<PAGE>
THE BRAZILIAN EQUITY FUND, INC.
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LETTER TO SHAREHOLDERS
April 28, 1995
Dear Shareholders:
We are pleased to present our report on the activities of The Brazilian Equity
Fund, Inc. (the "Fund") for the year ended March 31, 1995.
The Fund completed its initial public offering on April 10, 1992, raising $69
million of equity capital before deduction of underwriting commissions and
offering costs. After deductions of such commissions and costs, the Fund began
operations with a net asset value (NAV) of $63.5 million, or $13.79 per share.
At March 31, 1995, the Fund's NAV was $13.02 per share (net of dividends paid of
$3.86 per share), as compared to $20.80 per share at March 31, 1994.
At March 31, 1995, substantially all of the Fund's net assets of $60.2 million
were invested in Brazilian equity securities.
POLITICAL AND ECONOMIC DEVELOPMENTS
The past twelve months have been a momentous period of economic, political and
social change in Brazil. A year ago, investors in the Brazilian equity market
were hopeful -- if not entirely optimistic -- that the government's newest
anti-inflation plan would be implemented successfully, which would in turn help
to stabilize the economy and perhaps even drive the ruling party's presidential
candidate to victory in the October elections. At the time, Brazil was coming
off a period of profound political uncertainty (including the removal from
office of a sitting president) combined with a socially destructive and
seemingly insurmountable hyperinflation. The REAL Plan of July 1994, designed by
then Finance Minister Fernando Enrique Cardoso, was the government's eighth
attempt in the past nine years to bring inflation under control. Its centerpiece
was the introduction of a new currency, the REAL, linked to the U.S. dollar.
In the nine months since the REAL Plan was put into effect, it has succeeded as
well as Cardoso and his supporters could have hoped. Brazilian inflation has
dramatically declined from an annual rate of nearly 2,500% at the end of 1993 to
an annualized rate of approximately 35% as of the end of March 1995. This has
led to a substantial improvement in the country's economic and political
climate: Cardoso's election to the presidency in October (by a substantial
margin in the first ballot) can be directly attributed to his universally
acclaimed status as Brazil's savior from hyperinflation. The decline in the
inflation rate has been accompanied by a sharp rise in internal consumption, as
pent-up demand has driven increased consumer purchases. Economic growth has
therefore been quite robust, coming in at 5.7% for 1994. It is anticipated that
the Brazilian GDP will grow an average of 6% per annum for the years 1995
through 1997. Corporate earnings have also shown strong growth, helped during
the second half of 1994 by the appreciation of the REAL against the U.S. dollar,
which brought down the cost of U.S. dollar debt for many Brazilian companies.
1
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THE BRAZILIAN EQUITY FUND, INC.
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From a long-term view, perhaps the most positive news has been a series of
statements by President Cardoso in which he has stressed that the predominant
emphasis of his policies will be upon deregulation and privatization, within a
context of controlled inflation. The Cardoso administration has proposed
implementing an accelerated privatization program, focusing particularly on the
energy and telecommunications infrastructure industries. (Recent polls of
Brazil's Congress have shown surprisingly strong support for these initiatives,
a very positive sign in a country that can often display real tension between
the executive and legislative branches of government.) In addition, Cardoso has
stated very plainly his intention to push through Congress the sorts of
constitutional reforms that we believe are necessary to institutionalize the
liberalization of the Brazilian economy. In addition to privatization, these
reforms are likely to include the streamlining of the country's vastly
inefficient tax collection system and the reform of the social security system,
both of which should be helpful in controlling inflation and maintaining the
government's fiscal health going forward. It is also expected that the Southern
Common Market, or "Mercosur," composed of Brazil, Argentina, Paraguay and
Uruguay, which became a formal customs union as of the beginning of 1995, will
lead to increased trade and business activity among Brazil and her neighbors.
This should further expand economic growth and investment opportunities in
Brazil and the region.
The one significant setback for Brazil in the past several months has been the
Mexican economic crisis, which began in mid-December 1994 and has had a profound
effect on economies and markets throughout Latin America. The extent to which
equity markets in the region have declined in sympathy to Mexico's has largely
depended upon two variables, which often go hand in hand. The first is the
importance, within each market, of foreign investors. As Mexico's troubles have
sucked liquidity out of the emerging markets, the BOLSAS that are dominated by
foreigners feel substantially more selling pressure than those where domestic
investors control the preponderance of shares. The second factor is the
country's similarity, in economic terms, to Mexico. Brazil has had problems, on
a superficial level at least, with both variables. We believe, however, that the
Brazilian economy is far less vulnerable to the fickle sentiments of foreign
investors and is larger and more liquid than any of its neighbors. The country
also maintains over $40 billion in foreign currency reserves. Its current
account deficit is minuscule and the export economy is huge and growing.
