<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS James W. Grisham
Frederick B. Whittemore VICE PRESIDENT
VICE-CHAIRMAN OF THE BOARD Michael F. Klein
OF DIRECTORS VICE PRESIDENT
Warren J. Olsen Harold J. Schaaff, Jr.
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Joseph P. Stadler
DIRECTOR VICE PRESIDENT
John W. Croghan Valerie Y. Lewis
DIRECTOR SECRETARY
David B. Gill James R. Rooney
DIRECTOR TREASURER
Graham E. Jones Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
John A. Levin
DIRECTOR
</TABLE>
---------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
---------------------------------------------------------
U.S. ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
---------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
---------------------------------------------------------
SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644,
Boston, Massachusetts 02102-0644
(617) 575-3120
---------------------------------------------------------
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
---------------------------------------------------------
For additional Fund information, including the Fund's net asset value per share
and information regarding the investments comprising the Fund's portfolio,
please call 1-800-221-6726.
----------
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
----------
THIRD QUARTER REPORT
SEPTEMBER 30, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the nine months ended September 30, 1996, the total return for The Latin
American Discovery Fund, Inc. (the "Fund"), based on net asset value per share,
was 40.62% compared with 18.65% for the Morgan Stanley Capital International
Emerging Markets Global Latin America Index (the "Index"). For the period since
commencement of operations on June 23, 1992 through September 30, 1996, the
Fund's total return, based on net asset value per share, was 81.57% compared
with 47.09% for the Index. On September 30, 1996, the closing price of the
Fund's shares on the New York Stock Exchange was $13.25 representing a 14.2%
discount to the net asset value per share.
The table below presents the percentage change in the Morgan Stanley Capital
International indices for each respective country, in U.S. dollar terms as of
September 30, 1996, for the periods presented:
<TABLE>
<CAPTION>
3 MONTHS 9 MONTHS
----------- -----------
<S> <C> <C>
Argentina........................ -7.0 6.7
Brazil........................... 2.8 32.0
Chile............................ -3.1 -1.4
Colombia......................... 6.3 9.4
Mexico........................... 1.9 17.8
Peru............................. 5.4 14.6
Venezuela........................ 23.8 93.7
</TABLE>
courtesy: FAME/Randall-Helms
ARGENTINA
The performance of the Argentine market was driven in large part by the
departure of the respected Minister of Economy Domingo Cavallo and recurring
concerns about the fiscal deficit. President Menem, who had fought publicly with
Cavallo throughout his five-year tenure, finally decided the political costs of
the minister's frequent public tirades were too high and asked him to resign.
(The population was also looking for someone to take the hit for the high
unemployment.) The man chosen to replace him, ex-central bank head Roque
Fernandez, is a widely respected Chicago-trained economist who quickly endorsed
the fiscal measures introduced by Cavallo. The markets traded down in the
uncertainty surrounding the succession, and on the belief that tight fiscal
measures would weaken an already fragile economic recovery. Although we are
somewhat cautious, we increased our exposure to YPF during the period since we
expect it will benefit from higher oil prices.
BRAZIL
Uncharacteristically for Brazil, there was no major macroeconomic or political
news and corporate earnings were within expectations. The Brazilian market is
currently de-emphasizing the macro environment and focusing on deregulation,
privatization and earnings growth at the industry level. Despite the strong
appreciation, the market has not re-rated since last year. This year's market
performance has been driven by sector-specific earnings growth which outpaced
expectations. In fact, on some measures (e.g. price times next year earnings)
the market is cheaper now than it was at the same time last year.
The macro environment has been rather benign. Inflation has fallen to such an
extent that the market is talking about a single digit number for 1997. The
economy, if not roaring ahead, has recovered to reach its medium term potential
(i.e. around 4% per year). Unemployment, though increasing due to productivity
measures and to the less robust recovery, is not a major concern. The trade
accounts, though worsening, are under control. Interest rates, though high, are
continuing to fall. Structural reforms, though slow, are moving ahead.
