<PAGE>
333-5475; Rule 497(c).
PROSPECTUS
THE BRAZILIAN EQUITY FUND, INC.
1,544,668 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE FOR SUCH SHARES
-------------------
The Brazilian Equity Fund, Inc. (the "Fund") is issuing to its shareholders
of record ("Record Date Shareholders") as of the close of business on July 17,
1996 (the "Record Date") non-transferable rights ("Rights") entitling the
holders thereof to subscribe for an aggregate of 1,544,668 shares ("Shares") of
the Fund's common stock (the "Offer"). Each Record Date Shareholder is being
issued one Right for each whole share of the Fund's common stock ("Common
Stock") owned on the Record Date. The Rights entitle the Record Date Shareholder
to acquire at the Subscription Price (as hereinafter defined) one Share for
every three Rights held (one for three). Shareholders who fully exercise their
Rights will be entitled to subscribe for additional shares of Common Stock
pursuant to an Over-Subscription Privilege, as described herein. The Fund may
increase at its discretion the number of shares of Common Stock subject to
subscription by up to 25% of the Shares, or 386,167 Shares, for an aggregate
total of 1,930,835 Shares. Fractional Shares will not be issued upon the
exercise of Rights. Accordingly, Shares may be purchased only pursuant to the
exercise of Rights in integral multiples of three. The Rights are non-
transferable and will not be admitted for trading on the New York Stock Exchange
or any other exchange. See "The Offer." THE SUBSCRIPTION PRICE PER SHARE (THE
"SUBSCRIPTION PRICE") WILL BE 90% OF THE LOWER OF (i) THE AVERAGE OF THE LAST
REPORTED SALES PRICE OF A SHARE OF THE FUND'S COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE ON THE DATE OF THE EXPIRATION OF THE OFFER (THE "PRICING DATE") AND ON
THE FOUR PRECEDING BUSINESS DAYS THEREOF AND (ii) THE NET ASSET VALUE PER SHARE
AS OF THE CLOSE OF BUSINESS ON THE PRICING DATE.
The Fund announced the Offer after the close of trading on the New York
Stock Exchange on June 6, 1996. Shares of the Common Stock trade on that
exchange under the symbol "BZL." The last reported net asset value per share of
Common Stock at the close of business on June 6, 1996 and July 11, 1996 was
$15.51 and $17.43, respectively, and the last reported sales price of a share of
the Fund's Common Stock on that exchange on those dates was $13.50 and $14.75,
respectively.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON AUGUST 16, 1996
(THE "EXPIRATION DATE"), UNLESS EXTENDED AS DESCRIBED HEREIN.
Upon the completion of the Offer, Record Date Shareholders who do not fully
exercise their Rights will own a smaller proportional interest in the Fund than
would otherwise be the case if the Offer had not been made. In addition, because
the Subscription Price per Share will be less than the net asset value per
share, the Offer will result in dilution of net asset value per share for all
shareholders. If the Subscription Price per Share were to be substantially less
than the net asset value per share, such dilution would be substantial.
Shareholders will have no right to rescind their subscriptions after receipt of
their payment for Shares by the Subscription Agent. See "Risk Factors and
Special Considerations--Certain Effects of the Offer."
If you have questions or need further information about the Offer, please
call Shareholder Communications Corporation, the Fund's information agent for
the Offer at (800) 733-8481, extension 348.
(CONTINUED ON THE FOLLOWING PAGE)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED PROCEEDS
SUBSCRIPTION ESTIMATED TO
PRICE(1) SALES LOAD(2) THE FUND(3)(4)
<S> <C> <C> <C>
Per Share.................. $ 13.28 $ 0.48 $ 12.80
Total Maximum(5)........... $ 20,513,191 $ 741,441 $ 19,771,750
</TABLE>
(FOOTNOTES ON THE FOLLOWING PAGE)
-------------------
BEAR, STEARNS & CO. INC.
-------------------
THE DATE OF THIS PROSPECTUS IS JULY 17, 1996
<PAGE>
(CONTINUED FROM THE PREVIOUS PAGE)
The Fund is a closed-end, non-diversified management investment company that
seeks long-term capital appreciation by investing primarily in Brazilian equity
securities. It is the policy of the Fund, under normal market conditions, to
invest at least 65% of its total assets in equity securities of Brazilian
issuers. It is anticipated that at least 80% of the Fund's assets normally will
be invested in equity securities of Brazilian issuers. There can be no assurance
that the Fund's investment objective will be achieved. See "Investment Objective
and Policies." BEA Associates serves as the Fund's investment adviser. The
address of the Fund is One Citicorp Center, 57th Floor, 153 East 53rd Street,
New York, New York 10022, and the Fund's telephone number is (212) 832-2626.
INVESTMENT IN BRAZIL INVOLVES CERTAIN SPECIAL CONSIDERATIONS NOT TYPICALLY
ASSOCIATED WITH INVESTMENTS IN THE UNITED STATES. SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS."
This Prospectus sets forth information about the Fund that a prospective
investor ought to know before investing and should be retained for future
reference. A Statement of Additional Information dated July 17, 1996 (the "SAI")
containing additional information about the Fund has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this Prospectus. A copy of the SAI, the table of contents of which
appears on page 33 of this Prospectus, may be obtained without charge by
contacting the Information Agent at the address and telephone number set forth
above. Any such request will be honored within two business days of receipt.
-------------------
(FOOTNOTES FROM THE PREVIOUS PAGE)
(1) Estimated on the basis of 90% of the market price per share on July 11,
1996. See "The Offer-- Subscription Price."
(2) In connection with the Offer, Bear, Stearns & Co. Inc. (the "Dealer
Manager") and other broker-dealers soliciting the exercise of Rights will
receive soliciting fees equal to 2.50% of the Subscription Price per Share
for each Share issued upon exercise of the Rights and the Over-Subscription
Privilege. The Fund has also agreed to pay the Dealer Manager a fee for
financial advisory and marketing services in connection with the Offer equal
to 1.125% of the Subscription Price per Share for Shares issued upon
exercise of the Rights and the Over-Subscription Privilege and has agreed to
indemnify the Dealer Manager against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act").
(3) Before deduction of offering expenses incurred by the Fund, estimated at
$396,250, including an aggregate of up to $100,000 to be paid to the Dealer
Manager as partial reimbursement for its expenses.
(4) Funds received by check prior to the final due date of this Offer will be
deposited into a segregated interest bearing account (which interest will be
paid to the Fund) pending proration and distribution of Shares.
(5) Assumes all Rights are exercised at the Estimated Subscription Price.
Pursuant to the Over-Subscription Privilege, the Fund may at its discretion
increase the number of Shares subject to subscription by up to 25% of the
Shares offered hereby. If the Fund increases the number of Shares subject to
subscription by 25%, the aggregate maximum Estimated Subscription Price,
Estimated Sales Load and Estimated Proceeds to the Fund will be $25,641,489,
$926,801 and $24,714,688, respectively.
-------------------
Unless otherwise specified, all references in this Prospectus to "U.S.
dollars," "dollars," "US$" or "$" are to United States dollars.
Unless otherwise specified, all references to "Reais" are to the Real which
has been the legal tender currency of Brazil since July 1, 1994. On July 9,
1996, one US dollar equalled .99 Real.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS AND THE STATEMENT OF
ADDITIONAL INFORMATION ("SAI").
PURPOSE OF THE OFFER
The Board of Directors of The Brazilian Equity Fund, Inc. (the "Fund") has
determined that it would be in the best interests of the Fund and its
shareholders to increase the assets of the Fund available for investment,
thereby enabling the Fund to more fully take advantage of available investment
opportunities consistent with the Fund's investment objective of long-term
capital appreciation. In reaching its decision, the Board of Directors was
advised by BEA Associates that the availability of new funds would provide the
Fund with additional investment flexibility as well as increase the Fund's
ability to take advantage of what BEA Associates believes to be timely
opportunities in the Brazilian market as a result of recent economic and
political events and stock market developments. In evaluating such investment
opportunities, the Board considered, among other things, the impact that
Brazil's reform process would have on the country's stock prices, the future
prospects for Brazil's growth and the likelihood of future privatizations.
The Board of Directors also considered that a well-subscribed rights
offering may reduce the Fund's expense ratio, which may be of long-term benefit
to shareholders. In addition, the Board of Directors considered that such a
rights offering could result in an improvement in the liquidity of the trading
market for shares of the Fund's common stock ("Common Stock") on the New York
Stock Exchange, where the shares are listed and traded. The Board of Directors
also considered the proposed terms of the Offer (as defined below), including
the expenses of the Offer, and its dilutive effect, including the effect on non-
exercising shareholders of the Fund. After careful consideration, the Fund's
Board of Directors unanimously voted to approve the Offer.
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to the Offer. Any such future rights offering will be made
in accordance with the Investment Company Act of 1940, as amended (the "1940
Act").
TERMS OF THE OFFER
The Fund is issuing to its shareholders of record ("Record Date
Shareholders") as of the close of business on July 17, 1996 (the "Record Date")
non-transferable rights ("Rights") to subscribe for an aggregate of 1,544,668
shares ("Shares") of the Fund's Common Stock, par value $0.001 per share (the
"Offer"). Each Record Date Shareholder is being issued one Right for each whole
share of Common Stock owned on the Record Date. The Rights entitle the Record
Date Shareholder to acquire at the Subscription Price (as hereinafter defined)
one Share for every three Rights held (one for three). Rights may be exercised
at any time during the offering period (the "Subscription Period"), which
commences on July 17, 1996 and ends at 5:00 p.m., New York City time, on August
16, 1996 (the "Expiration Date"), unless extended by the Fund until 5:00 p.m.,
New York City time, on a date no later than August 23, 1996. The right to
acquire one Share for every three Rights held during the Subscription Period at
the Subscription Price is hereinafter referred to as the "Primary Subscription."
OVER-SUBSCRIPTION PRIVILEGE
Any Record Date Shareholder who fully exercises all Rights issued to such
shareholder is entitled to subscribe for Shares which were not otherwise
subscribed for by others on Primary Subscription (the "Over-Subscription
Privilege"). If sufficient Shares are not available to honor all requests for
over-subscriptions, the Fund may, at its discretion, issue shares of Common
Stock up to an additional 25% of the Shares available pursuant to the Offer (up
to 386,167 Shares) in order to satisfy such over-subscription requests. Shares
requested pursuant to the Over-Subscription Privilege may be subject to
allotment, which is more fully discussed under "The Offer--Over-Subscription
Privilege."
3
<PAGE>
SUBSCRIPTION PRICE
The subscription price per Share (the "Subscription Price") will be 90% of
the lower of (i) the average of the last reported sales price of a share of the
Fund's Common Stock on the New York Stock Exchange on the Expiration Date (the
"Pricing Date") and on the four preceding business days thereof and (ii) the net
asset value per share as of the close of business on the Pricing Date. See "The
Offer--Subscription Price."
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted for trading on the New York Stock Exchange
or any other exchange. However, the Shares to be issued pursuant to the Rights
will be admitted for trading on the New York Stock Exchange.
METHOD OF EXERCISE OF RIGHTS
Rights will be evidenced by subscription certificates ("Subscription
Certificates") that will be mailed to Record Date Shareholders, or if shares are
held by Cede & Co. ("Cede"), the nominee for The Depository Trust Company, or
any other depository or nominee, to Cede or such other depository or nominee.
Rights may be exercised by completing and signing a Subscription Certificate and
delivering it, together with payment, either by means of a notice of guaranteed
delivery or a check, to The First National Bank of Boston (the "Subscription
Agent"). Shareholders who exercise their Rights will have no right to rescind
their subscription after the Subscription Agent has received payment. See "The
Offer--Subscription Agent" and "The Offer--Method of Exercise of Rights."
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (for these purposes the
United States includes its territories and possessions and the District of
Columbia) ("Foreign Record Date Shareholders"). The Rights to which such
Subscription Certificates relate will be held by the Subscription Agent for such
Foreign Record Date Shareholder's accounts until instructions are received to
exercise the Rights. If no instructions are received prior to the Expiration
Date, such Rights will expire.
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
- ------------------------------------------------------------------ -------------------------------------------
<S> <C>
Record Date....................................................... July 17, 1996
Subscription Period............................................... July 17, 1996 to August 16, 1996*
Payment for Shares or Notice of Guaranteed Delivery Due........... August 16, 1996*
Expiration and Pricing Date....................................... August 16, 1996*
Payment for Guarantees of Delivery Due............................ August 21, 1996*
Confirmation to Participants...................................... August 30, 1996*
Final Payment for Shares.......................................... September 16, 1996*
</TABLE>
- ---------
* Unless the Offer is extended to a date not later than August 23, 1996.
INFORMATION AGENT
The Information Agent for the Offer (the "Information Agent") is:
[LOGO]
Toll Free: (800) 733-8481, Extension 348
DISTRIBUTION ARRANGEMENTS
Bear, Stearns & Co. Inc. (the "Dealer Manager") will act as the dealer
manager for the Offer. The Fund has agreed to pay the Dealer Manager a fee for
its financial advisory and marketing services equal to 1.125% of the
Subscription Price per Share for Shares issued upon exercise of the Rights and
the Over-Subscription
4
<PAGE>
Privilege, and to pay broker-dealers, including the Dealer Manager, fees for
their soliciting efforts equal to 2.50% of the Subscription Price per Share for
each Share issued upon exercise of the Rights and the Over-Subscription
Privilege. See "Distribution Arrangements."
INFORMATION REGARDING THE FUND
The Fund has been engaged in business as a closed-end, non-diversified
management investment company since April 10, 1992. The Fund's investment
objective is long-term capital appreciation by investing primarily in Brazilian
equity securities. The Fund's policy, under normal market conditions, is to
invest at least 65% of its total assets in equity securities of Brazilian
issuers. The Fund expects, under normal market conditions, to have at least 80%
of its assets invested in Brazilian equity securities. The Fund may also invest
up to 25% of its assets in corporate and governmental debt securities of
Brazilian issuers for the purpose of seeking long-term capital appreciation. The
portion of the Fund's assets not invested in Brazilian equity and debt
securities may be invested in securities deemed to be "Temporary Investments"
(as defined below under "Investment Objective and Policies"). There can be no
assurance that the Fund's investment objective will be achieved. See "Investment
Objective and Policies." BEA Associates anticipates that investment of the net
proceeds of the Offer, in accordance with the Fund's investment objective and
policies, will take up to six months from their receipt by the Fund, depending
on market conditions and the availability of appropriate securities. The Fund
intends to invest in Brazilian equity securities promptly as investment
opportunities are identified, but over a period of time in order to minimize
local market impact. See "Use of Proceeds." The Common Stock is listed and
traded on the New York Stock Exchange under the symbol "BZL." As of July 11,
1996, the net assets of the Fund were approximately $81 million.
INVESTMENT ADVISER AND ADMINISTRATORS
BEA Associates, a U.S. investment counseling firm ("BEA Associates"), serves
as the Fund's investment adviser. BEA Associates emphasizes a global investment
strategy and, as of March 31, 1996, acted as adviser for assets in excess of
$28.5 billion, including as of that date approximately $2.5 billion of assets
invested in Latin American markets.
Bear Stearns Funds Management Inc., an affiliate of the Dealer Manager,
serves as the Fund's U.S. administrator (the "U.S. Administrator") and The First
National Bank of Boston, Sao Paulo ("Bank of Boston, Sao Paulo") serves as the
Fund's Brazilian administrator ("Brazilian Administrator"). The Fund has also
retained BEA Associates to provide certain administrative and shareholder
services to the Fund not provided by the Fund's administrators. See "Management
of the Fund."
ADVISORY, ADMINISTRATIVE AND CONSULTING FEES
The aggregate annual fees payable by the Fund for investment advice (after
fee waiver) equal 1.00% of the first U.S. $100 million of the Fund's average
weekly net assets and 0.70% of amounts over U.S. $100 million. The advisory fees
paid by the Fund are higher than those paid by most other U.S. investment
companies investing exclusively in the securities of U.S. issuers, primarily
because of the additional time and expense required of BEA Associates when
investing in a single country. Such investments entail additional time and
expense because available public information concerning Brazilian securities is
limited in comparison to that available for U.S. companies, and accounting
standards vary from U.S. accounting standards. See "Management of the Fund."
For administrative services in the United States, the Fund pays the U.S.
Administrator a fee at an annual rate of 0.10% of the first $100 million of the
Fund's average weekly net assets and 0.08% of amounts in excess of $100 million.
The Brazilian Administrator is paid a fee, out of the custody fee payable to
Brown Brothers Harriman & Co., the Fund's accounting agent and custodian, a
quarterly fee based on an annual rate of 0.12% of the average month-end assets
of the Fund held in Brazil. BEA Associates is reimbursed by the Fund for costs
incurred by BEA Associates on behalf of the Fund pursuant to its administrative
services agreement (up to U.S. $20,000 per annum).
Since the Fund's investment adviser's and administrators' fees are based on
the net assets of the Fund, the Fund's investment adviser and administrators
will benefit from an increase in the Fund's assets resulting
5
<PAGE>
from the Offer. In addition, three directors who are "interested persons" (as
such term is defined under the 1940 Act) of the Fund because of their positions
as directors and/or officers of BEA Associates could benefit indirectly from the
Offer because of such directors' affiliations. See "The Offer--Certain Impact on
Fees."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain matters that should be considered, among
others, in connection with an exercise of Rights and an additional investment in
the Fund.
CERTAIN EFFECTS OF THE OFFER. Upon the completion of the Offer,
shareholders who do not fully exercise their Rights will own a smaller
proportional interest in the Fund than would be the case if the Offer had not
been made. In addition, an immediate dilution of the net asset value per share
will be experienced by all shareholders as a result of the Offer because the
Subscription Price will be less than the then current net asset value per share,
the Fund will bear the expenses of the Offer and the number of shares
outstanding after the Offer will have increased proportionately more than the
increase in the size of the Fund's net assets. Although it is not possible to
state precisely the amount of such a decrease in net asset value, because it is
not known at this time how many Shares will be subscribed for or what the
Subscription Price will be, such dilution might be substantial. See "Risk
Factors and Special Considerations."
ECONOMIC AND POLITICAL FACTORS. Like other investors in Brazilian
securities, the Fund is subject to the general economic and political conditions
in Brazil. The investment by the Fund in Brazilian equity securities, as well as
in corporate and governmental debt securities of Brazilian issuers (including
assignments of, and participations in, fixed and floating rate loans), involves
certain considerations not typically associated with investments in securities
of U.S. companies, including (a) controls on foreign investment and on the
Fund's ability to exchange Reais for U.S. dollars, (b) greater share price
volatility, substantially less trading liquidity and significantly smaller
market capitalization of securities markets, (c) currency devaluations and other
currency exchange rate fluctuations, (d) more substantial government involvement
in the economy, (e) significantly higher historical rates of inflation, (f) less
government supervision and regulation of the securities markets and participants
in those markets and (g) political uncertainty and other considerations. See
"Risk Factors and Special Considerations."
CURRENCY DEVALUATIONS AND FLUCTUATIONS; REPORTING STANDARDS. Because the
Fund generally does not seek to hedge against a decline in the value of Reais,
the Fund will be adversely affected by devaluations of Reais against the U.S.
dollar to the extent the Fund is invested in securities quoted or denominated in
Reais. In addition, accounting, auditing and financial reporting standards in
Brazil are different from U.S. standards. As a result, certain material
disclosures may not be made and less information may be available to the Fund
and other investors than would be the case if the Fund's investments were
restricted to securities of U.S. issuers. See "Risk Factors and Special
Considerations."
BRAZILIAN DEBT. The Fund may invest up to 25% of its assets in corporate
and government debt securities of Brazilian issuers, including sovereign debt,
for the purpose of seeking long-term capital appreciation. The issuers of the
debt or the governmental authorities that control the repayment of the debt may
be unable or unwilling to repay principal and/or interest when due in accordance
with the terms of such debt. Brazilian debt instruments in which the Fund may
invest are widely considered to have a credit quality below investment grade as
determined by U.S. rating agencies (and as low as securities rated D by Standard
& Poor's Ratings Group ("S&P") or C by Moody's Investors Service, Inc.
("Moody's")). As a result, Brazilian debt may be regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and involves major
risk exposure to adverse conditions. The Fund may not, however, invest more than
5% of its assets in debt securities that are determined by BEA Associates to be
comparable to securities rated C or below by either S&P or Moody's. Certain
Brazilian debt instruments available for investment by the Fund are not
currently paying principal and/or interest. There is no liquid secondary market
for certain Brazilian debt securities, and the Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may also have an adverse impact
on the market price for such securities and may make it more difficult for the
Fund to obtain accurate market quotations for purposes of valuing the Fund's
portfolio and calculating its net asset value. In addition, the market value of
6
<PAGE>
lower quality securities, such as certain Brazilian debt securities, may be less
sensitive to interest rate changes but more sensitive to adverse economic
changes than that of higher quality securities. See "Risk Factors and Special
Considerations."
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Fund may invest up to 25% of its
assets in corporate and governmental debt securities of Brazilian issuers,
including investments in loan assignments and participations. The Fund's
investments in loan participations in a lender's portion of a loan typically
will result in the Fund having a contractual relationship only with the lender,
not with the borrower. As a result, the Fund will assume the credit risk of both
the borrower and the lender selling the loan participation. Because there is no
liquid market for loan assignments or participations, the Fund may have
difficulty disposing of such securities. See "Risk Factors and Special
Considerations."
MARKET VALUE AND NET ASSET VALUE. Shares of closed-end investment companies
frequently trade at a discount to net asset value. This characteristic of shares
of a closed-end fund is a risk separate and distinct from the risk that the
Fund's net asset value may decrease. The Fund cannot predict whether its shares
will trade at, below or above net asset value. Since the commencement of the
Fund's operations, the Fund's shares have traded in the market for more than
half of that time at a discount to net asset value. See "Net Asset Value" and
"Common Stock."
RIGHTS UNDER BRAZILIAN LAW. It may be more difficult for the Fund to obtain
a judgment in a court in Brazil than in the United States.
NON-DIVERSIFIED STATUS. The Fund is classified as a "non-diversified"
investment company under the 1940 Act, which means that the Fund is not limited
by that Act in the proportion of its assets that may be invested in the
securities of a single issuer. The Fund, however, is subject to certain
Brazilian laws limiting investment in a single issuer and has complied with and
intends to continue to comply with the diversification requirements imposed by
the U.S. Internal Revenue Code of 1986 for qualification as a regulated
investment company. As a non-diversified investment company, the Fund may invest
a greater proportion of its assets in the securities of a smaller number of
issuers and, as a result, may be subject to greater risk with respect to
portfolio securities. See the SAI under "Investment Restrictions" and
"Taxation--United States Federal Income Taxes--The Fund and Its Investments."
CHARTER PROVISIONS. Certain provisions of the Fund's Articles of
Incorporation may have the effect of inhibiting the Fund's possible conversion
to open-end status and limiting the ability of other persons to acquire control
of the Fund's Board of Directors. In certain circumstances, these provisions
might also inhibit the ability of shareholders to sell their shares at a premium
over prevailing market prices. See "Common Stock."
7
<PAGE>
FEE TABLE
The following table sets forth certain fees and expenses of the Fund.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of the Subscription Price per Share)(1)............ 3.625%
ANNUAL EXPENSES (as a percentage of net assets)
Management Fees (after waiver)(2).............................................. 1.00%
Other Expenses(3).............................................................. 0.67%
TOTAL ANNUAL EXPENSES(2)........................................................... 1.67%
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- ------------------------------------------------------------------------------------ --- ----- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment assuming a 5% annual
return(4)....................................................................... $53 $87 $124 $227
</TABLE>
- ---------
(1) The Dealer Manager and the other broker-dealers soliciting the exercise of
Rights will receive soliciting fees equal to 2.50% of the Subscription Price
per Share for each Share issued upon exercise of the Rights and the
Over-Subscription Privilege. The Fund has also agreed to pay the Dealer
Manager a fee for financial advisory and marketing services in connection
with the Offer equal to 1.125% of the Subscription Price per Share for
Shares issued upon exercise of the Rights and the Over-Subscription
Privilege. These fees will be borne by the Fund and indirectly by all of the
Fund's shareholders, including those shareholders who do not exercise their
Rights.
(2) Based on net assets of the Fund after giving effect to the anticipated net
proceeds of the Offer including proceeds from the issuance of up to 25% of
the Shares pursuant to the Over-Subscription Privilege. The Management Fee
payable to BEA Associates (after the waiver) is 1.00% of the first $100
million of the Fund's average weekly net assets and 0.70% of the Fund's
average weekly net assets in excess of $100 million. Management Fees
(without the fee waiver) and Total Annual Expenses would have been 1.35% and
2.02%, respectively, after giving effect to the Offer, including the
issuance of up to 25% of the Shares pursuant to the Over-Subscription
Privilege.
(3) Based upon estimated amounts for the current fiscal year and on the net
assets of the Fund after giving effect to the anticipated net proceeds of
the Offer including proceeds from the issuance of up to 25% of the Shares
pursuant to the Over-Subscription Privilege. Does not include expenses of
the Fund incurred in connection with the Offer, estimated at $396,250.
(4) The example reflects the Sales Load and other expenses of the Fund incurred
in connection with the Offer and assumes that all of the Rights are
exercised.
THE PURPOSE OF THE FOREGOING TABLE AND EXAMPLE IS TO ASSIST RIGHTS HOLDERS
IN UNDERSTANDING THE VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND
BEARS, DIRECTLY OR INDIRECTLY, BUT SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR RATE OF RETURN. THE ACTUAL EXPENSES OF THE FUND MAY
BE GREATER OR LESSER THAN THOSE SHOWN. For more complete descriptions of certain
of the Fund's costs and expenses, see "Management of the Fund" below and in the
SAI.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth selected financial data for a share of Common
Stock outstanding throughout each period presented. The per share operating
performance and ratios for each of the periods have been derived from financial
statements audited by Coopers & Lybrand L.L.P., the Fund's independent
accountants, as stated in their report which is incorporated by reference into
the SAI. The following information should be read in conjunction with the
Financial Statements and Notes thereto, which are incorporated by reference into
the SAI.
PER SHARE OPERATING PERFORMANCE FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH
PERIOD
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD 4/10/92*
3/31/96 3/31/95 3/31/94 THROUGH 3/31/93
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......................... $13.02 $20.80 $11.83 $13.79 **
Net Investment Income/(loss).................................. 0.06 (0.12) (0.04) 0.06
Net Realized and Unrealized Gains or Losses on Investments and
Foreign Currency-Related Transactions........................ 3.32 + (3.80) 9.09 (1.99)
----------- ----------- ----------- ---------------
Net Increase/(Decrease) in Net Assets Resulting from
Operations................................................... 3.38 (3.92) 9.05 (1.93)
----------- ----------- ----------- ---------------
Less Dividends and Distributions;
Dividends (from net investment income)........................ -- -- (0.08) (0.03)
In excess of net investment income............................ -- (0.03) -- --
Net realized gain on investments.............................. (2.22) (3.83) -- --
----------- ----------- ----------- ---------------
Total Dividends and Distributions............................. (2.22) (3.86) (0.08) (0.03)
----------- ----------- ----------- ---------------
Net Asset Value, End of Period................................ $14.18 $13.02 $20.80 $11.83
----------- ----------- ----------- ---------------
----------- ----------- ----------- ---------------
Per Share Market Value, End of Period......................... $13.875 $14.75 $19.00 $11.25
----------- ----------- ----------- ---------------
----------- ----------- ----------- ---------------
Total Investment Return(a).................................... 8.85 % (6.79)% 69.55 % (19.16) %
----------- ----------- ----------- ---------------
----------- ----------- ----------- ---------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted)........... $65,696 $60,156 $95,820 $54,493
Ratio of Expenses to Average Net Assets, net of
fee waivers...................................... 1.76% 1.86%++ 2.05%++ 2.45%(b)
Ratio of Expenses to Average Net Assets, without
fee waivers...................................... 2.11% 2.13% 2.05% 2.45%(b)
Ratio of Net Investment Income/(loss) to Average
Net Assets....................................... 0.39% (0.62)% (0.28)% 0.61%(b)
Portfolio Turnover Rate........................... 55% 69% 73% 50%(c)
</TABLE>
- ------------
<TABLE>
<S> <C>
* Commencement of investment operations.