Despite these significant differences, Brazil has been one of the worst victims
of the so-called "tequila effect," and the equity market felt the pinch as
panicky investors sucked liquidity from the entire region. During the first
quarter, the Brazilian market performed nearly as poorly as Mexico's, losing
nearly a third of its value in U.S. dollar terms. To some extent, however, the
decline of the Brazilian market was a natural reaction to the ebullience of
investors during 1994, when Brazil returned upwards of 65%. While we remain
extremely enthusiastic about investment opportunities in Brazil, short-term
setbacks are common in the emerging markets in the wake of strong and rapid
rallies.
Coming into 1995, it was perhaps predictable that the honeymoon between
President Cardoso and the investment community (a honeymoon that began
significantly before Cardoso was actually elected) would have to cool
eventually. In our view, nothing has occurred to take the bloom off of the new
government's rose -- no significant policy failures in the face of a crisis (the
Mexican fiasco) not of their making. However, the reality remains that Brazil
still faces substantial challenges, and the market was bound to step back from
its unbridled enthusiasm and take account of that fact. The fact that there has
not been much progress in the
2
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implementation of Mr. Cardoso's campaign promises on constitutional reforms is a
concern, and the market has clearly reacted adversely to this in recent weeks.
We remain confident, however, that the slow pace of reform so far is more the
result of the fragmented state of Congressional politics than of a loss of
commitment within the Cardoso administration. Recent progress on privatization
of the gas and oil monopolies, and on the deregulation of foreign investment,
are positive signs of continued engagement in this process.
We believe that Brazil's potential for economic growth remains substantial. The
valuations are attractive and the Cardoso administration continues to move in
the right direction. The government's reaction to the Mexican crisis has been
encouraging. During March, a change was announced in the mechanism by which the
REAL is pegged to the dollar. The impact of this change was an effective
devaluation of the REAL, which had actually appreciated significantly since its
creation (as the centerpiece of the government's successful anti-inflation
program) last July, by approximately 4%. This move, along with a recent increase
in tariff rates, indicates that the government is willing to risk some
short-term increase in inflation in exchange for bringing down the current
account deficit. Unlike the disastrous Mexican devaluation last December, the
Brazilian policy was clearly and openly explained by the government, and it was
generally well-received by the capital markets.
MARKET DEVELOPMENTS AND THE PORTFOLIO
From inception to March 31, 1995, the Morgan Stanley Capital International
Brazilian Index rose by 15.4% in U.S. dollar terms. During the same period the
NAV of the Fund, adjusted for dividend payments to shareholders, rose by 14.2%.
For the year ended March 31, 1995, the Morgan Stanley Capital International
Brazilian Index fell by (22.5%) versus (24.8%) for the Fund. While we are
disappointed by the Fund's underperformance relative to the Index during this
period, such underperformance is explained by the Fund's relative underweighting
in several stocks which constitute the bulk of the Index's capitalization. We
believe that taking index weightings in these stocks would materially reduce the
Fund's diversification, and expose the Fund to undue risk.
As of March 31, 1995, it is estimated that the Brazilian market had an aggregate
price/earnings ratio of approximately 9 times trailing earnings, and a market to
book ratio of approximately 50%. In light of these and other relevant valuation
indicators, we continue to believe that Brazilian equities provide the
opportunity for substantial price appreciation over the long-term, particularly
in the wake of the election of Cardoso and the improving political and monetary
situation.
The Fund's holdings are diversified among several sectors, with the largest
weightings in infrastructure industries such as electricity, telecommunications
and petrochemicals. We believe that basic industries such as these are most
likely to benefit from monetary stabilization and economic growth. As of March
31, 1995, the Fund's five largest investments were:
- Telecomunicacoes Brasileiras S/A - Telebras
- Centrais Eletricas Brasileiras S/A - Eletrobras
- Petroleo Brasileiro S/A - Petrobras
3
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THE BRAZILIAN EQUITY FUND, INC.
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- Usinas Siderurgicas de Minas Gerais S/A - Usiminas
- Bardella S/A Industrias Mecanicas
We wish to remind shareholders whose shares are registered in their own names
that they automatically participate in the Fund's dividend reinvestment program.
The automatic Dividend Reinvestment Plan can be of value to shareholders in
maintaining their proportional ownership interest in the Fund in an easy and
convenient way. A shareholder whose shares are held in the name of a
broker/dealer or nominee should contact that party for details about
participating in the plan. The Fund also offers shareholders a voluntary Cash
Purchase Plan. The Dividend Reinvestment and Cash Purchase Plans are described
on pages 17-18 of this report.
We appreciate your interest in the Fund and would be pleased to respond to your
questions and comments.
Respectfully,
[LOGO]
Piers Playfair
Chief Investment Officer*
* Piers Playfair, who is a Managing Director and International Portfolio Manager
of BEA Associates, is primarily responsible for management of the Fund's assets.
Mr. Playfair has served the Fund in such capacity since the commencement of the
Fund's operations and has been with BEA Associates (formerly Basic Economic
Appraisals, Inc. and BEA Associates, Inc.) since September 1990. Mr. Playfair is
an Executive Vice President of the Fund and is also an Executive Vice President
and Investment Officer of The Latin America Equity Fund, Inc., The Emerging
Markets Telecommunications Fund, Inc., and The Emerging Markets Infrastructure
Fund, Inc. and a Vice President of The Latin America Investment Fund, Inc. Prior
to joining BEA Associates, Mr. Playfair was a Director of Capital Markets at
Salomon Brothers Inc. from 1985 to September 1990.
