<PAGE>
THE BRAZILIAN INVESTMENT FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS R. Charles Tschampion
Frederick B. Whittemore DIRECTOR
VICE-CHAIRMAN OF THE James W. Grisham
BOARD OF DIRECTORS VICE PRESIDENT
Warren J. Olsen Michael F. Klein
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones James R. Rooney
DIRECTOR TREASURER
John A. Levin Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
- ---------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- --------------------------------------------------------
U.S. ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- --------------------------------------------------------
BRAZILIAN ADMINISTRATOR AND CUSTODIAN
Unibanco-Uniao de Bancos Brasileiros S.A.
Avenida Eusebio Matoso, 891,
Sao Paulo, S.P., Brazil
- --------------------------------------------------------
U.S. CUSTODIAN
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
- --------------------------------------------------------
SHAREHOLDER SERVICING AGENT
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
(800) 548-7786
- --------------------------------------------------------
LEGAL COUNSEL
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
- --------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
- --------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
------------------------
THE
BRAZILIAN INVESTMENT
FUND, INC.
---------------------
ANNUAL REPORT
DECEMBER 31, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the year ended December 31, 1996, the total return for The Brazilian
Investment Fund, Inc. (the "Fund"), based on net asset value per share, was
48.54% compared to 34.36% for the IFC Total Return Index for Brazil (the
"Index"). For the period from commencement of operations on June 4, 1991 through
December 31, 1996, the Fund's total return, based on net asset value per share
was 249.98% compared to 276.79% for the Index.
The Fund's positive results were due to an overweighting in the
telecommunications, retail, and beverage sectors, and an underweighting in the
electric generation and mining sectors. In the fourth quarter the Fund
underperformed the Index, however, as its move toward small capitalization
stocks hurt performance as the market continued to be driven by positive events
in the large capitalization, government-owned companies.
1996 IN REVIEW
Interestingly, during the course of the year there was very little progress
made on critical government reform items -- notably administrative and social
security reform, and fiscal account improvement -- which were originally thought
to be vital for market performance. Lack of tangible progress on these key
items, which depend on congress for their improvement, was more than offset by
substantial improvement in a number of key areas. First, inflation and interest
rates continued their downward movement, finishing the year at annualized rates
of roughly 9% and 23%, respectively. Second, two key privatizations -- first
Light, and then Cerj -- took place in the all-important electric utility sector
in the state of Rio de Janeiro. Third, positive tariff reform in both the
telecommunications and the electric utility sector contributed to a remarkable
improvement in corporate earnings growth in those two sectors, which together
comprise over a third of the market's capitalization. Fourth, positive
liberalization of the state oil and gas monopoly provider, Petrobras, was
introduced which considerably improved the prospects for that company. Fifth,
tangible progress was made in preparing state mining giant CVRD for eventual
privatization in the first half of 1997. Sixth, economic activity was robust
enough to allow for selected private sector companies to grow their earnings at
a brisk pace.
Overall, in a political context in which the government's ability to act
independently of congress on reform items is limited, the Cardoso administration
nevertheless demonstrated a genuine commitment to improving shareholder value
via positive reforms in those areas over which it has independent authority.
Coupled with this commitment, the state level governments have in many cases
been forced or motivated to introduce their own reform and privatization
efforts, which has further enhanced shareholder value.
ISSUES AHEAD
Needless to say, there are many issues which confront the investor in Brazil
when looking out to 1997. In no particular order, the most pivotal issues which
will affect the market during 1997 are as follows: the Cardoso re-election
effort; the CVRD privatization; fiscal reform efforts; trade balance and foreign
exchange concerns; telecommunications and electric utility regulatory reform;
and economic activity (interest rates, inflation, and private sector corporate
profits). Each of these items are briefly reviewed below:
RE-ELECTION -- the Cardoso administration effort to amend the constitution to
allow him to run for re-election is probably the most important, and most
proximate, item facing the country and market in 1997. Simply put, if he is able
to run again for President in 1998, the chances are high that he would win.