** Initial public offering price of $15.00 per share less underwriting discount of $1.05 per share
and offering expenses of $0.16 per share.
+ Includes a $0.01 per share increase to the Fund's net asset value per share resulting from the
anti-dilutive impact of shares issued pursuant to the Fund's automatic dividend reinvestment
plan in 1996.
++ For the calendar year ending December 31, 1994, the Brazilian Congress imposed a 0.25%
withholding tax on financial transactions. If such tax had not been imposed, the ratio of
expenses to average net assets would have been 1.73% for the year ended March 31, 1995 and 2.02%
for the year ended March 31, 1994, net of fee waivers and 2.00% for the year ended March 31,
1995 and 2.02% for the year ended March 31, 1994 excluding fee waivers.
(a) Total investment return at market value is based on the changes in market price of a share
during the period and assumes reinvestment of dividends and distributions, if any, at actual
prices pursuant to the Fund's dividend reinvestment plan. Total investment return does not
reflect brokerage commissions or initial underwriting discounts and has not been annualized.
(b) Annualized.
(c) Not annualized.
</TABLE>
9
<PAGE>
THE OFFER
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interest of the Fund and its shareholders to increase the assets of the
Fund available for investment, thereby enabling the Fund to more fully take
advantage of available investment opportunities consistent with the Fund's
investment objective of long-term capital appreciation. In reaching its
decision, the Board of Directors was advised by BEA Associates that the
availability of new funds would provide the Fund with additional investment
flexibility as well as increase the Fund's ability to take advantage of what BEA
Associates believes to be timely opportunities in the Brazilian market as a
result of recent economic and political events and stock market developments. In
evaluating such investment opportunities, the Board considered among other
things the impact that Brazil's reform process would have on the country's stock
prices, the future prospects for Brazil's growth and the likelihood of future
privatizations.
The Board of Directors also considered that a well-subscribed rights
offering may reduce the Fund's expense ratio, which may be of long-term benefit
to shareholders. In addition, the Board of Directors considered that such a
rights offering could result in an improvement in the liquidity of the trading
market for shares of the Fund's Common Stock on the New York Stock Exchange,
where the shares are listed and traded. The Board of Directors also considered
the proposed terms of the Offer, including the expenses of the Offer, and its
dilutive effect, including the effect on non-exercising shareholders of the
Fund. After careful consideration, the Fund's Board of Directors unanimously
voted to approve the Offer.
The Fund may, in the future and at its discretion, choose to make additional
rights offerings from time to time for a number of shares and on terms which may
or may not be similar to the Offer. Any such future rights offering will be made
in accordance with the 1940 Act.
TERMS OF THE OFFER
The Fund is issuing to Record Date Shareholders Rights to subscribe for
Shares pursuant to the exercise of such Rights. Each Record Date Shareholder is
being issued one Right for each whole share of Common Stock owned on the Record
Date. The Rights entitle the shareholder to acquire at the Subscription Price
one Share for every three Rights held (one for three). Fractional Shares will
not be issued upon the exercise of Rights. Accordingly, Shares may be purchased
only pursuant to the exercise of Rights in integral multiples of three. Rights
may be exercised at any time during the Subscription Period, which commences on
July 17, 1996 and ends at 5:00 p.m., New York City time, on August 16, 1996,
unless extended by the Fund until 5:00 p.m., New York City time, on a date not
later than August 23, 1996. A Record Date Shareholder's right to acquire one
Share for every three Rights held during the Subscription Period at the
Subscription Price is hereinafter referred to as the "Primary Subscription." The
Rights are evidenced by Subscription Certificates, which will be mailed to
Record Date Shareholders, except as discussed below under "Foreign
Restrictions."
Any Record Date Shareholder who fully exercises all Rights issued to such
shareholder will be entitled to subscribe for additional Shares pursuant to the
Over-Subscription Privilege. Shares requested pursuant to the Over-Subscription
Privilege are subject to allotment and may be subject to increase, which is more
fully discussed below under "--Over-Subscription Privilege." For purposes of
determining the maximum number of Shares a Record Date Shareholder may acquire
pursuant to the Offer, shareholders whose shares are held of record by Cede, the
nominee for The Depository Trust Company, or by any other depository or nominee
will be deemed to be the holders of the Rights that are issued to Cede or such
other depository or nominee on their behalf.
As fractional Shares will not be issued, Record Date Shareholders who
receive or have remaining fewer than three Rights will be unable to purchase
Shares upon the exercise of such Rights and will not be entitled to receive any
cash in lieu thereof. Such shareholders, however, may subscribe for Shares
pursuant to the Over-Subscription Privilege provided such shareholders have
fully exercised the Rights issued to them. Shareholders will have no right to
rescind their subscriptions after receipt of their payment for Shares by the
Subscription Agent.
10
<PAGE>
OVER-SUBSCRIPTION PRIVILEGE
To the extent Record Date Shareholders do not exercise all of the Rights
issued to them, the underlying Shares represented by such Rights will be offered
by means of the Over-Subscription Privilege to Record Date Shareholders who have
exercised all the Rights issued to them pursuant to the Primary Subscription and
who desire to acquire additional Shares. Only Record Date Shareholders who
exercise all such Rights may indicate on the Subscription Certificate the number
of additional Shares desired pursuant to the Over-Subscription Privilege. If
sufficient Shares remain as a result of unexercised Rights, all
over-subscriptions may be honored in full. If sufficient Shares are not
available to honor all requests for over-subscriptions, the Fund may, at its
discretion, issue shares of Common Stock up to an additional 25% of the Shares
available pursuant to the Offer (up to 386,167 Shares) in order to satisfy such
over-subscription requests. Regardless of whether the Fund issues such
additional Shares, to the extent Shares are not available to honor all over-
subscriptions, the available Shares will be allocated among those who
over-subscribe based on the number of Rights originally issued to them by the
Fund, so that the number of Shares issued to Record Date Shareholders who
subscribe pursuant to the Over-Subscription Privilege will generally be in
proportion to the number of shares owned by them in the Fund on the Record Date.
The allocation process may involve a series of allocations in order to assure
that the total number of Shares available for over-subscriptions is distributed
on a pro rata basis.
The Fund will not sell any Shares that are not subscribed for pursuant to
the Primary Subscription or the Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price for each Share to be issued pursuant to the Rights
will be 90% of the lower of (i) the average of the last reported sales price of
a share of the Fund's Common Stock on the New York Stock Exchange on the Pricing
Date and on the four preceding business days thereof and (ii) the net asset
value per share as of the close of business on the Pricing Date. For example, if
the average of the last reported sales price on the New York Stock Exchange on
the Pricing Date and on the four preceding business days thereof of a share of
the Fund's Common Stock is $15.00, and the net asset value as of the close of
business on the Pricing Date is $15.50, the Subscription Price will be $13.50
(90% of $15.00). If, however, the average of the last reported sales price of a
share on that exchange on the Pricing Date and on the four preceding business
days thereof is $14.90, and the net asset value as of the close of business on
the Pricing Date is $14.80, the Subscription Price will be $13.32 (90% of
$14.80). See "Common Stock."
The Fund announced the Offer after the close of trading on the New York
Stock Exchange on June 6, 1996. The last reported net asset value per share of
Common Stock at the close of business on June 6, 1996 and July 11, 1996 was
$15.51 and $17.43, respectively, and the last reported sales price of a share of
the Fund's Common Stock on the New York Stock Exchange on those dates was $13.50
and $14.75, respectively.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or
sold. The Rights will not be admitted for trading on the New York Stock Exchange
or any other exchange. However, the Shares to be issued pursuant to the Rights
will be admitted for trading on the New York Stock Exchange.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on August 16, 1996,
unless extended by the Fund until 5:00 p.m., New York City time, to a date not
later than August 23, 1996. Rights will expire on the Expiration Date and
thereafter may not be exercised. Since the Expiration Date and the Pricing Date
will be the same date, Record Date Shareholders who decide to acquire Shares
during the Primary Subscription or pursuant to the Over-Subscription Privilege
will not know, when they make such decision, the purchase price for such Shares.
Any extension of the Offer will be followed as promptly as practical by an
announcement thereof. Without limiting the manner in which the Fund may choose
to make such announcement, the Fund will not, unless otherwise required by law,
have any obligation to publish, advertise or otherwise communicate any such
announcement other than by making a release to the Dow Jones News Service or
such other means of announcement as the Fund deems appropriate.
11
<PAGE>
SUBSCRIPTION AGENT
The Subscription Agent is The First National Bank of Boston ("Bank of
Boston"), 100 Federal Street, Boston, Massachusetts, which will receive, for its
administrative, processing, invoicing and other services as subscription agent,
a fee estimated to be $15,000, plus reimbursement for its out-of-pocket expenses
related to the Offer. The Subscription Agent is also the Fund's Transfer Agent,
Dividend-Paying Agent and Registrar with respect to the Common Stock. SIGNED
SUBSCRIPTION CERTIFICATES TOGETHER WITH PAYMENT OF THE ESTIMATED SUBSCRIPTION
PRICE MUST BE SENT TO BANK OF BOSTON by one of the methods described below. The
Fund will accept only Subscription Certificates actually received on a timely
basis at any of the addresses listed below.
(1) BY FIRST CLASS MAIL:
The First National Bank of Boston
Corporate Reorganization
P.O. Box 1889
Mail Stop 45-02-53
Boston, MA 02105
(2) BY HAND:
BancBoston Trust Company of New York
55 Broadway, 3rd Floor
New York, NY 10006
(3) BY OVERNIGHT COURIER:
The First National Bank of Boston
Corporate Agency & Reorganization
150 Royall Street
Mail Stop 45-02-53
Canton, MA 02021
(4) BY FACSIMILE (TELECOPY):
FOR NOTICE OF GUARANTEED DELIVERY ONLY
(617) 774-4519, with the original
Subscription Certificate to be sent
by one of the three methods above.
Confirm facsimile by telephone at
(617) 774-4511.
DELIVERY TO AN ADDRESS OTHER THAN THOSE SET FORTH ABOVE DOES NOT CONSTITUTE
GOOD DELIVERY.
METHOD OF EXERCISE OF RIGHTS
Rights will be evidenced by Subscription Certificates that will be mailed to
Record Date Shareholders, or if shares are held by Cede or any other depository
or nominee, to Cede or such other depository or nominee except as discussed
under "Foreign Restrictions" below. Rights may be exercised by completing and
signing the Subscription Certificate and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate, together
with payment for the Shares as described below under "--Payment for Shares," to
the Subscription Agent. Rights may also be exercised by contacting your broker,
banker or trust company, which can arrange, on your behalf, to guarantee
delivery of payment and of a properly completed and executed Subscription
Certificate. A fee may be charged for this service. Fractional Shares will not
be issued, and shareholders who receive, or who have remaining, fewer than three
Rights will not be able to purchase any Shares upon the exercise of such Rights.
Such shareholders may, however, subscribe for Shares pursuant to the
Over-Subscription Privilege provided such shareholders have
12
<PAGE>
fully exercised the Rights issued to them. Completed Subscription Certificates
or Notices of Guaranteed Delivery must be received by the Subscription Agent
prior to 5:00 p.m., New York City time, on the Expiration Date at one of the
offices of the Subscription Agent set forth above.
SHAREHOLDERS WHO ARE RECORD OWNERS. Shareholders who are record owners can
choose between either option set forth under "--Payment for Shares" below. If
time is of the essence, option (2) will permit delivery of the completed
Subscription Certificate and payment after the Expiration Date.
INVESTORS WHOSE SHARES ARE HELD BY A NOMINEE. Shareholders whose shares are
held by a nominee, such as a broker or trustee, must contact that nominee to
exercise their Rights. In that case, the nominee will complete the Subscription
Certificate on behalf of the investor and arrange for proper payment by one of
the methods set forth under "--Payment for Shares" below.
NOMINEES. Nominees who hold shares for the account of others should notify
the beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the nominee should complete the
Subscription Certificate and submit it to the Subscription Agent with the proper
payment described under "--Payment for Shares" below.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (for these purposes the
United States includes its territories and possessions and the District of
Columbia). The Rights to which those Subscription Certificates relate will be
held by the Subscription Agent for such Foreign Record Date Shareholders'
accounts until instructions are received to exercise the Rights. If no
instructions are received prior to the Expiration Date, such Rights will expire.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number listed below:
THE INFORMATION AGENT FOR THE OFFER IS:
[LOGO]
Toll Free: (800) 733-8481, Extension 348
Shareholders may also contact their brokers or nominees for information with
respect to the Offer.
The Information Agent will receive a fee estimated to be $10,000 plus
reimbursement for its out-of-pocket expenses related to the Offer.
PAYMENT FOR SHARES
Shareholders who acquire Shares during the Primary Subscription or pursuant
to the Over-Subscription Privilege may choose between the following methods of
payment:
(1) A shareholder can send the completed Subscription Certificate
together with payment for the Shares acquired during the Primary
Subscription and for additional Shares subscribed for pursuant to the
Over-Subscription Privilege to the Subscription Agent, calculating the total
payment on the basis of an estimated Subscription Price of $13.28 per Share
(the "Estimated Subscription Price"). To be accepted, such payment, together
with the properly executed and completed Subscription Certificate, must be
received by the Subscription Agent at one of the Subscription Agent's
offices at the addresses set forth above prior to 5:00 p.m., New York City
time, on the Expiration Date. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN
UNITED STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE
UNITED STATES OF AMERICA, MUST BE PAYABLE TO THE BRAZILIAN EQUITY FUND, INC.
AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH
SUBSCRIPTION CERTIFICATE TO BE ACCEPTED.
13
<PAGE>
(2) Alternatively, a subscription will be accepted by the Subscription
Agent, if, prior to 5:00 p.m., New York City time, on the Expiration Date,
the Subscription Agent has received a Notice of Guaranteed Delivery by
facsimile (telecopy) or otherwise from a bank, trust company, or New York
Stock Exchange member guaranteeing delivery to Bank of Boston of (i) payment
of the full Subscription Price for the Shares subscribed for during the
Primary Subscription and any additional Shares subscribed for pursuant to
the Over-Subscription Privilege, and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a Notice of
Guaranteed Delivery if a properly completed and executed Subscription
Certificate, together with payment, is not received by the Subscription
Agent by the close of business on the third business day after the
Expiration Date.
Within ten business days following the Pricing Date (the "Confirmation
Date"), a confirmation will be sent by the Subscription Agent to each Record
Date Shareholder (or, if the shareholder's shares are held by Cede or any other
depository or nominee, to Cede or such depository or nominee), showing (i) the
number of Shares acquired pursuant to the Primary Subscription, (ii) the number
of Shares, if any, acquired pursuant to the Over-Subscription Privilege, (iii)
the per Share and total purchase price for the Shares, and (iv) any additional
amount payable by such shareholder to the Fund or any excess to be refunded by
the Fund to such shareholder, in each case based on the Subscription Price as
determined on the Pricing Date. Any additional payment required from a
shareholder must be received by the Subscription Agent within ten business days
after the Confirmation Date. Any excess payment to be refunded by the Fund to a
shareholder will be mailed by the Subscription Agent to such shareholder as
promptly as possible. No interest shall be paid by the Fund on any such excess
payment. All payments by a shareholder must be in U.S. Dollars by money order or
check drawn on a bank located in the United States of America and payable to THE
BRAZILIAN EQUITY FUND, INC.
The Subscription Agent will deposit all checks received by it prior to the
final due date into a segregated interest bearing account (which interest will
accrue to the benefit of the Fund) pending distribution of the Shares.
Whichever of the two payment methods described above is used, issuance and
delivery of certificates for the Shares purchased are subject to collection of
checks and actual payment pursuant to any Notice of Guaranteed Delivery.
SHAREHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER RECEIPT
OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT.
If a shareholder who acquires Shares pursuant to the Primary Subscription or
the Over-Subscription Privilege does not make payment of any additional amounts
due, the Fund reserves the right to take any or all of the following actions:
(i) sell such subscribed and unpaid-for Shares to other shareholders, (ii) apply
any payment actually received by it toward the purchase of the greatest whole
number of Shares which could be acquired by such holder upon exercise of the
Primary Subscription and/or Over-Subscription Privilege, and/or (iii) exercise
any and all other rights or remedies to which it may be entitled, including,
without limitation, set-offs against payments actually received by it with
respect to such subscribed Shares and/or to enforce the relevant guaranty of
payment.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Fund determines
in its sole discretion. The Fund will not be under any duty to give notification
of any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to
give such notification.
DELIVERY OF STOCK CERTIFICATES
Except as noted below in this paragraph, stock certificates for all Shares
acquired during the Primary Subscription and pursuant to the Over-Subscription
Privilege will be mailed promptly after the Confirmation Date and after payment
for the Shares subscribed for has cleared. Participants in the Fund's Dividend
14
<PAGE>
Reinvestment and Cash Purchase Plan (the "Plan") will have any Shares acquired
during the Primary Subscription or pursuant to the Over-Subscription Privilege
credited to their accounts in the Plan. Stock certificates will not be issued
for Shares credited to Plan accounts. Shareholders whose shares of Common Stock
are held of record by Cede or by any other depository or nominee on their behalf
or their broker-dealers' behalf will have any Shares acquired during the Primary
Subscription or pursuant to the Over-Subscription Privilege credited to the
account of Cede or such other depository or nominee.
FEDERAL INCOME TAX CONSEQUENCES
For United States federal income tax purposes, neither the receipt nor the
exercise of the Rights by Record Date Shareholders will result in taxable income
to holders of Common Stock, and no loss will be realized if the Rights expire
without exercise. A shareholder's holding period for a Share acquired upon
exercise of a Right begins with the date of exercise. A shareholder's basis for
determining gain or loss upon the sale of a Share acquired upon the exercise of
a Right will be equal to the sum of the Subscription Price per Share, any
servicing fee charged to the shareholder by the shareholder's broker, bank or
trust company, and the shareholder's basis, if any, in the Rights exercised (as
discussed below). A shareholder's gain or loss recognized upon a sale of a Share
acquired upon the exercise of a Right will be a capital gain or loss (assuming
the Share is held as a capital asset at the time of sale) and will be a
long-term capital gain or loss if the Share has been held at the time of sale
for more than one year.
If the fair market value of the Rights on the date of distribution is less
than 15% of the fair market value of the shares of Common Stock with respect to
which they are issued, on that date the basis of a Right will be zero unless a
Record Date Shareholder elects to allocate his basis in those shares of the Fund
which he originally owned between such shares and the Rights issued in the
Offer. This allocation is based upon the relative fair market value of such
shares and the Rights as of the date of distribution of the Rights. Thus, if
such an election is made, the shareholder's basis in the shares originally owned
will be reduced by an amount equal to the basis allocated to the Rights. This
election must be made in a statement attached to the shareholder's federal
income tax return for the year in which the Offer occurs. If the fair market
value of the Rights on the date of distribution is equal to or greater than 15%
of the fair market value of the shares of Common Stock with regard to which they
are issued, a Record Date Shareholder will allocate his basis in those shares of
the Fund which he originally owned between such shares and the Rights issued in
the offer based upon their relative fair market values on the date of the
distribution. However, if a shareholder does not exercise the Rights, no loss
will be recognized and no portion of the shareholder's basis in the shares will
be allocated to the unexercised Rights. If a shareholder exercises the Rights,
the basis of any Shares acquired through exercise of the Rights will be
increased by the basis allocated to such Rights. Accordingly, shareholders
should consider the advisability of making the election described above if the
shareholder intends to exercise the Rights.
The foregoing is a general summary of the material United States federal
income tax consequences of the receipt and exercise of Rights by a Record Date
Shareholder. The discussion is based upon applicable provisions of the United
States Internal Revenue Code of 1986, as amended (the "Code"), United States
Treasury regulations and other authorities currently in effect, and does not
cover state, local or foreign taxes. The Code and regulations are subject to
change by legislative or administrative action. Shareholders should consult
their tax advisors regarding specific questions as to federal, state, local or
foreign taxes. See "Taxation" in the SAI.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
Shareholders that hold their shares through employee benefit plans that are
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (including corporate savings and 401(k) plans, Keogh Plans of
self-employed individuals and Individual Retirement Accounts (collectively,
"Benefit Plans")) should be aware of the complexity of the rules and regulations
governing Benefit Plans and the penalties for noncompliance, and should consult
their counsel and tax advisors regarding the consequences under ERISA and the
Code of their exercise of the Rights.
15
<PAGE>
CERTAIN EFFECTS OF THE OFFER
Upon the completion of the Offer, shareholders who do not fully exercise
their Rights will own a smaller proportional interest in the Fund than would be
the case if the Offer had not been made. In addition, because the Subscription
Price per Share will be less than the then current net asset value per share of
the Fund's Common Stock, the Offer will result in a dilution of net asset value
per share for all shareholders, which will disproportionately affect
shareholders who do not exercise their Rights. Although it is not possible to
state precisely the amount of such decrease in net asset value because it is not
known at the date of this Prospectus how many Shares will be subscribed for, or
what the Subscription Price will be, such dilution might be substantial. For
example, assuming all Rights are exercised at the Estimated Subscription Price,
including up to an additional 25% of the Shares which may be issued to satisfy
over-subscriptions, the Fund's current net asset value of $17.43 per share would
be reduced by approximately $1.42 or 8.15%, taking into account the expenses of
the Offer.
It is expected that no dividends or other distributions will be payable with
respect to the Shares offered hereby until January 1997.
CERTAIN IMPACT ON FEES
The Fund's investment adviser and administrators will benefit from the Offer
because the investment advisory and administration fees are based on the net
assets of the Fund. See "Management of the Fund." It is not possible to state
precisely the amount of additional compensation the Fund's investment adviser or
administrators will receive as a result of the Offer because it is not known how
many Shares will be subscribed for and because the proceeds of the Offer will be
invested in additional portfolio securities which will fluctuate in value.
However, assuming all Rights are exercised at the Estimated Subscription Price,
including up to an additional 25% of the Shares which may be issued to satisfy
over-subscriptions, the annual compensation to be received by the Fund's
investment adviser (after fee waiver) and administrators would be increased by
approximately $228,000 and $52,000, respectively. Three of the Fund's directors
who voted to authorize the Offer are "interested persons" of the Fund within the
meaning of the 1940 Act because of their positions as directors and/or officers
of BEA Associates. These directors could benefit indirectly from the Offer
because of such directors' affiliations. The other five directors are not
"interested persons" of the Fund. See "Management of the Fund" in the SAI.
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
- ------------------------------------------------------ -------------------------------------------------------
<S> <C>
Record Date........................................... July 17, 1996
Subscription Period................................... July 17, 1996 through August 16, 1996*
Payment for Shares or Notices of Guaranteed Delivery
Due.................................................. August 16, 1996*
Expiration and Pricing Date........................... August 16, 1996*
Payment for Guarantees of Delivery Due................ August 21, 1996*
Confirmation to Participants.......................... August 30, 1996*
Final Payment for Shares.............................. September 16, 1996*
</TABLE>
- ---------
* Unless the Offer is extended to a date not later than August 23, 1996.
16
<PAGE>
THE FUND
The Fund, incorporated in Maryland on February 10, 1992, is a
non-diversified, closed-end management investment company registered under the
1940 Act. The Fund's Common Stock is traded on the New York Stock Exchange under
the symbol "BZL."
The Fund commenced operations on April 10, 1992 after an initial public
offering of 4,600,000 shares of Common Stock, the net proceeds to the Fund of
which were approximately $63,430,000.
The Fund's investment objective is long-term capital appreciation. The Fund
seeks to achieve its objective by investing primarily in Brazilian equity
securities. It is the policy of the Fund, under normal market conditions, to
invest at least 65% of its total assets in equity securities of Brazilian
issuers. It is anticipated that at least 80% of the Fund's assets normally will
be invested in equity securities of Brazilian issuers. The Fund may, however,
invest up to 25% of its assets in corporate and governmental debt securities of
Brazilian issuers, and may hold securities deemed to be Temporary Investments
(as defined below).
As of March 31, 1996, approximately 90% of the Fund's net assets were
invested in equity securities of Brazilian companies operating in the following
industries:
<TABLE>
<CAPTION>
% OF FUND'S NET
INDUSTRY ASSETS
- ------------------------------------------------------------- ---------------------
<S> <C>
Electric Distribution 16.82%
Telecommunications 15.04%
Consumer Goods 12.79%
Holding Companies 8.88%
Food and Beverages 8.34%
Electric Generation 8.24%
Textiles 6.68%
Banking 4.76%
Retail 4.42%
Capital Goods 3.93%
</TABLE>
The Fund's ten largest holdings at March 31, 1996 (percentage of net assets)
were:
<TABLE>
<S> <C>
- - Companhia Energetica de Minas Gerais (10.6%) (Electric Distribution)
- - Centrais Eletricas Brasileiras S.A. (8.2%) (Electric Generation)
- - Telecomunicacoes de Sao Paulo S.A. (5.3%) (Telecommunications)
- - Investimentos Itau S.A. (5.0%) (Holding Companies)
- - Banco Bradesco S.A. (4.8%) (Banking)
- - Dixie Toga S.A. (4.7%) (Consumer Goods)
- - Companhia Cervejaria Brahma (4.6%) (Food and Beverages)
- - Refrigeracao Parana S.A. (4.5%) (Consumer Goods)
- - Lojas Americanas S.A. (4.4%) (Retail)
- - Telecomunicacoes do Parana S.A. (4.0%) (Telecommunications)
</TABLE>
Set forth in the Appendix to the SAI is certain information regarding Brazil
and the Brazilian securities markets.
USE OF PROCEEDS
Assuming all Shares offered pursuant to the Primary Subscription are sold at
the Estimated Subscription Price, the net proceeds of the Offer are estimated to
be $19,375,500, after payment of the Dealer Manager's fees, the soliciting fees
and the estimated offering expenses. These expenses will be borne by the Fund
and will reduce the net asset value of the Common Stock. If the Fund increases
the number of Shares subject to the Offer by 25%, or 386,167 Shares, in order to
satisfy over-subscription requests, the additional net proceeds will be
approximately $4,942,938. The Fund intends to invest in Brazilian equity
securities promptly as investment opportunities are identified, but over a
period of time in order to minimize local market impact. The Fund expects that,
subject to market conditions, substantially all of the net proceeds of
17
<PAGE>
the Offer will be invested in accordance with the Fund's investment objective
within six months from the date of this Prospectus. Pending such investment, the
proceeds will be invested in certain short- and medium-term debt instruments, as
described under "Investment Objective and Policies--Temporary Investments."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should consider the following special considerations associated
with an exercise of Rights and an additional investment in the Fund.
CERTAIN EFFECTS OF THE OFFER
Upon the completion of the Offer, shareholders who do not fully exercise
their Rights will own a smaller proportional interest in the Fund than would be
the case if the Offer had not been made. In addition, an immediate dilution of
the net asset value per share will be experienced by all shareholders as a
result of the Offer because the Subscription Price will be less than the then
current net asset value per share, the Fund will bear the expenses of the Offer
and the number of shares outstanding after the Offer will have increased
proportionately more than the increase in the size of the Fund's net assets.
Although it is not possible to state precisely the amount of such a decrease in
value, because it is not known at this time how many Shares will be subscribed
for or what the Subscription Price will be, such dilution might be substantial.
For example, if the Subscription Price per Share is $15.69, representing a price
that is 90% of an assumed net asset value per share of $17.43, assuming that all
Rights are exercised, including an additional 25% of the Shares which may be
issued to satisfy over-subscription requests, the Fund's net asset value per
share would be reduced by approximately $.74 per share. If, on the other hand,
the Subscription Price represents a price that is less than 90% of the Fund's
then net asset value, which would be the case if the Subscription Price is set
at a time when the market price per share is lower than the net asset value per
share, the dilution would be greater. For example, if the Subscription Price per
Share is $13.28, representing a price which is only 76% of the net asset value
per share, assuming that all Rights are exercised, including an additional 25%
of the Shares which may be issued to satisfy over-subscription requests, the
Fund's net asset value per share would be reduced by approximately $1.42 per
share. The foregoing examples assume Subscription Prices of $15.69 and $13.28
per Share, respectively. However, the actual Subscription Price may be greater
or less than such assumed Subscription Price. This dilution of net asset value
per share will disproportionately affect shareholders who do not exercise their
Rights.