4
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SCHEDULE OF INVESTMENTS
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
NO. OF SHARES SECURITY (NOTE A)
- ------------- ------------------------------------------------------------ -------------
<C> <S> <C>
BRAZILIAN EQUITY SECURITIES-98.79%
Banking-5.30%
286,300,880 Banco Bradesco S/A PN** $ 1,926,719
87,050,000 Banco do Brasil S/A PN* 901,486
16,378,000 Uniao de Bancos Brasileiros S/A PN-Unibanco* 360,717
-------------
3,188,922
-------------
Capital Goods-5.49%
12,084 Bardella S/A Industrias Mecanicas PN 2,782,412
562,204 Trafo Equipamentos Electricos S/A PN* 519,054
-------------
3,301,466
-------------
Construction Material-3.65%
1,020,000 Confab Industrial S/A PN* 1,429,588
1,683,500 Eternit S/A ON 767,762
-------------
2,197,350
-------------
Consumer Goods-7.12%
1,588,293 Dixie Lalekla S/A* 1,077,707
1,633,000 Multibras da Amazonia S/A PN 1,491,316
579,293,000 Refrigeracao Parana S/A PN-Refripar 1,114,769
1,145,620,000 Tec Toy PN* 598,934
-------------
4,282,726
-------------
Electric Generation-12.64%
38,638,500 Centrais Eletricas Brasileiras S/A ON-Eletrobras 7,607,358
-------------
Electric Distribution-7.27%
1,305,500 Centrais Eletricas de Santa Catarin PN* 791,432
95,997,595 Companhia Energetica de Minas Gerais PN-Cemig 1,922,088
37,754,041 Companhia Paulista de Forca e Luz ON-CPFL* 1,658,826
-------------
4,372,346
-------------
Food & Beverages-8.26%
5,711,943 Companhia Cervejaria Brahma PN 1,366,101
737,029 Companhia Cervejaria Brahma PN, Rights* 43,369
57,495 Companhia Cervejaria Brahma ON, Warrants* 3,167
2,020,000 Moinho Santista Alimentos S/A* 2,583,982
673,000 S/A Moinho Santista Industrias Gerais PN* 973,192
-------------
4,969,811
-------------
</TABLE>
5
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THE BRAZILIAN EQUITY FUND, INC.
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SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
VALUE
NO. OF SHARES SECURITY (NOTE A)
- ------------- ------------------------------------------------------------ -------------
<C> <S> <C>
Holding Companies-3.22%
3,332,800 Investimentos Itau S/A PN-Itausa $ 1,582,987
1,545,000 Brasmotor S/A PN 352,308
-------------
1,935,295
-------------
Mining-1.91%
8,529,000 Companhia Vale do Rio Doce PN 1,147,952
-------------
Paper & Pulp-4.41%
166,000 Companhia Suzano de Papel e Celulose PN* 945,406
1,430,000 Eucatex S/A Industria e Comercio PN* 930,534
20,861,609 Industrias de Papel Simao PN 775,677
-------------
2,651,617
-------------
Petrochemicals-7.06%
944,000 Copene Petroquimica do Nordeste S/A PN 665,735
51,506,933 Petroleo Brasileiro S/A PN-Petrobras 3,580,849
-------------
4,246,584
-------------
Retail-5.11%
37,162,776 Lojas Americanas S/A ON 868,096
94,097,078 Lojas Americanas S/A PN 1,779,366
4,293,000 Mesbla S/A PN* 425,002
-------------
3,072,464
-------------
Steel-7.37%
37,150,000 Companhia Siderurgicas Nacional-CSN* 867,384
1,053,000 Mannesmann S/A ON* 292,825
2,174,440,000 Usinas Siderurgicas de Minas Gerais S/A PN-Usiminas 2,491,294
62,000 Usinas Siderurgicas de Minas Gerais S/A ADR-Usiminas# 782,440
-------------
4,433,943
-------------
Telecommunications-13.29%
34,321,000 Telecomunicacoes Brasileiras S/A ON-Telebras 797,896
260,754,240 Telecomunicacoes Brasileiras S/A PN-Telebras 7,019,210
197,589 Telecomunicacoes de Sao Paulo S/A PN-Telesp 20,440
40,709 Telecomunicacoes do Parana S/A-Telepar* 9,736
3,777,200 Telecomunicacoes do Rio de Janeiro S/A PN-Telerj 151,466
-------------
7,998,748
-------------
Textiles-5.60%
115,254,000 Artex S/A Fabrica de Artefatos Texteis* 641,012
10,433,100 Companhia Tecidos Norte de Minas S/A PN 2,727,229
-------------
3,368,241
-------------
</TABLE>
6
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SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
VALUE
NO. OF SHARES SECURITY (NOTE A)
- ------------- ------------------------------------------------------------ -------------
<C> <S> <C>
Transport-1.09%
4,868,700 Marcopolo S/A PN* $ 655,298
-------------
TOTAL BRAZILIAN EQUITY SECURITIES
(Cost $73,199,566) 59,430,121
-------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS (Cost $73,199,566+) 98.79% 59,430,121
OTHER ASSETS IN EXCESS OF LIABILITIES 1.21 726,007
------ ------------
NET ASSETS 100.00% $ 60,156,128
------ ------------
------ ------------
</TABLE>
ADR American Depository Receipt.
