). Ms. Alejos is also Chief Investment Officer of The Brazilian Equity
Fund, Inc. and LAM, Inc. and Investment Officer of The Chile Fund, Inc. and The
Emerging Markets Telecommunications Fund, Inc.
Yarek Aranowicz, 36, has been a Vice President of CSAM since March 1998.
He was a Director of Research for Europe and the Middle East, TransNational
Research Corporation (12/95-2/98) and an Analyst at John Hancock Financial
Services (5/92-6/95).
Hal Liebes, 35, has been a Managing Director and General Counsel of CSAM
since December 1999. He was Director and General Counsel of CSAM (3/97-12/99).
Mr. Liebes was Vice President and Counsel for Lehman Brothers, Inc. (6/96-3/97),
Vice President and Legal Counsel for CSAM (6/95-6/96) and Chief Compliance
Officer for CS First Boston Investment Management (3/94-6/95).
Michael A. Pignataro, 40, has been a Vice President of CSAM since December
1995. He was an Assistant Vice President and the Chief Administrative Officer
for Investment Companies of CSAM (9/89 - 12/95). Mr. Pignataro is also the Chief
Financial Officer and Secretary of LAM, The Chile Fund, Inc., The Brazilian
Equity Fund, Inc., The Emerging Markets Telecommunications Fund, Inc., The First
Israel Fund, Inc. and The Emerging Markets Infrastructure Fund, Inc. and Chief
Financial Officer and Assistant Secretary of The Indonesia Fund, Inc.
Mr. Torino is a resident of Argentina and a substantial portion of his
assets is located in Argentina. Mr. Torino has not appointed an agent for
service of process in the United States.
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<PAGE>
All the Directors and Officers of LAQ are also Directors and Officers of
LAM. However, one director of LAM, Riodan Roett, is not a director of LAQ.
Riordan Roett, 60, is the Sarita and Don Johnston Professor of Political
Science at The John Hopkins University since 1973. He is the Director of ten
SBAM-advised investment companies.
Each Fund pays each of its directors who is not a director, officer,
partner, co-partner or employee of CSAM or any affiliate thereof an annual fee
of $5,000 plus $500 for each Board of Directors meeting attended. In addition,
each Fund will reimburse those directors for travel and out-of-pocket expenses
incurred in connection with Board of Directors meetings. The aggregate
remuneration paid to directors by LAQ and LAM during fiscal year 1999 was
$42,000, and $49,500, respectively.
On May 8, 2000, the Board of Directors of LAQ and LAM unanimously approved
a proposal by the Non-interested Directors to partially compensate
Non-interested Directors in shares of the respective Funds. Under this new
policy, the Non-interested Directors will receive 50% of their annual retainer
in the form of shares purchased by the respective Fund in the open market.
Paying directors' fees in shares is intended to align the interests of the
Non-interested Directors with those of each Fund's shareholders.
The Articles of Incorporation and By-laws of each Fund provide that the
Fund will indemnify directors and officers and may indemnify employees or agents
of the Fund against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their positions with the
Fund to the fullest extent permitted by law. In addition, each Fund's Articles
of Incorporation provide that the Fund's directors and officers will not be
liable to shareholders for money damages, except in limited instances.
Each of the Non-interested Directors of the Funds is also party to an
Indemnification Agreement with the Fund or Funds as to which he serves as a
director providing for contractual rights of indemnity and advancement of
expenses. However, nothing in the Articles of Incorporation, the By-laws or the
Indemnification Agreements of either Fund protects or indemnifies a director,
officer, employee or agent against any liability to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office. Insurance obtained by either Fund shall not protect or purport
to protect officers or directors or the investment adviser of that Fund against
any liability to the Fund or its shareholders to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of their obligations and duties.
Investment Managers. CSAM, located at 466 Lexington Avenue, 16th Floor,
New York, New York 10017, is the investment manager to both LAQ and LAM pursuant
to investment advisory agreements with each.
CSAM is an indirect wholly-owned U.S. subsidiary of Credit Suisse Group.
Credit Suisse Group is a global financial services company which provides a
comprehensive range of banking and insurance products. As of December 31, 1999,
Credit Suisse Group had
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<PAGE>
approximately $203 billion of global assets under management. The principal
business address of Credit Suisse Group is Paradeplatz 8, CH 8070, Zurich,
Switzerland.
CSAM is a diversified asset manager, handling global equity, balanced,
fixed income and derivative securities accounts for private individuals, as well
as corporate pension and profit-sharing plans, state pension funds, union funds,
endowments and other charitable institutions. As of December 31, 1999, CSAM
managed approximately $72.0 billion in assets. CSAM is registered as an
investment adviser under the Investment Advisers Act of 1940, or the Advisers
Act. For information regarding a proposed new investment advisory agreement with
CSAM, see "Proposal 2 (Latin America Equity Shareholders Only): Approval of New
Investment Advisory Agreement."
CSAM has sole investment discretion for each Fund's assets (other than
Sovereign Debt, in the case of LAM) under the supervision of each Fund's Board
of Directors and in accordance with each Fund's stated policies. CSAM will
select investments for each Fund and will place purchase and sale orders on
behalf of the Funds. CSAM, together with the Boards of the Funds (and SBAM, in
the case of LAM), monitors the services provided by Celfin, the Funds' Chilean
sub-adviser. For information about each Fund's investment advisory fees,
including amounts paid for the year ended December 31, 1999, see "Synopsis--Fees
and Expenses--The Latin America Equity Fund" and "Synopsis--Fees and
Expenses--The Latin America Investment Fund."
CSAM's executive officers and directors are as follows: William W. Priest,
Jr., Richard W. Watt, Hal Liebes (all of whom are also executive officers or
directors of the Funds), James P. McCaughan, Laurence R. Smith, Elizabeth B.
Dater, Eugene L. Podsiadlo, Sheila N. Scott, Timothy T. Taussig, James W.
Bernaiche, Robert D. Birnbaum, Susan Black, Steven D. Bleiberg, Jo Ann Corkran,
Alain G. De Coster, Gregg M. Diliberto, Paul N. Edwards, Harold W. Ehrlich, Kyle
F. Frey, Jeffrey A. Geller, Robert S. Janis, Kevin K. Keady, Scott T. Lewis,
Richard J. Lindquist, Brady T. Lipp, Stephen J. Lurito, Lynn S. Martin, Jack
Morgenstern, Maryanne S. Mullarkey, Terry S. Newman, Sharon B. Parente, Roger
Reinlieb, Eric N. Remole, Donald C. Schultheis, Harold E. Sharon, Eugene J.
Siembieda, Mark K. Silverstein, Barbara A. Tarmy and Donna M. Vandenbulcke.
In addition, Emily Alejos, the Funds' Chief Investment Officer, Yarek
Aranowicz, the Funds' Investment Officer, Michael A. Pignataro, the Funds' Chief
Financial Officer and Secretary, Rocco A. Del Guercio, a Vice President of each
Fund, and Robert M. Rizza, the Funds' Treasurer, are also employees of CSAM.
SBAM serves as LAM's investment adviser with respect to Sovereign Debt
pursuant to an advisory agreement with the Fund. SBAM, which is registered as an
investment adviser under the Advisers Act, is a wholly owned subsidiary of
Salomon Holding Company Inc, which is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc., which is in turn a wholly owned subsidiary of Citigroup
Inc. SBAM is located at Seven World Trade Center, New York, New York 10048.
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<PAGE>
SBAM provides a broad range of fixed income and equity investment advisory
services for its individual and institutional clients located around the world.
As of December 31, 1999 SBAM managed approximately $25.3 billion in assets.
SBAM has sole investment discretion for the Latin American Investment Fund
with respect to Sovereign Debt and makes all decisions affecting the Fund's
holdings of Sovereign Debt under the supervision of the Fund's Board of
Directors and in accordance with the Fund's stated investment policies. In
addition, SBAM makes available to CSAM international economic information and
analysis with particular emphasis on macroeconomic issues that may affect the
overall economic development of Latin American countries within the
international economic community. SBAM also furnishes CSAM with investment
advice regarding global debt securities. SBAM will not serve as an investment
adviser to LAQ if the Merger is consummated. For information about the fees paid
to SBAM, see "Synopsis--Fees and Expenses--The Latin America Investment Fund."
Portfolio Management. Emily Alejos, who is a director of CSAM and who held
the office of Vice President of CSAM from April 1997 to January 1999, is
primarily responsible for management of each Fund's assets, except LAM's
investments in Sovereign Debt which are managed by SBAM. James Craige, who is a
Managing Director of SBAM, is primarily responsible for management of LAM's
assets with respect to Sovereign Debt. Mr. Craige, who joined SBAM in 1992, is a
Senior Portfolio Manager responsible for SBAM's portfolios that invest in high
yield sovereign debt and high yield corporate securities.
Investment Sub-Adviser. Under the supervision of the Board of Directors
and CSAM, in the case of LAQ, and the Board of Directors, CSAM and SBAM, in the
case of LAM, Celfin provides a variety of services, including:
o furnishing advice and making recommendations regarding the purchase
and sale of securities traded in the Chilean market,
o providing CSAM (and SBAM, in the case of LAM) with statistical,
research and other factual data for their use in connection with
each Fund's investment program,
o identifying regulatory and other governmental requirements
applicable to each Fund in connection with each Fund's investment
activities in Chile,
o monitoring the execution of transactions and the settlement and
clearance of the Fund's securities transactions, and
o providing information regarding corporate actions, repatriation
restrictions, current restrictions and other matters as may be
requested by either Fund or CSAM (or SBAM, in the case of LAM) from
time to time.
CSAM (or SBAM, in the case of LAM) may retain the services of consultants
and, with the approval of the shareholders and the Board of Directors of each
Fund, including a majority of each Fund's Non-interested Directors, investment
sub-advisers with respect to Latin American
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<PAGE>
securities markets in addition to Chile, at no additional costs to the Funds,
when CSAM (or CSAM and SBAM, in the case of LAM) determines it to be
appropriate.
Currently, Celfin is the only sub-adviser to either Fund. Celfin serves as
each Fund's investment sub-adviser with respect to Chilean investments. Celfin,
which is registered as an investment adviser under the Advisers Act, was
organized in March 1989 under the laws of the Republic of Chile and is located
at Apoquindo 3721, Piso 19, Santiago, Chile. Celfin, through a series of Chilean
partnerships, is ultimately controlled by its three Managing Directors, Mr. Juan
Andres Camus, Mr. Jorge Diego Errazuriz and Mr. Alejandro Montero.
In addition to its services as investment sub-adviser, as described above,
Celfin renders, on behalf of Funds, certain administrative and accounting
services to the Chilean administrator pursuant to sub-administration agreements.
Fees for these services are paid by the Chilean administrator and Celfin is also
reimbursed by the Chilean administrator for certain expenses incurred in
connection with services rendered under the Chilean Sub-Administration
Agreements. For information about the fees paid to Celfin, see "Synopsis--Fees
and Expenses--The Latin America Equity Fund" and "Synopsis--Fees and
Expenses--The Latin America Investment Fund."
Celfin is domiciled in Chile and substantially all of its assets are
located in Chile. Although Celfin is subject to service of process in the United
States, it may be difficult for shareholders to enforce, in United States
courts, judgments against Celfin obtained in such courts predicated on the civil
liability provisions of the United States securities laws. In addition, there is
doubt as to the enforceability in Latin American courts of liabilities
predicated solely upon the United States securities laws, whether or not such
liabilities are based upon judgments of courts in the United States.
Administrator. Bear Stearns Funds Management Inc. serves as each Fund's
U.S. administrator pursuant to an administrative agreement with each Fund. BSFM
is located at 575 Lexington Avenue, New York, New York 10022. For information
about fees paid to BSFM, see "Synopsis--Fees and Expenses--The Latin America
Equity Fund" and "Synopsis--Fees and Expenses--The Latin America Investment
Fund."
BSFM provides office facilities and personnel adequate to perform the
following services for each Fund:
o oversight of the determination and publication of each Fund's net
asset value in accordance with the respective Fund's policy as
adopted from time to time by the respective Board of Directors,
o maintenance of the books and records of each Fund as required under
the Investment Company Act,
o preparation of each Fund's U.S. federal, state and local income tax
returns,
o preparation of financial information for each Fund's proxy
statements and semiannual and annual reports to shareholders, and
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<PAGE>
o preparation of certain of each Fund's reports to the SEC.
As of May 31, 2000, BSFM provided accounting and/or administrative
services for 29 investment companies and investment partnerships, with combined
total assets of approximately $4.2 billion.
Each Fund has retained CSAM to provide certain administrative and
shareholder services to the respective Fund that are not provided by BSFM,
subject to the supervision and direction of the respective Board of Directors of
the respective Fund pursuant to an administrative services agreement with CSAM.
These services include:
o furnishing certain internal executive and administrative services,
responding to shareholder inquiries,
o acting as liaison between the respective Fund and its various
service providers,
o furnishing corporate secretarial services, which include assisting
in the preparation of materials for meetings of the Board of
Directors,
o coordinating the preparation of proxy statements, reports to
shareholders and filings with state blue sky authorities,
o assisting in the preparation of tax returns, and
o generally assisting in monitoring and developing compliance
procedures for each Fund.
CSAM is reimbursed by each Fund for costs incurred on behalf of the Fund
(up to $20,000 per annum). Costs incurred on behalf of two or more funds for
which CSAM provides administrative and shareholder services are apportioned
among such funds according to their respective net asset values. Each Fund also
reimburses CSAM for any out-of-pocket expenses in providing these services to
each Fund, including postage, telephone and other telecommunications charges and
duplicating costs. For information regarding fees paid to CSAM for
administrative services for year ended December 31, 1999, see "Synopsis--Fees
and Expenses--The Latin America Equity Fund" and "Synopsis--Fees and
Expenses--The Latin America Investment Fund."
Chilean Administrator. Under Chilean law, each Fund is required to have an
administrator in Chile. AFICE serves as each Fund's Chilean administrator
pursuant to an administrative agreement with each Fund. The Chilean
administrator, a Chilean corporation located at Apoquindo 3721, Piso 19,
Santiago, Chile, a subsidiary of CSAM, performs various services for each Fund,
including:
o maintaining the general ledger and preparing financial statements
required for each Fund pursuant to Chilean law and regulations,
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<PAGE>
o making applications to the Central Bank of Chile for remittances of
dividends, interest, net realized capital gains and capital outside
Chile,
o withholding Chilean taxes due on amounts remitted abroad on account
of dividends, interest and net realized capital gains or otherwise,
o acting as each Fund's representative in Chile, and
o providing clerical assistance in connection with Chilean
investments.
For information regarding fees paid to AFICE, see "Synopsis--Fees and
Expenses--The Latin America Equity Fund" and "Synopsis--Fees and Expenses--The
Latin America Investment Fund."
Estimated Expenses. Except as otherwise provided in the administrative
services agreements, the Chilean administration agreements and the Chilean
sub-administration agreements, CSAM, SBAM (in the case of LAM), Celfin, BSFM and
AFICE are each obligated to pay expenses associated with providing the services
contemplated by the agreements to which they are parties, including compensation
of and office space for their respective officers and employees connected with
investment and economic research, trading and investment management and
administration of each Fund, as well as the fees of all directors of each Fund
who are affiliated with those companies or any of their affiliates. Each Fund
pays all other expenses incurred in the operation of that Fund including, among
other things:
o expenses for legal and independent accountants' services,
o costs of printing proxies, stock certificates and shareholder
reports,
o charges of the custodians, any sub-custodians and the transfer and
dividend-paying agent's expenses in connection with the Fund's
Dividend Reinvestment and Cash Purchase Plan,
o U.S. SEC fees and fees of Latin American regulatory bodies,
o fees and expenses of unaffiliated directors,
o accounting and pricing costs,
o membership fees in trade associations,
o fidelity bond coverage for the Fund's officers and employees,
o directors' and officers' errors and omissions insurance coverage,
o interest,
o brokerage costs and stock exchange fees,
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<PAGE>
o taxes,
o stock exchange listing fees and expenses,
o expenses of qualifying the Fund's shares for sale in various states
and foreign jurisdictions,
o litigation, and
o other extraordinary or non-recurring expenses and other expenses
properly payable by the Fund.
Portfolio Managers. If the Merger is consummated, it is anticipated that
Emily Alejos will continue as the Chief Investment Officer of LAQ. For more
information regarding Ms. Alejos, see "--Directors and Officers."
Custodian. Brown Brothers Harriman & Co., 40 Water Street, Boston, MA
02109, is the custodian for both Funds' U.S. and foreign assets.
Transfer Agent and Registrar. Fleet National Bank c/o EquiServe, L.P.,
P.O. Box 1865, Mail Stop 45-02-62, Boston, MA 02105 acts as the transfer agent
and registrar of each Fund.
Control Persons and Principal Holders of Securities. The following table
shows certain information based on filings made with the SEC on June 7, 2000
concerning persons who may be deemed beneficial owners of 5% or more of the
shares of common stock of either Fund because they possessed or shared voting or
investment power with respect to the shares of that Fund:
<TABLE>
<CAPTION>
Number of Shares Percent
Fund Name and Address Beneficially Owned of Shares
---- ---------------- ------------------ ---------
<S> <C> <C> <C>
LAQ President and Fellows of Harvard
College........................ 1,394,800 19.3%
c/o Harvard Management Company,
Inc.
600 Atlantic Avenue
Boston MA 02210
LAM President and Fellows of Harvard
College........................ 1,694,600 25.7%
c/o Harvard Management Company,
Inc.
600 Atlantic Avenue
Boston MA 02210
</TABLE>
It is not possible to calculate President and Fellows of Harvard College's
ownership of the outstanding shares of common stock of LAQ after consummation of
the Tender Offer and the Merger because the Fund is unable to determine:
o the amount of President and Fellows of Harvard College's
participation in the Tender Offer;
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<PAGE>
o the affect of the pro rata allocation on the amount of shares
tendered by President and Fellows of Harvard College, assuming the
Tender Offer is fully subscribed; and
o the net asset value of each Fund on the Effective Date.
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<PAGE>
EXPERTS
Each Fund has selected PricewaterhouseCoopers LLP, 2400 Eleven Penn
Center, Philadelphia, PA 19103, as its independent public accountants who will
audit its financial statements.
REQUIRED VOTE
The Merger has been approved by 75% of the Continuing Directors of each
Fund. Accordingly, under the Articles of Incorporation of each Fund, approval of
the Merger requires the affirmative vote of the holders of a majority of the
outstanding shares of common stock of each Fund. Subject to such approval, the
Merger is currently scheduled to be consummated shortly after completion of the
Tender Offer, but may be postponed by mutual agreement of the Funds. The Board
of Directors of each Fund recommends that the shareholders of each Fund vote in
favor of this Proposal 1.
LEGAL PROCEEDINGS
There are currently no material legal proceedings to which the Funds are a
party.
LEGAL OPINIONS
Certain legal matters in connection with the Merger will be passed upon
for the Funds by Willkie Farr & Gallagher. Willkie Farr & Gallagher will rely as
to certain matters of Maryland law on the opinion of Venable, Baetjer and
Howard, LLP.
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<PAGE>
PROPOSAL 2 (LATIN AMERICA EQUITY FUND SHAREHOLDERS ONLY):
APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENT
BACKGROUND
CSAM currently acts as LAQ's investment adviser pursuant to an investment
advisory agreement between CSAM and the Fund dated October 22, 1991. Under the
advisory agreement, CSAM is contractually entitled to receive a quarterly fee
computed monthly at an annual rate of 1.25% of the first $100 million of the
Fund's average weekly net assets, 1.15% of the next $50 million and 1.05% of
amounts over $150 million. From this fee, CSAM provides compensation to Celfin,
the Fund's Chilean sub-adviser, equal to 0.25% of the Fund's average weekly net
assets invested in Chilean securities. CSAM waives that portion of its advisory
fee previously payable to the Fund's former sub-advisers.
On July __, 2000, the Fund's Board of Directors approved a proposal by
CSAM to enter into a new investment advisory agreement, or the New Investment
Advisory Agreement. The New Investment Advisory Agreement will be substantially
similar to the current investment advisory agreement except with regard to the
method used to calculate the investment advisory fees. Instead of basing the fee
on the Fund's average weekly net asset value, the New Investment Advisory
Agreement will calculate fees based on the lower of the average weekly market
value of the Fund's outstanding shares or the Fund's average weekly net asset
value. Assuming that the Fund's shares trade at a discount to net asset value
from time to time, the effect of this amendment will be to reduce the Fund's
advisory fee, thereby lowering its expense ratio.
If the New Investment Advisory Agreement is not approved, the current
investment advisory agreement will remain in effect. CSAM, however, has
voluntarily agreed to waive any amounts payable in excess of the proposed new
fee structure effective July 1, 2000 to the date of LAQ's special meeting of
shareholders. Thereafter, the higher fee reflected in the current agreement
would once again take effect.
A description of the proposed New Investment Advisory Agreement is
provided below under "-- The New Investment Advisory Agreement." This
description is only a summary and is qualified by reference to the form of
investment advisory agreement attached hereto as Exhibit B. THE NEW INVESTMENT
ADVISORY AGREEMENT IS SUBSTANTIALLY SIMILAR TO THE REDUCED CURRENT INVESTMENT
ADVISORY AGREEMENT EXCEPT WITH RESPECT TO THE REDUCED FEE STRUCTURE.
BOARD RECOMMENDATION
On July __, 2000, at an in-person meeting of the Board specifically called
for this purpose, the Board of Directors of the Fund, including the
Non-interested Directors, unanimously approved the New Investment Advisory
Agreement and recommended its approval to shareholders of the Fund.
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<PAGE>
BOARD CONSIDERATIONS; REASONS FOR
THE NEW INVESTMENT ADVISORY AGREEMENT
As discussed in "Proposal 1 (Both Funds): Approval of the Merger Agreement
and Plan of Reorganization Pursuant to which The Latin America Investment Fund
Will Merge with and into The Latin America Equity Fund--Information About the
Merger," the Board of Directors of the Fund has been concerned with the size of
the discount to net asset value at which the Fund's shares have traded on the
NYSE. The Board has discussed and considered various alternative strategies to
address the discount at meetings held on February 8, 2000, April 6, 2000 and May
8, 2000. For a description of these strategies, see "Proposal 1 (Both Funds):
Approval of the Merger Agreement and Plan of Reorganization Pursuant to which
The Latin America Investment Fund Will Merge with and into The Latin America
Equity Fund--Information About the Merger--Reasons for the Merger."
At the May 8, 2000 board meeting, CSAM proposed changing the fee
structure. Changing the methodology by which the current investment advisory
fees are calculated as described above would:
o reduce the investment advisory fee, thereby lowering the Fund's
overall expense ratio, and
o have an on-going accretive impact on net asset value.
In addition, the Board of Directors believes that calculating the
investment advisory fee with reference to the stock price (market value) when
the Fund's shares are trading at a discount, will more closely align the
interests of CSAM with the interests of the Fund's shareholders in enhancing the
Fund's market value and narrowing the market discount, recognizing that CSAM
does not and cannot control the discount at which Fund shares trade.
The Board of Directors also considered and evaluated the proposed New
Investment Advisory Agreement and determined that, except for the fee structure,
the New Investment Advisory Agreement is not materially different from the
current investment advisory agreement. CSAM has confirmed that the level and
quality of the services provided to the Fund will not change if the New
Investment Advisory Agreement is approved by the Fund's shareholders.
INFORMATION CONCERNING CREDIT SUISSE GROUP AND CSAM
For information about the Fund's investment adviser, see "Proposal 1 (Both
Funds): Approval of the Merger Agreement and Plan of Reorganization Pursuant to
which The Latin America Investment Fund Will Merge with and into The Latin
America Equity Fund--Management of the Funds."
DESCRIPTION OF CURRENT INVESTMENT ADVISORY AGREEMENT
Under the current investment advisory agreement, CSAM provides the Fund
with ongoing investment advisory services. CSAM:
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<PAGE>
o manages the Fund's assets in accordance with the Fund's investment
objective and policies,
o selects investments for the Fund,
o places purchase and sale orders on behalf of the Fund, and
o together with the Board of Directors of the Fund, monitors the
performance of Celfin.
CSAM also provides investment research and supervision of the Fund's
investments and conducts a continual program of investment, evaluation and if
appropriate, sale and reinvestment of the Fund's assets. Furthermore, CSAM also
provides administrative services to the Fund pursuant to a separate
administrative agreement. For more information about the administrative services
CSAM provides to the Fund pursuant to this agreement, see "Proposal 1 (Both
Funds): Approval of the Merger Agreement and Plan of Reorganization Pursuant to
which The Latin America Investment Fund Will Merge with and into The Latin
America Equity Fund--Management of the Funds--Administrator."
CSAM is responsible for all expenses incurred in connection with the
performance of its services under the current investment advisory agreement,
including fees payable to any sub-advisers. The Fund is responsible for all
other expenses, including those described under "Proposal 1 (Both Funds):
Approval of the Merger Agreement and Plan of Reorganization Pursuant to which
The Latin America Investment Fund Will Merge with and into The Latin America
Equity Fund--Management of the Funds--Estimated Expenses."
CSAM is contractually entitled to receive a quarterly investment advisory
fee in return for the services provided by CSAM to the Fund computed monthly at
an annual rate of 1.25% of the first $100 million of the Fund's average weekly
net assets, 1.15% of the next $50 million and 1.05% of amounts over $150
million. CSAM waives that portion of its advisory fee previously payable to the
Fund's former sub-advisers which aggregates approximately 0.25% of the Fund's
average weekly net assets. For the year ended December 31, 1999, CSAM earned
$1,237,005 for advisory services, of which CSAM waived $75,649. In addition,
CSAM was reimbursed $12,029 for administrative services rendered to the Fund for
the year ended December 31, 1999.
The current investment advisory agreement provides that CSAM shall not be
liable, and shall be indemnified, for error of judgment or mistake of law or for
any loss suffered by the Fund in connection with matters to which such agreement
relates, except liability resulting from willful misfeasance, bad faith or gross
negligence on the part of CSAM in the performance of its duties or reckless
disregard of its obligations and duties under the current investment advisory
agreement. CSAM is entitled to receive advances from the Fund for payment of the
reasonable expenses it incurs in connection with any matter as to which it seeks
indemnification in the manner and to the fullest extent permissable under the
MGCL.
The current investment advisory agreement may be terminated without
penalty upon 60 days' written notice by the Board of Directors or the vote of
the holders of a majority of the Fund's shares. CSAM may terminate this
agreement, without penalty, upon 90 days' written notice. This agreement
terminates automatically in the event of its assignment.
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<PAGE>
THE NEW INVESTMENT ADVISORY AGREEMENT
Shareholders are being asked to approve or disapprove the New Investment
Advisory Agreement. The New Investment Advisory Agreement is substantially
similar to the current investment advisory agreement except with regard to the
fee structure.
The New Investment Advisory Agreement will be dated as of the date
shareholder approval is granted. The agreement will be in effect for an initial
two-year term, ending on the second anniversary of the date on which shareholder
approval is granted. The agreement may continue thereafter from year to year
only if specifically approved at least annually by either (i) the Board of
Directors of the Fund or (ii) the "vote of a majority of the outstanding voting
securities" of the Fund, and in either case, the vote of a majority of the
Non-interested Directors, cast in person at a meeting called for such purpose.
In the event that shareholders do not approve the New Investment Advisory
Agreement, the current investment advisory agreement will remain in effect and
the voluntary CSAM fee waiver based on the market value of the Fund's
outstanding shares will terminate.
DIFFERENCES BETWEEN THE CURRENT AND
THE NEW INVESTMENT ADVISORY AGREEMENT
The New Investment Advisory Agreement is substantially similar to the
current investment advisory agreement except with respect to the fee structure.
The New Investment Advisory Agreement would change the method by which the
investment advisory fees are calculated. Under the current investment advisory
agreement, CSAM's fees are based on the average weekly net asset value of the
Fund, whereas, under the New Investment Advisory Agreement, fees will be based
on the lower of the average weekly market value of the Fund's outstanding shares
and its average weekly net asset value.
The following table sets forth the investment advisory fee paid for the
year ended December 31, 1999 under the current investment advisory agreement and
the amount that would have been paid had the New Investment Advisory Agreement
been in effect for 1999. Also shown is the difference between the two amounts in
dollars and as a percentage of the fee paid under the existing agreement.
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<PAGE>
--------------------------------------------------------------------------------
Fee Payable Under Fee Payable Under Reduction in Fee
Current Agreement(1) New Agreement $ as %
--------------------------------------------------------------------------------
$1,161,356 $887,857 $273,499 23.55%
--------------------------------------------------------------------------------
----------
(1) The percentages in the above table reflect the actual amounts paid by the
Fund to CSAM after deducting a portion of such fees previously payable to the
Fund's former sub-advisers waived by CSAM. CSAM is contractually entitled to
receive 1.25% of the first $100 million of the Fund's average weekly assets,
1.15% of the next $50 million and 1.05% of amounts over $150 million. If the
Fund had paid CSAM the fee which it is contractually entitled to receive, the
reduction in fees as a percentage would be 22.11% for the year ended December
31, 1999.
REQUIRED SHAREHOLDER VOTE
Approval of the New Investment Advisory Agreement requires the affirmative
vote of a "majority of the outstanding voting securities" of the Fund as defined
under "General."
IN THE JUDGMENT OF THE BOARD OF DIRECTORS OF THE FUND, THE NEW INVESTMENT
ADVISORY AGREEMENT SERVES THE BEST INTERESTS OF THE FUND AND ITS SHAREHOLDERS,
AND THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" PROPOSAL 2.
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PROPOSAL 3 (LATIN AMERICA EQUITY FUND SHAREHOLDERS ONLY):
APPROVAL OF NEW INVESTMENT SUB-ADVISORY AGREEMENT
BACKGROUND
Celfin currently acts as LAQ's investment sub-adviser pursuant to an
investment sub-advisory agreement among Celfin, CSAM and the Fund dated October
22, 1991. Under the sub-advisory agreement, CSAM provides compensation to
Celfin, from the advisory fee payable by the Fund to CSAM, equal to 0.25% of the
Fund's average weekly net assets invested in Chilean securities.
On July __, 2000, the Fund's Board of Directors approved a proposal by
Celfin to enter into a new investment sub-advisory agreement, or the New
Investment Sub-Advisory Agreement. The New Investment Sub-Advisory Agreement
will be substantially similar to the current investment sub-advisory agreement
except that the calculation of the investment sub-advisory fees will be reduced
by the discount from net asset value at which the Fund's outstanding shares are
trading. Assuming that the Fund's shares trade at a discount to net asset value
from time to time, the effect of this amendment will be to reduce the Fund's
sub-advisory fee, thereby lowering its expense ratio.
If the New Investment Sub-Advisory Agreement is not approved, the current
investment sub-advisory agreement will remain in effect. Celfin, however, has
voluntarily agreed to waive any amounts payable in excess of the proposed new
fee structure effective July 1, 2000 to the date of LAQ's special meeting of
shareholders. Thereafter, the higher fee reflected in the current agreement
would once again take effect.
A description of the proposed New Investment Sub-Advisory Agreement is
provided below under "-- The New Investment Sub-Advisory Agreement." This
description is only a summary and is qualified by reference to the form of
investment sub-advisory agreement attached hereto as Exhibit C. THE NEW
INVESTMENT SUB-ADVISORY AGREEMENT IS SUBSTANTIALLY SIMILAR TO THE CURRENT
INVESTMENT SUB-ADVISORY AGREEMENT EXCEPT WITH RESPECT TO THE REDUCED FEE
STRUCTURE.
BOARD RECOMMENDATION
On July __, 2000, at an in-person meeting of the Board specifically called
for this purpose, the Board of Directors of the Fund, including the
Non-interested Directors, unanimously approved the New Investment Sub-Advisory
Agreement and recommended its approval to shareholders of the Fund.
BOARD CONSIDERATIONS; REASONS FOR
THE NEW INVESTMENT SUB-ADVISORY AGREEMENT
As discussed in "Proposal 1 (Both Funds): Approval of the Merger Agreement
and Plan of Reorganization Pursuant to which The Latin America Investment Fund
Will Merge with and into The Latin America Equity Fund--Information About the
Merger," the Board of Directors of the Fund has been concerned with the size of
the discount to net asset value at which the Fund's shares have traded on the
NYSE. The Board has discussed and considered various alternative strategies to
address the discount at meetings held on February 8, 2000, April 6, 2000 and May
8,
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2000. For a description of these strategies, see "Proposal 1 (Both Funds):
Approval of the Merger Agreement and Plan of Reorganization Pursuant to which
The Latin America Investment Fund Will Merge with and into The Latin America
Equity Fund--Information About the Merger--Reasons for the Merger."
At the July __, 2000 board meeting, the Board of Directors reviewed a
proposal by Celfin to change the fee structure. Changing the methodology by
which the current investment sub-advisory fees are calculated as described above
would:
o reduce the investment advisory fee, thereby lowing the Fund's
overall expense ratio, and
o have an on-going accretive impact on net asset value.
In addition, the Board of Directors believes that calculating the
investment sub-advisory fee with reference to the stock price value when the
Fund's shares are trading at a discount, will more closely align the interests
of Celfin with the interests of the Fund's shareholders in enhancing the Fund's
market value and narrowing the market discount.
The Board of Directors also considered and evaluated the proposed New
Investment Sub-Advisory Agreement and determined that, except for the fee
structure, the New Investment Sub-Advisory Agreement is not materially different
from the current investment sub-advisory agreement. Celfin has confirmed that
the level and quality of the services provided to the Fund will not change if
the New Investment Sub-Advisory Agreement is approved by the Fund's
shareholders.
INFORMATION CONCERNING CELFIN
For information about the Fund's investment sub-adviser, see "Proposal 1
(Both Funds): Approval of the Merger Agreement and Plan of Reorganization
Pursuant to which The Latin America Investment Fund Will Merge with and into The
Latin America Equity Fund--Management of the Funds--Investment Sub-Adviser."
DESCRIPTION OF CURRENT INVESTMENT SUB-ADVISORY AGREEMENT
Under the current investment sub-advisory agreement, Celfin provides CSAM
and the Fund with the following services described under "Proposal 1 (Both
Funds): Approval of the Merger Agreement and Plan of Reorganization Pursuant to
which The Latin America Investment Fund Will Merge with and into The Latin
America Equity Fund--Management of the Funds--Investment Sub-Adviser."
Celfin is responsible for all expenses incurred in connection with the
performance of its services under the current investment sub-advisory agreement.
The Fund is responsible for all other expenses, including those described under
"Proposal 1 (Both Funds): Approval of the Merger Agreement and Plan of
Reorganization Pursuant to which The Latin America Investment Fund Will Merge
with and into The Latin America Equity Fund--Management of the Funds--Estimated
Expenses."
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CSAM provides compensation to Celfin, from the advisory fee payable by the
Fund to CSAM, equal to 0.25% of the Fund's average weekly net assets invested in
Chilean securities. Under the current investment sub-advisory agreement, CSAM
may direct the Fund to pay Celfin directly amounts due under the agreement in
Chilean pesos at the "dolar observado" rate on the date of payment or, if such
rate ceases to be calculated in Chile, at an exchange rate commonly utilized in
lieu of the "dolar observado" rate. For the year ended December 31, 1999, Celfin
earned $15,164 for sub-advisory services.
The current investment sub-advisory agreement provides that Celfin shall
not be liable, and shall be indemnified, for error of judgment or mistake of law
or for any loss suffered by the Fund or CSAM in connection with matters to which
such agreement relates, except liability resulting from willful misfeasance, bad
faith or gross negligence on the part of Celfin in the performance of its duties
or reckless disregard of its obligations and duties under the current investment
sub-advisory agreement.
The current investment sub-advisory agreement may be terminated without
penalty upon 60 days' written notice by the Board of Directors, CSAM or the vote
of the holders of a majority of the Fund's shares. Celfin may terminate this
agreement, without penalty, upon 90 days' written notice. This agreement
terminates automatically in the event of its assignment.
THE NEW INVESTMENT SUB-ADVISORY AGREEMENT
Shareholders are being asked to approve or disapprove the New Investment
Sub-Advisory Agreement. The New Investment Sub-Advisory Agreement is
substantially similar to the current investment advisory agreement except with
regard to the fee structure.
The New Investment Sub-Advisory Agreement will be dated as of the date
shareholder approval is granted. The agreement will be in effect for an initial
two-year term, ending on the second anniversary of the date on which shareholder
approval is granted. The agreement may continue thereafter from year to year
only if specifically approved at least annually by either (i) the Board of
Directors of the Fund or (ii) the "vote of a majority of the outstanding voting
securities" of the Fund, and in either case, the vote of a majority of the
Non-interested Directors, cast in person at a meeting called for such purpose.
In the event that shareholders do not approve the New Investment Sub-Advisory
Agreement, the current investment sub-advisory agreement will remain in effect
and the voluntary Celfin fee waiver based on the value of the Fund's outstanding
shares will terminate.
DIFFERENCES BETWEEN THE CURRENT AND
THE NEW INVESTMENT SUB-ADVISORY AGREEMENT
The New Investment Sub-Advisory Agreement is substantially similar to the
current investment sub-advisory agreement except with respect to the fee
structure. The New Investment Sub-Advisory Agreement would change the method by
which the investment sub-advisory fees are calculated. Under the current
investment sub-advisory agreement, Celfin's fees are based on the average weekly
net asset value of the Fund corresponding to assets invested in Chilean
securities, whereas, under the New Investment Sub-Advisory Agreement, the
calculation of the
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investment sub-advisory fees will be reduced by the discount from net asset
value at which the Fund's outstanding shares are trading.
The following table sets forth the investment sub-advisory fee paid for
the year ended December 31, 1999 under the current investment sub-advisory
agreement and the amount that would have been paid had the New Investment
Sub-Advisory Agreement been in effect for 1999. Also shown is the difference
between the two amounts in dollars and as a percentage of the fee paid under the
existing agreement.
--------------------------------------------------------------------------------
Fee Payable Under Fee Payable Under Reduction in Fee
Current Agreement New Agreement $ as %
--------------------------------------------------------------------------------
$15,164 $11,593 $3,571 23.55%
--------------------------------------------------------------------------------
REQUIRED SHAREHOLDER VOTE
Approval of the New Investment Sub-Advisory Agreement requires the
affirmative vote of a "majority of the outstanding voting securities" of the
Fund as defined under "General."
IN THE JUDGMENT OF THE BOARD OF DIRECTORS OF THE FUND, THE NEW INVESTMENT
SUB-ADVISORY AGREEMENT SERVES THE BEST INTERESTS OF THE FUND AND ITS
SHAREHOLDERS, AND THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
PROPOSAL 3.
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PROPOSAL 4 (BOTH FUNDS): SHAREHOLDER PROPOSAL TO
TERMINATE EACH FUND'S INVESTMENT
ADVISORY AGREEMENT WITH CSAM
BACKGROUND
On June 2, 2000, each Fund received the following proposal and supporting
statement from Walter S. Baer, who advised each Fund that, at the time he
submitted his proposal to the respective Fund, he owned shares of that Fund with
a market value of at least $2,000 continuously for the preceding year. Each Fund
will provide the address of Mr. Baer to any person who so requests such
information orally or in writing, promptly upon the receipt of any oral or
written request therefor, to CSAM at 466 Lexington Avenue, 16th Floor, New York
10017. The Funds accept no responsibility for the accuracy of either the
proposal or Mr. Baer's supporting statement. The Board of Directors of each Fund
recommends a vote AGAINST this shareholder proposal.
SHAREHOLDER PROPOSAL
The text of the shareholder proposal for each Fund is as follows:
"RESOLVED: The investment advisory agreement between Credit Suisse Asset
Management (CSAM) and the Fund shall be promptly terminated unless, within 45
days after passage of this proposal, the Fund's Board of Directors presents for
shareholder approval and supports a proposal to open-end the Fund or otherwise
permit shareholders of the Fund to redeem their shares at Net Asset Value
(NAV)."
SUPPORTING STATEMENTS
The text of the supporting statement for the shareholder proposal of LAQ
is as follows:
"At the Fund's annual meeting held on May 23, 2000, shareholders approved
by more than a four-to-one margin a proposal recommending that shareholders be
permitted to realize NAV for their shares. However, in calling a special meeting
of shareholders scheduled for September 15, 2000, the Fund's Board of Directors
has not sought to implement what the shareholders voted for. Instead,
shareholders are being asked to vote to merge the Fund with a sister CSAM fund,
the Latin America Investment Fund. Such a merger will not give the Fund's
shareholders an opportunity to receive NAV for any of their shares.
This proposal asks the Fund to move expeditiously to permit shareholders
to realize NAV, or else sever the contractual link with the Fund's investment
adviser, CSAM, if such a plan is not submitted to shareholders within 45 days.
Breaking the ties with CSAM may be necessary, in my opinion, because I believe
that CSAM has been a principal impediment to shareholders' efforts to realize
NAV. If the advisory agreement with CSAM is terminated, I believe there are
other qualified investment advisers who will work with the Fund's Board of
Directors to enable shareholders to realize NAV."
The text of the supporting statement for the shareholder proposal of LAM
is as follows:
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"At the Fund's annual meeting held on May 23, 2000, shareholders approved
by nearly a four-to-one margin a proposal recommending that shareholders be
permitted to realize NAV for their shares. However, in calling a special meeting
of shareholders scheduled for September 15, 2000, the Fund's Board of Directors
has not sought to implement what the shareholders voted for. Instead, the Fund
proposes a tender offer for 50% of shares at 95% of NAV, contingent on
shareholders voting to merge the Fund with a sister CSAM fund, the Latin America
Equity Fund.
I believe that the May 23 vote clearly indicates that shareholders want to
be able to realize 100% of NAV for 100% of their shares, not 95% of NAV for 50%
of their shares. This proposal seeks to accomplish that objective. It asks the
Fund to move expeditiously to permit shareholders to realize NAV, or else sever
the contractual link with the Fund's investment adviser, CSAM, if such a plan is
not submitted to shareholders within 45 days. Breaking the ties with CSAM may be
necessary, in my opinion, because I believe that CSAM has been a principal
impediment to shareholders' efforts to realize NAV. If the advisory agreement
with CSAM is terminated, I believe there are other qualified investment advisers
who will work with the Fund's Board of Directors to enable shareholders to
realize NAV."
REQUIRED SHAREHOLDER VOTE
Termination of each investment advisory agreement with CSAM requires the
affirmative vote of a "majority of the outstanding voting securities" of each
Fund as defined under "General."
OPPOSING STATEMENT OF THE BOARDS OF DIRECTORS
The Board of Directors of each Fund has, over the years, taken a range of
actions intended to address the discount to net asset value at which each Fund's
shares have traded on the NYSE and the impact on shareholders of the discount.
After numerous discussions and the consideration of various alternative
strategies, the Directors of each Fund have concluded that it is in the best
interests of each Fund and its shareholders to maintain the closed-end format.
For more information about the factors considered by each Board, see "Proposal 1
(Both Funds): Approval of the Merger Agreement and Plan of Reorganization
Pursuant to which The Latin America Investment Fund Will Merge with and into The
Latin America Equity Fund -- Information About the Merger -- Reasons for the
Merger." However, in recognition of the desire of certain shareholders to be
able to realize an amount approximating net asset value for their shares, the
Board of Directors of LAQ has approved, subject to the consummation of the
Merger, a program whereby the Fund intends to effectuate a self-tender for not
less than 15% of its outstanding shares on an annual basis, as described above
under "Proposal 1 (Both Funds): Approval of the Merger Agreement and Plan of
Reorganization Pursuant to which The Latin America Investment Fund Will Merge
with and into The Latin America Equity Fund--Additional Information About The
Funds--Discount to Net Asset Value." The Board of Directors believe that the
combination of the Funds pursuant to the Merger proposal and the implementation
of this self-tender program achieves a proper balance between the ability of the
Fund to pursue its investment objective and the desire of certain shareholders
to sell their shares at a price approximating net asset value. Accordingly,
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THE BOARD OF DIRECTORS OF EACH FUND, INCLUDING THE NON-INTERESTED
DIRECTORS, RECOMMENDS THAT THE SHAREHOLDERS OF EACH FUND VOTE
"AGAINST" PROPOSAL 4.
In the event that Proposal 4 is approved as to LAQ or the Merger is not
consummated and Proposal 4 is approved as to LAM, the Board of Directors of each
Fund will consider what actions to take in response thereto. If the investment
advisory agreement between CSAM and either Fund terminates as a result of the
adoption of Proposal 4, these actions may include the engagement of a new
investment adviser or the re-engagement of CSAM as investment adviser, in each
case subject to approval by the Fund's shareholders in accordance with the
Investment Company Act.
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ADDITIONAL INFORMATION
The Proxy Statement/Prospectus does not contain all of the information set
forth in the registration statements and the exhibits relating thereto which the
Funds have filed with the Commission, under the SEC and the Investment Company
Act, to which reference is hereby made.
The Funds are subject to the informational requirements of the Securities
Exchange Act and in accordance therewith, file reports and other information
with the SEC. Reports, proxy statements, registration statements and other
information filed by the Funds can be inspected and copied at the public
reference facilities of the SEC in Washington, D.C. and at the New York Regional
Office of the SEC at Seven World Trade Center, New York, New York 10048. Copies
of such materials also can be obtained by mail from the Public Reference Branch,
Office of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20594, at prescribed rates.
Proposals of Shareholders. A shareholder desiring to submit a proposal for
inclusion in either Fund's proxy material for a shareholder meeting subsequent
to the special meeting, if any, must be a record or beneficial owner of at least
1% of the outstanding shares of common stock of that Fund or shares of that Fund
with a market value of $2,000 entitled to be voted at the meeting and must have
held such shares for at least one year. Further, the shareholder must continue
to hold such shares through the date on which the meeting is held. Documentary
support regarding the foregoing must be provided along with the proposal. There
are additional requirements regarding proposals of the shareholders, and a
shareholder contemplating submission of a proposal is referred to Rule 14a-8
promulgated under the Securities Exchange Act. Shareholders who meet the above
conditions and desire to submit a written proposal, should send their written
proposals to the relevant Fund c/o Credit Suisse Asset Management, LLC, 466
Lexington Avenue, 16th Floor, New York, New York 10017, within a reasonable time
before the solicitation of proxies for the meeting of shareholders. The timely
submission of a proposal does not guarantee its inclusion in either Fund's proxy
materials.
Other Matters to Come Before the Meeting. The Board of Directors of each
Fund is not aware of any matters that will be presented for action at the
Meeting other than the matters set forth herein. Should any other matters
requiring a vote of shareholders arise, the proxy in the accompanying form will
confer upon the person or persons entitled to vote the shares represented by
such proxy the discretionary authority to vote the shares as to any such other
matters in their discretion in the interest of the respective Fund. PLEASE
COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) PROMPTLY. NO POSTAGE IS
REQUIRED IF MAILED IN THE UNITED STATES.
By order of the Boards of Directors of The Latin America Equity Fund, Inc. and
The Latin America Investment Fund, Inc.
Michael A. Pignataro
Chief Financial Officer and Secretary, The Latin America Equity Fund, Inc.
Michael A. Pignataro
Chief Financial Officer and Secretary, The Latin America Investment Fund, Inc.
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EXHIBIT A
FORM OF
MERGER AGREEMENT AND PLAN OF REORGANIZATION
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<PAGE>
MERGER AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
THE LATIN AMERICA INVESTMENT FUND, INC.
AND
THE LATIN AMERICA EQUITY FUND, INC.
