<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.
----------
ANNUAL REPORT
DECEMBER 31, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the year ended December 31, 1996, The Latin American Discovery Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of 47.19%
compared with 21.96% 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 December 31, 1996, the
Fund's total return, based on net asset value per share, was 90.05% compared
with 51.19% for the Index. On December 31, 1996, the closing price of the Fund's
shares on the New York Stock Exchange was $12.50 representing a 15.4% discount
to the net asset value per share.
The table below represents the percentage change in the Morgan Stanley Capital
International indices for each respective country, in U.S. dollar terms, as of
December 31, 1996, for the period presented:
<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS 12 MONTHS
----------- ----------- -------------
<S> <C> <C> <C>
ARGENTINA.................. 12.7% 4.8% 20.3%
BRAZIL..................... 7.9% 11.0% 42.5%
CHILE...................... (12.3%) (15.0%) (13.5%)
COLOMBIA................... 1.5% 7.9% 11.1%
MEXICO..................... 0.2% 2.0% 18.0%
PERU....................... (13.2%) (8.5%) (0.5%)
VENEZUELA.................. 19.4% 47.8% 131.2%
LATIN AMERICA.............. 2.8% 3.8% 22.0%
</TABLE>
ARGENTINA
The Argentine market's strong performance reflected a strong economic
turnaround after the gut-wrenching recession in 1995 provoked by the Mexican
devaluation. Despite a huge increase in unemployment as a result of the
recession, from roughly 10% to 17%, the Argentine government demonstrated
remarkable determination to keep a steady course of fiscal discipline. The
government even introduced labor reforms late in the year, which should create
more flexibility in the labor markets and thereby, over the long-term, reduce
the structural unemployment problem. Additionally, corporate profits grew at a
robust pace during the year, especially in the second half, and this boosted the
stock market toward year end.
The melodrama in the middle of the year of the departure of respected economic
minister Domingo Cavallo, after five years of superlative stewardship of the
economy, quickly dissipated as his successor Roque Fernandez convinced the
market of his pro-market beliefs. Further, Fernandez' tenure will likely be less
politically turbulent, and this should introduce much needed calm to the
political scenario.
Another interesting development in Argentina in 1997 was the emergence of the
local pension funds as an important institutional investor for the equity
market. We welcome this development for a variety of reasons. First, the private
pension fund system should help increase the low domestic savings rate in
Argentina. Second, more companies will likely utilize equity financing as a
means of raising capital for investments, thereby broadening the market. Third,
local trading volumes will increase and reduce the local market's dependency on
foreign portfolio investment, thereby deepening the local market and reducing
volatility.
Overall, we are encouraged by developments in Argentina. The economy is in the
midst of a sometimes painful process of structural transformation as it opens to
the outside world and increases its exposure both to private participants
domestically and to foreign competition. The government has shown its commitment
to steering the free market course despite occasional adverse shocks, and we
think this bodes well both for future economic activity and also for future
stock market performance.
BRAZIL
Interestingly, despite the Brazilian market's strong performance, during the
course of the year there was very little progress made on critical government
reform items -- notably administrative and social security reform, and fiscal
account improvement -- which were originally thought to be vital. Lack of
tangible progress on these key items, which depend on congress for their
improvement, was more than offset by substantial improvement in a number of key
areas. First, inflation and interest rates continued their downward movement,
finishing the year at annualized rates of roughly 9% and 23%, respectively.
Second, two key privatizations -- first Light, and then Cerj -- took place in
the all-important electric utility sector in the state of Rio de Janeiro. Third,
positive tariff reform in both the telecommunications and the electric utility
sector contributed to a remarkable improvement in corporate earnings growth in
those two sectors, which together comprise over a third of the market's
capitalization. Fourth, positive liberalization of the state oil and gas
monopoly provider, Petrobras, was introduced which considerably improved the
prospects for that company. Fifth, tangible progress was made in preparing state
mining giant CVRD for eventual privatization in the first half of 1997. Sixth,
economic activity was robust enough to allow for selected private sector
companies to grow their earnings at a brisk pace.
Taken together, in a political context in which the government's ability to act
independently of congress
2
<PAGE>
on reform items is limited, the Cardoso administration nevertheless demonstrated
a genuine commitment to improving shareholder value via positive reforms in
those areas over which it has independent authority. Coupled with this
commitment, the state level governments have in many cases been forced or
motivated to introduce their own reform and privatization efforts, which has
further enhanced shareholder value.