* Non-income producing security.
** Deemed to be an affiliated security. During the year ended March 31, 1995,
the Fund earned $79,882 in dividend income from such security, and sales of
this security resulted in a net capital gain of $853,274.
# Security exempt from registration under Rule 144A of the Securities Act of
1933. This security has limited primary and secondary markets in that it is
traded only among qualified institutional buyers.
+ Aggregate cost for federal income tax purposes was $73,948,432. The
aggregate gross unrealized appreciation (depreciation) for all securities
is as follows:
Excess of value over tax cost $7,960,223
Excess of tax cost over value $(22,478,534)
See accompanying notes to financial statements.
7
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THE BRAZILIAN EQUITY FUND, INC.
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STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $73,199,566) (Note A) $59,430,121
Cash 850,346
Dividends receivable 171,393
Prepaid expenses 37,192
Unamortized organizational costs (Note A) 20,326
-----------
Total Assets 60,509,378
-----------
LIABILITIES:
Payables:
Due to advisor (Note B) 180,739
Due to administrators (Note B) 28,558
Accrued expenses 143,953
-----------
Total Liabilities 353,250
-----------
NET ASSETS (applicable to 4,619,271 shares of common stock outstanding)
(Note C) $60,156,128
-----------
-----------
NET ASSET VALUE PER SHARE ($60,156,128 DIVIDED BY 4,619,271) $13.02
-----------
-----------
Net assets consist of:
Capital stock, $.001 par value; 4,619,271 shares issued and outstanding
(100,000,000 shares authorized) $ 4,619
Paid-in capital 63,727,324
Accumulated net realized gains 10,192,393
Net unrealized depreciation on investments and other assets
and liabilities denominated in foreign currency (13,768,208)
-----------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $60,156,128
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
8
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STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income (Note A):
Dividends, net of withholding taxes of $187,673 $ 1,089,875
Interest 59,844
-----------
Total Investment Income 1,149,719
-----------
Expenses:
Investment advisory fees (Note B) 1,228,260
Administration fees (Note B) 188,078
Brazilian taxes (Note A) 146,253
Accounting fees 68,374
Legal fees 64,413
Printing fees 49,100
Custodian fees (Note B) 47,655
Audit fees 39,766
Directors' fees (Note B) 38,706
Insurance 37,842
Transfer agent fees 28,717
Amortization of organizational costs (Note A) 10,001
Miscellaneous 19,995
-----------
Total Expenses 1,967,160
Less: Fees waived by investment advisor (Note B) (250,975)
-----------
Net Expenses 1,716,185
-----------
Net Investment Loss (566,466)
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY RELATED TRANSACTIONS:
Net realized gain/(loss) on:
Investments 30,407,409
Foreign currency related transactions (285,978)
-----------
30,121,431
-----------
Net change in unrealized appreciation in value of investments and other
assets and liabilities denominated in foreign currency (47,668,256)
-----------
Net realized and unrealized loss on investments and foreign currency
related transactions (17,546,825)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(18,113,291)
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
9
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THE BRAZILIAN EQUITY FUND, INC.
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STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, MARCH 31,
1995 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss $ (566,466) $ (196,163)
Net realized gain on investments and foreign currency
related transactions 30,121,431 7,352,643
Net change in unrealized appreciation in value of investments
and other assets and liabilities denominated in foreign currency (47,668,256) 34,517,885
------------- -------------
Net increase (decrease) in net assets resulting from operations (18,113,291) 41,674,365
------------- -------------
Dividends and distributions to shareholders:
In excess of net investment income ($0.03 per share in 1995) (138,215) --
From net investment income ($0.08 per share in 1994) -- (347,380)
From net realized gain on investments ($3.83 per share in 1995) (17,645,457) --
------------- -------------
Total dividends and distributions (17,783,672) (347,380)
------------- -------------
Capital share transactions (Note C):
Proceeds from 12,102 shares issued in reinvestment of dividends 232,844 --
------------- -------------
Total increase (decrease) in net assets (35,664,119) 41,326,985
NET ASSETS:
Beginning of year 95,820,247 54,493,262
------------- -------------
End of year $ 60,156,128 $ 95,820,247
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
10
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FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a share of common
stock outstanding throughout each of the periods presented.