Thus, the first step in the process, to change the constitution to allow him to
run again, is of huge significance. Owing to Cardoso's huge electoral
popularity, the splintered nature of the opposition parties, and the President's
proven ability to "horse trade" behind closed doors, we are cautiously
optimistic that he will secure the necessary votes for the amendment. If
accomplished, it would signify a higher likelihood of status quo for four
additional years and, with it, a lower country risk premium and a less
intransigent congress.
CVRD PRIVATIZATION -- state mining conglomerate CVRD is scheduled to be
privatized sometime in the second quarter of 1997. The process should consist of
two stages; the first stage will be an auction of a near-controlling stake to a
strategic partner; the second stage will consist of selling a large block of
shares to institutional investors in a global stock offering. The successful
completion of the first stage will be of significant psychological importance to
the market, because it will represent the first major privatization of a
federal-level company of national significance, and thereby considerably
strengthen the Cardoso administration's image as a serious, free-market reform
oriented government. We are confident that CVRD will be privatized in the first
half of 1997.
FISCAL REFORM -- the fiscal accounts are perhaps one of the most vulnerable
elements of the outlook for 1997. The budget deficit did not show the
improvement that the market was looking for in 1996 -- demonstrating a marginal
improvement owing to the decline in interest
2
<PAGE>
rates -- and we do not see signs for material improvement in 1997. The chief
obstacle is congress and, behind them, state governments. Government debt as a
percentage of GDP is still not at an alarming level, roughly 35%, but the growth
rate is disturbing. Our general outlook is that fiscal reform will take a back
seat to the re-election issue; upon successful resolution of same, the
government will focus its energies on the vital administrative reform. We are
less optimistic on this front than the above two items, as we think that
congress will slow progress on fiscal reform to a snail's pace.
TRADE BALANCE/FOREIGN EXCHANGE -- the trade balance is an item that looms ahead
with the potential to tip the apple cart. There is no doubt that the Brazilian
currency, the real, is overvalued. The critical question is how long it will
take for the "Brazilian cost" to be reduced to a level at which Brazilian
exports are competitive on world markets, and whether the currency market will
take matters into its own hands before. At present rates, the trade deficit will
be between 1-2% of GDP next year; hardly distressing levels, but with interest
payments the current account deficit will be a couple of percentage points
higher. Although the treasury has sufficient international reserves to defend
the currency for the foreseeable future, we are monitoring this item very
closely. For the time being, we expect the rate of devaluation to trend with
relative inflation differentials between Brazil and the U.S.
TELECOMMUNICATIONS/ELECTRIC UTILITY REGULATORY REFORM -- this area is too
complex to fully describe in these pages, but we are closely analyzing the
pending regulatory, tariff, and privatization announcements over the next year
to assess which shape these two respective sectors will take in the years to
come. We are extremely bullish on the long-term outlook for both sectors, and on
the relative value presently obtained in the stock market therein, but need to
monitor events closely so as to identify how much shareholder value will be
enhanced by government action. The government has thus far showed itself to be
very astute at maximizing shareholder value, and we have no reason to believe
they will cease being so going forward.
ECONOMIC ACTIVITY -- the year ahead should not be particularly exciting from an
economic activity standpoint, although inflation should remain subdued. The
fiscal deficit will keep a lid on economic potential via
higher-than-otherwise-necessary interest rates, and the trade balance pressures
will marginally add to those interest rate pressures. Inflation, on the other
hand, will likely continue to be subdued and settle in at a high single digit
level. Private sector corporate profits, as a result of the aforementioned
factors, will be spotty. Thus, stock picking among the private sector companies
will be of paramount importance in 1997.
CONCLUSION
In short, we are bullish on the market for 1997. In terms of portfolio
positioning, we have an overweight stance on the electric utility and
telecommunications sectors among the government-owned companies, and an
overweight position in the retail, and cable TV sectors among the private sector
companies.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Andy Skov
PORTFOLIO MANAGER
[SIGNATURE]
Robert L. Meyer
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
MORGAN STANLEY GROUP INC., THE DIRECT PARENT COMPANY OF THE FUND'S INVESTMENT
ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., RECENTLY ANNOUNCED ITS INTENTION
TO MERGE WITH DEAN WITTER, DISCOVER & CO. TO FORM MORGAN STANLEY, DEAN WITTER,
DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE TRANSACTION WILL CLOSE IN
MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT INC. WILL BE A SUBSIDIARY
OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
3
<PAGE>
The Brazilian Investment Fund, Inc.