We welcome the consolidation of the benign macro scenario, but are by no means
lulled into a false sense of complacency. Chief concerns are: a) a Cardoso
stumble in his effort to change the constitution in order to run for a second
presidential term, b) a marked deterioration in the trade accounts, c) a
deterioration or non-improvement in the fiscal deficit, or d) a pickup in
inflation owing to heated economic activity. Despite these risks we feel that
Brazil still offers the most exciting investment opportunities in the region.
The Brazilian portion of the portfolio is concentrated in electric and telecom
utilities which should benefit from both increased earnings and privatization,
and well managed companies in the consumer sector.
CHILE
The Chilean market performance was driven by continued concerns over tight
monetary policy. The central bank has an ambitious inflation reducing stance and
economic growth, while slowing, is still strong. More importantly, real wage
growth has not slowed. Coupled with those factors, corporate earnings registered
disappointing growth rates, bolstering the view that many industries in Chile
are suffering from margin compression. While an anticipated decline in rates may
cause us
2
<PAGE>
to increase our exposure to Chile, we will continue to be underweight the market
until we see good earnings growth.
COLOMBIA
The Colombian market was able to record a strong performance for the quarter
despite its continued obsession with politics and the plight of President
Samper. The United States government stepped up pressure for stricter anti-drug
measures and rumors of potential economic sanctions increased the hesitation of
major market players. The economy continued to show signs of weakness and
consensus GDP growth estimates were revised down from 3.5% to 2.5% levels for
1996. The outlook for 1997 is slightly brighter as high local interest rate
levels have begun to recede and several industries are expected to hit their
cyclical lows during the second half of this year. We continue to be bullish on
certain stocks in the financial and consumer sectors, which offer extremely good
value and solid fundamentals.
MEXICO
The third quarter continued some of the same themes as earlier in the year. The
economic recovery has been faster and stronger than expected. Holding the market
back somewhat has been a series of political and business scandals and recent
uncertainty about a revaluing peso. Year-to-date, domestic companies have
clearly outperformed the more defensive export sector. The Fund is emphasizing
interest rate sensitive banks, bottlers, and cement stocks. Current consensus
estimates for GDP have risen from 2% earlier this year to 4% GDP growth for
1996, followed by 4.5% in 1997. Unemployment, inflation and interest rates have
continued to fall. Furthermore, the Mexican government has returned to
international capital markets and has raised $6.5 billion, refinancing
outstanding debts at more attractive rates. 1997 will see increased political
risk as elections are held for Congress, mayor of Mexico City, and several
governorships. The market, however, continues to look attractive as domestically
driven companies should continue to recover as wages stop declining and begin
increasing in real terms.
PERU
The Peruvian market has rebounded as better macroeconomic data signals the end
of the mini-recession that hit the country for a few months at the beginning of
the year. Monthly GDP growth figures were above 4% for both June and July and
inflation was unexpectedly low for the last two months of the third quarter. We
maintain a neutral stance in the market.
VENEZUELA
The Venezuelan market continued its impressive ascent this year as investors
focus on the country following its return to free-market policies. Following an
economic adjustment plan introduced in April, inflation has fallen from a
monthly high of 12.6% to 3.6% in September, the currency stabilized and
international reserves increased sharply. The Fund has increased its position in
Venezuela, adding equities to its fixed income holdings looking for further
appreciation linked to regulatory reform and the recovery of the domestic
economy.
Overall the Fund benefited from its overweight positions in Brazil and Colombia
and its underweight in Chile as well as good stock selection in Brazil and
Mexico. We are sticking with similar strategies and expect continued good
performance as long as global markets remain benign.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Robert L. Meyer
PORTFOLIO MANAGER
October 21, 1996
3
<PAGE>
The Latin American Discovery Fund, Inc.