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 10, 1992
FOR THE FOR THE (COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) THROUGH
MARCH 31, 1995 MARCH 31, 1994 MARCH 31, 1993
--------------- --------------- --------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $20.80 $11.83 $13.79*
------- ------- -------
Net investment income (loss) (.12) (.04) .06
Net realized and unrealized gain (loss)
on investments and foreign currency
related transactions (3.80) 9.09 (1.99)
------- ------- -------
Net increase (decrease) in net assets
from operations (3.92) 9.05 (1.93)
------- ------- -------
Dividends and distributions to
shareholders:
In excess of net investment income (.03) -- --
From net investment income -- (.08) (.03)
From net realized gain on investments (3.83) -- --
------- ------- -------
Total dividends and distributions (3.86) (.08) (.03)
------- ------- -------
Net asset value, end of period $13.02 $20.80 $11.83
------- ------- -------
------- ------- -------
Market value, end of period $14.75 $19.00 $11.25
------- ------- -------
------- ------- -------
Total investment return (1) (6.79)% 69.55% (19.64)%+
------- ------- -------
------- ------- -------
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net
assets, including Brazilian taxes 1.86%# 2.05% 2.45%+
Ratio of expenses to average net
assets, excluding Brazilian financial
transaction taxes 1.73% 2.02% 2.45%
Ratio of net investment income (loss)
to
average net assets (.62)%# (.28)% .61%+
Portfolio turnover rate 69% 73% 50%
Net assets, end of period (000
omitted) $60,156 $95,820 $54,493
<FN>
- ------------------------
* Initial public offering price of $15.00 per share less underwriting discount
of $1.05 per share and offering expenses of $0.16 per share.
# The investment advisor waived a portion of its fees during this period. If
such waiver had not been made, the ratio of expenses to average net assets
would have been 2.13% and the ratio of net investment loss to average net
assets would have been (0.89%).
+ Annualized.
(1) Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market
price on the last day of each period reported. Dividends and distributions,
if any, are assumed, for purposes of this calculation, to be reinvested at
prices obtained under the Fund's dividend reinvestment plan. Total
investment return does not reflect sales charges or brokerage commissions.
</TABLE>
See accompanying notes to financial statements.
11
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THE BRAZILIAN EQUITY FUND, INC.
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NOTES TO FINANCIAL STATEMENTS
NOTE A. The Brazilian Equity Fund, Inc. (the "Fund") was incorporated in
Maryland on February 10, 1992 and commenced operations on April 10, 1992. The
Fund is registered under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified management investment company. Significant
accounting policies are as follows:
PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. All 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 asked prices, if available. All other securities and assets are taken at
fair value as determined in good faith by or under the direction of the Board of
Directors. Short-term investments having a maturity of 60 days or less are
valued on the basis of amortized cost. The net asset value per share of the Fund
is calculated weekly and at the end of each month.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on an accrual basis; dividend
income is recorded on the ex-dividend date.
TAXES: No provision is made for U.S. federal income or excise taxes as it is the
Fund's intention to 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 federal income and excise taxes.
No Brazilian income tax is imposed on capital gains. A 15% withholding tax is
imposed on dividends and interest from stock market investments. The Fund
intends to elect, for U.S. federal income tax purposes, to treat certain foreign
taxes paid by the Fund that can be treated as income taxes under U.S. income tax
principles as paid by its shareholders.
Effective January 1, 1994 and expiring December 31, 1994, the Brazilian Congress
imposed a 0.25% withholding tax on financial transactions. Brazilian banks and
financial institutions withheld this tax on all charges against Brazilian bank
accounts of both individuals and corporations. The Fund incurred $120,511 in
such taxes during the year ended March 31, 1995.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(I) market value of investment securities, income and expenses at the
current rate of exchange; and
(II) purchases and sales of investment securities, income and expenses at
the rate of exchange prevailing on the respective dates of such
transactions.
12
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NOTES TO FINANCIAL STATEMENTS (continued)
The Fund does not isolate that portion of gains and losses on investments in
equity securities which is due to changes in the foreign exchange rate from that
which is due to changes in market prices of equity securities.
DISTRIBUTION OF INCOME AND GAINS: The Fund intends to distribute to
shareholders, at least annually, substantially all of its net investment income
and expects to distribute annually any net long-term capital gains in excess of
net short-term capital losses. An additional distribution may be made to the
extent necessary to avoid the payment of a 4% federal excise tax.
Net investment income and realized capital gains differ for financial statement
and tax purposes primarily due to the deferral of wash sale losses.
The character of distributions made from net investment income or net realized
foreign currency related transactions may differ from their ultimate
characterization for federal income tax purposes due to GAAP/ tax differences in
the character of income and expense recognition.
OTHER: Costs incurred by the Fund in connection with its organization of $50,000
are being amortized on a straight line basis over a five-year period beginning
at the commencement of operations of the Fund.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in exchange rates.
The Brazilian securities markets are substantially smaller, less liquid and more
volatile than the major securities markets in the United States. Consequently,
acquisition and disposition of securities by the Fund may be inhibited. A
significant proportion of the aggregate market value of equity securities listed
on the Brazilian Exchanges are held by a small number of investors and are not
publicly traded. This may limit the number of shares available for acquisition
by the Fund.