DATED AS OF JUNE [ ], 2000
A-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. DEFINITIONS.................................................................................................1
2. BASIC TRANSACTION...........................................................................................1
2.1. The Merger.........................................................................................1
2.2. Actions at Closing.................................................................................2
2.3. Effect of Merger...................................................................................2
3. REPRESENTATIONS AND WARRANTIES OF THE LATIN AMERICA INVESTMENT FUND.........................................2
3.1. Organization.......................................................................................2
3.2. Registrations and Qualifications...................................................................2
3.3. Regulatory Consents and Approvals..................................................................2
3.4. Noncontravention...................................................................................3
3.5. Financial Statements...............................................................................3
3.6. Annual Report......................................................................................3
3.7. Qualification, Corporate Power, Authorization of Transaction.......................................3
3,8. Legal Compliance...................................................................................4
3.9. Material Contracts.................................................................................4
3.10. Undisclosed Liabilities............................................................................4
3.11. Tax Filings........................................................................................4
3.12. Qualification under Subchapter M...................................................................4
3.13. Form N-14 and Exemptive Application................................................................5
3.14. Capitalization.....................................................................................5
3.15. Books and Records..................................................................................5
4. REPRESENTATIONS AND WARRANTIES OF THE LATIN AMERICA EQUITY FUND.............................................6
4.1. Organization.......................................................................................6
4.2. Registrations and Qualifications...................................................................6
4.3. Regulatory Consents and Approvals..................................................................6
4.4. Noncontravention...................................................................................6
4.5. Financial Statements...............................................................................6
4.6. Annual Report......................................................................................7
4.7. Qualification, Corporate Power, Authorization of Transaction.......................................7
4.8. Legal Compliance...................................................................................7
4.9. Material Contracts.................................................................................7
4.10. Undisclosed Liabilities............................................................................7
4.11. Tax Filings........................................................................................8
4.12. Qualification under Subchapter M...................................................................8
4.13. Form N-14 and Exemptive Application................................................................8
4.14. Capitalization.....................................................................................8
4.15. Issuance of Stock..................................................................................9
4.16. Books and Records..................................................................................9
</TABLE>
A-i
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<TABLE>
<CAPTION>
<S> <C>
5. CONVERSION TO LATIN AMERICA EQUITY FUND COMMON STOCK........................................................9
5.1. Conversion.........................................................................................9
5.2. Computation of Net Asset Value.....................................................................9
5.3. Issuance of Latin America Equity Fund Common Stock................................................10
5.4. Surrender of Latin America Investment Fund Stock Certificates.....................................10
6. COVENANTS OF THE PARTIES...................................................................................10
6.1. Shareholders' Meetings............................................................................10
6.2. Operations in the Normal Course...................................................................11
6.3. Articles of Merger................................................................................11
6.4. Regulatory Filings................................................................................11
6.5. Preservation of Assets............................................................................11
6.6. Tax Matters.......................................................................................11
6.7. Shareholder List..................................................................................12
6.8. Delisting, Termination of Registration as an Investment Company...................................12
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE LATIN AMERICA EQUITY FUND.......................................12
7.1. Approval of Merger................................................................................12
7.2 Certificates and Statements by the Latin America Investment Fund..................................13
7.3. Absence of Litigation.............................................................................13
7.4. Legal Opinions....................................................................................13
7.5. Auditor's Consent and Certification...............................................................15
7.6. Liabilities.......................................................................................15
7.7. Effectiveness of N-14 Registration Statement......................................................16
7.8. Approval of Exemptive Application; Regulatory Filings.............................................16
7.9. Administrative Rulings, Proceedings...............................................................16
7.10. Satisfaction of the Latin America Equity Fund, Inc................................................16
7.11. Dividends.........................................................................................16
7.12. Custodian's Certificate...........................................................................16
7.13. Books and Records.................................................................................16
8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE LATIN AMERICA INVESTMENT FUND...............................17
8.1. Approval of Merger................................................................................17
8.2. Certificates and Statements by the Latin America Equity Fund......................................17
8.3. Absence of Litigation.............................................................................18
8.4. Legal Opinions....................................................................................18
8.5. Auditor's Consent and Certification...............................................................19
8.6. Effectiveness of N-14 Registration Statement......................................................20
8.7. Approval of Exemptive Application; Regulatory Filings.............................................20
8.8. Satisfaction of the Latin America Investment Fund.................................................20
8.9. Dividends.........................................................................................20
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
9. PAYMENT OF EXPENSES.......................................................................................21
9.1. Allocation......................................................................................21
10. COOPERATION FOLLOWING EFFECTIVE DATE......................................................................21
11. INDEMNIFICATION...........................................................................................21
11.1. The Latin America Investment Fund................................................................21
11.2. The Latin America Equity Fund....................................................................21
12. TERMINATION, POSTPONEMENT AND WAIVERS.....................................................................22
12.1. Termination......................................................................................22
12.2. Waiver...........................................................................................22
12.3. Expiration of Representations and Warranties.....................................................22
13. MISCELLANEOUS.............................................................................................23
13.1. Transfer Restriction.............................................................................23
13.2. Material Provisions..............................................................................23
13.3. Notices..........................................................................................23
13.4. Amendments.......................................................................................25
13.5. Headings.........................................................................................25
13.6. Counterparts.....................................................................................25
13.7. Enforceability...................................................................................25
13.8. Successors and Assigns...........................................................................25
13.9. Governing Law....................................................................................25
</TABLE>
A-iii
<PAGE>
THIS MERGER AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement")
is made as of this day of June, 2000, between The Latin America Investment
Fund, Inc. (the "Target Fund" or the "Latin America Investment Fund"), a
Maryland corporation and a registered investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and The Latin America Equity
Fund, Inc. (the "Acquiring Fund" or the "Latin America Equity Fund"), a Maryland
corporation and a registered investment company under the 1940 Act.
This agreement contemplates a tax-free merger transaction which
qualifies for federal income tax purposes as a reorganization within the meaning
of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code").
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the Parties hereto agree as follows:
1. DEFINITIONS
Certain capitalized terms used in this Agreement are specifically
defined herein.
2. BASIC TRANSACTION
2.1. The Merger. On and subject to the terms and conditions of this
Agreement, the Target Fund will merge with and into the Acquiring Fund (the
"Merger") at the Effective Date (as defined in Section 2.3 below) in accordance
with the Maryland General Corporation Law ("MGCL"). The Latin America Equity
Fund shall be the surviving investment company. The Latin America Investment
Fund shall cease to exist as a separate investment company.
Each share of the Latin America Investment Fund will be converted
into an equivalent dollar amount (to the nearest one ten-thousandth of one cent)
of full shares of Common Stock of the Latin America Equity Fund, with a par
value of $0.001 per share, based on the net asset value per share of each of the
Parties at 4:00 p.m. Eastern Time on the Business Day prior to the Effective
Date (the "Valuation Time"). No fractional shares of the Latin America Equity
Fund will be issued to Latin America Investment Fund shareholders. In lieu
thereof, the Latin America Equity Fund's transfer agent will aggregate all
fractional shares of the Latin America Equity Fund and sell the resulting full
shares on the New York Stock Exchange ("NYSE") at the current market price for
shares of the Latin America Equity Fund for the account of all holders of
fractional interests, and each such holder will receive such holder's pro rata
share of the proceeds of such sale, without interest, upon surrender of such
holder's Latin America Investment Fund Common Stock certificates pursuant to
Article 5 below. The Effective Date and the Business Day prior to it must each
be a day on which the NYSE is open for trading (a "Business Day").
From and after the Effective Date, the Acquiring Company shall
possess all of the properties, assets, rights, privileges, powers and shall be
subject to all of the restrictions, liabilities, obligations, disabilities and
duties of the Latin America Investment Fund, all as provided under Maryland law.
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2.2. Actions at Closing. At the closing of the transactions
contemplated by this Agreement (the "Closing") on the date thereof (the "Closing
Date"), (i) the Latin America Investment Fund will deliver to the Latin America
Equity Fund the various certificates and documents referred to in Article 7
below, (ii) the Latin America Equity Fund will deliver to the Latin America
Investment Fund the various certificates and documents referred to in Article 8
below, and (iii) the Latin America Investment Fund and the Latin America Equity
Fund will file jointly with the State Department of Assessments and Taxation of
Maryland (the "Department") articles of merger (the "Articles of Merger") and
make all other filings or recordings required by Maryland law in connection with
the Merger.
2.3. Effect of Merger. Subject to the requisite approvals of the
shareholders of the Parties, and to the other terms and conditions described
herein, the Merger shall become effective at such time as the Articles of Merger
are accepted for record by the Department or at such later time as is specified
in the Articles of Merger (the "Effective Date") and the separate corporate
existence of the Latin America Investment Fund shall cease. As promptly as
practicable after the Merger, the Latin America Investment Fund shall delist its
shares from the NYSE and its registration under the 1940 Act shall be
terminated. Any reporting responsibility of the Latin America Investment Fund
is, and shall remain, the responsibility of the Latin America Investment Fund up
to and including the Effective Date.
3. REPRESENTATIONS AND WARRANTIES OF THE LATIN AMERICA INVESTMENT FUND
The Latin America Investment Fund represents and warrants to the
Latin America Equity Fund that the statements contained in this Article 3 are
correct and complete in all material respects as of the execution of this
Agreement on the date hereof. The Latin America Investment Fund represents and
warrants to, and agrees with, the Latin America Equity Fund that:
3.1. Organization. The Latin America Investment Fund is a
corporation duly organized, validly existing under the laws of the State of
Maryland and is in good standing with the Department, and has the power to own
all of its assets and to carry on its business as it is now being conducted and
to carry out this Agreement.
3.2. Registrations and Qualifications. The Latin America Investment
Fund is duly registered under the 1940 Act as a closed-end, non-diversified
management investment company (File No. 811-6094), and such registration has not
been revoked or rescinded and is in full force and effect. The Latin America
Investment Fund has elected and qualified for the special tax treatment afforded
regulated investment companies ("RICs") under Sections 851-855 of the Code at
all times since its inception. The Latin America Investment Fund is qualified as
a foreign corporation in every jurisdiction where required, except to the extent
that failure to so qualify would not have a material adverse effect on the Latin
America Investment Fund.
3.3. Regulatory Consents and Approvals. No consent, approval,
authorization, or order of any court or governmental authority is required for
the
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consummation by the Latin America Investment Fund of the transactions
contemplated herein, except (i) such as have been obtained or applied for under
the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange
Act of 1934 (the "1934 Act"), and the 1940 A ct, (ii) such as may be required by
state securities laws and (iii) such as may be required under Maryland law for
the acceptance for record of the Articles of Merger by the Department.
3.4. Noncontravention. The Latin America Investment Fund is not, and
the execution, delivery and performance of this Agreement by the Latin America
Investment Fund will not result, in violation of the laws of the State of
Maryland or of the Articles of Incorporation or the By-laws of the Latin America
Investment Fund, or of any material agreement, indenture, instrument, contract,
lease or other undertaking to which the Latin America Investment Fund is a party
or by which it is bound, and the execution, delivery and performance of this
Agreement by the Latin America Investment Fund will not result in the
acceleration of any obligation, or the imposition of any penalty, under any
agreement, indenture, instrument, contract, lease, judgment or decree to which
the Latin America Investment Fund is a party or by which it is bound.
3.5. Financial Statements. The Latin America Equity Fund has been
furnished with a statement of assets, liabilities and capital and a schedule of
investments of the Latin America Investment Fund, each as of December 31, 1999,
said financial statements having been examined by PricewaterhouseCoopers LLP,
independent public auditors. These financial statements are in accordance with
generally accepted accounting principles applied on a consistent basis ("GAAP")
and present fairly, in all material respects, the financial position of the
Latin America Investment Fund as of such date in accordance with GAAP, and there
are no known contingent liabilities of the Latin America Investment Fund
required to be reflected on a balance sheet (including the notes thereto) in
accordance with GAAP as of such date not disclosed therein.
The Latin America Equity Fund has been furnished with an unaudited
statement of assets, liabilities and capital and a schedule of investments of
the Latin America Investment Fund, each as of March 31, 2000. This financial
statement and the schedule of investments are in accordance with GAAP and
present fairly, in all material respects, the financial position of the Latin
America Investment Fund as of such date in accordance with GAAP, and there are
no known contingent liabilities of the Latin America Investment Fund required to
be reflected on a balance sheet (including the notes thereto) in accordance with
GAAP as of such date not disclosed therein.
3.6. Annual Report. The Latin America Equity Fund has been furnished
with the Latin America Investment Fund's Annual Report to Shareholders for the
year ended December 31, 1999.
3.7. Qualification, Corporate Power, Authorization of Transaction.
The Latin America Investment Fund has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors, and, subject to shareholder approval, this Agreement
constitutes a valid and binding contract enforceable in accordance with its
terms, subject to the effects of bankruptcy, insolvency,
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moratorium, fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto.
3.8. Legal Compliance. No material litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending (in which service of process has been received) or to its
knowledge threatened against the Latin America Investment Fund or any properties
or assets held by it. The Latin America Investment Fund knows of no facts which
might form the basis for the institution of such proceedings which would
materially and adversely affect its business and is not a party to or subject to
the provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transactions herein contemplated.
3.9. Material Contracts. There are no material contracts outstanding
to which the Latin America Investment Fund is a party that have not been
disclosed in the N-14 Registration Statement (as defined in Section 3.13 below)
or will not be otherwise disclosed to the Latin America Equity Fund prior to the
Effective Date.
3.10. Undisclosed Liabilities. Since December 31, 1999, there has
not been any material adverse change in the Latin America Investment Fund's
financial condition, assets, liabilities or business and the Latin America
Investment Fund has no known liabilities of a material amount, contingent or
otherwise, required to be disclosed in a balance sheet in accordance with GAAP
other than those shown on the Latin America Investment Fund's statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since January 1, 2000,
and those incurred in connection with the Merger. Prior to the Effective Date,
the Latin America Investment Fund will advise the Latin America Equity Fund in
writing of all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or accrued. For purposes
of this Section 3.10, a decline in net asset value per share of the Latin
America Investment Fund due to declines in market values of securities in the
Latin America Investment Fund's portfolio or the discharge of Latin America
Investment Fund liabilities will not constitute a material adverse change.
3.11. Tax Filings. All federal and other tax returns and information
reports of the Latin America Investment Fund required by law to have been filed
shall have been filed and are or will be correct in all material respects, and
all federal and other taxes shown as due or required to be shown as due on said
returns and reports shall have been paid or provision shall have been made for
the payment thereof, and, to the best of the Latin America Investment Fund's
knowledge, no such return is currently under audit and no assessment has been
asserted with respect to such returns. All tax liabilities of the Latin America
Investment Fund have been adequately provided for on its books, and no tax
deficiency or liability of the Latin America Investment Fund has been asserted
and no question with respect thereto has been raised by the Internal Revenue
Service or by any state or local tax authority for taxes in excess of those
already paid, up to and including the taxable year in which the Effective Date
occurs.
3.12. Qualification under Subchapter M. For each taxable year of its
operation (including the taxable year ending on the Effective Date), the Latin
America
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Investment Fund has met the requirements of Subchapter M of the Code for
qualification as a RIC and has elected to be treated as such, has been eligible
to and has computed its federal income tax under Section 852 of the Code, and
will have distributed substantially all of its investment company taxable income
and net realized capital gain (as defined in the Code) that has accrued through
the Effective Date.
3.13. Form N-14 and Exemptive Application. The exemptive application
to be filed with the Securities and Exchange Commission (the "SEC") by the
Parties regarding the Merger (the "Exemptive Application") and the registration
statement to be filed by the Latin America Equity Fund on Form N-14 relating to
the Latin America Equity Fund Common Stock to be issued pursuant to this
Agreement, and any supplement or amendment thereto or to the documents therein
(as amended, the "N-14 Registration Statement"), on the effective date of the
N-14 Registration Statement, at the time of the shareholders' meetings referred
to in Article 6 of this Agreement and at the Effective Date, insofar as it
relates to the Latin America Investment Fund (i) shall have complied or will
comply in all material respects with the provisions of the 1933 Act, the 1934
Act and the 1940 Act and the rules and regulations thereunder and (ii) did not
or will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this Section 3.13 shall only apply to
statements in, or omissions from, the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by the Latin America
Equity Fund for use in the N-14 Registration Statement.
3.14. Capitalization.
(a) All issued and outstanding shares of the Latin America
Investment Fund (i) have been offered and sold in compliance in all material
respects with applicable registration requirements of the 1933 Act and state
securities laws, (ii) are, and on the Effective Date will be, duly and validly
issued and outstanding, fully paid and non-assessable, and (iii) will be held at
the time of the Closing by the persons and in the amounts set forth in the
records of the transfer agent as provided in Section 6.7. The Latin America
Investment Fund does not have outstanding any options, warrants or other rights
to subscribe for or purchase any of the Latin America Investment Fund shares,
nor is there outstanding any security convertible into, or exchangeable for, any
of the Latin America Investment Fund shares.
(b) The Latin America Investment Fund is authorized to issue
100,000,000 shares of stock, par value $0.001 per share, all of which shares are
classified as Common Stock and each outstanding share of which is fully paid,
non-assessable and has full voting rights.
3.15. Books and Records. The books and records of the Latin America
Investment Fund made available to the Latin America Equity Fund are
substantially
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true and correct and contain no material misstatements or omissions with respect
to the operations of the Latin America Investment Fund.
4. REPRESENTATIONS AND WARRANTIES OF THE LATIN AMERICA EQUITY FUND
The Latin America Equity Fund represents and warrants to the Latin
America Investment Fund that the statements contained in this Article 4 are
correct and complete in all material respects as of the execution of this
Agreement on the date hereof. The Latin America Equity Fund represents and
warrants to, and agrees with, the Latin America Investment Fund that:
4.1. Organization. The Latin America Equity Fund is a corporation
duly organized, validly existing under the laws of the State of Maryland and is
in good standing with the Department, and has the power to own all of its assets
and to carry on its business as it is now being conducted and to carry out this
Agreement.
4.2. Registrations and Qualifications. The Latin America Equity Fund
is duly registered under the 1940 Act as a closed-end, non-diversified
management investment company (File No. 811- ) and such registration has not
been revoked or rescinded and is in full force and effect. The Latin America
Equity Fund has elected and qualified for the special tax treatment afforded
RICs under Sections 851-855 of the Code at all times since its inception. The
Latin America Equity Fund is qualified as a foreign corporation in every
jurisdiction where required, except to the extent that failure to so qualify
would not have a material adverse effect on the Latin America Equity Fund.
4.3. Regulatory Consents and Approvals. No consent, approval,
authorization, or order of any court or governmental authority is required for
the consummation by the Latin America Equity Fund of the transactions
contemplated herein, except (i) such as have been obtained or applied for under
the 1933 Act, the 1934 Act and the 1940 Act, (ii) such as may be required by
state securities laws and (iii) such as may be required under Maryland law for
the acceptance for record of the Articles of Merger by the Department.
4.4. Noncontravention. The Latin America Equity Fund is not, and the
execution, delivery and performance of this Agreement by the Latin America
Equity Fund will not result, in violation of the laws of the State of Maryland
or of the Articles of Incorporation or the By-laws of the Latin America Equity
Fund, or of any material agreement, indenture, instrument, contract, lease or
other undertaking to which the Latin America Equity Fund is a party or by which
it is bound, and the execution, delivery and performance of this Agreement by
the Latin America Equity Fund will not result in the acceleration of any
obligation, or the imposition of any penalty, under any agreement, indenture,
instrument, contract, lease, judgment or decree to which the Latin America
Equity Fund is a party or by which it is bound.
4.5. Financial Statements. The Latin America Investment Fund has
been furnished with a statement of assets, liabilities and capital and a
schedule of investments of the Latin America Equity Fund, each as of December
31, 1999, said financial statements
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having been examined by PricewaterhouseCoopers LLP, independent public auditors.
These financial statements are in accordance with GAAP and present fairly, in
all material respects, the financial position of the Latin America Equity Fund
as of such date in accordance with GAAP, and there are no known contingent
liabilities of the Latin America Equity Fund required to be reflected on a
balance sheet (including the notes thereto) in accordance with GAAP as of such
date not disclosed therein.
The Latin America Investment Fund has been furnished with an
unaudited statement of assets, liabilities and capital and a schedule of
investments of the Latin America Equity Fund, each as of March 31, 2000. This
financial statement and schedule of investments are in accordance with GAAP and
present fairly, in all material respects the financial position of the Latin
America Equity Fund as of such date in accordance with GAAP, and there are no
known contingent liabilities of the Latin America Equity Fund required to be
reflected on a balance sheet (including the notes thereto) in accordance with
GAAP as of such date not disclosed therein.
4.6. Annual Report. The Latin America Investment Fund has been
furnished with the Latin America Equity Fund's Annual Report to Shareholders for
the year ended December 31, 1999.
4.7. Qualification, Corporate Power, Authorization of Transaction.
The Latin America Equity Fund has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors, and, subject to shareholder approval, this Agreement
constitutes a valid and binding contract enforceable in accordance with its
terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights generally
and court decisions with respect thereto.
4.8. Legal Compliance. No material litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending or to its knowledge threatened against the Latin America
Equity Fund or any properties or assets held by it. The Latin America Equity
Fund knows of no facts which might form the basis for the institution of such
proceedings which would materially and adversely affect its business and is not
a party to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects its business
or its ability to consummate the transactions herein contemplated.
4.9. Material Contracts. There are no material contracts outstanding
to which the Latin America Equity Fund is a party that have not been disclosed
in the N-14 Registration Statement or will not be otherwise disclosed to the
Latin America Investment Fund prior to the Effective Date.
4.10. Undisclosed Liabilities. Since December 31, 1999, there has
not been any material adverse change in the Latin America Equity Fund's
financial condition, assets, liabilities, or business and the Latin America
Equity Fund has no known liabilities of a material amount, contingent or
otherwise, required to be disclosed in a balance sheet with GAAP other than
those shown on the Latin America Equity Fund's statements of
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assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since January 1, 2000,
and those incurred in connection with the Merger. Prior to the Effective Date,
the Latin America Equity Fund will advise the Latin America Investment Fund in
writing of all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or accrued. For purposes
of this Section 4.10, a decline in net asset value per share of the Latin
America Equity Fund due to declines in market values of securities in the Latin
America Equity Fund's portfolio or the discharge of the Latin America Equity
Fund liabilities will not constitute a material adverse change.
4.11. Tax Filings. All federal and other tax returns and information
reports of the Latin America Equity Fund required by law to have been filed
shall have been filed and are or will be correct in all material respects, and
all federal and other taxes shown as due or required to be shown as due on said
returns and reports shall have been paid or provision shall have been made for
the payment thereof, and, to the best of the Latin America Equity Fund's
knowledge, no such return is currently under audit and no assessment has been
asserted with respect to such returns. All tax liabilities of the Latin America
Equity Fund have been adequately provided for on its books, and no tax
deficiency or liability of the Latin America Equity Fund has been asserted and
no question with respect thereto has been raised by the Internal Revenue Service
or by any state or local tax authority for taxes in excess of those already
paid, up to and including the taxable year in which the Effective Date occurs.
4.12. Qualification under Subchapter M. For each taxable year of its
operation, the Latin America Equity Fund has met the requirements of Subchapter
M of the Code for qualification as a RIC and has elected to be treated as such,
has been eligible to and has computed its federal income tax under Section 852
of the Code, and will have distributed substantially all of its investment
company taxable income and net realized capital gain (as defined in the Code)
that has accrued through the Effective Date.
4.13. Form N-14 and Exemptive Application. The Exemptive
Application, and the N-14 Registration Statement, on the effective date of the
N-14 Registration Statement, at the time of the shareholders' meetings referred
to in Section 6 of this Agreement and at the Effective Date, insofar as it
relates to the Latin America Equity Fund (i) shall have complied or will comply
in all material respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act and the rules and regulations thereunder and (ii) did not or will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this Section 4.13 shall not apply to
statements in, or omissions from, the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by the Latin America
Investment Fund for use in the N-14 Registration Statement.
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4.14. Capitalization.
(a) All issued and outstanding shares of the Latin America Equity
Fund (i) have been offered and sold in compliance in all material respects with
applicable registration requirements of the 1933 Act and state securities laws,
(ii) are, and on the Effective Date will be, duly and validly issued and
outstanding, fully paid and non-assessable, and (iii) will be held at the time
of the Closing by the persons and in the amounts set forth in the records of the
transfer agent. The Latin America Equity Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of the Latin
America Equity Fund shares, nor is there outstanding any security convertible
into, or exchangeable for, any of the Latin America Equity Fund shares.
(b) The Latin America Equity Fund is authorized to issue 100,000,000
shares of stock, par value $0.001 per share, all of which shares are classified
as Common Stock and each outstanding share of which is fully paid,
non-assessable and has full voting rights.
4.15. Issuance of Stock.
(a) The offer and sale of the shares to be issued pursuant to this
Agreement will be in compliance with all applicable federal and state securities
laws.
(b) At or prior to the Effective Date, the Latin America Equity Fund
will have obtained any and all regulatory, director and shareholder approvals
necessary to issue the Latin America Equity Fund Common Stock.
4.16. Books and Records. The books and records of the Latin America
Equity Fund made available to the Latin America Investment Fund are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of the Latin America Equity Fund.
5. CONVERSION TO LATIN AMERICA EQUITY FUND COMMON STOCK
5.1. Conversion.
(a) Subject to the requisite approval of the shareholders of the
Parties, and the other terms and conditions contained herein, at the Effective
Date, each share of Common Stock of the Latin America Investment Fund will be
converted into an equivalent dollar amount (to the nearest one ten-thousandth of
one cent) of full shares of Latin America Equity Fund Common Stock, computed
based on the net asset value per share of each of the Parties at the Valuation
Time.
(b) No fractional shares of the Latin America Equity Fund will be
issued to Latin America Investment Fund shareholders. In lieu thereof, the Latin
America Equity Fund's transfer agent will aggregate all fractional shares of the
Latin America Equity Fund and sell the resulting full shares on the NYSE at the
current market price for shares of the Latin America Equity Fund for the account
of all holders of fractional interests, and each such holder will receive such
holder's pro rata share of the proceeds of
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such sale, without interest, upon surrender of such holder's Latin America
Investment Fund Common Stock certificates.
5.2. Computation of Net Asset Value. The net asset value per share
of the Parties shall be determined as of the Valuation Time, and no formula will
be used to adjust the net asset value so determined of either of the Parties to
take into account differences in realized and unrealized gains and losses. The
value of the assets of the Latin America Investment Fund to be transferred to
the Latin America Equity Fund shall be determined by the Latin America Equity
Fund pursuant to the principles and procedures consistently utilized by the
Latin America Equity Fund in valuing its own assets and determining its own
liabilities for purposes of the Merger, which principles and procedures are
substantially similar to those employed by the Latin America Investment Fund
when valuing its own assets and determining its own liabilities. Such valuation
and determination shall be made by the Latin America Equity Fund in cooperation
with the Latin America Investment Fund and shall be confirmed in writing by the
Latin America Equity Fund to the Latin America Investment Fund. The net asset
value per share of Latin America Equity Fund Common Stock shall be determined in
accordance with such procedures, and the Latin America Equity Fund shall certify
the computations involved.
5.3. Issuance of Latin America Equity Fund Common Stock. The Latin
America Equity Fund shall issue to the shareholders of the Latin America
Investment Fund separate certificates or share deposit receipts for the Latin
America Equity Fund Common Stock by delivering the certificates or share deposit
receipts evidencing ownership of the Latin America Equity Fund Common Stock to
BankBoston N.A., as the transfer agent and registrar for the Latin America
Equity Fund Common Stock.
5.4. Surrender of Latin America Investment Fund Stock Certificates.
With respect to any Latin America Investment Fund shareholder holding
certificates representing shares of the Common Stock of the Latin America
Investment Fund as of the Effective Date, and subject to the Latin America
Equity Fund being informed thereof in writing by the Latin America Investment
Fund, the Latin America Equity Fund will not permit such shareholder to receive
new certificates evidencing ownership of the Latin America Equity Fund Common
Stock until such shareholder has surrendered his or her outstanding certificates
evidencing ownership of the Common Stock of the Latin America Investment Fund
or, in the event of lost certificates, posted adequate bond. The Latin America
Investment Fund will request its shareholders to surrender their outstanding
certificates representing certificates of the Common Stock of the Latin America
Investment Fund or post adequate bond therefor. Dividends payable to holders of
record of shares of the Latin America Equity Fund as of any date after the
Effective Date and prior to the exchange of certificates by any shareholder of
the Latin America Investment Fund shall be paid to such shareholder, without
interest; however, such dividends shall not be paid unless and until such
shareholder surrenders his or her stock certificates of the Latin America
Investment Fund for exchange.
6. COVENANTS OF THE PARTIES
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6.1. Shareholders' Meetings.
(a) Each of the Parties shall hold a meeting of its respective
shareholders for the purpose of considering the Merger as described herein,
which meeting has been called by each Party for September 15, 2000, and any
adjournments thereof.
(b) Each of the Parties agrees to mail to each of its respective
shareholders of record entitled to vote at the meeting of shareholders at which
action is to be considered regarding the Merger, in sufficient time to comply
with requirements as to notice thereof, a combined Proxy Statement and
Prospectus which complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act,
and the rules and regulations, respectively, thereunder.
6.2. Operations in the Normal Course. Each Party covenants to
operate its business in the ordinary course between the date hereof and the
Effective Date, it being understood that such ordinary course of business will
include (i) the declaration and payment of customary dividends and other
distributions and (ii) in the case of the Latin America Investment Fund,
preparing for its deregistration, except that the distribution of dividends
pursuant to Sections 7.11 and 8.9 of this Agreement shall not be deemed to
constitute a breach of the provisions of this Section 6.2.
6.3. Articles of Merger. The Parties agree that, as soon as
practicable after satisfaction of all conditions to the Merger, they will
jointly file executed Articles of Merger with the Department and make all other
filings or recordings required by Maryland law in connection with the Merger.
6.4. Regulatory Filings.
(a) The Latin America Investment Fund undertakes that, if the Merger
is consummated, it will file, or cause its agents to file, an application
pursuant to Section 8(f) of the 1940 Act for an order declaring that the Latin
America Investment Fund has ceased to a registered investment company.
(b) The Latin America Equity Fund will file the N-14 Registration
Statement with the SEC and will use its best efforts to ensure that the N-14
Registration Statement becomes effective as promptly as practicable. The Latin
America Investment Fund agrees to cooperate fully with the Latin America Equity
Fund, and will furnish to the Latin America Equity Fund the information relating
to itself to be set forth in the N-14 Registration Statement as required by the
1933 Act, the 1934 Act, the 1940 Act, and the rules and regulations thereunder
and the state securities or blue sky laws.
(c) The Parties each agree to proceed as promptly as possible to
cause to be made the necessary filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Filing") if applicable, with respect to the
transactions contemplated by this Agreement and to ensure that the related
waiting period expires or is otherwise terminated at the earliest possible time.
6.5. Preservation of Assets. The Latin America Equity Fund agrees
that it has no plan or intention to sell or otherwise dispose of the assets of
the Latin America
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Investment Fund to be acquired in the Merger, except for dispositions made in
the ordinary course of business.
6.6. Tax Matters. Each of the Parties agrees that by the Effective
Date all of its federal and other tax returns and reports required to be filed
on or before such date shall have been filed and all taxes shown as due on said
returns either have been paid or adequate liability reserves have been provided
for the payment of such taxes. In connection with this covenant, the Parties
agree to cooperate with each other in filing any tax return, amended return or
claim for refund, determining a liability for taxes or a right to a refund of
taxes or participating in or conducting any audit or other proceeding in respect
of taxes. The Latin America Equity Fund agrees to retain for a period of ten
(10) years following the Effective Date all returns, schedules and work papers
and all material records or other documents relating to tax matters of the Latin
America Investment Fund for its final taxable year and for all prior taxable
periods. Any information obtained under this Section 6.6 shall be kept
confidential except as otherwise may be necessary in connection with the filing
of returns or claims for refund or in conducting an audit or other proceeding.
After the Effective Date, the Latin America Equity Fund shall prepare, or cause
its agents to prepare, any federal, state or local tax returns, including any
Forms 1099, required to be filed and provided to required persons by the Latin
America Investment Fund with respect to its final taxable years ending with the
Effective Date and for any prior periods or taxable years for which the due date
for such return has not passed as of the Effective Date and further shall cause
such tax returns and Forms 1099 to be duly filed with the appropriate taxing
authorities and provided to required persons. Notwithstanding the aforementioned
provisions of this Section 6.6, any expenses incurred by the Latin America
Equity Fund (other than for payment of taxes) in excess of any accrual for such
expenses by the Latin America Investment Fund in connection with the preparation
and filing of said tax returns and Forms 1099 after the Effective Date shall be
borne by the Latin America Equity Fund.
6.7. Shareholder List. Prior to the Effective Date, the Latin
America Investment Fund shall have made arrangements with its transfer agent to
deliver to the Latin America Equity Fund, a list of the names and addresses of
all of the shareholders of record of the Latin America Investment Fund on the
Effective Date and the number of shares of Common Stock of the Latin America
Investment Fund owned by each such shareholder, certified by the Latin America
Investment Fund's transfer agent or President to the best of their knowledge and
belief.
6.8. Delisting, Termination of Registration as an Investment
Company. The Latin America Investment Fund agrees that the (i) delisting of the
shares of the Latin America Investment Fund with the NYSE and (ii) termination
of its registration as a RIC will be effected in accordance with applicable law
as soon as practicable following the Effective Date.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE LATIN AMERICA EQUITY FUND
The obligations of the Latin America Equity Fund hereunder shall be
subject to the following conditions:
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7.1. Approval of Merger. This Agreement shall have been adopted by
the affirmative vote of the holders of a majority of the shares of Common Stock
of the Latin America Equity Fund issued and outstanding and entitled to vote
thereon and the affirmative vote of the holders of a majority of the shares of
Common Stock of the Latin America Investment Fund issued and outstanding and
entitled to vote thereon; and the Latin America Investment Fund shall have
delivered to the Latin America Equity Fund a copy of the resolutions approving
this Agreement adopted by its Board of Directors and shareholders, certified by
its secretary.
7.2. Certificates and Statements by the Latin America Investment
Fund.
(a) The Latin America Investment Fund shall have furnished a
statement of assets, liabilities and capital, together with a schedule of
investments with their respective dates of acquisition and tax costs, certified
on its behalf by its President (or any Vice President) and its Treasurer, and a
certificate executed by both such officers, dated the Effective Date, certifying
that there has been no material adverse change in its financial position since
March 31, 2000, other than changes in its portfolio securities since that date
or changes in the market value of its portfolio securities.
(b) The Latin America Investment Fund shall have furnished to the
Latin America Equity Fund a certificate signed by its President (or any Vice
President), dated the Effective Date, certifying that as of the Effective Dates,
all representations and warranties made in this Agreement are true and correct
in all material respects as if made at and as of such date and each has complied
with all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to such dates.
(c) The Latin America Investment Fund shall have delivered to the
Latin America Equity Fund a letter from PricewaterhouseCoopers LLP, dated the
Effective Date, stating that such firm has performed a limited review of the
federal, state and local income tax returns for the period ended December 31,
1999, and that based on such limited review, nothing came to their attention
which caused them to believe that such returns did not properly reflect, in all
material respects, the federal, state and local income taxes of the Latin
America Investment Fund for the period covered thereby; and that for the period
from December 31, 1999 to and including the Effective Date and for any taxable
year ending upon the Effective Date, such firm has performed a limited review to
ascertain the amount of such applicable federal, state and local taxes, and has
determined that either such amount has been paid or reserves have been
established for payment of such taxes, this review to be based on unaudited
financial data; and that based on such limited review, nothing has come to their
attention which caused them to believe that the taxes paid or reserves set aside
for payment of such taxes were not adequate in all material respects for the
satisfaction of federal, state and local taxes for the period from December 31,
1999, to and including the Effective Date and for any taxable year ending upon
the Effective Date or that the Latin America Investment Fund would not continue
to qualify as a RIC for federal income tax purposes.
7.3. Absence of Litigation. There shall be no material litigation
pending with respect to the matters contemplated by this Agreement.
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7.4. Legal Opinions.
(a) The Latin America Equity Fund shall have received an opinion of
Willkie Farr & Gallagher, as counsel to the Latin America Investment Fund, in
form and substance reasonably satisfactory to the Latin America Equity Fund and
dated the Effective Date, to the effect that (i) the Latin America Investment
Fund is a corporation duly organized, validly existing under the laws of the
State of Maryland and in good standing with the Department; (ii) the Agreement
has been duly authorized, executed and delivered by the Latin America Investment
Fund, and, assuming that the N-14 Registration Statement complies with the 1933
Act, 1934 Act and the 1940 Act, constitutes a valid and legally binding
obligation of the Latin America Investment Fund, enforceable in accordance with
its terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws pertaining to the enforcement of creditors'
rights generally and by equitable principles; (iii) to the best of such
counsel's knowledge, no consent, approval, authorization or order of any United
States federal or Maryland state court or governmental authority is required for
the consummation by the Latin America Investment Fund of the Merger, except such
as may be required under the 1933 Act, the 1934 Act, the 1940 Act, the published
rules and regulations of the SEC thereunder and under Maryland law and such as
may be required by state securities or blue sky laws; (iv) such counsel does not
know of any contracts or other documents with respect to the Latin America
Investment Fund related to the Merger of a character required to be described in
the N-14 Registration Statement which are not described therein or, if required
to be filed, filed as required; (v) the execution and delivery of this Agreement
does not, and the consummation of the Merger will not, violate any material
provision of the Articles of Incorporation, as amended, the by-laws, as amended,
or any agreement (known to such counsel) to which the Latin America Investment
Fund is a party or by which the Latin America Investment Fund is bound, except
insofar as the parties have agreed to amend such provision as a condition
precedent to the Merger; (vi) to the best of such counsel's knowledge, no
material suit, action or legal or administrative proceeding is pending or
threatened against the Latin America Investment Fund; and (vii) all corporate
actions required to be taken by the Latin America Investment Fund to authorize
this Agreement and to effect the Merger have been duly authorized by all
necessary corporate actions on behalf of the Latin America Investment Fund. Such
opinion shall also state that (A) while such counsel cannot make any
representation as to the accuracy or completeness of statements of fact in the
N-14 Registration Statement or any amendment or supplement thereto with respect
to the Latin America Investment Fund, nothing has come to their attention that
would lead them to believe that, on the respective effective dates of the N-14
Registration Statement and any amendment or supplement thereto with respect to
the Latin America Investment Fund, (1) the N-14 Registration Statement or any
amendment or supplement thereto contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading with respect to the
Latin America Investment Fund, and (2) the prospectus included in the N-14
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading with
respect to the Latin America Investment Fund; provided that such counsel need
not express any opinion or belief as to the financial statements, other
financial data, statistical data or information relating to the Latin America
Investment Fund contained or incorporated by reference in
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the N-14 Registration Statement. In giving the opinion set forth above, Willkie
Farr & Gallagher may state that it is relying on certificates of officers of the
Latin America Investment Fund with regard to matters of fact and certain
certificates and written statements of governmental officials with respect to
the good standing of the Latin America Investment Fund and on the opinion of
Venable, Baetjer and Howard, LLP, as to matters of Maryland law.
(b) The Latin America Equity Fund shall have received an opinion
from Willkie Farr & Gallagher, as counsel to the Latin America Equity Fund,
dated the Effective Date, to the effect that for federal income tax purposes (i)
the Merger as provided in this Agreement will constitute a reorganization within
the meaning of Section 368(a)(1)(A) of the Code and that the Latin America
Equity Fund and the Latin America Investment Fund will each be deemed a "party"
to a reorganization within the meaning of Section 368(b) of the Code; (ii) no
gain or loss will be recognized to the Latin America Investment Fund as a result
of the Merger or the conversion of Latin America Investment Fund shares to Latin
America Equity Fund Common Stock except to the extent such shareholders are paid
cash in lieu of fractional shares of Latin America Equity Fund in the Merger;
(iii) no gain or loss will be recognized to the Latin America Equity Fund as a
result of the Merger; (iv) in accordance with Section 354(a)(1) of the Code, no
gain or loss will be recognized to the shareholders of the Latin America
Investment Fund on the conversion of their shares into Latin America Equity Fund
Common Stock; (v) the tax basis of the Latin America Investment Fund assets in
the hands of the Latin America Equity Fund will be the same as the tax basis of
such assets in the hands of the Latin America Investment Fund prior to the
consummation of the Merger; (vi) immediately after the Merger, the tax basis of
the Latin America Equity Fund Common Stock received by the shareholders of the
Latin America Investment Fund in the Merger will be equal, in the aggregate, to
the tax basis of the shares of the Latin America Investment Fund converted
pursuant to the Merger; (vii) a shareholder's holding period for the Latin
America Equity Fund Common Stock will be determined by including the period for
which he or she held the Common Stock of the Latin America Investment Fund
converted pursuant to the Merger, provided that such Latin America Investment
Fund shares were held as a capital asset; (viii) the Latin America Equity Fund's
holding period with respect to the Latin America Investment Fund assets
transferred will include the period for which such assets were held by the Latin
America Investment Fund; and (ix) the payment of cash to the Latin America
Investment Fund shareholders in lieu of fractional shares of the Latin America
Equity Fund will be treated as though the fractional shares were distributed as
part of the Merger and then redeemed by the Latin America Equity Fund with the
result that the Latin America Investment Fund shareholder will generally have
capital gains or losses to the extent the cash distribution differs from such
shareholder's basis allocable to the fractional shares.
7.5. Auditor's Consent and Certification. The Latin America Equity
Fund shall have received from PricewaterhouseCoopers LLP a letter dated as of
the effective date of the N-14 Registration Statement and a similar letter dated
within five days prior to the Effective Date, in form and substance satisfactory
to the Latin America Equity Fund, to the effect that (i) they are independent
public auditors with respect to the Latin America Investment Fund within the
meaning of the 1933 Act and the applicable published rules and regulations
thereunder; and (ii) in their opinion, the financial
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statements and supplementary information of the Latin America Investment Fund
included or incorporated by reference in the N-14 Registration Statement and
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder.
7.6. Liabilities. The assets or liabilities of the Latin America
Investment Fund to be transferred to the Latin America Equity Fund shall not
include any assets or liabilities which the Latin America Equity Fund, by reason
of limitations in its Registration Statement or Articles of Incorporation, may
not properly acquire or assume. The Latin America Equity Fund does not
anticipate that there will be any such assets or liabilities but the Latin
America Equity Fund will notify the Latin America Investment Fund if any do
exist and will reimburse the Latin America Investment Fund for any reasonable
transaction costs incurred by the Latin America Investment Fund for the
liquidation of such assets and liabilities.
7.7. Effectiveness of N-14 Registration Statement. The N-14
Registration Statement shall have become effective under the 1933 Act and no
stop order suspending such effectiveness shall have been instituted or, to the
knowledge of the Latin America Equity Fund, contemplated by the SEC.
7.8. Approval of Exemptive Application; Regulatory Filings.
(a) The Exemptive Application shall have been approved and the Latin
America Equity Fund shall have received from the SEC such orders or
interpretations as Willkie Farr & Gallagher, as counsel to the Latin America
Equity Fund, deems reasonably necessary or desirable under the 1933 Act and the
1940 Act in connection with the Merger, provided, that such counsel shall have
requested such orders as promptly as practicable, and all such orders shall be
in full force and effect.
(b) Any applicable waiting period under the HSR Act relating to the
transactions contemplated hereby shall have expired or been terminated.
7.9. Administrative Rulings, Proceedings. The SEC shall not have
issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Merger under Section 25(c) of the 1940 Act; no other legal,
administrative or other proceeding shall be instituted or threatened which would
materially affect the financial condition of the Latin America Investment Fund
or would prohibit the Merger.
7.10. Satisfaction of the Latin America Equity Fund, Inc. All
proceedings taken by the Latin America Investment Fund and its counsel in
connection with the Merger and all documents incidental thereto shall be
satisfactory in form and substance to the Latin America Equity Fund.
7.11. Dividends. Prior to the Effective Date, the Latin America
Investment Fund shall have declared and paid a dividend or dividends which,
together with all such previous dividends, shall have the effect of distributing
to its shareholders substantially all of its net investment company taxable
income that has accrued through the
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Effective Date, if any (computed without regard to any deduction of dividends
paid), and substantially all of its net capital gain, if any, realized through
the Effective Date.
7.12. Custodian's Certificate. The Latin America Investment Fund's
custodian shall have delivered to the Latin America Equity Fund a certificate
identifying all of the assets of the Latin America Investment Fund held or
maintained by such custodian as of the Valuation Time.
7.13. Books and Records. The Latin America Investment Fund's
transfer agent shall have provided to the Latin America Equity Fund (i) the
originals or true copies of all of the records of the Latin America Investment
Fund in the possession of such transfer agent as of the Exchange Date, (ii) a
certificate setting forth the number of shares of the Latin America Investment
Fund outstanding as of the Valuation Time, and (iii) the name and address of
each holder of record of any shares and the number of shares held of record by
each such shareholder.
8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE LATIN AMERICA
INVESTMENT FUND
The obligations of the Latin America Investment Fund hereunder shall
be subject to the following conditions:
8.1. Approval of Merger. This Agreement shall have been adopted, by
the affirmative vote of the holders of a majority of the shares of Common Stock
of the Latin America Investment Fund issued and outstanding and entitled to vote
thereon and the affirmative vote of the holders of a majority of the shares of
Common Stock of the Latin America Equity Fund issued and outstanding and
entitled to vote thereon; and that the Latin America Equity Fund shall have
delivered to the Latin America Investment Fund a copy of the resolutions
approving this Agreement adopted by its Board of Directors and shareholders,
certified by its secretary.
8.2. Certificates and Statements by the Latin America Equity Fund.
(a) The Latin America Equity Fund shall have furnished a statement of assets,
liabilities and capital, together with a schedule of investments with their
respective dates of acquisition and tax costs, certified on its behalf by its
President (or any Vice President) and its Treasurer, and a certificate executed
by both such officers, dated the Effective Date, certifying that there has been
no material adverse change in its financial position since March 31, 2000, other
than changes in its portfolio securities since that date or changes in the
market value of its portfolio securities.
(b) The Latin America Equity Fund shall have furnished to the Latin
America Investment Fund a certificate signed by its President (or any Vice
President), dated the Effective Date, certifying that as of the Effective Date,
all representations and warranties made in this Agreement are true and correct
in all material respects as if made at and as of such date and each has complied
with all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to such dates.
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(c) The Latin America Equity Fund shall have delivered to the Latin
America Investment Fund a letter from PricewaterhouseCoopers LLP, dated the
Effective Date, stating that such firm has performed a limited review of the
federal, state and local income tax returns for the period ended December 31,
1999, and that based on such limited review, nothing came to their attention
which caused them to believe that such returns did not properly reflect, in all
material respects, the federal, state and local income taxes of the Latin
America Equity Fund for the period covered thereby; and that for the period from
December 31, 1999 to and including the Effective Date, such firm has performed a
limited review to ascertain the amount of such applicable federal, state and
local taxes, and has determined that either such amount has been paid or
reserves established for payment of such taxes, this review to be based on
unaudited financial data; and that based on such limited review, nothing has
come to their attention which caused them to believe that the taxes paid or
reserves set aside for payment of such taxes were not adequate in all material
respects for the satisfaction of federal, state and local taxes for the period
from December 31, 1999, to and including the Effective Date or that the Latin
America Equity Fund would not continue to qualify as a RIC for federal income
tax purposes.
8.3. Absence of Litigation. There shall be no material litigation
pending with respect to the matters contemplated by this Agreement.