ECONOMIC AND POLITICAL RISKS
The economy of Brazil may differ favorably or unfavorably from the U.S.
economy in such respects as general development, wealth distribution, rate of
inflation, volatility of the rate of growth of gross domestic product ("GDP"),
capital reinvestment, resource self-sufficiency and balance of payments
position, among others. The government of Brazil has exercised and continues to
exercise substantial influence over many aspects of the private sector. The
Brazilian government owns or controls many companies, including some of the
largest in the country. As a result, government actions in the future could have
a significant effect on economic conditions in Brazil, which, in turn, may
adversely affect companies in the private sector, general market conditions and
prices and yields of securities in the Fund's portfolio. Expropriation,
confiscatory taxation, nationalization, political, economic or social
instability or other developments such as military coups, have occurred in the
past in Brazil and could adversely affect the assets of the Fund held in Brazil
should these conditions or events recur. There may also be greater difficulty in
respect of the Fund's ability to protect and enforce its rights against
governmental and private entities in Brazil.
INVESTMENT CONTROLS
Foreign investment in the securities of Brazilian issuers is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in certain Brazilian issuers and increase the
costs and expenses of the Fund. Brazil requires governmental approval prior to
investments by foreign persons, and limits the amount of investment by foreign
persons in a particular company. Brazil also restricts investment opportunities
by foreigners in certain industries. The Fund makes investments in Brazil
pursuant to Annex IV to the Central Bank of Brazil's Resolution 1289 of March
20, 1987, as amended. Under this regulation the Fund will generally be unable to
invest in unlisted equity securities in Brazil and will be subject to certain
withholding taxes. See the SAI under "Investment Restrictions--Certain Brazilian
Restrictions" and "Taxation--Brazilian Taxes." The Fund does not believe that
these restrictions will adversely affect
18
<PAGE>
the Fund's ability to achieve its investment objective or its performance.
Brazil requires governmental approval for the repatriation of investment income,
capital and the proceeds of sales of securities by foreign investors. Although
such approvals are routinely given, there can be no assurance that such
approvals will be forthcoming in the future. In addition, if there is a
deterioration in Brazil's balance of payments or for other reasons, the
government of Brazil may impose temporary restrictions on foreign capital
remittances abroad. In 1990, the government froze bank deposits as part of an
economic stabilization plan, including the deposits of foreign investors
investing through government-approved programs. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments. There can be no assurance that additional or
different restrictions or adverse policies applicable to the Fund could not be
imposed in the future, nor as to the duration or impact of such restrictions or
policies if imposed. If for any reason the Fund was unable to distribute
substantially all of its investment company taxable income (as defined for U.S.
tax purposes) within applicable time periods, the Fund would cease to qualify
for the favorable tax treatment afforded to regulated investment companies under
the Code. See "Taxation" in the SAI.
MARKET ILLIQUIDITY; VOLATILITY; SMALLER MARKET CAPITALIZATION
The securities markets of Brazil are substantially smaller, less liquid and
more volatile than the major securities markets in the United States. At
December 31, 1995, the aggregate market capitalization of listed equity
securities on the Sao Paulo exchange (the main Brazilian exchange) was
approximately U.S. $148 billion, with an aggregate annual trading value for the
year then ended of approximately U.S. $69 billion. By comparison, at December
31, 1995, the market capitalization for the New York Stock Exchange was
approximately U.S. $6 trillion and the annual aggregate trading value for the
year then ended was approximately U.S. $3 trillion. A high proportion of the
shares of many Brazilian companies are closely held by a limited number of
persons, which may limit the number of shares available for investment by the
Fund. A limited number of issuers in Brazilian securities markets may represent
a disproportionately large percentage of market capitalization and trading
value. The limited liquidity of Brazilian securities markets may also affect the
Fund's ability to acquire or dispose of securities at the price and time it
wishes to do so. In addition, the Brazilian securities markets are susceptible
to being influenced by large investors trading significant blocks of securities
or by large dispositions of securities resulting from the failure to meet margin
calls when due.
In addition to its smaller size, lesser liquidity and greater market
volatility, Brazilian securities markets are less developed than U.S. securities
markets. Disclosure and regulatory standards are in many respects less stringent
than U.S. standards. Furthermore, there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets, and
enforcement of existing regulations has been extremely limited. Consequently,
the prices at which the Fund may acquire investments may be affected by (i)
other market participants' anticipation of the Fund's investing, (ii) trading by
persons with material non-public information and (iii) securities transactions
by brokers in anticipation of transactions by the Fund in particular securities.
Commissions and other transaction costs associated with Brazilian securities
exchanges are generally higher than in the United States. See the Appendix to
the SAI.
CURRENCY DEVALUATIONS AND FLUCTUATIONS
The Fund normally will invest principally in securities denominated in
Reais. Accordingly, a change in the value of the Real against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of the Fund's
assets denominated in Reais. Such changes will also affect the Fund's income and
net asset value. The Fund computes its income on the date of its receipt by the
Fund at the exchange rate in effect with respect to Reais on that date. If the
value of the Real declines relative to the U.S. dollar between the date income
is received and the date the Fund makes distributions, the Fund may need to
liquidate portfolio securities to make distributions to shareholders required to
maintain its status as a regulated investment company for U.S. federal income
tax purposes. There can be no assurance that the Fund will be able to liquidate
securities in order to meet such distribution requirements. The Fund is
permitted to borrow money to make distributions required to maintain its status
as a regulated investment company for U.S. tax purposes. If the exchange rate
against the U.S. dollar of the Real declines between the time the Fund incurs
expenses in U.S. dollars and the time cash expenses are paid, the amount of
Reais required to be converted into U.S. dollars in order to pay expenses in
U.S. dollars will be greater than the equivalent amount in Reais of such
expenses at the time they are incurred. The Brazilian currency has experienced
steady devaluations
19
<PAGE>
relative to the U.S. dollar, and major adjustments have been made at times.
Historical exchange rates per U.S. dollar for the Real are set forth, for the
periods and dates indicated, in the table "Exchange Rates of the Real per U.S.
dollar" in the Appendix to the SAI.
CURRENCY HEDGING
BEA Associates generally does not seek to hedge against a decline in the
value of the Fund's non-dollar-denominated portfolio securities resulting from
currency devaluations or fluctuations. As a consequence, the Fund will be
subject to the risk of changes in the value of the Real in relation to the U.S.
dollar.
INFLATION
Brazil has experienced substantial, and in some periods extremely high and
volatile, rates of inflation for many years. Inflation and rapid fluctuations in
inflation rates have had and may continue to have negative effects on the
economy and securities markets of Brazil. In an attempt to control inflation,
wage and price controls have been imposed at times in Brazil. In the past,
various programs to reduce inflation were introduced, which were not able to
effect a sustained reduction of inflation. The current Brazilian government is
implementing another program to control inflation through a tight budgetary
policy and monetary reform. There has been opposition to this policy and other
aspects of the government's economic stabilization program. Although this
current plan has so far been successful in reducing the country's inflation,
there can be no assurance that the recent economic measures will be any more
successful than previous programs in reducing inflation in the long term. For a
further discussion of inflation in Brazil and the current government's economic
reforms, see the Appendix to the SAI.
REPORTING STANDARDS
Companies in Brazil are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from those
applicable to U.S. companies. The items appearing on the financial statements of
a Brazilian company may not reflect its financial position or results of
operations in the way they would be reflected had such financial statements been
prepared in accordance with U.S. generally accepted accounting principles. In
addition, for companies that keep accounting records in Reais, inflation
accounting rules in Brazil have in the past required, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
company's balance sheet and income statement using an index established by the
government in order to express items in terms of currency of constant purchasing
power. This restatement requirement was recently eliminated for Brazilian public
companies. Brazilian companies, however, are permitted to continue such
inflation accounting adjustments if they so elect. Consequently, data for
companies that continue to make such inflation accounting adjustments may not
accurately reflect the real condition of such companies. Furthermore, this lack
of standardization in the country's accounting practice will make meaningful
comparisons between Brazilian companies very difficult. There may also be
substantially less publicly available information about companies in Brazil and
the Brazilian government than there is about U.S. companies and the U.S.
government.
BRAZILIAN DEBT
Among developing countries, Brazil is currently the second largest debtor to
commercial banks and foreign governments. At times Brazil has declared moratoria
on the payment of principal and/or interest on certain external debt.
Trading in Brazilian debt involves a high degree of risk. The issuer or
governmental authorities that control the repayment of Brazilian debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. A debtor's willingness or ability to repay
principal and interest due in a timely manner may be affected by, among other
factors, its cash flow situation, and, in the case of a sovereign debtor, the
extent of its foreign reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the debt service burden to
the economy as a whole, the sovereign debtor's policy towards the International
Monetary Fund (the "IMF") and the political constraints to which a sovereign
debtor may be subject. Sovereign debtors may default on their debt and may also
be dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a sovereign debtor's
implementation of
20
<PAGE>
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve such levels of
economic performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors. There is no bankruptcy proceeding by which sovereign debt on
which a sovereign entity has defaulted may be collected in whole or in part. In
addition, the risks attached to an investment in sovereign debt may be greater
for private holders of securitized sovereign debt than they are for participants
in syndicated bank loans because the lower level of creditor cooperation that
characterizes securitized transactions may reduce the ability of creditors to
obtain enforcement of their rights.
Investors should be aware that the Brazilian debt instruments in which the
Fund may invest may involve great risk and are deemed to be the equivalent in
terms of quality to securities rated below investment grade by Moody's and S&P.
Such securities are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of those obligations and involve major risk to adverse conditions. Some of
such debt, which may not be paying interest currently or may be in payment
default, may be comparable to securities rated D by S&P or C by Moody's. The
Fund may have difficulty disposing of certain Brazilian debt obligations because
there may be a thin trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market may have an
adverse impact on the market price of such securities and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio and
calculating its net asset value. The market value of lower quality securities,
such as certain Brazilian debt, is less sensitive to interest rate changes but
is more sensitive to adverse economic changes than that of higher quality
securities. The Fund may not, however, invest more than 5% of its assets in debt
securities that are determined by BEA Associates to be comparable to securities
rated C or below by either S&P or Moody's.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest up to 25% of its assets in corporate and government debt
securities of Brazilian issuers including Assignments of and Participations in
Loans, as defined below. In accordance with this limitation, the Fund may invest
in fixed and floating rate loans ("Loans") arranged through private negotiations
between a borrower and one or more financial institutions ("Lenders")
represented in each case by one or more Lenders acting as agent ("Agent") of the
several Lenders. The Agent is frequently the commercial bank that originated the
Loan on behalf of the several Lenders and was primarily responsible for
negotiating the loan agreement or agreements ("Loan Agreement") relating to the
Loan. In larger transactions, it is common to have several Agents, although only
one Agent typically has primary responsibility for documentation and
administration of the Loan.
The Fund also may invest in participations ("Participations") in Loans and
purchase assignments ("Assignments") of portions of Loans from third parties. If
the Fund decides to invest in Loans, the majority of its investments will be in
Assignments and Participations of new Loans. The Fund's investment in
Participations of a Loan typically will result in the Fund having a contractual
relationship only with the Lender, not with the borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. In connection with purchasing a
Participation, the Fund generally will have no right to enforce compliance by
the borrower with the terms of the Loan Agreement, nor any rights of set-off
against the borrower, and the Fund may not directly benefit from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the Fund will assume the credit risk of both the borrower and the Lender selling
the Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of the Lender, and
may not
21
<PAGE>
benefit from any set-off between the Lender and the borrower. The Fund will
acquire Participations only if the Lender interpositioned between the Fund and
the borrower is deemed by BEA Associates to be creditworthy. The Fund also may
purchase Assignments from Lenders under which it will succeed to all the rights
and obligations under the Loan Agreement of the assigning Lender and become a
Lender under the Loan Agreement with the same rights and obligations as the
assigning Lender. Assignments are, however, arranged through private
negotiations between potential assignees and potential assignors, and the rights
and obligations acquired by the purchaser of an Assignment may differ from, and
be more limited than, those held by the assigning Lender. The Fund may have
difficulty disposing of Assignments and Participations because to do so it will
have to assign such securities to a third party. Because there is no liquid
market for such securities, the Fund anticipates that such securities could be
sold only to a limited number of institutional investors. The lack of a liquid
secondary market may have an adverse impact on the value of such securities and
the Fund's ability to dispose of particular Assignments or Participations when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the borrower.
The lack of a liquid secondary market for Assignments and Participations also
may make it more difficult for the Fund to assign a value to these securities
for purposes of valuing the Fund's portfolio and calculating its net asset
value.
Loan Agreements may include various restrictive covenants designed to limit
the activities of the borrower in an effort to protect the right of the Lenders
to receive timely payments of interest on and repayment of principal of the
Loans. Restrictive covenants in Loan Agreements may include mandatory prepayment
provisions arising from excess cash flow and typically include restrictions on
dividend payments, specific mandatory minimum financial ratios, limits on total
debt and other financial tests. Breach of the covenants, if not waived by the
Lenders, is generally an event of default under the applicable Loan Agreement
and may give the Lenders the right to accelerate principal and interest
payments. BEA Associates will consider the terms of any restrictive covenants,
as well as the performance history of the Loans, in deciding whether to invest
in Loans for the Fund's portfolio.
OPERATING EXPENSES
The Fund's annual operating expenses, which are higher than those of many
investment companies of comparable size, are believed by the Fund's management
to be comparable to expenses of other closed-end management investment companies
that invest primarily in the securities of a single country.
MARKET VALUE AND NET ASSET VALUE
Shares of closed-end investment companies frequently trade at a discount to
net asset value. This characteristic of shares of a closed-end fund is a risk
separate and distinct from the risk that the Fund's net asset value will
decrease. The risk of purchasing shares of a closed-end fund that might trade at
a discount is more pronounced for investors who wish to sell their shares in a
relatively short period of time because for those investors, realization of a
gain or loss on their investments is likely to be more dependent upon the
existence of a premium or discount than upon portfolio performance. Since the
commencement of the Fund's operations the Fund's shares have traded in the
market for more than half of that time at a discount to net asset value. The
Fund's shares are not subject to redemption. Investors desiring liquidity may,
subject to applicable securities laws, trade their shares in the Fund on any
exchange where such shares are then listed at the then current market value,
which may differ from the then current net asset value. If, at any time, shares
of the Fund's Common Stock trade publicly for a substantial period of time at a
substantial discount from the Fund's then current net asset value per share, the
Board of Directors of the Fund will consider, at its next regularly scheduled
meeting, taking various actions designed to reduce or eliminate the discount.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. The Fund, however, is subject to certain Brazilian laws limiting
investments in a single issuer and intends to comply with the diversification
requirements imposed by the Code for qualification as a regulated investment
company. As a non-diversified investment company, the Fund may invest a greater
proportion of its assets in the obligations of a smaller number of issuers and,
as a result, may be subject to greater risk with respect to its portfolio
securities.
22
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The Fund's investment objective is long-term capital appreciation. The fund
seeks to achieve this objective by investing primarily in equity securities of
Brazilian issuers. The Fund's investment objective is a fundamental policy and
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities. As used herein, a "majority of the Fund's
outstanding voting securities" means the lesser of (a) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (b) more than 50% of the outstanding shares. No assurance can be
given that the Fund's investment objective will be achieved. For a more detailed
discussion of the Fund's investment objective and policies, see "Investment
Objective and Policies" in the SAI.
INVESTMENT POLICIES
It is the policy of the Fund, under normal market conditions, to invest at
least 65% of the Fund's total assets in equity securities of Brazilian issuers.
It is anticipated that at least 80% of the Fund's assets normally will be
invested in equity securities of Brazilian issuers. The Fund, however, will not
invest more than 25% of its assets in the securities of companies in the same
industry. Because of the restrictions of Annex IV to the Central Bank of
Brazil's Resolution 1289 of March 20, 1987, as amended, currently applicable to
the Fund, the Fund intends to invest only in listed securities when investing in
equity securities in Brazil. The equity securities in which the Fund will invest
will include common stock, preferred stock (including convertible preferred
stock), warrants and convertible debt securities. The Fund defines Brazilian
issuers to be (a) companies organized in Brazil or for which the principal
trading market for their securities is in Brazil, (b) companies financing
operations in Brazil by means of equity securities denominated in the Brazilian
local currency, (c) companies that derive at least 50% of their revenues
primarily from either goods or services produced in Brazil or sales made in
Brazil, (d) issuers of depositary shares for Brazilian equity securities and (e)
the government of Brazil, its political subdivisions and their respective
agencies or instrumentalities or the Central Bank of Brazil.
The Fund's definition of Brazilian issuer includes companies that may have
characteristics and business relationships common to companies in a country or
countries other than Brazil. As a result, the value of the equity securities of
such companies may reflect economic and market forces applicable to other
countries, as well as to Brazil. The Fund believes, however, that investment in
such companies will be appropriate because the Fund will invest only in those
companies which, in its view, have sufficiently strong exposure to economic and
market forces in Brazil such that their value will tend to reflect developments
in Brazil to a greater extent than developments in another country or countries.
Annex IV to the Central Bank of Brazil's Resolution 1289 of March 20, 1987 may
be amended from time to time to provide a Managed Portfolio (as defined in such
Resolution), such as the Fund, greater or lesser flexibility in connection with
its investment activities in Brazil. The Fund may take advantage of any greater
flexibility afforded by these amendments in the discretion of BEA Associates.
The government of Brazil has been engaged in a program of selling part or
all of its interests in government-owned or -controlled enterprises
("privatizations"). BEA Associates believes that privatizations may offer
investors opportunities for significant capital appreciation and intends to
invest assets of the Fund in privatizations in appropriate circumstances. The
ability of foreign entities, such as the Fund, to participate in privatizations
is limited by Brazilian law, or the terms on which the Fund may be permitted to
participate may be less advantageous than those for local investors. There can
be no assurance that the Brazilian government will continue to sell companies it
currently owns or controls, that privatizations will be successful or that the
Fund will be able to participate in privatizations.
The Fund intends its portfolio, under normal market conditions, to consist
principally of Brazilian equity securities. The Fund may, however, invest up to
25% of its assets in corporate and government debt securities of Brazilian
issuers when BEA Associates believes that it is appropriate to do so in order to
achieve capital appreciation. Brazilian equity securities in which the Fund will
invest will consist predominantly of common stock and preferred stock, although
the Fund may also invest to a limited extent in convertible securities, options
and warrants. Brazilian debt securities that the Fund may acquire include bonds,
notes
23
<PAGE>
and debentures of any maturity of the Brazilian government and obligations of
its political subdivisions, agencies, instrumentalities and the central bank and
of Brazilian banks and other companies, determined by BEA Associates to be
suitable investments for the Fund (including repurchase agreements with respect
to obligations of the Brazilian government or the central bank and Assignments
of, and Participation in, Loans). BEA Associates may invest in securities of
companies that it determines to be suitable investments for the Fund regardless
of such securities' ratings. The Fund may not, however, invest more than 5% of
its assets in debt securities that are determined by BEA Associates to be
comparable to securities rated C or below by either S&P or Moody's. The Fund's
holdings of lower-quality debt securities will consist predominantly of its
holdings of sovereign debt, much of which trades at substantial discounts from
face value and which may include sovereign debt comparable to securities rated
as low as D by S&P or C by Moody's. For a description of S&P's and Moody's
corporate bond ratings, see the Appendix to this Prospectus.
The Fund will not invest more than 25% of its assets in the securities of
companies in the same industry. In selecting industries and companies for
investment by the Fund, BEA Associates will consider factors such as overall
growth prospects, competitive position in domestic and export markets,
technology, research and development, productivity, labor costs, raw material
costs and sources, profit margins, return on investment, capital resources,
government regulation and management. Certain sectors of the economy of Brazil
are closed to equity investments by foreign investors or the acquisition of
voting interests in companies in those sectors is limited (see the Appendix to
the SAI).
Brazil has adopted a debt conversion program, pursuant to which investors
may use external debt of Brazil, directly or indirectly, to make investments in
local companies. The Fund intends to acquire debt of Brazilian issuers to hold
and trade in appropriate circumstances, as well as to use it to participate in
the Brazilian debt conversion program. BEA Associates will evaluate
opportunities to enter into debt conversion transactions as they arise.
TEMPORARY INVESTMENTS
During periods in which BEA Associates believes changes in economic,
financial or political conditions make it advisable, the Fund may for temporary
defensive purposes reduce its holdings in other securities and invest in certain
short-term (less than twelve months to maturity) debt securities or hold cash.
The short-term debt securities in which the Fund may invest consist of (a)
obligations of the United States or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign banks denominated in any currency; (c) floating rate securities and
other instruments denominated in any currency issued by international
development agencies; (d) finance company and corporate commercial paper and
other short-term corporate debt obligations of U.S. and foreign corporations
meeting the Fund's credit quality standards; and (e) repurchase agreements with
banks and broker-dealers with respect to such securities. The Fund intends to
invest only in short-term debt securities that BEA Associates believes to be of
high quality, i.e., rated in one of the two highest rating categories by Moody's
or S&P or determined to be equivalent in credit quality.
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which a buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price and date. Under a repurchase agreement, the seller is required to maintain
the value of the securities subject to the repurchase agreement at not less than
their repurchase price. BEA Associates will monitor the value of such securities
daily to determine that the value equals or exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the seller, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities.
CURRENCY TRANSACTIONS
BEA Associates generally does not seek to hedge against a decline in value
of the Fund's non-dollar-denominated portfolio securities resulting from a
currency devaluation or fluctuation. As a consequence, the Fund will be subject
to the risk of changes in the value of the Real, thereby affecting the value of
its portfolio assets, as well as the value of the amounts of interest, dividends
and net realized capital gains received or to
24
<PAGE>
be received in Reais that it intends to remit out of Brazil. Therefore, the risk
of currency devaluations and fluctuations and the effect these may have on the
Fund should be carefully considered by investors in determining whether to
purchase shares of the Fund.
The Fund reserves the right, upon 30 days' written notice to shareholders,
to conduct currency exchange transactions either on a spot (i.e., cash) basis or
through entering into forward contracts to purchase or sell currency should
suitable hedging instruments become available on acceptable terms.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors, and the day to day operations of the Fund are
conducted through or under the direction of the officers of the Fund. Although
the Fund is a Maryland corporation, one of its directors is a resident of
Argentina. A substantial portion of such director's assets is located outside of
the United States; he has not appointed an agent for service of process in the
United States. Consequently, it may be difficult for investors to enforce, in
United States courts, judgments against such director obtained in such courts
predicated on the civil liability provisions of the United States securities
laws. In addition, there is doubt as to the enforceability in Argentine courts
of liabilities predicated solely upon the United States securities laws, whether
or not such liabilities are based upon judgments of courts in the United States.
For certain information regarding the directors and officers of the Fund, see
"Management of the Fund--Directors and Officers" in the SAI.
BEA ASSOCIATES
BEA Associates serves as the Fund's investment adviser pursuant to an
Advisory Agreement with the Fund (the "Advisory Agreement"). BEA Associates is a
general partnership organized under the laws of the State of New York and,
together, with its predecessor firms, has been engaged in the investment
advisory business for over 50 years. BEA Associates is located at One Citicorp
Center, 57th Floor, 153 East 53rd Street, New York, New York 10022. Credit
Suisse Capital Corporation ("CS Capital") is an 80% partner and CS Advisors
Corp., a New York corporation and a wholly owned subsidiary of CS Capital, is a
20% partner in BEA Associates. CS Capital is a wholly owned subsidiary of Credit
Suisse Investment Corporation, which is a wholly owned subsidiary of Credit
Suisse, the second largest Swiss bank, which in turn is a subsidiary of CS
Holding, a Swiss corporation. BEA Associates is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Advisers
Act").
BEA Associates is a diversified asset manager, handling global equity,
balanced, fixed income and derivative securities accounts for private
individuals, as well as corporate pension and profit-sharing plans, state
pension funds, union funds, endowments and other charitable institutions. As of
March 31, 1996, BEA Associates managed in excess of $28.5 billion of assets.
BEA Associates has sole investment discretion for the Fund with respect to
the Fund's portfolio under the supervision of the Fund's Board of Directors and
in accordance with the Fund's stated policies. BEA Associates will select
investments for the Fund and will place purchase and sale orders on behalf of
the Fund. For its services, BEA Associates is paid a quarterly fee computed at
an annual rate of 1.35% of the first U.S. $100 million of the Fund's average
weekly net assets and 1.05% of amounts over U.S. $100 million.
BEA Associates and BEA Capital LLC, a company organized and controlled by
Mr. Emilio Bassini and a former officer of BEA, have entered into a consulting
agreement, dated as of December 12, 1995, pursuant to which BEA Capital LLC will
provide consulting services to BEA Associates with respect to private equity
investments held by clients of BEA Associates, including the Fund, for a fee of
$2 million per annum payable by BEA Associates. This consulting agreement is
terminable by either party on the last day of any calendar year commencing on
December 31, 1996; provided, that if BEA Associates terminates this agreement as
of December 31, 1996, BEA Associates is required to pay BEA Capital LLC an
additional $2 million as a termination fee.
25
<PAGE>
Garantia Adminisdracao de Recursos S.A. ("Garantia") resigned as an
investment sub-adviser to the Fund on June 21, 1994. On August 15, 1994,
Patrimonio Planejamento Financiero Ltda. ("Patrimonio") also resigned as
investment sub-adviser to the Fund. Since such resignations, BEA Associates has
voluntarily waived that portion of its fees (0.35 of 1.00% of the Fund's average
weekly net assets) that would have been otherwise payable to Garantia and
Patrimonio.
PORTFOLIO MANAGEMENT
Richard Watt, who has been a Senior Vice President of BEA Associates since
1995, is primarily responsible for management of the Fund's assets. Mr. Watt has
served the Fund in such capacity since August 1995. Prior to that time, he was
head of Emerging Markets Investments and Research at Gartmore Investment Limited
(November 1992 to June 1995). From 1987 until 1992, Mr. Watt was a director of
Kleinwort Benson International Investment. He is also Director and Investment
Officer of The Emerging Markets Telecommunications Fund, Inc., The Emerging
Markets Infrastructure Fund, Inc. and The Latin America Equity Fund, Inc.
U.S. ADMINISTRATOR
Bear Stearns Funds Management Inc., a Delaware corporation and an affiliate
of the Dealer Manager (the "U.S. Administrator"), serves as the Fund's U.S.
administrator pursuant to an agreement with the Fund (the "U.S. Administration
Agreement"). The U.S. Administrator's principal offices are located at 245 Park
Avenue, New York, New York. Under the U.S. Administration Agreement, the Fund
pays the U.S. Administrator a monthly fee that is computed weekly at an annual
rate of 0.10% of the first $100 million of the Fund's average weekly net assets
and 0.08% of amounts in excess of $100 million.
The U.S. Administrator provides office facilities and personnel adequate to
perform services for the Fund including, without limitation, the following:
oversight of the determination and publication of the Fund's net asset value in
accordance with the Fund's policy as adopted from time to time by the Board of
Directors; oversight of the maintenance by Brown Brothers Harriman & Co. of the
books and records of the Fund as required under the 1940 Act; assistance in
preparation and filing of the Fund's U.S. federal, state and local income tax
returns; preparation of financial information for the Fund's proxy statements
and semiannual and annual reports to shareholders; and preparation of certain of
the Fund's reports to the Securities and Exchange Commission.