Investments in Brazil may involve certain considerations and risks not typically
associated with investments in the United States including the possibility of
future political and economic developments and the level of Brazilian
governmental supervision and regulation of its securities markets.
NOTE B. BEA Associates ("BEA") serves as the Fund's investment advisor. As
compensation for its investment advisory services, BEA receives from the Fund an
annual fee, calculated weekly and paid quarterly, equal to 1.35% of the first
$100 million of the Fund's average weekly net assets and 1.05% of average weekly
net assets in excess of $100 million. For the year ended March 31, 1995,
$977,285 was paid or accrued to BEA for investment advisory services. BEA 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 March 31, 1995, $4,610 was paid or accrued to BEA for administrative
services rendered to the Fund.
Garantia Administracao de Recursos S.A. ("Garantia") and Patrimonio Planejamento
Financeiro Ltda. ("Patrimonio") served as the Fund's sub-advisors. In return for
its services, Garantia was paid a fee, out of the advisory fee payable to BEA,
computed and paid quarterly at an annual rate of 0.25% of the Fund's average
weekly net assets. Patrimonio was paid a fee for its services, out of the
advisory fee payable to BEA,
13
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THE BRAZILIAN EQUITY FUND, INC.
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NOTES TO FINANCIAL STATEMENTS (continued)
computed and paid quarterly at an annual rate of 0.10% of the Fund's average
weekly net assets. Effective June 21, 1994 and August 15, 1994, Garantia and
Patrimonio, respectively, resigned as sub-advisors to the Fund. The Fund paid
Garantia and Patrimonio $41,461 and $29,872, respectively, for services rendered
during the period April 1, 1994 to the time the sub-advisory agreements were
terminated. BEA has voluntarily elected to waive $250,975 in investment advisory
fees that would have been paid to Garantia and Patrimonio during the year ended
March 31, 1995.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") and Banco de
Investimentos Garantia S.A. ("Banco Garantia") act as the Fund's U.S. and
Brazilian administrators, respectively. The Fund pays Mitchell Hutchins a
monthly fee for its services computed at an annual rate of 0.15% of the Fund's
average weekly net assets. For its services, Banco Garantia is paid an annual
fee by the Fund equal to 0.05% of the Fund's average weekly net assets invested
in Brazil. For the year ended March 31, 1995, fees paid or accrued to Mitchell
Hutchins and Banco Garantia for administrative services amounted to $138,129 and
$45,339, respectively.
The Fund pays each of its Directors who is not a director, officer or employee
of BEA, Mitchell Hutchins or Banco Garantia or any affiliate thereof an annual
fee of $5,000 plus $500 for each Board of Directors' meeting attended. In
addition, the Fund will reimburse the Directors for travel and out-of-pocket
expenses incurred in connection with Board of Directors' meetings.
Banco Bradesco de Investimento S.A. acts as the custodian of the Fund's
investments in Brazil. As Brazilian custodian, it holds the Fund's
real-denominated securities when held in Brazil. PNC Bank, N.A. serves as the
custodian of the Fund's assets held in the United States.
NOTE C. The authorized capital stock of the Fund is 100,000,000 shares of common
stock, $.001 par value. Of the 4,619,271 shares outstanding at March 31, 1995,
BEA owned 7,169 shares.
NOTE D. Purchases and sales of securities, other than short-term obligations,
aggregated $63,318,399 and $82,778,582, respectively, for the year ended March
31, 1995.
NOTE E. The Fund, along with fifteen other regulated investment companies for
which BEA serves as investment advisor, have a credit agreement with the First
National Bank of Boston. The agreement provides that each fund is permitted to
borrow an amount equal to the lesser of $50,000,000 or 25% of the net assets of
the fund. However, at no time shall the aggregate outstanding principal amount
of all loans to any of the 16 funds exceed $50,000,000. The line of credit will
bear interest at (i) the greater of the bank's prime rate or the Federal Funds
Effective Rate plus 0.50% or (ii) the Adjusted Eurodollar Rate plus 1.50%. The
Fund had no amounts outstanding under the agreement at March 31, 1995.
Each loan is payable on demand or upon termination of this credit agreement on
December 31, 1995. However, any loan made at the Eurodollar Rate is due and
payable on the last day of the applicable interest period.