8.4. Legal Opinions.
(a) The Latin America Investment Fund shall have received an opinion
of Willkie Farr & Gallagher, as counsel to the Latin America Equity Fund, in
form and substance reasonably satisfactory to the Latin America Investment Fund
and dated the Effective Date, to the effect that (i) the Latin America Equity
Fund is a corporation duly organized, validly existing under the laws of the
State of Maryland and in good standing with the Department; (ii) the Agreement
has been duly authorized, executed and delivered by the Latin America Equity
Fund, and, assuming that the N-14 Registration Statement complies with the 1933
Act, 1934 Act and the 1940 Act, constitutes a valid and legally binding
obligation of the Latin America Equity Fund, enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws pertaining to the enforcement of creditors'
rights generally and by equitable principles; (iii) to the best of such
counsel's knowledge, no consent, approval, authorization or order of any United
States federal or Maryland state court or governmental authority is required for
the consummation by the Latin America Equity Fund of the Merger, except such as
may be required under the 1933 Act, the 1934 Act, the 1940 Act and the published
rules and regulations of the SEC thereunder and under Maryland law and such as
may be required under state securities or blue sky laws; (iv) the N-14
Registration Statement has become effective under the 1933 Act, no stop order
suspending the effectiveness of the N-14 Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act, and, with respect to the Latin America Equity
Fund, the N-14 Registration Statement, and each amendment or supplement thereto,
as of their respective effective dates, appear on their face to be appropriately
responsive in all material respects to the requirements of the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the SEC
thereunder; (v) such counsel does not know of any statutes, legal or
governmental proceedings or contracts with respect to the Latin America Equity
Fund or
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other documents related to the Merger of a character required to be described in
the N-14 Registration Statement which are not described therein or, if required
to be filed, filed as required; (vi) the execution and delivery of this
Agreement does not, and the consummation of the Merger will not, violate any
material provision of the Articles of Incorporation, as amended, the by-laws, as
amended, or any agreement (known to such counsel) to which the Latin America
Equity Fund is a party or by which the Latin America Equity Fund is bound,
except insofar as the parties have agreed to amend such provision as a condition
precedent to the Merger; (vii) to the best of such counsel's knowledge, no
material suit, action or legal or administrative proceeding is pending or
threatened against the Latin America Equity Fund; and (viii) all corporate
actions required to be taken by the Latin America Equity Fund to authorize this
Agreement and to effect the Merger have been duly authorized by all necessary
corporate actions on behalf of the Latin America Equity Fund. Such opinion shall
also state that (A) while such counsel cannot make any representation as to the
accuracy or completeness of statements of fact in the N-14 Registration
Statement or any amendment or supplement thereto with respect to the Latin
America Equity Fund, nothing has come to their attention that would lead them to
believe that, on the respective effective dates of the N-14 Registration
Statement and any amendment or supplement thereto, (1) the N-14 Registration
Statement or any amendment or supplement thereto contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading with respect
to the Latin America Equity Fund; and (2) the prospectus included in the N-14
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading with
respect to the Latin America Equity Fund; provided that such counsel need not
express any opinion or belief as to the financial statements, other financial
data, statistical data or information relating to the Latin America Equity Fund
contained or incorporated by reference in the N-14 Registration Statement. In
giving the opinion set forth above, Willkie Farr & Gallagher may state that it
is relying on certificates of officers of the Latin America Equity Fund with
regard to matters of fact and certain certificates and written statements of
governmental officials with respect to the good standing of the Latin America
Equity Fund and on the opinion of Venable, Baetjer and Howard, LLP as to matters
of Maryland law.
(b) The Latin America Investment Fund shall have received an opinion
from Willkie Farr & Gallagher and dated the Effective Date, to the effect that
for federal income tax purposes (i) the Merger as provided in this Agreement
will constitute a reorganization within the meaning of Section 368(a)(1)(A) of
the Code and that the Latin America Equity Fund and the Latin America Investment
Fund will each be deemed a "party" to a reorganization within the meaning of
Section 368(b) of the Code; (ii) no gain or loss will be recognized to the Latin
America Investment Fund as a result of the Merger or on the conversion of Latin
America Investment shares to Latin America Equity Fund Common Stock except to
the extent such shareholders are paid cash in lieu of fractional shares of Latin
America Equity Fund in the Merger; (iii) no gain or loss will be recognized to
the Latin America Equity Fund as a result of the Merger; (iv) no gain or loss
will be recognized to the shareholders of the Latin America Investment Fund on
the conversion of their shares into Latin America Equity Fund Common Stock; (v)
the tax basis of the Latin America Investment Fund assets in the hands of the
Latin America Equity Fund will be the same as the tax basis of such assets in
the hands of the Latin America Investment Fund
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prior to the consummation of the Merger; (vi) immediately after the Merger, the
tax basis of the Latin America Equity Fund Common Stock received by the
shareholders of the Latin America Investment Fund in the Merger will be equal,
in the aggregate, to the tax basis of the shares of the Latin America Investment
Fund converted pursuant to the Merger; (vii) a shareholder's holding period for
the Latin America Equity Fund Common Stock will be determined by including the
period for which he or she held the Common Stock of the Latin America Investment
Fund converted pursuant to the Merger, provided, that such Latin America
Investment Fund shares were held as a capital asset; (viii) the Latin America
Equity Fund's holding period with respect to the Latin America Investment Fund
assets transferred will include the period for which such assets were held by
the Latin America Investment Fund; and (ix) the payment of cash to the Latin
America Investment Fund shareholders in lieu of fractional shares of the Latin
America Equity Fund will be treated as though the fractional shares were
distributed as part of the Merger and then redeemed by the Latin America Equity
Fund with the result that the Latin America Investment Fund shareholder will
generally have capital gains or losses to the extent the cash distribution
differs from such shareholder's basis allocable to the fractional shares.
8.5. Auditor's Consent and Certification. The Latin America
Investment Fund shall have received from PricewaterhouseCoopers LLP a letter
dated as of the effective date of the N-14 Registration Statement and a similar
letter dated within five days prior to the Effective Date, in form and substance
satisfactory to the Latin America Investment Fund, to the effect that (i) they
are independent public auditors with respect to the Latin America Equity Fund
within the meaning of the 1933 Act and the applicable published rules and
regulations thereunder; and (ii) in their opinion, the financial statements and
supplementary information of the Latin America Equity Fund incorporated by
reference in the N-14 Registration Statement and reported on by them comply as
to form in all material respects with the applicable accounting requirements of
the 1933 Act and the published rules and regulations thereunder.
8.6. Effectiveness of N-14 Registration Statement. The N-14
Registration Statement shall have become effective under the 1933 Act and no
stop order suspending such effectiveness shall have been instituted or, to the
knowledge of the Latin America Investment Fund, contemplated by the SEC.
8.7. Approval of Exemptive Application; Regulatory Filings.
(a) The Exemptive Application shall have been approved and the Latin
America Investment Fund shall have received from the SEC such orders or
interpretations as Willkie Farr & Gallagher, as counsel to the Latin America
Investment Fund, deems reasonably necessary or desirable under the 1933 Act and
the 1940 Act in connection with the Merger, provided, that such counsel or
counsel to the Latin America Equity Fund shall have requested such orders as
promptly as practicable, and all such orders shall be in full force and effect.
Any applicable waiting period under the HSR Act relating to the transactions
contemplated hereby shall have expired or been terminated.
(b) The SEC shall not have issued an unfavorable advisory report
under Section 25(b) of the 1940 Act, nor instituted or threatened to institute
any proceeding seeking to enjoin consummation of the Merger under Section 25(c)
of the 1940 Act; no
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other legal, administrative or other proceeding shall be instituted or
threatened which would materially affect the financial condition of the Latin
America Investment Fund or would prohibit the Merger.
(c) The Latin America Equity Fund shall have received from any
relevant state securities administrator such order or orders as are reasonably
necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act, and any
applicable state securities or blue sky laws in connection with the transactions
contemplated hereby, and that all such orders shall be in full force and effect.
8.8. Satisfaction of the Latin America Investment Fund. All
proceedings taken by the Latin America Equity Fund and its counsel in connection
with the Merger and all documents incidental thereto shall be satisfactory in
form and substance to the Latin America Investment Fund.
8.9. Dividends. Prior to the Effective Date, the Latin America
Equity Fund shall have declared and paid a dividend or dividends which, together
with all such previous dividends, shall have the effect of distributing to its
shareholders substantially all of its net investment company taxable income that
has accrued through the Effective Date, if any (computed without regard to any
deduction of dividends paid), and substantially all of its net capital gain, if
any, realized through the Effective Date.
9. PAYMENT OF EXPENSES
9.1. Allocation. All expenses incurred in connection with the Merger
since _______, 2000 shall be allocated equally between the Latin America Equity
Fund and the Latin America Investment Fund in the event the Merger is
consummated. Such expenses shall include, but not be limited to, all costs
related to the preparation and distribution of the N-14 Registration Statement,
the Exemptive Application, the HSR Filing for the Parties, proxy solicitation
expenses, SEC registration fees, and NYSE listing fees. Neither of the Parties
owes any broker's or finder's fees in connection with the transactions provided
for herein.
10. COOPERATION FOLLOWING EFFECTIVE DATE
In case at any time after the Effective Date any further action is
necessary to carry out the purposes of this Agreement, each of the Parties will
take such further action (including the execution and delivery of such further
instruments and documents) as any other Party may reasonably request, all at the
sole cost and expense of the requesting Party (unless the requesting Party is
entitled to indemnification as described below). The Latin America Investment
Fund acknowledges and agrees that from and after the Effective Date, the Latin
America Equity Fund shall be entitled to possession of all documents, books,
records, agreements and financial data of any sort pertaining to the Latin
America Investment Fund.
11. INDEMNIFICATION
11.1. The Latin America Investment Fund. The Latin America Equity
Fund agrees to indemnify and hold harmless the Latin America Investment Fund and
each
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of the Latin America Investment Fund's directors and officers from and against
any and all losses, claims, damages, liabilities or expenses (including, without
limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally, the Latin America Investment Fund
or any of its directors or officers may become subject, insofar as any such
loss, claim, damage, liability or expense (or actions with respect thereto)
arises out of or is based on any breach by the Latin America Equity Fund of any
of its representations, warranties, covenants or agreements set forth in this
Agreement.
11.2. The Latin America Equity Fund. The Latin America Investment
Fund agrees to indemnify and hold harmless the Latin America Equity Fund and
each of the Latin America Equity Fund's directors and officers from and against
any and all losses, claims, liabilities or expenses (including, without
limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally, the Latin America Equity Fund or
any of its directors or officers may become subject, insofar as any such loss,
claim, damage, liability or expense (or actions with respect thereto) arises out
of or is based on any breach by the Latin America Investment Fund of any of its
representations, warranties, covenants or agreements set forth in this
Agreement.
12. TERMINATION, POSTPONEMENT AND WAIVERS
12.1. Termination.
(a) Notwithstanding anything to the contrary in this Agreement, this
Agreement may be terminated and the Merger abandoned at any time (whether before
or after adoption by the shareholders of each of the Parties) prior to the
Effective Date, or the Effective Date may be postponed, (i) by mutual agreement
of the Parties' Board of Directors; (ii) by the Board of Directors of the Latin
America Equity Fund if any of the obligations of the Latin America Investment
Fund set forth in this Agreement has not been fulfilled or waived by such Board
or if the Latin America Investment Fund has made a material and intentional
misrepresentation herein or in connection herewith; or (iii) by the Board of
Directors of the Latin America Investment Fund if any of the obligations of the
Latin America Equity Fund set forth in this Agreement has not been fulfilled or
waived by such Board or if the Latin America Equity Fund has made a material and
intentional misrepresentation herein or in connection herewith.
(b) If the transaction contemplated by this Agreement shall not have
been consummated by December 31, 2000, this Agreement automatically shall
terminate on that date, unless a later date is mutually agreed to by the Boards
of Directors of the Parties.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the Agreement shall become void and have no further effect,
and there shall not be any liability hereunder on the part of either of the
Parties or their respective directors or officers, except for any such material
breach or intentional misrepresentation, as to each of which all remedies at law
or in equity of the party adversely affected shall survive.
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12.2. Waiver. At any time prior to the Effective Date, any of the
terms or conditions of this Agreement may be waived by the Board of Directors of
either the Latin America Investment Fund or the Latin America Equity Fund
(whichever is entitled to the benefit thereof), if, in the judgment of such
Board after consultation with its counsel, such action or waiver will not have a
material adverse effect on the benefits intended in this Agreement to the
shareholders of their respective fund, on behalf of which such action is taken.
12.3. Expiration of Representations and Warranties.
(a) The respective representations and warranties contained in
Articles 3 and 4 of this Agreement shall expire with, and be terminated by, the
consummation of the Merger, and neither of the Parties nor any of their
officers, directors, agents or shareholders shall have any liability with
respect to such representations or warranties after the Effective Date. This
provision shall not protect any officer, director, agent or shareholder of the
Parties against any liability to the entity for which that officer, director,
agent or shareholder so acts or to its shareholders to which that officer,
director, agent or shareholder would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties in
the conduct of such office.
(b) If any order or orders of the SEC with respect to this Agreement
shall be issued prior to the Effective Date and shall impose any terms or
conditions which are determined by action of the Boards of Directors of the
Parties to be acceptable, such terms and conditions shall be binding as if a
part of this Agreement without further vote or approval of the shareholders of
the Parties, unless such terms and conditions shall result in a change in the
method of computing the number of shares of Latin America Equity Fund Common
Stock to be issued pursuant to this Agreement, in which event, unless such terms
and conditions shall have been included in the proxy solicitation materials
furnished to the shareholders of the Parties prior to the meetings at which the
Merger shall have been approved, this Agreement shall not be consummated and
shall terminate unless the Parties call special meetings of shareholders at
which such conditions so imposed shall be submitted for approval.
13. MISCELLANEOUS
13.1. Transfer Restriction. Pursuant to Rule 145 under the 1933 Act,
and in connection with the issuance of any shares to any person who at the time
of the Merger is, to its knowledge, an affiliate of a party to the Merger
pursuant to Rule 145(c), the Latin America Equity Fund will cause to be affixed
upon the certificate(s) issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT TO THE LATIN AMERICA EQUITY FUND, INC. (OR ITS STATUTORY
SUCCESSOR) UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO
IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION
OF COUNSEL REASONABLY
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SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to the Latin
America Equity Fund's transfer agent with respect to such shares. The Latin
America Investment Fund will provide the Latin America Equity Fund on the
Effective Date with the name of any Latin America Investment Fund Shareholder
who is to the knowledge of the Latin America Investment Fund an affiliate of it
on such date.
13.2. Material Provisions. All covenants, agreements,
representations and warranties made under this Agreement and any certificates
delivered pursuant to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding any investigation made by
them or on their behalf.
13.3. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to the Latin America Investment Fund:
Hal Liebes, Esq.
Senior Vice President
The Latin America Investment Fund, Inc.
466 Lexington Avenue
New York, New York 10017
With copies to:
Daniel Schloendorn, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Marco E. Adelfio, Esq.
Morrison & Foerster
2000 Pennsylvania Avenue, N.W.
Suite 5500
Washington, D.C. 20006
If to the Latin America Equity Fund:
Hal Liebes, Esq.
Senior Vice President
The Latin America Equity Fund
466 Lexington Avenue
New York, New York 10017
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<PAGE>
With copies to:
Daniel Schloendorn, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Marco E. Adelfio, Esq.
Morrison & Foerster
2000 Pennsylvania Avenue, N.W.
Suite 5500
Washington, D.C. 20006
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.
13.4. Amendments. This Agreement may be amended, modified or
supplemented in such manner as may be mutually agreed upon in writing by the
authorized officers of the Latin America Investment Fund and the Latin America
Equity Fund; provided, however, that following the meeting of the Latin America
Investment Fund and Latin America Equity Fund shareholders to approve the
Merger, no such amendment may have the effect of changing the provisions for
determining the number of the Latin America Equity Fund shares to be issued to
the Latin America Investment Fund shareholders under this Agreement to the
detriment of such shareholders without their further approval.
13.5. Headings. The Article headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.6. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
13.7. Enforceability. Any term or provision of this Agreement that
is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
13.8. Successors and Assigns. This Agreement shall bind and inure to
the benefit of the parties hereto and their respective successors and assigns,
but no assignment or transfer hereof or of any rights or obligations hereunder
shall be made by any party
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without the written consent of the other party. Nothing herein expressed or
implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and the shareholders of the
Parties and their respective successors and assigns, any rights or remedies
under or by reason of this Agreement.
13.9. Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with the laws of the State of Maryland,
without regard to its principles of conflicts of law.
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<PAGE>
IN WITNESS WHEREOF, each of the Parties hereto has caused this
Agreement to be executed by its President or Vice President and its seal to be
affixed thereto and attested by its Secretary or Assistant Secretary.
THE LATIN AMERICA EQUITY FUND, INC.
By:_______________________________[SEAL]
Name:___________________________________
Attest:_________________________________
Title:__________________________________
THE LATIN AMERICA INVESTMENT FUND,
INC.
By:_______________________________[SEAL]
Name:___________________________________
Attest:_________________________________
Title:__________________________________
A-27-
<PAGE>
EXHIBIT B
FORM OF
NEW CSAM INVESTMENT ADVISORY AGREEMENT
B-1
<PAGE>
INVESTMENT ADVISORY AGREEMENT
_________ ___, 2000
Credit Suisse Asset Management, LLC
466 Lexington Avenue
New York, New York 10017
Dear Sirs:
The Latin America Equity Fund, Inc. (the "Company"), a corporation
organized under the laws of the state of Maryland, herewith confirms its
agreement with Credit Suisse Asset Management, LLC (the "Adviser"), a limited
liability company organized under the laws of the state of Delaware, as follows:
1. Investment Description; Appointment
The Company desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Articles of Incorporation, as amended, and in its Registration
Statement as from time to time in effect, and in such manner and to such extent
as may from time to time be approved by the Board of Directors of the Company.
Copies of the Company's Registration Statement and Articles of Incorporation, as
amended, have been or will be submitted to the Adviser. The Company agrees to
provide copies of all amendments to the Company's Registration Statement and
Articles of Incorporation to the Adviser on an ongoing basis. The Company
desires to employ and hereby appoints the Adviser to act as investment adviser
to the Company. The Adviser accepts the appointment and agrees to furnish the
services described herein for the compensation set forth below.
2. Services as Investment Adviser
Subject to the supervision and direction of the Board of Directors
of the Company, the Adviser will (a) act in accordance with the Company's
Articles of Incorporation, the Investment Company Act of 1940 and the Investment
Advisers Act of 1940 as the same may from time to time be amended, (b) manage
the Company's assets in accordance with its investment objective and policies as
stated in the Company's Registration Statement as from time to time in effect,
(c) make investment decisions and exercise voting rights in respect of portfolio
securities for the Company, (d) place purchase and sale orders on behalf of the
Company for all investments and (e) monitor and evaluate the services provided
by the Company's investment sub-advisers under the investment sub-advisory
agreements. In providing these services, the Adviser will provide investment
research and supervision of the Company's investments and conduct a continual
program of investment, evaluation and, if appropriate, sale and reinvestment of
the Company's assets. In addition, the Adviser will furnish the Company with
whatever statistical information the Company may reasonably request with respect
to the securities that the Company may hold or contemplate purchasing.
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3. Brokerage
In executing transactions for the Company and selecting brokers or
dealers, the Adviser will use its best efforts to seek the best overall terms
available. In assessing the best overall terms available for any Company
transaction, the Adviser will consider all factors it deems relevant including,
but not limited to, breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer and the reasonableness of any commission for the specific transaction and
on a continuing basis. In selecting brokers or dealers to execute a particular
transaction and in evaluating the best overall terms available, the Adviser may
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Company
and/or other accounts over which the Adviser or an affiliate exercises
investment discretion.
4. Information Provided to the Company
The Adviser will keep the Company informed of developments
materially affecting the Company, and will, on its own initiative, furnish the
Company from time to time with whatever information the Adviser believes is
appropriate for this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in rendering the
services described in paragraphs 2 and 3 above. The Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Company in connection with the matters to which this Agreement relates, provided
that nothing herein shall be deemed to protect or purport to protect the Adviser
against any liability to the Company or its shareholders to which the Adviser
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement ("disabling
conduct"). The Company will indemnify the Adviser against, and hold it harmless
from, any and all losses, claims, damages, liabilities or expenses (including
reasonable counsel fees and expenses) not resulting from disabling conduct by
the Adviser. Indemnification shall be made only following: (i) a final decision
on the merits by a court or other body before whom the proceeding was brought
that the Adviser was not liable by reason of disabling conduct or (ii) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the Adviser was not liable by reason of disabling conduct by (a)
the vote of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors") or (b) an independent legal counsel in a
written opinion. The Adviser shall be entitled to advances from the Company for
payment of the reasonable expenses incurred by it in connection with the matter
as to which it is seeking indemnification in the manner and to the fullest
extent permissible under the Maryland General Corporation Law. The Adviser shall
provide to the Company a written affirmation of its good faith belief that the
standard of conduct necessary for indemnification by the Company has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at least
one of the following additional conditions shall be met: (a) the Adviser shall
provide security in form and
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<PAGE>
amount acceptable to the Company for its undertaking; (b) the Company is insured
against losses arising by reason of the advance; or (c) a majority of a quorum
of disinterested non-party directors, or independent legal counsel, in a written
opinion, shall have determined, based on a review of facts readily available to
the Company at the time the advance is proposed to be made, that there is reason
to believe that the Adviser will ultimately be found to be entitled to
indemnification.
6. Compensation
6(a). In consideration of the services rendered pursuant to this
Agreement, the Company will pay the Adviser after the end of each calendar
quarter a fee for the previous quarter computed at an annual rate of 1.25% of
the first US$ 100 million of the Company's "Average Weekly Base Amount" (as
defined below), 1.15% of the next US$ 50 million and 1.05% of amounts above US$
150 million.
(b) (i) "Average Weekly Base Amount" for any quarter is the
average of the lesser of (A) "Market Value" of the Company's outstanding shares,
and (B) the Company's net assets, in each case determined as the last trading
day for each week during that quarter.
(ii) "Market Value" of the Company's outstanding shares will
be determined as follows:
(A) if the Company's shares are listed or traded on any
national securities exchange or on the Nasdaq National Market, the shares shall
be valued at the last sale price on the exchange or market on which they are
principally traded, on the valuation date; if there is no sale on the valuation
date, the shares shall be valued at the mean between the closing bid and asked
price;
(B) if the Company's shares are traded over-the-counter but
are not listed or traded on any national securities exchange or on the Nasdaq
National Market, the shares shall be valued at the last sale price on the
valuation date or, if no sale occurs on that date, at the last bid price; or
(C) if the Company's shares are not listed or traded on any
recognized securities market or over-the-counter, the shares shall be deemed to
have the same value as the underlying net assets of the Fund as of the valuation
date.
(c) The Adviser (or, as provided below, the Company) shall pay to
each of the sub-investment advisers of the Company (the "Sub-Advisers") the fees
payable under each Investment Sub-Advisory Agreement relating to the Company
among the Company, the Adviser and each such Sub-Adviser. In the event that any
one of the Investment Sub-Advisory Agreements is terminated, the Adviser shall
be responsible for furnishing to the Company the services required to be
performed by such Sub-Adviser under the respective Investment Sub-Advisory
Agreement or arranging for a successor sub-investment adviser with respect to
such investments on terms and conditions acceptable to the Company and subject
to the requirements of the Investment Company Act of 1940.
(d) The Company agrees that, at the request of the Adviser, it will
pay the Sub-Advisers directly in local currency the amounts payable to each of
the Sub-
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<PAGE>
Advisers for sub-advisory services, provided that the fee payable to the Adviser
hereunder shall be reduced to the extent of amounts so paid to the Sub-Adviser
(e) Upon any termination of this Agreement before the end of a
quarter, the fee for such part of that quarter shall be prorated according to
the proportion that such period bears to the full quarterly period and shall be
payable upon the date of termination of this Agreement. For the purpose of
determining fees payable to the Adviser, the value of the Company's net assets
shall be computed at the times and in the manner specified in the Company's
Registration Statement as from time to time in effect.
7. Expenses
The Adviser will bear all expenses in connection with the
performance of its services under this Agreement, including compensation of and
office space for its officers and employees connected with investment and
economic research, trading and investment management and administration of the
Company, as well as the fees of all directors of the Company who are affiliated
with the Adviser or any of its affiliates. The Company will bear certain other
expenses to be incurred in its operation, including: organizational expenses;
taxes, interest, brokerage costs and commissions and stock exchange fees; fees
of directors of the Company who are not officers, directors, or employees of the
Adviser, the Sub-Advisers, any U.S. or foreign administrator; Securities and
Exchange Commission fees; state Blue Sky qualification fees; charges of
custodians, sub-custodians and transfer and dividend disbursing agents; expenses
in connection with the Company's Dividend Reinvestment and Cash Purchase Plan;
insurance premiums; outside auditing, pricing and legal expenses; costs of
maintenance of the Company's existence; costs attributable to investor services,
including, without limitation, telephone and personnel expenses; costs of
printing stock certificates; costs of shareholders' reports and meetings of the
shareholders of the Company and of the officers or Board of Directors of the
Company; membership fees in trade associations; stock exchange listing fees and
expenses; litigation and other extraordinary or non-recurring expenses.
8. Services to Other Companies or Accounts
The Company understands that the Adviser now acts, will continue to
act or may act in the future as investment adviser to fiduciary and other
managed accounts or as investment adviser to one or more other investment
companies, and the Company has no objection to the Adviser so acting, provided
that whenever the Company and one or more other accounts or investment companies
advised by the Adviser have available funds for investment, investments suitable
and appropriate for each will be allocated in accordance with procedures
believed to be equitable to each entity. Similarly, opportunities to sell
securities will be allocated in an equitable manner. The Company recognizes that
in some cases this procedure may adversely affect the size of the position that
may be acquired or disposed of for the Company. In addition, the Company
understands that the persons employed by the Adviser to assist in the
performance of the Adviser's duties hereunder will not devote their full time to
such service and nothing contained herein shall be deemed to limit or restrict
the right of the Adviser or any affiliate of the Adviser to engage in and devote
time and attention to other businesses or to render services of whatever kind or
nature.
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9. Term of Agreement
This Agreement shall become effective as of the date hereof and
shall continue for an initial two-year term and shall continue thereafter so
long as such continuance is specifically approved at least annually by (i) the
Board of Directors of the Company or (ii) a vote of a "'majority" (as defined in
the Investment Company Act of 1940) of the Company's outstanding voting
securities, provided that in either event the continuance is also approved by a
majority of the Board of Directors who are not "interested persons" (as defined
in said Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. This Agreement is terminable,
without penalty, on 60 days' written notice, by the Board of Directors of the
Company or by vote of holders of a majority of the Company's shares, or upon 90
days' written notice, by the Adviser. This Agreement will also terminate
automatically in the event of its assignment (as defined in said Act).
10. Entire Agreement
This Agreement constitutes the entire agreement between the parties
hereto.
11. Changes in Membership
The Adviser shall notify the Company of any change in the membership
of the Adviser within a reasonable time after such change.
12. Governing Law
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the state of New York without giving effect to the
conflicts of laws principles thereof.
13. Counterparts
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same original.
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If the foregoing accurately sets forth our agreement, kindly
indicate your acceptance hereof by signing and returning the enclosed copy
hereof.
Very truly yours,
THE LATIN AMERICA EQUITY FUND, INC.
By:_____________________________________
Name: Richard W. Watt
Title: President
Accepted:
CREDIT SUISSE ASSET
MANAGEMENT, LLC
By:____________________________
Name:
Title:
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<PAGE>
EXHIBIT C
FORM OF
NEW CELFIN INVESTMENT SUB-ADVISORY AGREEMENT
C-1
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT
___________, 2000
Celfin Servicios Financieros S.A.
Apoquinda 3721, Piso 19
Santiago
Chile
Dear Sirs:
The Latin America Equity Fund, Inc. (the "Company"), a corporation
organized under the laws of the state of Maryland, and Credit Suisse Asset
Management, LLC ("CSAM"), a limited liability company organized under the laws
of the state of Delaware and the investment adviser to the Company, each
herewith confirms its agreement with Celfin Servicios Financieros S.A. (the
"Sub-Adviser") as follows:
1. Investment Description; Appointment
The Company desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Articles of Incorporation, as amended, and in its Registration
Statement as from time to time in effect, and in such manner and to such extent
as may from time to time be approved by the Board of Directors of the Company.
Copies of the Company's Registration Statement and Articles of Incorporation, as
amended, have been or will be submitted to the Sub-Adviser. The Company agrees
to provide copies of all amendments to the Company's Registration Statement and
Articles of Incorporation to the Sub-Adviser on an on-going basis. The Company
and CSAM desire to employ and hereby appoint the Sub-Adviser to act as
investment sub-adviser to the Company with respect to Chilean investments. The
Sub-Adviser accepts the appointment and agrees to furnish the services described
herein for the compensation set forth below.
2. Services as Investment Sub-Adviser
Subject to the supervision and direction of the Board of Directors
of the Company and of CSAM, the Sub-Adviser will (a) act in conformity with the
Company's Articles of Incorporation, the U.S. Investment Company Act of 1940 and
the U.S. Investment Advisers Act of 1940, as the same may from time to time be
amended, and (b) provide the following services: (1) furnishing advice and
making recommendations to CSAM regarding the purchase and sale of Chilean
securities, (2) providing CSAM with statistical, research and other factual data
for its use in connection with the Company's investment program in Chile, (3)
identifying Chilean regulatory and other Chilean governmental requirements
applicable to the Company in connection with the Company's investment activities
in Chile, (4) monitoring the execution of transactions and the settlement and
clearance of the Company's Chilean securities transactions and (5) providing
information regarding corporate actions, repatriation restrictions, currency
restrictions and other matters relating to the Company's Chilean holdings as may
be requested by the Company or CSAM from time to time.
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3. Information Provided to CSAM
The Sub-Adviser will keep CSAM informed of developments in Chile
materially affecting the Company, and will, on its own initiative, furnish CSAM
from time to time with whatever information the Sub-Adviser believes is
appropriate for this purpose.
4. Standard of Care
The Sub-Adviser shall exercise its best judgment in rendering the
services described in paragraphs 2 and 3 above. The Sub-Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Company or CSAM in connection with the matters to which this Agreement
relates, provided that nothing herein shall be deemed to protect or purport to
protect the Sub-Adviser against any liability to CSAM, the Company or its
shareholders to which the Sub-Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
5. Compensation
In consideration of the services rendered pursuant to this
Agreement, CSAM will pay the Sub-Adviser within five business days after the end
of each calendar quarter during the term of this Agreement a fee for the
previous quarter computed at an annual rate of .25 of 1.00% of the Company's
average weekly net assets invested in Chilean securities, less the "Discount
Adjustment Amount." For purposes of this Agreement, the "Discount Adjustment
Amount" shall mean the product of (x) the quarterly fee otherwise due to the
Sub-Adviser hereunder, and (y) a fraction, the numerator of which is the amount
by which the investment advisory fee payable to CSAM by the Company for the
corresponding quarter has been reduced, pursuant to the terms of the Investment
Advisory Agreement between the Company and CSAM, as a consequence of the market
value of the Company's outstanding shares trading at a discount to the Company's
net asset value, and the denominator of which is the investment advisory fee
that would have been payable to CSAM for that quarter if no such reduction was
required by the terms of that agreement. If the Investment Advisory Agreement
between the Company and CSAM at any time no longer requires any such adjustment,
the Discount Adjustment Amount hereunder shall be zero.
Pursuant to the terms of the Investment Advisory Agreement between
the Company and CSAM of even date herewith, CSAM may direct the Company to pay
the Sub-Adviser directly amounts owing under this Agreement in Chilean pesos at
the "dolar observado" rate on this date of payment or, if such rate ceases to be
calculated in Chile, at an exchange rate commonly utilized in lieu of the "dolar
observado" rate. Other than in this instance, the Sub-Adviser shall have no
right to obtain compensation directly from the Company for services provided
hereunder and agrees to look solely to CSAM for payment of fees due. Upon any
termination of this Agreement before the end of a quarter, the fee for such part
of that quarter shall be prorated according to the proportion that such period
bears to the full quarterly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees payable to
the Sub-Adviser, the value of the Company's net assets invested in Chilean
securities shall be computed at the times and in the manner specified in the
Company's Registration Statement as from time to time in effect.
6. Expenses
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The Sub-Adviser will bear all expenses in connection with the
performance of its services under this Agreement. The Company will bear certain
other expenses to be incurred in its operation, including: organizational
expenses, taxes, interest, brokerage costs and commissions and stock exchange
fees; fees of directors of the Company who are not officers, directors or
employees of the Sub-Adviser, CSAM, any other sub-investment adviser or any of
their affiliates; U.S. Securities and Exchange Commission fees, state Blue Sky
qualification fees; charges of custodians, sub-custodians and transfer and
dividend disbursing agents; expenses in connection with the Company's Dividend
Reinvestment and Cash Purchase Plan; insurance premiums; outside auditing,
pricing and legal expenses; costs of maintenance of the Company's existence;
costs attributable to investor services, including, without limitation,
telephone and personnel expenses; costs of printing stock certificates; costs of
shareholders' reports and meetings of the shareholders of the Company and of the
officers or Board of Directors of the Company; membership fees in trade
associations; stock exchange listing fees and expenses; litigation and other
extraordinary or non-recurring expenses.
7. Services to Other Companies or Accounts
The Company understands that the Sub-Adviser now acts, will continue
to act or may act in the future as investment adviser to fiduciary and other
managed accounts or as investment adviser to one or more other investment
companies, and the Company has no objection to the Sub-Adviser so acting. The
Company understands that the persons employed by the Sub-Adviser to assist in
the performance of the Sub-Adviser's duties hereunder will not devote their full
time to such services and nothing contained herein shall be deemed to limit or
restrict the right of the Sub-Adviser or any affiliate of the Sub-Adviser to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
8. Term of Agreement
This Agreement shall become effective as of the date hereof and
shall continue for an initial two-year term and shall continue thereafter so
long as such continuance is specifically approved at least annually by (i) the
Board of Directors of the Company or (ii) a vote of a "majority" (as defined in
the Investment Company Act of 1940) of the Company's outstanding voting
securities, provided that in either event the continuance is also approved by a
majority of the Board of Directors who are not "interested persons" (as defined
in said Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. This Agreement is terminable,
without penalty, on 60 days' written notice, by the Board of Directors of the
Company or CSAM or by vote of holders of a majority of the Company's shares, or
upon 90 days' written notice, by the Sub-Adviser. This Agreement will also
terminate automatically in the event of its assignment (as defined in said Act).
9. Entire Agreement
This Agreement constitutes the entire agreement among the parties
hereto.
10. Governing Law
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This Agreement shall be governed by and continued and enforced in
accordance with the laws of the state of New York without giving effect to the
conflicts of laws principles thereof.
11. Consent to Jurisdiction and Service of Process
The Sub-Adviser irrevocably submits to the jurisdiction of any New
York State or United States Federal court sitting in the Borough of Manhattan,
The City of New York over any suit, action or proceeding arising out of or
relating to this Agreement. The Sub-Adviser irrevocably waives, to the fullest
extent permitted by law, any objection which it may have to the laying of the
venue of any such suit, action or proceeding brought in such a court and any
claim that any such suit, action or proceeding brought in such a court has been
brought in an inconvenient forum. The Sub-Adviser agrees that final judgment in
any such suit, action or proceeding brought in such a court shall be conclusive
and binding upon the Sub-Adviser, and may be enforced to the extent permitted by
applicable law in any court of the jurisdiction of which the Sub-Adviser is
subject by a suit upon such judgment, provided that service of process is
effected upon the Sub-Adviser in the manner specified in the following paragraph
or as otherwise permitted by law.
As long as this Agreement remains in effect, the Sub-Adviser will at
all times have an authorized agent in the Borough of Manhattan, The City of New
York upon whom process may be served in any legal action or proceeding in a New
York State or United States Federal court sitting in the Borough of Manhattan,
The City of New York over any suit, action or proceeding arising out of or
relating to this Agreement. The Sub-Adviser hereby appoints CT Corporation
System as its agent for such purpose, and covenants and agrees that service of
process in any such legal action or proceeding may be made upon it at the office
of such agent at 1633 Broadway, New York, New York 10019 (or at such other
address in the Borough of Manhattan, The City of New York, as said agent may
designate by written notice to the Company and CSAM). The Sub-Adviser hereby
consents to process being served in any suit, action or proceeding of the nature
referred to in the preceding paragraph by service upon such agent together with
the mailing of a copy thereof by registered or certified mail, postage prepaid,
return receipt requested, to the address of the Sub-Adviser set forth in the
heading to this Agreement or to any other address of which the Sub-Adviser shall
have given written notice to the Company and CSAM. The Sub-Adviser irrevocably
waives, to the fullest extent permitted by law, all claim of error by reason of
any such service (but does not waive any right to assert lack of subject matter
jurisdiction) and agrees that such service (i) shall be deemed in every respect
effective service of process upon the Sub-Adviser in any suit, action or
proceeding and (ii) shall, to the fullest extent permitted by law, be taken and
held to be valid personal service upon and personal delivery to the Sub-Adviser.
Nothing in this Section shall affect the right of the Company or
CSAM to serve process in any manner permitted by law or limit the right of the
Company or CSAM to bring proceedings against the Sub-Adviser in the courts of
any jurisdiction or jurisdictions.
12. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed
C-5
<PAGE>
an original, but all of which together shall constitute one and the same
original.
C-6
<PAGE>
If the foregoing accurately sets forth our agreement, kindly
indicate your acceptance hereof by signing and returning the enclosed copy
hereof.
Very truly yours,
THE LATIN AMERICA EQUITY FUND, INC.
By:_____________________________________
Name: Richard W. Watt
Title: President
CREDIT SUISSE ASSET MANAGEMENT, LLC
By:_____________________________________
Name: Richard W. Watt
Title: Managing Director
Accepted:
CELFIN SERVICIOS FINANCIEROS S.A.
By:_____________________________________
Name: Juan Andres Camus
Title: Managing Director
By:_____________________________________
Name:
Title: Managing Director
C-7
<PAGE>
PROXY CARD FOR
THE LATIN AMERICA EQUITY FUND, INC.
D-1
<PAGE>
PROXY
THE LATIN AMERICA EQUITY FUND, INC.
This Proxy is Solicited on Behalf of the Board of Directors
P R O X Y
The undersigned hereby appoints Michael A. Pignataro and Hal Liebes as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated on the reverse side and in
accordance with their judgment on such other matters as may properly come before
the meeting or any adjournments thereof, all shares of The Latin America Equity
Fund, Inc. (the "Fund") that the undersigned is entitled to vote at the special
meeting of shareholders to be held on September 15, 2000, and at any
adjournments thereof.
------------- -------------
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
------------- -------------
D-2
<PAGE>
|X| Please mark
votes as in
this example
This proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this proxy
will be voted "FOR" Proposals 1, 2 and 3 and "AGAINST" Proposal 4.
The Board of Directors recommends a vote "FOR" Proposal 1, "FOR" Proposal
2, "FOR" Proposal 3 and "AGAINST" Proposal 4.
FOR AGAINST ABSTAIN
1. To approve a Merger Agreement and Plan
of Reorganization whereby The Latin America |_| |_| |_|
Investment Fund, Inc. will merge with and
into the Fund.
FOR AGAINST ABSTAIN
2 To approve a new investment advisory
agreement with Credit Suisse Asset |_| |_| |_|
Management, LLC.
FOR AGAINST ABSTAIN
3. To approve a new investment sub-advisory
agreement with Celfin Servicios |_| |_| |_|
Financieros
S.A.
FOR AGAINST ABSTAIN
4. To approve a shareholder proposal to
terminate the current investment advisory |_| |_| |_|
agreement with Credit Suisse Asset
Management, LLC.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT |_|
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Please sign exactly as name appears at left. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If in a
partnership, please sign in partnership name by authorized person.
Signature:___________________________________________ Date:____________________
Signature:___________________________________________ Date:____________________
D-3
<PAGE>
PROXY CARD FOR
THE LATIN AMERICA INVESTMENT FUND, INC.
E-1
<PAGE>
PROXY
THE LATIN AMERICA INVESTMENT FUND, INC.
This Proxy is Solicited on Behalf of the Board of Directors
P R O X Y
The undersigned hereby appoints Michael A. Pignataro and Hal Liebes as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated on the reverse side and in
accordance with their judgment on such other matters as may properly come before
the meeting or any adjournments thereof, all shares of The Latin American
Investment Fund, Inc. (the "Fund") that the undersigned is entitled to vote at
the special meeting of shareholders to be held on September 15, 2000, and at any
adjournments thereof.
------------- -------------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
------------- -------------
E-2
<PAGE>
|X| Please mark
votes as in
this example
This proxy when properly executed will be voted in the manner directed herein by
the undersigned shareholder. If no direction is made, this proxy will be voted
"FOR" Proposal 1 and "AGAINST" Proposal 2.
The Board of Directors recommends a vote "FOR" Proposal 1 and "AGAINST" Proposal
2.
1. To approve a Merger Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization whereby the Fund will merge with and |_| |_| |_|
into The Latin America Equity Fund, Inc.
2. To approve a shareholder proposal to terminate the FOR AGAINST ABSTAIN
current investment advisory agreement with Credit |_| |_| |_|
Suisse Asset Management, LLC.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY |_|
USING THE ENCLOSED ENVELOPE.
Please sign exactly as name appears at left. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by president or other authorized officer. If in a
partnership, please sign in partnership name by authorized person.
Signature:___________________________________________ Date:____________________
Signature:___________________________________________ Date:____________________
E-3
<PAGE>
PART B
SUBJECT TO COMPLETION DATED JUNE 30, 2000
THE LATIN AMERICA EQUITY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MERGER OF
THE LATIN AMERICA INVESTMENT FUND, INC.
466 LEXINGTON AVENUE, 16TH FLOOR
NEW YORK, NEW YORK 10017
(212) 875-3500
WITH AND INTO
THE LATIN AMERICA EQUITY FUND, INC.
466 LEXINGTON AVENUE, 16TH FLOOR
NEW YORK, NEW YORK 10017
(212) 875-3500
This Statement of Additional Information, or SAI, relates specifically to
the proposed merger (the "Merger") of The Latin America Investment Fund, Inc.
(the "Latin America Investment Fund") with and into The Latin America Equity
Fund, Inc. (the "Latin America Equity Fund") in accordance with the General
Corporation Law of the State of Maryland. This Statement of Additional
Information consists of this cover page, the information contained herein, and
the following documents, each of which has been filed electronically and is
incorporated by reference herein:
(1) The audited financial statements, notes to the audited financial
statements and report of the independent auditors for the Latin America
Equity Fund for the fiscal year ended December 31, 1999; and
(2) The audited financial statements, notes to the audited financial
statements and report of the independent auditors for the Latin America
Investment Fund for the fiscal year ended December 31, 1999.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Proxy Statement/Prospectus dated June , 2000,
relating to the Merger. A copy of the Proxy Statement/Prospectus may be obtained
without charge by writing to either Fund at 466 Lexington Avenue, New York, New
York 10017 or by calling Shareholders Communications Corporation at 1-(800)
403-7916.
This Statement of Additional Information is dated ____________, 2000
1
<PAGE>
TABLE OF CONTENTS
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES...............................3
INVESTMENT RESTRICTIONS.......................................................11
MANAGEMENT OF THE FUNDS.......................................................13
PORTFOLIO TRANSACTIONS........................................................18
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN..................................19
TAXATION......................................................................23
FINANCIAL STATEMENTS..........................................................34
PRO FORMA FINANCIAL STATEMENTS................................................34
APPENDIX A...................................................................A-1
2
<PAGE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
Organization. Both the Latin America Equity Fund and the Latin America
Investment Fund are closed-end, non-diversified management investment companies
registered under the Investment Company Act of 1940, or the Investment Company
Act. The Latin America Equity Fund and the Latin America Investment Fund are
sometimes collectively referred to in this SAI as the "Funds" and individually,
as the context may require, as the "Fund." Both Funds are organized as
corporations under the laws of the State of Maryland. Each Fund is managed and
advised by Credit Suisse Asset Management, LLC, or CSAM, formerly known as BEA
Associates, except that Salomon Brothers Asset Management Inc, or SBAM, manages
the debt securities of the Latin America Investment Fund. The shares of common
stock of each Fund are listed and trade on the New York Stock Exchange, or NYSE,
under the symbols "LAQ" and "LAM", respectively. After the Merger, the Latin
America Equity Fund's shares will continue to be traded on the NYSE under the
symbol "LAQ", while the Latin America Investment Fund's shares will be delisted
and that Fund will cease to exist.
The shares of common stock of each Fund have equal non-cumulative voting
rights and equal rights with respect to dividends, assets and dissolution. Each
Fund's shares of common stock are fully paid and non-assessable and have no
preemptive, conversion or other subscription rights. Fluctuations in the market
price of the Fund's shares is the principal investment risk of an investment in
either Fund. Portfolio management, market conditions, investment policies and
other factors affect such fluctuations. Although the investment objectives,
policies and restrictions of the Funds are similar, there are differences
between them, as discussed below. There can be no assurance that either Fund
will achieve its stated objective.
Investment Objectives. Long-term capital appreciation is the principal
investment objective of each Fund. The Latin America Equity Fund seeks to
achieve this objective by investing primarily in Latin American equity
securities, while the Latin America Investment Fund seeks to achieve this
objective by investing primarily in Latin American debt and equity securities.
This investment objective is a fundamental policy of each Fund and cannot be
changed without the approval of the holders of a majority of each Fund's
outstanding voting securities. As used throughout this SAI, for each Fund, a
"majority of the Fund's outstanding voting securities" means the lesser of:
o 67% of the shares of that Fund's common stock represented at a
meeting at which more than 50% of the outstanding shares of that
Fund's common stock are represented, or
o more than 50% of the outstanding shares of common stock.
Comparison of Investment Policies. The Latin America Equity Fund's policy
under normal market conditions is the investment of substantially all, and at
least 80%, of its total assets in Latin American equity securities. The Latin
America Investment Fund's policy, under normal market conditions, is the
investment of substantially all, and at least 65%, of its total assets in Latin
American debt and equity securities. These policies and the investment
limitations described below under "-- Investment Restrictions" are fundamental
and may not be changed without the approval of a majority of each Fund's
outstanding voting securities. All
3
<PAGE>
other policies and percentage limitations of each Fund as described below may be
modified by that Fund's Board of Directors if, in the reasonable exercise of its
business judgment, it determines that modification is necessary or appropriate
to carry out that Fund's investment objective.
Both Funds define Latin American equity securities as:
o equity securities of companies organized in a Latin American country
or for which the principal trading market is in Latin America,
o equity securities denominated in a Latin American currency issued by
companies to finance operations in Latin America,
o equity securities of companies that derive at least 50% of their
revenues primarily from either goods or services produced in Latin
America or sales made in Latin America, and
o Latin American equity securities in the form of depositary shares.
Both Funds also define Latin American equity securities to include equity
securities of companies that have characteristics and business relationships
common to companies in other geographic regions. As a result, the value of the
securities of these companies may reflect economic and market forces in other
regions as well as in Latin America. Each Fund believes, however, that
investment in such companies is appropriate in light of its investment objective
because CSAM will select only those companies which, in its view, have
sufficiently strong exposure to economic and market forces in Latin America such
that their value will tend to reflect Latin American developments to a greater
extent than developments in other regions. For example, CSAM may direct either
Fund to invest in companies organized and located in the United States or other
countries outside of Latin America, including companies having their entire
production facilities outside of Latin America, when such companies meet the
Funds' definition of Latin American equity securities (as enumerated above) so
long as CSAM believes at the time of investment that the value of the company's
equity securities will reflect principally conditions in Latin America.
In addition, the Latin America Investment Fund's definition of Latin
American debt securities includes debt securities that have the characteristics
enumerated above for equity securities as well as securities issued or
guaranteed by the government of a Latin American country, its agencies or
instrumentalities, or the central bank of that country.
