<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
---------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
OF DIRECTORS Harold J. Schaaff, Jr.
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Joseph P. Stadler
Allerton Cushman, Jr. VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR Hilary D. Toole
Andrew McNally IV ASSISTANT SECRETARY
DIRECTOR James R. Rooney
Fergus Reid TREASURER
DIRECTOR Timothy F. Osborne
Victor Savanti ASSISTANT TREASURER
DIRECTOR
---------------------------------------------
U.S. INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
--------------------------------------------------------
U.S. ADMINISTRATOR
The United States Trust Company of New York
73 Tremont Street
Boston, Massachusetts 02108
--------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The United States Trust Company of New York
770 Broadway
New York, New York 10003
--------------------------------------------------------
SHAREHOLDER SERVICING AGENT
The First National Bank of Boston
Investor Relations Department
P.O. Box 644, Mail Stop 46-02-09
Boston, Massachusetts 02102-0644
(617)-575-2900
--------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
--------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
--------------------------------------------------------
[LOGO]
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
[LOGO]
FIRST QUARTER REPORT
MARCH 31, 1995
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- - -------
The selling panic that began in the last two weeks of 1994 in response to the
Mexican currency crisis continued as investors feared that other countries in
the region, despite significant fundamental differences, were vulnerable to a
Mexico-style crisis. Although the Fund was underweight Mexico for the quarter,
Brazil and Argentina, two of the Fund's largest overweights, were hit hard both
by domestic factors and the Mexico ripple effect. At the same time, the Fund was
hurt by its underweight position in Chile which, despite its high valuations,
declined the least in the region due to the stability of its economy and the
insulating effect of the country's restrictions on foreign investment. For the
first quarter, the Fund's total return based on net asset value per share was
- - -39.16% compared to -27.75% in US dollars for the IFC Global Latin America Total
Return Index. The decline was driven by concern about political delays in the
constitutional reform process and by reversal of the country's trade balance
from a surplus to a deficit.
Although President Cardoso's Plan Real has successfully stabilized the Brazilian
economy and brought about inflation control, there is significant opposition to
the pace at and manner in which structural reforms are being introduced by the
administration. During the quarter, congress handed Cardoso procedural defeats
on social security reform. While this is a secondary issue, congress wanted to
send the message that the major reforms will need to be negotiated. In response,
the administration has shifted to a strategy implementing the least
controversial amendments while negotiating privatization and fiscal
restructuring, the most significant reforms, behind the scenes. We expect
progress on privatization and fiscal reform to proceed steadily, albeit slowly
and with a low degree of visibility. As a result, we expect the market to
continue to be highly sensitive to political developments.
On the economic front, the success of the Plan Real produced a
post-stabilization increase in domestic demand which has led to concerns that
inflation could reignite. This possibility of resurgent inflation remains the
major risk in the market. With the decline in inflation, the purchasing power of
the poorest segments of society increased dramatically, leading to a consumption
boom despite high interest rates and consumer credit restrictions. Due to the
high real rates, capital inflows and Cardoso's monetary policy, the real
appreciated against the dollar, further increasing consumer purchasing power. As
a result, imports surged, exports declined and Brazil's trade surplus turned to
deficit. This shift in the balance of payments was exacerbated as investors grew
concerned over the current account deficit in light of the Mexican experience.
The government has taken steps to alleviate these pressures. Nevertheless, we
view Brazil's finances as inherently more stable due to the country's high
foreign exchange reserves, low level of debt and low level of foreign investors
in the market.
We expect outperformance of the stock market as Cardoso makes progress on the
political front and as global investors distinguish between Brazil's financial
position and that of Mexico prior to its crisis. Thus, the Fund expects to
continue overweighting Brazilian equities throughout 1995.
The Mexican market's first quarter plunge of 42.8% in US dollars (comprising a
22% decline in the Bolsa and a 20% drop in the value of the peso) was driven by
a general crisis of confidence regarding economic and political concerns. A
currency crisis, sparked by the devaluation of the peso at the close of 1994,
developed into a liquidity squeeze as investors refused to roll-over maturing
debt of both sovereign and private sector borrowers. Due to excessively high
levels of short-term debt at both the country
2
<PAGE>
and company level, the market sold-off indiscriminately on concerns that the
liquidity problems could produce a systemic solvency crisis as in the early
1980's.
Although the Zedillo administration handled the devaluation poorly, the policy
action is a positive development from a fundamental, long-term perspective. The
weaker peso makes Mexico more competitive globally and will hasten the country's
transition to an export-driven economy. The key issue is how long the adjustment
period will be. In the near term we expect a deep recession as the stabilization
program, based on orthodox fiscal and monetary policy, imposes strict austerity
on the country. President Zedillo's democratic reforms have led to increased
participation in government of the PAN, the dominant opposition party, which
holds orthodox economic views similar to those of the President. Thus, as the
two major parties in Mexico are behind the program, we expect disciplined
adherence in spite of potential political turbulence.