14
<PAGE>
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NOTES TO FINANCIAL STATEMENTS (continued)
NOTE F. Quarterly Results of Operations (unaudited):
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS AND NET INCREASE
TOTAL NET INVESTMENT FOREIGN CURRENCY (DECREASE) IN NET
INVESTMENT RELATED ASSETS RESULTING
INCOME INCOME (LOSS) TRANSACTIONS FROM OPERATIONS MARKET PRICE ON
-------------- ----------------- ------------------- ------------------ NYSE
TOTAL PER TOTAL PER TOTAL PER TOTAL PER ----------------
(000) SHARE (000) SHARE (000) SHARE (000) SHARE HIGH LOW
------ ------ ------- ------- --------- ------- --------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1994............ $ 321 $ .07 $ (70) $ (.02) $ (19,142) $ (4.16) $ (19,212) $(4.18) $21.125 $14.750
September 30, 1994....... $ 515 $ .11 $ (8) $ .00 $ 49,252 $ 10.69 $ 49,244 $10.69 $27.000 $18.500
December 31, 1994........ $ 19 $ .00 $ (477) $ (.10) $ (16,224) $ (3.52) $ (16,701) $(3.62) $27.500 $18.625
March 31, 1995........... $ 295 $ .07 $ (11) $ .00 $ (31,433) $ (6.81) $ (31,444) $(6.81) $21.125 $11.000
------ ------ ------- ------- --------- ------- --------- ------
Totals................... $1,150 $ .25 $ (566) $ (.12) $ (17,547) $ (3.80) $ (18,113) $(3.92)
------ ------ ------- ------- --------- ------- --------- ------
------ ------ ------- ------- --------- ------- --------- ------
June 30, 1993............ $ 143 $ .03 $ (206) $ (.04) $ 8,578 $ 1.86 $ 8,372 $ 1.82 $13.875 $10.000
September 30, 1993....... $ 449 $ .10 $ 147 $ .03 $ 8,134 $ 1.77 $ 8,281 $ 1.80 $15.250 $11.500
December 31, 1993........ $ 277 $ .06 $ (64) $ (.01) $ 1,794 $ 0.39 $ 1,730 $ 0.38 $16.125 $13.250
March 31, 1994........... $ 395 $ .08 $ (73) $ (.02) $ 23,364 $ 5.07 $ 23,291 $ 5.05 $26.250 $14.750
------ ------ ------- ------- --------- ------- --------- ------
Totals................... $1,264 $ .27 $ (196) $ (.04) $ 41,870 $ 9.09 $ 41,674 $ 9.05
------ ------ ------- ------- --------- ------- --------- ------
------ ------ ------- ------- --------- ------- --------- ------
</TABLE>
15
<PAGE>
THE BRAZILIAN EQUITY FUND, INC.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of The Brazilian Equity Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
Brazilian Equity Fund, Inc., including the schedule of investments, as of March
31, 1995 and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments and cash held by
the custodians as of March 31, 1995 . An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Brazilian Equity Fund, Inc., as of March 31, 1995, 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 periods
presented, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 12, 1995
16
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DESCRIPTION OF THE FUND'S DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN
Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), each shareholder will be deemed to have elected, unless PNC Bank as the
Plan Agent (the "Plan Agent"), is otherwise instructed by the shareholder in
writing, to have all distributions, net of any applicable U.S. withholding tax,
automatically reinvested in additional shares of the Fund. Shareholders who do
not participate in the Plan will receive all dividends and distributions in
cash, net of any applicable U.S. withholding tax, paid in dollars by check
mailed directly to the shareholder by PNC Bank, as dividend-paying agent.
Shareholders who do not wish to have dividends and distributions automatically
reinvested should notify the Plan Agent, c/o PFPC, Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809. Dividends and distributions with respect to shares
registered in the name of a broker-dealer or other nominee (i.e. in "street
name") will be reinvested under the Plan unless such service is not provided by
the broker or nominee or the shareholder elects to receive dividends and
distributions in cash. A shareholder whose shares are held by the broker or
nominee that does provide a dividend reinvestment program may be required to
have his shares registered in his own name to participate in the Plan. Investors
who own shares of the Fund's common stock registered in street name should
contact the broker or nominee for details concerning participation in the Plan.
Certain distributions of cash attributable to the Fund that are derived from
securities of Brazilian issuers are subject to taxes payable by the Fund at the
time amounts are remitted. Such taxes, if any, will be borne by the Fund and
allocated to all shareholders in proportion to their interests in the Fund.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the Board of Directors of the Fund declares an income dividend or a capital
gain distribution payable either in the Fund's common stock or in cash, as
shareholders may have elected, nonparticipants in the Plan will receive cash and
participants in the Plan will receive common stock to be issued by the Fund. If
the market price per share on the valuation date equals or exceeds net asset
value per share on that date, the Fund will issue new shares to participants
valued at net asset value or, if the net asset value is less than 95% of the
market price on the valuation date, then valued at 95% of the market price. If
net asset value per share on the valuation date exceeds the market price per
share on that date, participants in the Plan will receive shares of stock from
the Fund valued at the market price.
The valuation date is the dividend or distribution payment date or, if that date
is not a New York Stock Exchange trading day, the next preceding trading day. If
the Fund should declare an income dividend or capital gain distribution payable
only in cash, the Plan Agent will, as agent for the participants, buy Fund
shares in the open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts on, or shortly after, the payment date.
Participants in the Plan have the option of making additional cash payments to
the Plan Agent, semiannually, in any amount from $100 to $3,000, for investment
in the Fund's common stock. The Plan Agent will use all funds received from
participants to purchase Fund shares in the open market on or about
17
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THE BRAZILIAN EQUITY FUND, INC.