For purposes of this SAI, unless otherwise indicated, Latin America
consists of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba,
Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico,
Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela.
The Latin America Equity Fund invests primarily in listed equity
securities in Argentina, Brazil, Chile and Mexico, the most developed capital
markets in Latin America. Although the Fund expects, under normal market
conditions, to invest at least 80% of its assets in equity
4
<PAGE>
securities in these four countries, the portion of its holdings in any Latin
American country will vary from time to time.
The Latin America Investment Fund invests primarily in listed securities
in Brazil, Chile and Mexico. The Fund expects, under normal market conditions,
to invest at least 65% of its assets in debt and equity securities in these
three countries.
The governments of some Latin American countries have been engaged in
"privatization" programs which involve the sale of part or all of their stakes
in government owned or controlled enterprises. CSAM believes that privatizations
may offer shareholders opportunities for significant capital appreciation and
intends to invest assets of each Fund in privatizations in appropriate
circumstances. In certain Latin American countries, the ability of foreign
entities, such as the Funds, to participate in privatizations may be limited by
local law. In addition, the terms on which the Funds may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that Latin American governments will continue to sell companies
currently owned or controlled by them or that privatization programs will be
successful.
The Latin America Equity Fund may also invest up to 20% of its assets in
corporate and government debt securities of Latin American issuers, and the
Latin America Investment Fund may invest a substantial portion of its assets in
Latin American debt securities, when CSAM, in the case of the Latin America
Equity Fund, or CSAM and SBAM, in the case of the Latin America Investment Fund,
believe that it is appropriate to do so in order to achieve capital
appreciation. Latin American equity securities in which the Funds may invest
consist predominantly of:
o common stock,
o preferred stock, and
o to a limited extent, convertible securities and warrants.
Latin American debt securities that the Funds may acquire include:
o bonds,
o notes and debentures of any maturity of Latin American
governments,
o obligations of Latin American governments' agencies,
instrumentalities and central banks, and
o obligations of banks and other companies of Latin American
countries determined by CSAM to be suitable investments for
each Fund (including repurchase agreements with respect to
obligations of the governments or central banks of Latin
American countries).
5
<PAGE>
In addition, the Latin American Equity Fund may acquire Assignments of, and
Participations in, loans (as such terms are defined under "Risk Factors and
Special Considerations--Loan Participations and Assignments" in the Proxy
Statement/Prospectus).
CSAM may invest in securities that it determines to be suitable
investments for each Fund regardless of such securities' ratings. The Latin
America Equity Fund may not, however, invest more than 15% of its assets, and
the Latin America Investment Fund may not invest more than 30% of its assets, in
debt securities that are determined by CSAM to be comparable to securities rated
below investment grade by Standard & Poor's Rating Group, or S&P, or Moody's
Investor Services, or Moody's. The Funds' holdings of lower-quality or unrated
debt securities will consist predominantly of Sovereign Debt, much of which
trades at substantial discounts from face value and which may include Sovereign
Debt comparable to securities rated as low as D by S&P or C by Moody's. For more
information about Sovereign Debt, see "Risk Factors and Special
Considerations--Sovereign Debt" and "Comparison of Investment Objectives and
Policies" in the Proxy Statement/Prospectus.
Neither Fund will invest more than 25% of its assets in the securities of
companies in the same industry. In selecting industries and companies for
investment by the Funds, CSAM considers factors such as overall growth
prospects, competitive position in domestic and export markets, technology,
research and development, productivity, labor costs, raw materials costs and
sources, profit margins, return on investment, capital resources, government
regulation and management. Certain sectors of the economies of certain Latin
American countries are closed to equity investments by foreigners.
Several Latin American countries have adopted debt conversion programs,
pursuant to which investors may use external debt of a country, directly or
indirectly, to make investments in local companies. The terms of the various
programs vary from country to country although each program includes significant
restrictions on the application of the proceeds received in the conversion and
on the remittance of profits on the investment and of the invested capital. Both
Funds intend to acquire Sovereign Debt of Latin American issuers to hold and
trade in appropriate circumstances, as well as to use to participate in Latin
American debt conversion programs. The portion of the Latin American Equity
Fund's assets invested in Sovereign Debt is not normally expected to exceed 15%
of its total assets. The portion of the Latin America Investment Fund's assets
invested in Sovereign Debt is not normally expected to exceed 30% of its total
assets.
As a result of legal restrictions or market practices or both, the Funds,
as U.S. entities, may be precluded from purchasing shares in public offerings by
certain Latin American companies.
Both Funds invest with a long-term perspective and do not trade in
securities for short-term gain. For information regarding each Fund's portfolio
turnover rate, see "Financial Highlights" and "Comparison of Investment
Objectives and Policies--Portfolio Turnover Rate" in the Proxy
Statement/Prospectus. Portfolio turnover rate is calculated by dividing the
lesser of sales or purchases of portfolio securities for any given year by the
average monthly value of that Fund's portfolio securities for such year. For
purposes of this calculation, portfolio securities exclude purchases and sales
of debt securities having a maturity at the date of purchase of one
6
<PAGE>
year or less. Portfolio turnover directly affects the amount of transaction
costs that will be borne by each Fund.
Temporary Investments. Each of the Funds may, for cash management
purposes, invest up to 25% of its assets in certain short-term instruments and
may, for temporary defensive purposes, invest up to 100% of its assets in
certain short-term instruments. Diversification requirements and prohibitions on
repatriation of capital in certain Latin American countries for certain types of
investments may limit each Fund's ability to make defensive investments during a
period in which CSAM believes that such investments are warranted.
Each Fund may invest in the following short-term instruments:
o obligations of the U.S. Government, its agencies or
instrumentalities (including repurchase agreements with
respect to these securities),
o bank obligations (including certificates of deposit, time
deposits and bankers' acceptances) of U.S. banks and foreign
banks denominated in any currency,
o floating rate securities and other instruments denominated in
any currency issued by international development agencies,
banks and other financial institutions, governments and their
agencies and instrumentalities, and corporations located in
countries that are members of the Organization for Economic
Cooperation and Development,
o obligations of U.S. corporations that are rated no lower than
A-2 by S&P or P-2 by Moody's or the equivalent by another
rating service or, if unrated, deemed to be of equivalent
quality by CSAM, and
o shares of money market funds that are authorized to invest in
short-term instruments described above.
Among the obligations of agencies and instrumentalities of the U.S.
Government in which the Funds may invest are securities that are supported by
the "full faith and credit" of the U.S. Government (such as securities of the
Government National Mortgage Association), by the rights of the issuer to borrow
from the U.S. Treasury (such as those of the Export-Import Bank of the United
States), by the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as those of the Federal National Mortgage
Association) or by the credit of the U.S. Government instrumentality itself
(such as those of the Student Loan Marketing Association).
Repurchase agreements are contracts under which the buyer of a security
simultaneously buys and commits to resell the security to the seller at an
agreed upon price and date. The Funds will enter into repurchase agreements
regarding U.S. Government securities with primary government securities dealers
recognized by the Federal Reserve Bank of New York and member banks of the
Federal Reserve System and regarding securities issued by the governments of
Latin American countries, their agencies or instrumentalities, with creditworthy
parties. The Funds will only enter into repurchase agreements pursuant to which
the seller is
7
<PAGE>
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. CSAM will monitor and mark to
market the value of such securities daily to assure that the value equals or
exceeds the repurchase price. CSAM will also monitor the creditworthiness of
parties to repurchase agreements under the Directors' general supervision.
Repurchase agreements may involve risks in the event of default or insolvency of
the seller, including possible delays or restrictions upon either Fund's ability
to dispose of the underlying securities.
Currency Transactions. CSAM generally does not seek to hedge against
declines in the value of the Funds' non-dollar-denominated portfolio securities
resulting from currency devaluations or fluctuations. If suitable hedging
instruments are available on a timely basis and on acceptable terms, CSAM may,
in its discretion, hedge all or part of the value of the Funds'
non-dollar-denominated portfolio securities, although it is not obligated to do
so. Each Fund will be subject to the risk of changes in value of the Latin
American currencies in which their assets are denominated, unless they engage in
hedging transactions.
In addition to hedging against a decline in the value of its portfolio
assets, each Fund may, from time to time, seek to protect, during the time prior
to the remittance, the value of the amounts of interest, dividends and net
realized capital gains received or to be received in a local currency that it
intends to remit out of a particular Latin American country by investing such
amounts in U.S. dollar-denominated Latin American debt securities and engaging
in the forward currency market for the purchase of U.S. dollars in the subject
country. There can be no guarantee that efforts to hedge against a currency
devaluation or fluctuation will be effective or that suitable U.S.
dollar-denominated investments will be available at the time CSAM wishes to use
them to hedge amounts to be remitted. Moreover, investors should be aware that
the forward currency market for the purchase of U.S. dollars in most, if not
all, Latin American countries is not highly developed. In certain Latin American
countries no forward market for foreign currencies currently exists and in other
countries such markets may be closed to investment by the Funds. Consequently,
the risk of currency devaluations and fluctuations should be carefully
considered by investors in determining whether to purchase shares of either
Fund.
Both Funds will conduct any currency exchange transactions on a spot,
i.e., cash, basis at the rate prevailing in the currency exchange market, or
through entering into forward contracts to purchase or sell currency. A forward
currency contract typically involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. If either Fund enters into a forward contract, that Fund's U.S.
or non-U.S. custodian will place cash or readily marketable securities in a
segregated account of that Fund in an amount equal to the value of that Fund's
total assets committed to the consummation of the forward contract. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to the contract.
At or before the maturity of a forward contract, either Fund may sell a
portfolio security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency which it is obligated to deliver. If the
8
<PAGE>
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The cost to the Funds of engaging in currency transactions will vary with
factors such as the length of the contract period and the market conditions then
prevailing. Because forward currency exchange transactions are usually conducted
on a principal basis, no fees or commissions are involved, although the price
charged in the transaction includes a dealer's markup. The use of forward
currency contracts does not eliminate fluctuations in the underlying prices of
the securities, but it does establish a rate of exchange that can be achieved in
the future. In addition, although forward currency contracts limit the risk of
loss due to a decline in the value of the hedged currency, at the same time,
they limit any potential gain that might result should the value of the currency
increase.
If a devaluation is generally anticipated, either Fund may not be able to
contract to sell the currency at a price above the devaluation level it
anticipates, particularly with regard to forward contracts for local Latin
American currencies in view of the relatively small and inactive market for
these contracts where a market actually exists.
There is a risk that the U.S. dollar value of each Fund's dividends,
interest and net realized capital gains in local currency will decline, to the
extent of the devaluation of the currency, during the interval between the time
that the Fund becomes entitled to receive or receives dividends and interest and
realizes gains and the time such amounts are converted into U.S. dollars for
remittance out of the particular country or countries.
Borrowing. Borrowing increases exposure to capital risk, and borrowed
funds are subject to interest costs that may offset or exceed the return earned
on investment of the amounts borrowed. Nevertheless, both Funds are authorized
to borrow money from banks for the following reasons:
o for temporary or emergency purposes,
o for such short-term credits as may be necessary for the
clearance or settlement of transactions,
o to finance repurchases of its shares in amounts not exceeding
10% (taken at the lower of cost or current value) of its total
assets (not including the amount borrowed),
9
<PAGE>
o to pay any dividends required to be distributed to maintain
the Fund's qualification as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the
"Code"), or
o to pay Fund expenses outside of Latin America, and not for the
purpose of leveraging.
In no event shall borrowings by either Fund exceed 33-1/3% of that Fund's total
assets (not including the amount borrowed). Neither Fund will make additional
investments when borrowings exceed 5% of that Fund's total assets. Either Fund
may pledge its assets to secure such borrowings. Collateral arrangements with
respect to the writing of options or the purchase or sale of future contracts or
related options or forward currency contracts are not deemed a pledge of assets
or the issuance of a senior security.
10
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund has adopted "fundamental" investment restrictions or policies
which may not be changed without the prior approval of the holders of a majority
of each Fund's outstanding voting securities. For purposes of the restrictions
listed below and the other investment limitations set forth herein, all
percentage limitations apply immediately after a purchase or initial investment.
Any subsequent change in any applicable percentage resulting from market
fluctuations does not require elimination of any security from that Fund's
portfolio. The Funds have also adopted "nonfundamental" investment policies
which may be modified by each Fund's Board of Directors if, in the reasonable
exercise of its business judgment, the Board determines that modification is
necessary or appropriate to carry out that Fund's investment objective.
Following is a description of the Funds' current fundamental investment
restrictions or policies:
1. Neither Fund may invest more than 25% of the total value of its
assets in a particular industry. This restriction does not apply to
investments in U.S. Government securities.
2. Neither Fund may issue senior securities, borrow money or pledge
its assets, except that either Fund may borrow from a lender for the
reasons specified above under "Comparison of Investment Objectives and
Policies--Borrowing."
3. Neither Fund may lend money to other persons except through the
purchase of debt obligations, loans or participation interests in loans,
and the entering into of repurchase agreements or reverse repurchase
agreements consistent with applicable regulatory requirements, in each
case consistent with the Fund's investment objective and policies.
4. Neither Fund may make short sales of securities or maintain a
short position in any security.
5. Neither Fund may purchase securities on margin, except such
short-term credits as may be necessary or routine for the clearance or
settlement of transactions and the maintenance of margin with respect to
forward contracts or other hedging securities.
6. Neither Fund may underwrite securities of other issuers, except
insofar as either Fund may be deemed an underwriter under the Securities
Act in selling portfolio securities.
7. Neither Fund may purchase or sell commodities or real estate,
except that either Fund may invest in securities secured by real estate or
interests in real estate or in securities issued by companies, including
real estate investment trusts, that invest in real estate or interests in
real estate, and may purchase and sell forward contracts on foreign
currencies to the extent permitted under applicable law.
8. Neither Fund may make investments for the purpose of exercising
control over, or management of, the issuers of any securities.
11
<PAGE>
In addition to the foregoing restrictions, each Fund is subject to
investment limitations, portfolio diversification requirements and other
restrictions imposed by certain Latin American countries in which it invests.
Under the Investment Company Act, neither Fund may:
o invest more than 5% of its total assets in the securities of
any one investment company, nor
o acquire more than 3% of the outstanding voting securities of
any such company.
In addition, the Funds may not invest more than 10% of their total assets
in securities issued by all investment companies. As a shareholder in any
investment company, each Fund will bear its ratable share of that investment
company's expenses, and would remain subject to payment of the company's
advisory, sub-advisory and administrative fees with respect to assets so
invested.
12
<PAGE>
MANAGEMENT OF THE FUNDS
Directors and Principal Officers
The names, addresses and principal occupations of the directors and
principal officers of each Fund are described under "Management of the Funds --
Directors and Principal Officers" in the Proxy Statement/Prospectus.
Compensation of Directors and Principal Officers
The following table shows certain compensation information for the
directors of the Funds for the fiscal year ended December 31, 1999. None of the
Fund's executive officers or directors who are also officers or directors of
CSAM received any compensation from the Funds for such period. For the purpose
of this table, "LAQ" refers to the Latin America Equity Fund and "LAM" refers to
the Latin America Investment Fund.
<TABLE>
<CAPTION>
Pension or Total Total Number
Retirement Compensation of Boards of
Benefits Estimated from Funds and CSAM-Advised
Aggregate Accrued as Annual Fund Complex Investment
Compensation Part of Fund Benefits upon Paid to Companies
Name of Director from Funds Expenses Retirement Directors Served
------------------------------------ -------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Enrique R. Arzac................ LAQ: $9,000 0 0 $99,500 11
LAM: $9,000
James J. Cattano.................... LAQ: $8,500 0 0 $61,500 6
LAM: $8,500
Peter A. Gordon*.................... LAQ: $7,500 0 0 $44,500 6
LAM: $7,500
George W. Landau.................... LAQ: $9,000 0 0 $64,000 7
LAM: $9,000
Riordan Roett....................... LAM: $7,500 0 0 $ 7,500 1
Martin M. Torino.................... LAQ: $8,000 0 0 $51,000 6
LAM: $8,000
William W. Priest Jr................ LAQ: $ 0 0 0 0 55
LAM: $ 0
Richard W. Watt..................... LAQ: $ 0 0 0 0 6
LAM: $ 0
</TABLE>
----------
* Mr. Gordon resigned from the Boards of the Funds effective December 20,
1999.
Each Fund pays each of its directors who is not a director, officer,
partner, co-partner or employee of CSAM or any affiliate thereof an annual fee
of $5,000 plus $500 for each Board of Directors meeting attended. In addition,
each Fund will reimburse those directors for travel and out-of-pocket expenses
incurred in connection with Board of Directors meetings. The aggregate
13
<PAGE>
remuneration paid to directors by the Latin America Equity Fund and the Latin
America Investment Fund during fiscal year 1999 was $42,000, and $49,500,
respectively.
The Articles of Incorporation and By-laws of each Fund provide that the
Fund will indemnify directors and officers and may indemnify employees or agents
of the Fund against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their positions with the
Fund to the fullest extent permitted by law. In addition, each Fund's Articles
of Incorporation provide that the Fund's directors and officers will not be
liable to shareholders for money damages, except in limited instances.
Each of the Non-interested Directors of the Funds is also party to an
Indemnification Agreement with the Fund or Funds as to which he serves as a
director providing for contractual rights of indemnity and advancement of
expenses. However, nothing in the Articles of Incorporation, the By-laws or the
Indemnification Agreements of either Fund protects or indemnifies a director,
officer, employee or agent against any liability to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office. Insurance obtained by either Fund shall not protect or purport
to protect officers or directors or the investment adviser of that Fund against
any liability to the Fund or its shareholders to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of their obligations and duties.
Control Persons and Principal Holders of Securities. The following table
shows certain information based on filings made with the Securities and Exchange
Commission (the "SEC") on June 7, 2000 concerning persons who may be deemed
beneficial owners of 5% or more of the shares of common stock of either Fund
because they possessed or shared voting or investment power with respect to the
shares of that Fund:
<TABLE>
<CAPTION>
Number of Shares Percent
Fund Name and Address Beneficially Owned of Shares
---- ---------------- ------------------ ---------
<S> <C> <C> <C>
Latin America President and Fellows of Harvard College.......... 1,394,800 19.3%
Equity Fund c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston MA 02210
Latin America President and Fellows of Harvard College.......... 1,694,600 25.7%
Investment Fund c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston MA 02210
</TABLE>
All the directors and executive officers, as a group, of the Latin America
Equity Fund, as of June 7, 2000, owned less than 1% of the outstanding shares of
that Fund, and all the directors and executive officers, as a group, of the
Latin America Investment Fund, as of the same date, owned less than 1% of the
outstanding shares of that Fund.
14
<PAGE>
Advisory and Sub-Advisory Arrangements
CSAM serves as the investment adviser to both Funds, and SBAM (together
with CSAM, each an "Adviser") serves as the investment adviser to the Latin
America Investment Fund with respect to Sovereign Debt pursuant to advisory
agreements with each Fund (the "Advisory Agreements"). Each Advisory Agreement
provides that the Adviser shall not be liable, and shall be indemnified, for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which the Advisory Agreement relates, except
liability resulting from willful misfeasance, bad faith or gross negligence on
the part of the Adviser in the performance of its duties or from reckless
disregard of its obligations and duties under the Advisory Agreement. In
addition, each Adviser is entitled to receive advances from each Fund for
payment of the reasonable expenses it incurs in connection with any matter as to
which it seeks indemnification in the manner and to the fullest extent
permissible under the Maryland General Corporation Law.
Under each Advisory Agreement, the Adviser may cause the Fund to pay an
investment sub-adviser directly in local currency for services rendered, which
will reduce the amount payable to the Adviser by the Fund.
For more information about each Adviser and the Advisory Agreements, see
"Synopsis -- Fees and Expenses -- The Latin America Equity Fund," "Synopsis --
Fees and Expenses of the Latin America Investment Fund" and "Management" in the
Proxy Statement/Prospectus. Shareholders of the Latin America Equity Fund have
been requested to consider and approve a new investment advisory agreement with
CSAM. For information regarding the terms of the new investment advisory
agreement, see "Proposal 2 (Latin America Equity Fund Shareholders Only):
Approval of New Investment Advisory Agreement" in the Proxy
Statement/Prospectus. Shareholders of the Latin America Equity Fund have been
requested to consider and approve a new investment sub-advisory agreement with
Celfin Servicios Financieros S.A. ("Celfin"). For information regarding the
terms of the new investment sub-advisory agreement, see "Proposal 3 (Latin
America Equity Fund Shareholders Only): Approval of New Investment Sub-Advisory
Agreement" in the Proxy Statement/Prospectus.
The table below sets forth the investment advisory fees earned by each
Adviser, waivers, sub-advisory fees paid to Celfin and net advisory fees for
each Fund for the last three fiscal years.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Gross Sub-Advisory Net Advisory
Fund Adviser Year Ended Advisory Fee Waivers(1) Fees Paid(2) Fees
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Latin America Equity CSAM December 31, 1997 $2,015,794 $210,285 $57,167 $1,748,342
Fund ---------------------------------------------------------------------------------
December 31, 1998 $1,434,269 $182,108 $20,748 $1,231,413
---------------------------------------------------------------------------------
December 31, 1999 $1,237,005 $ 75,649 $15,164 $1,146,192
------------------------------------------------------------------------------------------------------------------------
Latin America CSAM December 31, 1997 $1,724,006 $172,739 $84,685 $1,466,582
Investment Fund ---------------------------------------------------------------------------------
December 31, 1998 $1,234,850 $118,997 $59,029 $1,056,824
---------------------------------------------------------------------------------
December 31, 1999 $1,012,087 $ 97,269 $47,684 $ 867,134
------------------------------------------------------------------------------------------------------------------------
Latin America SBAM December 31, 1997 $ 303,465 $ 29,462 0 $ 274,003
Investment Fund ---------------------------------------------------------------------------------
December 31, 1998 $ 217,911 $ 20,996 0 $ 196,915
---------------------------------------------------------------------------------
December 31, 1999 $ 178,603 $ 17,165 0 $ 161,438
------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
(1) The Advisers have agreed to waive a portion of their respective advisor
fees previously payable to each respective Fund's former sub-advisers.
(2) CSAM pays a sub-advisory fee to Celfin Servicios Financieros S.A., the
Chilean Sub-Adviser of each Fund.
The agreement between each Fund, CSAM and Celfin (collectively, the
"Sub-Advisory Agreements") contains provisions regarding standards of care and
indemnification (with the exception of advancement of fees) identical to those
contained in the Advisory Agreements described above.
For information about the Funds' custodian, transfer agent and registrar,
see "Management of the Funds" in the Proxy Statement/Prospectus. For information
about the Funds' independent accountants, see "Experts" in the Proxy
Statement/Prospectus.
Duration and Termination; Non-Exclusive Services
Unless earlier terminated as described below, the Advisory Agreements and
the Sub-Advisory Agreements remain in effect if approved annually by either (i)
the Board of Directors of the Fund or (ii) the "vote of a majority of the
outstanding voting securities" of the Fund, and in either case, the vote of a
majority of the Non-interested Directors (as defined in the Investment Company
Act), cast in person at a meeting called for such purpose. Each of the Advisory
Agreements and the Sub-Advisory Agreements terminates automatically on its
assignment by any party and may be terminated without penalty on 60 days'
written notice by the Board of Directors or the vote of the holders of a
majority of the Fund's outstanding shares. Each Adviser, or Celfin, as the case
may be, may terminate their respective agreements, without penalty, upon 90
days' written notice. If a Sub-Advisory Agreement is terminated, the Adviser
will be responsible for furnishing the services required to be performed by the
terminated Sub-Adviser or arranging for a successor investment sub-adviser on
terms and conditions acceptable to the Fund and subject to the requirements of
the Investment Company Act.
The U.S. Administration Agreement between Bear Stearns Funds Management
Inc. ("BSFM" or the "U.S. Administrator") and the Fund is terminable on 60 days'
notice by either party. Unless terminated by the Fund's Board of Directors upon
60 days' prior written notice or by the relevant service provider upon 90 days'
prior written notice, the Chilean Administration Agreement between the Fund and
BEA Administration, Administradora de Fondos de Inversion de Capital Extranjero
S.A. (the "AFICE" or the "Chilean Administrator") and the Chilean
Sub-Administration Agreement between the Chilean Administrator and Celfin will
continue automatically from year to year. The Chilean Sub-Administration
Agreement also terminates automatically upon termination of the Chilean
Administration Agreement. The Chilean Administrator may be replaced only by an
entity authorized to act as an administrator of a foreign capital investment
fund under Chilean law.
16
<PAGE>
The following table sets forth the amounts BSFM and AFICE earned as
administrative fees, the amounts CSAM was reimbursed for administrative fees and
the amounts earned by Celfin for accounting services.
--------------------------------------------------------------------------------
Fund Year Ended BSFM AFICE(1) CSAM CELFIN
--------------------------------------------------------------------------------
Latin America December 31, 1997 $153,299 $80,300 $14,545 $7,982
Equity Fund
---------------------------------------------------------------
December 31, 1998 $111,913 $75,300 $ 9,045 $4,800
---------------------------------------------------------------
December 31, 1999 $ 93,319 $73,800 $12,029 $7,300
--------------------------------------------------------------------------------
Latin America December 31, 1997 $155,498 $83,201 $16,824 $8,309
Investment Fund
---------------------------------------------------------------
December 31, 1998 $113,804 $95,277 $13,137 $7,001
---------------------------------------------------------------
December 31, 1999 $ 95,101 $66,411 $14,001 $5,942
--------------------------------------------------------------------------------
----------
(1) The administrative fees earned by AFICE are in turn paid by AFICE to
Celfin for certain administrative services.
The services of CSAM, SBAM, Celfin, the Chilean Administrator and the U.S.
Administrator are not deemed to be exclusive, and nothing in the relevant
service agreements will prevent any of them or their affiliates from providing
similar services to other investment companies and other clients (whether or not
such clients' investment objectives and policies are similar to those of the
Fund) or from engaging in other activities.
Code of Ethics
Each Fund and CSAM have each adopted a written Code of Ethics (the
"Code"), which permits personnel covered by the Code ("Covered Persons") to
invest in securities, including securities that may be purchased or held by the
respective Fund. The Code also contains provisions designed to address the
conflicts of interest that could arise from personal trading by advisory
personnel, including: (1) all Covered Persons must report their personal
securities transactions at the end of each quarter; (2) with certain limited
exceptions, all Covered Persons must obtain preclearance before executing any
personal securities transactions; (3) Covered Persons may not execute personal
trades in a security if there are any pending orders in that security by the
respective Fund; and (4) Covered Persons may not invest in initial public
offerings.
The Board of Directors of each Fund reviews the administration of
the Code at least annually and may impose sanctions for violations of the Code.
17
<PAGE>
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for each Fund are made by CSAM, and
decisions to buy and sell Sovereign Debt for the Latin America Investment Fund
are made by SBAM, in either case subject to the overall review of that Fund's
Board of Directors. Portfolio securities transactions for each Fund are placed
on behalf of that Fund by persons authorized by CSAM or SBAM, as the case may
be. CSAM and SBAM manage other investment companies and accounts that invest in
Latin American securities. Although investment decisions for the Fund are made
independently from those of the other accounts, investments of the type the
Funds may make may also be made on behalf of those other accounts. When the
Funds and one or more of other accounts is prepared to invest in, or desires to
dispose of, the same security, available investments or opportunities for each
will be allocated in a manner believed by CSAM or SBAM to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
the Funds or the size of the position obtained or disposed of by the Funds. The
Funds may utilize Celfin, CS First Boston Corporation, other affiliates of CSAM
or Salomon Smith Barney Inc., an affiliate of SBAM, in connection with a
purchase or sale of securities in accordance with rules or exemptive orders
adopted by the SEC when CSAM or SBAM believes that the charge for the
transaction does not exceed usual and customary levels. In addition, the Funds
may purchase securities in the placement for which Celfin, CS First Boston
Corporation or Salomon Smith Barney Inc. has acted as agent to or for issuers,
consistent with applicable rules adopted by the SEC or regulatory authorization,
if necessary. The Funds will not purchase securities from or sell securities to
any Adviser or Sub-Adviser or their affiliates acting as principal.
Transactions on U.S. and some foreign stock exchanges involve the payment
of negotiated brokerage commissions, which may vary among different brokers. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased from
and sold to dealers in the over-the-counter markets include an undisclosed
dealer's mark-up or mark-down. Fixed income securities, including Sovereign
Debt, are generally traded on a "net" basis with dealers acting as principal for
their own accounts without a stated commission, although the price of the
security will likely include a profit to the dealer.
In selecting brokers or dealers to execute portfolio transactions on
behalf of each Fund, CSAM or SBAM, as the case may be, will seek the best
overall terms available. Each Advisory Agreement provides that, in assessing the
best overall terms available for any transaction, the Adviser will consider the
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In addition, each Advisory
Agreement authorizes the Adviser in selecting brokers or dealers, to execute a
particular transaction and in evaluating the best overall terms available, to
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Funds
and/or other accounts over which the Adviser exercises investment discretion.
The fees payable under the Advisory Agreements are not reduced as a result of
the Adviser's receiving such brokerage and research services.
18
<PAGE>
The Board of Directors of each Fund will review periodically the
commissions paid by that Fund to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to such Fund.
The aggregate amounts paid by the Latin America Equity Fund in brokerage
commissions for the fiscal years ended 1997, 1998 and 1999 were $59,130,
$725,561 and $647,806, respectively and the aggregate amounts paid by the Latin
America Investment Fund for the same periods were $54,438, $536,126 and
$282,786, respectively. None of the brokerage commissions paid by LAQ for the
three fiscal years ended December 31, 1999 were paid to affiliated brokers. The
higher commissions paid in fiscal years ended 1998 and 1999 by both Funds is
attributable to increases in purchases and sales of portfolio securities. For
the fiscal year ended December 31, 1999, LAQ and LAM paid $19,049 and $17,484,
respectively, to brokers and dealers who provided research services.
Each Fund has the benefit of an exemptive order of the SEC issued under
the Investment Company Act authorizing the Funds and other investment companies
advised by CSAM to co-invest in securities issued in privately-negotiated
transactions, subject to the terms and conditions of the order.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Each Fund operates a Dividend Reinvestment and Cash Purchase Plan, the
InvestLinkSM Program, or the Program, sponsored and administered by BankBoston,
N.A., pursuant to which Fund dividends and distributions, net of any applicable
U.S. withholding tax, are reinvested in additional shares of that Fund. Fleet
National Bank c/o EquiServe, L.P. serves as the Program Administrator for the
shareholders in administering the Program. The purpose of the Program is to
provide interested investors with a simple and convenient way to invest funds
and reinvest dividends in shares of that Fund's common stock ("Shares") at
prevailing prices, with reduced brokerage commissions and fees.
An interested investor may join the Program at any time. Purchases of
Shares with funds from a participant's cash payment or automatic account
deduction will begin on the next day on which funds are invested. If a
participant selects the dividend reinvestment option, automatic investment of
dividends generally will begin with the next dividend payable after the Program
Administrator receives the participant's enrollment form. Once in the Program, a
person will remain a participant until he or she terminates his or her
participation or sells all Shares held in his or her Program account, or his or
her account is terminated by the Program Administrator. A participant may change
his or her investment options at any time by requesting a new enrollment form
and returning it to the Program Administrator.
A participant will be assessed certain charges in connection with his or
her participation in the Program. First-time investors will be subject to an
initial service charge which will be deducted from their initial cash deposit.
All optional cash deposit investments will be subject to a service charge. Sales
processed through the Program will have a service fee deducted from the net
proceeds, after brokerage commissions. In addition to the transaction charges
outlined above, participants will be assessed per share processing fees (which
include brokerage commissions). Participants will not be charged any fee for
reinvesting dividends.
19
<PAGE>
The number of Shares to be purchased for a participant depends on the
amount of his or her dividends, cash payments or bank account or payroll
deductions, less applicable fees and commissions, and the purchase price of the
Shares. The Program Administrator uses dividends and funds of participants to
purchase Shares of the relevant Fund's Common Stock in the open market. Such
purchases will be made by participating brokers as agent for the participants
using normal cash settlement practices. All Shares purchased through the Program
will be allocated to participants as of the settlement date, which is usually
three business days from the purchase date. In all cases, transaction processing
will occur within 30 days of the receipt of funds, except where temporary
curtailment or suspension of purchases is necessary to comply with applicable
provisions of the federal securities laws or when unusual market conditions make
prudent investment impracticable. In the event the Program Administrator is
unable to purchase Shares within 30 days of the receipt of funds, such funds
will be returned to the participants.
The average price of all Shares purchased by the Program Administrator
with all funds received during the time period from two business days preceding
any investment date up to the second business day preceding the next investment
date shall be the price per share allocable to a participant in connection with
the Shares purchased for his or her account with his or her funds or dividends
received by the Program Administrator during such time period. The average price
of all Shares sold by the Program Administrator pursuant to sell orders received
during such time period shall be the price per share allocable to a participant
in connection with the Shares sold for his or her account pursuant to his or her
sell orders received by the Program Administrator during such time period.
The Program Administrator administers the Program for participants, keeps
records, sends statements of account to participants and performs other duties
relating to the Program. Each participant in the Program will receive a
statement of his or her account following each purchase of Shares. The
statements will also show the amount of dividends credited to such participant's
account (if applicable), as well as the fees paid by the participant. In
addition, each participant will receive copies of the respective Fund's annual
and semi-annual reports to shareholders, proxy statements and, if applicable,
dividend income information for tax reporting purposes.
If the respective Fund is paying dividends on the Shares, a participant
will receive dividends through the Program for all Shares held on the dividend
record date on the basis of full and fractional Shares held in his or her
account, and for all other Shares of the Fund registered in his or her name. The
Program Administrator will send checks to the participants for the amounts of
their dividends that are not to be automatically reinvested at no cost to the
participants.
Shares of the Fund purchased under the Program will be registered in the
name of the accounts of the respective participants. Unless requested, the Fund
will not issue to participants certificates for Shares of the Fund purchased
under the Program. The Program Administrator will hold the Shares in book-entry
form until a Program participant chooses to withdraw his or her Shares or
terminates his or her participation in the Program. The number of Shares
purchased for a participant's account under the Program will be shown on his or
her statement of account. This feature protects against loss, theft or
destruction of stock certificates.
20
<PAGE>
A participant may withdraw all or a portion of the Shares from his or her
Program account by notifying the Program Administrator. After receipt of a
participant's request, the Program Administrator will issue to such participant
certificates for the whole Shares of the Fund so withdrawn or, if requested by
the participant, sell the Shares for him or her and send him or her the
proceeds, less applicable brokerage commissions, fees, and transfer taxes, if
any. If a participant withdraws all full and fractional Shares in his or her
Program account, his or her participation in the Program will be terminated by
the Program Administrator. In no case will certificates for fractional Shares be
issued. The Program Administrator will convert any fractional Shares held by a
participant at the time of his or her withdrawal to cash.
Participation in any rights offering, dividend distribution or stock split
will be based upon both the Shares of the Fund registered in participants' names
and the Shares (including fractional Shares) credited to participants' Program
accounts. Any stock dividend or Shares resulting from stock splits with respect
to Shares of the Fund, both full and fractional, which participants hold in
their Program accounts and with respect to all Shares registered in their names
will be automatically credited to their accounts.
All Shares of the Fund (including any fractional share) credited to his or
her account under the Program will be voted as the participant directs. The
participants will be sent the proxy materials for the annual meetings of
shareholders. When a participant returns an executed proxy, all of such Shares
will be voted as indicated. A participant may also elect to vote his or her
Shares in person at the Shareholders' meeting.
A participant will receive tax information annually for his or her
personal records and to help him or her prepare his or her U.S. federal income
tax return. The automatic reinvestment of dividends does not relieve him or her
of any income tax which may be payable on dividends. For further information as
to tax consequences of participation in the Program, participants should consult
with their own tax advisors.
The Program Administrator in administering the Program will not be liable
for any act done in good faith or for any good faith omission to act. However,
the Program Administrator will be liable for loss or damage due to error caused
by its negligence, bad faith or willful misconduct. Shares held in custody by
the Program Administrator are not subject to protection under the Securities
Investors Protection Act of 1970.
The participant should recognize that neither the Fund nor the Program
Administrator can provide any assurance of a profit or protection against loss
on any Shares purchased under the Program. A participant's investment in Shares
held in his or her Program account is no different than his or her investment in
directly held Shares in this regard. The participant bears the risk of loss and
the benefits of gain from market price changes with respect to all of his or her
Shares. Neither the Fund nor the Program Administrator can guarantee that Shares
purchased under the Program will, at any particular time, be worth more or less
than their purchase price. Each participant must make an independent investment
decision based on his or her own judgment and research.
While the Program Administrator hopes to continue the Program
indefinitely, the Program Administrator reserves the right to suspend or
terminate the Program at any time. It
21
<PAGE>
also reserves the right to make modifications to the Program. Participants will
be notified of any such suspension, termination or modification in accordance
with the terms and conditions of the Program. The Program Administrator also
reserves the right to terminate any participant's participation in the Program
at any time. Any question of interpretation arising under the Program will be
determined in good faith by the Program Administrator and any such good faith
determination will be final.
Any interested investor may participate in the Program. To participate in
the Program, an investor who is not already a registered owner of the Shares
must make an initial investment of at least $250.00. All other cash payments or
bank account deductions must be at least $100.00, up to a maximum of $100,000.00
annually. An interested investor may join the Program by reading the Program
description, completing and signing the enrollment form and returning it to the
Program Administrator. The enrollment form and information relating to the
Program (including the terms and conditions) may be obtained by calling the
Program Administrator at one of the following telephone numbers: First Time
Investors--(800) 338-1176; Current Shareholders--(800) 730-6001. All
correspondence regarding the Program should be directed to: Fleet National Bank
c/o EquiServe, L.P., InvestLink(SM) Program, P.O. Box 8040, Boston, MA
02266-8040.
22
<PAGE>
TAXATION
The following is a summary of certain material United States federal
income tax considerations, and Argentine, Brazilian, Chilean and Mexican tax
considerations, regarding the purchase, ownership and disposition of shares in
either Fund. Each prospective shareholder is urged to consult his or her own tax
adviser with respect to the specific federal, state, local and foreign tax
consequences of investing in either Fund. The summary is based on the laws in
effect on the date of this SAI, which are subject to change.
United States Federal Income Taxes
The Funds and Their Investments
Each Fund has qualified, and intends to continue to qualify and elect to
be treated, as a regulated investment company for each taxable year under the
Code. To so qualify, each Fund must, among other things: (a) derive at least 90%
of its gross income in each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
stock or securities or foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
and (b) diversify its holdings so that, at the end of each quarter of that
Fund's taxable year, (i) at least 50% of the market value of that Fund's assets
is represented by cash, securities of other regulated investment companies,
United States government securities and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of that Fund's assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its assets
is invested in the securities (other than United States government securities or
securities of other regulated investment companies) of any one issuer or any two
or more issuers that such Fund controls and are determined to be engaged in the
same or similar trades or businesses or related trades or businesses. Each Fund
expects that all of its foreign currency gains will be directly related to its
principal business of investing in stocks and securities.
As a regulated investment company, neither Fund will be subject to United
States federal income tax on its net investment income (i.e., income other than
its net realized long- and short-term capital gains) and its net realized long-
and short-term capital gains, if any, that it distributes to its shareholders,
provided that an amount equal to at least 90% of its investment company taxable
income (i.e., 90% of its taxable income minus the excess, if any, of its net
realized long-term capital gains over its net realized short-term capital losses
(including any capital loss carryovers), plus or minus certain other adjustments
as specified in section 852 of the Code) for the taxable year is distributed,
but will be subject to tax at regular corporate rates on any income or gains
that it does not distribute. Furthermore, each Fund will be subject to a United
States corporate income tax with respect to such distributed amounts in any year
that it fails to qualify as a regulated investment company or fails to meet this
distribution requirement. Any dividend declared by either Fund in October,
November or December of any calendar year and payable to shareholders of record
on a specified date in such a month shall be deemed to have been received by
each shareholder on December 31 of such calendar year and to have been paid by
that Fund not later than such December 31, provided that such dividend is
actually paid by that Fund during January of the following calendar year.
23
<PAGE>
Each Fund intends to distribute annually to its shareholders substantially
all of its investment company taxable income. The Board of Directors of each
Fund will determine annually whether to distribute any such net realized
long-term capital gains in excess of net realized short-term capital losses
(including any capital loss carryovers). Each Fund currently expects to
distribute any excess annually to its shareholders. However, if either Fund
retains for investment an amount equal to its net long-term capital gains in
excess of its net short-term capital losses and capital loss carryovers, it will
be subject to a corporate tax (currently at a rate of 35%) on the amount
retained. In that event, each Fund expects to designate such retained amounts as
undistributed capital gains in a notice to its shareholders who (a) will be
required to include in income for United States federal income tax purposes, as
long-term capital gains, their proportionate shares of the undistributed amount,
(b) will be entitled to credit their proportionate shares of the 35% tax paid by
that Fund on the undistributed amount against their United States federal income
tax liabilities, if any, and to claim refunds to the extent their credits exceed
their liabilities, if any, and (c) will be entitled to increase their tax basis,
for United States federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed capital gains included in the
shareholder's income.
The Code imposes a 4% nondeductible excise tax on each Fund to the extent
such Fund does not distribute by the end of any calendar year at least 98% of
its net investment income for that year and 98% of the net amount of its capital
gains (both long- and short-term) for the one-year period ending, as a general
rule, on October 31 of that year. For this purpose, however, any income or gain
retained by such Fund that is subject to corporate income tax will be considered
to have been distributed by year-end. In addition, the minimum amounts that must
be distributed in any year to avoid the excise tax will be increased or
decreased to reflect any underdistribution or overdistribution, as the case may
be, from the previous year. Each Fund anticipates that it will pay such
dividends and will make such distributions as are necessary in order to avoid
the application of this tax.
Exchange control regulations may restrict repatriations of investment
income and capital or the proceeds of securities sales by foreign investors such
as the Funds and may limit the Funds' abilities to pay sufficient dividends and
to make sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
Each Fund will maintain accounts and calculate income in U.S. dollars. In
general, gains and losses on the disposition, or receipt of principal, of debt
securities denominated in a foreign currency that are attributable to
fluctuation in exchange rates between the date the debt security is acquired and
the date of disposition, or receipt of principal, gains and losses attributable
to fluctuations in exchange rates that occur between the time such Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time such Fund actually collects such
receivables or pays such liabilities, and gains and losses from the disposition
of foreign currencies and foreign currency forward contracts will be treated as
ordinary income or loss. If either Fund acquires a debt security denominated in
a Latin American currency, such security may bear interest at a high nominal
rate that takes into account expected decreases in the value of the principal
amount of the security due to anticipated devaluations of the currency. In the
case of such debt securities, each Fund would be required to include the stated
interest in income as it accrues, but would generally realize an ordinary loss
24
<PAGE>
attributable to devaluations of the currency with respect to principal only when
the security is disposed of or the principal amount is received.
Each Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by such Fund
(i.e., may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to such Fund and defer the Fund's losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require each Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out) and (b) may cause each Fund to recognize income without
receiving cash with which to pay dividends or make distributions in amounts
necessary to satisfy the distribution requirements for avoiding income and
excise taxes. Each Fund will monitor its transactions, will make the appropriate
tax elections and will make the appropriate entries in its books and records
when it acquires any foreign currency, forward contract, option, futures
contract or hedged investment in order to mitigate the effect of these rules and
prevent disqualification of such Fund as a regulated investment company.
Passive Foreign Investment Companies
If either Fund purchases shares in certain foreign investment entities,
called "passive foreign investment companies" (a "PFIC"), that Fund may be
subject to United States federal income tax on a portion of any "excess
distribution" or gain from the disposition of such shares even if such income is
distributed as a taxable dividend by the Fund to its shareholders. Additional
charges in the nature of interest may be imposed on that Fund in respect of
deferred taxes arising from such distributions or gains. If such Fund were to
invest in a PFIC and elected to treat the PFIC as a "qualified electing fund" (a
"QEF Election") under the Code, in lieu of the foregoing requirements, such Fund
might be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts would be subject to the 90% and
calendar year distribution requirements described above.
Alternatively, the Fund may make a mark-to-market election that will
result in the Fund being treated as if it had sold and repurchased all of the
PFIC stock at the end of each year. In such case, the Fund would report any such
gains as ordinary income and would deduct any such losses as ordinary losses to
the extent of previously recognized gains. The election, once made, would be
effective for all subsequent taxable years of the Fund, unless revoked with the
consent of the IRS. By making the election, the Fund could potentially
ameliorate the adverse tax consequences with respect to its ownership of shares
in a PFIC, but in any particular year may be required to recognize income in
excess of the distributions it receives from PFICs and its proceeds from
dispositions of PFIC stock. The Fund may have to distribute this "phantom"
income and gain to satisfy the 90% distribution requirement and to avoid
imposition of the 4% excise tax. The Fund will make the appropriate tax
elections if possible, and take any additional steps that are necessary to
mitigate the effect of these rules.
25
<PAGE>
Dividends and Distributions
Dividends of net investment income and distributions of net realized
short-term capital gains are taxable to a United States shareholder as ordinary
income, whether paid in cash or in shares. Distributions of net long-term
capital gains, if any, that either Fund designates as capital gains dividends
are taxable as long-term capital gains, whether paid in cash or in shares and
regardless of how long a shareholder has held shares of the Fund. Dividends and
distributions paid by each Fund (except for the portion thereof, if any,
attributable to dividends on stock of U.S. corporations received by the Fund)
will not qualify for the deduction for dividends received by corporations.
Distributions in excess of such Fund's current and accumulated earnings and
profits will, as to each shareholder, be treated as a tax-free return of
capital, to the extent of a shareholder's basis in his shares of the Fund, and
as a capital gain thereafter (if the shareholder held his shares of the Fund as
capital assets).
Shareholders reinvesting dividends or distributions in shares pursuant to
the Program will be treated for United States federal income tax purposes as
receiving a distribution in the amount equal to the amount of money that the
shareholders receiving cash dividends or distributions will receive, and will
have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend or capital
gain distribution should be aware that, although the price of shares just
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution
which nevertheless will be taxable to them.
If either Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends are included in
the Fund's gross income not as of the date received but as of the later of (a)
the date such stock became ex-dividend with respect to such dividends (i.e., the
date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date the Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, the Fund
may be required to pay dividends based on anticipated earnings, and shareholders
may receive dividends in an earlier year than would otherwise be the case.
Sales of Shares
Upon the sale or exchange of his shares, a shareholder will realize a
taxable gain or loss equal to the difference between the amount realized and his
basis in his shares. Such gain or loss will be treated as capital gain or loss,
if the shares are capital assets in the shareholder's hands, and will be
long-term capital gain or loss if the shares are held for more than one year and
short-term capital gain or loss if the shares are held for one year or less. Any
loss realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced, including replacement through the reinvesting of
dividends and capital gains distributions in the Fund under the Program, within
a period (of 61 days) beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be increased to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of a Fund share held by the shareholder for six months or less will
be treated for United States income tax
26
<PAGE>
purposes as a long-term capital loss to the extent of any distributions or
deemed distributions of long-term capital gains received by the shareholder with
respect to such share.