The Fund has retained BEA Associates to provide certain administrative and
shareholder services to the Fund that are not provided by the Fund's
administrators, subject to the supervision and direction of the Board of
Directors of the Fund pursuant to an Administrative Services Agreement with BEA
Associates (the "Administrative Services Agreement"). These services include
furnishing certain internal executive and administrative services, responding to
shareholder inquiries, acting as liaison between the Fund and the Fund's various
service providers, furnishing corporate secretarial services, which include
assisting in the preparation of materials for meetings of the Board of
Directors, coordinating the preparation of proxy statements, annual, semi-annual
and quarterly reports and filings with state blue sky authorities, assisting in
the preparation of tax returns and generally assisting in monitoring and
developing compliance procedures for the Fund. BEA Associates will be reimbursed
by the Fund for costs incurred by BEA Associates on behalf of the Fund (up to
$20,000 per annum). Costs incurred on behalf of two or more funds for which BEA
Associates provides administrative and shareholder services will be apportioned
among such funds according to their respective net asset values. The Fund will
also reimburse BEA Associates for any out-of-pocket expenses in providing these
services to the Fund, including postage, telephone and telecommunications
charges and duplicating costs.
BRAZILIAN ADMINISTRATOR
Under Brazilian law, the Fund is required to have a local manager in Brazil.
Bank of Boston, Sao Paulo serves as the Fund's Brazilian administrator,
performing those services required of a local manager in Brazil, pursuant to a
Brazilian Administration Agreement (the "Brazilian Administration Agreement")
with Brown Brothers Harriman & Co., the Fund's accounting agent and custodian.
Bank of Boston, Sao Paulo, a corporation located at Rua Libero Badaro, 487 Piso
11, Sao Paulo, Brazil, performs various services for the Fund, including (1)
furnishing local management services as required under Brazilian law, (2)
processing
26
<PAGE>
remittances of earnings and the repatriation of investment, (3) paying
applicable taxes imposed under Brazilian laws and regulations on the Fund, (4)
furnishing information as to the Fund's Brazilian portfolio and remittances, (5)
handling certain recordkeeping for the Fund's portfolio in Brazil and (6)
effecting the registration of the Fund's foreign capital with the Central Bank
of Brazil. For its services under the Brazilian Administration Agreement, Bank
of Boston, Sao Paulo is paid, out of the fee paid to Brown Brothers Harriman &
Co. a quarterly fee based on an annual rate of 0.12% of the average month-end
assets of the Fund held in Brazil.
ESTIMATED EXPENSES
Except as otherwise provided in the Administrative Services Agreement, BEA
Associates and the U.S. Administrator are each obligated to pay expenses
associated with providing the services contemplated by the agreements to which
they are parties, including compensation of and office space for their
respective officers and employees connected with investment and economic
research, trading and investment management and administration of the Fund, as
well as the fees of all directors of the Fund who are affiliated with those
companies or any of their affiliates. The Fund pays all other expenses incurred
in the operation of the Fund including, among other things, expenses for legal
and independent accountants' services, costs of printing proxies, stock
certificates and shareholder reports, charges of the custodians, any
sub-custodians and the transfer and dividend-paying agent, expenses in
connection with the Plan, Securities and Exchange Commission fees and fees of
Brazilian regulatory bodies, fees and expenses of unaffiliated directors,
accounting and pricing costs, membership fees in trade associations, fidelity
bond coverage for the Fund's officers and employees, directors' and officers'
errors and omissions insurance coverage, interest, brokerage costs and stock
exchange fees, taxes, stock exchange listing fees and expenses, expenses of
qualifying the Fund's shares for sale in various states and foreign
jurisdictions, litigation and other extraordinary or non-recurring expenses and
other expenses properly payable by the Fund.
PORTFOLIO TRANSACTIONS
The Fund may utilize CS First Boston Corporation and other affiliates of
Credit Suisse in connection with the purchase or sale of securities in
accordance with rules or exemptive orders adopted by the U.S. Securities and
Exchange Commission when BEA Associates believes that the charge for the
transaction does not exceed usual and customary levels. For a more detailed
discussion of the Fund's brokerage allocation practice, see the SAI under
"Portfolio Transactions."
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN
The Fund intends to distribute annually to shareholders substantially all of
its net investment income (its income other than its net realized long- and
short-term capital gains) and net realized short-term capital gains. The Fund
will determine annually whether to distribute any net realized long-term capital
gains in excess of net realized short-term capital losses (including any capital
loss carryovers), although it currently expects to distribute any such gains.
All dividends and distributions, net of any applicable U.S. withholding tax,
are automatically reinvested in additional shares of the Fund unless a
shareholder has instructed Bank of Boston, as the Plan Agent (the "Plan Agent"),
otherwise in writing. A shareholder whose shares are held by a broker or nominee
that does not provide a dividend reinvestment program may be required to have
his shares registered in his own name to participate in the Plan. The receipt of
dividends and distributions in shares under the Plan will not relieve
participants of any income tax (including withholding tax) that may be payable
on such dividends or distributions.
Certain distributions of cash attributable to the dividends paid 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 will be borne
by the Fund and allocated to all shareholders in proportion to their interests
in the Fund.
27
<PAGE>
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the Board of Directors of the Fund declares an income dividend or a
capital gains distribution payable either in the Fund's Common Stock or in cash,
as shareholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive Common Stock. 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, the Plan
Agent, as agent for the participants, will buy shares of Common Stock on the
open market, on the New York Stock Exchange or elsewhere, for the participants'
accounts. The valuation date generally is the dividend or distribution payment
date or, if that date is not a New York Stock Exchange trading day, the next
preceding trading day. If the Fund should declare an income dividend or capital
gains distribution payable only in cash, the Plan Agent will, as agent for the
participants, buy Fund shares in the open market, on the New York Stock Exchange
or elsewhere, for the participants' accounts on, or shortly after, the payment
date.
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, semi-annually, in any amount from $100 to $3,000, for
investment in the Fund's Common Stock.
There is no charge to participants for reinvesting dividends or capital
gains distributions payable in either shares 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 gains distributions payable only in cash. All
correspondence concerning the Plan should be directed to The First National Bank
of Boston, Investor Relations Department, P.O. Box 644, Mail Stop 45-02-09,
Boston, Massachusetts 02102-0644 or by telephone at 1-800-730-6001. For a more
complete description of the Plan, see "Dividend Reinvestment and Cash Purchase
Plan" in the SAI.
TAXATION
The Fund has qualified and intends to continue to qualify and elect to be
treated as a regulated investment company for each taxable year under the Code.
The Fund intends to distribute annually to its shareholders substantially all of
its investment company taxable income. The Board of Directors of the Fund will
determine annually whether to distribute any net realized long-term capital
gains in excess of net realized short-term capital losses (including any capital
loss carryovers). The Fund currently expects to distribute any excess annually
to its shareholders. However, if the Fund retains for investment an amount equal
to its net long-term capital gains in excess of its net short-term capital
losses and capital loss carryovers, it will be subject to a corporate tax
(currently at a rate of 35%) on the amount retained. In that event, the Fund
expects to designate such retained amounts as undistributed capital gains in a
notice to its shareholders who (a) will be required to include in income for
United States federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, (b) will be entitled to credit
their proportionate shares of the 35% tax paid by the Fund on the undistributed
amount against their United States federal income tax liabilities, if any, and
to claim refunds to the extent their credits exceed their liabilities, if any,
and (c) will be entitled to increase their tax basis, for United States federal
income tax purposes, in their shares by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholder's income.
Shareholders will be notified annually by the Fund as to the United States
federal income tax status of the dividends, distributions and deemed
distributions made by the Fund to its shareholders. Furthermore, shareholders
will also receive, if appropriate, various written notices after the close of
the Fund's taxable year regarding the United States federal income tax status of
certain dividends, distributions and deemed distributions that were paid (or
that are treated as having been paid) by the Fund to its shareholders during the
preceding taxable year. For a more detailed discussion of tax matters affecting
the Fund and its shareholders, including a discussion of Brazilian taxes, see
"Taxation" in the SAI.
28
<PAGE>
NET ASSET VALUE
Net asset value is calculated (a) no less frequently than weekly, (b) on the
last business day of each month and (c) at any other times determined by the
Fund's Board of Directors. All securities for which market quotations are
readily available are valued at the last sales price prior to the time of
determination, or, if no sales price is available at that time, at the closing
price quoted for the securities (but if bid and asked quotations are available,
at the mean between the last current bid and asked prices, rather than the
quoted closing price). For a more detailed description of the Fund's valuation
procedures, see "Net Asset Value" in the SAI.
The Common Stock trades on the New York Stock Exchange. Shares of closed-end
investment companies have often traded at a discount to net asset value, but in
some cases have traded above net asset value. Among the factors which may be
expected to affect whether shares of the Fund trade above or below net asset
value are portfolio investment results, the general performance of the Brazilian
stock and bond markets and supply and demand for shares of the Fund. Since the
commencement of the Fund's operations, the Fund's shares have traded in the
market for more than half of that time at a discount to net asset value.
The Fund's Bylaws provide that if, at any time, shares of the Fund's Common
Stock publicly trade for a substantial period of time at a substantial discount
from the Fund's then current net asset value per share, the Board of Directors
of the Fund will consider, at its next regularly scheduled meeting, taking
various actions designed to reduce or eliminate the discount. The actions
considered by the Board of Directors may include periodic repurchases of shares.
There can be no assurance that share repurchases will be made or that, if made,
they will reduce or eliminate the market discount. The Fund does not currently
contemplate repurchasing any of its shares. Should any such repurchases be made
in the future, it is expected that they would be made out of available cash
reserves rather than the proceeds of a sale of portfolio securities and would be
made at prices at or below the then current net asset value per share. Any such
repurchases would cause the Fund's total assets to decrease, which may have the
effect of increasing the Fund's expense ratio.
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock, $.001 par value per share. All shares of Common Stock have equal rights
as to dividends and voting privileges and, when issued, will be fully paid and
nonassessable. There are no conversion, preemptive or other subscription rights.
In the event of liquidation, each share of Common Stock is entitled to its
proportion of the Fund's assets after debts and expenses. Shareholders are
entitled to one vote per share and do not have cumulative voting rights.
Set forth below is information with respect to the Common Stock as of July
11, 1996:
<TABLE>
<CAPTION>
AMOUNT HELD BY FUND
AMOUNT AUTHORIZED FOR ITS OWN ACCOUNT AMOUNT OUTSTANDING
- --------------------- -------------------- -------------------
<S> <C> <C>
100,000,000 shares 0 Shares 4,634,005
</TABLE>
The number of shares outstanding as of July 11, 1996, adjusted to give
effect to the issuance of all the Shares pursuant to the Offer, including up to
25% of the Shares available for issuance pursuant to the Over-Subscription
Privilege, would be 6,564,840.
The Fund's shares are listed and traded on the New York Stock Exchange. The
average weekly trading volume of the Common Stock on the New York Stock Exchange
during the year ended March 31, 1996 was 124,940 shares. The following table
sets forth for the quarters indicated the high and low sales prices on the
29
<PAGE>
New York Stock Exchange per share of Common Stock and the net asset value and
the premium or discount from net asset value at which the Common Stock was
trading, expressed as a percentage of net asset value, at each of the high and
low sales prices provided.
<TABLE>
<CAPTION>
PREMIUM OR DISCOUNT
MARKET
PRICE(1) NET ASSET VALUE AS % OF NAV(2)
-------------------- -------------------- --------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1994.......................................... 21.125 14.750 18.82 13.90 12.25 6.12
September 30, 1994..................................... 27.000 18.500 27.29 16.63 (1.06) 11.24
December 31, 1994...................................... 27.500 18.625 27.29 18.92 0.77 (1.56)
March 31, 1995......................................... 21.125 11.000 17.31 11.06 22.04 (0.54)
June 30, 1995.......................................... 17.625 13.625 15.87 14.10 11.06 (3.37)
September 30, 1995..................................... 16.625 14.625 14.64 14.10 13.56 3.72
December 31, 1995...................................... 15.625 13.000 15.95 14.47 (2.04) (10.16)
March 31, 1996......................................... 17.000 12.125 12.85 13.76 32.30 (11.88)
June 30, 1996.......................................... 15.125 13.000 16.70 15.51 (9.43) (16.18)
</TABLE>
- ---------
(1) As reported by the New York Stock Exchange.
(2) Based on the Fund's computations.
SPECIAL VOTING PROVISIONS
The Fund has provisions in its Articles of Incorporation and Bylaws that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund, to cause it to engage in certain transactions or to
modify its structure. The Board of Directors has been divided into three classes
with directors in each class having a term of up to three years. This provision
could delay for up to two years the replacement of a majority of the Board of
Directors. A director may be removed from office only by a vote of the holders
of at least 75% of the shares of the Fund entitled to be voted on the matter.
In addition, conversion of the Fund from a closed-end to an open-end
investment company requires the affirmative vote of at least 75% of the
directors and of the holders of 75% of the shares of the Fund unless approved by
at least 75% of the Continuing Directors, as defined below, in which case a
majority of the votes entitled to be cast by shareholders of the Fund will be
required to approve such conversion. If the Fund were to be converted into an
open-end investment company, it could be restricted in its ability to redeem its
shares (otherwise than in kind) because, in light of the limited depth of the
markets for certain securities in which the Fund may invest, there can be no
assurance that the Fund could realize the then current market value of the
portfolio securities the Fund would be required to liquidate to meet redemption
requests. Also, as a subsidiary of a bank holding company, BEA Associates may be
prohibited under applicable federal law from acting as the sponsor or organizer
of an open-end investment company.
The affirmative votes of at least 75% of the directors and the holders of at
least 75% of the shares of the Fund are required to authorize any of the
following transactions (transactions within clauses (i) through (iii) are
referred to as a "Business Combination"):
(i) merger, consolidation or share exchange of the Fund with or into any
other person;
(ii) issuance or transfer by the Fund (in one or a series of
transactions in any 12-month period) of any securities of the Fund to any
other person or entity for cash, securities or other property (or
combination thereof) having an aggregate fair market value of $1,000,000 or
more excluding sales of securities of the Fund in connection with a public
offering, issuances of securities of the Fund pursuant to a dividend
reinvestment plan adopted by the Fund and issuances of securities of the
Fund upon the exercise of any stock subscription rights distributed by the
Fund;
30
<PAGE>
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund (in one or a series of transactions in any 12-month
period) to or with any person of any assets of the Fund having an aggregate
fair market value of $1,000,000 or more except for portfolio transactions
effected by the Fund in the ordinary course of its business;
(iv) any proposal as to the voluntary liquidation or dissolution of the
Fund or any amendment to the Fund's Articles of Incorporation to terminate
its existence; and
(v) any shareholder proposal as to specific investment decisions made or
to be made with respect to the Fund's assets.
However, in the case of a Business Combination, a 75% shareholder vote will
not be required if the transaction is approved by a vote of at least 75% of the
Continuing Directors (as defined below) or if certain conditions regarding the
consideration paid by the person entering into, or proposing to enter into, a
Business Combination with the Fund and various other requirements are satisfied.
In such case, a majority of the votes entitled to be cast by shareholders of the
Fund will be required to approve such transaction if it is a transaction
described in clause (i) or if it is a transaction described in clause (iii) that
involves substantially all of the Fund's assets with respect to which
shareholder approval is required under Maryland law and no shareholder vote will
be required to approve such transaction if it is any other Business Combination.
In addition, a 75% shareholder vote will not be required with respect to a
transaction described in clause (iv) above if it is approved by a vote of at
least 75% of the Continuing Directors, in which case a majority of the votes
entitled to be cast by shareholders of the Fund will be required to approve such
transaction. The Fund's Bylaws contain provisions the effect of which is to
prevent matters, including nominations of directors, from being considered at
shareholders' meetings where the Fund has not received sufficient prior notice
of the matters.
Reference is made to the Articles of Incorporation and Bylaws of the Fund on
file with the Securities and Exchange Commission for the full text of these
provisions. See "Further Information." These provisions could have the effect of
depriving shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. In the opinion of
the Board of Directors, however, these provisions offer several possible
advantages. They may require persons seeking control of the Fund to negotiate
with its management regarding the price to be paid for the shares required to
obtain such control, they promote continuity and stability and they enhance the
Fund's ability to pursue long-term strategies that are consistent with its
investment objectives. The Board of Directors has determined that the foregoing
voting requirements, which are generally greater than the minimum requirements
under Maryland law and the 1940 Act, are in the best interests of shareholders
generally.
A "Continuing Director" is any member of the Board of Directors of the Fund
(a) who is not a person or affiliate of a person (other than an investment
company advised by the Fund's initial investment manager or any of its
affiliates) who enters or proposes to enter into a Business Combination with the
Fund (such person or affiliate, an "Interested Party") and (b) who has been a
member of the Board of Directors of the Fund for a period of at least 12 months,
or is a successor of a Continuing Director who is unaffiliated with an
Interested Party and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors then on the Board of Directors of the Fund.
CUSTODIAN AND TRANSFER AND DIVIDEND-PAYING AGENT AND REGISTRAR
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
acts as the accounting agent and custodian for the Fund's assets. Bank of Boston
acts as the Fund's dividend-paying agent, transfer agent and registrar.
DISTRIBUTION ARRANGEMENTS
Bear, Stearns & Co. Inc., located at 245 Park Avenue, New York, New York,
will act as Dealer Manager for the Offer. Under the terms and subject to the
conditions contained in a Dealer Manager Agreement dated the date hereof, the
Dealer Manager will provide financial advisory and marketing services in
31
<PAGE>
connection with the Offer and will solicit the exercise of Rights by Record Date
Shareholders. The Offer is not contingent upon any number of Rights being
exercised. The Fund has agreed to pay the Dealer Manager a fee for financial
advisory and marketing services equal to 1.125% of the Subscription Price per
Share issued upon exercise of the Rights and the Over-Subscription Privilege and
to pay broker-dealers, including the Dealer Manager, fees for their soliciting
efforts ("Soliciting Fees") of 2.50% of the Subscription Price per Share for
each Share issued upon exercise of the Rights and the Over-Subscription
Privilege. Soliciting Fees will be paid to the broker-dealer designated on the
applicable portion of the Subscription Certificates or, if no broker-dealer is
so designated, to the Dealer Manager.
The Fund has also agreed to reimburse the Dealer Manager up to $100,000 for
its reasonable expenses incurred in connection with the Offer.
The Fund and BEA Associates have agreed to indemnify the Dealer Manager for
losses arising out of certain liabilities including liabilities under the
Securities Act. The Fund has also agreed to contribute to such losses. The
Dealer Manager Agreement also provides that the Dealer Manager will not be
subject to any liability to the Fund in rendering the services contemplated by
the Agreement except in instances involving the bad faith, willful misfeasance,
or gross negligence of the Dealer Manager or the reckless disregard by the
Dealer Manager of its obligations and duties under the Agreement.
The Fund has agreed, subject to certain exceptions, not to offer or sell, or
enter into any agreement to sell, any equity or equity related securities of the
Fund or securities convertible into such securities for a period of 180 days
after the date of the Dealer Manager Agreement without the prior consent of the
Dealer Manager.
The U.S. Administrator is an affiliate of the Dealer Manager.
LEGAL MATTERS
With respect to matters of United States law, the validity of the shares
offered hereby will be passed on for the Fund by Willkie Farr & Gallagher, New
York, New York. Certain legal matters will be passed on for the Dealer Manager
by Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois. Counsel for the Fund
and the Dealer Manager will rely, as to matters of Maryland law, on Venable,
Baetjer and Howard, LLP, Baltimore, Maryland. Certain matters of Brazilian law
will be passed upon for the Fund and the Dealer Manager by Tozzini, Freire,
Teixeira e Silva, Sao Paulo, Brazil.
EXPERTS
The financial statements of the Fund as of March 31, 1996 have been
incorporated by reference into the SAI in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing. Coopers & Lybrand L.L.P. is located at 2400
Eleven Penn Center, Philadelphia, Pennsylvania 19103.
OFFICIAL DOCUMENTS
The tabular and other statistical information set forth in this Prospectus
and the SAI is, unless otherwise indicated, based upon or derived from public
official documents or information of the Brazilian government and ministries,
the Central Bank of Brazil, major stock exchanges or official statistical
agencies.
FURTHER INFORMATION
Further information concerning these securities and their issuer may be
found in the Registration Statement of which this Prospectus constitutes a part
on file with the Securities and Exchange Commission.
32
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies.......................................................................... 2
Investment Restrictions.................................................................................... 5
Management of the Fund..................................................................................... 8
Portfolio Transactions..................................................................................... 14
Dividend Reinvestment and Cash Purchase Plan............................................................... 15
Taxation................................................................................................... 17
Net Asset Value............................................................................................ 24
Common Stock............................................................................................... 25
Financial Statements....................................................................................... 25
Appendix................................................................................................... A-1
</TABLE>
33
<PAGE>
APPENDIX
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
<TABLE>
<S> <C>
Aaa Bonds that are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or exceptionally stable margin and
principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are not likely to impair the fundamentally strong
position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa Securities.
A Bonds that are rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
</TABLE>
Moody's applies numerical modifiers (1, 2, and 3) with respect to the bonds
rated "Aa" through "B." The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
<TABLE>
<S> <C>
Ba Bonds that are rated Ba are judged to have speculative elements; their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa Bonds that are rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca Bonds that are rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C Bonds that are rated C are the lowest-rated class of bonds and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real investment
standing.
</TABLE>
STANDARD & POOR'S RATINGS GROUP
<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and
repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from AAA issues only in small degree.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
A Debt rated A has a strong capacity to pay interest and repay principal, although it
is somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories.
BBB This is the lowest investment grade. Debt rated BBB has an adequate capacity to pay
interest and repay principal. It normally exhibits adequate protection parameters,
but adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay.
</TABLE>
Speculative Grade
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the lowest degree of speculation, and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions. Debt rated D is in payment default.
In July 1994, Standard & Poor's initiated an "r" symbol to its ratings. The
"r" symbol is attached to derivative, hybrid and certain other obligations that
Standard & Poor's believes may experience high variability in expected returns
due to non-credit risks created by the terms of the obligation.
Modifiers
Standard & Poor's may apply plus (+) or minus (-) modifiers with respect to
bonds rated "AA" through "CCC." These modifiers show the bond's relative
standing within the major rating categories.
A-2
<PAGE>
- -------------------------------------------
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- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND, THE FUND'S INVESTMENT ADVISER OR THE DEALER
MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
AS SET FORTH IN THE PROSPECTUS OR IN THE AFFAIRS OF THE FUND SINCE THE DATE
HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Fee Table...................................... 8
Financial Highlights........................... 9
The Offer...................................... 10
The Fund....................................... 17
Use of Proceeds................................ 17
Risk Factors and Special Considerations........ 18
Investment Objective and Policies.............. 23
Management of the Fund......................... 25
Portfolio Transactions......................... 27
Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan.......... 27
Taxation....................................... 28
Net Asset Value................................ 29
Common Stock................................... 29
Custodian and Transfer and Dividend-Paying
Agent and Registrar.......................... 31
Distribution Arrangements...................... 31
Legal Matters.................................. 32
Experts........................................ 32
Official Documents............................. 32
Further Information............................ 32
Table of Contents of Statement of Additional
Information.................................. 33
Appendix....................................... A-1
</TABLE>
THE BRAZILIAN EQUITY FUND, INC.
1,544,668 SHARES OF
COMMON STOCK ISSUABLE UPON
EXERCISE OF RIGHTS TO SUBSCRIBE
TO SUCH SHARES
-------------------
P R O S P E C T U S
-------------------
BEAR, STEARNS & CO. INC.
------------
JULY 17, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
333-5475; Rule 497(c).
THE BRAZILIAN EQUITY FUND, INC.
------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
The Brazilian Equity Fund, Inc. (the "Fund") is a non-diversified,
closed-end management investment company that seeks long-term capital
appreciation by investing primarily in Brazilian equity securities. It is the
policy of the Fund, under normal market conditions, to invest at least 65% of
its total assets in equity securities of Brazilian issuers. It is anticipated
that at least 80% of the Fund's assets normally will be invested in equity
securities of Brazilian issuers.
This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the Prospectus for the Fund dated July
17, 1996 (the "Prospectus"). This SAI does not include all information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling (800) 733-8481
extension 348. This SAI incorporates by reference the entire Prospectus.
-----------------
TABLE OF CONTENTS
Page
----
Investment Objective and Policies. . . . . . . . . . . . . . . . . . . . . . . 2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Dividend Reinvestment and Cash Purchase Plan . . . . . . . . . . . . . . . . .15
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
--------------------
The Prospectus and this SAI omit certain of the information contained
in the registration statement filed with the Securities and Exchange Commission,
Washington, D.C. The registration statement may be obtained from the Securities
and Exchange Commission upon payment of the fee prescribed, or inspected at the
Securities and Exchange Commission's office at no charge.
---------------------
This Statement of Additional Information is dated
July 17, 1996.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is long-term capital appreciation.
The Fund seeks to achieve this objective by investing primarily in equity
securities of Brazilian issuers. The Fund's investment objective is a
fundamental policy and cannot be changed without the approval of the holders of
a majority of the Fund's outstanding voting securities, as such term is defined
under the Investment Company Act of 1940, as amended (the "1940 Act").
INVESTMENT POLICIES
It is the policy of the Fund, under normal market conditions, to
invest at least 65% of the Fund's total assets in equity securities of Brazilian
issuers. This policy and the investment limitations described below under the
caption "Investment Restrictions" are fundamental and may not be changed without
the approval of a majority of the Fund's outstanding voting securities, as such
term is defined in the 1940 Act. All other policies and percentage limitations
of the Fund as described below may be modified by the Board of Directors if, in
the reasonable exercise of the Board's business judgment, modification is
determined to be necessary or appropriate to carry out the Fund's investment
objective.
It is anticipated that at least 80% of the Fund's assets normally will
be invested in equity securities of Brazilian issuers. Because of the
restrictions of Annex IV to the Central Bank of Brazil's Resolution 1289 of
March 20, 1987, as amended, currently applicable to the Fund, the Fund intends
to invest only in listed securities when investing in equity securities in
Brazil. The Fund defines Brazilian issuers to be (a) companies organized in
Brazil or for which the principal trading market for their securities is in
Brazil, (b) companies financing operations in Brazil by means of equity
securities denominated in Brazilian local currency, (c) companies that derive at
least 50% of their revenues primarily from either goods or services produced in
Brazil or sales made in Brazil, (d) issuers of depositary shares for Brazilian
equity securities and (e) the government of Brazil, its political subdivisions
and their respective agencies or instrumentalities or the Central Bank of
Brazil.
The Fund's definition of Brazilian issuer includes companies that may
have characteristics and business relationships common to companies in a country
or countries other than Brazil. As a result, the value of the equity securities
of such companies may reflect economic and market forces applicable to other
countries, as well as to Brazil. The Fund believes, however, that investment in
such companies will be appropriate because the Fund will invest only in those
companies which, in its view, have sufficiently strong exposure to economic and
market forces in Brazil such that their value will tend to reflect developments
in Brazil to a greater extent than developments in another country or countries.
Annex IV to the Central Bank of Brazil's Resolution 1289 of March 20, 1987 may
be amended from time to time to provide a managed portfolio such as the Fund
greater or lesser flexibility in connection with its investment activities in
Brazil. The Fund may take advantage of any greater flexibility afforded by
these amendments in the discretion of BEA Associates.
The government of Brazil has been engaged in a program of selling part
or all of its interests in government owned or controlled enterprises
("privatizations"). BEA Associates believes that privatizations may offer
investors opportunities for significant capital appreciation and intends to
invest assets of the Fund in privatizations in appropriate circumstances. The
ability of foreign entities, such as the Fund, to participate in privatizations
is limited by Brazilian law, or the terms on which the Fund may be permitted to
participate may be less advantageous than those for local investors. There
2
<PAGE>
can be no assurance that the Brazilian government will continue to sell
companies it currently owns or controls, that privatizations will be successful
or that the Fund will be able to participate in privatizations.