By the end of the first quarter, a small but promising trade surplus indicated a
positive outlook for the program. By the close of the quarter, the market began
to recover as: 1) a US-led international support effort provided funding for
maturing sovereign debt; 2) political developments increased Mexican and
international confidence in President Zedillo's ability to govern and in his
commitment to political reform; 3) the Mexican government's economic program
showed early progress towards correcting the trade imbalances which had led to
the devaluation and 4) buyers were attracted to equities selling at distress
level valuations.
Mexico is not yet out of the woods either politically or economically, however,
the fundamentals are improving, valuations are low, but sentiment is still
negative. Thus, we are increasing positions in selected companies on the basis
of attractive valuations.
The IFC Index for Argentina decreased 10.4% in US dollars for the first quarter.
Unlike Brazil, Argentina's fundamentals have been affected by the capital
outflows from Latin America due to its currency peg to the dollar. The central
bank has responded to the crisis by raising interest rates at the cost of
slowing the economy. In addition, the economy withstood a run on the banking
system as depositors grew concerned over the risk of systemic failures. The key
event for the second quarter will be the presidential election in May. We expect
reelection of President Menem and continuity of the Argentine economic program.
While we expect a period of slow GDP growth and perhaps a recession, the Fund
will add selected stocks as valuations reach attractive levels.
The Chilean market fell 6.2% in the first quarter. The market was insulated from
the Latin America sell-off due to both the country's strong fundamentals and its
restrictions on capital repatriation by foreigners. Despite Chile's solid
fundamentals, the Fund will likely continue its underweighting of the market
throughout 1995, due to its investment restrictions and high valuations.
Colombia declined 6.5% in the first quarter. While Colombia, like Chile, has
solid fundamentals and is relatively insulated from external events due to a low
level of participation by foreign investors, the country has a structural
inflation problem which the central bank has been combatting through high
interest rates. Due to strong growth from increasing oil revenues, interest
rates are likely to remain high throughout 1995. The Fund will participate only
in selected companies.
3
<PAGE>
Peru decreased 21.4% for the quarter as a minor but highly visible border
conflict with Ecuador spooked investors. Peru is currently negotiating a
settlement with Ecuador and investors have now focused on the overwhelming
victory by President Fujimori and continuation of his economic program. The Fund
increased its exposure to Peru during the quarter and believes Peru's strong
fundamentals will drive good market performance.
Despite its closed economy and markets, Venezuela decreased 16.1% during the
quarter as local investors grew disillusioned with the progress of President
Caldera's economic measures. The Fund is likely to continue its nearly 0%
allocation due to the currency controls and populist economic policies of the
Caldera administration.
Despite the volatility of this quarter, the Latin American story remains intact.
By the end of the quarter, the markets began to recover as investors commenced
bottom-fishing. Over the last three weeks of March, Brazil rose 37%, Argentina
44% and Mexico 32%. Yet, valuations are still low, fundamentals are improving
and sentiment is still negative. While we expect continued volatility in the
near term, the confluence of these three factors is what could lead to superior
investment
performance over the long term. Thus, we are increasing positions in selected
companies on the basis of attractive valuations.
Sincerely,
[SIG]
Barton M. Biggs
CHAIRMAN
[SIG]
Robert L. Meyer
SENIOR PORTFOLIO MANAGER
[SIG]
James Colmenares
PORTFOLIO MANAGER
April 20, 1995
4
<PAGE>
INVESTMENTS (UNAUDITED)
- - ---------
MARCH 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - -------------------------------------------------------
- - ------------
<S> <C> <C>
COMMON STOCKS (97.8%)
(Unless otherwise noted)
- - -------------------------------------------------------
- - ------------
ARGENTINA (10.7%)
AUTOMOBILES
CIADEA 173,222 U.S.$ 892
------------
BANKING