Foreign Taxes
Income received by the Funds from sources within countries other than the
United States may be subject to withholding and other taxes imposed by such
countries, which will reduce the amount available for distribution to
shareholders. If more than 50% of the value of either Fund's total assets at the
close of its taxable year consists of securities of foreign corporations, that
Fund will be eligible and intends to elect to "pass-through" to shareholders the
amount of foreign income and similar taxes it has paid. Pursuant to this
election, shareholders of the Fund will be required to include in gross income
(in addition to the full amount of the taxable dividends actually received)
their pro rata share of the foreign taxes paid by that Fund. Each such
shareholder will also be entitled either to deduct (as an itemized deduction)
its pro rata share of foreign taxes in computing its taxable income or to claim
a foreign tax credit against its U.S. federal income tax liability, subject to
limitations. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions, but such a shareholder may be eligible to claim the
foreign tax credit. The deduction for foreign taxes is not allowable in
computing alternative minimum taxable income. Each shareholder will be notified
within 60 days after the close of that Fund's taxable year whether the foreign
taxes paid by the Fund will "pass through" for that year.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his or her foreign
source taxable income. For this purpose, if the pass-through election is made,
the source of each Fund's income flows through to its shareholders. Any gains
from the sale of securities by either Fund will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from
foreign currency-denominated debt securities, receivables and payables, will be
treated as ordinary income derived from U.S. sources. The limitation on the
foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit), including the foreign source
passive income passed through by each Fund. Because of the limitation,
shareholders taxable in the United States may be unable to claim a credit for
the full amount of their proportionate share of the foreign taxes paid by each
Fund. The foreign tax credit also cannot be used to offset more than 90% of the
alternative minimum tax (as computed under the Code for purposes of this
limitation) imposed on corporations and individuals.
Backup Withholding
Each Fund may be required to withhold, for United States federal income
tax purposes, 31% of the dividends and distributions payable to shareholders who
fail to provide such Fund with their correct taxpayer identification number or
to make required certifications, or who have been notified by the Internal
Revenue Service that they are subject to backup withholding. Corporate
shareholders and certain other shareholders are or may be exempt from backup
withholding. Backup withholding is not an additional tax and any amount withheld
may be credited against a shareholder's United States federal income tax
liabilities. Additional tax withholding requirements which apply with respect to
foreign investors are discussed below.
27
<PAGE>
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a foreign
investor (such as a nonresident alien individual, a foreign trust or estate, a
foreign corporation or a foreign partnership) depends, in part, on whether the
shareholder's income from either Fund is "effectively connected" with a United
States trade or business carried on by the shareholder.
If the foreign investor is not a resident alien and the income from such
Fund is not effectively connected with a United States trade or business carried
on by the foreign investor, distributions of net investment income and net
realized short-term capital gains will be subject to a 30% (or lower treaty
rate) United States withholding tax. Furthermore, foreign investors may be
subject to an increased United States tax on their income resulting from that
Fund's election (described above) to "pass-through" amounts of foreign taxes
paid by such Fund, but may not be able to claim a credit or deduction with
respect to the foreign taxes treated as having been paid by them. Distributions
to a non-resident alien of net realized long-term capital gains, amounts
retained by that Fund which are designated as undistributed capital gains, and
gains realized upon the sale of shares of such Fund generally will not be
subject to United States tax unless the foreign investor who is a nonresident
alien individual is physically present in the United States for more than 182
days during the taxable year. However, a determination by such Fund not to
distribute long-term capital gains will cause that Fund to incur a U.S. federal
tax liability with respect to retained long-term capital gains, thereby reducing
the amount of cash held by the Fund that is available for investment, and the
foreign investor may not be able to claim a credit or deduction with respect to
such taxes.
In general, if a foreign investor is a resident alien or if dividends or
distributions from either Fund are effectively connected with a United States
trade or business carried on by the foreign investor, then dividends of net
investment income, distributions of net short-term and long-term capital gains,
amounts retained by such Fund that are designated as undistributed capital gains
and any gains realized upon the sale of shares of the Fund will be subject to
United States income tax at the rates applicable to United States citizens or
domestic corporations. If the income from the Fund is effectively connected with
a United States trade or business carried on by a foreign investor that is a
corporation, then such foreign investor may also be subject to the 30% (or lower
treaty rate) branch profits tax.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Shareholders may be required to provide appropriate documentation
to establish their entitlement to the benefits of such a treaty. Foreign
investors are advised to consult their own tax advisers with respect to (a)
whether their income from either Fund is or is not effectively connected with a
United States trade or business carried on by them, (b) whether they may claim
the benefits of an applicable tax treaty, and (c) any other tax consequences to
them of an investment in either Fund.
Notices
Shareholders will be notified annually by each Fund as to the United
States federal income tax status of the dividends, distributions and deemed
distributions made by the Fund to its shareholders. Furthermore, shareholders
will also receive, if appropriate, various written
28
<PAGE>
notices after the close of each Fund's taxable year regarding the United States
federal income tax status of certain dividends, distributions and deemed
distributions that were paid (or that are treated as having been paid) by the
Fund to its shareholders during the preceding taxable year.
Latin American Taxes
Argentine Taxes
The following discussion of Argentine tax laws is based on the advice of
Coopers & Lybrand in Argentina.
The transfer of shares, bonds, debentures and other securities in
Argentina generally is subject to tax at rates varying from .5 of 1.00% for
exchange listed shares to 1.5% on Argentine government securities traded over
the counter, in each case as a percentage of the sale price.
Income from dividends of Argentine companies paid to non-Argentines, such
as the Funds, is subject to withholding tax in Argentina at the rate of 20%.
Argentine sourced interest income is generally subject to withholding tax in
Argentina at the rate of 14.4%, with exceptions for certain Argentine government
securities.
Gains on the sale of securities of Argentine companies may be liable to
withholding tax in Argentina at the rate of 36% of the gain. The taxpayer may,
however, elect to be taxed either:
(a) on the basis of a deemed gain equal to 50% of the gross proceeds
(resulting in an effective tax rate of 18% of the proceeds); or
(b) on the basis of a gain equal to the gross proceeds, less
allowable expenses, less the acquisition cost adjusted to reflect changes in the
wholesale price index from the date of acquisition to the date of sale.
Temporary investments in fixed-term deposits made with financial entities
included within the Argentine financial entities system are subject to an
aggregate tax of 4.2% on the interest and adjustments earned thereon, provided
that no such tax is imposed on interest on foreign currency deposits for 60 days
or more or fixed-term deposits (whether in local or foreign currency) for 120
days or more. Interest earned on fixed-term deposits remitted out of Argentina
is subject to a withholding tax of 32.4%.
Foreign currency trading transactions (purchases, sales or exchanges)
carried out with banks or other authorized financial entities are subject to a
.2 to .6 of 1.00% tax on the price of the transaction in Argentine currency, net
of bank commissions and charges. Such transactions can arise in connection with
the foreign currency transferred out of Argentina in respect of dividends or
interest collected in local currency, or the inflow of foreign currency for
making investments in Argentina.
No other Argentine taxes (currency gain, estate, sales, transfer,
property, stamp, etc.) are applicable to either Fund or its shareholders in
connection with that Fund's proposed activities in Argentina.
29
<PAGE>
Brazilian Taxes
The following discussion of Brazilian tax laws is based upon the advice of
Tozzini, Freire, Texeira e Silva Advogados, Brazilian counsel for the Funds.
Each Fund's investments in Brazil are channelled through a portfolio of
shares, securities and other assets (the "Brazilian Portfolio") formed under the
terms of Resolution 2689 of the Brazilian National Monetary Council dated
January 26, 2000.
The Funds may only invest in any instruments and investment modalities of
the financial and capital markets available to Brazilian resident investors in
Brazil.
There is no requirement as to a minimum period upon which investments
shall be maintained in Brazil. For purposes of remittance of profits and capital
gains, as well as repatriation of capital, investments made by the Funds are
subject to an electronic registration with the Central Bank of Brazil.
Any transactions of either Fund in derivatives or other futures markets in
Brazil may only be carried out in the stock, commodities, futures or
over-the-counter markets organized by an entity authorized by the Brazilian
Securities and Exchange Commission (the "CVM") to operate or register in certain
registration, settlement and custody systems recognized by the Central Bank of
Brazil or authorized by the CVM, in their respective areas of competence.
The Funds may not channel their respective investments in Brazil to enter
into transactions in the capital and financial markets in connection with an
acquisition or disposal:
(a) outside the stock exchange trading floors, electronic systems or
over-the-counter markets organized by any entity authorized by the CVM, of
publicly-held company securities registered for trading in such markets; or
(b) of securities in non-organized over-the-counter markets or in
over-the-counter markets organized by entities not authorized to operate by the
CVM.
Such restrictions are not applicable in case of stock subscription, stock
bonuses, conversion of debentures into shares, indices referenced in securities,
acquisition and disposal of quotas in open-end securities investment funds and,
provided that previously authorized by the CVM, the cases of companies that are
going private or are going to cancel or suspend the trading with their shares.
Each Fund's investments are subject to a special tax treatment in Brazil.
Gains realized by the Funds on transactions performed within a Brazilian stock
exchange are exempt from income tax. Gains realized outside a Brazilian stock
exchange are subject to income tax, at a rate of 15%.
Income obtained by the Funds in variable yield funds and swaps are subject
to income tax of 10%. Dividends received by the Funds with respect to profits
generated after January 1st, 1996 are exempt from income tax. Any other income
obtained by the Funds under Resolution 2689 shall be subject to an income tax of
15%.
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Each Fund's investments are subject to Tax on Bank Accounts ("CPMF"), at a
rate of 0.38% (to be reduced to 0.30% as of June 17, 2000) on the entrance and
on the exit of the investments into/from Brazil. All other transactions carried
out in the Brazilian markets by the Funds are exempt from CPMF. CPMF is supposed
to be charged until June 17, 2002, however, there are discussions in the
Brazilian Congress to transform CPMF into a permanent tax.
The conversion of foreign currency into Reals, and the conversion of Reals
into foreign currency are subject to Tax on Foreign Currency Exchange
Transactions ("IOF/Cambio"), which is currently zero in conversions in
connection to the Fund's investments. This tax may be increased at any time, by
a decision of the Minister of Finance, up to 25%, but only in relation to future
currency exchange transactions.
The negotiation of securities and bonds of each Fund's portfolio in Brazil
are subject to Tax on Transactions with Bonds and Securities ("IOF/Titulos"),
which is currently zero to all variable yield investments, although may be
increased at any time by a decision of the Minister of Finance, up to 1.5% per
day, in relation to future transactions. For fixed yield investments, including
fixed yield funds, the IOF/Titulos is levied at a rate of 1% per day, limited to
a percentage of income obtained in such fixed yield investment, as long as the
Fund redeems the investment before the 29th day after the date that the proceeds
were invested. In case of a redemption occurring after such 29 days-period,
IOF/Titulos will no longer apply.
Chilean Taxes
The following discussion of Chilean tax laws is based upon the advice of
Price Waterhouse in Chile.
All amounts earned by the Funds, including interest, dividends or net
realized capital gain, on amounts invested in Chile that exceed original
invested capital are subject to a 10% income tax at the time they are remitted
outside Chile. Amounts remitted abroad that do not correspond to interest,
dividends or net realized capital gains will normally be subject to a tax of up
to 35%. Net realized capital gains for these purposes means realized gains net
of realized losses (without regard for the length of time the securities were
held), including any capital loss carry-over. These taxes are retained by the
Chilean Administrator at the time a remittance is effected and are deposited in
the Chilean Treasury. The original amounts of portfolio investments, as well as
interest and dividends and gains thereon, if any, that have not been remitted
abroad may be reinvested in Chile and will not be subject to tax until actually
remitted. For this purpose, no Chilean tax is due on either Fund's shares
received pursuant to the Plan where the participant in the Plan elects to
receive shares rather than cash because no cash has been remitted abroad.
Remittances used to pay dividends to shareholders in cash, like all remittances
of amounts exceeding original invested capital during the first five years after
the capital is invested, are subject to a 10% income tax. No other Chilean
income taxes will be payable by either Fund or by a shareholder of either Fund
that is not a Chilean resident. This special tax regime is included in the
Investment Contract executed by the Funds under Decree Law 600 and, under
current Chilean law, will remain in effect for the duration of the Funds in
Chile. Nevertheless, increases in taxes on corporations in which the Funds hold
stock may affect each Fund's return. The corporate tax or "First Category Tax"
rate on corporate income is 15%. Since this tax is not creditable against the
10% tax on remittances, the return on dividend income
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<PAGE>
received by the Funds will be affected. In addition, the protection granted by
the Investment Contract applies to income taxes, which can reasonably be deemed
to include capital gains taxes, but does not refer to other taxes, such as VAT
sales and stamp taxes, that may be imposed on either Fund or its operations in
Chile as a consequence of changes in general legislation. However, no taxation
may affect in a discriminatory way the Funds or other foreign investors that
have entered into an investment contract pursuant to the provisions of Decree
Law 600. Under current law, the Funds are not subject to any Chilean
inheritance, wealth or estate taxes.
The Funds would become subject to Chilean tax at rates applicable to
foreign investors, in accordance with tax laws then in effect, should the Funds
fail to sell investments held in violation of the diversification requirements
contained in Chilean Law No. 18,657 within the time prescribed by the Chilean
Superintendency of Securities and Insurance (the "SVS"). Under the general tax
regime, the Funds would be subject to a "First Category Tax" on accrued income
(excluding dividends, in which case the tax is paid by the distributing
company). The rate of this tax is 15%. In addition, distributions received by
shareholders of the Funds would be subject to a 35% withholding "Additional Tax"
against which the First Category Tax would be credited. Therefore, the aggregate
tax burden for both taxes, calculated as a percentage of pre-tax income would be
35%. Investors should be aware that, under the general tax regime applicable to
foreign investors, tax rates, taxable basis and the manner in which taxes would
be applied may be amended by law at any time. The Funds would be subject to the
above-described taxation for the duration of its operation in Chile and would
continue to be unable to repatriate capital out of Chile during the five years
after the capital is brought into Chile.
Mexican Taxes
The following discussion of Mexican tax laws is based upon the advice of
Noriega y Escobedo A.C., Mexican counsel for the Funds.
Dividends paid to the Funds by a company that has already paid Mexican
corporate tax are not subject to tax. However, if such company has not paid
Mexican corporate tax, then the dividends will be subject to a tax, payable by
the company, at the rate of 35% on the amount which results by multiplying such
dividends by 1.5385. In addition, since 1999 when a Mexican company pays a
dividend, a withholding tax of 5% on the amount which results by multiplying
such dividend by 1.5385 applies.
Profits derived from the sale of equity securities listed on the Mexican
Stock Exchange that are either directly available to foreign investors or only
available to foreign investors through a trust are not subject to tax on Mexico.
Gains from off-exchange transactions in both listed and unlisted shares are
subject to a 20% withholding tax on the gross income, or at the option of the
foreign investor, a 40% income tax over the net gain. This alternative tax
regime is also applicable to profits derived from equity investments made under
Mexico's debt conversion program.
Interest earned by the Funds from money market instruments that are listed
on the Mexican Stock Exchange are subject to a withholding tax on the gross
amount at the rate of 10%, except on Sovereign Debt issued by the Federal
Government of Mexico, including money market instruments, which are exempt from
such tax.
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Interest earned on unlisted debt securities is subject to a 21%
withholding tax if the obligor is a credit institution and to a 40% withholding
tax in all other cases.
During the first six months of the year 2000, the rate of 4.9% and the
rate of 10% shall apply instead of the rate of 10% and 21% respectively
depending on whether or not there is a treaty to avoid the double taxation.
Mexico has entered into tax treaties with the United States, Canada, France,
Finland, Sweden, Switzerland, the Netherlands, the United Kingdom, Italy,
Singapore, Norway, Japan, Belgium, the Republic of Korea, Denmark, Germany,
Chile and Spain.
No further Mexican tax will be applicable to the Fund or its shareholders,
other than shareholders, such as residents of Mexico, who are subject to tax in
Mexico for reasons other than their status as shareholders in the Fund.
Other Taxation
Distributions also may be subject to additional state, local and foreign
taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING THE FUNDS AND THEIR SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM
OF AN INVESTMENT IN THE LATIN AMERICA EQUITY FUND.
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<PAGE>
FINANCIAL STATEMENTS
The audited financial statements, notes to the financial statements and
report of the independent auditors of each Fund for the fiscal year ended
December 31, 1999 are incorporated by reference herein and are included in the
Funds' Annual Reports to Shareholders. The Annual Reports may be obtained
without charge, by writing to Shareholder Communications Corporation, 17 State
Street, New York, New York 10004, or by calling 1-(800) 403-7916.
PRO FORMA FINANCIAL STATEMENTS
The following tables set forth the unaudited pro forma condensed statement
of assets and liabilities and unaudited pro forma condensed statement of
operations for each Fund as of and for the period ending December 31, 1999 and
as adjusted to give effect to the Latin America Investment Fund's tender offer
to acquire up to 50% of its shares of common stock at a price per share equal to
95% of its net asset value per share (the "Tender Offer") and the Merger.
34
<PAGE>
PRO FORMA CONDENSED STATEMENT
OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1999 (unaudited)
<TABLE>
<CAPTION>
THE LATIN
THE LATIN AMERICA COMBINED
AMERICA INVESTMENT PRO FORMA FUND (AS
EQUITY FUND FUND ADJUSTMENTS ADJUSTED)
ASSETS:
<S> <C> <C> <C> <C>
Investments, at value.................. $120,483,970 $112,719,095 $(57,792,123)(a) $175,410,943
Cash................................... 2,385,418 1,891,802 4,277,220
Receivables:...........................
Investments sold.................... 371,859 371,859 743,718
Dividends........................... 474,349 287,630 761,979
Interest............................ -- 961,657 961,657
Prepaid expenses and other assets...... 4,733 4,639 (4,639)(c) 4,733
------------ ------------ ------------ ------------
Total Assets........................... $123,720,329 $116,236,682 $182,160,250
------------ ------------ ------------
LIABILITIES:
Payables:
Merger and Tender Offer Expenses.... -- -- 1,018,720(b) 1,018,720
Investment advisory fee............. 298,526 288,103 586,629
Administration fees................. 36,749 44,186 80,935
Other accrued expenses.............. 123,413 320,148 443,561
------------ ------------ ------------
Total Liabilities...................... 458,688 652,437 2,129,845
------------ ------------ ------------
NET ASSETS............................. $123,261,641 $115,584,245 $180,030,405
------------ ------------ ------------
NET ASSET VALUE PER SHARE..............
NET ASSETS CONSIST OF:
Capital stock, $0.001 par value;
7,235,428 shares of the Latin
America Equity Fund and 6,587,139
shares of the Latin America
Investment Fund issued and
outstanding (100,000,000 shares
of each Fund authorized).............
$ 7,236 $ 6,587 $ (3,293)(a) $ 10,530
Paid-in capital........................ 120,495,828 117,453,301 (57,788,830)(a) 180,160,300
Undistributed net investment
income/(loss)....................... -- -- (1,023,359)(b)(c) (1,023,359)
Accumulated net realized loss on
investments and foreign currency
related transactions................ (27,658,249) (25,214,671) (d) (52,872,920)
Net unrealized appreciation in value
of investments and translation of
other assets and liabilities
denominated in foreign currencies... 30,416,826 23,339,028 (d) 53,755,854
------------ ------------ ------------
$123,261,641 $115,584,245 $ (3,255,639)(a) $180,030,405
------------ ------------ ------------
Shares outstanding..................... 7,235,428 6,587,139 10,566,928
------------ ------------ ------------
Net Asset value per share.............. $ 17.04 $ 17.55 $ 17.04
------------ ------------ ------------
</TABLE>
See Accompanying Notes to the Pro Forma Financial Statements.
35
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE 12 MONTH PERIOD ENDED DECEMBER 31, 1999
(unaudited)
<TABLE>
<CAPTION>
THE LATIN
AMERICA COMBINED
THE LATIN AMERICA INVESTMENT PRO FORMA FUND (AS
EQUITY FUND FUND ADJUSTMENTS ADJUSTED)
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Income:
Dividends.......................... $ 2,545,736 $ 1,623,099 $ (345,233)(i) $ 3,823,602
Interest........................... 164,703 4,491,651 (4,491,651)(i) 164,703
Less: Foreign taxes withheld....... (280,864) (182,618) 91,309 (i) (372,173)
----------- ----------- ------------ -----------
Total Investment Income............... 2,429,575 5,932,132 (4,745,575) 3,616,132
Expenses:
Investment advisory fees........... 1,237,005 1,190,690 (1,108,697)(e) 1,318,998
Audit fees......................... 62,716 58,681 (58,397)(h) 63,000
Legal fees......................... 56,835 79,756 (56,591)(h) 80,000
Administration fees................ 179,148 175,513 (127,565)(f) 227,096
Custodian fees..................... 133,441 90,320 (63,761)(g) 160,000
Printing........................... 111,885 79,634 (91,519)(h) 100,000
Accounting fees.................... 82,490 80,763 (83,253)(h) 80,000
Directors' fees.................... 43,365 52,000 (45,365)(h) 50,000
Transfer agent fees................ 39,094 32,452 (31,546)(h) 40,000
NYSE listing fees.................. 16,170 16,170 (16,170)(h) 16,170
Insurance.......................... 10,104 10,392 (5,196)(c) 15,300
Other.............................. 26,044 16,743 (12,787)(h) 30,000
Brazilian taxes.................... 80,117 29,417 -- 109,534
----------- ----------- ------------ -----------
Total Expenses........................ 2,078,414 1,912,531 (1,700,847) 2,290,098
Less: Fee waivers..................... (75,649) (114,434) 91,332 (98,751)
Net Expenses....................... 2,002,765 1,798,097 (1,609,515) 2,191,347
----------- ----------- ------------ -----------
Net Investment Income.............. 426,810 4,134,035 3,136,060 1,424,785
----------- ----------- ------------ -----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FOREIGN
CURRENCY RELATED TRANSACTIONS:
Net realized gain/(loss) from:
Investments........................ 1,714,172 2,475,138 (d) 4,189,310
Foreign currency related
transactions ...................... (216,618) (583,431) (800,049)
Net change in unrealized
depreciation in value of
investments and translation of
other assets and liabilities
denominated in foreign
currencies ........................ 46,392,673 34,738,713 (d) 81,131,386
----------- ----------- ------------ -----------
Net realized and unrealized gain on
investments and foreign currency
related transactions............... 47,890,227 36,630,420 -- 84,520,647
----------- ----------- ------------ -----------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS......................... $48,317,037 $40,764,455 $ (3,136,060) $85,945,432
----------- ----------- ------------ -----------
</TABLE>
See Accompanying Notes to the Financial Statements.
36
<PAGE>
The Latin America Equity Fund, Inc.
The Latin America Investment Fund, Inc.
Notes to Pro Forma Financial Statements (unaudited)
1. Basis of Combination
The unaudited Pro Forma Condensed Portfolio of Investments, Pro
Forma Condensed Statement of Assets and Liabilities and Pro Forma
Condensed Statement of Operations give effect to the proposed merger of
The Latin America Investment Fund, Inc. ("LAM") into The Latin America
Equity Fund, Inc. ("LAQ"). The proposed merger will be accounted for by
the method of accounting for tax-free mergers of investment companies
(sometimes referred to as the pooling-of-interest basis). Prior to
consummation of the Merger, LAM intends to make a Tender Offer to acquire
up to 50% of its shares of common stock at 95% of its net asset value. The
Tender Offer will not occur unless the shareholders of both Funds approve
the Merger. The Merger provides for the transfer of all or substantially
all of the assets of LAM to LAQ in exchange for LAQ common shares, the
distribution of such LAQ common shares to common shareholders of LAM and
the subsequent liquidation of LAM. Each share of common stock of LAM will
convert into an equivalent dollar amount of full shares of common stock of
LAQ based on the net asset value per share of each Fund. The accounting
survivor in the proposed merger will be LAQ. This is because although LAM
has substantially similar investment objectives as LAQ, the surviving Fund
will invest in a style that is similar to the way in which LAQ is
currently operated.
The pro forma combined statements should be read in conjunction with
the historical financial statements of the constituent Fund and the notes
thereto incorporated by reference in the Registration Statement filed on
Form N-14.
LAQ and LAM are both closed-end, non-diversified management
investment companies registered under the Investment Company Act of 1940,
as amended.
Pro Forma Adjustments:
The Pro Forma adjustments below reflect the impact of the merger
between LAQ and LAM.
(a) To remove 50% of net assets from LAM as a result of Tender Offer,
investments will be sold off.
(b) To reflect expenses to be incurred in connection with the Tender
Offer and Merger.
(c) To remove certain prepaid expenses associated with LAM, in the
statement of assets and liabilities, which will not be assumed by
LAQ; and to reduce the corresponding amortization on the statement
of operations.
(d) In connection with LAM's intention to make a Tender Offer to acquire
up to 50% of its net assets, LAM will be selling 100% of its fixed
income securities and a certain percentage of its equity securities.
As a result, actual realized and unrealized gains and losses will be
impacted. The effects of these sales are not reasonably estimable at
this time.
(e) Adjustment based on contractual agreements with Advisor and
reduction in net assets associated with Tender Offer.
(f) Adjustment based on the contractual agreement with the Administrator
for the combined Fund.
(g) Adjustment based on the contractual agreement with the Custodian for
the combined Fund.
(h) Assumes elimination of duplicate charges in combination and reflects
management's estimates of combined pro forma operations.
(i) Adjustment for sale of securities in connection with Tender Offer.
37
<PAGE>
2. Significant Accounting Policies
The following is a summary of significant accounting policies, which are
consistently followed by each of LAQ and LAM in the preparation of its financial
statements.
Management Estimates: The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make certain estimates and assumptions that may affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
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 prior to the time of
determination, or, if no sales price is available at that time, at the closing
price 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 at the
fair value 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 not readily marketable securities. The net asset value
per share of each Fund is calculated on each business day, with the exception of
those days on which the New York Stock Exchange is closed .
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 each 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.
Income received by each Fund from sources within Latin America may be
subject to withholding and other taxes imposed by such countries. Also, certain
Latin American countries impose taxes on funds remitted or repatriated from such
countries.
Each Fund is subject to a 10% Chilean repatriation tax with respect to all
remittances from Chile in excess of original invested capital.
From January 23, 1997 through January 22, 1999, Brazil imposed a 0.20%
Contribucao Provisoria sobre Movimentacaoes Financieras ("CPMF") tax that
applied to most debit transactions carried out by financial institutions.
Effective January 23, 1999 the CPMF tax
38
<PAGE>
expired and was reinstated on June 17, 1999 for a period of three years. The tax
is assessed at a rate of 0.38% for the initial year and will drop to 0.30% for
the remaining two years.
Foreign Currency Translations: The books and records of each Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
market value of investment securities, assets and liabilities at the
current rate of exchange; and
purchases and sales of investment securities, income and expenses at the
relevant rates of exchange prevailing on the respective dates of such
transactions.
Each Fund does not isolate that portion of gains and losses in 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. However, each Fund does isolate the
effect of fluctuations in foreign exchange rates when determining the gain or
loss upon the sale or maturity of foreign currency denominated debt obligations
pursuant to U.S. federal income tax regulations, with such amount categorized as
foreign exchange gain or loss for both financial reporting and U.S. federal
income tax reporting purposes.
Net currency gains or losses from valuing foreign currency denominated
assets and liabilities at period end exchange rates are reflected as a component
of net unrealized appreciation/depreciation in value of investments and
translation of other assets and liabilities denominated in foreign currencies.
Net realized foreign exchange losses 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 date on security transactions,
and the difference between the amounts of interest and dividends recorded on
each Fund's books and the U.S. dollar equivalent of the amounts actually
received.
Distributions of Income and Gains: Each Fund distributes at least annually
to shareholders, substantially all of its net investment income and net realized
short-term capital gains, if any. Each 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. 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 each Fund on the ex-dividend date. .
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.
39
<PAGE>
SCHEDULE OF INVESTMENTS OF THE LATIN AMERICA
EQUITY FUND, INC. AS OF DECEMBER 31, 1999
No. of
Description Shares/Units Value
----------- ------------ ----------
EQUITY OR EQUITY-LINKED SECURITIES-97.56%
ARGENTINA-4.17%
BANKING-0.91%
Banco de Galicia y Buenos Aires
S.A. de C.V., ADR 27,512 $ 545,081
Banco Frances S.A. ADR 24,300 575,606
----------
1,120,687
----------
LOCAL AND/OR LONG DISTANCE
TELEPHONE SERVICE-1.80%
Telecom Argentina Stet - France
Telecom S.A. ADR 64,900 2,222,825
----------
OIL & NATURAL GAS-0.98%
Perez Companc S.A 68,899 352,814
Perez Companc S.A. ADR 83,900 859,237
----------
1,212,051
----------
STEEL-0.48%
Siderca S.A.I.C 279,800 587,665
----------
TOTAL ARGENTINA (Cost $4,658,559) 5,143,228
----------
BRAZIL-35.60%
BANKING-3.46%
Banco Bradesco S.A. PN 203,837,952 1,598,884
Banco Bradesco S.A., Rights (expiring 12/25/49)+ 13,236,031 52,534
Banco do Brasil S.A., Series A,
Warrants (expiring 06/30/01)+ 11,076,400 8,032
Banco do Brasil S.A., Series B,
Warrants (expiring 06/30/06)+ 16,614,600 15,175
Banco do Brasil S.A., Series C,
Warrants (expiring 06/30/11)+ 27,691,000 28,205
Banco Itau S.A. PN 29,889,580 2,564,564
----------
4,267,394
----------
CELLULAR TELECOMMUNICATIONS-1.60%
Telemig Celular S.A. PNC+ 144,037 2,626
Telesp Celular Participacoes
S.A. ADR 46,300 1,961,962
----------
See Accompanying Notes to the Financial Statements.
40
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ ----------
1,964,588
----------
ELECTRIC DISTRIBUTION-0.56%
Eletropaulo Metropolitana -
Eletricidade de Sao Paulo
S.A. PN 10,659,100 $ 690,349
----------
FERTILIZER-0.03%
Serrana S.A. ON+ 27,210 15,665
Serrana S.A. PN+ 32,445 17,781
----------
33,446
----------
FOOD & BEVERAGES-3.91%
Companhia Brasileira de
Distribuicao Grupo Pao de
Acucar ADR 85,000 2,746,562
Companhia Cervejaria
Brahma PN 2,720,543 1,987,886
Seara Alimentos S.A 160,771,340 80,986
----------
4,815,434
----------
LOCAL AND/OR LONG DISTANCE
TELEPHONE SERVICE-13.49%
Embratel Participacoes S.A. ADR 228,090 6,215,452
Tele Centro Sul Participacoes
S.A. ADR 60,540 5,494,005
Tele Norte Leste Participacoes
S.A. ADR 192,700 4,913,850
Telecomunicacoes Brasileiras
S.A. PN 43,464,259 962
Telecomunicacoes de Minas
Gerais S.A. PNB 144,037 5,573
Telecomunicacoes de Sao Paulo S.A 434 6
----------
16,629,848
----------
MINING-3.57%
Companhia Vale do Rio Doce
PNA 159,108 4,403,764
----------
Oil & NATURAL GAS-4.33%
Petroleo Brasileiro S.A. ADR 181,400 4,162,183
Ultrapar Participacoes S.A. ADR+ 102,200 1,175,300
----------
5,337,483
----------
See Accompanying Notes to the Financial Statements.
41
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ ----------
PAPER PRODUCTS-2.56%
Aracruz Celulose S.A. ADR 66,800 $1,753,500
Votorantim Celulose e Papel
S.A. PN 30,457,757 1,399,388
----------
3,152,888
----------
STEEL-0.97%
Gerdau S.A. PN 45,139,285 1,199,383
----------
UTILITIES-1.12%
Centrais Eletricas Brasileiras
S.A. PNB 58,000,000 1,383,781
----------
TOTAL BRAZIL (Cost $29,851,788) 43,878,358
----------
CHILE-8.52%
BANKING-0.80%
Banco de Credito e Inversiones 121,029 982,397
----------
CONSUMER DURABLES-0.36%
Empresas Almacenes Paris S.A 366,549 449,753
----------
ELECTRIC DISTRIBUTION-0.79%
Chilectra S.A. ADR 48,000 978,480
----------
ELECTRIC GENERATION-0.78%
Empresa Nacional de
Electricidad S.A 1,193,650 563,308
Enersis S.A 839,404 392,963
----------
956,271
----------
ENGINEERING & CONSTRUCTION-0.27%
Besalco S.A 64,421 179,977
Maderas y Sinteticos S.A 341,850 152,937
----------
332,914
----------
FERTILIZER-0.80%
Sociedad Quimica y Minera de
Chile S.A 213 6,710
Sociedad Quimica y Minera de
Chile S.A., ADR 19,300 609,156
Sociedad Quimica y Minera de
See Accompanying Notes to the Financial Statements.
42
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ ----------
Chile S.A., Class A 81,321 $ 262,499
Sociedad Quimica y Minera de
Chile S.A., Class B 35,000 110,335
----------
988,700
----------
FINANCIAL SERVICES-0.00%
Invercap S.A 12,094 5,936
----------
FOOD & BEVERAGES-1.34%
Compania Cervecerias Unidas
S.A 88,567 561,746
Compania Cervecerias Unidas
S.A. ADR 16,700 535,444
Embotelladora Andina S.A. PNA 174,674 527,567
Embotelladora Andina S.A. PNB 10,923 26,393
----------
1,651,150
----------
FORESTRY-1.47%
Compania de Petroleos de Chile
S.A 277,815 1,232,403
Empresas CMPC S.A 56,159 579,877
----------
1,812,280
----------
INSURANCE-0.11%
Compania de Seguros La
Prevision Vida S.A.+ 217,878 135,724
----------
PHARMACEUTICALS-0.09%
Laboratorio Chile S.A 122,018 111,711
----------
REAL ESTATE INVESTMENT & MANAGEMENT-0.09%
Parque Arauco S.A 200,000 107,598
----------
RETAIL-0.32%
Sociedad Anonima Comercial e
Industrial Falabella 350,994 394,226
----------
STEEL-0.23%
Compania Acero del Pacifico
S.A 155,931 286,990
----------
TELECOMMUNICATIONS-1.07%
Compania de Telecomunicaciones de Chile S.A. ADR 52,200 952,650
See Accompanying Notes to the Financial Statements.
43
<PAGE>
No. of
Description Shares/Units Value
------------ ----------
Compania de Telecomunicaciones de Chile S.A.,
Class A 79,573 $ 360,501
----------
1,313,151
----------
TOTAL CHILE (Cost $8,789,088) 10,507,281
----------
COLOMBIA-0.97%
CEMENT-0.00%
Cementos Paz del Rio
S.A. ADR++ 31 206
----------
Food & Beverages-0.97%
Bavaria S.A 272,576 1,192,066
----------
TOTAL COLOMBIA (Cost $955,741) 1,192,272
----------
JAMAICA-0.99%
INVESTMENT & HOLDING COMPANIES-0.99%
Jamaican Assets I L.P.**+ (Cost $1,054,295) 939,513 1,221,198
----------
MEXICO-44.62%
BROADCAST, RADIO & TELEVISION-3.67%
Grupo Televisa S.A. GDR+ 66,300 4,524,975
----------
CELLULAR TELECOMMUNICATIONS-2.03%
Nuevo Grupo Iusacell S.A. de
C.V. ADR, V Shares+ 167,465 2,501,508
----------
CEMENT-3.85%
Cemex, S.A. de C.V. ADR+ 170,100 4,741,538
----------
DIVERSIFIED OPERATIONS-2.16%
Alfa, S.A., Series A+ 356,415 1,673,928
Desc, S.A. de C.V. ADR+ 59,200 991,600
----------
2,665,528
----------
ENTERTAINMENT-0.58%
Corporacion Interamericana de
Entretenimiento S.A., Class B 178,100 711,460
----------
FINANCIAL SERVICES-4.37%
Grupo Financiero Banamex
Accival, S.A. de C.V., Series O+ 775,796 3,111,372
See Accompanying Notes to the Financial Statements.
44
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ ----------
Grupo Financiero Bancomer, S.A. de C.V, Series O 2,740,010 $1,145,165
Grupo Financiero Inbursa, S.A. de C.V., Series O+ 277,168 1,134,999
----------
5,391,536
----------
FOOD & BEVERAGES-7.26%
Coca-Cola Femsa S.A. ADR 155,881 2,737,660
Fomento Economico Mexicano,
S.A. de C.V. ADR 62,370 2,775,465
Grupo Modelo, S.A. de C.V.,
Series C 801,372 2,199,016
Panamerican Beverages, Inc.,
Class A 60,000 1,233,750
----------
8,945,891
----------
INVESTMENT & HOLDING COMPANIES-4.24%
Carso Global Telecom,
Series A1+ 324,334 3,046,515
Grupo Carso S.A. de C.V.,
Series A1+ 439,041 2,187,096
----------
5,233,611
----------
MINING-1.33%
Grupo Mexico S.A., Series B 329,752 1,633,969
----------
PAPER PRODUCTS-1.76%
Kimberly-Clark De Mexico, S.A. de C.V., Series A 556,495 2,173,120
----------
RETAIL-3.48%
Cifra S.A. de C.V. ADR+ 188,500 3,777,936
Grupo Sanborns S.A., Series B1+ 229,673 509,038
----------
4,286,974
----------
STEEL-1.22%
Tubos de Acero de Mexico,
S.A. ADR 110,900 1,504,081
----------
TELECOMMUNICATIONS-8.67% Telefonos de Mexico, S.A.,
Class L ADR 95,000 10,687,500
----------
TOTAL MEXICO (Cost $40,703,461) 55,001,691
----------
PERU-1.73%
See Accompanying Notes to the Financial Statements.
45
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ ----------
ENGINEERING & CONSTRUCTION-0.29%
Ferreyros S.A 617,319 $ 334,304
Tecsur S.A.+ 78,486 20,581
-----------
354,885
-----------
FINANCIAL SERVICES-0.30%
Credicorp Limited 31,012 372,144
-----------
MINING-0.23%
Southern Peru Copper Corp
ADR 17,900 276,331
-----------
TELECOMMUNICATIONS-0.91%
Telefonica del Peru S.A. ADR 83,960 1,122,965
-----------
TOTAL PERU (Cost $2,011,764) 2,126,325
-----------
VENEZUELA-0.32%
TELECOMMUNICATIONS-0.32%
Venworld Telecommunications**+ (Cost $817,105) 40,161 395,123
GLOBAL-0.64%
INVESTMENT & HOLDING COMPANIES-0.64%
Emerging Markets Ventures I L.P. **+# (Cost
$742,023) 711,734 785,327
-----------
TOTAL EQUITY OR EQUITY-LINKED
SECURITIES (Cost $89,583,824) 120,250,803
-----------
FIXED OR FLOATING RATE INVESTMENTS-0.16%
Par (000)
---------
ARGENTINA-0.00%
Republic of Argentina, Bocon
Pre 2, 5.696%, 04/01/01(a) (Cost $195)
.................USD -- 189
------------
LATIN AMERICA-0.16%
International Wireless
Communications, Inc., Senior
Secured Note, 08/17/02*+(b) (Cost $451,280) 323 200,116
------------
TOTAL FIXED OR FLOATING RATE INVESTMENTS
(Cost $ 451,475) 200,305
------------
See Accompanying Notes to the Financial Statements.
46
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ ------------
(Cost 451,475) 200,305
------------
SHORT-TERM INVESTMENTS-0.03%
CHILEAN MUTUAL FUNDS-0.03%
Fondo Mutuo Citicorp Cash 9,272 $ 20,516
Fondo Mutuo Security Check 2,741 12,346
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $31,941) 32,862
------------
TOTAL INVESTMENTS-97.75% (Cost $90,067,240)
(Notes A,D) 120,483,970
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES-2.25% 2,777,671
------------
NET ASSETS-100.00% $123,261,641
============
----------
* Not readily marketable security.
** Restricted security, not readily marketable (see Note F).
+ Security is non-income producing.
++ SEC Rule 144 A security. Such securities are traded only among "qualified
institutional buyers".
# As of December 31, 1999, LAQ committed to. investing an additional
$512,889 of capital.
(a) . Floating rate bond; rate resets based on 1-month U.S. dollar London
Interbank Offered Rate ( LIBOR). Pro-rata sinking fund has been
established.
(b) March 31, 1998, this investment ceased accruing
. interest .
ADR American Depository Receipts.
GDR Global Depository Receipts.
ON Ordinary Shares.
PN Preferred Shares.
PNA Preferred shares, Class A.
PNB Preferred shares, Class B.
PNC Preferred shares, Class C.
USD United States Dollars.
See Accompanying Notes to the Financial Statements.
47
<PAGE>
SCHEDULE OF INVESTMENTS OF THE LATIN AMERICA
INVESTMENT FUND, INC. AS OF DECEMBER 31, 1999
No. of
Description Shares/Units Value
----------- ------------ -----
EQUITY OR EQUITY-LINKED SECURITIES - 68.71% @
BRAZIL-28.18%
BANKING-1.58%
Banco Bradesco S.A. PN 393,131 $ 3,084
Banco Bradesco S.A., Rights (expiring 12/25/49)+ 25,526 101
Banco do Brasil S.A., Series A,
Warrants (expiring 06/30/01)+ 11,877,000 8,613
Banco do Brasil S.A., Series B,
Warrants (expiring 06/30/06)+ 17,815,500 16,272
Banco do Brasil S.A., Series C,
Warrants (expiring 06/30/11)+ 29,692,500 30,243
Banco Itau S.A. PN 20,585,957 1,766,301
-----------
1,824,614
-----------
CELLULAR TELECOMMUNICATIONS-0.91 %
Telemig Celular S.A. PNC+ 132,070 2,408
Telesp Celular Participacoes
S.A. ADR 24,700 1,046,662
-----------
1,049,070
-----------
FERTILIZER-0.02%
Serrana S.A. ON+ 14,249 8,203
Serrana S.A. PN+ 16,991 9,311
-----------
17,514
-----------
FOOD & BEVERAGES-2.02%
Companhia Brasileira de
Distribuicao Grupo Pao de Acucar ADR 29,100 940,294
Companhia Cervejaria
Brahma ADR 99,400 1,391,600
-----------
2,331,894
-----------
LOCAL AND/OR LONG DISTANCE
TELEPHONE SERVICE-14.17%
Embratel Participacoes
S.A. ADR 101,765 2,773,096
Tele Centro Sul Participacoes
S.A. ADR 24,500 2,223,375
Tele Norte Leste Participacoes
S.A. ADR 114,100 2,909,550
Telecomunicacoes Brasileiras
S.A. ADR 57,900 7,440,150
Telecomunicacoes de Minas
See Accompanying Notes to the Financial Statements.
48
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ -----
Gerais S.A. PNB 132,070 $ 5,110
Telecomunicacoes de Sao
Paulo S.A. PN 42,510,599 1,030,703
-----------
16,381,984
-----------
MINING-2.58%
Companhia Vale do Rio
Doce ADR 18,900 526,900
Companhia Vale do Rio
Doce PNA 88,835 2,458,760
-----------
2,985,660
-----------
OIL & NATURAL GAS-3.19%
Petroleo Brasileiro S.A. PN 14,500,000 3,692,223
-----------
PAPER PRODUCTS-1.50%
Aracruz Celulose S.A. ADR 50,000 1,312,500
Votorantim Celulose e Papel
S.A. PN 9,150,659 420,429
-----------
1,732,929
-----------
STEEL-0.54%
-----------
Gerdau S.A. PN 23,557,02- 625,927
-----------
UTILITIES-1.67%
Centrais Eletricas Brasileiras
S.A. PNB ADR 160,836 1,932,525
-----------
TOTAL BRAZIL (Cost $21,798,615) 32,574,340
-----------
CHILE-7.14%
BANKING-0.51%
Banco de Credito e Inversiones 72,752 590,531
-----------
CONSUMER DURABLES-0.47%
Empresas Almacenes Paris S.A 441,229 541,385
-----------
ELECTRIC GENERATION-0.84%
Empresa Nacional de
Electricidad S.A 1,221,723 $ 576,556
Enersis S.A 830,623 388,852
-----------
965,408
-----------
ENGINEERING & CONSTRUCTION-0.29 %
Besalco S.A 66,354 185,378
Maderas y Sinteticos S.A 341,850 152,937
-----------
338,315
-----------
FERTILIZER-0.32%
See Accompanying Notes to the Financial Statements.
49
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ -----
Sociedad Quimica y Minera de Chile S.A., Class A 41,406 $ 133,656
Sociedad Quimica y Minera de Chile S.A., Class B 75,000 236,432
-----------
370,088
-----------
FINANCIAL SERVICES-0.01%
-----------
Invercap S.A 12,094 5,936
-----------
FOOD & BEVERAGES-1.53%
Compania Cervecerias
Unidas S.A 83,574 530,078
Embotelladora Andina
S.A. PNA 121,203 366,068
Embotelladora Andina
S.A. PNB 49,172 118,811
Embotelladora Arica S.A. ADR++ 75,000 750,000
-----------
1,764,957
-----------
FORESTRY-1.53%
Compania Chilena de
Fosforos S.A 69,033 76,233
Compania de Petroleos de
Chile S.A 262,729 1,165,480
Empresas CMPC S.A 51,504 531,811
-----------
1,773,524
-----------
INSURANCE-0.10%
Compania de Seguros La
Prevision Vida S.A.+ 188,348 117,329
-----------
PHARMACEUTICALS-0.10%
Laboratorio Chile S.A 122,019 $ 111,712
-----------
RETAIL-0.56%
Sociedad Anonima Comercial e Industrial Falabella 578,743 650,028
-----------
STEEL-0.43%
Compania Acero del Pacifico S.A 270,555 497,954
TELECOMMUNICATIONS-0.45%
Compania de
Telecomunicaciones de
Chile S.A., Class A 40,717 184,466
Compania de
Telecomunicaciones de
Chile S.A., Class B 113,213 333,388
-----------
517,854
-----------
See Accompanying Notes to the Financial Statements.
50
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ -----
TOTAL CHILE (Cost $6,660,732) 8,245,021
-----------
COLOMBIA-0.24%
FOOD & BEVERAGES-0.24%
Bavaria S.A. (Cost $253,853) 63,239 $ 276,565
-----------
JAMAICA-0.89%
INVESTMENT & HOLDING COMPANIES-0.89%
Jamaican Assets I L.P.**+ (Cost $892,099) 794,973 1,033,322
-----------
MEXICO-30.52%
BROADCAST, RADIO & TELEVISION-3.79%
Grupo Televisa S.A. GDR+ 64,200 4,381,650
-----------
CEMENT-2.63%
Cemex, S.A. de C.V. ADR+ 108,855 3,034,333
Cemex, S.A. de C.V. CPO 2 11
-----------
3,034,344
-----------
DIVERSIFIED OPERATIONS-1.09%
Alfa, S.A., Series A+ 185,158 869,607
Desc, S.A. de C.V. ADR+ 23,400 391,950
-----------
1,261,557
-----------
FINANCIAL SERVICES-2.86%
Grupo Financiero Banamex
Accival, S.A. de C.V., Series O + 471,000 1,888,971
Grupo Financiero Bancomer,
S.A. de C.V., Series O 3,400,000 1,421,003
-----------
3,309,974
-----------
FOOD & BEVERAGES-4.58%
Coca-Cola Femsa S.A. ADR 68,345 1,200,309
Fomento Economico Mexicano,
S.A. de C.V. ADR 44,380 1,974,910
Grupo Bimbo, S.A. de C.V.,
Series A+ 229,914 513,212
Grupo Modelo, S.A. de C.V.,
Series C 586,557 1,609,550
-----------
5,297,981
-----------
INVESTMENT & HOLDING COMPANIES-1.03%
Grupo Carso S.A. de C.V.,
Series A1+ 237,625 1,183,736
-----------
MINING-0.72%
Grupo Mexico S.A., Series B 168,773 836,295
-----------
See Accompanying Notes to the Financial Statements.