The Fund intends its portfolio, under normal market conditions, to
consist principally of Brazilian equity securities. The Fund may, however,
invest up to 25% of its assets in corporate and government debt securities of
Brazilian issuers when BEA Associates believes that it is appropriate to do so
in order to achieve capital appreciation. Brazilian equity securities in which
the Fund will invest will consist predominantly of common stock and preferred
stock, although the Fund may also invest to a limited extent in convertible
securities, options and warrants. Brazilian debt securities that the Fund may
acquire include bonds, notes and debentures of any maturity of the Brazilian
government and obligations of its political subdivisions, agencies,
instrumentalities and the Central Bank and of Brazilian banks and other
companies, determined by BEA Associates to be suitable investments for the Fund
(including repurchase agreements with respect to obligations of the Brazilian
government or the Central Bank and assignments of, and participations in,
loans). BEA Associates may invest in securities of companies that it determines
to be suitable investments for the Fund regardless of such securities' ratings.
The Fund may not, however, invest more than 5% of its assets in debt securities
that are determined by BEA Associates to be comparable to securities rated C or
below by either Standard & Poor's Ratings Group ("S&P") or Moody's Investor
Services, Inc. ("Moody's"). The Fund's holdings of lower-quality debt
securities will consist predominantly of its holdings of sovereign debt, much of
which trades at substantial discounts from face value and which may include
sovereign debt comparable to securities rated as low as D by S&P or C by
Moody's. For a description of S&P's and Moody's corporate bond ratings, see the
Appendix to the Prospectus.
As a result of legal restrictions or market practices or both, the
Fund, as a U.S. entity, may be precluded from purchasing shares in public
offerings by certain Brazilian companies. Additionally, under the 1940 Act, the
Fund is restricted in its ability to purchase any security of which BEA
Associates or any of its affiliate is a principal underwriter during the public
offering of such security.
The Fund will not invest more than 25% of its assets in the securities
of companies in the same industry. In selecting industries and companies for
investment by the Fund, BEA Associates will consider factors such as overall
growth prospects, competitive position in domestic and export markets,
technology, research and development, productivity, labor costs, raw material
costs and sources, profit margins, return on investment, capital resources,
government regulation and management. Certain sectors of the economy of Brazil
are closed to equity investments by foreign investors or the acquisition of
voting interests in companies in those sectors is limited (see the Appendix to
this SAI).
Brazil has adopted a debt conversion program, pursuant to which
investors may use external debt of Brazil, directly or indirectly, to make
investments in local companies. The program includes significant restrictions
on the application of the proceeds received in the conversion and on the
remittance of profits on the investment and of the invested capital. The Fund
intends to acquire debt of Brazilian issuers to hold and trade in appropriate
circumstances, as well as to use it to participate in the Brazilian debt
conversion program. BEA Associates will evaluate opportunities to enter into
debt conversion transactions as they arise.
The Fund may invest indirectly in securities of Brazilian issuers
through sponsored or unsponsored American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs") and other types of Depositary Receipts (which,
together with ADRs and GDRs, are hereinafter referred to
3
<PAGE>
as "Depositary Receipts"). Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the stock of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of the Depositary Receipts. ADRs are
Depositary Receipts typically issued by a United States bank or trust company
which evidence ownership of underlying securities issued by a foreign
corporation. GDRs and other types of Depositary Receipts are typically issued
by foreign banks or trust companies, although they also may be issued by United
States banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a United States corporation. Generally,
Depositary Receipts in registered form are designed for use in the United States
securities markets and Depositary Receipts in bearer form are designed for use
in securities markets outside the United States. For purposes of the Fund's
investment policies, the Fund's investments in ADRs, GDRs and other types of
Depositary Receipts will be deemed to be investments in the underlying
securities.
PORTFOLIO TURNOVER
The Fund does not expect to trade in securities for short-term gain.
It is anticipated that the Fund's annual portfolio turnover will not exceed
100%. For each fiscal period from the commencement of the Fund's operations
through March 31, 1996, the Fund's annual portfolio turnover rate has not
exceeded 75%. For information regarding the Fund's portfolio turnover rate, see
"Financial Highlights" in the Prospectus. This rate is calculated by dividing
the lesser of sales or purchases of portfolio securities for any given year by
the average monthly value of the Fund's portfolio securities for such year. For
purposes of this calculation, portfolio securities exclude purchase and sales of
debt securities having a maturity at the date of purchase of one year or less.
The rate of portfolio turnover will not be a limiting factor when BEA Associates
deems it appropriate to purchase or sell securities for the Fund. Portfolio
turnover, however, directly affects the amount of transaction costs that will be
borne by the Fund. In addition, the sale of securities held by the Fund for not
more than one year will give rise to short-term capital gain or loss for U.S.
federal income tax purposes. The U.S. federal income tax requirement that the
Fund derive less than 30% of its gross income from the sale or other disposition
of stock or securities held less than three months may limit the Fund's ability
to dispose of its securities. See "Taxation--United States Federal Income
Taxes."
TEMPORARY INVESTMENTS
During periods in which BEA Associates believes changes in economic,
financial or political conditions make it advisable, the Fund may for temporary
defensive purposes reduce its holdings in other securities and invest in certain
short-term (less than twelve months to maturity) debt securities or hold cash.
The short-term debt securities in which the Fund may invest consist of (a)
obligations of the United States or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign banks denominated in any currency; (c) floating rate securities and
other instruments denominated in any currency issued by international
development agencies; (d) finance company and corporate commercial paper and
other short-term corporate debt obligations of U.S. and foreign corporations
meeting the Fund's credit quality standards; and (e) repurchase agreements with
banks and broker-dealers with respect to such securities. The Fund intends to
invest only in short-term debt securities that BEA Associates believes to be of
high quality, i.e., rated in one of the two highest rating categories by Moody's
or S&P or determined to be equivalent in credit quality.
4
<PAGE>
Repurchase agreements with respect to the securities described in the
preceding paragraph are contracts under which a buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price and date. Under a repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. BEA Associates will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price. Repurchase agreements may involve risks in the event of default or
insolvency of the seller, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities.
CURRENCY TRANSACTIONS
BEA Associates generally does not seek to hedge against a decline in
value of the Fund's non-dollar-denominated portfolio securities resulting from a
currency devaluation or fluctuation. As a consequence, the Fund will be subject
to the risk of changes in value of the Real affecting the value of its portfolio
assets, as well as the value of the amounts of interest, dividends and net
realized capital gains received or to be received in Reais that it intends to
remit out of Brazil. Therefore, the risk of currency devaluations and
fluctuations and the effect these may have on the Fund should be carefully
considered by investors in determining whether to purchase shares of the Fund.
The Fund reserves the right, upon 30 days' written notice, to conduct
currency exchange transactions either on a spot (i.e., cash) basis or through
entering into forward contracts to purchase or sell currency should suitable
hedging instruments become available on acceptable terms.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions that
may not be changed without the prior approval of the holders of a majority of
the Fund's outstanding voting securities, as such term is defined under the 1940
Act. For purposes of the restrictions listed below, all percentage limitations
apply immediately after a purchase or initial investment, and any subsequent
change in any applicable percentage resulting from market fluctuations does not
require elimination of any security from the Fund's portfolio. Fund policies
that are not fundamental may be modified by the Board of Directors if, in the
reasonable exercise of the Board's business judgment, modification is determined
to be necessary or appropriate to carry out the Fund's investment objective.
Under its fundamental investment restrictions, the Fund may not:
1. Invest more than 25% of the total value of its assets in a
particular industry. This restriction does not apply to investments in
U.S. Government securities.
2. Issue senior securities, borrow money or pledge its assets,
except that the Fund may borrow from a lender (a) for temporary or
emergency purposes, (b) for such short-term credits as may be necessary for
the clearance or settlement of the transactions, (c) to finance repurchases
of its shares (see "Common Stock" in the Prospectus), in amounts not
exceeding 10% (taken at the lower of cost or current value) of its total
assets (not including the amount borrowed), or (d) to pay any dividends
required to be distributed in order for the Fund to maintain its
qualification as a regulated investment company under the U.S. Internal
Revenue Code of 1986, as amended (the "Code") or otherwise to avoid
taxation under the Code. Additional investments will not be made when
borrowings exceed 5% of the Fund's assets. The Fund may pledge its assets
to secure borrowings.
5
<PAGE>
3. Lend money to other persons except through the purchase of
debt obligations, loans or participation interests in loans and the
entering into of repurchase agreements consistent with the Fund's
investment objective and policies.
4. Make short sales of securities or maintain a short position
in any security.
5. Purchase securities on margin, except such short-term
credits as may be necessary or routine for the clearance or settlement of
transactions and the maintenance of margin with respect to forward
contracts or other hedging securities.
6. Underwrite securities of other issuers, except insofar as
the Fund may be deemed an underwriter under applicable securities laws in
selling portfolio securities.
7. Purchase or sell commodities or real estate, except that the
Fund may invest in securities secured by real estate or interests in real
estate or in securities issued by companies, including real estate
investment trusts, that invest in real estate or interests in real estate,
and may purchase and sell forward contracts on foreign currencies to the
extent permitted under applicable law.
8. Make investments for the purpose of exercising control over,
or management of, the issuers of any securities.
Except for the Fund's investment objective, the Fund's policy of
investing at least 65% of its assets in Brazilian equity securities and the
investment restrictions listed above, the other policies and percentage
limitations set forth in the Prospectus and this Statement of Additional
Information are not fundamental policies or investment restrictions of the Fund
and can be changed by the Board of Directors.
In addition to the foregoing restrictions, the Fund is subject to
certain limitations on its activities in Brazil applicable to foreign
institutional investors. These limitations, which do not affect activities
undertaken outside Brazil, prohibit borrowing money, limit the types and amounts
of certain securities the Fund can hold and impose certain other limits. BEA
Associates does not believe application of these rules have, or will, adversely
affect the ability of the Fund to achieve its objective or its performance.
Under the 1940 Act, the Fund may neither invest more than 5% of its
total assets in the securities of any one investment fund, nor acquire more than
3% of the outstanding voting securities of any such fund. In addition, the Fund
may not invest more than 10% of its total assets in securities issued by all
investment funds. As a shareholder in any investment company, the Fund will
bear its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's advisory, sub-advisory and administrative fees
with respect to assets so invested. See "Taxation--United States Federal Income
Taxes--Passive Foreign Investment Companies."
CERTAIN BRAZILIAN RESTRICTIONS
In Brazil, the Fund may only invest in equity securities or other
floating rate securities issued by publicly-held corporations that it acquires
on the Brazilian stock exchanges, in over-the-counter markets organized by the
Brazilian Securities Commission ("CVM") or by subscription from publicly-held
corporations. Brazilian legislation defines securities as: shares,
participation certificates,
6
<PAGE>
debentures and their respective coupons, subscriptions bonuses, certificates of
deposit of securities, securities subscription rights, securities subscription
receipts, securities options, share deposit certificates and commercial paper
issued for public offering. The Fund's investments must not be used to acquire
control, directly or indirectly, of Brazilian companies.
There is no requirement as to a minimum period upon which investments
shall be maintained in Brazil. For purposes of remittance of profits and
capital gains, as well as repatriation of capital, investments made by the Fund
are subject to registration with the Central Bank of Brazil which issues a
certificate of registration in the name of the Fund. The application for
registration of any such investment with the Central Bank of Brazil must be
submitted within a period of 30 days from the date of execution of the relevant
exchange contract. Pursuant to Resolution No. 2275 dated April 30, 1996 of the
Central Bank of Brazil, non-compliance with the registration obligation is
subject to a fine in the amount of $50,000.
Funds of the Annex IV investment vehicles that are not directed to the
acquisition of securities must be directed exclusively to the acquisition of any
type of investments authorized by the CVM and by the Central Bank. Annex IV
investors are prohibited from leasing, lending, pledging or encumbering the
securities or rights pertaining to securities comprising their portfolios.
Furthermore, funds registered under Annex IV may not be invested in derivatives
transactions involving securities, interest rates or exchange rates that are
administered by securities or commodities exchanges. Purchases and sales of
securities or rights pertaining to securities on margin are not restricted.
7
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The names of the directors and principal officers of the Fund are set
forth below, together with their positions and their principal occupations
during the past five years.
<TABLE>
<CAPTION>
Name, Address and Age Position with the Fund
--------------------- ----------------------
<S> <C>
Emilio Bassini (46)* . . . . . . . . . . . . . . . . . Director, Chairman of the Board,
One Citicorp Center President and Chief Executive Officer
153 East 53rd Street
New York, New York 10022
Richard Watt (37)* . . . . . . . . . . . . . . . . . . Director, Senior Vice President
One Citicorp Center and Chief Investment Officer
153 East 53rd Street
New York, New York 10022
Daniel Sigg (40)*. . . . . . . . . . . . . . . . . . . Director and Senior Vice President
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Dr. Enrique R. Arzac (54). . . . . . . . . . . . . . . Director
Columbia University
Graduate School of Business
New York, New York 10027
James J. Cattano (52). . . . . . . . . . . . . . . . . Director
80 Field Point Road
Greenwich CT 06830
Peter A. Gordon (53) . . . . . . . . . . . . . . . . . Director
c/o BEA Associates
153 East 53rd Street
New York, New York 10022
George W. Landau (76). . . . . . . . . . . . . . . . . Director
Two Grove Isle Drive
Coconut Grove, Florida 33133
Martin M. Torino (46). . . . . . . . . . . . . . . . . Director
Reconquista 365, 9th Fl.
Capital Federal 1003
Buenos Aires, Argentina
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Paul P. Stamler (35) . . . . . . . . . . . . . . . . . Senior Vice President
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Michael A. Pignataro (36). . . . . . . . . . . . . . . Chief Financial Officer and Secretary
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Rachel D. Manney (29). . . . . . . . . . . . . . . . . Vice President and Treasurer
One Citicorp Center
153 East 53rd Street
New York, New York 10022
</TABLE>
- ---------------
* Messrs. Bassini, Sigg and Watt are "interested persons" of the Fund within
the meaning of the 1940 Act by virtue of their positions as directors
and/or officers of BEA Associates.
Emilio Bassini is a member of the Executive Committee and Executive
Director of BEA Associates (since 1985). Mr. Bassini is also Managing Principal
of Bassini, Playfair + Associates LLC (since December 1995). Mr. Bassini is
also a Director, Chairman of the Board, President and Chief Investment Officer
of The Latin America Investment Fund, Inc. and The Latin America Equity Fund,
Inc., a Director, President and Chief Investment Officer of The Chile Fund,
Inc., The Portugal Fund, Inc., The Emerging Markets Telecommunications Fund,
Inc., The First Israel Fund, Inc. and The Emerging Markets Infrastructure Fund,
Inc. and President and Secretary of The Indonesia Fund, Inc.
Richard Watt has been a Senior Vice President of BEA Associates since
August 1995. Prior to that time, he was head of Emerging Markets Investments
and Research at Gartmore Investment Limited (November 1992 to June 1995). From
1987 until 1992, Mr. Watt was a director of Kleinwort Benson International
Investment. He is also Director and Investment Officer of The Emerging Markets
Telecommunications Fund, Inc., The Emerging Markets Infrastructure Fund, Inc.
and The Latin America Equity Fund, Inc.
Daniel Sigg is a member of the Executive Committee, Chief Financial
Officer, and an Executive Director of BEA Associates (since May 1995). From
February 1992 to April 1995, Mr. Sigg was a member of the Executive Committee
and Managing Director of BEA Associates. He was Vice President of Marketing of
BEA from January 1991 to January 1992. Mr. Sigg has been President of Credit
Suisse Advisors Corporation since December 1995 and President of Credit Suisse
Capital Corporation since December 1994. He was Director and Vice President of
Credit Suisse Capital Corporation from December 1990 to November 1994. From
1987 to December 1990, Mr. Sigg was Vice President and Head of International
Equity Sales and Trading at Swiss American Securities. Mr. Sigg is also a
Director and Senior Vice President of The Latin America Investment Fund, Inc.,
The Latin America Equity Fund, Inc., The Portugal Fund, Inc., The Indonesia
Fund, Inc., The Chile Fund, Inc., The Emerging Markets Telecommunications Fund,
Inc., The First Israel Fund, Inc. and The Emerging Markets Infrastructure Fund,
Inc. and a Director of BEA Strategic Income Fund, Inc. and BEA Income Fund, Inc.
9
<PAGE>
Dr. Enrique R. Arzac is Professor of Finance and Director of the
Financial Management Program at the Graduate School of Business of Columbia
University (since 1971). He is also a Director of The Adam Express Company and
Petroleum and Resources Corp. Dr. Arzac is also a director of The Latin America
Investment Fund, Inc., The Latin America Equity Fund, Inc., The Portugal Fund,
Inc., The Chile Fund, Inc., The Emerging Markets Telecommunications Fund, Inc.,
The First Israel Fund, Inc., The Emerging Markets Infrastructure Fund, Inc., BEA
Strategic Income Fund, Inc. and BEA Income Fund, Inc.
Peter A. Gordon is a former General Partner of Ethos Capital
Management. He was Managing Director at Salomon Brothers, Inc. from 1981 to
June 1992. Mr. Gordon is also a Director of TCS Fund, Inc., the Mills
Corporation, The First Israel Fund, Inc., The Emerging Markets
Telecommunications Fund, Inc., The Emerging Markets Infrastructure Fund, Inc.,
The Latin America Investment Fund, Inc. and The Latin America Equity Fund, Inc.
He is a Trustee of the Contemporary Art Institute of New York and a Director of
the American Friends of Canada.
George W. Landau is Chairman of the Latin American Advisory Board of
the Coca-Cola Corporation and Senior Advisor of Coca-Cola International (since
1988). Ambassador Landau was President of the Americas Society and Council of
the Americas from July 1985 to October 1993. He was the United States
Ambassador to Venezuela (1982-1985), United States Ambassador to Chile (1977-
1982) and United States Ambassador to Paraguay (1972-1977). Ambassador Landau
is also a Director of The Chile Fund, Inc., The Latin America Investment Fund,
Inc., The Latin America Equity Fund, Inc., The Emerging Markets
Telecommunications Fund, Inc., The Emerging Markets Infrastructure Fund, Inc.
and The First Israel Fund, Inc. He is also a Director of Emigrant Savings Bank
and GAM Funds, Inc.
James J. Cattano is President of Atlantic Fertilizer & Chemical
Company (an international trading company specializing in the sale of
agricultural commodities in Latin American markets) (since October 1991). He
was President of Diamond Fertilizer & Chemical Corporation, a subsidiary of
Norsk Hydro A.S. (a Norwegian agriculture, oil and gas, light metals and petro-
chemical company) from January 1984 to October 1991; Mr. Cattano is also a
Director of The Chile Fund, Inc., The Portugal Fund, Inc., The Latin America
Investment Fund, Inc., The Latin America Equity Fund, Inc., The Emerging Markets
Telecommunications Fund, Inc. and The Emerging Markets Infrastructure Fund, Inc.
Martin M. Torino is Executive Director of TAU S.A. (since November
1990); Director of Greenwich Investments (Buenos Aires) (investment banking,
1/91-present); President of San Lucas S.A. (agribusiness, 10/90-present);
President of DYAT S.A. (10/93-present); President of Dipoler S.A. (grain
processing, 10/89-present); and Member of the Coffee, Sugar & Cocoa Exchange,
Inc. (1985-present). Mr. Torino was a Vice President of Louis Dreyfus Sugar
Company, Inc. from 1984 to 1990. Mr. Torino is also a Director of The Portugal
Fund, Inc., The Latin America Investment Fund, Inc., The Latin America Equity
Fund, Inc., The Emerging Markets Telecommunications Fund, Inc. and The Emerging
Markets Infrastructure Fund, Inc.
Paul P. Stamler is a Senior Vice President of BEA Associates (since
June 1993). From April 1992 to May 1993, Mr. Stamler was self-employed as a
certified public accountant. From June 1988 to March 1992, Mr. Stamler was Vice
President of Bear, Stearns & Co. Inc. Mr. Stamler is also the Senior Vice
President of The Latin America Investment Fund, Inc., The Latin America Equity
Fund, Inc., The Portugal Fund, Inc., The Indonesia Fund, Inc., The Chile Fund,
Inc., The Emerging
10
<PAGE>
Markets Telecommunications Fund, Inc., The First Israel Fund, Inc. and The
Emerging Markets Infrastructure Fund, Inc. and Treasurer of BEA Income Fund,
Inc. and BEA Strategic Income Fund, Inc.
Michael A. Pignataro has been Vice President of BEA Associates since
December 1995. He was Assistant Vice President and Chief Administrative Officer
for Investment Companies of BEA from September 1989 to December 1995. Mr.
Pignataro is also the Chief Financial Officer and Secretary of The Latin America
Investment Fund, Inc., The Latin America Equity Fund, Inc., The Portugal Fund,
Inc., The Chile Fund, Inc., The Emerging Markets Telecommunications Fund, Inc.,
The First Israel Fund, Inc. and The Emerging Markets Infrastructure Fund, Inc.
and Chief Financial Officer and Assistant Secretary of The Indonesia Fund, Inc.
and Secretary of BEA Income Fund, Inc. and BEA Strategic Income Fund, Inc.
Rachel D. Manney is an Assistant Vice President and Administrative
Officer for Investment Companies of BEA Associates (since April 1992). From
1989 to 1992, Ms. Manney was a Senior Associate at Coopers & Lybrand. Ms.
Manney is also Vice President and Treasurer of The Latin America Investment
Fund, Inc., The Latin America Equity Fund, Inc., The Portugal Fund, Inc., The
Indonesia Fund, Inc., The Chile Fund, Inc., The Emerging Markets
Telecommunications Fund, Inc., The First Israel Fund, Inc. and The Emerging
Markets Infrastructure Fund, Inc.
Mr. Torino is a resident of Argentina. A substantial portion of his
assets is located outside of the United States. Mr. Torino has not appointed an
agent for service of process in the United States.
The Fund pays each of its directors who is not a director, officer or
employee of BEA Associates 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 those directors for travel and out-of-pocket expenses incurred in
connection with Board of Directors meetings. The aggregate remuneration paid to
all such unaffiliated directors by the Fund during the fiscal year ended March
31, 1996 was $34,000.
The following table shows certain compensation information for the directors of
the Fund for the fiscal year ended March 31, 1996. None of the Fund's executive
officers or directors who are also officers or directors of BEA Associates
received any compensation from the Fund for such period. The Fund has no bonus,
profit sharing, pension or retirement plans. Dr. Arzac was appointed as a
Director effective February 13, 1996 and therefore received no compensation for
the fiscal year ended March 31, 1996.
<TABLE>
<CAPTION>
Total Total Number
Pension or Compensation of Boards of
Retirement From Fund and BEA-Advised
Aggregate Benefits Accrued Estimated Fund Complex Investment
Compensation as Part of Fund Annual Benefits Paid to Companies
Name of Director from Fund Expenses Upon Retirement Directors Served
- ---------------- ------------- ---------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
James J. Cattano $7,000 0 0 $49,000 7
David C. Garlow+ 6,500 0 0 6,500 1
Peter A. Gordon 6,500 0 0 39,000 6
George W. Landau 7,000 0 0 49,000 7
Martin M. Torino 7,000 0 0 42,000 6
</TABLE>
- ---------------
+ Mr. Garlow resigned as a director effective May 1996.
11
<PAGE>
The Articles of Incorporation and Bylaws of the Fund provide that the
Fund will indemnify directors and officers and may indemnify employees or agents
of the Fund against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their positions with the
Fund to the fullest extent permitted by law. In addition, the Fund's Articles
of Incorporation provide that the Fund's directors and officers will not be
liable to shareholders for money damages, except in limited instances. However,
nothing in the Articles of Incorporation or the Bylaws of the Fund protects or
indemnifies a director, officer, employee or agent against any liability to
which such person would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such person's office. No insurance obtained by the Fund shall
protect or purport to protect officers or directors, the investment adviser or
any principal underwriter of the Fund against any liability to the Fund or its
shareholders to which they would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of their
obligations and duties.
The Board of Directors has been divided into three classes with
directors in each class having a term of up to three years. See "Common Stock--
Special Voting Provisions" in the Prospectus.
ADVISORY ARRANGEMENTS
BEA Associates act as the Fund's investment adviser pursuant to an
Advisory Agreement with the Fund (the "Advisory Agreement").
The Advisory Agreement provides that BEA Associates shall not be
liable, and shall be indemnified, for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which the
Advisory Agreement relates, except liability resulting from willful misfeasance,
bad faith or gross negligence on the part of BEA Associates in the performance
of its duties or from reckless disregard of its obligations and duties under the
Advisory Agreement.
Under the Advisory Agreement, BEA Associates may cause the Fund to pay
an investment sub-adviser directly in local currency for services rendered,
which will reduce the amount payable to BEA Associates by the Fund.
For the fiscal years ended March 31, 1996, March 31, 1995 and March
31, 1994, BEA Associates was paid for advisory services rendered to the Fund of
$921,310, $977,285 and $961,431, respectively. These advisory fees are
exclusive of the advisory fees paid to the sub-advisers to the Fund during that
period. Pursuant to the Advisory Agreement, BEA Associates caused the Fund to
pay the sub-advisers directly for services rendered to the Fund, thereby
reducing the amount payable to BEA Associates by the Fund.
BEA Associates and BEA Capital LLC, a company organized and controlled
by Mr. Bassini and a former officer of BEA, have entered into a consulting
agreement, dated as of December 12, 1995, pursuant to which BEA Capital LLC will
provide consulting services to BEA Associates with respect to private equity
investments held by clients of BEA Associates, including the Fund, for a fee of
$2 million per annum payable by BEA. This consulting agreement is terminable by
either party as of the last day of any calendar year commencing on December 31,
1996; provided, that if BEA Associates terminates this agreement as of December
31, 1996, BEA Associates is required to pay BEA Capital LLC an additional $2
million as a termination fee.
12
<PAGE>
On June 21, 1994, Garantia Administracao de Recursos S.A. ("Garantia")
resigned as an investment sub-adviser to the Fund. Since June 21, 1994, BEA
Associates has waived that portion of its fees that would have been otherwise
payable to Garantia. For the fiscal period from April 1, 1994 to June 21, 1994,
the fiscal year ended March 31, 1994 and the fiscal period from April 10, 1992
(commencement of the Fund's operations) to March 31, 1993, Garantia was paid
fees for advisory services rendered to the Fund equal to $41,461, $178,043 and
$116,329, respectively.
On August 15, 1994, Patrimonio Planejamento Financeiro Ltda.
("Patrimonio") resigned as an investment sub-adviser to the Fund. Since August
15, 1994, BEA Associates has waived that portion of its fees that would have
been otherwise payable to Patrimonio. For the fiscal period from April 1, 1994
to August 15, 1994, the fiscal year ended March 31, 1994 and the fiscal period
from April 10, 1992 (commencement of the Fund's operations) to March 31, 1993,
Patrimonio was paid fees for advisory services rendered to the Fund equal to
$29,872, $71,217 and $46,532, respectively.
ADMINISTRATIVE ARRANGEMENT
Bear Stearns Funds Management Inc. (the "U.S. Administrator"), an
affiliate of the Dealer Manager, serves as the Fund's U.S. administrator
pursuant to an agreement with the Fund (the "Administration Agreement"). The
First National Bank of Boston, Sao Paulo ("Bank of Boston, Sao Paulo") serves as
the Fund's Brazilian administrator pursuant to a Brazilian Administration
Agreement with Brown Brothers Harriman & Co., the Fund's accounting agent and
custodian (the "Brazilian Administration Agreement"). The Fund has also
retained BEA Associates to provide certain administrative and shareholder
services to the Fund that are not provided by the Fund's administrators.
DURATION AND TERMINATION; NON-EXCLUSIVE SERVICES
The Advisory Agreement became effective on March 6, 1992. Unless
earlier terminated as described below, the Advisory Agreement remains in effect
if approved annually (a) by the Board of Directors of the Fund or by the holders
of a majority of the Fund's outstanding voting securities (as defined in the
1940 Act) and (b) by a majority of the directors who are not parties to the
Advisory Agreement or "interested persons" (as defined in the 1940 Act) of any
such party. The Advisory Agreement terminates on its assignment by any party
and may be terminated without penalty on 60 days' written notice at the option
of the Board of Directors of the Fund or by the vote of the majority of the
holders of the Fund's shares, or upon 90 days' written notice, by BEA
Associates. In the event of the termination of a sub-advisory agreement, BEA
Associates is responsible for furnishing the services required to be performed
by the former sub-adviser or arranging for a successor sub-adviser on terms and
conditions acceptable to the Fund and subject to the requirements of the 1940
Act.