Investment Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
--------------------------------------------------------
NET ASSET VALUE (2) INDEX (1)(3)
--------------------------- ---------------------------
AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
ONE YEAR 48.54% 48.54% 34.36% 34.36%
FIVE YEAR 176.40 22.55 264.10 29.49
SINCE INCEPTION* 249.98 25.17 276.79 26.77
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
A BAR CHART REFLECTING THE DATA BELOW IS REFLECTED HERE.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
1991* 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share $ 63.31 $ 55.28 $ 83.58 $ 129.97 $ 64.14 $ 52.72
Income Dividends - - - $ 1.80 - $ 0.02
Capital Gains Distributions - - $ 7.06 $ 6.65 $ 37.73 $ 30.75
Fund Total Return (2) 26.62% -12.68% 72.52% 68.32% -26.61% 48.54%
Index Total Return (1)(3) 3.48% 0.32% 99.45% 69.83% -20.24% 34.36%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. The Fund's shares are issued in a private placement and not
traded; therefore, market value total investment return is not calculated.
(3) The IFC Total Return Index for Brazil is an unmanaged index of common
stocks.
* The Fund commenced operations on June 4, 1991.
4
<PAGE>
The Brazilian Investment Fund, Inc.
Portfolio Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Equity Securities 97.0%
Short-Term Investments 3.0%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Banking 4.1%
Broadcasting & Publishing 4.2%
Electrical & Electronics 2.1%
Energy Sources 4.1%
Food & Household Products 2.7%
Merchandising 22.0%
Metals - Non-Ferrous 4.9%
Telecommunications 30.0%
Textiles & Apparel 4.2%
Utilities 16.5%
Other 5.2%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF NET
ASSETS
---------------
<C> <S> <C>
1. Telebras 29.4%
2. Lojas Renner 15.1
3. CVRD 4.9
4. Eletrobras 4.9
5. Cemig 4.7
<CAPTION>
PERCENT OF NET
ASSETS
---------------
<C> <S> <C>
6. TV Filme, Inc. 4.2%
7. Petrobras 4.1
8. Lojas Arapua 3.5
9. Coteminas 3.2
10. CPFL 2.2
---
76.2%
---
---
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
BRAZILIAN INVESTMENT FUND (98.6%)
- --------------------------------------------------
- ----------
BRAZILIAN NON-VOTING PREFERRED
STOCKS (96.5%)
(Unless otherwise noted)
- --------------------------------------------------
- ----------
BANKING (4.1%)
Banco Bradesco 136,000,000 U.S.$ 986
*/+Banco Nacional 112,483,664 5
Itaubanco 2,300,000 996
--------------
1,987
--------------
BEVERAGES & TOBACCO (0.5%)
Souza Cruz 39,000 256
--------------
BROADCASTING & PUBLISHING (4.2%)
+TV Filme, Inc. ADR 162,000 2,065
--------------
BUILDING MATERIALS & COMPONENTS (0.5%)
Duratex 5,800,000 218
--------------
ELECTRICAL & ELECTRONICS (2.1%)
+Sharp 766,400,000 1,032
--------------
ENERGY SOURCES (4.1%)
Petrobras 12,500,000 1,991
--------------
FOOD & HOUSEHOLD PRODUCTS (2.7%)
Lorenz 45,165,000 1,065
Pao de Acucar GDR 12,950 226
#Pao de Acucar GDR (144A) 2,005 35
--------------
1,326
--------------
INDUSTRIAL COMPONENTS (0.2%)
+Schulz 7,018,000 118
--------------
MACHINERY & ENGINEERING (0.5%)
Weg 535,000 252
--------------
MERCHANDISING (22.0%)
+Bompreco GDR 27,650 494
+Casa Anglo Brasiliera 12,652,195 384
+Globex Utiladedes 45,700 743
Lojas Arapua 91,800,000 1,697
Lojas Renner 160,172,000 7,399
--------------
10,717
--------------
METALS -- NON-FERROUS (4.9%)
CVRD 125,323 2,412
--------------