51
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ -----
PAPER PRODUCTS-1.40%
Kimberly-Clark de Mexico, S.A. de C.V., Series A 414,102 $ 1,617,074
-----------
RETAIL-2.25%
Cifra S.A. de C.V. ADR+ 129,489 2,595,231
-----------
STEEL-0.55%
Tubos de Acero de Mexico,
S.A. ADR 47,200 640,150
-----------
TELECOMMUNICATIONS-9.62%
Telefonos de Mexico,
S.A., Class L ADR 98,800 11,115,000
-----------
TOTAL MEXICO (Cost $25,961,595) 35,272,992
-----------
PERU-0.72%
ENGINEERING & CONSTRUCTION-0.02 %
Tecsur S.A.+ 82,212 $ 21,558
-----------
TELECOMMUNICATIONS-0.70%
Telefonica del Peru S.A. ADR 60,600 810,525
-----------
TOTAL PERU (Cost $953,107) 832,083
-----------
VENEZUELA-0.34%
CEMENT-0.00%
Corporacion Venezolana de
Cementos, S.A.C.A.,
Shares 1 280 97
Corporacion Venezolana de
Cementos, S.A.C.A.,
Shares 2 37 12
-----------
109
-----------
TELECOMMUNICATIONS-0.34%
Venworld
Telecommunications**+ 40,140 394,916
-----------
TOTAL VENEZUELA (Cost $816,963) 395,025
-----------
GLOBAL-0.68%
INVESTMENT & HOLDING COMPANIES-0.68%
Emerging Markets Ventures I
L.P.**+# (Cost $742,023) 711,734 785,327
-----------
See Accompanying Notes to the Financial Statements.
52
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ -----
TOTAL EQUITY OR EQUITY-LINKED
SECURITIES (Cost $58,078,987) $79,414,675
-----------
FIXED OR FLOATING RATE
INVESTMENTS-28.73% @
Par (000)
---------
ARGENTINA-6.61%
Republic of Argentina,
Debentures, 6.8125%,
03/31/05(2)(5)(6) .......... USD 440 402,820
Republic of Argentina, Global
Note, 11.75%, 04/07/09 3,500 3,526,250
Republic of Argentina, Global
Senior Note, 9.164%,
04/10/05(4) ................ USD 650 598,000
Republic of Argentina, Note,
11.75%, 02/12/07++ 2,000 1,840,000
Republic of Argentina, Series 54 ,
Tranche 1, Unsubordinated
Note, 8.75%, 07/10/02++ 1,250 1,131,250
Republic of Argentina,
Series REGS, Euro MTN,
11.75%, 02/12/07++ ......... ARS 150 138,020
-----------
TOTAL ARGENTINA (Cost $7,122,549) 7,636,340
-----------
BRAZIL-5.79%
Federal Republic of Brazil,
Bearer Bond, 5.00%,
04/15/09(4)(5)(6) .......... USD 148 110,260
Federal Republic of Brazil,
Capitalization Bond, 8.00%,
04/15/14(1)(5)(6) 767 576,978
Federal Republic of Brazil,
Capitalization Debenture,
Series L, 8.00%,
04/15/14(1)(5)(6) 701 527,680
Federal Republic of Brazil,
Debt Conversion Bond,
Series L-18 yr, 7.00%,
04/15/12(3)(5)(6) 2,076 1,551,810
Federal Republic of Brazil,
Debt Conversion Bond,
Series L-RG, 7.00%,
See Accompanying Notes to the Financial Statements.
53
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ -----
04/15/12(3)(5)(6) 1,926 $1,439,685
Federal Republic of Brazil,
Unsubordinated Bond,
14.50%, 10/15/09 2,241 2,488,631
----------
TOTAL BRAZIL (Cost $5,987,735) 6,695,044
----------
COLOMBIA-2.49%
Republic of Colombia, Global
Bond, 10.875%, 03/09/04 1,400 1,438,500
Republic of Colombia, Global
Unsubordinated Bond,
7.625%, 02/15/07 200 169,500
Republic of Colombia, Global
Unsubordinated Note,
8.625%, 04/01/08 ........... USD 250 220,000
Republic of Colombia, Series 9,
Euro MTN, 7.27%, 06/15/03 500 455,000
Republic of Colombia, Yankee
Note, 11.442%, 08/13/05(9) 614 592,510
----------
TOTAL COLOMBIA (Cost $2,741,903) 2,875,510
----------
COSTA RICA-0.29%
Banco Central Costa Rica,
Series B, Principal Bond,
6.25%, 05/21/15(6) (Cost $349,606) 400 340,000
ECUADOR-1.01%
The Republic of Ecuador, Par
Bond, 4.00%, 02/28/25(5)(7) (Cost $1,507,426) 3,400 1,168,750
LATIN AMERICA-0.17%
International Wireless
Communications, Inc., Senior
Secured Note, 08/17/02*+(8) (Cost $451,924) 323 200,115
MEXICO-5.58%
United Mexican States, Global
Bond, 11.375%, 09/15/16 485 550,257
United Mexican States, Secured
Bond, Series W-A, 6.25%,
12/31/19(5) 700 549,500
United Mexican States, Series
W-B, Par Bond, 6.25%,
See Accompanying Notes to the Financial Statements.
54
<PAGE>
No. of
Description Shares/Units Value
----------- ------------ -----
12/31/19(5) 6,500 5,131,100
United Mexican States, Warrants
(expiring 02/18/00)+ 2,130 $ 213,000
----------
TOTAL MEXICO (Cost $6,091,654) 6,443,857
----------
Par (000)
---------
PANAMA-1.34%
The Republic of Panama, Global 405 340,200
Bond, 8.875%, 09/30/27 ..... USD
The Republic of Panama, Global
Bond, 9.375%, 04/01/29 775 739,156
The Republic of Panama, Interest
Reduction Debenture, 4.25%,
07/17/14(4)(5)(6) 600 471,000
----------
TOTAL PANAMA (Cost $1,579,730) 1,550,356
----------
PERU-1.39%
The Republic of Peru, Front
Loaded Interest Reduction
Bond, 3.75%,
03/07/17(4)(5)(6) 2,250 1,397,813
The Republic of Peru, Past Due
Interest Bond, 4.50%,
03/07/17(4)(5)(6) 300 207,750
----------
TOTAL PERU (Cost $1,572,647) 1,605,563
----------
VENEZUELA-4.06%
Republic of Venezuela, Global
Bond, 13.62%, 08/15/18 2,375 2,149,375
Republic of Venezuela, Global
Bond, 9.25%, 09/15/27 200 132,000
Republic of Venezuela,
Series A, Front Loaded
Interest Reduction Debenture,
6.87%, 03/31/07(3)(5)(6) 2,857 2,257,132
Republic of Venezuela,
Series DL, Debt Conversion
Debenture, 7.00%,
12/18/07(3)(5)(6) 190 150,476
----------
TOTAL VENEZUELA (Cost $3,793,876) 4,688,983
----------
TOTAL FIXED OR FLOATING RATE
See Accompanying Notes to the Financial Statements.
55
<PAGE>
No. of
Description Shares/Units Value
------------ -----
INVESTMENTS (Cost $31,199,050) $ 33,204,518
------------
Description
SHORT-TERM INVESTMENTS-0.08%
CHILEAN MUTUAL FUNDS-0.08%
Bice Manager Investment Fund 32,904 86,607
Fondo Mutuo Security Check 2,952 13,295
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $98,915) 99,902
------------
TOTAL INVESTMENTS-97.52%
(Cost $89,376,952) 112,719,095
CASH AND OTHER ASSETS IN EXCESS
OF LIABILITIES-2.48% 2,865,150
------------
NET ASSETS-100.00% $115,584,245
============
--------------------------------------------------------------------------------
@ Assumes that 21.27% of Equity or Equity-Linked securities and all of the
Fixed or Floating Rate Investments (28.73% of LAM's net assets) will be
sold due to the 50% tender of its shares resulting in the following:
Total Investments $56,359,458
Cash and other assets in excess of liabilities 1,432,575
-----------
Net Assets $57,792,123
* Not readily marketable security.
** Restricted security, not readily marketable (See Note F).
+ Security is non-income producing.
++ SEC Rule 144A security. Such securities are traded only among "qualified
institutional buyers."
# As of December 31, 1999, LAM commited to investing an additional $512,889
of capital.
(1) Payment-in-kind bond; of which all or a portion of the coupon is being
capitalized at periodic intervals.
(2) Floating rate bond; rate resets based on 6-month London Interbank Offered
Rate ("LIBOR") plus 0.8125%.
(3) Floating rate bond; rate resets based on 6-month LIBOR plus 0.875%.
(4) Variable rate bond; coupon varies at periodic intervals.
(5) Brady Bond.
(6) Pro-rata sinking fund has been established.
(7) Step-up bond; coupon increases at periodic intervals.
(8) As of March 31, 1998, this investment ceased accruing interest.
See Accompanying Notes to the Financial Statements.
56
<PAGE>
Description
(9) Floating rate note; rate resets based on the average of the Republic of
Colombia, 7.625%, 02/15/07 and the Republic of Colombia, 8.625%, 04/01/08
minus 0.375%.
ADR American Depository Receipts.
ARS Argentine Pesos.
CPO Ordinary Participation Certificates.
GDR Global Depository Receipts.
MTN Medium Term Note.
ON Ordinary Shares.
PN Prefered Shares
PNA Preferred Shares, Class A
PNB Preferred Shares, Class B
PNC Preferred Shares, Class C
USD United States Dollars.
See Accompanying Notes to the Financial Statements.
57
<PAGE>
PART C
OTHER INFORMATION
Item 15. Indemnification
A policy of insurance covering Credit Suisse Asset Management, LLC, its
affiliates, and all of the registered investment companies advised by Credit
Suisse Asset Management, LLC insures the Registrant's directors and officers and
others against liability arising by reason of an alleged breach of duty caused
by any negligent act, error or accidental omission in the scope of their duties.
Article Eighth of the Registrant's Articles of Incorporation states as follows:
ARTICLE VIII
LIMITATION ON LIABILITY; INDEMNIFICATION
(1) To the fullest extent that limitations on the liability of directors
and officers are permitted by the Maryland General Corporation Law, no director
or officer of the Corporation shall have any liability to the Corporation or its
stockholders for damages. This limitation on liability applies to events
occurring at the time a person serves as a director or officer of the
Corporation whether or not such person is a director or officer at the time of
any proceeding in which liability is asserted.
(2) Any person who was or is a party or is threatened to be made a party
in any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is a current or former director or officer of the Corporation, or is
or was serving while a director or officer of the Corporation at the request of
the Corporation as a director, officer, partner, trustee, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust, enterprise
or employee benefit plan, shall be indemnified by the Corporation against
judgments, penalties, fines, excise taxes, settlements and reasonable expenses
(including attorneys' fees) actually incurred by such person in connection with
such action, suit or proceeding to the fullest extent permissible under the
Maryland General Corporation Law, the Securities Act of 1933 and the Investment
Company Act of 1940 as such statutes are now or hereafter in force. In addition,
the Corporation shall also advance expenses to its currently acting and its
former directors and officers to the fullest extent that indemnification of
directors is permitted by the Maryland General Corporation Law, the Securities
Act of 1933 and the Investment Company Act of 1940. The Board of Directors may
by Bylaw, resolution or agreement make further provision for indemnification of
directors, officers, employees and agents to the fullest extent permitted by the
Maryland General Corporation Law.
(3) No provision of this Article shall be effective to protect or purport
to protect any director or officer of the Corporation against any liability to
the Corporation or its security holders to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
<PAGE>
(4) References to the Maryland General Corporation Law in this Article are
to that law as from time to time amended. No amendment to the charter of the
Corporation shall affect any right of any person under this Article based on any
event, omission or proceeding prior to the amendment.
Articles 5.2 and 5.3 of Registrant's By-Laws state as follows:
INDEMNIFICATION AND INSURANCE
Article 5.2. Indemnity.
(a) The Company shall indemnify its directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The Company shall indemnify its officers to the same extent as its
directors and to such further extent as is consistent with law. The Company
shall indemnify its directors and officers who, while serving as directors or
officers, also serve at the request of the Company as a director, officer,
partner, trustee, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan to
the fullest extent consistent with law. The indemnification and other rights
provided by this Article shall continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. This Article shall not protect any such person
against any liability to the Company or any Stockholder thereof to which such
person would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office ("disabling conduct").
(b) Any current or former director or officer of the Company seeking
indemnification within the scope of this Article shall be entitled to advances
from the Company for payment of the reasonable expenses incurred by him in
connection with the matter as to which he is seeking indemnification in the
manner and to the fullest extent permissible under the Maryland General
Corporation Law. The person seeking indemnification shall provide to the Company
a written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Company has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following conditions shall be met: (i) the person seeking indemnification shall
provide security in form and amount acceptable to the Company for his
undertaking; (ii) the Company is insured against losses arising by reason of the
advance; or (iii) a majority of a quorum of directors of the Company who are
neither "interested persons" as defined in Section 2(a)(19) of the Investment
Company Act of 1940, as amended, nor parties to the proceeding ("disinterested
non-party directors"), or independent legal counsel, in a written opinion, shall
have determined, based on a review of facts readily available to the Company at
the time the advance is proposed to be made, that there is reason to believe
that the person seeking indemnification will ultimately be found to be entitled
to indemnification.
(c) At the request of any person claiming indemnification under this
Article, the Board of Directors shall determine, or cause to be determined, in a
manner consistent with the Maryland General Corporation Law, whether the
standards required by this Article have been met. Indemnification shall be made
only following: (i) a final decision on the merits by a court or
<PAGE>
other body before whom the proceeding was brought that the person to be
indemnified was not liable by reason of disabling conduct or (ii) in the absence
of such a decision, a reasonable determination, based upon a review of the
facts, that the person to be indemnified was not liable by reason of disabling
conduct by (a) the vote of a majority of a quorum of disinterested non-party
directors or (b) an independent legal counsel in a written opinion.
(d) Employees and agents who are not officers or directors of the Company
may be indemnified, and reasonable expenses may be advanced to such employees or
agents, as may be provided by action of the Board of Directors or by contract,
subject to any limitations imposed by the Investment Company Act of 1940.
(e) The Board of Directors may make further provision consistent with law
for indemnification and advance of expenses to directors, officers, employees
and agents by resolution, agreement or otherwise. The indemnification provided
by this Article shall not be deemed exclusive of any other right, with respect
to indemnification or otherwise, to which those seeking indemnification may be
entitled under any insurance or other agreement or resolution of stockholders or
disinterested directors or otherwise.
(f) References in this Article are to the Maryland General Corporation Law
and to the Investment Company Act of 1940, as from time to time amended. No
amendment of these Bylaws shall affect any right of any person under this
Article based on any event, omission or proceeding prior to the amendment.
Article 5.3. Insurance. The Company may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Company or who, while a director, officer, employee or agent of the Company, is
or was serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan,
against any liability asserted against and incurred by such person in any such
capacity or arising out of such person's position; provided that no insurance
may be purchased by the Company on behalf of any person against any liability to
the Company or to its Stockholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
<PAGE>
Item 16. Exhibits
1. Articles of Incorporation of the Registrant,
dated September 16, 1991, as amended
September 16, 1991.*
2. Amended and Restated By-laws of the
Registrant dated November 9, 1999.
3. Not Applicable.
4. Form of Merger Agreement and Plan of
Reorganization. Filed herewith.
5. Not Applicable.
6.(a) Investment Advisory Agreement between the
Registrant and BEA Associates dated October
22, 1991.*
6.(b) Investment Sub-Advisory Agreement, among the
Registrant, BEA and Celfin Agente de Valore
Limitada (formerly Celsius Agente de Valores
Limitada) (the "Chilean Sub-Adviser") dated
October 22, 1991.*
7. Not Applicable.
8. Not Applicable.
9. Custodian Agreement between the Registrant
and Brown Brothers Harriman & Co., dated June
14, 1995, as amended.*
10. Not Applicable
11.(a) Opinion and Consent of Willkie Farr &
Gallagher.*
(b) Opinion and consent of Venable, Baetjer and
Howard, LLP.*
(c) Consent of Brunchou, Fernandez Madero &
Lombardi.*
--------
* To be filed by amendment.
<PAGE>
(d) Consent of Tozzini, Freire, Teixeira E
Silva.*
(e) Consent of Guerrero, Olivos, Novoa Y
Errazuriz.*
(f) Consent of Noriega y Escobedo.*
12 Opinion and Consent of Willkie Farr &
Gallagher with respect to tax matters.*
13.(a) Registrar, Transfer Agency and Service
Agreement between the Registrant and the
First National Bank of Boston, dated
September 1, 1995.*
(b) Administrative Services Agreement between the
Registrant and BEA Associates dated April 30,
1992.*
(c) Shareholder Servicing Agreement between the
Registrant and Shareholder Communications
Corporation dated September 20, 1994.*
(d) Chilean Administration Agreement between the
Registrant, BEA Associates and BEA
Administration, Administradora de Fondos de
Inversion de Capital Extranjero S.A. (the
"Chilean Administrator") dated November 4,
1997.*
(e) Chilean Sub-Administration Agreement between
the BEA Administration, Administradora de
Fondos de Inversion de Capital Extranjero
S.A. and Celfin Servicios Financieros S.A.
dated November 4, 1997.*
14. Consent of PricewaterhouseCoopers LLP. Filed
herewith.
--------
* To be filed by amendment.
<PAGE>
15. Not Applicable
16. Powers of Attorney. (see signature page)
17. Code of Ethics.*
<PAGE>
Item 17. Undertakings
(1) The Registrant agrees that prior to any public reoffering of the securities
registered through the use of a prospectus which is a part of this registration
statement by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act, the reoffering prospectus will
contain the information called for by the applicable registration form for
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The Registrant agrees that every prospectus that is filed under paragraph
(1) above will be filed as a part of an amendment to the registration statement
and will not be used until the amendment is effective, and that, in determining
any liability under the 1933 Act, each post-effective amendment shall be deemed
to be a new registration statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona
fide offering of them.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement on Form N-14 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York and the State of New York on the 30th
day of June, 2000.
The Latin America Equity Fund, Inc.
By: /s/ Richard W. Watt
------------------------------------------
Richard W. Watt, President
Each person whose signature appears below hereby constitutes and appoints
Michael A. Pignataro and Hal Liebes and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement on Form N-14 and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby grants to such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-14 has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ William W. Priest, Jr.
--------------------------
William W. Priest, Jr. Chairman of the Board and June 30, 2000
Director
/s/ Dr. Enrique R. Arzac
--------------------------
Dr. Enrique R. Arzac Director June 30, 2000
/s/ James J. Cattano
--------------------------
James J. Cattano Director June 30, 2000
/s/ George W. Landau
--------------------------
George W. Landau Director June 30, 2000
/s/ Martin M. Torino
--------------------------
Martin M. Torino Director June 30, 2000
/s/ Richard W. Watt
--------------------------
Richard W. Watt President and Director June 30, 2000
(Principal Executive Officer)
/s/ Michael A. Pignataro
--------------------------
Michael A. Pignataro Chief Financial Officer and June 30, 2000
Secretary (Principal Financial
Officer)
<PAGE>
Exhibit No. Exhibit
----------- -------
4 Form of Merger Agreement and Plan of Reorganization.
14 Consent of PricewaterhouseCoopers LLP.
16 Powers of Attorney. (see signature page)
<PAGE>
Appendix A
ECONOMIC AND SECURITIES MARKET DATA:
ARGENTINA, BRAZIL, CHILE AND MEXICO
The information set forth in this Appendix has been extracted from
various governmental and private publications. Neither the Latin America Equity
Fund, Inc. (the "Fund") nor its Board of Directors make any representation as to
the accuracy of the information, and neither the Fund nor its Board of Directors
attempted to verify it; furthermore, no representation is made that any
correlation exists between Latin American countries or their economies in
general and the performance of the Fund.
ARGENTINA
General Information
The Republic of Argentina consists of 23 provinces and the federal
capital of Buenos Aires. It is the second largest country in Latin America and
is among the highest in terms of per capital gross national product. The
official language is Spanish.
The present constitution of Argentina provides for a division of
power among the executive, legislative and judicial branches of government.
Until May 1994, the president and vice-president, comprising the executive
branch, were elected for non-renewable six-year terms by an electoral college
chosen on the basis of proportional representation. In early 1994, A Constituent
Assembly enacted constitutional reforms that provided for the direct election of
the President to a four-year term, renewable once. The National Congress, the
nation's legislative body, consists of a Senate and a Chamber of Deputies, whose
members, by 2001, will serve terms of six and four years, respectively.
One-third of the Senate seats are up for election every three years, and
one-half of the Chamber seats are up for election every two years. The judicial
system encompasses a Supreme Court, federal appeals courts and provincial courts
that include supreme and subsidiary judicial bodies.
The two largest political parties in Argentina are the Partido
Justicialista, or Peronist Party (the "PJ"), which evolved out of Juan Peron's
efforts to expand the role of labor in the political process in the 1940s, and
the Union Civica Radical, or Radical Civic Union (the "UCR"), founded in 1890.
Traditionally, the UCR has had more urban middle-class support and the PJ more
labor support. At present, support for both parties is broadly based, with the
PJ having substantial support from the business community. Frente Grande
("Frepaso"), a center-left coalition, unexpectedly gained political prominence
during the 1994 Constituent Assembly elections. In 1997 the UCR and Frepaso
formed a coalition called Alianza (the "Alliance"). The Alliance has a platform
centered on remedying social problems, including reducing unemployment,
increasing social assistance and improving education.
Since 1983, Argentina has had three successively elected civilian
presidents: Raul Alfonsin, Carlos Menem and Fernando De La Rua. Raul Alfonsin,
elected in 1983, was the first civilian president in six decades to stay in
office until the scheduled election of a successor. His UCR Government
re-established civilian rule, including a functioning Congress. Carlos Menem won
the presidential election in May 1989 and took office in July 1989, several
months ahead of the scheduled inauguration, in the midst of an economic crisis.
In 1995 he was re-elected for an
<PAGE>
additional four years. Fernando De La Rua, the current President, an Alliance
candidate, was elected in 1999 to a four-year term.
Argentina has diplomatic and trade relations with almost every
nation in the world and is a member of many international and regional
organizations. Argentina is a charter member of the United Nations (the "UN"), a
founding member of the Organization of American States (the "OAS") and is also a
member of the International Bank for Reconstruction and Development (the "World
Bank"), the International Monetary Fund (the "IMF"), the International Finance
Corporation (the "IFC") and the Inter-American Development Bank (the "IABD").
Argentina is a permanent member of the Interim Committee of the IMF (a policy
advisory committee), a party to the General Agreement on Tariffs and Trade (the
"GATT") and a member of the World Trade Organization (the "WTO"). In 1997, the
United States Congress declared Argentina a special non-NATO ally, affording the
country privileged access to U.S. surplus defense supplies and certain military
funding.
Recent Developments
The global economic crisis that started at the end of 1997 and
continued through 1999 has negatively affected the Argentine economy. The
1997-1999 global crisis was triggered by the collapse of various economies in
Asia during the last quarter of 1997. It continued with the devaluation of the
Russian ruble and default by Russia on its ruble-denominated debt in 1998. As a
result of the 1997-1999 global crisis, Argentina has suffered declining stock
market values and widening spreads of Government securities in the secondary
market. In January of 1999, Brazil, Argentina's neighbor and principal trading
partner, devalued its currency. The downturn in the Brazilian economy has led to
a reduction in the rate of Argentine exports and imports of capital goods and
other goods and services. Following the crisis in Brazil, Argentina experienced
an economic contraction of 3% during 1999.
The Government has indicated that it remains committed to the
convertibility plan, described in "The Economy" below, as a key to continuing
economic development in Argentina. However, Argentina's economy remains subject
to global conditions that are outside its immediate control, such as the
economic challenges brought about by the devaluation of the Mexican currency in
1994, the 1997-1999 global economic crisis and the devaluation of the Brazilian
currency in 1999.
In 1993, the Government eliminated restrictions on foreign direct
investment and abolished a three-year waiting period for capital repatriation.
The abolishment of the three-year waiting period allowed foreign investors to
remit profits at any time, thereby granting foreign investors the same rights as
local investors. As a result of these reforms and increased confidence in the
Argentine economy, foreign banks have made significant investments in
Argentina's financial sector. As of March 1999, eight of the ten largest private
sector banks in Argentina were either foreign-owned or -controlled.
On March 10, 2000, the IMF approved a three-year credit facility of
approximately US$7.4 billion for Argentina. The terms of the credit facility
require Argentina to meet certain targets with respect to levels of public
indebtedness and the reduction of its fiscal
2
<PAGE>
deficit. As of March 31, 2000, Argentina had met all of these targets. This
credit facility replaces the US$2.8 billion credit facility approved by the IMF
on February 3, 1998.
Argentina has continued efforts to eliminate trade barriers,
particularly through its involvement in Mercosur. Mercosur is a trade union of
countries in the "southern cone" of Latin America, including Chile and Brazil.
Mercosur has the objective of gradually integrating the economies of member
countries and harmonizing their economic and fiscal policies. This harmonization
includes the fixing of a common external tariff and the adoption of a common
trade policy with respect to non-Mercosur countries. With the exception of the
automotive sector, which is subject to different treatment, tariff barriers
between the Mercosur member countries were eliminated on January 1, 1995.
Non-tariff restrictions on trade are in the process of being eliminated for most
goods.
ECONOMY
Argentina has a well diversified, mechanized agricultural sector
which benefits from a favorable climate and some of the world's richest soils.
It is a major producer of grains and livestock. Argentina has significant oil
and gas reserves and is the third largest oil and gas producer in Latin America
after Venezuela and Mexico. The import substitution policies pursued by
successive Argentine Governments throughout most of the post-World War II period
fostered the growth of the manufacturing sector, which now employs approximately
one-fifth of the country's economically active population.
In March 1991, Domingo Cavallo, Minister of the Economy, announced
the Convertibility Plan, which was designed to reduce inflation and achieve
long-term economic growth and low levels of inflation. The Convertibility Law
passed by Congress in March 1991 effectively established the convertibility of
the peso, obligating the Central Bank to sell dollars at a fixed exchange rate
of one peso per dollar, reducing at the same time the outstanding stock of pesos
and, to that end, required full international reserve backing for Argentina's
monetary base.
On October 31, 1991, the Government promulgated its principal
deregulation legislation, which deregulated the domestic market for goods,
services and transportation, abolished restrictions on imports and exports,
abolished or simplified a number of regulatory agencies and allowed free wage
bargaining in the private sector. In the financial sector, this legislation
abolished all stamp taxes relating to publicly offered securities, all capital
gains taxes on stocks and bonds held by non-resident investors and fixed
brokerage commissions on the stock exchange.
On September 8, 1993, legislation was adopted abolishing
requirements of a three-year waiting period for capital repatriation. Under this
legislation, foreign investors are permitted to remit profits at any time and to
organize their companies and make use of domestic credit with the same rights
and under the same conditions as local companies.
In March 1995, the Government presented an economic consolidation
program aimed at protecting the country's currency against devaluation and
supporting the banking sector, which was adversely affected by the 1994 Mexican
financial crisis.
3
<PAGE>
In 1997, there was a visible trade deficit of US$3.195 billion and a
deficit of US$10.119 billion on the current account of the balance of payments.
In 1998, the Government responded to concern regarding the country's widening
trade and budget deficits by reducing public expenditures and postponing an
ambitious public works program. In September 1998, legislation on tax reforms,
including measures that would extend the scope of value-added tax, received
congressional approval.
On December 29, 1999, Congress approved an Alianza-sponsored tax
package designed to raise tax collections by an additional US$1.9 billion for
the year 2000.
Gross Domestic Product and Inflation
Between 1991 and 1998, Argentina's gross domestic product ("GDP")
grew at a cumulative rate of 55.4%. Between 1991 and 1994, GDP grew in each
year, driven by political and economic stability, consumer confidence and
increased investment. In 1995 GDP contracted 2.8% due to capital flight, reduced
demand and investment that resulted from the December 1994 devaluation of the
Mexican Peso (the "Mexican Crisis"). The reduction in economic activity led to
increased unemployment and an increased poverty rate in Argentina. A decrease in
bank deposits and widespread demand for dollars by Argentines seeking to protect
themselves against a possible devaluation placed stress on the banking section
and caused a reduction in reserves. A number of banks subsequently collapsed,
prompting banking regulatory and supervisory reforms. In 1996, the Argentine
economy began to recover, with GDP increasing by 5.5%, primarily due to
increased foreign and domestic investment and burgeoning consumer confidence.
Unemployment continued to be a problem during this time, while the banking
sector began to recuperate deposits. GDP grew 8.1% during 1997 as a result of
continued foreign and domestic investment and an increase in personal
consumption and domestic demand. GDP grew 3.88% during 1998, slowing from its
previous pace due to a downturn in the manufacturing and automotive sectors
during the second half of the year. This downturn was caused by growing
international economic problems, including problems in Brazil, Argentina's
principal trading partner. GDP contracted over 3% for 1999 as compared to 1998
due primarily to the decline in gross domestic investment and a downturn in the
manufacturing and automotive sectors. However, during the fourth quarter of 1999
and January 2000, industrial production increased compared to the fourth quarter
of 1998 and January 1999.
As of April 30, 2000, the Consumer Price Index (the "CPI") had
decreased by 1.1% as compared to April 30, 1999 and the Wholesale Price Index
had increased by 2.7% as compared to April 30, 1999, primarily due to increases
in commodities prices.
4
<PAGE>
The following table shows the major components of Argentina's Gross
Domestic Product and the percentage changes in nominal and real GDP:
Gross Domestic Product
(millions of Pesos)
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Private Consumption .. 178,269 190,522 207,108 210,785 197,195
Gross Fixed Capital .. 46,285 49,211 56,727 59,276 53,909
Exports of Goods ..... 25,017 28,470 30,939 31,088 27,827
Imports of Goods ..... (25,985) (30,077) (37,240) (38,491) (32,515)
Gross Domestic Product 258,032 272,150 292,859 298,131 282,769
Real GDP (1993 Prices) 233,186 256,626 277,441 288,195 277,082
Change in Real GDP -2.85% 5.52% 8.11% 3.88% -3.86%
</TABLE>
----------
(1): Estimated.
Sources: International Monetary Fund, International Financial Statistics Vol.
LIII, No. 5, May 2000; The Economist Intelligence Unit Ltd., February 2000, EIU
Country Risk Service (citing the International Monetary Fund, International
Financial Statistics).
The following table sets forth the annual change in Argentina's real
GDP by sector for the periods indicated:
At Constant 1993 Prices
---------------------------------------
1994 1995 1996 1997 1998 (1)
---- ---- ---- ---- --------
Agriculture, livestock, fisheries and
forestry .......................... 7.5% 5.6% (1.2)% 0.5% 10.3
Mining and extractives
(including petroleum and gas) ..... 13.8 16.4 4.5 0.7 2.3
Manufacturing ....................... 4.5 (7.2) 6.5 9.2 1.6
Construction ........................ 5.8 (12.2) 8.4 16.6 7.2
Electricity, gas and water .......... 10.8 7.4 4.1 8.2 6.4
Transportation, storage and
communication ..................... 10.3 1.7 6.9 11.2 8.0
Commerce, hotels and restaurants .... 6.7 (7.5) 7.9 10.9 3.1
Financial services, insurance
and real estate ................... 9.5 (0.9) 6.1 7.3 7.3
Community, social and personal
services .......................... 1.6 0.6 2.3 4.0 1.9
----------
(1) Preliminary figures.
Source: Argentina Ministry of Economy (Republic of Argentina 1998 Annual Report,
Form 18-K Exhibit D).
5
<PAGE>
The following table sets forth the consumer price index and the
wholesale price index for the stated periods:
Inflation
Consumer Prices Wholesale Prices
--------------- ----------------
(increase over previous period) (increase over
previous period)
1994.................. 3.9% 3.0%
1995 (1).............. 1.6 5.8
1996 (1).............. 0.2 -2.1
1997 (1).............. 0.3 0.9
1998 (1).............. 0.7 -6.3
1999 (1).............. -1.2 -3.8
----------
(1) In 1996, a new index was introduced called the Indice Precios Internos al
por Mayor (the "IPIM"). The IPIM is broadly similar to the index formerly
used to determine wholesale price inflation, but varies slightly as to the
weighted average of the goods measured in the index. The 1995 figures were
also recalculated using the new IPIM index.
Sources: INDEC (Republic of Argentina 1998 Annual Report, Form 18-K Exhibit D);
The Economist Intelligence Unit Ltd. February 2000, EIU Country Risk
Service (citing Bloomberg Financial Services).
Government Finance and Monetary Policy
The implementation of monetary reform has been accompanied by a
substantial improvement in Argentina's fiscal accounts, as can be seen in the
following table:
Summary of Public Sector Accounts
(billions US$)
<TABLE>
<CAPTION>
Six
months
ended
June,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues ................... 48.75 47.97 46.42 54.26 56.41 27.87
Expenditures (ex Interest) . 46.63 46.44 47.37 53.10 53.92 26.30
Primary Balance before
Privatizations ........... 2.13 1.54 (0.95) 1.16 2.49 1.57
Privatization Proceeds .... 0.73 1.17 0.37 0.31 0.10 2.57
------ ------ ------ ------ ------ ------
Primary Balance after
Privatizations ........... 2.86 2.71 (0.58) 1.47 2.59 4.14
Net Interest Payments ...... (3.15) (4.08) (4.61) (5.75) (6.66) (3.95)
------ ------ ------ ------ ------ ------
Overall balance ............ $ (.29) $(1.37) $(5.19) $(4.28) $(4.07) $ 0.20
====== ====== ====== ====== ====== ======
</TABLE>
----------
Source: Argentina Ministry of the Economy (Republic of Argentina 1998 Annual
Report, Form 18-K Exhibit D).
6
<PAGE>
Balance of Payments
Argentina has not achieved a current account surplus since 1990.
This may be attributed to several factors, including the implementation of trade
liberalization measures and the relatively significant economic growth between
1991 and 1994 that led to increased demand for imported consumer and capital
goods. In 1995, the current account deficit decreased by 54.9% to US$4.9
billion. This decrease was due largely to a turnaround in the trade balance as
exports grew by 32.1% and imports fell by 6.7%, producing a trade surplus of
US$2.4 billion. In 1995, exports expanded in all major sectors. The overall
decline in imports that year was the result of the economic contraction provoked
by the Mexican Crisis. The largest declines were in imports of vehicles and
transport products and of machinery and equipment. The current account deficit
increased to US$6.5 billion in 1996. This was due principally to the
deterioration of the trade balance as a result of an increase in imports during
the economic recovery following the Mexican Crisis. In 1997, the current account
deficit increased to US$12.0 billion due to a continued increase in imports
coupled with a more modest increase in exports. Exports increased only modestly
that year due to a decline in prices of exported Argentine products and
decreased demand. An increase of interest and dividend net payments from US$5.3
billion in 1996 to US$6.2 billion in 1997 also contributed to the increased
current account deficit in 1997. In 1998, the current account deficit increased
to US$14.7 billion due primarily to an increased trade deficit as a result of
the deterioration of prices for certain important Argentine exports such as
wheat, soy and oil, as well as decreased demand from Brazil.
7
<PAGE>
The following table shows the balance of payments for the years 1995
through 1998 and first quarter 1999:
Balance of Payments
(millions US$)
<TABLE>
<CAPTION>
As of 1st
-------------------------------------------------------- Quarter,
1994 1995 1996 1997 1998(2) 1999(2)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Current Account (1)
Exports ................ $ 16,023 $ 21,161 $ 24,043 $ 26,431 $ 26,434 $ 5,067
Imports ................ 20,162 18,804 22,283 28,554 29,448 5,460
Trade balance .......... (4,139) 2,357 1,760 (2,123) (3,014) (393)
Non-financial services . (3,692) (3,326) (3,366) (4,178) (4,386) (1,405)
Interest and dividends . (3,524) (4,482) (5,278) (6,171) (7,687) (1,769)
Transfers .............. 406 513 416 436 389 76
-------- -------- -------- -------- -------- --------
Total .................. (10,949) (4,938) (6,468) (12,036) (14,698) (3,491)
Capital Account
Central Bank (3) ....... 444 1,922 1,003 (586) (512) (334)
Other Financial Entities
(4) .................... 1,612 2,525 (1,048) (870) 3,810 (517)
Non-financial Public
Sector (5) ............. 3,969 5,717 8,880 7,932 9,260 3,226
Non-financial Private
Sector (6) ............. 6,426 (3,646) 3,163 10,114 5,642 1,181
-------- -------- -------- -------- -------- --------
Total .................. 12,451 6,518 11,998 16,590 18,200 3,556
Errors and Omissions ... (820) (1,682) (1,648) (1,281) (64) (1,073)
Change in International
Reserve (7) ............ $ 682 $ (102) $ 3,882 $ 3,273 $ 3,438 $ (1,008)
======== ======== ======== ======== ======== ========
</TABLE>
----------
(1) With respect to the current account balance, both imports and exports are
calculated on a fee on board ("FOB") basis and the non-financial services
account includes import freight and insurance fees paid to non-residents.
(2) Preliminary figures.
(3) Includes transactions between the Central Bank and foreign entities such
as the IADB, the IMF and other foreign creditors.
(4) Net assets or liabilities of financial entities (other than the Central
Bank) with respect to foreign creditors.
(5) Includes operations of the national government, provincial government,
municipal governments and decentralized governmental organizations with
respect to foreign entities in the form of bonds, loans from international
organizations, operations with the Paris Club and privatization of State
entities.
(6) Includes operations of the private sector with respect to the issuance of
bonds, loans from international organizations or banks, foreign direct
investment (inflows) and payments on dollar-denominated bonds to Argentina
residents (outflows).
(7) Does not include the value of bonds issued by the Government and held as
reserves by the Central Bank.
Source: Ministry of Economy (Republic of Argentina 1998 Annual Report, Form 18-K
Exhibit D).
During 1999, Argentina recorded a trade deficit of US$2.2 billion
compared to a trade deficit of US$4.9 billion recorded in 1998. Total exports
during this period fell by 11.8%, to a level of US$23.3 billion due primarily to
decreased demand, particularly from Brazil. As a result of the slowdown in the
economy, total imports during this period fell by 18.7%, to a level of US$20.6
billion. During 1999, Argentina had a current account deficit of US$12.2
billion, 14.8% lower than the current account deficit in 1998, primarily as a
result of the decreased trade
8
<PAGE>
deficit in 1999. Total imports during the first quarter 2000 remained flat as
compared to the same period of 1999, at a level of US$5.8 billion.
Privatizations
Although the Government privatized the majority of its state
enterprises between 1989 and 1994, several significant privatizations have
occurred within the past few years or are expected to occur in the near future.
On August 1, 1997, Argentina completed the privatization of the postal service
through a competitive bidding process. The Government awarded a 30-year
concession to a consortium that will pay approximately US$51.6 million every six
months for the first 20 years of its operations and 1.0% of gross revenues for
the remaining ten years. On January 23, 1998, the Government selected the
winning bidder for a concession to operate the 33 main airports in Argentina for
a period of 30 years in exchange for US$171 million in annual royalties. On
February 27, 1998, the Government raised US$82.7 million from the sale of its
remaining 20% stake in gas distributor Gas Natural BAN S.A. On February 2, 1999,
the Government privatized Banco Hipotecario Nacional, the national mortgage
bank. The proceeds of this privatization totaled US$307.5 million. On January
20, 1999, the Government sold a 14.99% stake in YPF to Repsol S.A. for US$2.0
billion. On June 24, 1999, the Government sold an additional 5.3% stake in YPF
to Repsol S.A. for US$842.0 million.
As a result of the Government's privatization program, subsidies and
transfers to public sector enterprises, which totaled US$827 million in 1992,
were eliminated by 1998. During the first half of 1999 the Government gave no
subsidies and made no transfers to public sector enterprises. Between 1990 and
June 30, 1999, the Government privatized, in whole or in part, 75 public sector
entities and other assets. Total proceeds from privatization for 1998 were
US$96.3 million (excluding the sale of tax receivables). The Government has
realized increased tax revenues from newly privatized entities. The
privatization program has resulted in an increase in economic productivity and
has served as an important conduit for direct foreign investment into Argentina,
attracting investors from Asia, Europe, North America and Latin America.
Finally, principally as a result of the privatization program, there was a
reduction in public sector employment in the period from 1989 to 1994 of over
240,000 employees (excluding the defense sector), which has resulted in
substantial public sector savings. As of June 30, 1999, the public sector
employed approximately 255,000 people, as compared with approximately one
million people employed by the public sector in 1991.
Foreign Exchange
The Argentine currency experienced almost continuous devaluations
relative to the U.S. dollar during the 1980s. On June 14, 1985, the austral was
introduced and in March 1991 the conversion ratio of australs to dollars was
fixed at 10,000:1. In January 1992, the peso argentino was introduced at a fixed
conversion ratio of one peso equaling 10,000 australs. For the past eight years
the peso has been exchangeable to dollars at a stable rate of 1:1. However, this
stable exchange rate was subject to speculation during the Mexican Crisis and
the 1998 Russian debt default. It is unclear how much longer this stable
exchange rate will last.
Under the Central Bank's charter, it is required to back Argentina's
currency with foreign currency or Argentine government bonds. However, if the
Central Bank does use
9
<PAGE>
Argentine government bonds, the bonds have to be purchased for face value,
cannot constitute more than 33% of the total reserves, and cannot increase by
more than 10% in any year.(1) Furthermore, the Central Bank is not allowed to
lend to the government.
In 1994, Argentina's monetary base was US$16.3 billion and grew to
US$24.7 billion by 1998. During the five year span of 1994 to 1998, aside from a
temporary decline caused by the Mexican Crisis in 1994, total international
reserves consistently grew from US$19 billion to US$32 billion. The narrow money
aggregate, M1, also increased from 6.6% of GDP in 1994 to 8.0% of GDP in 1998.
The broad money aggregate, M3, increased from 21.8% of GDP in 1994 to 30.3% of
GDP in 1998.(2)
The following table sets forth the composition of Argentina's
monetary base (expressed in terms of the Central Bank's monetary liabilities)
and international reserves for the periods indicated:
Monetary Base and Central Bank International Reserves (1)
(millions US$, as of December 31)
<TABLE>
<CAPTION>
As of
June 30,
1994 1995 1996 1997 1998(2) 1999 (2)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Currency including cash in vaults at banks ...... $13,317 $13,050 $14,030 $15,966 $16,370 $14,085
Other (2) ....................................... 2,951 3,355 4,139 6,435 8,323 9,263
------- ------- ------- ------- ------- -------
Monetary base (3) ........................... $16,268 $16,405 $18,169 $22,401 $24,693 $23,348
======= ======= ======= ======= ======= =======
International reserves deposited in the
Central Bank (4) ............................ 17,256 17,042 19,296 24,308 28,524 24,752
International reserves deposited in foreign banks 1,791 1,383 3,510 6,962 5,488 7,010
Total international reserves ................ $19,047 $18,975 $22,807 $31,269 $32,012 $31,762
======= ======= ======= ======= ======= =======
</TABLE>
----------
(1) All figures are at market values as of the date indicated.
(2) Up to January 17, 1995, includes reserves required in pesos for peso
deposits in commercial banks. From January 17, 1995 to August 31, 1995,
includes reserves required in U.S. dollars for peso deposits. Since August
31, 1995, includes reserves required in U.S. dollars for peso deposits as
well as Bank Liquidity Notes.
(3) Up to January 17, 1995, includes currency in circulation plus reserve
requirements in pesos for peso deposits. From January 17, 1995 to August
31, 1995, includes currency in circulation plus reserves required in U.S.
dollars for peso deposits. Since August 31, 1995, includes the sum of
currency in circulation, reserves required in U.S. dollars for peso
deposits, and Bank Liquidity Notes.
(4) Excludes Government deposits in the Central Bank.
(5) Preliminary figures.
Source: Argentina Central Bank (Republic of Argentina 1998 Annual Report, Form
18-K Exhibit D).
As of April 30, 2000 the monetary base (consisting of currency in
circulation, reserves required in U.S. dollars for peso deposits, Bank Liquidity
Notes and repurchase agreements between the Central Bank and commercial banks)
was US$24.7 billion, representing
----------
(1) Source: Economic Perspectives March 22, 2000 No.1, Vol. 24.
(2) Source: Prospectus Supplement, Republic of Argentina 12 1/8% Global Bonds,
February 24, 2000.
10
<PAGE>
a 3.4% increase from the level recorded on April 30, 1999. Between March 31,
2000 and April 30, 2000, the monetary base increased 1.0%. On April 2000, gross
international reserves at the Central Bank (including approximately US$1.4
billion of public bonds) stood at US$26.2 billion, a 2.3% increase from the
April 30, 1999 level, and remained flat as compared to March 31, 2000.(3)
External Debt
The following table shows Argentina's external debt at the end of
the year for the periods indicated:
External Debt
(millions US$)
1995 1996 1997 1998 1999(e)
---- ---- ---- ---- -------
Total foreign debt 99,364 111,934 130,828 144,050 148,595
Public medium & long-term 55,811 63,076 67,562 76,799 88,889
Private medium & long-term 16,066 19,068 25,411 30,853 30,053
Short term 21,355 23,498 31,988 30,956 25,175
IMF debt 6,131 6,293 5,868 5,442 4,478
Total foreign debt service, due 8,981 13,054 18,308 21,502 21,411
----------
(e) Estimated
Source: The Economist Intelligence Unit Ltd. February 2000, EIU Country Risk
Service (citing the World Bank, Global Development Finance).
As of March 20, 2000, Argentina had approximately US$120 billion of
external debt.
The Securities Markets
Introduction
The Bolsa de Comercio de Buenos Aires ("Buenos Aires Stock Exchange"
or the "Exchange") was founded in 1854 and is a non-profit civil association
that currently has several thousand members. The Exchange is the principal stock
exchange in Argentina, but there are eleven other smaller exchanges, six of
which are authorized to quote securities (collectively, with the Buenos Aires
Stock Exchange, the "Exchanges"). The Exchanges are responsible for developing
and implementing regulations governing the securities markets, subject to the
approval and oversight of the Comision Nacional de Valores (the "Argentine
Securities Commission"). Trading in securities is conducted through Mercados de
Valores ("Mercados") affiliated with one of the Exchanges. Each Mercado is a
corporation whose shareholders are the individuals and entities entitled to
trade in the securities listed in that particular Mercado. The largest Mercado
in Argentina is the Mercado de Valores de Buenos Aires S.A. (the "Buenos Aires
Stock Market," together with the other Argentine securities market, the
"Argentine Stock Markets"), which is located in the City of Buenos Aires; four
smaller Mercados are located in the
----------
(3) Source: The Republic of Argentina, supplement dated June 2, 2000 to Form
18-K filed with the SEC on September 16, 1999.
11
<PAGE>
cities of Cordoba, Mendoza, Rosario and La Plata. The Buenos Aires Stock Market
accounts for a substantial majority of the value of all trades in the Argentine
stock markets.
Individuals, pension funds and mutual funds constitute the largest
groups of investors in Argentina's capital markets. Investment by banks and
insurance companies in the equity markets is limited by law. Since the reform of
the social security system, total assets managed by pension funds have grown
significantly, reaching a level of US$11.5 billion in 1998. While Argentina's
mutual funds currently control only a small portion of the capital market, the
total capitalization of mutual funds in Argentina has increased from US$0.4
billion in 1994 to US$6.9 billion in 1998. The development of mutual funds and
the increase in the assets of Argentine institutional pension funds has created
a broader market and increased the level of activity on the Buenos Aires Stock
Exchange.
The Buenos Aires Stock Market
The Buenos Aires Stock Market has shareholders/members that are
allowed to effect transactions either as principal or as agent in that stock
market. Trading in the Buenos Aires Stock Market is conducted through two
different trading systems -- the traditional auction system and an electronic
continuous market system (the "Continuous Market System"). Argentine Government
Securities, corporate bonds, and to a lesser extent, corporate shares are traded
through the Continuous Market System, which is actually a system for registering
and making public trades that were privately arranged by registered brokers and
brokerage companies on behalf of their clients. In addition, a substantial
over-the-counter market exists for private trading in listed debt securities.