The Administration Agreement is terminable upon 60 days' notice by
either party. The Brazilian Administration Agreement is terminable upon 60
days' notice by either Brown Brothers Harriman & Co. or Bank of Boston, Sao
Paulo; however, Bank of Boston, Sao Paulo may be replaced only by an entity
authorized to act as a joint manager of a managed portfolio of bonds and
securities under Brazilian law.
The services of BEA Associates, the U.S. Administrator and Bank of
Boston, Sao Paulo are not deemed to be exclusive, and nothing in the relevant
service agreements will prevent any of them or their affiliates from providing
similar services to other investment companies and other
13
<PAGE>
clients (whether or not such clients' investment objectives and policies are
similar to those of the Fund) or from engaging in other activities.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the Fund are made by BEA
Associates, subject to the overall review of the Fund's Board of Directors.
Portfolio securities transactions for the Fund are placed on behalf of the Fund
by persons authorized by BEA Associates. BEA Associates manages other
investment companies and accounts (the "BEA Accounts") that invest in Brazilian
securities. Although investment decisions for the Fund are made independently
from those of the other BEA Accounts, investments of the type the Fund may make
may also be made on behalf of the BEA Accounts. When the Fund and one or more
of the BEA Accounts is prepared to invest in, or desires to dispose of, the same
security, available investments or opportunities for each will be allocated in a
manner believed by BEA Associates to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained or disposed of by the Fund. The Fund may utilize
CS First Boston Corporation and other affiliates of Credit Suisse in connection
with the purchase or sale of securities in accordance with rules or exemptive
orders adopted by the Securities and Exchange Commission when BEA Associates
believes that the charge for the transaction does not exceed usual and customary
levels.
Transactions on U.S. and some foreign stock exchanges involve the
payment of negotiated brokerage commissions, which may vary among different
brokers. For information about brokerage commissions in Brazil, see the
Appendix to this SAI under "The Securities Markets." The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased from and sold to dealers in the
over-the-counter markets include a dealer's mark-up or mark-down, which normally
is not disclosed. Fixed-income securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security will likely include a profit to
the dealer.
In selecting brokers or dealers to execute portfolio transactions on
behalf of the Fund, BEA Associates will seek the best overall terms available.
The Advisory Agreement provides that, in assessing the best overall terms
available for any transaction, BEA Associates will consider the factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, for the specific
transaction and on a continuing basis. In addition, the Advisory Agreement
authorizes BEA Associates, in selecting brokers or dealers to execute a
particular transaction and in evaluating the best overall terms available, to
consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund
and/or other accounts over which BEA Associates exercises investment discretion.
The fees payable under the Advisory Agreement are not reduced as a result of BEA
Associates' receiving such brokerage and research services.
The Fund's Board of Directors will review periodically the commissions
paid by the Fund to determine if the commissions paid over representative
periods of time were reasonable in relation to the benefits inuring to the Fund.
The aggregate amounts paid by the Fund in brokerage commissions for
the fiscal years ended March 31, 1996, March 31, 1995 and March 31, 1994 were
$328,603, $683,707 and
14
<PAGE>
$529,342, respectively. For the fiscal period ended March 31, 1993, the Fund
paid Garantia $403,517 in brokerage commissions. The Fund paid Garantia
$425,396 in brokerage commissions for the fiscal year ended March 31, 1994, or
80.4% of the total brokerage commissions paid. Garantia effected 81.0% of the
total dollar amount of transactions involving brokerage commissions during that
period. The Fund paid Garantia $58,367 in brokerage commissions for the fiscal
period from April 1, 1994 to June 21, 1994. For the fiscal period ended March
31, 1993, the Fund paid Patrimonio $81,260 in brokerage commissions. The Fund
paid Patrimonio $96,168 in brokerage commissions for the fiscal year ended March
31, 1994, or 18.2% of the total brokerage commissions paid. Patrimonio effected
17.1% of the total dollar amount of transactions involving brokerage commissions
during that period. The Fund paid Patrimonio $34,741 in brokerage commissions
for the fiscal period from April 1, 1994 to August 15, 1994. The Fund paid
$33,481 in brokerage commissions to Banco Bradesco de Investimento S.A.
("Bradesco"), which had served as economic consultant to the Fund from 1992 to
March 1995, for the fiscal period ended March 31, 1993. The Fund paid no
brokerage commissions to Bradesco for the fiscal year ended March 31, 1994 and
March 31, 1995.
The Fund has the benefit of an exemptive order of the Securities and
Exchange Commission issued under the 1940 Act authorizing the Fund and other
investment companies and offshore funds advised by BEA Associates to co-invest
in securities issued in privately-negotiated transactions, subject to the terms
and conditions of the order.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan
(the "Plan"), each shareholder will be deemed to have elected, unless The First
National Bank of Boston ("Bank of Boston"), 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 Bank of Boston, as dividend-paying agent.
Shareholders who do not wish to have dividends and distributions automatically
reinvested should notify Bank of Boston, as the Plan Agent for The Brazilian
Equity Fund, Inc., Investor Relations Department, P.O. Box 644, Mail Stop 45-02-
09, Boston, Massachusetts 02102-0644 or by telephone at 1-800-730-6001.
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 a broker or nominee that does not provide a
dividend reinvestment program may be required to have his shares registered in
his own name to participate in the 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 dividends paid 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 will be
borne by the Fund and allocated to all shareholders in proportion to their
interests in the Fund.
The Plan Agent serves as agent for the shareholders in administering
the Plan. If the Board of Directors of the Fund declares an income dividend or
a capital gains distribution payable either in the Fund's Common Stock or in
cash, as shareholders may have elected, non-participants in the Plan will
receive cash and participants in the Plan will receive Common Stock. If the
market price
15
<PAGE>
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, the
Plan Agent, as agent for the participants, will buy shares of Common Stock on
the open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts. If, before the Plan Agent has completed its purchases,
the market price exceeds the net asset value of shares, the average per share
purchase price paid by the Plan Agent may exceed the net asset value of shares,
resulting in the acquisition of fewer shares than if the dividend or
distribution had been paid in shares issued by the Fund at net asset value.
Additionally, if the market price exceeds the net asset value of shares before
the Plan Agent has completed its purchases, the Plan Agent is permitted to cease
purchasing shares and the Fund may issue the remaining shares at a price equal
to the greater of (a) net asset value or (b) 95% of the then current market
price. In a case where the Plan Agent has terminated open market purchases and
the Fund has issued the remaining shares, the number of shares received by the
participant in respect of the cash dividend or distribution will be based on the
weighted average of prices paid for shares purchased in the open market and the
price at which the Fund issues the remaining shares. The valuation date is the
dividend or distribution payment date or, if that date is not a New York Stock
Exchange trading day, the next preceding trading day. If the Fund should
declare an income dividend or capital gains distribution payable only in cash,
the Plan Agent will, as agent for the participants, buy Fund shares in the open
market, on the New York Stock Exchange or elsewhere, for the participants'
accounts on, or shortly after, the payment date.
Participants in the Plan have the option of making additional cash
payments to the Plan Agent, semi-annually, in any amount from $100 to $3,000,
for investment in the Fund's Common Stock. The Plan Agent will use all funds
received from participants to purchase Fund shares in the open market on or
about February 15 and August 15 of each year. Any voluntary cash payments
received more than 30 days prior to these dates will be returned by the Plan
Agent and interest will not be paid on any uninvested cash payments. To avoid
unnecessary cash accumulations, and also to allow ample time for receipt and
processing by the Plan Agent, it is suggested that participants send in
voluntary cash payments to be received by the Plan Agent approximately 10 days
before February 15 or August 15, as the case may be. A participant may withdraw
a voluntary cash payment by written notice, if the notice is received by the
Plan Agent not less than 48 hours before the payment is to be invested. A
participant's tax basis in his shares acquired through this optional investment
right will equal his cash payments to the Plan, including any cash payments used
to pay brokerage commissions allocable to his acquired shares.
The Plan Agent maintains all shareholder accounts in the Plan and
furnishes written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in the name of
the participant and each shareholder's proxy will include those shares purchased
pursuant to the Plan.
In the case of a shareholder, such as a bank, broker or nominee, that
holds shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time to
time by the shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There is no charge to participants for reinvesting dividends or
capital gains distributions payable in either stock or cash. The Plan Agent's
fees for the handling of reinvestment of
16
<PAGE>
such dividends and capital gains distributions will be paid by the Fund. There
will be no brokerage charges with respect to shares issued directly by the Fund
as a result of dividends or capital gains distributions payable either in stock
or in cash. However, each participant will be charged by the Plan Agent a pro
rata share of brokerage commissions incurred with respect to the Plan Agent's
open market purchases in connection with voluntary cash payments made by the
participant or the reinvestment of dividends or capital gains distributions
payable only in cash. Brokerage charges for purchasing small amounts of stock
for individual accounts through the Plan are expected to be less than the usual
brokerage charges for such transactions because the Plan Agent will be
purchasing stock for all participants in blocks and prorating the lower
commission thus obtainable. Brokerage commissions will vary based on, among
other things, the broker selected to effect a particular purchase and the number
of participants on whose behalf such purchase is being made. The Fund cannot
predict, therefore, whether the cost to a participant who makes a voluntary cash
payment will be less than if a participant were to make an open market purchase
of the Fund's Common Stock on his own behalf.
The receipt of dividends and distributions in stock under the Plan
will not relieve participants of any income tax (including withholding tax) that
may be payable on such dividends or distributions.
The Fund and the Plan Agent reserve the right to terminate the Plan as
applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the termination sent to the members of the Plan at
least 30 days before the semi-annual contribution date, in the case of voluntary
cash payments, or the record date for dividends or distributions. The Plan also
may be amended by the Fund or the Plan Agent, but (except when necessary or
appropriate to comply with applicable law, rules or policies of a regulatory
authority) only by at least 30 days' written notice to members of the Plan. All
correspondence concerning the Plan should be directed to the Plan Agent,
Investor Relations Department, P.O. Box 644, Mail Stop 45-02-09, Boston,
Massachusetts 02102-0644 or by telephone at 1-800-730-6001
TAXATION
The following is a summary of the material United States federal
income tax considerations and Brazilian tax considerations regarding the
purchase, ownership and disposition of shares in the Fund. Each prospective
shareholder is urged to consult his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of investing in the Fund.
The summary is based on the laws in effect on the date of this SAI, which are
subject to change.
UNITED STATES FEDERAL INCOME TAXES
THE FUND AND ITS INVESTMENTS
THE FUND AND ITS INVESTMENTS. The Fund has qualified and intends to
continue to qualify and elect to be treated as a regulated investment company
for each taxable year under the Code. To so qualify, the Fund must, among other
things: (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or foreign currencies, or
other income (including, but not limited to, gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; (b) derive less than 30% of its gross income in
each taxable year from the sale or other disposition of (i) stock or securities
held for less than three months, (ii) options, futures or forward contracts
(other than options, futures or forward contracts on foreign
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currencies) held for less than three months and (iii) foreign currencies (or
options, futures or forward contracts on such foreign currencies) held for less
than three months but only if such currencies (or options, futures or forward
contracts) are not directly related to the Fund's principal business of
investing in stock or securities (or options or futures with respect to stock or
securities); and (c) diversify its holdings so that, at the end of each quarter
of the Fund's taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash, securities of other regulated investment
companies, United States government securities and other securities, with such
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the Fund's assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its assets
is invested in the securities (other than United States government securities or
securities of other regulated investment companies) of any one issuer or any two
or more issuers that the Fund controls and are determined to be engaged in the
same or similar trades or businesses or related trades or businesses. The Fund
expects that all of its foreign currency gains will be directly related to its
principal business of investing in stocks and securities.
Although legislation that would repeal the 30% limitation on a
regulated investment company's ability to make short-term investments has been
proposed in Congress, it is unclear when, if ever, such legislation will be
enacted or the form of such legislation if enacted.
As a regulated investment company, the Fund will not be subject to
United States federal income tax on its net investment income (i.e., income
other than its net realized long- and short-term capital gains) and its net
realized long- and short-term capital gains, if any, that it distributes to its
shareholders, provided that an amount equal to at least 90% of the sum of its
investment company taxable income (i.e., 90% of its taxable income minus the
excess, if any, of its net realized long-term capital gains over its net
realized short-term capital losses (including any capital loss carryovers), plus
or minus certain other adjustments as specified in section 852 of the Code) and
its net tax-exempt income for the taxable year is distributed, but will be
subject to tax at regular corporate rates on any taxable income or gains that it
does not distribute. Furthermore, the Fund will be subject to a United States
corporate income tax with respect to such distributed amounts in any year that
it fails to qualify as a regulated investment company or fails to meet this
distribution requirement. Any dividend declared by the Fund in October,
November or December of any calendar year and payable to shareholders of record
on a specified date in such a month shall be deemed to have been received by
each shareholder on December 31 of such calendar year and to have been paid by
the Fund not later than such December 31, provided that such dividend is
actually paid by the Fund during January of the following calendar year.
The Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of
Directors of the Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). The Fund currently expects to
distribute any excess annually to its shareholders. However, if the Fund
retains for investment an amount equal to all or a portion its net long-term
capital gains in excess of its net short-term capital losses and capital loss
carryovers, it will be subject to a corporate tax (currently at a rate of 35%)
on the amount retained. In that event, the Fund expects to designate such
retained amounts as undistributed capital gains in a notice to its shareholders
who (a) will be required to include in income for United States federal income
tax purposes, as long-term capital gains, their proportionate shares of the
undistributed amount, (b) will be entitled to credit their proportionate shares
of the 35% tax paid by the Fund on the undistributed amount against their United
States federal income tax liabilities, if any, and to claim refunds to the
extent their credits exceed their liabilities, if any, and (c) will be entitled
to increase
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their tax basis, for United States federal income tax purposes, in their shares
by an amount equal to 65% of the amount of undistributed capital gains included
in the shareholder's income.
The Code imposes a 4% nondeductible excise tax on the Fund to the
extent the Fund does not distribute by the end of any calendar year at least 98%
of its net investment income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any income
or gain retained by the Fund that is subject to corporate income tax will be
considered to have been distributed by year-end. In addition, the minimum
amounts that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any underdistribution or overdistribution, as
the case may be, from the previous year. The Fund anticipates that it will pay
such dividends and will make such distributions as are necessary in order to
avoid the application of this tax.
Exchange control regulations may restrict repatriations of investment
income and capital or the proceeds of securities sales by foreign investors such
as the Fund and may limit the Fund's ability to pay sufficient dividends and to
make sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
If, in any taxable year, the Fund fails to qualify as a regulated
investment company under the Code, the Fund would be taxed in the same manner as
an ordinary corporation and distributions to its shareholders would not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits would constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to shareholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the shareholders' hands
as long-term capital gains. If the Fund fails to qualify as a regulated
investment company in any year, it must pay out its earnings and profits
accumulated in that year in order to qualify again as a regulated investment
company. In addition, if the Fund failed to qualify as a regulated investment
company for a period greater than one taxable year, the Fund may be required to
recognize any net built-in gains (the excess of the aggregate gains, including
items of income, over aggregate losses that would have been realized if it had
been liquidated) in order to qualify as a regulated investment company in a
subsequent year.
The Fund will maintain accounts and calculate income in U.S. dollars.
In general, gains and losses on the disposition, or receipt of principal, of
debt securities denominated in a foreign currency that are attributable to
fluctuation in exchange rates between the date the debt security is acquired and
the date of disposition, or receipt of principal, gains and losses attributable
to fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities, and gains and losses from the disposition
of foreign currencies and foreign currency forward contracts will be treated as
ordinary income or loss. If the Fund acquires a debt security denominated in a
Latin American currency, such security may bear interest at a high nominal rate
that takes into account expected decreases in the value of the principal amount
of the security due to anticipated devaluations of the currency. In the case of
such debt securities, the Fund would be required to include the stated interest
in income as it accrues, but would generally realize an ordinary loss
attributable to devaluations of the currency with respect to principal only when
the security is disposed of or the principal amount is received.
The Fund's transactions in foreign currencies, forward contracts,
options and futures contracts (including options and futures contracts on
foreign currencies) will be subject to special
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provisions of the Code that, among other things, may affect the character of
gains and losses realized by the Fund (i.e., may affect whether gains or losses
are ordinary or capital), accelerate recognition of income to the Fund and defer
Fund losses. These rules could therefore affect the character, amount and
timing of distributions to shareholders. These provisions also (a) will require
the Fund to mark-to-market certain types of the positions in its portfolio
(i.e., treat them as if they were closed out) and (b) may cause the Fund to
recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the distribution requirements for
avoiding income and excise taxes. The Fund will monitor its transactions, will
make the appropriate tax elections and will make the appropriate entries in its
books and records when it acquires any foreign currency, forward contract,
option, futures contract or hedged investment in order to mitigate the effect of
these rules and prevent disqualification of the Fund as a regulated investment
company.
PASSIVE FOREIGN INVESTMENT COMPANIES. If the Fund purchases shares in
certain foreign investment entities, called "passive foreign investment
companies" (a "PFIC"), the Fund may be subject to United States federal income
tax on a portion of any "excess distribution" or gain from the disposition of
such shares even if such income is distributed as a taxable dividend by the Fund
to its shareholders. Additional charges in the nature of interest may be imposed
on the Fund in respect of deferred taxes arising from such distributions or
gains. Any tax paid by the Fund as a result of its ownership of shares in a
PFIC will not give rise to any deduction or credit to the Fund or any
shareholder. If the Fund were to invest in a PFIC and elected to treat the PFIC
as a "qualified electing fund" under the Code, in lieu of the foregoing
requirements, the Fund might be required to include in income each year a
portion of the ordinary earnings and net capital gains of the qualified electing
fund, even if not distributed to the Fund, and such amounts would be subject to
the 90% and excise tax distribution requirements described above. In order to
make this election, the Fund would be required to obtain certain annual
information from the passive foreign investment companies in which it invests,
which may be difficult or not possible to obtain.
Legislation has been proposed before the U.S. Congress that would
unify and, in certain cases, modify the anti-deferral rules contained in various
provisions of the Code, including the PFIC provisions, related to the taxation
of U.S. shareholders of foreign corporations. It is impossible to predict if or
when the legislation will become law and, if it is so enacted, what form it will
ultimately take.
On April 1, 1992, proposed regulations of the Internal Revenue Service
(the "IRS") were published providing a mark-to-market election for certain
regulated investment companies that would result in the Fund being treated as if
it had sold and repurchased all of its PFIC stock at the end of each year. In
this case, the Fund would recognize (as ordinary income) gains (but not losses)
and might be required to recognize income in excess of the distributions it
receives from each PFIC and the proceeds from dispositions of PFIC stock.
Although these regulations would be effective for taxable years ending after
promulgation of the regulations as final regulations, the IRS has issued a
notice indicating that final regulations will provide that regulated investment
companies may elect the mark-to-market election for tax years ending after March
31, 1992 and before April 1, 1993. Whether and to what extent the notice
applies to taxable years of the Fund is unclear. The Fund could potentially
ameliorate the adverse tax consequences with respect to its ownership of shares
in a PFIC, but in any particular year may be required to recognize income in
excess of the distributions it receives from PFICs and its proceeds from
dispositions of PFIC company stock.
DIVIDENDS AND DISTRIBUTIONS. Dividends of net investment income and
distributions of net realized short-term capital gains are taxable to a United
States shareholder as ordinary income, whether paid in cash or in shares.
Distributions of net long-term capital gains, if any, that the Fund
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designates as capital gains dividends are taxable as long-term capital gains,
whether paid in cash or in shares and regardless of how long a shareholder has
held shares of the Fund. Dividends and distributions paid by the Fund (except
for the portion thereof, if any, attributable to dividends on stock of U.S.
corporations received by the Fund) will not qualify for the deduction for
dividends received by corporations. Distributions in excess of the Fund's
current and accumulated earnings and profits will, as to each shareholder, be
treated as a tax-free return of capital, to the extent of a shareholder's basis
in his shares of the Fund, and as a capital gain thereafter (if the shareholder
holds his shares of the Fund as capital assets).
Shareholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for United States
federal income tax purposes as receiving a distribution in the amount equal to
the amount of money that the shareholders receiving cash dividends or
distributions will receive, and should have a cost basis in the shares received
equal to such amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
just purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to them.
If the Fund is the holder of record of any stock on the record date
for any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
SALES OF SHARES. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss equal to the difference between
the amount realized and his basis in his shares. Such gain or loss will be
treated as capital gain or loss, if the shares are capital assets in the
shareholder's hands, and will be long-term capital gain or loss if the shares
are held for more than one year and short-term capital gain or loss if the
shares are held for one year or less. Any loss realized on a sale or exchange
will be disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains distributions
in the Fund under the Plan, within a 61-day period beginning 30 days before and
ending 30 days after the disposition of the shares. In such a case, the basis
of the shares acquired will be increased to reflect the disallowed loss. Any
loss realized by a shareholder on the sale of a Fund share held by the
shareholder for six months or less will be treated for United States federal
income tax purposes as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gains received by the
shareholder with respect to such share.
FOREIGN TAXES. If the Fund qualifies as a regulated investment
company, if certain distribution requirements are satisfied and if more than 50%
of the value of the Fund's assets at the close of the taxable year consists of
stocks or securities of foreign corporations, the Fund may elect, for United
States federal income tax purposes, to treat any foreign income taxes paid by
the Fund that can be treated as income taxes under United States income tax
principles as paid by its shareholders (the "foreign tax passthrough election").
The Fund expects to qualify for and make the foreign tax passthrough
election in some, but not necessarily all, of its taxable years. For any year
that the Fund makes such an election, an amount equal to the Brazilian taxes
paid by the Fund will be included in the income of its shareholders
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and each shareholder will be entitled (subject to certain limitations) to credit
the amount included in his income against such shareholder's United States tax
liabilities, if any, or to deduct such amount from such shareholder's United
States taxable income, if any. Shortly after any year for which it makes such
an election, the Fund will report to its shareholders, in writing, the amount
per share of such foreign income taxes that must be included in each
shareholder's gross income and the amount which will be available for deduction
or credit. In general, a shareholder may elect each year whether to claim
deductions or credits for foreign taxes. However, no deductions for foreign
taxes may be claimed by noncorporate shareholders (including certain foreign
shareholders as described below) who do not itemize deductions. If a
shareholder elects to credit foreign taxes, the amount of credit that may be
claimed in any year may not exceed the same proportion of the United States tax
against which such credit is taken which the shareholder's taxable income from
foreign sources (but not in excess of the shareholder's entire taxable income)
bears to his entire taxable income. This limitation may be applied separately
to certain categories of income and the related foreign taxes.
The foregoing is only a general description of the foreign tax credit
under current law. Because application of the credit depends on the particular
circumstances of each shareholder, shareholders are advised to consult their own
tax advisers.
BACKUP WITHHOLDING. The Fund may be required to withhold, for United
States federal income tax purposes, 31% of the dividends and distributions
payable to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Corporate shareholders and certain other shareholders are exempt
from backup withholding. Backup withholding is not an additional tax and any
amount withheld may be credited against a shareholder's United States federal
income tax liabilities. Additional tax withholding requirements which apply
with respect to foreign investors are discussed below.
FOREIGN SHAREHOLDERS. Taxation of a shareholder who, as to the United
States, is a foreign investor (such as a nonresident alien individual, a foreign
trust or estate, a foreign corporation or a foreign partnership) depends, in
part, on whether the shareholder's income from the Fund is "effectively
connected" with a United States trade or business carried on by the shareholder.
If the foreign investor is not a resident alien and the income from
the Fund is not effectively connected with a United States trade or business
carried on by the foreign investor, distributions of net investment income and
net realized short-term capital gains will be subject to a 30% (or lower treaty
rate) United States withholding tax. Furthermore, foreign investors may be
subject to an increased United States tax on their income resulting from the
Fund's election (described above) to "pass-through" amounts of foreign taxes
paid by the Fund, but may not be able to claim a credit or deduction with
respect to the foreign taxes treated as having been paid by them. Distributions
to a non-resident alien of net realized long-term capital gains, amounts
retained by the Fund which are designated as undistributed capital gains, and
gains realized upon the sale of shares of the Fund generally will not be subject
to United States tax unless the foreign investor who is a nonresident alien
individual is physically present in the United States for more than 182 days
during the taxable year and, in the case of gain realized upon the sale of Fund
shares, unless (a) such gain is attributable to an office or fixed place of
business in the United States or (b) such nonresident alien individual has a tax
home in the United States and such gain is not attributable to an office or
fixed place of business located outside the United States. However, a
determination by the Fund not to distribute long-term capital gains will cause
the Fund to incur a U.S. federal tax liability with respect to retained long-
term capital gains, thereby reducing the amount of cash held by the Fund that is
available for investment, and the foreign investor may not be able to claim a
credit or deduction with respect to such taxes.
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In general, if a foreign investor is a resident alien or if dividends
or distributions from the Fund are effectively connected with a United States
trade or business carried on by the foreign investor, then dividends of net
investment income, distributions of net short-term and long-term capital gains,
amounts retained by the Fund that are designated as undistributed capital gains
and any gains realized upon the sale of shares of the Fund will be subject to
United States income tax at the rates applicable to United States citizens or
domestic corporations. If the income from the Fund is effectively connected
with a United States trade or business carried on by a foreign investor that is
a corporation, then such foreign investor may also be subject to the 30% (or
lower treaty rate) branch profits tax.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Shareholders may be required to provide appropriate documentation
to establish their entitlement to the benefits of such a treaty. Foreign
investors are advised to consult their own tax advisers with respect to (a)
whether their income from the Fund is or is not effectively connected with a
United States trade or business carried on by them, (b) whether they may claim
the benefits of an applicable tax treaty, and (c) any other tax consequences to
them of an investment in the Fund.
NOTICES. Shareholders will be notified annually by the Fund as to the
United States federal income tax status of the dividends, distributions and
deemed distributions made by the Fund to its shareholders. Furthermore,
shareholders will also receive, if appropriate, various written notices after
the close of the Fund's taxable year regarding the United States federal income
tax status of certain dividends, distributions and deemed distributions that
were paid (or that are treated as having been paid) by the Fund to its
shareholders during the preceding taxable year.
BRAZILIAN TAXES
The following discussion of Brazilian tax laws is based upon the
advice of Tozzini, Freire, Texeira e Silva, Brazilian counsel for the Fund.
The Fund's investments in Brazil are channeled through a portfolio of
shares and securities (the "Brazilian Portfolio") formed under the terms of
Annex IV to the Central Bank of Brazil's Resolution No. 1289 of March 20, 1987,
as subsequently amended and supplemented, and thus receives certain tax
benefits. The Fund will not be subject to income tax on redemption of funds and
capital gains earned with respect to its Annex IV investments. Dividends
repatriated by the Fund from Brazil in respect of stock market investments will
be subject to a 15% withholding tax if the dividends are paid out of pre-1996
earnings. No withholding tax is imposed on dividend income paid out of post-
1995 earnings from stock market investments at the time the dividend income is
earned by the investor. The Fund's investment in Brazil will be subject only to
withholding taxes on income earned from such investment at a rate of 10%.
Dividends paid by the Fund outside of Brazil and gains made from the
sale of shares of the Fund outside of Brazil are not subject to any Brazilian
taxes.
OTHER TAXATION
Distributions also may be subject to additional state, local and
foreign taxes depending on each shareholder's particular situation.
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THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING
THE FUND AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN
TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE FUND.