Banco de Galicia 74,769 288
Banco del Suquia 228,510 308
------------
596
------------
BEVERAGES & TOBACCO
Quilmes 110,300 1,820
------------
ENERGY SOURCES
Capex GDR 169,000 1,859
------------
METALS - STEEL
Siderca 1,392,415 836
------------
TELECOMMUNICATIONS
CAI - Co. Austral de
Inversiones 227,000 3,405
------------
9,408
------------
- - -------------------------------------------------------
- - ------------
BRAZIL (53.3%)
APPLIANCES & HOUSEHOLD DURABLES
Brasmotor (Preferred) 4,777,100 1,089
Continental 2001
(Preferred) 92,286,000 2,248
Refripar (Preferred) 810,437,277 1,560
------------
4,897
------------
AUTOMOBILES
Iochpe Maxion
(Preferred) 2,072,000 1,003
------------
BANKING
Banco Bradesco
(Preferred) 334,009,446 2,248
Banco do Brasil
(Preferred) 119,790,000 1,241
Banco Itau (Preferred) 10,764,000 2,562
------------
6,051
------------
BEVERAGES & TOBACCO
Brahma (Preferred) 2,201,000 526
------------
CHEMICALS
Rhodia Ster ADS 148,000 1,813
------------
ENERGY SOURCES
Petrobras (Preferred) 42,887,000 2,982
------------
FOOD & HOUSEHOLD PRODUCTS
Dixie Lalekla
(Preferred) 950,000 645
------------
MERCHANDISING
Casa Anglo (Preferred) 8,689,301 1,141
Lojas Americanas (Bonus
Preferred Rights) 159,382 22
Mesbla (Preferred) 1,143,000 113
------------
1,276
------------
METALS - NON-FERROUS
CVRD 200,000 44
------------
- - -------------------------------------------------------
- - ------------
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- - -------------------------------------------------------
- - ------------
METALS - STEEL
Cosipa 'B' (Preferred) 93,000,000 U.S.$ 163
CSN 89,824,000 2,097
Usiminas (Preferred) 1,709,900,000 1,959
------------
4,219
------------
TELECOMMUNICATIONS
Telebras 135,899,000 3,159
Telebras (Preferred) 110,957,740 2,987
Telesp 300,000 35
Telesp (Preferred) 25,837,800 2,673
------------
8,854
------------
TEXTILES & APPAREL
Brasperola 'A'
(Preferred) 1,810,000 1,792
Moinho Santista
(Preferred) 375,000 542
------------
2,334
------------
UTILITIES - ELECTRICAL & GAS
CELESC `B' (Preferred) 1,125,000 657
Cemig ADR 81,850 1,637
Cemig (Preferred) 13,140,000 263
CESP 37,553,370 1,274
CESP (Preferred) 1,503,210 60
CPFL 35,143,000 1,544
CPFL (Preferred) 23,800,000 900
Eletrobras 9,449,000 1,860
Eletrobras 'B'
(Preferred) 15,049,000 2,879
Light 4,564,000 1,345
------------
12,419
------------
47,063
------------
- - -------------------------------------------------------
- - ------------
CHILE (11.4%)
BANKING
Banco Osorno 14,714,102 839
------------
BEVERAGES & TOBACCO
Andina 252,324 1,095
------------
BUILDING MATERIALS & COMPONENTS
Madeco 323,717 779
Masisa 1,993,705 1,211
------------
1,990
------------
CHEMICALS
Soquimich 'A' 185,140 583
Soquimich 'B' 97,854 299
------------
882
------------
ENERGY SOURCES
Chilgener 72,150 446
Copec 156,500 864
------------
1,310
------------
FOREST PRODUCTS & PAPER
CMPC - Manufacturera de
Cartones 28,776 464
Forrestal Terranova 134,849 212
------------
676
------------
HEALTH & PERSONAL CARE
LABCHILE 562,708 500
------------
- - -------------------------------------------------------
- - ------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- - -------------------------------------------------------
- - ------------
<S> <C> <C>
CHILE (CONTINUED)
METALS - STEEL
CAP - Aceros Del
Pacifico 134,849 U.S.$ 726
------------
RECREATION, OTHER CONSUMER GOODS
Video Chile 539,859 107
------------
TELECOMMUNICATIONS
CTC 'A' 186,452 733
Entel 3,900 18
Telex-Chile 204,186 729
------------
1,480
------------
UTILITIES - ELECTRICAL & GAS
Enersis 951,000 465
------------
10,070
------------
- - -------------------------------------------------------
- - ------------
COLOMBIA (2.6%)
BANKING
Banco de Colombia 5,693,307 2,287
MULTI-INDUSTRY
Corfivalle 1 --
------------
2,287
------------
- - -------------------------------------------------------
- - ------------
MEXICO (16.9%)
BANKING
G. Banacci 'C' 1,223,500 1,403
G. Bancomer 'B' 2,125,000 341
G. Bancomer ADR 455,125 1,650
------------
3,394
------------
BEVERAGES & TOBACCO
Panamco 'A' 67,700 1,769
------------
BUILDING MATERIALS & COMPONENTS
Apasco 86,900 237
Cemex ADR 22,012 93
Tolmex 'B2' 711,200 1,620
------------
1,950
------------
CONSTRUCTION & HOUSING
G. Tribasa ADR 137,264 789
GMD 'B' ADR 358,608 897
GMD 'L' ADR 4,427 13
------------
1,699
------------
METALS - STEEL
G. Hylsamex ADR 150,725 1,394
------------
MULTI-INDUSTRY
G. Carso ADR 175,900 1,535