TELECOMMUNICATIONS (30.0%)
Telebras 153,099,895 11,787
Telebras ADR 8,450 646
Telebras (Common) 26,853,000 1,925
Telesp 245,601 53
Telesp (Common) 1,200,473 260
--------------
14,671
--------------
TEXTILES & APPAREL (4.2%)
Coteminas 4,859,000 1,551
+Wentex 149,000 473
--------------
2,024
--------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
UTILITIES -- ELECTRICAL & GAS (16.5%)
+CESP 90 U.S.$ --
CPFL 11,761,000 1,074
Cemig 52,330,000 1,783
Cemig ADR 14,360 489
#/+Celesc (144A) GDR 11,410 1,033
Copel 38,515,000 408
Eletrobras ADR 250 5
Eletrobras 'B' 2,412,000 896
Eletrobras 'B' (Common) 4,206,000 1,506
FLCL (Common) 137,900,000 150
Light 1,356,000 481
+Lightpar 1,000,000 242
--------------
8,067
--------------
- -----------------------------------------------------------------
- -------------
TOTAL BRAZILIAN NON-VOTING PREFERRED STOCKS
(Cost U.S. $39,438) 47,136
--------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (2.1%)
Brazilian Real (Cost U.S. $1,052) BRL 1,093 1,052
--------------
- -----------------------------------------------------------------
- -------------
TOTAL BRAZILIAN INVESTMENT FUND
(Cost U.S. $40,490) 48,188
--------------
- -----------------------------------------------------------------
- -------------
SHORT-TERM INVESTMENT (0.8%)
REPURCHASE AGREEMENT (0.8%)
Chase Securities, Inc. 5.95%, dated
12/31/96, due 1/2/97, to be
repurchased at U.S. $386,
collateralized by U.S. $370 United
States Treasury Bonds 7.25%, due
5/15/16, valued at U.S. $394
(Cost U.S. $386) U.S.$ 386 386
--------------
- -----------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (99.4%)
(Cost U.S. $40,876) 48,574
--------------
- -----------------------------------------------------------------
- -------------
OTHER ASSETS (12.9%)
Receivable for Investments Sold 6,227
Dividends Receivable 72
Other Assets 6 6,305
--------------- --------------
- -----------------------------------------------------------------
- -------------
LIABILITIES (-12.3%)
Payable for:
Investments Purchased (5,900)
Professional Fees (39)
Shareholder Reporting Expenses (27)
Investment Advisory Fees (25)
Directors' Fees and Expenses (16)
Administrative Fees (10)
Brazilian Administrative Fees (5)
U.S. Custodian Fees (1) (6,023)
--------------- --------------
- -----------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
(000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
NET ASSETS (100%)
Applicable to 926,782 issued and outstanding U.S. $.01
par value shares (50,000,000 shares authorized) U.S.$ 48,856
--------------
--------------
- -----------------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE U.S.$ 52.72
--------------
--------------
- -----------------------------------------------------------------
- -------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------
Common Stock U.S.$ 9
Capital Surplus 33,812
Undistributed Net Investment Income 679
Accumulated Net Realized Gain 6,660
Unrealized Appreciation on Investments
and Foreign Currency Translations 7,696
- -----------------------------------------------------------------
- -------------
TOTAL NET ASSETS U.S.$ 48,856
--------------
--------------
- -----------------------------------------------------------------
- -------------
</TABLE>
+ -- Non-income producing.
* -- Security valued at fair value -- see Note A-1 to financial statements.