Investment Summary as of September 30, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION (UNAUDITED)
TOTAL RETURN (%)
-------------------------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3)
--------------------------- --------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
--------------------------- --------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO
DATE 34.18% -- 40.62% -- 18.65% --
ONE YEAR 39.38+ 39.38%+ 31.45+ 31.45%+ 14.28 14.28%
SINCE INCEPTION* 55.82+ 10.93+ 81.57+ 14.98+ 47.09 9.45
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
A BAR CHART REFLECTING THE DATA BELOW IS REFLECTED HERE.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31: NINE MONTHS ENDED
1992* 1993 1994 1995 SEPTEMBER 30, 1996 (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share $15.23 $23.31 $17.16 $10.98 $15.44
Market Value Per Share $13.25 $27.13 $18.25 $9.88 $13.25
Premium/(Discount) -13.0% 16.4% 6.4% -10.0% -14.2%
Income Dividends - - $0.00# - -
Capital Gains Distributions - - $5.74 $0.45 -
Fund Total Return (2) 8.01% 65.36%+ -0.14% -27.61%+ 40.62%
Index Total Return (1)(3)** -2.26% 52.29% -3.69% -13.53% 18.65%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. This return does not include the effect of dilution in
connection with the Rights Offering. These percentages are not an
indication of the performance of a shareholder's investment in the Fund
based on market value due to differences between the market price of the
stock and the net asset value per share of the Fund.
(3) The Morgan Stanley Capital International Emerging Markets Global Latin
America Index (MSCI EMG Latin America Index) is a broad based market cap
weighted composite index covering at least 60% of markets in Mexico,
Argentina, Brazil, Chile, Colombia, Peru and Venezuela.
* The Fund commenced operations on June 23, 1992.
** Unaudited.
# Amount is less than $0.01 per share.
+ Adjusted for Rights Offering.
4
<PAGE>
The Latin American Discovery Fund, Inc.
Portfolio Summary as of September 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Equity Securities 96.3%
Debt Instruments 2.60%
Short-Term Investments 1.1%
100.0%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Banking 15.7%
Beverages 9.7%
Broadcasting & Publishing 4.1%
Building Materials & Components 4.2%
Energy Sources 5.0%
Food & Household Products 11.0%
Merchandising 8.0%
Multi-Industry 2.9%
Telecommunications 17.4%
Utilities - Electrical & Gas 12.0%
Other 10.0%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Brazil 41.4%
Mexico 31.0%
Argentina 11.4%
Colombia 6.4%
Peru 3.6%
Venezuela 3.4%
Chile 2.7%
Other 0.1%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
-----------------
<C> <S> <C>
1. Telebras 11.7%
2. Eletrobras 5.1
3. FEMSA 4.7
4. Lojas Renner 4.3
5. YPF ADR 3.5
<CAPTION>
PERCENT OF
NET ASSETS
-----------------
<C> <S> <C>
6. G. Televisa ADR 3.4%
7. Cemex 3.4
8. Brahma 3.2
9. Banco Bradesco 3.1
10. G. Bancomer 2.7
---
45.1%
---
---
</TABLE>
5
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
COMMON STOCKS (96.5%)
(Unless otherwise noted)
- ---------------------------------------------------------
- ------------
ARGENTINA (11.4%)
BANKING
Banco Del Suquia 485,075 U.S.$ 727
Bansud S.A. 'B' 121,168 1,094
-------------
1,821
-------------
BEVERAGES
Quilmes 69,350 667
-------------
ENERGY SOURCES
Perez Companc 'B' 143,900 911
YPF ADR 274,795 6,286
-------------
7,197
-------------
FOOD & HOUSEHOLD PRODUCTS
Disco ADR 177,440 3,482
-------------
METALS -- STEEL
Siderar 'A' 227,005 670
Siderar ADR 85,965 1,999