G. Sidek 'B' 1,187,000 727
------------
2,262
------------
RECREATION, OTHER CONSUMER GOODS
G. Mexicano de Videos
'B' ADR 40,000 160
------------
TELECOMMUNICATIONS
G. Iusacell 'D' ADR 7,200 75
G. Iusacell 'L' ADR 45,500 540
G. Televisa ADR 15,695 261
Telmex 'L' ADR 48,380 1,379
------------
2,255
------------
14,883
------------
- - -------------------------------------------------------
- - ------------
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- - -------------------------------------------------------
- - ------------
PERU (2.7%)
BUILDING MATERIALS & COMPONENTS
Cementos Yura 320,000 U.S.$ 2,002
------------
METALS - NON-FERROUS
Minas Buenaventura 'C' 1 --
Southern Peru Copper 1 --
------------
--
------------
MULTI-INDUSTRY
La Fabril 385,367 348
------------
TELECOMMUNICATIONS
CPT - Peruana de
Telefonos `B' 1,570 2
------------
2,352
------------
- - -------------------------------------------------------
- - ------------
VENEZUELA (0.2%)
UTILITIES -- ELECTRICAL & GAS
Electricidad de Caracas 201,161 213
------------
- - -------------------------------------------------------
- - ------------
TOTAL COMMON STOCKS
(Cost U.S. $120,389) 86,276
------------
- - -------------------------------------------------------
- - ------------
PURCHASED OPTIONS (0.3%)
- - -------------------------------------------------------
- - ------------
BRAZIL (0.3%)
UTILITIES - ELECTRICAL & GAS
CPFL call, expiring
10/16/95,
strike price BRL 70.00 37,400,000 62
Eletrobras call,
expiring 6/19/95,
strike price BRL 30.58 16,690,000 186
------------
(Cost U.S. $892) 248
------------
- - -------------------------------------------------------
- - ------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- - -------------------------------------------------------
- - ------------
DEBT INSTRUMENT (2.9%)
- - -------------------------------------------------------
- - ------------
COLOMBIA (2.9%)
BANKING
Banco de Colombia
(Convertible) 5.20%,
2/1/99
(Cost U.S. $3,700) U.S.$ 3,700 2,572
------------
- - -------------------------------------------------------
- - ------------
SHORT TERM INVESTMENTS (1.0%)
- - -------------------------------------------------------
- - ------------
CHILE (0.6%)
<CAPTION>
SHARES
-------------
<S> <C> <C>
INVESTMENT COMPANIES
Financiero Mutual Fund 6,449 97
------------
<CAPTION>
FACE
AMOUNT
(000)
-------------
<S> <C> <C>
BANKING
Banco Bice PRBC 5.80%,
6/12/95 CLP 1,500 430
------------
527
------------
- - -------------------------------------------------------
- - ------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- - -------------------------------------------------------
- - ------------
<S> <C> <C>
UNITED STATES (0.4%)
REPURCHASE AGREEMENT
U.S. Trust, 6.00%, dated
3/31/95, due 4/3/95, to
be repurchased at U.S.
$335, collateralized by
U.S. $330 Government
National Mortgage
Association, 9.50% to
10.00%, due 10/15/09 to
11/15/09, valued at
U.S. $356 U.S.$ 335 U.S.$ 335
------------
- - -------------------------------------------------------
- - ------------
TOTAL SHORT TERM INVESTMENTS
(Cost U.S. $852) 862
------------
- - -------------------------------------------------------
- - ------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.2%)
Brazilian Real BRL 26 29
Chilean Peso CLP 365 1
Colombian Peso COP 29,678 33
Mexican New Peso MXN 651 96
Venezuelan Bolivar VLB 1,019 6
------------
(Cost U.S. $192) 165
------------
- - -------------------------------------------------------
- - ------------
TOTAL INVESTMENTS (102.2%)
(Cost U.S. $126,025) 90,123
------------
- - -------------------------------------------------------
- - ------------
<CAPTION>
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- - -------------------------------------------------------
- - ------------
OTHER ASSETS AND LIABILITIES (-2.2%)
Other Assets U.S.$ 562
Liabilities (2,475) U.S.$ (1,913)
------------- ------------
- - -------------------------------------------------------
- - ------------
NET ASSETS (100%)
Applicable to 8,447,084 issued and
outstanding U.S. $.01 par value
shares (100,000,000 shares
authorized) U.S.$ 88,210
------------
- - -------------------------------------------------------
- - ------------
NET ASSET VALUE PER SHARE U.S.$ 10.44
------------
- - -------------------------------------------------------
- - ------------
<FN>
ADR--American Depositary Receipt
ADS --American Depositary Share
GDR--Global Depositary Receipt
GDS --Global Depositary Share
</TABLE>
7