# -- 144A Security -- certain conditions for public sale may exist.
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
December 31, 1996 exchange rate-Brazilian Real (BRL) 1.03910 = U.S. $1.00
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
STATEMENT OF OPERATIONS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends............................................................................... U.S.$ 1,760
Interest................................................................................ 17
Less: Foreign Taxes Withheld............................................................ (161)
- ---------------------------------------------------------------------------------------------------------------
Total Income.......................................................................... 1,616
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees................................................................ 425
U.S. Administrative Fees and Transfer Agent Fees........................................ 126
Professional Fees....................................................................... 71
Brazilian Administrative and Custodian Fees............................................. 70
Shareholder Reporting Expenses.......................................................... 38
Amortization of Organization Costs...................................................... 38
Directors' Fees and Expenses............................................................ 32
Custodian Fees.......................................................................... 4
Other Expenses.......................................................................... 60
- ---------------------------------------------------------------------------------------------------------------
Total Expenses........................................................................ 864
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income............................................................. 752
- ---------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold.............................................................. 6,835
Foreign Currency Transactions........................................................... (45)
- ---------------------------------------------------------------------------------------------------------------
Net Realized Gain................................................................. 6,790
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments............................................................. 9,958
Appreciation on Foreign Currency Translations........................................... 2
- ---------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation.................................... 9,960
- ---------------------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized Appreciation/Depreciation.................. 16,750
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... U.S.$ 17,502
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss)........................................ U.S.$ 752 U.S.$ (60)
Net Realized Gain................................................... 6,790 17,440
Change in Unrealized Appreciation/Depreciation...................... 9,960 (34,680)
- ---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations..... 17,502 (17,300)
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............................................... (21) --
Net Realized Gain................................................... (17,583) (23,408)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions................................................. (17,604) (23,408)
- ---------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Subscription of Shares (35,440 and 25,702 shares, respectively)..... 1,525 1,853
Reinvestment of Distributions (446,448 and 286,103 shares,
respectively)...................................................... 17,360 23,041
Repurchase of Shares (115,699 and 376,486 shares, respectively)..... (5,881) (29,496)
- ---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting From Capital Share
Transactions....................................................... 13,004 (4,602)
- ---------------------------------------------------------------------------------------------------------------
Total Increase (Decrease)........................................... 12,902 (45,310)
Net Assets:
Beginning of Year................................................... 35,954 81,264
- ---------------------------------------------------------------------------------------------------------------
End of Year (including undistributed net investment income of U.S.
$679 and U.S. $0, respectively.)................................... U.S.$ 48,856 U.S.$ 35,954
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS: 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR...... U.S.$ 64.14 U.S.$129.97 U.S.$ 83.58 U.S.$ 55.28 U.S.$ 63.31
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss)............ 0.81 (0.11) (0.71) 1.42 (0.09)
Net Realized and Unrealized Gain (Loss)
on Investments......................... 18.54 (27.99) 55.55 33.94 (7.94)
- -------------------------------------------------------------------------------------------------------------------
Total from Investment Operations.... 19.35 (28.10) 54.84 35.36 (8.03)
- -------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............... (0.02) -- -- -- --
In Excess of Net Investment
Income............................ -- -- (1.80) -- --
Net Realized Gain................... (30.75) (37.73) (6.65) (6.89) --
In Excess of Net Realized Gain...... -- -- -- (0.17) --
- -------------------------------------------------------------------------------------------------------------------
Total Distributions................. (30.77) (37.73) (8.45) (7.06) --
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... U.S.$ 52.72 U.S.$ 64.14 U.S.$129.97 U.S.$ 83.58 U.S.$ 55.28
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Net Asset Value (1)................. 48.54% (26.61)% 68.32% 72.52% (12.68)%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (THOUSANDS)..... U.S.$48,856 U.S.$35,954 U.S.$81,264 U.S.$52,207 U.S.$46,687
- -------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.81% 2.07% 1.82% 2.22% 2.27%(2)
Ratio of Net Investment Income (Loss) to
Average Net Assets..................... 1.58% (0.14)% (0.61)% 1.57% (0.07)%
Portfolio Turnover Rate................. 179% 112% 52% 40% 36%
Average Commission Rate (3)............. $0.0000 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. The Fund's shares are issued in a private placement and are not
traded, therefore market value total investment return is not calculated.
Total return for the year ended December 31, 1992 would have been lower were
it not for vouluntary expense limits.
(2)Reflects a voluntary expense limitation in effect during the period. As a
result of such limitation, expenses of the Fund for the year ended December
31, 1992 reflect a benefit of U.S. $0.14.