-------------
2,669
-------------
TELECOMMUNICATIONS
Argentine Cellular Communications 454,000 454
Telecom Argentina ADR 19,482 787
Telefonica Argentina ADR 136,600 3,398
-------------
4,639
-------------
20,475
-------------
- ---------------------------------------------------------
- ------------
BRAZIL (41.3%)
BANKING
Banco Bradesco (Preferred) 654,082,658 5,573
Banco Nacional (Preferred) 95,420,000 5
Itaubanco (Preferred) 9,306,100 3,860
Unibanco (Preferred) 16,684,000 474
-------------
9,912
-------------
BEVERAGES
Brahma (Preferred) 9,105,946 5,663
-------------
ENERGY SOURCES
Petrobras (Preferred) 15,474,000 1,819
-------------
FOOD & HOUSEHOLD PRODUCTS
Pao de Acucar GDR 43,813 841
Pao de Acucar GDS 7,600 146
-------------
987
-------------
MERCHANDISING
Casa Anglo (Preferred) 32,361,000 1,553
Lojas Renner (Preferred) 132,385,000 7,650
-------------
9,203
-------------
METALS -- NON-FERROUS
CVRD (Preferred) 182,744 3,624
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
MULTI-INDUSTRY
Itausa (Preferred) 884,000 U.S.$ 693
-------------
TELECOMMUNICATIONS
Telebras 110,863,000 7,210
Telebras (Preferred) 83,969,740 6,604
Telebras (Preferred) ADR 92,005 7,222
Telesp 4,067,256 689
-------------
21,725
-------------
TEXTILES & APPAREL
Coteminas (Preferred) 830,000 301
-------------
UTILITIES -- ELECTRICAL & GAS
Celesc (Preferred) GDR 22,460 1,937
Cemig ADR 7,540 225
Cemig ADR 22,225 664
Copel 234,140,000 2,339
CPFL (Preferred) 60,885,000 4,174
Electropaulo (Preferred) 'B' 4,762,000 466
Eletrobras 'B' 28,576,000 7,529
Eletrobras 'B' (Preferred) 2,976,000 831
Eletrobras (Preferred) ADR 62,850 841
Light 1,990,000 617
Lightpar (Preferred) 3,990,000 563
-------------
20,186
-------------
74,113
-------------
- ---------------------------------------------------------
- ------------
CHILE (2.2%)
FOOD & HOUSEHOLD PRODUCTS
Santa Isabel S.A. ADR 157,005 4,023
-------------
- ---------------------------------------------------------
- ------------
COLOMBIA (6.4%)
BANKING
Banco Ganadero ADR (Preferred) 37,050 750
Banco Ganadero 'C' (Preferred) 3,575,527 726
Banco Ganadero (Rights) expiring
10/04/96 1,856,342 --
Banco de Colombia 17,127,240 7,287
-------------
8,763
-------------
BEVERAGES
Bavaria 714,831 2,734
-------------
MULTI-INDUSTRY
Corfivalle 2 --
-------------
11,497
-------------
- ---------------------------------------------------------
- ------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
MEXICO (30.8%)
BANKING
G. Banacci 'B' 686,805 U.S.$ 1,485
G. Banacci 'L' 645,651 1,319
G. Bancomer 'B' 1,221,060 599
G. Bancomer 'B' ADR 423,926 4,186
-------------
7,589
-------------
BEVERAGES
FEMSA ADR 74,135 1,761
FEMSA 'B' 2,168,070 6,616
-------------
8,377
-------------
BROADCASTING & PUBLISHING
G. Televisa ADR 211,280 6,101
Radio Centro 161,050 1,329
-------------
7,430
-------------
BUILDING MATERIALS & COMPONENTS
Apasco 209,550 1,443
Cemex 'B' 254,305 1,046
Cemex CPO 1,147,362 4,293
Cemex CPO ADR 97,517 737
-------------
7,519
-------------
CONSTRUCTION & HOUSING
Bufete ADR 15,010 263
Consorcio ARA ADR 84,590 1,808
Empresas ICA Sociedad
Controladora ADR 26,440 403
-------------
2,474
-------------
FINANCIAL SERVICES
Banorte 'B' 913,940 970
-------------
FOOD & HOUSEHOLD PRODUCTS
Corvi 3,913,380 4,393
Gruma 'B' 525,850 3,304
G. Casa Autrey ADR 58,050 1,299
Maseca 'B' 1,744,290 2,221
-------------
11,217
-------------
INSURANCE
Invercorp. ADR 43,500 11
-------------
MERCHANDISING
Benavides 'B' 865,520 1,752
Cifra 'B' 1,040,330 1,502
Comerci Unit 687,690 639