NET ASSET VALUE
Net asset value is calculated (a) no less frequently than weekly, (b)
on the last business day of each month and (c) at any other times determined by
the Fund's Board of Directors. Net asset value is calculated by dividing the
value of the Fund's net assets (the value of its assets less its liabilities,
exclusive of capital stock and surplus) by the total number of shares of Common
Stock outstanding. All securities for which market quotations are readily
available are valued at the last sales price prior to the time of determination,
or, if no sales price is available at that time, at the closing price quoted for
the securities (but if bid and asked quotations are available, at the mean
between the last current bid and asked prices, rather than the quoted closing
price). Forward contracts are valued at the current cost of covering or
offsetting the contracts. Securities that are traded over-the-counter are
valued, if bid and asked quotations are available, at the mean between the
current bid and asked prices. If bid and asked quotations are not available,
then over-the-counter securities are valued as determined in good faith by the
Board of Directors. Investments in short-term debt securities having a maturity
of 60 days or less are valued at amortized cost if their term to maturity from
the date of purchase was less than 60 days, or by amortizing their value on the
61st day prior to maturity if their term to maturity from the date of purchase
when acquired by the Fund was more than 60 days, unless this is determined by
the Board of Directors not to represent fair value. All other securities and
assets are taken at fair value as determined in good faith by the Board of
Directors, although the actual calculation may be done by others. In making a
determination of fair value, the Board of Directors will consider, among other
things, the fundamental analytical data relating to the securities, the nature
and duration of any restrictions relating to the securities and the market
forces influencing the price at which these securities may be purchased or sold.
The Board of Directors will also consider specific factors relating to a
particular security such as: nature or type of the security, financial
statements of the issuer of the security, cost of the security at the date of
purchase, size of the holding, liquidity and depth of the market in such
securities, information as to any transactions relating to the security and such
other information as the Directors shall deem relevant for purposes of
determining the fair value of the securities. The Board of Directors has
delegated to the Fund's management the function for periodic determination of
the value of such securities in accordance with guidelines and procedures
established and adopted by the Board. Such determinations by the Fund's
management are submitted to the Fund's valuation committee for its approval,
which committee is comprised of Mr. Bassini and two disinterested directors.
Actions taken by the valuation committee are then submitted to the full Board
for its review at its next regularly scheduled meeting.
In valuing the Fund's assets, quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents at the then current
currency value. The Fund's obligation to pay any local tax on remittances from
Brazil will become a liability on the record date for a dividend payment and
will have the effect of reducing the Fund's net asset value.
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 shares of
Common Stock. The Fund has no present intention of offering additional shares
other than pursuant to the Offer, except that additional shares may be issued
under the Plan. See "Dividend Reinvestment and Cash Purchase
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<PAGE>
Plan." Other offerings of shares, if made, will require approval of the Fund's
Board of Directors. Any additional offering will be subject to the requirement
of the 1940 Act that shares not be sold at a price below the then current net
asset value (exclusive of underwriting discounts and commissions) except in
connection with an offering to existing shareholders or with the consent of the
holders of a majority of the Fund's outstanding voting securities, as such term
is defined under the 1940 Act.
BENEFICIAL OWNER
There are no persons known to the Fund who may be deemed beneficial
owners of 5% or more of the shares of the Fund's Common Stock because they
possessed or shared voting or investment power with respect to shares of the
Fund's Common Stock. The officers and directors of the Fund, in the aggregate,
own less than 1% of the outstanding shares of the Fund's Common Stock.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended March 31, 1996 (the
"Report"), which either accompanies this SAI or has previously been provided to
the person to whom this Prospectus is being sent, is incorporated herein by
reference with respect to all information other than the information set forth
in the Letter to Shareholders included therein. The Fund will furnish, without
charge, a copy of its Report upon request to Shareholder Relations at BEA
Associates, One Citicorp Center, 153 East 53rd Street, New York, New York 10022,
(800) 293-1232.
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APPENDIX
ECONOMIC AND SECURITIES MARKET DATA:
THE FEDERATIVE REPUBLIC OF BRAZIL
THE INFORMATION SET FORTH IN THIS APPENDIX HAS BEEN EXTRACTED FROM VARIOUS
GOVERNMENTAL AND PRIVATE PUBLICATIONS. THE FUND, ITS BOARD OF DIRECTORS AND THE
DEALER MANAGER MAKE NO REPRESENTATION AS TO THE ACCURACY OF THE INFORMATION, NOR
HAS THE FUND, ITS BOARD OF DIRECTORS OR THE DEALER MANAGER ATTEMPTED TO VERIFY
IT; FURTHERMORE, NO REPRESENTATION IS MADE THAT ANY CORRELATION EXISTS BETWEEN
BRAZIL OR ITS ECONOMY IN GENERAL AND THE PERFORMANCE OF THE FUND.
GENERAL
GEOGRAPHY AND DEMOGRAPHY
Brazil is the fifth largest country in the world, with a land area of
3,786,473 square miles. Brazil's population in 1994 was estimated by the
Central Bank of Brazil at approximately 154 million. The population is
currently growing at a rate of approximately 1.9% per year. The two most
populous cities are Sao Paulo and Rio de Janeiro, with populations of 17 million
and 11 million, respectively. The capital of Brazil is Brasilia and the
official language is Portuguese.
GOVERNMENT
Brazil is a federative republic. A new constitution was enacted in October
1988 establishing a presidential form of government with three independent
branches: executive, legislative and judicial. A national plebiscite held in
April 1993 confirmed the presidential system as the preferred form of
government.
The executive power is vested in the President, who is elected by direct
vote for a term of four years and is not thereafter eligible for re-election.
The President has a broad range of powers including the right to appoint
ministers and key executives in selected administrative and political posts.
The legislative branch is composed of a National Congress consisting of 81
Senators elected for eight-year terms and 513 Deputies elected for four-year
terms. The judicial branch is headed by the Federal Supreme Court, which is the
court of final appeal for both federal and state courts.
At the State level, the executive power is exercised by Governors who are
elected for four-year terms. The legislative power is exercised by State
Deputies who are also elected for four-year terms, and the judicial power is
vested in state courts.
EXTERNAL AFFAIRS
Brazil has diplomatic and trade relations with almost every nation in the
world. It is a member of many international organizations, including the United
Nations and all of the United Nations' intergovernmental specialized agencies.
Brazil is also a member of the International Bank for Reconstruction and
Development (the "World Bank"), the International Development Association, the
International Finance Corporation and the International Monetary Fund (the
"IMF"). Brazil is also a party to the General Agreement on Tariffs and Trade
(the "GATT") and a charter member of the World Trade Organization (the "WTO").
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At the regional level, Brazil participates in the Organization of American
States, the Inter-American Development Bank, as well as in the Latin American
Integration Association (the Asociacion Latinoamericana de Integracion or
ALADI). Relations with the rest of South America have emphasized cooperation in
trade and investment issues, most notably with the signing of the Treaty of
Asuncion on March 26, 1991, creating the Mercado Comun del Sur ("Mercosur"), the
Southern Common Market, composed of Brazil, Argentina, Paraguay and Uruguay.
The original treaty and subsequent complementary agreements provide for the
progressive establishment of a free trade area and customs union, as well as the
gradual integration of the members states' economies and an accompanying
harmonization of economic and fiscal policies.
On December 17, 1994, the Mercosur countries adopted the Protocol of Ouro
Preto (the "Protocol") which allows the free trade area to become a full customs
union. Effective January 1, 1995, trade tariffs on 90% of trade within the
Mercosur area were lifted and common external trade tariffs ("CET") ranging from
zero to 20%, with a 14% median, were adopted on about 85% of imports from
outside the union. Final lists of products, including cars and sugar, were
agreed to be exempted from the free trade and customs union rules and remain
temporarily under domestic tariffs. Brazil's growing current account deficit
led the government to significantly increase trade tariffs in April 1995. See
"The External Sector--Exchange Policy." Mercosur has led to a significant
increase in trade among its initial members. Brazil's trade with other Mercosur
partners reached U.S. $13.1 billion in 1995, as compared to U.S. $10.6 billion
in 1994.
The Protocol also sets forth a legal framework which, upon ratification by
the member states, will give Mercosur a legal status comparable to the European
Union. This framework includes rules to promote competition, ease customs
procedures and permit Mercosur representation of its members in international
trade negotiations. The Protocol also establishes Mercosur institutions having
authority to carry out the purpose of the Mercosur agreements. Among such
institutions, the council of the presidents and foreign and finance ministers of
the four members, headed by each country for six months on a rotating basis, is
the highest decision-making body. A trade commission has also been created to
arbitrate trade disputes among the four countries. Finally, the Mercosur
partners have agreed to consider before 2001 moving toward a full common market,
including free movement of goods and labor.
On June 25, 1996, the Mercosur partners reached an agreement with Chile
pursuant to which Chile will join the organization as a free trade rather than a
customs union member (associate membership). Effective October 1, 1996, all
parties to such agreement will lower trade tariffs among them to an average of
6% on most imports before gradually reducing them to zero by 2004. Bolivia is
negotiating to join the organization with a status similar to that of Chile.
Negotiations are also under way with Venezuela.
Brazil will also participate in the Free Trade Area of the Americas which
the leaders of all American countries (except Cuba) present at the Summit of the
Americas held on December 9 and 10, 1994 agreed to establish by 2005.
FINANCIAL SYSTEM
The National Monetary Council, which is chaired by the Minister of Finance
and includes the Minister of Planning and the President of the Central Bank, is
the highest authority on monetary and financial policy in Brazil. It is
authorized to regulate credit operations of every kind, to authorize and
regulate currency issues, to supervise the country's reserves of gold and
foreign exchange, to determine savings and investment policies and to regulate
the securities and capital markets, including
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the activities of both the Central Bank of Brazil and the Comissao de Valores
Mobiliarios (the "CVM"), the Brazilian Securities Commission.
The Central Bank of Brazil, which is not operated independently from the
Brazilian government, is responsible for implementing the monetary and foreign
exchange policies adopted by the National Monetary Council and overseeing the
implementation of financial legislation. It is authorized, among other things,
to issue money, oversee the circulation of currency, control the level of credit
in the economy, monitor foreign investments and currency movements and
administer Brazil's domestic debt.
RECENT POLITICAL HISTORY
The Brazilian military ruled the country from 1964 to 1984. In 1985 a
series of political reforms were enacted, including the convocation of a
Constitutional Assembly. In 1988 a new Constitution was promulgated
reintroducing direct presidential election.
In 1989, Fernando Collor de Mello became the first President to be elected
by popular vote since 1960. President Collor's political support began to ebb
in June 1992, as Congress initiated an investigation on charges of corruption
involving the President. In December 1992, President Collor resigned in the
midst of his impeachment trial. He was subsequently found guilty of corruption
and thereafter prohibited by a Senate decision to run for political office for
eight years. In December 1994, the Supreme Court overturned all corruption
charges against former President Collor, which allows him to appeal the Senate
ban. Itamar Franco, the Vice-President under President Collor, who had become
acting President during the impeachment proceedings, assumed the Presidential
office, where he remained until Fernando Henrique Cardoso, winner of the
presidential elections held in October 1994, took office on January 1, 1995.
Fernando Henrique Cardoso's party, the Brazilian Social Democratic Party
("PSDB") made a strong performance in both national and state elections held in
November 1994. The PSDB won six out of 27 governorships, including those of the
three most important states. After winning support in early December 1994 from
the Brazilian Democratic Movement Party ("PMDB"), Brazil's biggest political
party, the PSDB and its allies now control slightly less than 70% of the seats
in Congress. Due to traditionally weak party loyalty, there is no assurance
that President Fernando Henrique Cardoso will be able to attract the support
necessary to implement the reforms which he has announced.
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ECONOMY
OVERVIEW
Although the Brazilian economy is the largest in Latin America, with a
strong export-oriented private sector, in recent years it has endured erratic
growth, primarily due to large fiscal deficits and spiraling inflation. Real
GDP growth averaged 1.4% per annum from 1989 to 1994, as successive plans to cut
inflation hampered economic activity.
The following table sets out selected economic indicators for Brazil for
the periods indicated.
<TABLE>
<CAPTION>
SELECTED ECONOMIC INDICATORS
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
GDP (in U.S. $ billion) 433.3 446.6 482.3 528.3 N.A.
Real GDP (%) 0.3 (0.8) 4.2 5.8 4.1
Inflation CPI, end-of-year (%)(1) 493.8 1,156.0 2,828.7 1,238.0 22
Trade balance (in U.S. $ billion) 10.6 15.2 13.3 10.5 (3.2)
Total foreign debt (in U.S. $ billion) 123.9 135.9 145.7 148.3 N.A.
</TABLE>
- ---------------
(1) Consumer Price Index
N.A. = Not Available
Source: Central Bank of Brazil, BOLETIM DO BANCO CENTRAL DO BRASIL, Volume 32,
no. 1; Ministry of Finance of Brazil, THE REAL PLAN AND THE BRAZILIAN
ECONOMY TWO YEARS LATER, July 1996.
RECENT DEVELOPMENTS
The recurrent threat of hyper-inflation in the latter half of the 1980s and
early 1990s prompted successive Brazilian governments to implement a series of
economic programs. From 1986 through 1991, these programs relied mainly on
price and wage controls in an attempt to decrease the level of indexation of the
economy. In addition, the government would also periodically tighten money
supply. These plans generally did not attempt to deal with Brazil's public
deficit problem.
In March 1990, President Collor's administration implemented an emergency
economic program (the "Collor Plan") which included a substantial withdrawal of
liquidity, as well as a wage-price freeze, higher taxes, planned cuts in
government spending and a privatization program. This program led to a
recession in 1990 but resulted in a drop in inflation and a sharp reduction in
the nominal public deficit. However, further progress was limited by the
government's inability to control spending both by state governments and public
companies, as well as other factors, including decreasing fiscal revenues caused
by the recession.
The Collor Plan plunged Brazil into its most severe recession since 1983
and, in 1990, real GDP declined 4.3%. A new set of economic measures in early
1991 was again based mainly on wage and price controls. The initial impact was
relatively favorable, but these measures caused only a temporary reduction in
inflation. A new economic team appointed in early May 1991 achieved more
centralized controls over public finances, initiated some long-delayed
structural adjustment measures,
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pursued further orthodox economic policies, and accelerated negotiations with
foreign creditors. Positive real economic growth at low rates resumed in 1991
but turned into an overall decline in GDP of 0.8% in 1992, partly because of the
political turmoil surrounding President Collor's resignation.
In 1993, the government announced a new economic plan including cuts in the
budget, stronger measures to deal with tax evasion, the acceleration of the
privatization program and improvements in governmental control over federal and
state banks. Although inflation continued to rise throughout 1993, real GDP grew
4.2% in 1993, mainly due to a substantial growth of 7.4% in industrial output.
Since March 1994, the government has been implementing a new economic plan,
designed by Fernando Henrique Cardoso, then finance minister. The so-called
Real Stabilization Plan (the "Real Plan") emphasizes a comprehensive monetary
reform backed by tight budgetary policy.
A new price index (the URV or Real Unit of Value) was introduced to replace
most indexation indices and to allow overall relative prices in the economy to
adjust, thus reducing relative price dispersions. The URV index was converted
into a new stable currency unit (the "Real") as of July 1, 1994. Indexation of
wages, prices and contracts to the URV progressed throughout 1994, albeit at a
slower pace than initially expected. To strengthen the credibility of the new
plan, the Central Bank acted to maintain fixed parity between the URV and the
dollar. Indexation to the URV therefore resulted in an indirect "dollarisation"
of the economy. Backed by strong inflows of foreign capital and high interest
rates, the introduction of the Real has been successful in cutting monthly
inflation (IPC) from 48.24% in June 1994 before implementation of the Real Plan,
to a low of .93% in April 1996, with a government forecast of 12-13% for the
year 1996 (average rate).
The new government has faced difficulties due to political maneuvering in
Congress. The government took office in the midst of a serious international
financial crisis created by the Mexican devaluation of December 1994, which led
to the devaluation of the Real in March 1995. See "The External Sector--
Exchange Policy." The government managed, however, to pass legislation
providing for spending cuts and tax increases in an attempt to reduce the budget
deficit. New rules for public concessions allowing greater private sector
competition have also been enacted.
President Fernando Henrique Cardoso has been successful in obtaining
legislative approval of various reforms of Brazil's constitution that open
previously restricted industries, such as oil and gas production,
hydroelectricity and shipping, to foreign investment, and telecommunications to
private sector competition. In addition, constitutional provisions restricting
tax and other benefits to businesses controlled by Brazilian nationals have been
lifted.
There is widespread agreement within the international financial community
as well as in Brazil that further political and economic reforms are needed to
maintain the current reduced inflation rate and lower the level of domestic
interest rates. Reforms needed include an overhaul of Brazil's current tax and
social security systems, as well as further reductions of the government and
nearly bankrupt state banking system.
The Government has announced proposals to reform Brazil's current social
security system, including health insurance and retirement benefits. An
important step was taken in March 1996 with the passage of a social security
bill in the lower house of the National Congress. However, critics have argued
that the reforms are too timid and that additional measures are necessary.
Further reform proposals are expected to be announced in the future, including a
transfer of certain responsibilities
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from the federal government to the state and the private sector, further cuts in
the government's spending obligations and a comprehensive reform of Brazil's tax
system.
Most of these reforms require constitutional changes (which must be
approved by a three-fifths vote of each House of Congress in two separate
rounds), and may well face strong opposition in Congress and from local
politicians and other lobbies. There is no assurance that these reforms will be
implemented by the government or that, if implemented, they will be successful.
RECENT DEVELOPMENTS IN THE BANKING INDUSTRY
One result of the greatly reduced rate of inflation has been that Brazilian
banks, which traditionally relied on wide interest-rate spreads under high
inflation for a large portion of their profits, have faced liquidity problems.
As a result, the Central Bank of Brazil was forced to rescue several troubled
banks through direct acquistion (Banco Nacional) or capital injections,
including an injection of over U.S. $8 billion into the government-controlled
Banco do Brasil in March 1996.
In response to these liquidity problems, the government created the Program
of Incentives to the Restructuring and Strengthening of the National Financial
System ("Proer") in November 1995. Proer consists of special lines of credit
and fiscal incentives to be used by institutions to implement reorganizations
resulting in transfers of stock control. As a result of Proer, liquidity has
increased, leading to a decrease in interest rates. At the end of November
1995, the effective rate on federal securities was at 2.88% for the month, the
lowest rate since the Real was introduced.
Confidence in the industry has also been hurt by mounting criticism over
the accuracy of the financial information provided by Brazil's banks.
GROSS DOMESTIC PRODUCT
The following table sets out the annual growth rates of Brazil's economic
sectors for the periods indicated.
<TABLE>
<CAPTION>
ANNUAL GROWTH RATES OF BRAZIL'S ECONOMIC SECTORS
SECTOR 1991 1992 1993 1994 1995(1)
------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Agriculture . . . . . . . . . . . . . . . . . . . 2.8% 5.4% (1.0)% 8.1% N.A.
Industry. . . . . . . . . . . . . . . . . . . . . (2.6) (3.7) 7.4 7.6 3.9
Manufacturing . . . . . . . . . . . . . . . . . . (2.4) (4.1) 7.9 7.9 4.0
Mining. . . . . . . . . . . . . . . . . . . . . . 0.9 0.8 0.6 4.7 2.9
Services. . . . . . . . . . . . . . . . . . . . . 1.6 (0.0) 3.5 4.1 N.A.
Gross Domestic Product. . . . . . . . . . . . . . 0.3 (0.8) 4.2 5.8 N.A.
</TABLE>
- ---------------
(1) Period from January to October 1995 compared to same period of the previous
year.
N.A. = Not Available
Source: Central Bank of Brazil, BOLETIM DO BANCO CENTRAL DO BRASIL, Vol. 32,
no. 1.
In 1994, agriculture, industry and services represented 14.2%, 37.2% and
55.8% of Brazil's GDP, respectively. The government is forecasting 3.4% growth
in 1996, compared with 4.1% in 1995. Growth was lower than expected in 1995 due
to high interest rates and a large budget deficit.
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<PAGE>
The combination of high interest rates, budget deficits and the uncertainty
created by the difficulties faced by Brazil's banking industry could result in
lower than expected economic growth in 1996.
MANUFACTURING. In recent years, the fastest growing segments of the
manufacturing sector have been the metallurgy, machinery, chemical, electrical
and transport equipment sectors, including high tension transformers, heavy
trucks and such farm equipment as tractors and harvesters. Consumer goods
accounted for a major portion of 1995 growth of industrial output. The
production of automobiles reached record levels in 1994, at 1.58 million units,
and remained stable in 1995 at 1.53 million units. In the category of non-
durable goods, Brazil is also a large manufacturer of chemicals, food products
and textiles. Processed food (including sugar, instant coffee and orange juice)
has made an increasingly important contribution to the country's exports.
MINING. Brazil has one of the largest mineral reserves in the world. The
principal minerals produced are iron ore, manganese, bauxite, tin, gold,
diamonds and semi-precious stones. Iron ore reserves are believed to be
equivalent to a third of the world's total, and bauxite reserves are known to be
the largest in Latin America.
AGRICULTURE. Brazil is virtually self-sufficient in food except for wheat.
Brazil is the world's largest producer of coffee and the world's second largest
producer of sugar cane and soya. Brazil is also a major producer of tobacco,
cocoa and forestry products. In 1995 Brazil posted a record harvest of
approximately 80 million tons of grain, legumes and oil crops.
ENERGY. Brazil has substantially reduced its dependence on imported crude
oil as a source of energy. Hydroelectric power represents a large part of the
total electricity produced in the country. To reduce Brazil's imports of
foreign petroleum, Petrobras, the national oil company, has made significant
investments in domestic oil exploration. The increase in domestic oil
production, the decline in Brazilian oil consumption, and a sharp decline in
international oil prices have helped to improve Brazil's balance of trade in
recent years. The demand for electrical energy has grown rapidly over the past
few years as a result of the expansion of the industrial and commercial sectors
of the economy and increased consumer demand.
PRICES
Brazil has historically experienced very high and variable rates of
inflation, which have had significant negative effects on the Brazilian economy.
An indexation system was created in 1964 to cope with this endemic inflationary
environment. Since 1986, Brazil has implemented six "inflation-fighting" plans.
A seventh plan, the Real Plan, is currently underway in an attempt to de-index
the economy. The Real Plan has been successful in reducing monthly inflation
(INPC) from 48.2% in June 1994, before its July inception, to approximately 1.6%
in April 1996. The government expects inflation (average rate) to total 12.13%
for the year 1996. The appreciation of the Real against the dollar in the
latter half of 1994 and drops in the prices of important food products have
helped to keep inflation down. Despite the initial success of the Real Plan,
pressures for higher inflation still exist. The inflation rate reached 2.5% and
1.6% in July and December 1995, respectively, mainly due to increases in
industrial prices, housing and clothing costs. On May 1, 1995, the government
raised the hourly minimum wage 42.9% to R$100 from R$70.
A major reason for the initial success of the Real Plan is that the
government managed to balance the 1994 budget. The drop in inflation resulting
from the Real Plan caused a notable improvement in the public sector balance.
In 1994, net federal government revenues increased by 11.5% with tax revenues
estimated at U.S. $63.2 billion. In 1995, however, the federal government
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had a budget deficit of nearly 5% of GDP and the continuing success of the Real
plan was obtained through maintaining high interest and exchange rates. The
budget deficit is expected by the government to fall to 3% in 1996. President
Fernando Henrique Cardoso is considering overhauling the tax system and reducing
government spending to maintain tight control over budgetary accounts.
The following table shows selected information on price indices for the
periods indicated.
<TABLE>
<CAPTION>
NATIONAL CONSUMER PRICE INDEX (END-OF-YEAR): AVERAGE % CHANGE
<S> <C>
1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430%
1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 981
1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,936
1994(1)
First Six months 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759.15
Jul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.75
Aug . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.85
Sep . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.40
Oct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.82
Nov . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.96
Dec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.70
1995(1)
Jan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.44
Feb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01
Mar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.62
Apr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.49
May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.10
Jun . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.18
Jul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.46
Aug . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.02
Sep . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17
Oct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.40
Nov . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.51
Dec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.65
1996(1)
Jan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.46
Feb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.71
Mar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.29
Apr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.93
</TABLE>
- ---------------
(1) Monthly after June 30, 1994 (introduction of the Real Plan).
Source: Central Bank of Brazil, BOLETIM DO BANCO CENTRAL DO BRASIL, Volume
32, no. 1.
PRIVATIZATION AND DEREGULATION
The public sector grew rapidly during the 1970s and continues to play a
significant role in Brazil's economy. The government, directly and through
various state-owned enterprises, controls a major portion of activities in the
extractive and basic industry sectors, while supplying basic services such as
education and health care.
Energy production, rail transport, oil prospecting, drilling and refining,
and telephone and telegraph communications are all directly or indirectly
controlled by the Brazilian government. In
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<PAGE>
addition, the government controls some companies that compete with private
enterprises, such as Banco do Brasil, the country's largest commercial bank, the
principal iron-ore mining companies, and several smaller companies in other
sectors of the Brazilian economy.
The government has sought to reduce its participation in the nation's
economy. Important developments in this regard include the establishment of a
free foreign exchange market, the termination of price controls, a reduction of
administrative regulations surrounding foreign trade and capital flows and the
elimination of existing protectionist measures. The government is also acting
to partially deregulate certain segments of the economy, including energy
production and distribution (measures maintaining governmental monopoly over the
petroleum industry but allowing the government to contract with private sector
companies), telecommunications (removal of governmental monopoly) and
transportation as well as water supply and treatment facilities. For example,
in May 1996, the lower house of the National Congress approved new laws opening
the telecommunications sector to private competition, beginning with cellular
telephones later this year.
An important element of the Collor administration was its drive to
privatize government-controlled companies as part of the overall restructuring
of the Brazilian economy. The privatization program was initiated in 1991 with
the sale of Usinas Siderurgicas de Minas Gerais ("Usiminas") followed by three
other companies. In 1992, fourteen companies were privatized, including Copesul
and the steel manufacturers Acesita and Companhia Siderurgica Tubarao. In 1993,
six state enterprises were sold, the National Steel Company (Companhia
Siderurgica Nacional, or CSN), Cosipa, Acominas, Poliolefinas, Oxiteno and
Ultrafertil. In 1994, nine state enterprises were sold, including Embraer and
Petroquimica Uniao. In 1995, eight state enterprises were sold, including
Escelsa (Espirito Santo's electricity distribution) and Copene (petrochemicals).
Since 1991, 43 state enterprises have been privatized in the first phase of
Brazil's privatization program, netting total proceeds for the government of
approximately U.S. $14 billion. Sales of shares in the privatized companies
have, for the most part, been effected through auctions.
Brazil's privatization program for 1996 included major companies such as
Light (Rio de Janeiro's electricity distributor), Meridional Bank, RFFSA
(Brazil's railway company) and Koppol and Polipropileno (petrochemicals). The
government is considering extending Brazil's privatization program to
telecommunications companies (Telebras and its operating companies), oil and
mining companies, including Companhia Vale do Rio Doce, the world's largest iron
ore exporter, and power utilities (Eletrobras and its generation subsidiaries,
Furnas, Eletronorte, Eletrosul and Chesf). Various projects in the state of Rio
Grande do Sul were also announced, including the opening of the capital of the
state Electricity Company and the Riograndense Telecommunications Company and
the privatizations of Armazens Gerais and Companhia Industrial de Eletroquimicos
(Ciel). Rio de Janeiro also announced the privatization of at least 14
transportation, sanitation, electricity and agricultural research companies, and
the abolishment or merger of several others. Brazilian labor unions have
opposed certain of the privatization measures proposed by the government, but
the government has to date been able to move forward with its program, albeit at
a slower pace than expected.
THE EXTERNAL SECTOR
Brazil's external sector has been experiencing significant growth since
1991 as a result of the world economic recovery and a clear policy shift away
from traditional protectionism, as demonstrated by Brazil's leadership in the
Mercosur negotiation.
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<PAGE>
FOREIGN TRADE POLICY
Under Mercosur rules, most Brazilian imports and exports within the
Mercosur area are now free of custom duties. In addition to goods exempted from
free trade rules (cars and sugar), Brazil has opted out 29 products (mainly
agricultural). Domestic tariffs covering these products are scheduled to be
gradually lifted by the year 2000.