(3)For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose the average commission rate per share it paid for portfolio
trades on which commissions were charged. For the year ended December 31,
1996, the average commission rate paid on trades on which commissions were
charged was 0.30% of the trade amount.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- ---------
The Brazilian Investment Fund, Inc. (the "Fund") was incorporated on
November 7, 1990, and is registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's common stock is not registered under the Securities Act of 1933. The
Fund's investment objective is long-term capital appreciation primarily through
investments in equity securities. The Fund makes its investments in Brazil
through an investment fund established in compliance with Brazilian law. The
accompanying financial statements are prepared on a consolidated basis and
present the financial position and results of operations of the investment fund
and the Fund.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities,
including purchased options, for which market quotations are readily
available are valued at the last sales price on the valuation date, or if
there was no sale on such date, at the mean between the current bid and
asked prices. Securities which are traded over-the-counter are valued at the
average of the mean of current bid and asked prices obtained from reputable
brokers. Short-term securities which mature in 60 days or less are valued at
amortized cost. Other securities and assets for which market values are not
readily available (including investments which are subject to limitations as
to their sale or for which a ready market for the securities in the
quantities owned by the Fund does not exist) are valued at fair value as
determined in good faith by the Board of Directors (the "Board"), although
the actual calculations may be done by others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To the
extent that any repurchase transaction exceeds one business day, the value
of the collateral is marked-to-market on a daily basis to determine the
adequacy of the collateral. In the event of default on the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counter-party to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Amounts denominated in Brazilian currency are
translated into U.S. dollars at the mean of the bid and asked prices of such
currency against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rate and market values at the close of the period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in
the foreign exchange rates from the fluctuations arising from changes in the
market prices of the securities held at period end. Similarly, the Fund does
not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of securities sold
during the period. Accordingly, realized and unrealized foreign currency
gains (losses) are included in the reported net realized and unrealized
gains (losses) on investment transactions and balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of forward foreign
currency exchange contracts, disposition of foreign currency and currency
gains or losses realized between the trade and settlement dates on
securities transactions. Foreign currency gains (losses) also occur due to
the difference between the amount of investment income and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized currency gains
(losses) from valuing foreign currency denominated assets and liabilities at
period end exchange rates are reflected as a component of unrealized
appreciation (depreciation) in the Statement of Net Assets. The change in
net unrealized currency gains (losses) for the period is reflected in the
Statement of Operations.
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<PAGE>
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward foreign currency exchange contracts to attempt to protect securities
and related receivables and payables against changes in future foreign
exchange rates. A forward foreign currency exchange contract is an agreement
between two parties to buy or sell currency at a set price on a future date.
The market value of the contract will fluctuate with changes in currency
exchange rates. The contract is marked-to-market daily and the change in
market value is recorded by the Fund as unrealized gain or loss. The Fund
records realized gains or losses when the contract is closed, equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed. Risk may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms
of their contracts and is generally limited to the amount of unrealized gain
on the contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
6. PURCHASED OPTIONS: The Fund may purchase call and put options on indices or
securities. The Fund may purchase call options to protect against an
increase in the price of the underlying index or security. The Fund may
purchase put options on indices or securities to protect against a decline
in the value of the underlying index or security. Possible losses from
purchased options cannot exceed the total amount invested. Realized gains or
losses on purchased options are included with net gain (loss) on securities
sold in the financial statements.
7. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis. Dividend income is recorded on
the ex-dividend date (except certain dividends which may be recorded as soon
as the Fund is informed of such dividend) net of applicable withholding
taxes where recovery of such taxes is not reasonably assured. Distributions
to shareholders are recorded on the ex-date.
The amount and character of income and capital gain distributions to be paid
are determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for foreign currency
transactions and of the timing of the recognition of losses on securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected in
ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "Adviser") provides investment
advisory services to the Fund under the terms of an Investment Advisory
Agreement (the "Agreement"). Under the Agreement, the Adviser is paid a fee
computed weekly and payable monthly at an annual rate of .90% of the Fund's
first $50 million of average weekly net assets, .70% of the Fund's next $50
million of average weekly net assets and .50% of the Fund's average weekly net
assets in excess of $100 million.