Such trades are reported on the Mercado Abierto Electronico (the "MAE"), an
electronic reporting system similar to, but apart from, the Continuous Market
System.
Trading in shares is only allowed in the Argentine Stock Markets.
Settlement of trades is generally effected either the same day or within 24-72
hours, as agreed upon by the parties to the transaction.
The Secondary Markets
Equity Market
Equity securities may be traded in the Argentine Stock Markets or
through the Continuous Market System. Trades in the Argentine Stock Markets are
effected through brokers or brokerage firms acting as brokers or as principals.
Information regarding listed securities (quotations, trading volume, financial
data, stock price indices, etc.) is available through a network of computer
terminals located in offices of financial entities, brokerage firms, securities
dealers, institutional investors and others.
The number of listed companies in Argentina has decreased since 1990
from 179 to 125 in 1999. This decline was due largely to foreign acquisitions
that led to the delisting of the acquired company and to the disappearance of
companies through local mergers. The capitalization of shares in the equities
market increased from US$44.6 billion in 1996 to US$59.2 billion in 1997 due to
an increase of capital inflows to Argentina.
12
<PAGE>
The volume of shares traded on the Buenos Aires Stock Exchange and
the Mercado Abierto Electronico increased from US$35.2 million in 1996 to
US$41.2 million in 1997 due to the increase in capital inflows. Capital inflows
to Argentina decreased in 1998 due to the crisis in emerging markets. As a
result, the capitalization of shares in the equities market decreased to US$45.3
billion and the total volume of shares traded decreased to US$32.3 million in
1998. As of March 31, 2000, the market capitalization of the 114 companies
listed on the Buenos Aires Stock Market was approximately US$84.89 billion and
average daily trading value was US$43.417 million.(4)
The market capitalization of shares listed on the Buenos Aires Stock
Exchange is presented in the following table:
Buenos Aires Stock Market Capitalization
Market
Year Capitalization
---- --------------
(millions US$)
1990........................................ 3,314.7
1991........................................ 18,509.1
1992........................................ 18,613.9
1993........................................ 44,011.2
1994........................................ 36,867.2
1995........................................ 37,779.6
1996........................................ 44,670.3
1997........................................ 59,239.9
1998........................................ 45,291.5
1999........................................ 83,879.0
2000 (through 3/31/00)...................... 84,890.0
----------
Sources: Buenos Aires Stock Exchange 1999 Fact Book; Buenos Aires Stock Exchange
(http://www.merval.sba.com.ar/).
----------
(4) Source: Argentine Stock Exchange System,
http://www.merval.sba.com.ar/info/i_indicadores.htm
13
<PAGE>
The Buenos Aires Stock Exchange publishes the Stock Exchange Index,
which is comprised of all the stocks listed in the Buenos Aires Stock Market.
Data on the movement of the index, on an inflation-adjusted basis, is set forth
below:
Buenos Aires Stock Exchange Index Composite Index
(Adjusted for Inflation)
Year December Average
---- ----------------
1990........................................... 65.21
1991........................................... 276.19
1992........................................... 191.92
1993........................................... 257.66
1994........................................... 224.09
1995........................................... 200.74
1996........................................... 232.86
1997........................................... 288.06
1998........................................... 226.26
1999........................................... 276.34
1999 Monthly Average
---- ---------------
January........................................ 207.43
February....................................... 211.39
March.......................................... 219.64
April.......................................... 244.31
May............................................ 279.70
June........................................... 270.19
July........................................... 250.83
August......................................... 248.24
September...................................... 257.02
October........................................ 257.15
November....................................... 268.18
December....................................... 276.34
----------------
Source: Buenos Aires Stock Exchange 1999 Fact Book.
Market Regulation
The Argentine Securities Commission is a public organization headed
by a five-person Board of Directors, including a Chairman. All five Directors
are appointed by the President of Argentina to seven-year terms. The Argentine
Securities Commission has authority over the entire securities market (other
than the primary issue of Argentine Government securities), including powers of
regulation, investigation and the authority to impose disciplinary measures. In
addition, the Argentine Securities Commission has the function of promoting and
supporting the development of the corporate securities market in Argentina.
All companies must register with the Argentine Securities Commission
before issuing and selling securities to the public. Such registration requires
the disclosure of information about the company including financial reports,
compliance with statutory norms and corporate activities. Listed companies must
update the information on an annual basis and file
14
<PAGE>
interim and quarterly reports. Moreover, any fact or event that may materially
affect the company must be immediately reported by its management to the
Argentine Securities Commission and the Stock Exchange. Such information is
normally released to the public immediately. Noncompliance with these
registration and disclosure rules may subject the company and its management to
penalties provided by law.
The over-the-counter market is also regulated by the Argentine
Securities Commission. In addition, all transactions effected over-the-counter
must be reported to the Argentine Securities Commission. In general, if an
unlisted company's securities are publicly offered, it is subject to regulations
similar to those imposed on listed companies.
The regulatory powers of the Argentine Securities Commission are
exercised primarily through their approval of the operating regulations
established by each Stock Exchange. Each Stock Exchange establishes listing and
quotation requirements, issues rules governing the preparation and submission of
financial statements, supervises compliance by listed companies with the
applicable rules and applies disciplinary measures when appropriate.
Each Argentine Stock Market is responsible for registering the
individual brokers and brokerage companies who are trading in that particular
market, issuing trading regulations, enforcing compliance with its rules and
regulations, and for guaranteeing the clearing and settlement of trades.
The Argentine Securities Commission has established a set of
penalties for fraud and market manipulation (insider trading) and requires
disclosure of holdings by directors or persons involved in the issue of debt or
publicly traded shares. Anti-takeover regulations have also been adopted,
requiring purchasers to inform a company when they have acquired more than 5% of
its shares.
Several credit rating organizations have been in operation since
November 1992. A rating from two local rating agencies is required to publicly
offer debt securities. In the case of equity securities, ratings are not
mandatory.
Foreign Investment and the Fund
Foreign investment in Argentina is regulated by the Foreign
Investment Law No. 21382, as amended. There are currently no restrictions on the
movement of funds into and out of Argentina and repatriation of income and
capital gains by the Fund is permitted at any time. There can be no guaranty,
however, that restrictions would not be imposed in the future if governmental
authorities determine that financial and economic circumstances justify such
restrictions.
Investment of foreign capital in Argentina no longer requires
advance approval by the Argentine Government. Foreign enterprises may obtain
domestic credit with the same rights and under the same conditions as domestic
enterprises. Generally, there are no restrictions on the Fund's ability, as a
foreigner, to invest in Argentine companies, except that investment by
foreigners in the broadcasting industry is prohibited, and government approval
is required for foreigners to acquire more than 30% of the capital of banks and
financial entities.
15
<PAGE>
THE FEDERATIVE REPUBLIC OF BRAZIL
GENERAL
Geography and Demography
Brazil is the fifth largest country in the world, with a land area
of approximately 3,300,000 square miles. Brazil's population in 1999 was
estimated at 172 million, its capital is Brasilia, and the official language is
Portuguese.
Government
Brazil is a Federative republic. A new constitution was enacted in
October 1988 establishing a presidential form of government with three
independent branches: executive, legislative and judicial. A national plebiscite
held in April 1993 confirmed the presidential system as the preferred form of
government.
The executive power is vested in the President, who is elected by
direct vote for a term of four years and is eligible for re-election. The
President has a broad range of powers including the right to appoint ministers
and key executives in selected administrative and political posts. The
legislative branch is composed of a National Congress consisting of Senators
elected for eight-year terms and Deputies elected for four-year terms. The
judicial branch is headed by the Federal Supreme Court, which is the court of
final appeal for both federal and state courts.
At the State level, the executive power is exercised by Governors
who are elected for four-year terms. The legislative power is exercised by State
Deputies who are also elected for four-year terms, and the judicial power is
vested in state courts.
External Affairs
Brazil has diplomatic and trade relations with almost every nation
in the world. It is a member of many international organizations, including the
UN and all of the UN's intergovernmental specialized agencies. Brazil is also a
member of the OAS, the IADB, the World Bank, the International Development
Association, the IFC and the IMF. Brazil is also a party to the GATT.
In March 1991, Brazil, Argentina, Paraguay and Uruguay entered into
the Treaty of Asuncion, formally establishing the Mercado Comum do Sul
("Mercosul"), a common market organization composed of the signatory nations. In
December 1994, the four member countries signed an agreement establishing the
date of January 1, 1995 for the implementation of a Common External Tariff
("CET") intended to transform the region into a customs union. However, because
each member country was permitted a list of 450 exceptions (399 in the case of
Paraguay) to the CET, the full implementation of a customs union has not been
achieved. In December 1995, Mercosul and the European Union signed a framework
agreement for the development of free trade between them. In 1996, Mercosul
signed agreements with Chile and Bolivia, effective October 1996 and February
1997, respectively, for the development of free
16
<PAGE>
trade among them; these agreements were approved by the Brazilian National
Congress in September 1996 and April 1997, respectively.
Financial System
The Conselho Monetario Nacional (the "National Monetary Council"),
which is composed of representatives of government, business and financial
interests, is the highest authority on monetary and financial policy in Brazil.
It is authorized to regulate credit operations of every kind, to authorize and
regulate currency issues, to supervise the country's reserves of gold and
foreign exchange, to determine savings and investment policies and to regulate
the securities and capital markets, including the activities of both the Banco
Central Do Brasil (the "Central Bank of Brazil") and the Comissao de Valores
Mobiliarios (the "CVM"), the Brazilian securities commission.
The Central Bank of Brazil, which is not operated independently from
the Brazilian government, is responsible for implementing policies adopted by
the National Monetary Council and overseeing the implementation of financial
legislation. It is authorized, among other things, to issue money, to oversee
the circulation of currency, to control the level of credit in the economy, to
control foreign investments and currency movements related to these investments
and to administer Brazil's domestic debt.
Recent Political History
The Brazilian military ruled the country from 1964 to 1984. In 1985
a series of political reforms were enacted, including the reintroduction of
direct Presidential elections and the convocation of a Constitutional Assembly.
In 1988 a new Constitution was promulgated.
In 1989 Fernando Collor de Mello became the first President to be
elected by popular vote since 1960. President Collor's political support began
to ebb in June 1992 as Congress initiated an investigation on charges of
corruption involving the President. In December 1992 President Collor resigned
in the midst of his impeachment trial. He was subsequently found guilty of
corruption and was prohibited from running for political office for eight years,
but in 1998 he was cleared of charges of illegal enrichment. Itamar Franco, the
Vice-President under Collor, who had become acting President during the
impeachment proceedings, assumed the Presidential office. In October 1994,
Fernando Henrique Cardoso, the former Minister of the Economy, was elected
President for a four-year term. In 1997 a constitutional amendment was approved
that allowed the President to run for re-election to a second four-year term. In
1998 Cardoso was re-elected.
ECONOMY
Overview
The Brazilian government actively influences the country's economy
by frequently changing monetary, taxation, credit, tariff and other policies.
Despite attempts to stabilize the economy, Brazil has been susceptible to
volatile economic cycles. Furthermore, several states have suspended or might
suspend debt payments owed to the federal government.
17
<PAGE>
Real GDP growth averaged 2.4% per annum from 1988 to 1998. From
1990-1997 agricultural, industrial, mining and services GDP increased an average
of 3.9%, 2.5%, 2.2% and 3.7%, respectively. In 1998 real GDP declined by
approximately 0.1% and GDP rose by approximately 0.8%. In 1999 Brazil's GDP rose
0.8%.
The following table sets out selected economic indicators for Brazil
for the five years ended December 31, 1998:
Selected Brazilian Economic Indicators
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Domestic Product ("GDP")
(in billions of constant 1998 reais) R$812.8 R$847.1 R$869.6 R$900.9 R$899.8(e)
(in billions) (1) US$543.1 US4705.4 US$775.5 US$801.7 R$775.5(e)
Real GDP Growth (decline) 5.9% 4.2% 2.7% 3.6% (0.1)%
General Price Index-Domestic Supply
(rate of change) (2) 909.6% 14.78% 9.34% 7.48% 1.70%
Nominal Devaluation Rate (3) 613.4% 15.0% 6.8% n.a. n.a
</TABLE>
----------------
(e) Estimated
(1) Converted into dollars based on weighted average exchange rate for each
year.
(2) GPI-DS is one indicator of inflation. While many inflation indicators are
used in Brazil, the GPI-DS, calculated by the Getulio Vargas Foundation,
an independent research organization, is one of the most widely utilized
indices.
(3) Year on year percentage devaluation of the real against the dollar (sell
side).
Source: IBGE; Getulio Vargas Foundation; Central Bank (Federative Republic of
Brazil 1998 Annual Report, Form 18-K Exhibit D).
Recent Developments
Since the introduction of the real (R$) in 1994, Brazil has been
successful in combating inflation. While inflation averaged 470% per year from
1990-1997, inflation rates for 1997, 1998 and 1999 were significantly below that
average. In 1995, the country's privatization program was revived and
temporarily aided the government's attempt to stabilize the economy.
A primary objective of the Brazilian Government in recent years has
been to control government spending. The task is made more difficult by the
difficulty of controlling expenditures by government-controlled companies.
Continued high or increasing deficits in the public sector could exacerbate
Brazil's high rates of inflation.
During 1998, when Brazil's budget deficit approached 8% of GDP, the
government raised R$22.1 billion when it auctioned Telebras, the state
telecommunications company, and President Cardoso announced details of a three
year program of fiscal adjustment. In December 1998 the IMF provided Brazil with
a three-year credit equivalent of US$18.1 billion.
18
<PAGE>
In January 1999, after the unexpected resignation of the President
of the Central Bank, Brazil devalued the real. This action caused Brazil to be
in breach of the exchange-rate policy that it had agreed to with the IMF and
caused a renewal of capital flight. The loss of capital depleted the country's
reserves and led to turmoil in international financial markets.
The following table sets out Government revenues and expenditures as
a percentage of GDP for the years 1994 to 1999.
Government Revenues and Expenditures As Percentage of GDP
(billions US$)
<TABLE>
<CAPTION>
1994 1995 1996 1997(1) 1998 (1) 1999 (1)
---- ---- ---- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues............. 32.900 33.100 33.000 33.500 34.500 32.900
Expenditures......... 40.030 38.973 39.100 41.600 44.000 40.030
Surplus (deficit).... (7.130) (5.873) (6.141) (8.056) (9.531) (7.130)
</TABLE>
-----------------
(1) Preliminary.
Sources: IMF, Banco Central do Brasil.
Prices
Brazil has historically experienced very high and variable rates of
inflation, which have had significant negative effects on the Brazilian economy.
As a result, an indexation system was created in 1964 which, after several
unsuccessful attempts to lower inflation, developed into an efficient method to
cope with an endemic inflationary environment. However, after six
"inflation-fighting" plans since 1986, a seventh economic plan is currently
underway, and since July 1, 1994, the economy has been completely de-indexed. In
1994 inflation peaked at approximately 2,000% and by 1995 had declined to below
200%.
The inflation rate, as measured by GPI-DS (the composite price
index) declined to 7.48% in 1997 and 1.7% in 1998 from 9.34% in 1996. Since the
Central Bank's decision to permit the value of the real to float, the inflation
rate has increased, registering 19.98% in 1999. The broad consumer price index
(the "IPCA") rose 8.9% in 1999, versus the 8% IPCA target for 1999.
Gross Domestic Product
The Brazilian economy is well diversified, and in 1997 manufactured
goods accounted for 21.3% of GDP, services 62.4% and agriculture 7.9%. In 1998
Brazil's GDP was US$775.5 billion (based on constant 1998 reais). In 1998 GDP
grew at an annual rate of 0.2%, and such growth was primarily driven by the
private sector.
19
<PAGE>
Participation of Classes and Activities in Value Added at Basic Prices (1)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Agricultural 9.9% 9.0% 8.3% 7.9% 8.4%
Industry 40.0 36.7 34.7 34.8 34.0
Mining, Oil, & Gas 1.0 0.9 1.0 0.9 0.6
Manufacturing 26.8 23.9 21.5 21.3 20.3
Construction 9.2 9.2 9.5 10.0 10.3
Public utilities 3.0 2.7 2.7 2.7 2.7
Service 64.3 60.7 62.3 62.4 62.8
Retail Services 9.5 80.9 7.8 7.7 7.3
Transportation 3.5 3.4 3.0 3.0 3.0
Communications 1.5 1.5 1.9 2.1 2.6
Financial Services (2) 15.9 8.0 6.3 6.6 6.5
Government 15.2 16.3 16.0 15.3 15.5
Other 18.7 22.5 26.7 27.8 27.9
--------------------------------------------------------------------------------
Total 114.1 106.4 105.1 105.1 105.2
--------------------------------------------------------------------------------
Adjustments (3) 14.1 6.4 5.3 5.1 5.2
Value Added at Basic Prices 100 100 100 100 100
-----------------
(1) The information in this table has been restated to reflect the current
methodology used by IBGE and the Central Bank to compare the various
sectors of the Brazilian economy and the changes therein; prior to 1995
IBGE and the Central Bank calculated the composition of GDP by sector
rather than the participation of classes and activities in value added at
basic prices.
(2) Does not include financial intermediation services
(3) Adjustment for double counting arising from the inability to allocate debt
service among the classes and activities set forth in this table
Sources: IBGE and Central Bank (Federative Republic of Brazil 1998 Annual
Report, Form 18-K Exhibit D).
Foreign Sector
Preliminary estimates for 1999 indicate that Brazil's balance of
payments registered a deficit of approximately US$7.8 billion for that year,
versus a US$8.0 billion deficit in 1998. Brazil's current account deficit for
1999 stood at an estimated US$24.5 billion, or 4.4% of GDP, compared with a
US$33.8 billion deficit in 1998, or 4.3% of GDP.
During 1999, imports totaled US$49.2 billion, a 14.8% reduction from
1998, while exports totaled US$48 billion, a 6.1% reduction from the same period
in 1998. Brazil's trade deficit for 1999 was approximately US$1.2 billion,
compared with the US$6.6 billion trade deficit recorded in 1998.
At December 31, 1999 and 2000, Brazil's international reserves stood
at approximately US$36.3 billion and US$37.6 billion, respectively,
corresponding to approximately 9 months of imports of goods.
20
<PAGE>
The following table sets forth Brazil's trade balance and current
account for the six years ended December 31, 1999:
Brazil's Trade Balance & Current Account
(millions US$)
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Exports 44.102 46.506 47.851 53.189 51.136 48.014
Imports 33.241 49.663 53.304 59.841 57.739 49.210
Trade Balance 10.861 -3.157 -5.453 -6.652 -6.603 -1.196
Current Account -1.153 -18.136 -23.248 -30.491 -33.829 -24.505
----------
Source: The Economist Intelligence Unit Ltd. February 2000, EIU Country Risk
Service (citing the International Monetary Fund).
Privatizations
It has generally been the Brazilian Government's policy to operate
public utilities as well as to control certain key industries, but not to
displace private enterprise in other sectors of the economy. Energy production,
rail transport, oil prospecting, drilling and refining, postal service and
telephone and telegraph communications are all directly or indirectly controlled
by the Brazilian Government. In addition, the Government controls some companies
that compete with private enterprise, such as the largest commercial bank, Banco
do Brasil, the principal iron-ore mining companies, and other small companies in
different sectors of the Brazilian economy.
An important element of the Collor administration was its drive to
privatize government-controlled companies as part of the overall restructuring
of the Brazilian economy. The privatization program was initiated in 1991. Cash
and a number of securitized government debt instruments were accepted in the
privatization auctions, as were securitized public sector debt and foreign debt
paper.
21
<PAGE>
The following table provides information about the national
privatization program from 1994 through 1998:
Privatization Program
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Privatized companies 9 8 11 4 7
Steel 0 0 0 0 0
Petroquisa complex 6 7 5 0 0
Fertilizers 1 0 0 0 0
Electric sector 0 1 1 0 1
Railroad 0 0 5 1 1
Other 2 0 0 3 5
Revenues (US$ million) $ 620 $1,123 $4,198 $3,805 $1,234
Steel 0 0 0 0 0
Petroquisa complex 411 604 212 0 0
Fertilizers 11 0 0 0 0
Electric sector 0 519 2,509 0 879
Railroad 0 0 1,477 15 206
Other 198 0 0 3,790 149
Liabilities transferred to buyer
(US$ million) $ 349 $ 624 $ 670 $3,559 $1,082
Steel 0 0 0 0 0
Petroquisa complex 84 622 84 0 0
Fertilizers 2 0 0 0 0
Electric sector 0 2 586 0 1,082
Railroad 0 0 0 0 0
Other 263 0 0 3,559 0
</TABLE>
----------
Source: BNDES (Federative Republic of Brazil 1998 Annual Report, Form 18-K
Exhibit D).
Foreign Exchange and Exchange Controls
Background
The purchase and sale of foreign currency in Brazil has been subject
to governmental control. Prior to July 1994, there were two exchange markets in
Brazil -- an exchange rate market and a floating exchange rate market. The key
distinction between these two markets was that, while both operated at floating
rates freely negotiated between the parties, (i) the commercial exchange rate
market was generally restricted to transactions which required the prior
approval of the Brazilian monetary authorities; and (ii) the floating exchange
rate market was generally open to transactions that did not require any kind of
prior approval by the Brazilian monetary authorities.
As part of the Stabilization Plan, since July 1, 1994 the Central
Bank began allowing the foreign exchange rate to float more freely, thereby
permitting the market to continuously adjust to prevailing supply and demand
pressures within a band established by the Central Bank. The Central Bank also
committed itself to sell dollars if the real-dollar exchange rate increased
above R$1.00, thus preventing the rate from exceeding that level. The Central
22
<PAGE>
Bank's actions resulted in the real's gradual devaluation relative to the
dollar. On January 13, 1999 the Central Bank widened the band within which the
real could trade. Then on January 15, 1999 because of market forces, the Central
Bank abolished the band system and decided to let the real to dollar exchange
rate float freely.
Since the Central Bank's decision to let the real float freely, the
Central Bank has intervened occasionally to limit unstable movements in the
exchange rate. During December 1999, the Central Bank intervened in the foreign
exchange markets to increase the liquidity of those markets to address concerns
about the possible impact of Year 2000-related problems on external financing
operations. The real-dollar exchange rate (sell side) on December 31, 1999, as
published by the Central Bank, was R$1.789 to $1.00, up from R$1.9227 to $1.00
on November 30, 1999 and R$1.953 to $1.00 on October 29, 1999. The real-dollar
exchange rate (sell side), as published by the Central Bank, stood at R$1.7381
on March 21, 2000. It is unclear if or for how long the Central Bank will
continue its existing policy of allowing the real to float against the US dollar
and under what circumstances the Central Bank will intervene in exchange
markets.
23
<PAGE>
Balance of Payments
Factors including interest rates, petroleum prices and the trade
policies of Brazil and Brazil's trading partners have had a significant impact
on Brazil's balance of payments in recent years. The following table sets forth
certain information with respect to Brazil's balance of payments for the periods
indicated.
Balance of Payments(1)
(millions US$)
<TABLE>
<CAPTION>
1994 1995 1996 1997(2) 1998(2)
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Current Account .................... $ (1,689) $(17,972) $(23,137) $(30,916) $(34,296)
Trade Balance ...................... 10,466 (3,352) (5,554) (6,848) (6,594)
Exports ........................ 43,545 46,506 47,747 52,990 51,120
Imports ........................ 33,079 49,858 53,301 59,838 57,714
Services (net) ..................... (14,743) (18,594) (20,483) (26,284) (29,480)
Interest ....................... (6,338) (8,155) (9,173) (10,390) (11,948)
Other .......................... (8,405) (10,438) (11,310) (15,894) (17,532)
Unilateral Transfers (3) ........... 2,568 3,974 2,900 2,210 1,778
Capital Account, Net ............... 8,699 28,845 33,984 26,045 13,413
Direct Investments ............. 934 2,753 10,032 15,515 22,745
Portfolio Investments (4) ...... 54,051 10,322 22,060 9,141 18,243
Of which: 1994 Restructuring 42,475 31 249 -- --
Other Medium- and Long-Term
Capital ...................... (42,350) (1,481) (3,291) 14,723 6,137
Of which: Refinancing (5) . (39,410) -- -- (449) --
Other Short-Term Capital ....... (3,935) 17,251 5,183 (13,335) (33,702)
Of which: Arrears (6) ...... (5,653) (510) (286) 00 00
Errors and Omissions ............... 334 2,093 (2,109) (3,002) 3,584)
Surplus (deficit) .................. 7,344 12,966 8,738 (7,873) (17,299)
Gold ............................... (297) (331) 342 247 (467)
SDRs ............................... 2 -- -- -- --
IMF Position ....................... -- -- -- -- --
Foreign Exchange ................... (6,920) (12,588) (9,008) 7,660 8,437
Other Holdings ..................... -- -- -- -- --
Use of IMF Credits (7) ............. (129) (47) (72) (34) 4,789
Extraordinary Financing (8) ........ -- -- -- -- 4,540
</TABLE>
---------------
(1) These figures were calculated in accordance with the methodology set forth
in the IMF Balance of Payments Manual, Fourth Edition.
(2) Preliminary.
(3) Unilateral transfers consist of transactions without a quid pro quo, many
of which are gifts, and migrant transfers.
(4) Includes bonds, commercial paper and notes.
(5) The 1994 amount relates to transactions in connection with a Brady
Plan-type restructuring completed that year. The 1997 amount relates to
transactions in connection with the Republic's 1997 exchange offer.
(6) Represents mainly arrears on interest payments due but not paid on certain
medium- and long-term bank indebtedness. The 1994 amount includes $6.4
billion in interest arrears in respect of certain external indebtedness
restructured that year.
(7) In December 1998, the Republic received the first installment under a
$41.8 billion IMF-led support package.
(8) The 1998 amount consists of loans from the Bank for International
Settlements and the Bank of Japan under the IMF-led support package.
Source: Central Bank (Federative Republic of Brazil 1998 Annual Report, Form
18-K Exhibit D).
24
<PAGE>
Public Sector Debt
Net public debt in Brazil, composed of the internal and external
debt of the federal Government, State and local governments and public sector
enterprises, amounted to approximately US$181.5 billion as of December 31, 1994,
or 28.1% of GDP, largely due to the increase in net internal indebtedness to
US$175.3 billion from US$128.9 billion at the end of 1994, as a result of the
issuance by the federal Government of domestic debt securities in an effort to
absorb excess liquidity in the domestic market. Net public sector debt continued
to rise in 1996, 1997 and 1998, totaling US$259.2 billion, or 34.4% of GDP, at
December 31, 1996, US$276.6 billion, or 34.5% of GDP, at December 31, 1997 and
US$321.8 billion, or 42.6% of GDP, at December 31, 1998. The real average rate
of interest on such domestic securities was 23.0% in the twelve-month period
ended August 31, 1998 as compared to 33.4% in the twelve-month period ended
December 31, 1995. Following certain debt and debt service reduction agreements
implemented on April 15, 1994, the maturity profile of Brazil's public sector
external debt was substantially lengthened from an average of 6.9 years at
December 31, 1993 to an average of 8.8 years at December 31, 1996. The average
maturity of Brazil's public-sector external debt was 7.7 years at December 31,
1997 and 6.9 years at December 31, 1998. Net external public sector debt as a
percentage of GDP declined from 8.1% in 1994 to 4.3% as of December 31, 1997
before rising again to 6.6% as of December 31, 1998. Total gross public sector
debt as a percentage of GDP increased from 41.4% in 1994 to 59.6% of GDP as of
December 31, 1998. As of December 31, 1998, total gross public sector debt was
$450.1 billion or 59.6% of GDP.
On January 6, 1999, the newly inaugurated governor of the State of
Minas Gerais announced that the State would suspend for 90 days payments on its
approximately R$18.3 billion debt to the Government. The Governor of the State
of Rio Grande do Sul subsequently sought and obtained an injunction permitting
that State to make payments into an escrow account, pending the resolution of
the request of seven States to renegotiate refinancing agreements reached with
the Government under Law No. 9,496 of September 11, 1997. The Government
responded by withholding constitutionally mandated transfers payable to the
State of Minas Gerais and, on February 10, 1999, paid approximately half of an
approximately $85 million due in respect of the State's Eurobonds that matured
on that date to ease investor concerns about the risk of default by State
governments. The Government also notified certain international financial
institutions that it would no longer guarantee these States' obligations to
these financial institutions, leading the World Bank to suspend loans to the
States of Minas Gerais and Rio Grande do Sul.
In a meeting with the President on February 28, 1999, some Governors
pressed for a renegotiation of the refinancing agreements. The President offered
instead to make loans to the States to cover the costs of layoffs and pension
reform and promised to review a law exempting exports from State taxes. The
Government has initiated negotiations with the World Bank to secure refunding
for such loans.
On June 2, 1999, the Central Bank declared the State of Pernambuco
in default after the State announced that it would not honor approximately R$260
million aggregate principal amount of the State's bonds. As a result of the
default, the State is precluded from borrowing in the local markets.
25
<PAGE>
On April 14, 1999, a Parliamentary Committee of Inquiry of the
Senate was formed to investigate certain events involving the financial system,
including, among other things, allegations that had appeared in the Brazilian
press that the Central Bank improperly had sold dollars to two Brazilian banks
at rates below the prevailing trading price. The Central Bank has delivered to
the Senate a detailed report responding to the issues that the Senate has
raised.
During the period from 1982 until the implementation of Brazil's
external debt restructuring in 1994, Brazil failed to make payments on certain
of its external indebtedness from commercial banks as originally scheduled, and
in February 1987 declared a moratorium on principal and interest payments on
external indebtedness to commercial banks. Brazil's external indebtedness to
commercial banks was restructured in a Brady Plan-type restructuring in April
1994. In April 1999, the Republic completed an exchange offer pursuant to which
the Republic acquired and cancelled approximately US$993.1 million aggregate
outstanding principal amount of bonds issued in a prior restructuring and
US$200.4 million aggregate outstanding principal amount of bonds issued in a
prior restructuring of interest areas. After giving effect to the cancellation
of such bonds, approximately US$35.0 billion aggregate principal amount of bonds
issued pursuant to the Republic's Brady Plan-type restructuring remained
outstanding on April 30, 1999. In 1998 debt service (principal and interest) on
public sector external debt was equivalent to approximately US$15.4 billion,
which amounted to approximately 30.2% of receipts from exports of goods.
Throughout the debt restructuring process, from 1982 to 1994, the Republic
continued to make principal and interest payments on its external bonded
indebtedness in accordance with the terms of such indebtedness.
At December 31, 1999, total external debt in Brazil stood at
US$241.2 billion, or 43.3% of GDP. Of that amount, approximately US$100.5
billion consisted of public sector external debt and approximately US$140.7
billion consisted of private sector external debt. Interest expense on that debt
amounted to approximately US$17.4 billion in 1999, of which approximately US$7.6
billion was paid in respect of public sector external debt and approximately
US$9.8 billion was paid in respect of private sector external debt.
26
<PAGE>
The following tables set out Brazil's external debt and debt service
for the years indicated:
External Debt
(million US$)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998(e)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
A. Total debt (B+C) 148,295 159,256 179,935 199,998 235,058
B. Medium and long-term debt 119,668 128732 142,148 163,283 210,458
IMF loans 186 142 68 32 11
Renegotiated debt bonds 51,538 51,451 51,239 41,930 40,400
Other bonds 1,616 2,452 3,637 7,457 8,900
Import financing 35,711 36,113 34,165 50,785 65,040
Multilateral 10,473 18,976 15,821 14,348 15,339
Other financing sources 5,765 6,457 52,836 62,898 95,949
Currency loans 30,387 38,347 52,836 62,898 95,949
Other loans 230 227 203 181 158
C. Short-term debt 28,627 30,524 37,787 36,715 24,600
Credit line for petroleum
Imports 2,530 3,067 4,985 5,695 4,276
Other credit lines for public
companies 56 354 177 -- --
Commercial banks (liabilities) 25,575 26,235 30,611 26,501 18,476
Resolution no. 2,148 Rural
financial -- 581 1,944 4,003 1,232
</TABLE>
----------
(e) Estimated.
Sources: Boletim do Banco Central do Brasil (Central Bank of Brazil) Annual
Report 1998; Federative Republic of Brazil 1998 Annual Report, Form
18-K Exhibit D.
External Debt Service
(millions US$ except where noted)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998(1) 1999(1)
---- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Debt service repayments ..... 9,581 10,920 14,444 26,534 17,625 29,341
Gross interest .............. 6,631 10,761 10,627 11,556 13,175 13,354
------- ------- ------- ------- ------- -------
Total ....................... 16,212 21,681 25,071 38,090 30,800 42,695
Gross external debt ......... 151,209 159,035 179,480 193,663 223,051 216,108
International reserves ...... 38,488 51,475 59,704 51,730 43,938 35,554
Net external debt ........... 112,721 107,560 119,776 141,933 179,113 180,554
Debt service/exports(%) ..... 32 43 47 70 55 73
Net external debt/exports(%) 222 215 226 263 324 312
Exports of goods and services 50,647 49,916 52,966 53,930 55,253 57,815
</TABLE>
----------
(1) Preliminary.
Source: World Bank, IMF.
At January 31, 2000, Brazil's U.S. dollar-indexed domestic
securities debt totaled approximately R$92.8 billion, an increase from the
approximately R$92.3 billion of such securities at December 31, 1999, but down
from approximately R$98.4 billion at November 30, 1999 and approximately R$100.5
billion at October 31, 1999.
27
<PAGE>
Foreign Investment
The National Monetary Council of Brazil has adopted two resolutions
that are intended to promote foreign investment in Brazil. Resolution No. 2,683
of December 29, 1999 eliminates the minimum term for foreign loan transactions
involving a Brazilian resident. Prior to the adoption of that resolution, the
minimum term for such loan transactions had been 90 days. A second resolution,
Resolution No. 2,689 of January 26, 2000, aims at simplifying the procedures for
registering foreign investments in the domestic capital markets with the Central
Bank by, among other things, eliminating the so-called "Annex IV" and "Annex VI"
investment vehicles established under National Monetary Council resolution No.
1,289 of March 20, 1987. The changes introduced by Resolution No. 2,689 became
effective March 31, 2000.
Total net foreign investment totaled approximately US$31.5 billion
in 1999, of which US$1.5 billion consisted of net portfolio investment and US$30
billion consisted of net direct investment. Total net foreign investment in
1998, by contrast, totaled approximately US$44.4 billion, of which US$18.2
billion consisted of net portfolio investment and US$26.1 billion consisted of
net direct investment.
28
<PAGE>
SECURITIES MARKETS
Until recently Brazil had nine stock exchanges. Of these, the Bolsa
de Valores de Sao Paulo (the "Sao Paulo Exchange") and the Bolsa de Valores do
Rio de Janeiro (the "Rio Exchange" and together with the Sao Paulo Exchange, the
"Brazilian Exchanges") were the most important. In January 2000, Brazil's nine
stock exchanges were merged with the Sao Paulo Exchange as the surviving entity.
Although any of the outstanding shares of an exchange-listed company
may trade on the Sao Paulo Exchange, in most cases, less than half of the listed
shares are actually available for trading by the public, the remainder being
held by small groups of controlling persons who rarely trade their shares. For
this reason, data showing the total market capitalization of one or more
Brazilian Exchanges may give an exaggerated view of the size of the Brazilian
equity securities market.
In 1998 the National Monetary Council, in a step towards
deregulation, abolished fixed brokerage fees for trading securities in favor of
allowing clients to negotiate with their agents on the commission structure.
The annual trading value and certain other information about equity
securities traded on the Brazilian Exchanges is presented in the following
tables:
Secondary Stock Market Trading
(R$ million)
<TABLE>
<CAPTION>
1997 1998
-------------------------------- --------------------------------
Sao Paulo Rio Sao Paulo Rio
Exchange Exchange Total Exchange Exchange Total
<S> <C> <C> <C> <C> <C> <C>
At sight 170,413 12,240 182,653 132,152 8,180 140,332
Term 1,186 210 1,396 982 65 1,047
Put and call options 18,138 1,757 19,895 12,539 1,796 14,335
Options exercise 9,664 1,564 11,229 4,684 904 5,588
Other(1) 7,038 13,192 20,231 11,487 27,763 39,250
Total 206,441 28,964 235,404 161,844 38,708 200,552
Market value 285,139 252,777 537,916 194,399 195,915 390,314
Daily average in year 821 150 971 658 157 815
</TABLE>
----------
(1) Claims and receipts, Decree-Law no. 1,376 funds, privatization
certificates, auctions and odd-lot market.
Source: Central Bank of Brazil 1998 Annual Report.
Market Activity on Sao Paulo Exchange
(millions US$, other than listed company data)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of Listed Companies 544 543 550 536 527
Market capitalization ..... 189,058 147,567 215,297 255,409 160,886
Market Volume ............. 88,207 69,446 97,761 191,091 139,970
</TABLE>
----------
Source: BOVESPA (Federative Republic of Brazil 1998 Annual Report, Form 18-K
Exhibit D).
29
<PAGE>
Stock Indexes
On May 2, 2000 the IBV Index (the "Rio Index") ceased to exist and
the Bovespa Stock Index (the "Sao Paulo Index") became the sole stock index for
the Sao Paulo Exchange.
Background Information
The Sao Paulo Index indicates average stock price behavior on the
Sao Paulo Exchange by representing the current value in local currency of a
hypothetical stock portfolio originally selected on January 2, 1968. This
portfolio consists of stocks representing an aggregate value of 80% of the cash
volume of stocks traded during an earlier 12-month period. Since July 1994, 56
stocks comprise the index. The weight of each stock in the portfolio is directly
related to its value in the cash market, both in terms of number of transactions
and their value in local currency. Consequently, the movement of the index may
not be representative of the movement of the majority of issues listed on the
Sao Paulo Exchange. The composition of the Sao Paulo Index is re-determined
every four months.
The following table shows the percentage change in the Sao Paulo
Index, measured in (a) simple return based on price appreciation, and (b) total
return, which includes price appreciation and reinvested dividends:
Percentage Changes in Sao Paulo Index
<TABLE>
<CAPTION>
Simple Return Total Return
Year Ended (Based on Price appreciation) (includes reinvested dividends)
---------- ----------------------------- -------------------------------
<S> <C> <C>
1995................................ -1.26% -1.26%
1996................................ 63.76 78.18
1997................................ 44.84 51.17
1998................................ -33.46 -33.16
1999................................ 151.93 162.99
2000*............................... 1.39 n/a
</TABLE>
------------------
*As of June 7, 2000.
Source: Bloomberg Financial Services.
Securities Regulation
The Central Bank of Brazil licenses and oversees the operations of
Brazilian financial institutions, including investment banks, brokerage firms
and securities dealerships. In particular, the Central Bank of Brazil is
responsible for licensing brokerage firms. Once licensed with the Central Bank
of Brazil, a financial institution's activities in the Brazilian securities
markets are regulated by the CVM. The CVM, which is managed by appointees of the
President of Brazil who serve at the President's discretion, is responsible for
the regulation and supervision of the corporate securities markets and the
protection of investors in those markets.
All companies must register with the CVM before issuing and selling
securities to the public. Companies must update information about their
operations on an annual basis and, in addition, file interim and quarterly
reports with the CVM, though that information is not required
30
<PAGE>
to be distributed to the companies' shareholders. Moreover, any fact or event
that may materially affect a company must be immediately reported by its
management to the CVM and is usually required to be immediately reported to the
Brazilian Exchanges and the public. Noncompliance with these registration and
disclosure rules may subject a company and its management to penalties provided
by law.
Investment by the Fund in the Securities Market
Previously, the Fund invested under "Annex IV" (see "Economy-Foreign
Investment" above); however, recently enacted rules eliminated this
classification and the Fund must convert to the new requirements applicable to
foreign investments in Brazil by June 30, 2000. Under the new regulations that
replace Annex IV, the Fund will have unlimited access to the Brazilian capital
markets. The Fund can invest in stocks or future contracts that are traded on
the organized OTC market or in clearing systems authorized by the Central Bank
or CVM. Under the new regulations, foreign investors such as the Fund must
appoint one or more legal representatives, in substitution of the previously
required local administrator. The legal representative, who may be an
individual, a non-financial corporation or a Brazilian institution duly
authorized by the Central Bank, will be responsible for communications between
the Fund and the CVM or other authorities. For this purpose, the Fund has
appointed Bankboston Banco Multiplo S.A. as its legal representative.
31
<PAGE>
THE REPUBLIC OF CHILE
GENERAL
Geography and Demography
Chile has an area of approximately 756,626 square kilometers
(excluding the Antarctic Territory with an area of 1,269,000 square kilometers)
and a population of approximately 15 million people. Chile's population,
industry and arable land are concentrated in a central valley region where the
nation's capital and largest city, Santiago, and its largest port, Valparaiso,
are located. Spanish is the official language of Chile.
Government
The Chilean Constitution provides for a tripartite system of
government: an executive branch headed by a President; a legislative branch made
up of a bicameral congress; and a judicial branch, of which the Supreme Court is
the highest authority.
The current President, Ricardo Lagos Escobar, is the first socialist
president in over twenty years and was elected to serve a single six-year term
beginning in March 2000. The Congress is made up of a Senate and a Chamber of
Deputies. Thirty-eight Senators are elected to eight-year terms while the
Supreme Court, the National Security Council and the President appoint a total
of nine senators, also for eight-year terms. Deputies are elected to four-year
terms. The Supreme Court consists of twenty-one judges who are appointed by the
President, out of a list of persons presented by the Supreme Court and confirmed
by the Senate, and serve until age 75.
Chile has a long history of civilian democracy; however, in
September 1973, a military junta assumed power and the Commander-in-Chief of the
Army, General Augusto Pinochet, became President of Chile in December 1974. A
new Constitution was approved at a national referendum in 1980 and amended and
confirmed at a plebiscite held in July 1989. In accordance with the
Constitution, national elections were held, as a result of which Mr. Aylwin, a
member of the Christian Democratic Party, was elected to the Presidency.
Civilian rule was reinstated on March 11, 1990 with the inauguration of Mr.
Aylwin. In March 1994, Eduardo Frei Ruiz-Tagle was sworn in as President and
served until President Lagos took office.
Political conflicts may arise between President Lagos and members of
the military and Congress as a result of Lagos's willingness to allow the
prosecution of former President Pinochet. Conservative members of the Congress
have threatened to block or impede the progress of future Presidential proposals
and directives if Pinochet is forced to stand trial for atrocities committed
during his tenure. On June 5, 2000 a Chilean appellate court voted to rescind
his immunity, thus clearing the way for a trial. Furthermore, tensions may
increase between the executive branch and the military if President Lagos
follows through on his pledge to amend the Constitution so that the President is
able to directly appoint and remove the high commanders of the armed forces.
32
<PAGE>
Politics
A center-left coalition, Concertacion, and center-right opposition
are the two major political groups in Chile. Chile's current President is a
member of Concertacion, which includes the centrist Christian Democratic Party
("PDC"), Radical Social Democratic Party ("PRSD"), the moderate leftist Party
for Democracy ("PPD"), and the Socialist Party ("PS"). The National Renewal
Party ("RN") and the Independent Democratic Union ("UDI") combine to form the
center-right coalition. Chile also has several other smaller parties which may
or may not have seats in the Congress or other elected or appointed bodies.
External Affairs
Chile is a member of the UN and its specialized agencies, the IMF,
the World Bank and the IFC. Chile is also a party to GATT and is a member of the
OAS and the IDB. Chile also has a bilateral free trade agreement with Mexico and
Canada, and since 1996 has been an associate member of the Mercosur Treaty.
During 1998 and 1999 Chile's relations with the United Kingdom and
Spain were strained as a result of the UK's arrest and detainment for possible
extradition of former President Pinochet to Spain. In early 2000, President
Pinochet was allowed to return to Chile.
Financial System
The Chilean financial sector is comprised of Banco Central de Chile
(the "Central Bank"), Banco del Estado (a state commercial bank), national and
foreign commercial banks, consumer credit finance corporations and several
government organizations, including Corfo, the state-owned Chilean Development
Agency. The Central Bank, which has been independent from the Chilean government
since December 1989, implements monetary policy, regulates foreign currency
flows and is a lender of last resort to Chile's commercial banks.
ECONOMY
Economic Policy and Performance
Chile's economic history has been oriented toward the export of
primary products. Chile was a major exporter of nitrate and agricultural
products in the 19th century and increased its copper exports in the 20th
century. Following the collapse of Chile's export markets and its loss of access
to international capital markets during the 1930s, successive governments sought
to reduce the country's dependence on trade through implementation of
import-substitution-industrialization policies designed to promote the growth of
domestic industry and discourage imports. Chile's agricultural sector languished
while its protected industry became inefficient. The role of the state in the
economy expanded in the post-war period and accelerated during the socialist
government of Salvador Allende during 1970 to 1973.
Following the military junta's assumption of power in 1973, the
military government introduced a series of economic reforms designed to open the
economy to market forces and foreign investment, liberalize trade and foreign
investment, and reduce the size and influence of the public sector in the
economy. Although the government was able to reduce
33
<PAGE>
inflation, eliminate budget deficits and foster a resumption of real growth,
economic performance suffered in the early 1980s as the result of an external
debt crisis, exchange rate policies and global recession. Since the mid 1980s
the economy has grown by approximately 7% per year.
The Aylwin administration's economic team continued to follow
liberal trade and investment policies in order to promote growth in the private
sector. The Aylwin government managed two potential threats it faced in its
first year--the overheating of the economy and the sharp rise in oil prices
during the crisis in the Middle East. Responding to a 10% increase in GDP in
1989 and rising prices, the government reduced the growth rate in the narrow
money supply (M1A) from 25.2% in 1989 to 11.9% in 1990. Inflation reached an
annual 27.3% in 1990, with a monthly high of 5% in September 1990 resulting from
the impact of the Gulf War on oil prices. By 1996 inflation dropped to 6.6%, and
in 1999 inflation had dropped to a low of 2.3%. GDP growth fell to 2.1% in 1990,
as a result of the government's tightening, but it increased to 6.0% in 1991 and
by 1996 peaked at 6.6%. Inflation averaged 14.5% during the period 1986-1997 and
GDP grew by approximately 7.7% during that same period. During 1999 Chile
experienced its worse recession in over 10 years when the economy shrank 1.1%
and unemployment climbed to approximately 11.0% from approximately 6% in 1998.
Both the Aylwin and Frei administrations worked towards building a
wide consensus around a free market economy. Current President Lagos, a Duke
University-educated economist, has indicated that he plans on continuing the
work of his predecessors toward a free market economy.
Government Participation in the Economy
The economic program implemented by General Pinochet in the
mid-1970s involved the privatization of important economic sectors as a strategy
for fiscal deficit reduction. The industries privatized included
telecommunications, steel, energy and the social security system.
34
<PAGE>
The following table sets forth information regarding Chile's
principal privatizations from 1991 through early 1999:
Privatizations
<TABLE>
<CAPTION>
Company Date Sector % Sold % Retained Proceeds
------- ---- ------ ------ ---------- --------
(millions US$)
<S> <C> <C> <C> <C> <C>
Zofri S.A.............. 1991-93 Service 48% 52% 23.9
El Abra................ 1994 Mining 51 49 330.0
Fepasa S.A............. 1994 Transportation 51 49 30.