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February 15th and August 15th of each year. Any voluntary cash payments received
more than 30 days prior to these dates will be returned by the Plan Agent and
interest will not be paid on any uninvested cash payments. To avoid unnecessary
cash accumulations, and also to allow ample time for receipt and processing by
the Plan Agent, it is suggested that participants send in voluntary cash
payments to be received by the Plan Agent approximately 10 days before February
15th or August 15th, as the case may be. A participant may withdraw a voluntary
cash payment by written notice, if the notice is received by the Plan Agent not
less than 48 hours before the payment is to be invested. A participant's tax
basis in his shares acquired through this optional investment right will equal
his cash payments to the Plan, including any cash payments used to pay brokerage
commissions allocable to his acquired shares.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in the name of the
participant and each shareholder's proxy will include those shares purchased
pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital gain
distributions payable in either stock or cash. The Plan Agent's fee for the
handling of reinvestment of such dividends and capital gain distributions will
be paid by the Fund. There will be no brokerage charges with respect to shares
issued directly by the Fund as a result of dividends or capital gain
distributions payable either in stock or cash. However, each participant will be
charged by the Plan Agent a pro rata share of brokerage commissions incurred
with respect to the Plan Agent's open market purchases in connection with
voluntary cash payments made by the participant or the reinvestment of dividends
or capital gain distributions payable only in cash. Brokerage charges for
purchasing small amounts of stock for individual accounts through the Plan are
expected to be less than the usual brokerage charges for such transactions
because the Plan Agent will be purchasing stock for all participants in blocks
and prorating the lower commission thus obtainable. Brokerage commissions will
vary based on, among other things, the broker selected to effect a particular
purchase and the number of participants on whose behalf such purchase is being
made. The Fund cannot predict, therefore, whether the cost to a participant who
makes a voluntary cash payment will be less than if a participant were to make
an open market purchase of the Fund's common stock on his own behalf.
The Fund and the Plan Agent reserve the right to terminate the Plan as applied
to any voluntary cash payments made and any dividends or capital gain
distributions paid subsequent to notice of the termination sent to the members
of the Plan at least 30 days before the semiannual contribution date, in the
case of voluntary cash payments, or the record date for dividends or capital
gain distributions. The Plan also may be amended by the Fund or the Plan Agent,
but (except when necesaary or appropriate to comply with applicable law, rules
or policies of a regulatory authority) only by at least 30 days' written notice
to the members of the Plan. All correspondence concerning the Plan should be
directed to the Plan Agent, c/o PFPC, Inc., 400 Bellevue Parkway, Wilmington,
Delaware 19809 or by telephone at 1-800-852-4750.
18
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TAX INFORMATION
The Fund is required by subchapter M of the Internal Revenue Code of 1986, as
amended, to advise its shareholders within 60 days of the Fund's fiscal year end
(March 31, 1995) as to the U.S. federal tax status of distributions received by
the Fund's shareholders in respect of such fiscal year. Of the $3.86 per share
dividend and capital gain distribution paid in respect of such fiscal year,
$0.03 was derived from net investment income, $0.22 was derived from net
short-term captial gains and $3.61 was derived from net long-term capital gains.
There were no dividends which would qualify for the dividend received deduction
available to corporate shareholders. The Fund paid no foreign withholding taxes,
therefore no foreign tax credit or deduction is available to its shareholders.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1995. The second notification, which
will reflect the amount to be used by calendar year taxpayers on their 1995
federal income tax returns, will be made in conjunction with Form 1099 DIV and
will be mailed
in January 1996. Shareholders are advised to consult their own tax advisers with
respect to the tax consequences of their investment in the Fund.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their dividend.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be
reported as taxable income for U.S. federal income tax purposes. However, some
retirement trusts (e.g., corporate, Keogh and 403(b)(7) plans) may need this
information for their annual information reporting.
OTHER INFORMATION
Since the filing of the most recent amendment to the Fund's registration
statement with the Securities and Exchange Commission, there have been (i) no
material changes in the Fund's investment objectives or policies, (ii) no
changes to the Fund's charter or by-laws that would delay or prevent a change of
control of the Fund, (iii) no material changes in the principal risk factors
associated with investment in the Fund, and (iv) no change in the person
primarily responsible for the day-to-day management of the Fund's portfolio.
19
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INVESTMENT ADVISOR
BEA Associates
New York, New York
ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
New York, New York
TRANSFER AGENT AND REGISTRAR
PNC Bank, N.A.
Philadelphia, Pennsylvania
CUSTODIANS
PNC Bank, N.A.
Philadelphia, Pennsylvania
Banco Bradesco de Investimento S.A.
Osasco, Brazil
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
This report, including the financial statements herein, is sent to shareholders
of the Fund for their information. It is not a prospectus, circular or
representation intended for use in the purchase or sale of the Fund or of any
securities mentioned in this report.
THE BRAZILIAN EQUITY
-------------------------
FUND, INC.
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THE BRAZILIAN EQUITY FUND, INC.
ANNUAL REPORT
MARCH 31, 1995