C. The Chase Manhattan Bank, through its affiliate Chase Global Funds Services
Company (the "U.S. Administrator"), provides administrative and shareholder
services to the Fund under an Administration Agreement. Under the Administration
Agreement, the U.S. Administrator is paid a fee computed weekly and payable
monthly at an annual rate of .08% of the Fund's average weekly net assets, plus
$75,000 per annum. In addition, the Fund is charged certain out-of-pocket
expenses by the U.S. Administrator. The Chase Manhattan Bank acts as custodian
for the Fund's assets held in the United States.
D. Unibanco -- Uniao de Bancos Brasileiras S.A. ("the Brazilian Administrator
and Custodian") provides Brazilian administrative and custodian services to the
Fund under the terms of an agreement. Under the agreement, the Brazilian
Administrator and Custodian is paid a fee computed weekly and payable monthly at
an annual rate of .15% of the Fund's first $50 million of average weekly net
assets, .125% of the Fund's next $50 million of average weekly net assets and
.10% of the Fund's average weekly net assets in excess of $100 million.
E. During the year ended December 31, 1996, the Fund made purchases and sales
totaling $82,040,000 and $86,368,000, respectively, of investment securities
other than long-term U.S. Government securities and short term investments.
There were no purchases and sales of long-term U.S. Government securities. At
December 31, 1996, the U.S. Federal income tax cost basis of securities was
$39,876,000 and accordingly, net unrealized appreciation for U.S. Federal income
tax purposes was $7,646,000, of which $10,490,000 related to appreciated
securities and $2,844,000 related to depreciated securities. For the year
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<PAGE>
ended December 31, 1996, the Fund expects to defer to January 1, 1997, for U.S.
Federal income tax purposes, post-October currency losses of $7,000.
F. In connection with its organization, the Fund incurred $445,000 of
organization costs which are being amortized on a straight-line basis over a
five-year period beginning June 4, 1991, the date the Fund commenced operations.
G. A significant portion of the Fund's net assets consist of securities
denominated in Brazilian currency. Changes in currency exchange rates will
affect the value of and investment income from such securities. Brazilian
securities are subject to greater price volatility, limited capitalization and
liquidity, and higher rates of inflation than securities of companies based in
the United States. In addition, Brazilian securities may be subject to
substantial governmental involvement in the economy and greater social, economic
and political uncertainty.
H. The Fund's Articles of Incorporation provide that, commencing January 6,
1992 and on each calendar quarter thereafter, the Fund will make a tender offer
to repurchase its outstanding shares of Common Stock at a price equal to the net
asset value per share at the time of repurchase.
During the year ended December 31, 1996, the Fund repurchased the following
shares:
<TABLE>
<CAPTION>
U.S.
DATE SHARES (000)
-------- ------ ------
<S> <C> <C>
2/5/96 15,131 $ 653
5/6/96 7,040 $ 300
8/5/96 2,000 $ 104
11/5/96 91,528 $4,824
</TABLE>
I. Shareholders of the Fund may purchase shares of Common Stock from the Fund
at a price equal to the net asset value at the beginning of the month. Purchases
are not allowed during each month the Fund makes a tender offer to repurchase
its outstanding shares. During the year ended December 31, 1996, the Fund issued
35,440 shares totaling $1,525,000.
J. Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage of
their total fees earned as a Director of the Fund. These deferred portions are
treated, based on an election by the Director, as if they were either invested
in the Fund's shares or invested in U.S. Treasury Bills, as defined under the
Plan. The deferred fees payable, under the Plan, at December 31, 1996 totaled
$6,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
K. During December 1996, the Board declared a distribution of $6.25 per share,
derived from net realized gains, payable on January 3, 1997, to Shareholders of
record on December 31, 1996.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1996, the Fund designates $784,000 as
long-term capital gain and expects to pass through to shareholders foreign tax
credits of approximately $161,000. In addition, for the year ended December 31,
1996, gross income derived from sources within foreign countries amounted to
$1,760,000.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------
To the Shareholders and Board of Directors of
The Brazilian Investment Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The Brazilian Investment Fund, Inc. (the "Fund") at December 31, 1996, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodians and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1997
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