Colbun S.A............. 1994 Power Utility 8 92 65.0
Linea Aerea Nacional
(Lan).... ........... 1994 Transportation 24 0 10.7
Edelnor S.A............ 1994 Power Utility 30 9 86.4
Empremar S.A........... 1995 Transportation 95 0 4.5
Radio Nacional......... 1995 Broadcasting 100 0 1.8
Minsal S.A............. 1995 Mining 18 0 7.1
Colbun S.A............. 1996 Power Utility 38 43 340.0
Ferronor S.A........... 1996 Transportation 100 0 12.0
Inversiones Tocopilla
Ltda. (1)............ 1996 Power Utility 51 49 178.0
Edelaysen S.A.......... 1998 Power Utility 91 0 43.0
Esval S.A.............. 1998-99 Sanitation 55 45 138.0
Emos................... 1999 Sanitation 42 48 960.0
</TABLE>
-----------------
(1) Codelco sold 51% of a holding company which controls 65.2% of the shares
of Electroandina S.A., the former Tocopilla Division of Codelco, and
retained the remaining 34.8%.
Source: Chile Ministry of Finance (Republic of Chile 6 7/8% Bond prospectus,
dated April 28, 1999).
Gross Domestic Product
After experiencing negative growth of 13.4% in 1982 and 3.5% in
1983, the Chilean economy has shown positive real GDP growth for 15 straight
years since 1984. The average annual rate of growth between 1990 and 1998 was
7.7%. The Chilean economy grew at a real rate of 7.6% of GDP in 1997, following
an expansion of 7.4% of GDP in 1996. In 1998, the Chilean economy expanded by a
real rate of 3.4% of GDP. The decrease in rate of growth is mainly due to the
adverse impact of the Asian crisis, events in international capital markets
following the devaluation of the Russian ruble and events in markets of
important trading partners, including Argentina, Brazil and Japan.
35
<PAGE>
The following table sets forth the composition of Chile's GDP by
economic sector for the periods indicated:
Real GDP by Sector
(% of GDP)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
PRIMARY SECTOR:
<S> <C> <C> <C> <C> <C>
Agriculture, livestock and forestry .............. 7.6% 6.8% 6.4% 5.7% 5.7%
Fishing .......................................... 1.4 1.5 1.5 1.5 1.5
Mining ........................................... 7.9 7.8 8.4 8.5 8.6
--------- --------- --------- --------- ---------
Total primary sector ........................... 16.8 16.1 16.3 15.8 15.8
MANUFACTURING SECTOR (1): 16.7 16.2 15.6 15.3 14.6
SERVICES SECTOR:
Construction ..................................... 5.3 5.2 5.3 5.3 5.1
Electricity, gas and water ....................... 2.5 2.5 2.2 2.3 2.3
Trade and catering ............................... 16.1 16.7 17.0 17.3 17.6
Personal services ................................ 6.7 6.2 6.1 5.9 5.9
Financial services ............................... 13.6 13.5 13.4 13.4 13.4
Transport and communications ..................... 7.4 7.6 7.8 8.3 8.9
Housing .......................................... 3.7 3.5 3.3 3.2 3.2
Public administration ............................ 2.6 2.4 2.3 2.1 2.1
--------- --------- --------- --------- ---------
Total services sector .......................... 57.9 57.5 57.4 57.7 58.5
Net adjustments for payments mad by
financial institutions, VAT and import
tariffs ........................................ 9.0 10.2 10.7 11.2 11.1
--------- --------- --------- --------- ---------
Real GDP (in billions of constant 1986
pesos) ........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= =========
Ps. 6,148 Ps. 6,801 Ps. 7,305 Ps. 7,858 Ps. 8,127
</TABLE>
----------
(1) Includes the processing of mining production.
Source: Central Bank (Republic of Chile 6 7/8% Bond prospectus, dated April 28,
1999).
Inflation
The following table sets forth the percentage change in the consumer
price index for the periods indicated:
Percentage Change in CPI From Previous Year
1994.................................................. 9.0%
1995.................................................. 8.2%
1996.................................................. 6.6%
1997.................................................. 6.0%
1998.................................................. 4.7%
1999.................................................. 2.3%
----------
Sources: Economic Intelligence Unit, Country Data for Chile; Central Bank of
Chile, "The Central Bank of Chile and the Economy", February 2000.
36
<PAGE>
EXTERNAL SECTOR
Foreign Trade
Chile's economic history has been dominated by the export of primary
products. The principal exports currently are copper and other minerals, fish
(mainly fishmeal), forestry products and fruits and other agricultural products.
Copper represented over one-third of the country's export revenue in 1998. The
Chilean economy is greatly affected by fluctuations in the world market price of
copper. Lower copper prices in 1998 and 1999 contributed to the 1999 recession,
while as 2000 has progressed copper prices have been increasing. Future copper
prices are uncertain and lower prices could threaten Chile's economy.
The performance of certain of Chile's export items is set forth in
the table below:
Exports (FOB)
(US$ millions)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Total Exports ........... 11,604 16,024 15,405 16,923 14,895
Total Mining .......... 5,192 7,850 7,324 8,467 6,634
Copper ....... 4,242 6,487 6,029 7,156 5,462
Agriculture, livestock,
forestry and fishing .. 1,298 1,566 1,594 1,534 1,548
Industrial ............ 5,115 6,608 6,487 6,923 6,713
-------------------
Source: Central Bank of Chile (Republic of Chile 6 7/8% Bond prospectus, dated
April 28, 1999).
Trading Partners
Japan, the United States, Germany, the United Kingdom, Brazil, Italy
and France are among Chile's principal trading partners.
37
<PAGE>
Balance of Payments
The following table shows the balance of payments for the years 1995
through 1998:
Balance of Payments
(Millions US$)
<TABLE>
<CAPTION>
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current Account -1,350 -3,510 -3,728 -4,139
Exports 16,025 15,405 16,663 14,831
Imports -14,644 -16,496 -18,221 -17,347
Trade Balance 1,381 -1,091 -1,558 -2,516
Service Balance -1,057 -1,351 -1,512 -2,630
Financial Account 2,357 6,665 7,355 3,181
Direct Investment Abroad -752 -1,188 -1,865 -2,798
Direct Investment in Reporting Economy 2,957 4,634 5,219 4,638
Portfolio Investment Assets -14 -131 -238 -1,420
Portfolio Investment Liabilities 48 1,231 2,603 591
Other Investment Assets -309 -327 -843 -2,546
Other Investment Liabilities 427 2,445 2,479 4,716
Net Errors and Omissions 132 -651 -443 -1,177
Overall Balance 1,139 2,504 3,184 -2,135
Reserves -1,139 -2,504 -3,184 2,135
Reserve Assets -740 -1,107 -3,184 2,135
Exceptional Financing -101 -1,397 -- --
Use of Fund Credit and Loans -298 -- -- --
</TABLE>
----------------
Source: International Monetary Fund, International Financial Statistics Vol.
LIII, No. 5, May 2000.
Foreign Exchange and Exchange Controls
Exchange Rate Policy
In the formal exchange market, the Central Bank sets a reference
exchange rate based on the pegged value of a basket of currencies. This basket
is currently comprised of the U.S. dollar, the Euro and the Japanese yen, in a
ratio of 80:15:5, respectively. The Central Bank adjusts daily the reference
exchange rate to reflect the differences between the domestic inflation target
and foreign inflation based on Chile's trade with certain countries.
Transactions by banks are generally within a narrow band that is set
around the reference exchange rate. In December 1998, the Central Bank set the
exchange band at 8% above and below the reference exchange rate and provided for
the gradual widening of the limits of the band at a daily rate of 0.01375%.
The daily observed exchange rate is the average exchange rate of the
transactions conducted in the formal exchange market on a given day, as
certified by the Central Bank on the banking day immediately following the given
date. The Central Bank is authorized to carry out its transactions at the
reference exchange rate and at the spot market rate. Authorized transactions by
commercial banks are generally carried out at the spot market rate.
38
<PAGE>
Since April 1997, when the Central Bank gave free access to buy and
sell foreign exchange in the formal exchange market, in general there has been
no difference between the exchange rate in the formal and the informal exchange
markets.
Between 1993 and 1997, the real exchange rate appreciated at an
average annual rate of 5.2%, which accounts in part for the increase in Chile's
productivity. In 1996 and 1997, the Chilean peso appreciated in real terms 4.2%
and 8.4%, respectively, as a result of increased investor confidence in the
Chilean economy.
In 1998, the Central Bank implemented monetary policies designed to
avoid sharp fluctuations in nominal exchange rates, while simultaneously
allowing the market to dictate the trend of the exchange rate. First, the
Central Bank reduced its international reserves by US$1.8 billion as a means to
stabilize the exchange rate. Secondly, the Central Bank introduced three- and
four-year readjusted peso-denominated dollar notes that may be used as hedging
instruments to mitigate the exchange rate risk. Since July 1998, the Central
Bank has sold these notes at bi-weekly auctions (approximately US$1.3 billion
notes through December 31, 1998).
Since September 1999, Chile has allowed its currency to float in a free market
system. The reference exchange rate and observed exchange rate have primarily
been maintained for contractual purposes and the Central Bank has not intervened
in the currency market.
External Debt
In 1998, Chile's total external debt stood at US$31.691billion, not
including amounts owed to the IMF. Since 1991, Chile's external debt has grown
by approximately US$15 billion. Even though external debt has almost doubled,
the country's short-term external debt has shrunk from a high of US$3.8 billion
in 1994 to US$1.6 billion in 1998. The economic policies that caused the
aforementioned division of short-term debt and other debt reflect the
government's recognition that the Chilean economy is susceptible to short term
fluctuations because of the country's reliance on international trade as a
significant revenue source. A large portion of this debt has been spent on
prolonging Chile's economic growth by investing in the electrical sector.
39
<PAGE>
External Debt Outstanding
(millions US$)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Medium- and long-term(1) 15,699 17,613 18,305 20,344 25,414 30,081
Short-term (2) 3,487 3,865 3,431 2,635 1,287 1,610
------ ------ ------ ------ ------ ------
Total 19,186 21,478 21,736 22,979 26,701 31,691
====== ====== ====== ====== ====== ======
</TABLE>
----------
(1) Original maturity of more than one year.
(2) Original maturity of one year or less.
Sources: Banco Central De Chile, Chilean External Debt 1998.
Foreign Investment
Chile's foreign investment policies are designed to encourage the
integration of the country into the international economy. Few restrictions
exist on foreign investment in Chile, and foreign businesses are guaranteed
equal treatment with local businesses. There is no limit on the percentage of a
Chilean company that may be owned by foreign investors. Under Decree Law 600
adopted in 1974, invested capital can be repatriated after one year and profits
may be freely remitted. However, investment companies such as the Fund investing
in Chile under Law No. 18,657 may only repatriate capital after five years. This
limitation does not apply to profits which may be freely remitted. See
"Investment by the Fund in the Securities Markets".
SECURITIES MARKETS
The Santiago Stock Exchange was established in 1893 and is comprised
of 282 companies with listed shares as of December 31, 1999. The Santiago Stock
Exchange is Chile's principal exchange and accounts for most of the equity
traded in Chile as of June 1994. Equity trading is also conducted on the Bolsa
Electronica de Chile, an electronic trading market which was created by banks
and non-member brokerage houses, while a small amount of equity is traded on the
Valparaiso Stock Exchange.
Equities, closed-end funds, fixed-income securities, short-term and
money market securities are traded on the Santiago Stock Exchange. Securities on
the Santiago Stock Exchange are mostly traded through an electronic trading
system and daily auctions, but two open voice auction trading rounds still
exist.
There are two share price indices for the Santiago Stock Exchange:
the General Share Price Index (the "IGPA") and the IPSA. The IGPA is calculated
using the prices of over 230 issues and is broken into five main sectors: banks
and finance, farming and forest products, mining, industrials and miscellaneous.
The IPSA is a major company index compiled by the Santiago Stock Exchange,
currently including the Santiago Stock Exchange's 40 most active stocks. Shares
included in the IPSA are weighted according to the value of shares traded, and
account for more than 61% of the entire market capitalization.
40
<PAGE>
The table below summarizes value and performance indicators for the
Santiago Stock Exchange:
Indicators for the Santiago Stock Exchange
<TABLE>
<CAPTION>
Market Annual Trading
As of December 31, Capitalization Volume IGPA Index (1) IPSA Index (1)
------------------ -------------- -------------- -------------- --------------
(billions US$) (billions US$)
<S> <C> <C> <C> <C>
1990 13.6 0.8 1,166.7 2,554.9
1991 28.0 1.9 2,483.7 6,800.7
1992 29.6 2.1 2,733.5 8,242.3
1993 44.9 2.8 3,915.5 13,907.2
1994 67.9 5.7 5,425.2 19,764.0
1995 71.2 11.1 5,740.0 20,001.2
1996 65.8 8.5 4,902.6 17,641.8
1997 71.9 7.3 4,794.4 19,917.5
1998 52.0 4.4 3,594.7 15,410.4
1999 67.0 6.4 5,167.7 22,044.6
</TABLE>
----------
(1) On December 31, 1980 , the index base equaled 100.
Source: Santiago Stock Exchange (Republic of Chile 6 7/8% Bond prospectus, dated
April 28, 1999).
The aggregate market capitalization of equity securities listed on
the Santiago Stock Exchange as of December 31, 1999 was US$67 billion.
Comparatively for 1999, the New York Stock Exchange had an aggregate market
capitalization of US$16.8 trillion, and average daily trading value of
approximately US$58.8 billion.
Securities Regulation
The Chilean securities markets are principally regulated by the
Superintendencia de Valores y Seguros (the Superintendency of Securities and
Insurance or "SVS"). The Superintendent of the SVS is appointed by and reports
to the President of Chile and has an obligation to coordinate with the Chilean
Minister of Finance. The SVS supervises open corporations, stock exchanges,
stock exchange brokers (Corredores de Bolsa), over-the-counter securities
brokers (Agentes de Valores), mutual funds, mutual fund and pension fund
managers, external auditors, insurance companies, foreign capital investment
funds and any entities offering securities to the public.
In executing its supervisory role, the SVS can interpret the law,
investigate claims of investors or other interested parties, initiate judicial
proceedings and act as a consultant to the judicial system. It also is
responsible for establishing accounting and disclosure rules for open
corporations. Specifically, the SVS requires quarterly financial statements from
issuers, quarterly reports of shares traded and of shareholders, monthly reports
on the status of the sale of new share issues, prior notification of dividend
payments and notification of other material facts. These reports must be made
available to the SVS, the stock exchanges and the public.
The SVS is the sole regulator of the Agentes de Valores, brokers who
trade outside the stock exchanges primarily in bond repurchase agreements and
money market
41
<PAGE>
instruments. Minimum capital and coverage ratios and maximum leverage ratios are
specified by the SVS. The SVS also requires the Agentes de Valores to report
daily on their transactions.
The SVS is responsible for examining prospectuses, reviewing the
books and financial statements of the entities it regulates and registering all
public debt and equity offerings and all open corporations in the National
Securities Registry (Registro Nacional de Valores). Once a corporation registers
in the Registry, either by virtue of being an "open corporation" or by publicly
offering its securities, it must comply with the disclosure requirements
prescribed by the SVS. The SVS is also responsible for establishing margin
requirements for share purchases.
Pension funds play a very large role in the Chilean securities
markets. The Administradoras de Fondos de Pensiones (Administrators of Pension
Funds or "AFPs") are legal entities that manage pension funds and are the
registered shareholders of shares acquired with pension fund monies. The AFPs
are regulated by the Superintendency of AFPs, which establishes investment
guidelines and criteria. AFPs are subject to certain investment restrictions and
limitations. The determination of which individual stocks may be purchased by
the AFPs is made by the Comision Clasificadora de Riesgo (the Risk
Classification Commission or "CCR").
Investment by the Fund in the Securities Markets
The Fund makes investments in Chile pursuant to the Chilean Foreign
Investment Law--Decree Law 600 of 1974, as amended ("Decree Law 600"), and Law
No. 18,657, enacted in September 1987. A series of foreign investment contracts
between the Fund and the Republic of Chile (collectively, the "Investment
Contract") permitted the Fund to invest up to US$200 million in Chile. The
Investment Contract provides for (1) non-discriminatory treatment of the Fund
with Chilean investors, (2) certain repatriation rights, including the right to
repatriate capital out of Chile after five years and the right to remit out of
Chile at any time dividends and interest received as well as net realized
capital gains and (3) a 10% tax payable on all remitted amounts not
corresponding to the original invested capital, which tax rate is to be
maintained for the duration of the Fund in Chile. The 10% tax is applied against
remitted amounts regardless of the purposes for which the remittances are used
outside of Chile and is not assessed against dividends, interest or net realized
capital gains that are reinvested in Chile rather than distributed to the Fund's
shareholders. Any corporate level tax paid by Chilean corporations which pay
dividends to the Fund may not be credited against the 10% remittance tax payable
by the Fund.
Notwithstanding Decree Law 600, the prior approval of the Central
Bank of Chile is required to repatriate capital or remit dividends, interest or
net realized capital gains abroad. The Fund has obtained such approvals in the
past and they are at present routinely granted. However, there can be no
assurance that such approvals will be forthcoming in the future. The Fund has
entered into a series of exchange agreements with the Central Bank of Chile
(collectively, the "Exchange Agreement"), which specifies the procedure the
Central Bank of Chile requires for enabling the Fund to make remittances abroad
pursuant to the investments made in Chile under the Investment Contract. The
Exchange Agreement confirms that, to the extent the Fund's expenses outside of
Chile payable in U.S. dollars exceed the Fund's income available for remittance
and remitted, the Fund will be permitted on a quarterly basis to liquidate
Chilean portfolio investments that represent invested capital and repatriate out
of Chile an amount not to exceed .50 of 1.00% of the value of the Fund's assets
in Chile on the last day of
42
<PAGE>
the preceding quarter, minus the sum of dividends, interest and net realized
capital gains remitted out of Chile during that preceding quarter. If the Fund
remits amounts to pay expenses, the Fund will be subject to a Chilean
withholding tax of currently up to 35% on such amounts remitted to the extent
that such amounts exceed dividends, interest and net realized capital gains.
The Investment Contract provides that the Fund may purchase foreign
currency in the Chilean foreign exchange market for the purpose of remitting
dividends, interest or net realized capital gains and repatriating capital to
the extent permitted, as described above. The acquisition of foreign currency
must be made in the formal exchange market (formed by banks and other authorized
institutions); however, there is no undertaking by the Central Bank of Chile
that there will be willing vendors of foreign exchange.
With respect to its assets invested in Chile, the Fund is subject to
a number of diversification and other investment restrictions, noncompliance
with which could result in the loss of the favorable tax regime applicable to
the Fund's Chilean investments. There can be no assurance that additional
Chilean restrictions applicable to the Fund could not be imposed in the future,
nor as to the duration or impact of such restrictions if imposed. Under current
Chilean law and judicial precedents, the Investment Contract may not be
unilaterally amended by the Republic of Chile or abrogated by future legislative
changes.
43
<PAGE>
UNITED MEXICAN STATES
GENERAL
Geography and Demography
Mexico, a nation formed by 31 states and a Federal District (Mexico
City), is the fifth largest nation in the Americas and the thirteenth largest in
the world in size, occupying a territory of 756,061 square miles (1,958,201
square kilometers). Mexico is the third most populous nation in the Americas,
with a population in July 1999 estimated at approximately 100.3 million.
Government
The present form of government in Mexico was established by the
Mexican Constitution, which was proclaimed on February 5, 1917. The Constitution
establishes Mexico as a Federal Republic and provides for the separation of the
executive, judicial and legislative branches of government. The President and
the members of Congress are elected by popular vote of Mexican citizens over 18
years of age.
The President is the chief of the executive branch of the
Government. The current President of Mexico is Ernesto Zedillo Ponce de Leon,
whose term expires on December 1, 2000. The Constitution provides that the
President may serve only one six-year term and may never be re-elected.
The Partido Revolucionario Institucional (the Institutional Revolutionary Party,
or the "PRI") is the dominant political party in Mexico. Since 1929, the PRI has
won all presidential elections. The party also held a majority in Congress from
1929 to July 1997 and until 1989 had won all of the state governorships.
However, the Partido de la Revolucion Democratica (Democratic Revolutionary
Party) now governs two states (including the Federal District) and jointly with
the Partido del Trabajo (Labor Party) and the Partido Verde Ecologista Mexicano
(Green Ecologist Mexican Party) holds another one. Moreover, the Democratic
Revolutionary Party also holds one other state jointly with the Labor Party. The
Partido Accion Nacional (National Action Party), the oldest opposition party in
the country, governs six states today, and the Alianza Opositora (Opposition
Alliance), an alliance formed by the Democratic Revolution Party, the National
Action Party and the Labor Party, governs another state.
External Affairs
Mexico has diplomatic ties with approximately 175 countries. It is a
charter member of the United Nations and a founding member of the Organization
of American States ("OAS"), the International Monetary Fund ("IMF"), the World
Bank, the International Finance Corporation ("IFC") and the Inter-American
Development Bank ("IDB"). Mexico is also a non-borrowing regional member of the
Caribbean Development Bank. In 1986, Mexico became a party to the General
Agreement on Trade and Tariffs. In 1991, Mexico became a founding member of the
European Bank for Reconstruction and Development and was admitted into the
Pacific Basin Economic Co-operation Conference. Mexico is a signatory, along
with Canada and the United States, to the North American Free Trade Agreement
("NAFTA"), which went
44
<PAGE>
into effect on January 1, 1994. On April 14, 1994, Mexico was admitted as a
member of the Organization for Economic Cooperation and Development, making it
the first new member to be admitted into that organization since 1973. Mexico
became a member of the World Trade Organization ("WTO") on January 1, 1995, the
date on which the World Trade Organization superseded the General Agreement on
Trade and Tariffs.
Financial System
Mexico's financial system comprises commercial banks, national
development banks, securities brokerage houses, development trust funds and
other non-bank institutions, such as insurance companies, bonding companies,
foreign exchange houses, factoring companies, bonded warehouses and financial
leasing companies, and limited-scope financial institutions. In 1990, Mexico
adopted the universal banking model which permits three or more financial
services companies to operate under a single financial services holding company.
The Ministry of Finance and Public Credit is responsible for the
coordination and supervision of Mexico's financial system and for the
formulation of Mexico's fiscal policy. Banco de Mexico is the Government's
primary instrument for the execution of monetary policy and the regulation of
currency and credit.
ECONOMY
General
While successful in reducing inflation from 159.2% in 1987 to 7.1%
in 1994 and achieving real GDP growth averaging 3.9% over the period 1990-1994,
the Mexican economy had certain weaknesses by 1994 that made it unable to
withstand the severe internal and external political and economic shocks that
occurred in that year, resulting in the destabilization of the Mexican economy
at the end of 1994, a crisis of confidence on the part of foreign portfolio
investors and an economic and financial crisis.
The Government's response to events of 1994-95 included a series of
social accords, an international assistance plan and various adjustments to the
Government's economic policy. Other accords between the Government, labor,
agriculture and business were signed in subsequent years.
Although inflation increased in 1995, rates have since then returned
to lower levels: 12.32% in 1999, in comparison to 59.5% in 1995. Moreover,
Mexico's GDP has increased over the past four years, after a decline in 1995.
Real GDP grew 3.7% in 1999, down from 4.8% growth in 1998. Mexico's trade
deficit declined in 1999 to US$5.584 billion, from US$7.914 billion in 1998. The
peso-dollar (US) exchange rate has begun to stabilize over the past two years,
as the rate fell from 9.865 pesos per US$ at the end of 1998 to 9.480 pesos per
US$ at the close of 1999.
However, total public sector debt increased in 1999, from 845.6
billion pesos in 1998 to 1,175.5 billion pesos in 1999. Much of the change may
be attributed to the increase in domestic public sector debt, which almost
quadrupled in 1999.
45
<PAGE>
Government Participation in the Economy
Since 1983, the Government has sought as a matter of priority to
sell to the private sector its interest in all non-strategic commercial
enterprises. In 1982, the Government owned or controlled 1,155 public sector
enterprises. By December 31, 1998, the number of Government-owned businesses had
been reduced to 213. In part as a result of these privatizations, the share of
Government expenditures in GDP fell from 41.8% in 1982 to 21.1% in 1998 The
importance of subsidies also diminished significantly. Enterprises privatized
include the two national airlines, copper, iron and coal mines, hotels,
Telefonos de Mexico S.A. de C.V. (the national domestic and long-distance
telephone company, "Telmex"), the state-owned steel industry and all eighteen
state-owned commercial banks, including the country's two largest commercial
banks, Banamex and Bancomer, S.A. ("Bancomer").
The petroleum industry, basic petrochemicals and the electrical power sector are
the three most important strategic sectors that are required by the Mexican
Constitution to remain in Government hands. The railroad sector is
constitutionally considered a priority activity for the development of Mexico.
Gross Domestic Product
Real GDP grew 3.7% in 1999, down from 4.8% in 1998. The following
table shows Mexico's Real GDP for the period 1994-1999:
Real GDP
(Billions of Pesos)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1993 Prices 1,311.66 1,230.77 1,294.49 1,381.35 1,447.95 1,501.01
Annual 4.4 -6.2 5.2 6.7 4.8 3.7
Growth
Rates (%)
</TABLE>
----------
Sources: International Monetary Fund, International Financial Statistics Vol.
LIII, No. 6, June 2000; Banco de Mexico.
46
<PAGE>
The following table sets forth the composition of Mexico's GDP by
economic sector for the periods indicated.
Gross Domestic Product by Sector
(1993 Prices)
<TABLE>
<CAPTION>
Share of
Annual growth rates (%) GDP (%) (1)
-------------------------------------------------- -------------
1997 1998 1999 1998
1994 1995 1996 (p) (p) (p) 1993 (p)
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Agriculture, livestock, forestry
and fishing .................. 0.9 0.9 3.6 0.2 0.5 3.5 5.8 5.3
Mining ......................... 2.5 -2.7 8.1 4.5 3.4 -3.2 1.3 1.3
Manufacturing industry ......... 4.1 -4.9 10.8 10.0 7.4 4.1 17.5 19.7
Construction ................... 8.4 -23.5 9.8 9.3 4.6 4.5 4.4 4.0
Electricity, gas and water ..... 4.8 2.2 4.6 5.2 4.7 4.4 1.5 1.6
Commerce, restaurants and
hotels ....................... 6.8 -15.5 4.8 10.6 4.2 4.1 20.0 18.9
Transportation and
communications ............... 8.7 -4.9 8.0 9.99 10.1 8.8 8.6 10.0
Financial services, insurance
and real estate leasing ...... 5.4 -0.3 0.6 3.7 3.8 2.7 14.6 14.4
Social and community services .. 1.3 -2.3 1.0 3.3 2.6 1.5 21.0 19.3
Imputed banking services ....... 11.1 -10.7 -5.1 10.6 6.0 n/a -2.7 -2.6
</TABLE>
----------
(1) The rounding does not add up because the table excludes net indirect taxes.
(p) Preliminary
Sources: National Accounting System (Sistema de Cuentas Nacionales de Mexico,
SCN); Instituto Nacional de Estradica Geografia E Informatica, Mexico
("INEGI").
Prices and Wages
From 1987 to 1997, the Government reached a series of accords with
labor and business representatives, each of which stressed the moderation of
inflation, fiscal discipline and (in the case of accords entered into before
1995) a gradual devaluation of the peso. There was a gradual reduction in the
number of goods and services whose prices were covered by the accords. These
policies contributed to lower consumer inflation rates from 51.7% in 1988 to
7.1% in 1994. The effect of the devaluation of the peso and the Government's
response to that event and related developments caused a significant increase in
inflation in 1995, as well as a decline in real wages for much of the population
during 1995. The fiscal and monetary policies implemented by the Government in
response to the 1995 crisis succeeded in lowering inflation
47
<PAGE>
(as measured by the increase in the national consumer price index) to 27.7% in
1996, 15.7% in 1997 and 12.327% in 1997, from 52.0% in 1995.
The following table shows in percentage terms the changes in price
indices for the periods indicated.
Consumer Price Index
(1994 = 100)
CPI (1) Percentage Changes
------ (Annual)
-----------------------------------
End of period Moving average (2)
------------- ------------------
1994 103.3 7.1 7.0
1995 156.9 52.0 35.0
1996 200.4 27.7 34.4
1997 231.9 15.7 20.6
1998 275.04 18.61 15.93
1999 308.92 12.32 16.59
January 2000 313.07 11.02 n/a
February 2000 315.84 10.52 n/a
March 2000 317.60 10.11 n/a
April 2000 319.40 9.73 n/a
May 2000 320.60 9.48 n/a
-----------------
(1) The annual figures refer to the index for December.
(2) Of the previous 12 months.
Sources: Banco de Mexico; INEGI.
Interest Rates
Interest rates generally increased and became more volatile in 1994
in response to a number of political and economic factors, including investor
reactions to the increase in U.S. interest rates, increased volatility of the
peso/dollar foreign exchange rate, uncertainty concerning the Mexican
Presidential elections in August 1994 and certain related developments. Interest
rates increased sharply during the first four months of 1995 in response to the
economic and financial events of that period and the Government's 1995 Economic
Plan. From May through September 1995, interest rates declined gradually, but
increased in October and November 1995, partially in response to increased
volatility of the peso/dollar exchange rate. In 1996, interest rates declined
gradually during most of the year, except for increases caused by seasonal
liquidity pressures and external factors. The favorable performance of interest
rates reflected the Government's success in reducing inflation and decreasing
the volatility of the peso/dollar exchange rate, as well as the positive results
of the banking system support program. During 1997, interest rates declined
steadily. This trend may be attributable to lower inflation expectations,
greater stability in the foreign exchange market, the Government's fiscal and
monetary discipline and the favorable perception of foreign and domestic
investors. Nonetheless, at the end of October 1997, external events translated
into an increase in volatility in the international financial markets, leading
to fluctuations in domestic interest rates.
48
<PAGE>
During 1998, interest rates experienced upward pressure due to
volatility in the foreign exchange markets and international financial markets
resulting from the financial crises in Asia and Russia, the financial turmoil in
countries such as Brazil and Venezuela and the restrictive monetary policies
adopted by Banco de Mexico. At the end of August 1998, interest rates increased
sharply in response to increased volatility of the peso/dollar exchange rate,
which led to temporary fluctuations in domestic interest rates. During 1998,
interest rates on 28-day Cetes averaged 24.8% and interest rates on 91-day Cetes
averaged 26.2%, as compared with average rates on 28-day and 91-day Cetes of
19.8% and 21.3%, respectively, during 1997. During 1999, interest rates on
28-day Cetes averaged 21.4% and interest rates on 91-day Cetes averaged 22.44%.
On June 8, 2000, the 28-day Cetes rate was 14.70%, and on June 6, 2000 the
91-day Cetes rate was 15.77%.
EXTERNAL SECTOR
Foreign Trade
To foster non-oil exports, the Government has promoted a
comprehensive set of trade, fiscal, financial and promotional measures designed
to create a macroeconomic environment in which exports will be more competitive.
The Government's decision to become a party to GATT in 1986 has resulted, among
other things, in an important reduction in the protection traditionally given to
domestic producers. By reducing the cost of imported goods, the opening of
domestic markets to foreign products has also complemented fiscal and monetary
polices aimed at reducing domestic inflation.
The following table provides information about the value of Mexican
exports (excluding tourism) for the periods indicated:
Exports (FOB)
(Millions of US$)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999(1)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Merchandise exports (f.o.b.) $ 7,445 $ 8,423 $ 11,654 $ 11,323 $ 7,134 $ 9,928
Oil and oil products ...... 6,624 7,420 10,705 10,334 6,368 n/a
Crude oil ............... 821 1,003 949 989 766 n/a
Non-oil products .......... 53,438 71,119 84,346 99,108 110,325 126,463
Agricultural ............ 2,678 4,016 3,592 3,828 3,797 3,926
Mining .................. 357 545 449 478 466 453
Manufactured goods ...... 50,402 66,558 80,305 94,802 106,062 122,085
In-bond industry ...... 26,269 31,103 36,920 45,166 53,083 63,854
Other ................. 24,132 35,455 43,385 49,637 52,979 58,231
-------- -------- -------- -------- -------- --------
Total Merchandise exports ... $ 60,882 $ 79,542 $ 96,000 $110,432 $117,460 $136,391
-------- -------- -------- -------- -------- --------
</TABLE>
----------
(1) Preliminary.
Source: Banco de Mexico.
49
<PAGE>
Trading Partners
The United States is Mexico's most important trading partner. Mexico
is also a member of NAFTA with the United States and Canada. The objectives of
NAFTA, which formally establishes a free trade area among Canada, Mexico and the
United States, are generally to dismantle barriers to trade, including a
progressive elimination of tariffs on goods, to promote conditions of fair
competition and to expand investment opportunities. NAFTA became effective on
January 1, 1994 after its approval by the U.S. Congress and the legislatures of
Mexico and Canada.
In November 1999, Mexico and the European Union ("EU") concluded
negotiations on a free trade agreement begun in July 1998. The agreement, which
remains subject to the ratification of the Mexican Senate and EU member states,
covers industrial tariffs, agricultural goods, services, public procurement,
rules of competition and investment, intellectual property rules of origin and
dispute resolution.
In-bond Industry
Mexico's maquiladora, or in-bond industry, imports components and
raw materials without duty and exports finished products with the manufacturer
paying tariffs only on the value added in Mexico. Initially established along
the border with the United States, in-bond plants are now being established in
other regions of the country where they have access to a larger and more diverse
labor pool and are able to take greater advantage of inputs available from
Mexican suppliers. Although in 1982 only 71 in-bond plants were in non-border
regions, by 1998 that number had increased to 793. Much of the value added by
the in-bond industry tends to be in the production of auto parts, transportation
equipment and electronic products.
At December 31, 1998, the number of in-bond plants totaled 3,130,
which together employed approximately one million workers. Net revenues from
maquiladora operations in 1998 totaled U.S. $10,307 million, an increase of
16.7% as compared with 1997.
Balance of Payments
Since 1988, Mexico has registered deficits in its current account,
corresponding with increases in imports by the private sector and the
Government's trade liberalization policies.
50
<PAGE>
The following table sets forth Mexico's balance of payments for the
periods indicated:
Balance of Payments
(Millions of US$)
1995 1996 1997 1998
---- ---- ---- ----
Current Account ............ -1,576 -2,328 -7,454 -15,960
Exports .................. 79,542 96,000 110,431 117,459
Imports .................. -72,453 -89,469 -109,808 -125,374
Trade Balance ............ 7,089 6,531 623 -7,915
Service Balance .......... 7,153 6,614 -593 -8,918
Financial Account .......... -10,487 6,132 19,253 17,308
Direct Investment
Abroad ................... -- -- -- --
Direct Investment in
Reporting. Economy ....... 9,526 9,186 12,831 10,238
Portfolio Investment
Assets ................... -662 544 -708 -768
Portfolio Investment
Liabilities .............. -9,715 13,417 5,038 1,294
Other Investment
Assets ................... -6,694 -6,885 7,425 1,531
Other Investment
Liabilities .............. -2,942 -10,130 -5,333 5,013
Net Errors and
Omissions ................ -4,248 58 2,198 1,845
Overall Balance ............ -16,312 3,863 13,997 3,193
Reserves ................... 16,312 -3,863 -13,997 -3,193
Reserve Assets ........... -9,648 -1,806 -10,513 -2,118
Exceptional
Financing ................ 14,010 -- -- --
Use of Fund Credit
and Loans ................ 11,950 -2,057 -3,485 -1,075
----------
Source: International Monetary Fund, International Financial Statistics Vol.
LIII, No. 6, June 2000.
(1) Banco de Mexico.
(p) Preliminary.
Increases in imports by the private sector and the Government's
trade liberalization polices have resulted in current account deficits since
1988, but the deficits have fluctuated yearly. The current account deficit
reached $15.96 billion in 1998, as compared with a deficit of $29.6 billion in
1993. Including revenue from in-bond industries, the trade deficit reached $7.9
billion in 1999.
Foreign Exchange and Exchange Controls
From December 20, 1982 through November 10, 1991, Mexico maintained
a dual foreign exchange rate system, with a "controlled" rate and a "free
market" rate. The controlled exchange rate applied to certain imports and
exports of goods, interest and capital payments on
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<PAGE>
registered foreign debt and funds used in connection with the in-bond industry
and payments of royalties and technical assistance under registered agreements.
The free market rate was applicable to all other transactions. Mexico repealed
its exchange control rules effective November 11, 1991 and now maintains only a
free, or market, exchange rate. The new peso replaced the peso effective January
1, 1993 at a rate of one new peso per one thousand pesos.
The following table sets forth, for the dates and periods indicated,
the end-of-period and average free market rates for the purchase of dollars,
expressed in new pesos per dollar:
Exchange Rates
(Pesos per US$)
Representative Market Rate
End of
Year Period Average(1)
---- ------ ----------
1994................. 5.325 3.375
1995................. 7.643 6.419
1996................. 7.851 7.599
1997................. 8.083 7.918
1998................. 9.865 9.136
1999................. 9.480(2) 9.4271(2)
2000 (May)................. 9.511(2) 9.5059(2)
----------
(1) Annual average of the daily rates published by Banco de Mexico.
(2) Bloomberg Financial Services.
Sources: Banco de Mexico; Bloomberg Financial Services.
Public Debt
Public debt may only be incurred by, or with the prior approval of,
the Ministry of Finance and Public Credit. In addition, public credit programs
must be submitted to Congress for approval annually.
52
<PAGE>
The following table summarizes the average balances of total net
debt of the public sector for the years indicated.
Total Net Public Debt
Broad Economic Debt
Average Stocks
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998(p) 1999(p)
---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Million
pesos Total 310,715 573,711 700,432 678,752 845,584 1,175,528
Domestic 54,201 40,600 53,100 64,163 126,970 506,388
External 256,514 533,111 648,332 614,589 718,615 658,160
Percent of
GDP Total 21.8 31.2 27.7 21.4 22.3 n/a
Domestic 3.8 2.2 2.1 2 3.3 n/a
External 18 29 25.6 19.3 19 n/a
</TABLE>
----------
(p) Preliminary.
Note: Figures may not add up due to rounding off and exchange rate conversions.
Sources: Banco de Mexico; Secretariat of Finance and Public Credit ("SHCP").
Debt reduction has been one of Mexico's goals in recent years. The
1989-92 Financing Package for Mexico was intended to reduce the principal amount
of, and the debt service burden associated with, Mexico's commercial bank debt,
and to secure sufficient future financing to allow Mexico to resume sustained
economic growth. The Financing Package offered commercial banks options for debt
reduction, interest reduction and new money.
Of the approximately US$48 billion of external debt held by Mexico's
commercial bank creditors in 1989, approximately US$43 billion participated in
the principal and interest reduction options. Thus, Mexico was able to reduce
the principal amount of its external debt by approximately US$7 billion. The
balance of Mexico's commercial bank creditors agreed to participate in the new
money option and to lend Mexico approximately US$1.6 billion in new credits over
four years. Moreover, in May 1996, the Government issued US$1.75 billion in
bonds in exchange for the cancellation of US$2.365 billion in outstanding bonds.
Foreign Investment
On December 28, 1993, the Foreign Investment Law became effective.
The Foreign Investment Law establishes a set of rules to provide legal certainty
to foreign investors and promote the country's competitiveness. The law
liberalizes certain restrictions on foreign investment in Mexico, permitting, if
certain conditions are satisfied, the ownership by foreign investors of 100% of
the capital stock of a Mexican company. The law also sets forth which activities
of the economy continue to be reserved to the Government or to Mexican investors
and lists the different activities in which foreign investment may not exceed
certain specified percentages of the total investment.
If certain requirements are met, the Foreign Investment Law allows
foreign investors to purchase equity securities traded on the Mexican Stock
Exchange that would
53
<PAGE>
otherwise be restricted to Mexican investors. Thus, with the authorization of
the Ministry of Commerce and Industrial Development, investment trusts may be
established by Mexican banks acting as trustees. These trusts issue ordinary
participation certificates that may be acquired by foreign investors; the
certificates grant only economic rights to their holders and do not confer
voting rights in the companies whose stock is held by the trusts (such as voting
rights exercisable only by the trustee).
During 1998, direct foreign investment in Mexico totaled US$4.5
billion (including temporary net imports of machinery and equipment of the
in-bond industry). Total accumulated direct foreign investment in Mexico for the
period 1994-1998, including new foreign investment projects authorized by the
National Foreign Investment Commission and the National Foreign Investment
Register, amounted to approximately US$41.2 billion. Of the total direct foreign
investment accumulated for the 1994-1998 period, excluding that in securities,
63.0% has been channeled to industry, 36.0% to services, 0.9% to mining and 0.1%
to agriculture and fishing.
SECURITIES MARKETS
The Bolsa Mexicana de Valores, S.A. de C.V. or Mexican Stock
Exchange (the "MSE") is the only stock exchange in Mexico. It was founded in
1895; however, it ceased operations in the early 1900's. It was reestablished in
1907 and has operated continuously since that time. Both equity and debt
instruments are traded through the exchange.
The MSE operates a system of automatic suspension of dealing in shares of
a particular issue as a means of controlling excessive price volatility. A price
band is established for shares with the upper limit being 15% above, and the
lower 15% below, a reference price, which is initially the last price of the
preceding day. If during the day a bid or offer is made or a transaction is
closed at a price outside this band, dealing in shares of the issue is
automatically suspended for a period of time not exceeding the current auction
session. The MSE shall determine the end of the suspension period, and the
original transaction (if any) is cancelled, and a deal is closed at either the
lowest offer or highest bid. Bids of offers that would result in a suspension
period that continues beyond the close of trading are not permitted.
Although there are no formal market makers, companies with the most
actively traded shares have informal understandings that certain brokerage
houses will make a market in their shares. Consequently, the MSE may be less
liquid than securities markets which have formal market makers.
54
<PAGE>
The following table shows the total market capitalization of the MSE
for the close of the periods indicated:
Market Capitalization
(Billions of US$)
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999 Feb. 2000
---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Market
Capitalization 129.85 90.94 106.78 156.18 91.98 153.49 155.88
</TABLE>
----------
Source: Bloomberg Financial Services.
The following table shows the trading volume in the securities
traded on the Mexican Stock Exchange during the periods indicated.
Trading Volume on the Mexican Stock Exchange
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total Shares .......... 13,293.9 5,054.248 10,353.285 17,594.355 13,709.014 21,455.780
Volume Variable Income
Traded: Securities .......... 298.6 227.322 331.720 438.315 333.081 398.615
(Billions of Fixed Income:
Pesos) Short Term .......... 11,729.04 11,926,145 4,593.752 9,339.314 8,665.691 n/a
Fixed Income:
Long Term .......... 1,266.2 2,900,781 5,427.814 7,816.726 4,710.242 n/a
</TABLE>
------------
Sources: Mexican Stock Exchange; Banco de Mexico.
As of December 31, 1999, the aggregate market capitalization of all
issuers listed on the MSE was approximately US$153.49 billion. Volume in shares
traded increased by 56.5% from 1998 to 1999.
Companies which publicly offer their shares must register with the
National Securities and Intermediaries Registrar and be listed on the MSE.
Currently, no over-the-counter market exists. However, the National Banking and
Securities Commission and the MSE are contemplating allowing smaller companies
to list their shares on the MSE through a new set of listing regulations for
these smaller companies.
Stock Index
Since 1978, an index for equity securities traded on the MSE (the
"Prices and Quotations Index") has been published by the MSE. The index
currently reflects the prices of 35 stocks selected by the MSE on the basis of
trading activity. The table below shows the total number of companies listed on
the MSE and the high, low and closing values for the periods indicated.
55
<PAGE>
The Mexican Stock Exchange Index
Price and Quotations Index
<TABLE>
<CAPTION>
Year Close High and Low Close for Year Number of Listed Companies
---- ----- --------------------------- --------------------------
<S> <C> <C> <C>
1995 ............... 2778.47 2834.39 / 1447.52 185
1996 ............... 3361.03 3433.75 / 2736.36 193
1997 ............... 5229.35 5369.48 / 3359.46 194
1998 ............... 3959.66 5204.00 / 2856.10 191
1999 ............... 7129.88 7129.88 / 3300.42 186
</TABLE>
----------
Sources: Mexican Stock Exchange; Bloomberg Financial Services.
Securities Regulation
The Mexican securities industry is regulated by the Securities
Market Law of 1989 (the "Mexican Securities Law"). In addition to providing a
regulatory structure for the securities industry, it sets standards for brokers
and empowers the National Banking and Securities Commission to regulate the
public offering and trading of securities and the use of non-public information
in the trading of securities. Pursuant to this authority, the National Banking
and Securities Commission regulates, inspects and supervises the securities
market and the market participants. The SHCP coordinates, supervises and designs
policy for Mexico's financial system. Banco de Mexico formulates and implements
currency and monetary policy, and Nacional Financiera, S.N.C., a national
development bank ("Nafin"), also plays an active role in the promotion of the
securities markets. Both Banco de Mexico and Nacional Financiera act as
institutional investors, and Banco de Mexico also acts as a market intermediary.
In order to offer securities to the public in Mexico, an issuer must
meet certain requirements of the Securities Market Law and regulations of the
National Banking and Securities Commission as to assets, operating history,
management and other matters and must be approved. Only securities approved by
the National Banking and Securities Commission may be listed on the MSE. Issuers
of listed securities are required to publish and furnish to the National Banking
and Securities Commission annual audited financial statements, unaudited
quarterly financial statements and other financial and operating information.
Although there is increasing participation by the public in trading
of securities through mutual funds, a significant part of the activity on the
MSE reflects transactions by institutional investors. Accordingly, although the
Fund's purchases and sales may occur at prices established by supply and demand
on the MSE, when the Fund is selling or buying securities traded on the MSE it
may deal through brokers with one or more of such institutions acting for their
own accounts or for accounts they manage, including trusts, pension funds and
individual accounts.
The Securities Market Law was amended in 1993 to include more
flexible rules for the repurchase by Mexican companies of their own shares and
new rules relating to privileged information. In addition, under these
amendments, brokerage houses are authorized to act as trustees in transactions
related to their trading activities, and the listing of foreign securities on
the Mexican Stock Exchanges is permitted upon the authorization of the Ministry
of Finance and Public Credit, the National Banking and Securities Commission and
Banco de Mexico. The amendments also include the creation of an international
quotation system. The
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<PAGE>
foreign securities firms were permitted to establish representative offices in
Mexico with the prior approval of the Ministry of Finance and Public Credit. As
of December 31, 1998, the Ministry of Finance and Public Credit had authorized
seven foreign securities firms to establish representative offices.
Investment by the Fund in the Securities Markets
The Fund may acquire equity securities listed on the MSE that are
available for investment directly by foreigners. While foreign investment may
represent 100% of the capital stock of a company in certain cases, more
restrictive provisions may be contained in an issuer's corporate documents or
may be provided by law in the case of companies engaged in certain industries.
Securities available for foreign investment are generally issued as a separate
class of either Series B voting stock, shares of which generally count toward
any applicable percentage limit on foreign investment, or Series N stock, which
are considered "neutral" shares under which foreign investors obtain the
monetary and economic rights with respect to the shares but not the voting
rights and that do not count toward any such limit. While foreigners such as the
Fund may not actually acquire listed securities reserved for Mexican nationals,
foreigners including the Fund may instruct a trust to acquire such shares for
their accounts. This type of trust is arranged with a Mexican bank, typically
Nafin. Under this system, the trust will acquire the securities that the Fund
has decided to purchase and Nafin then issues Ordinary Certificates of
Participation ("CEPOS") that represent the amount and kind of shares acquired by
the trust on behalf of the Fund. As owner of the CEPOS, the Fund would have all
of the economic rights incident to ownership of the securities acquired by the
trust on behalf of the Fund, but the Fund would have no voting rights with
respect to such shares. The introduction of this trust arrangement has resulted
in the effective elimination of any differential in price between those shares
reserved for Mexican nationals and shares that may be directly held by
non-Mexicans. The Fund intends to participate in this system through a trust
arrangement with Nafin or other suitable Mexican banks.
57