Brazil's imports from outside the Mercosur area are now subject to CETs
ranging from zero to 70%, with certain exceptions. In addition to goods exempted
from customs union rules (telecommunications equipment and capital goods),
Brazil has opted out 175 products, mainly chemical and petrochemical products,
dairy products and raw materials for the textile industry. Domestic tariffs on
these products are scheduled to decrease to CET levels by the year 2006.
BALANCE OF PAYMENTS
The following table sets forth Brazil's trade balance and current account
for the periods indicated.
<TABLE>
<CAPTION>
BRAZIL'S TRADE BALANCE & CURRENT ACCOUNT
(U.S. $ BILLION)
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Exports . . . . . . . . . . . . . . . . . . 31.4 31.6 35.8 38.6 43.5 46.5
Imports . . . . . . . . . . . . . . . . . . 20.7 21.0 20.6 25.3 33.1 49.7
Trade Balance . . . . . . . . . . . . . . . 10.8 10.6 15.2 13.3 10.5 (3.2)
Current Account . . . . . . . . . . . . . . (3.8) (1.4) 6.1 (0.6) (1.7) N.A.
</TABLE>
- ---------------
N.A. = Not Available
* Source: Central Bank of Brazil, BOLETIM DO BANCO CENTRAL DO BRASIL, Volume 32,
no. 1; Ministry of Finance of Brazil, THE REAL PLAN AND THE BRAZILIAN
ECONOMY TWO YEARS LATER, July 1996.
The trade balance registered a deficit of U.S. $3.2 billion in 1995,
compared to a surplus of U.S. $10.5 billion in 1994. Exports totaled U.S. $46.5
billion in 1995, an increase of 6.8% over the previous year, while imports were
U.S. $49.7 billion, an increase of 50% over the same period. Primary product
exports earned U.S. $10.1 billion during the period January through November
1995, as compared to U.S. $10.2 billion for the same period of 1994. Industrial
product exports rose to U.S. $31.7 billion through November 1995 as compared to
U.S. $29 billion for the same period of 1994. Growth of imports appears to have
slowed down in recent months. From January to April 1996, foreign trade showed
a deficit of U.S. $237 million, as compared with the U.S. $2.8 billion deficit
recorded during the same period in 1995.
The sharp growth in imports during 1994 and 1995 was influenced by the
increase in consumption which has resulted from the implementation of the Real
Plan, as well as the reduction of tariffs and the elimination of non-tariff
restrictions.
Factors including interest rates, petroleum prices and the trade policies
of Brazil and Brazil's trading partners have had a significant impact on
Brazil's balance of payments in recent years. The following table displays
certain information with respect to Brazil's balance of payments for the periods
indicated.
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BALANCE OF PAYMENTS
(U.S. $ MILLION)
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995(1)
---- ---- ---- ---- ---- ---- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1ST 2ND 3RD
QUARTER QUARTER QUARTER
Trade balance . . . . . . . . . . . . . 16,120 10,753 10,579 15,239 13,307 10,440 (2,336) (1,932) 812
Services balance. . . . . . . . . . . . (15,331) (15,369) 10,753 (11,339) (15,585) (14,743) (4,133) (5,461) (3,702)
Unilateral transfers. . . . . . . . . . 244 834 1,556 2,243 1,686 2,588 878 1,182 1,016
Current account . . . . . . . . . . . . 1,033 (3,782) (1,407) 6,143 (592) (1,715) (5,591) (6,211) (1,874)
Capital . . . . . . . . . . . . . . . . (3,648) (4,715) (4,148) 25,271 10,115 14,294 1,111 5,744 16,288
Direct Investment
(net). . . . . . . . . . . . . . . . . 125 0 170 2,972 6,170 8,131 (3,351) 1,623 4,231
Reinvestment. . . . . . . . . . . . . . 531 273 365 175 100 83 24 45 17
Financing . . . . . . . . . . . . . . . 3,640 3,424 2,026 13,258 2,380 1,939 644 1,040 439
Amortizations . . . . . . . . . . . . . (33,985) (8,665) (7,830) (8,572) (9,978) 50,411 (2,763) (3,189) (2,217)
Currency Loans. . . . . . . . . . . . . 25,972 (297) 964 17,577 11,659 53,802 6,603 6,524 13,866
Other Capital . . . . . . . . . . . . . 69 550 157 (139) (216) 750 (46) (299) (48)
Errors and omissions. . . . . . . . . . (776) (328) 876 (1,386) (1,119) 360 (271) 37 1,390
Surplus or deficit. . . . . . . . . . . (3,391) (8,825) (4,679) 30,028 8,404 12,939 (4,751) (430) 15,804
Change in Reserves. . . . . . . . . . . 887 480.4 (369) 14,670 8,709 7,215 5,060 458 (15,538)
</TABLE>
- ---------------
(1) Through September 1995
Source: Central Bank of Brazil, BOLETIM DO BANCO CENTRAL DO BRASIL, Volume
32, no. 1.
A-11
<PAGE>
Brazil's export mix has evolved markedly in recent years, with manufactured
goods claiming an increasing share of total Brazilian exports. Manufactured
goods accounted for 45% of all Brazilian exports in 1980, rising to 54% in 1989
and over 60% in 1994.
TRADING PARTNERS
The following table sets forth certain information regarding Brazil's trade
balance by geographical area.
TRADE BALANCE BY AREA (FOB)
(U.S. $ MILLION)
<TABLE>
<CAPTION>
1990 1991 1992 1993(1) 1994(1) 1995(2)
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EFTA(3) . . . . . . . . . . . . . . . . (333) (434) (459) (608) (686) (1,132)
LAIA(4) . . . . . . . . . . . . . . . . (405) 1,218 3,905 4,470 3,607 194
Canada. . . . . . . . . . . . . . . . . 116 (47) (69) (191) (287) (501)
EC. . . . . . . . . . . . . . . . . . . 5,620 5,171 6,168 4,276 3,221 (296)
Central and Eastern Europe. . . . . . . 345 16 31 117 85 254
USA(5). . . . . . . . . . . . . . . . . 3,263 1,387 2,171 2,248 1,295 (2,524)
Japan . . . . . . . . . . . . . . . . . 1,103 1,344 1,184 771 778 425
OPEC(6) . . . . . . . . . . . . . . . . (2,633) (1,559) (1,509) (1,314) (1,586) (1,070)
Other . . . . . . . . . . . . . . . . . 3,677 3,483 3,817 3,538 (4,039) 1,529
Total (excluding OPEC). . . . . . . . . 13,386 12,138 16,748 14,621 12,052 (2,051)
Total (U.S. $ billions) . . . . . . . 10,753 10,579 15,239 13,307 10,466 (3,121)
</TABLE>
- ---------------
(1) Preliminary.
(2) Preliminary (January through October 1995).
(3) European Free Trade Association.
(4) Latin American Integration Association (ALADI) (excludes Ecuador and
Venezuela through 1991, but includes Venezuela as from 1992).
(5) Includes Puerto Rico.
(6) Includes Venezuela and Ecuador through 1991, but excludes Ecuador as from
1992.
Source: Central Bank of Brazil, BOLETIM DO BANCO CENTRAL DO BRASIL, Volume 32,
no. 1.
The growth in imports during 1995 was influenced by significant increases
in the level of imports from the United States, the European Community and the
ALADI countries, especially Argentina. Growth in exports in 1995 resulted
principally from purchases by Asian countries, members of the European Community
and ALADI countries, especially Chile. Exports to Chile grew by 23% from
January 1994 through November 1995, as compared to the same period in the
previous year. Growth in exports to Mercosur countries was 5% from January
through November 1995, as compared to the same period in the previous year.
Brazil's trade with the other Mercosur countries reached U.S. $13.1 billion in
1995, compared to U.S. $10.6 billion in 1994.
A-12
<PAGE>
EXCHANGE CONTROL
The purchase and sale of foreign currency in Brazil is subject to
governmental control. There are two exchange markets in Brazil that are subject
to Central Bank regulations, both of which operate at floating rates.
(a) COMMERCIAL EXCHANGE RATE MARKET: This market is reserved basically
for (i) trade related transactions, such as import and export transactions; (ii)
foreign currency investments in Brazil; (iii) foreign currency loans to
residents in Brazil; and (iv) certain other transactions involving remittances
abroad, which are subject to prior approval by the Brazilian monetary
authorities.
(b) FLOATING EXCHANGE RATE MARKET: This market was developed initially
for the tourism industry and was later expanded to allow certain other
transactions. The applicable regulations indicate the types of transactions for
which payments in foreign currency, to and from Brazil, qualify for foreign
exchange in this market.
The key distinction between these two markets is that, while both operate
at floating rates freely negotiated between the parties, the commercial exchange
rate market is generally restricted to foreign trade and transactions which
require the prior approval of the Brazilian monetary authorities. The floating
exchange rate market, in contrast, is generally open to transactions that do not
require any kind of prior approval by the Brazilian monetary authorities. The
commercial exchange rate market is substantially more liquid and less volatile
than the floating exchange rate market.
Authorized Brazilian financial institutions can buy and sell currency in
either market at freely negotiated rates. The Central Bank is not required to
intervene in this market but usually does so to control rate fluctuations. The
purchase of currency for repatriation of capital invested in the country and for
the payment of principal and interest of loans, notes, bonds and other debt
instruments issued abroad by Brazilian obligors is also made in the commercial
market. The obligors of such obligations may freely purchase the necessary
currency to make the required payments abroad by presenting to a bank authorized
to deal in foreign exchange the registration certificate issued by the Central
Bank in connection with such obligations before they are incurred.
EXCHANGE RATE
The following table sets forth, for the periods and dates indicated,
historical exchange rates per U.S. dollar for the Real.
EXCHANGE RATES OF THE REAL PER U.S. DOLLAR (1)
<TABLE>
<CAPTION>
<S> <C>
1990
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.38
Average of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 24.84
1991
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.19
Average of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.15
1992
End of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.20
Average of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.64
1993
End of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.49
Average of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.32
</TABLE>
A-13
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
1994
End of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.85
Average of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.64
1995
End of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.97
Average of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.92
1996
First Quarter
End of Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.99
Average of Period. . . . . . . . . . . . . . . . . . . . . . . . . . 0.98
May
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00
Average of period. . . . . . . . . . . . . . . . . . . . . . . . . . 0.99
</TABLE>
- ---------------
(1) Reais per Million U.S. $ in 1990; per Thousand in 1991-92; per U.S. $
thereafter.
Source: International Monetary Fund, INTERNATIONAL FINANCIAL STATISTICS, July
1996.
EXCHANGE POLICY
As part of the Real Plan, since July 1, 1994, the Central Bank has allowed
the foreign exchange to float more freely, permitting the market to continuously
adjust to prevailing supply and demand pressures. The Central Bank initially
committed itself to sell dollars if the dollar rate rose up to R$1.00, thus
preventing the rate from going beyond that level.
Initially conceived as a new instrument to curb exaggerated capital inflow
which could jeopardize the monetary policy, the exchange system became a true
band system in March 1995, after six months of continuous appreciation of the
Real. From the July 1, 1994 introduction of the Real through January 1995, the
Real appreciated by about 15% against the dollar, primarily because of large
inflows of foreign capital attracted by high interest rates and prospects for
future growth and economic reforms. The appreciation of the Real and the
country's opening to international trade have resulted in a deterioration of
Brazil's trade position since November 1994. Imports have surged significantly
because of strong economic growth, resulting in an accumulated trade deficit of
approximately U.S. $3.2 billion in 1995.
On March 6, 1995, concerned with the risk that Brazil's increasing current
account deficit would trigger a Mexican-type crisis, the Central Bank of Brazil
introduced a new system of floating bands defended by interventions in which the
Real would trade against the Dollar. Confusion about Brazil's new exchange
policy and fears over a possible return to high inflation fueled sharp
speculative pressures against the Real amid general turmoil on the international
exchange markets. The Real fell to its new floor of 90 centavos to the Dollar,
from 86 centavos prior to March 6. After having spent in four days an estimated
U.S. $5.1 billion in foreign reserves to defend the Real, on March 10, 1995, the
Central Bank was forced to alter the new trading bands from 86 to 90 to 88 to 93
centavos to the Dollar and to temporarily raise monthly interest rates to 4.25%.
These measures helped to restore confidence in the Real which stabilized at 90
centavos to the Dollar, down 4.6% from its value prior to the March devaluation.
Growing pessimism led to strong outflows of foreign capital in March 1995,
which worsened Brazil's current account deficit. In an attempt to tackle the
current account deficit, Brazil increased
A-14
<PAGE>
import tariffs on automobiles from 20% to 32% in February 1995 and up to 70% on
March 29, 1995. Import tariffs on approximately 100 other products were also
increased to 70%. In April 1995, approximately 20 of such products had their
tariffs reduced to a range between 40% and 63% to meet the tariff level
established in GATT negotiations.
On June 22, 1995, the Central Bank of Brazil again altered the trading
bands to 91 to 99 centavos to the Dollar with the objective of preserving
foreign currency reserves and narrowing the recent trade deficit. On January
29, 1996, the Central Bank announced an additional adjustment, resulting in a
band of 97 centavos to R$ 1.06 to the Dollar. In February 1996, the government
imposed restrictions on the inflow of foreign capital after a sharp increase in
investment in the first few weeks of the year, including a 5% tax on foreign
money invested in special privatization funds. On July 9, 1996, the selling
Dollar Rate quoted by banks in New York for interbank transactions was R$ 0.995.
The international financial community has expressed concerns that the Real might
be overvalued, which, coupled with Brazil's high interest rates, budget deficits
and slower than expected reform process, could prompt operators to force a
devaluation of the Real. There is no assurance that the Central Bank of Brazil
could resist such market pressures or that the government of Brazil will
implement the reforms needed to ensure the success of the Real plan.
In November 1995, the Real was accepted for trading on the Chicago
Commodities Exchange in futures contracts and futures options, thus making it
possible for international operators to hedge currency and interest rate risks
in operations with Brazil.
EXTERNAL DEBT
Brazil's total external debt as of the years ended 1992, 1993 and 1994, and
as of June 1995, was approximately U.S. $136 billion, U.S. $146 billion, U.S.
$148 billion, and U.S. $157 billion, respectively. Most of the original debt
was incurred to finance capital projects prior to 1982. Most of the commercial
bank debt is denominated in U.S. dollars and bears interest at floating rates.
In July 1996, Brazil disbursed approximately U.S. $1.04 billion in foreign
reserves to pay part of the principal and interest on its foreign debt to the
Paris club creditors that had become due in June and July. U.S. $465 million
was allocated to the payment of the principal and U.S. $574.5 million was
allocated to the payment of interest.
A-15
<PAGE>
The following table describes Brazil's net disbursements of external debt
for the covered periods.
NET DISBURSEMENTS OF EXTERNAL DEBT(1)
(US$ million)
<TABLE>
<CAPTION>
-------- -------- -------- -------- ----------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- ----------------------------
1st 2nd 3rd
quarter quarter quarter
<S> <C> <C> <C> <C> <C> <C> <C>
1. Disbursements (medium-
and long-term debt) 6,134 28,174 13,415 55,282 1,730 5,435 6,054
Refinancing -- 18,683 1,190 42,476 298 0 13
Commercial banks -- 7,100 0 42,476 298 0 13
Brazilian banks -- -- -- 5,752 0 0 0
Foreign banks -- 7,100 -- 36,724 298 0 13
Government creditors -- 11,583 1,190 0 0 0 0
Other disbursements 6,134 9,491 12,338 12,806 1,432 5,435 6,041
2. Amortizations (medium-
and long-term debt)(2) 7,658 8,513 9,978 50,411 2,763 3,189 2,218
3. Short-term capital (net)(3) (492) 372 (219) 209 128 229 73
4. Net disbursements of external
debt (1 - 2 + 3) (2,016) 20,033 3,218 5,080 (905) 2,475 3,909
</TABLE>
- ---------------
(1) Provisional.
(2) Excludes amortizations related to debt reduction operations and accumulated
loan disbursements agreed with commercial creditor banks (including debt
equity conversion).
(3) Non-financial public sector short-term debt.
Source: Central Bank of Brazil, BOLETIM DO BANCO CENTRAL DO BRASIL, Volume 32,
No. 1.
In July 1992 Brazil and its foreign commercial creditors reached a debt
service reduction agreement, in principle, under the auspices of the Brady
initiative, covering U.S. $44 billion of debt to the commercial banks. A term
sheet for the transaction was agreed to in September 1992 and was approved by
the Brazilian Senate and the required number of bank creditors. Under the term
sheet, lenders had the opportunity to exchange their eligible debt for a
combination of six options, two of which called for the issuance of instruments
that would be fully secured with respect to the principal and 12 months of
interest, and one which would require providing additional financing to Brazil.
Brazil concluded an agreement with 750 banks on April 15, 1994 to refinance
approximately U.S. $49 billion in debt. Under the Brady Plan, Brazil will repay
much of its remaining debt to the banks with special bonds, backed by the U.S.
Treasury bonds as collateral. In 1995, Brazil was again able to borrow from
world financial markets, in two issues. The first was an issue of 80 billion
Yen-denominated two-year bonds, which took place in May 1995. One month later,
Brazil launched a one
A-16
<PAGE>
billion Deutschmark-denominated three-year bond offering. In March 1996, Brazil
completed another issue of 30 billion Yen-denominated five-year bonds.
FOREIGN INVESTMENT
Foreign investment in Brazilian securities is regulated by exchange control
laws and regulations of the National Monetary Council, the Central Bank of
Brazil and the CVM as well as by laws that restrict investment by foreigners in
particular sectors of the Brazilian economy, including the telecommunications,
oil, newspaper and broadcast, transport and defense industries. In some cases,
these restrictions take the form of limitations on ownership of voting stock by
foreigners. Several liberalization steps have, however, been taken by the
government and further projects are currently being considered by Congress. For
further discussion of recent measures to favor foreign investment, see "The
Economy--Privatization and Deregulation." Foreign portfolio investment in the
Brazilian securities markets is regulated by the National Monetary Council, the
Central Bank and the CVM. Non-residents may only invest in securities issued by
Brazilian publicly-held corporations. According to Brazilian laws, restricted
securities are: shares, participation certificates and debentures, their
respective coupons and underwriting bonuses; securities deposit certificates;
securities underwriting rights; securities underwriting receipts; securities
options; share deposit certificates; and commercial papers issued for public
offering. Annex IV investors may only acquire variable income securities (i) in
a Brazilian stock exchange, (ii) on an organized over-the-counter market duly
registered before the CVM or (iii) by means of subscription from publicly-held
corporations.
Funds registered for investment under Annex IV that are not allocated to
the acquisition of securities must be directed exclusively to the acquisition of
investments expressly and jointly authorized by the Central Bank of Brazil and
the Brazilian Securities Commission.
For a discussion of the regulatory framework applicable to the Fund's
investments in Brazil, see "Investment Restrictions--Certain Brazilian
Restrictions" in the SAI.
THE SECURITIES MARKETS
Brazil has nine stock exchanges. Of these, the Bolsa de Valores de Sao
Paulo (the "Sao Paulo Exchange") and the Bolsa de Valores do Rio de Janeiro (the
"Rio Exchange") are the most important. Under current practice, once a company
is listed, its shares can trade on any of the Brazilian stock exchanges
(together, the "Brazilian Exchanges").
Most securities listed on the Sao Paulo Exchange are also listed on the Rio
Exchange, although prices of listed securities are determined independently on
each Brazilian Exchange. Although any of the outstanding shares of an exchange-
listed company may trade on a Brazilian Exchange, in most cases, less than half
of the listed shares are actually available for trading by the public, the
remainder being held by small groups of controlling persons who rarely trade
their shares. For this reason, data showing the total market capitalization of
one or more Brazilian Exchanges may give an exaggerated view of the size of the
Brazilian equity securities market.
Most of the trading volume and most of the market capitalization of the
Brazilian Exchanges is represented by preferred stock rather than common stock.
Brazilian preferred stock is typically non-voting, generally has a preferential
payment right only upon liquidation and as a result is generally treated as an
equity investment. Since preferred stock does not carry voting rights, its
issuance permits a company's controlling persons to retain control through the
ownership of the company's
A-17
<PAGE>
ordinary shares (common stock). Whether or not the preferred shareholders have
a preference in relation to the common stockholders to receive dividends is
determined by the by-laws of each company. Pursuant to Brazilian corporate law,
holders of preferred stock are senior to common stock holders with respect to
the receipt of assets upon liquidation of a corporation.
The table below presents recent value indicators for the Sao Paulo
Exchange.
<TABLE>
<CAPTION>
MARKET CAPITALIZATION(1) TRADING VOLUME(2)
--------------------- --------------
(US$ billion) (US$ billion)
<S> <C> <C>
1990. . . . . . . . . . . . . . . . . . 15.37 4.73
1991. . . . . . . . . . . . . . . . . . 43.61 8.53
1992. . . . . . . . . . . . . . . . . . 45.26 18.30
1993. . . . . . . . . . . . . . . . . . 99.43 38.55
1994. . . . . . . . . . . . . . . . . . 189.06 88.20
1995. . . . . . . . . . . . . . . . . . 147.56 69.45
1996* . . . . . . . . . . . . . . . . . 191.23 42.57
</TABLE>
- ---------------
(1) Year-end total market value of listed domestic company shares.
(2) Year-end total volume traded of listed domestic company shares.
* As of June, 1996
Source: Sao Paulo Exchange, July 1996.
As of June 30, 1996, the total market capitalization of the companies listed
on the Sao Paulo Exchange was approximately U.S. $191 billion.
STOCK INDEXES
The Bovespa Stock Index (the "Sao Paulo Index") indicates average stock
price behavior on the Sao Paulo Exchange by representing the current value in
Brazilian currency of a hypothetical stock portfolio originally selected on
January 2, 1968. This portfolio consists of stocks representing an aggregate
value of 80% of the cash volume of stocks traded during an earlier 12-month
period. Since January 1995, 55 stocks have comprised the index. As of June 30,
1996, total market capitalization of these companies was approximately U.S. $126
billion. The weight of each stock in the portfolio is directly related to its
value in the cash market, both in terms of number of transactions and their
value in local currency. Consequently, the movement of the index may not be
representative of the movement of the majority of issues listed on the Sao Paulo
Exchange. The composition of the Sao Paulo index is reviewed every four months.
The IBV Index (the "Rio Index") is a market value-weighted index of the Rio
Exchange. The market value of each stock is computed by multiplying the price
of such stock by the number of shares outstanding; the market value of the
component stocks are then added and the total divided by an adjusted base market
value initially set at 100 as of December 29, 1983. That sum, multiplied by
100, is the value of the Rio Index at any particular time. Currently,
approximately 50 stocks, which
A-18
<PAGE>
represent more than 90% of the trading volume on the Rio Exchange, comprise the
index. The weight of each stock in the index depends on the percentage of the
overall market capitalization represented by the market value of the shares
outstanding.
The following table gives certain performance information regarding the Sao
Paulo Index. The Sao Paulo Index was divided by 10 on January 26, 1993, on
August 27, 1993, and again on February 10, 1994. The table has been adjusted to
reflect these divisions.
PERFORMANCE OF THE
SAO PAULO INDEX(1)
1990 TO PRESENT
<TABLE>
<CAPTION>
END OF PERIOD LEVELS NOMINAL VARIATION
-------------------- -----------------
(POINTS) (ANNUAL)
<S> <C> <C>
1990 . . . . . . . . . . . . . . . . . . . . . . . 0.25156 308.27
1991 . . . . . . . . . . . . . . . . . . . . . . . 6.0776 2,315.96
1992 . . . . . . . . . . . . . . . . . . . . . . . 67.805 1,015.65
1993 . . . . . . . . . . . . . . . . . . . . . . . 3754.5 5,437.20
1994 . . . . . . . . . . . . . . . . . . . . . . . 43,539 1,059.65
1995 . . . . . . . . . . . . . . . . . . . . . . . 42,990 (1.26)
1996(2)
January. . . . . . . . . . . . . . . . . . . . . 51.515 19.83
February . . . . . . . . . . . . . . . . . . . . 49.577 (3.76)
March. . . . . . . . . . . . . . . . . . . . . . 49.549 (0.05)
April. . . . . . . . . . . . . . . . . . . . . . 51.641 4.22
May. . . . . . . . . . . . . . . . . . . . . . . 57.279 10.91
June . . . . . . . . . . . . . . . . . . . . . . 60.438 5.51
</TABLE>
- ---------------
(1) 1968 = 0.000000001
(2) Monthly
Source: Sao Paulo Exchange, July 1996.
DEBT SECURITIES
PRIMARY MARKET. Corporate bonds are sold through public offerings and
private placements. The market for outstanding convertible and non-convertible
bonds is small and illiquid compared to the market for corporate equities.
Corporate bonds typically have original maturities of one to three years. These
bonds are issued with either fixed or floating interest rates and usually with
principal pegged to an inflation index.
The Brazilian government typically sells its debt instruments in primary
offerings through auctions in which certain financial institutions having the
requisite minimum capital are eligible to bid.
SECONDARY MARKET. Secondary transactions in bonds are generally made in
the over-the-counter market directly between market intermediaries (such as
investment banks and securities dealers) and investors, most of whom are
institutional. The secondary market for government debt has been relatively
active and liquid as compared to the market for corporate debt securities. Such
bonds are also used in repurchase agreements.
The following table sets forth the amounts of public sector bonds held by
investors other than the Central Bank of Brazil at the end of each period shown.
A-19
<PAGE>
FEDERAL DOMESTIC SECURITIES DEBT(1)
(REAIS THOUSANDS)
<TABLE>
<CAPTION>
YEAR OTNS LTNS LBCS LFTS BTNS BBCS NTNS TOTAL
---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990. . . . . . . . 0.2 250.2 11.1 505.6 37.4 -- -- 804.4
1991. . . . . . . . 0.2 -- 265.4 2,752.6 188.4 721.6 564.9 4,493.2
1992. . . . . . . . 0.8 -- 5,938.8 8,880.6 213.4 89,852 59,088.4 163,973.9
1993. . . . . . . . 1.0 240,199 1.0 187,884 4,965 1,077,268 3,477,241 4,987,559
1994. . . . . . . . -- 519,000 2,132,514 7,867,000 36,407 24,975,950 26,998,677 62,529,548
1995(2) . . . . . . -- 14,557,000 24,961,000 18,746,000 49,000 27,274,000 23,460,000 109,047,000
</TABLE>
- ---------------
(1) Not including bonds in Central Bank portfolio.
(2) Preliminary (January through November 1995).
OTN = National treasury obligations.
LTN = National treasury bills.
LBC = Central Bank bills.
LFT = Treasury financing bills.
BTN = National treasury bonds.
BBC = Central Bank bonds.
NTN = National treasury notes.
Source: Central Bank of Brazil, BOLETIM DO BANCO CENTRAL DO BRASIL, Volume 32,
no. 1.
External debt of Brazilian issuers commonly trades in the over-the-counter
market outside Brazil, typically in New York. While there is no data setting
forth the amount of trading in such securities, they are generally considered to
be actively traded. A number of Brazilian corporations have issued bonds that
are listed and traded on the Luxembourg Stock Exchange.
SECURITIES REGULATION
The Central Bank of Brazil licenses and oversees the operations of
Brazilian financial institutions, including investment banks, brokerage firms
and securities dealerships. In particular, the Central Bank of Brazil is
responsible for licensing brokerage firms. Once licensed with the Central Bank
of Brazil, a financial institution's activities in the Brazilian securities
markets are regulated by the CVM. The CVM, which is managed by appointees of
the President of Brazil who serve at the President's discretion, is responsible
for the regulation and supervision of the corporate securities markets and the
protection of investors in those markets.
All companies must register with the CVM before issuing and selling
securities to the public. Companies must update information about their
operations on an annual basis and, in addition, file interim and quarterly
reports with the CVM, though that information is not required to be distributed
to the companies' shareholders. Moreover, any fact or event that may materially
affect a company must be immediately reported by its management to the CVM and
is usually required to be immediately reported to the Brazilian Exchanges and
the public. Non-compliance with these registration and disclosure rules may
subject a company and its management to penalties provided by law.