Sears de Mexico 'B' 468,490 1,237
-------------
5,130
-------------
MULTI-INDUSTRY
Desc 63,680 1,417
G. Carso 'A1' 469,890 2,163
G. Carso ADR 'A1' 93,245 870
-------------
4,450
-------------
RECREATION, OTHER CONSUMER GOODS
G. Mexicano de Videos 'B' ADR 40,000 15
-------------
55,182
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
PERU (3.6%)
FINANCIAL SERVICES
Credicorp Ltd. 87,975 U.S.$ 1,671
-------------
TELECOMMUNICATIONS
Telefonica del Peru ADR 165,600 3,788
Telefonica del Peru 'B' 428,190 964
-------------
4,752
-------------
6,423
-------------
- ---------------------------------------------------------
- ------------
VENEZUELA (0.8%)
BANKING
Banco Mercantile 'B' 10,000 36
-------------
UTILITIES -- ELECTRICAL & GAS
Electricidad de Caracas 1,335,161 1,326
-------------
1,362
-------------
- ---------------------------------------------------------
- ------------
TOTAL COMMON STOCKS
(Cost U.S. $154,697) 173,075
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
DEBT INSTRUMENTS (2.6%)
- ---------------------------------------------------------
- ------------
VENEZUELA (2.6%)
BONDS
Republic of Venezuela Debt
Conversion Bond 'L' 6.625%,
12/18/07 (Cost $3,278) U.S.$ 5,750 4,765
-------------
- ---------------------------------------------------------
- ------------
<CAPTION>
SHARES
<S> <C> <C>
- ---------------------------------------------------------
- ------------
SHORT-TERM INVESTMENTS (0.8%)
- ---------------------------------------------------------
- ------------
CHILE (0.5%)
INVESTMENT COMPANIES
Desarrollo Mutual Fund 4,940 93
Financiero Mutual Fund 212 4
-------------
97
-------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
TIME DEPOSIT
Pacto Citicorp A.V. 11.64%,
10/2/96 CLP 275,567 668
-------------
765
-------------
- ---------------------------------------------------------
- ------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
UNITED STATES (0.3%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 5.40%,
dated 9/30/96, due 10/1/96, to
be repurchased at U.S. $586,
collateralized by U.S. $435
United States Treasury Notes
10.625%, due 8/15/15, valued at
U.S. $599 (Cost U.S. $586) U.S.$ 586 U.S.$ 586
-------------
- ---------------------------------------------------------
- ------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S. $1,349) 1,351
-------------
- ---------------------------------------------------------
- ------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.3%)
Argentine Peso ARP 22 22
Brazilian Real BRL 150 147
Chilean Peso CLP 154 --
Colombian Peso COP 18,938 18
Mexican Peso MXP 2,265 301
Peruvian New Sol PSS 75 30
Venezuelan Bolivar VEB 10,724 23
-------------
(Cost U.S. $586) 541
-------------
- ---------------------------------------------------------
- ------------
TOTAL INVESTMENTS (100.2%)
(Cost U.S. $159,910) 179,732
-------------
- ---------------------------------------------------------
- ------------
OTHER ASSETS AND LIABILITIES (-0.2%)
Other Assets U.S.$ 6,645
Liabilities (7,013) (368)
--------------- -------------
- ---------------------------------------------------------
- ------------
NET ASSETS (100%)
Applicable to 11,617,984 issued and outstanding
U.S. $0.01 par value shares (100,000,000 shares
authorized) U.S.$179,364
------------
- ---------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE U.S.$ 15.44
------------
- ---------------------------------------------------------
- ------------
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
GDS -- Global Depositary Shares.
</TABLE>
8