Needless to say, there are many issues which confront the investor in Brazil
when looking out to 1997. In no particular order, the most pivotal issues which
will affect the market during 1997 are as follows: the Cardoso re-election
effort; the CVRD privatization; fiscal reform efforts; trade balance and foreign
exchange concerns; telecommunications and electric utility regulatory reform;
and economic activity.
RE-ELECTION -- the Cardoso administration effort to amend the constitution
to allow him to run for re-election is probably the most important, and most
proximate, item facing the country and market in 1997. Simply put, if he is able
to run again for president in 1998, the chances are high that he would win.
Owing to Cardoso's huge electoral popularity, the splintered nature of the
opposition parties, and the president's proven ability to "horse trade" behind
closed doors, we are cautiously optimistic that he will secure the necessary
votes for the amendment.
CVRD PRIVATIZATION -- state mining conglomerate CVRD is scheduled to be
privatized sometime in the second quarter of 1997. The successful completion of
the first stage will be of significant psychological importance to the market,
because it will represent the first major privatization of a federal-level
company of national significance, and thereby considerably strengthen the
Cardoso administration's image as a serious, free-market reform oriented
government. We are confident that CVRD will be privatized in the first half of
1997.
FISCAL REFORM -- the fiscal accounts are perhaps one of the most vulnerable
elements of the outlook for 1997. The chief obstacle is congress and, behind
them, state governments. Our general outlook is that fiscal reform will take a
back seat to the re-election issue; upon successful resolution of same, the
government will focus its energies on the vital administrative reform. We are
less optimistic on this front than the above two items, as we think that
congress will slow progress on fiscal reform to a snail's pace.
TRADE BALANCE/FOREIGN EXCHANGE -- the trade balance is an item that looms
ahead with the potential to tip the apple cart. At present rates the trade
deficit will be between 1-2% of GDP next year; hardly distressing levels, but
with interest payments the current account deficit will be a couple percentage
points higher. Although the treasury has sufficient international reserves to
defend the currency for the foreseeable future, we are monitoring this item very
closely. For the time being, we expect the rate of devaluation to trend with
relative inflation differentials between Brazil and the US.
TELECOMMUNICATIONS/ELECTRIC UTILITY REGULATORY
REFORM -- this area is too complex to fully describe in these pages, but we are
closely analyzing the pending regulatory, tariff, and privatization
announcements over the next year to assess which shape these two respective
sectors will take in the years to come. We are extremely bullish on the
long-term outlook for both sectors, and on the relative value presently obtained
in the stock market therein, but need to monitor events closely so as to
identify how much shareholder value will be enhanced by government action. The
government has thus far showed itself to be very astute at maximizing
shareholder value, and we have no reason to believe they will cease being so
going forward.
ECONOMIC ACTIVITY -- the year ahead should not be particularly exciting from
an economic activity standpoint, although inflation should remain subdued. The
fiscal deficit will keep a lid on economic potential via
higher-than-otherwise-necessary interest rates, and the trade balance pressures
will marginally add to those interest rate pressures. Inflation, on the other
hand, will likely continue to be subdued and settle in at a high single digit
level. Private sector corporate profits, as a result of the aforementioned
factors, will be spotty. Thus, stock picking among the private sector companies
will be of paramount importance in 1997.
In short, we are bullish on the market for 1997. In terms of portfolio
positioning, we have an overweight stance on the electric utility and
telecommunications sectors among the government-owned companies, and an
overweight position in the retail sector among the private sector companies.
CHILE
The MSCI Chile Index declined 16% in 1996, reflecting a combination of
lackluster earnings and tight monetary policy. The Chilean market had a number
of things go wrong last year, all of which contributed to the surprisingly large
decline for the year. First, monetary authorities committed themselves to a
hawkish stance on inflation which, coupled with a
3
<PAGE>
rapidly growing economy in the first part of the year, led to a tight monetary
policy for the duration of the year and caused fixed income investments to be
tough competition for the equity market. Second, corporate earnings were, in
most cases, fairly ho-hum. Chile is in many sectors a mature market and
companies are increasingly looking outside their borders for growth
opportunities, which take longer to realize. Third, the all-important electric
utility sector suffered from two unrelated events. First, the price of
electricity generation fell markedly in the second half of the year owing to
additional (cheap) supply being factored into the wholesale price equation.
Second, an unprecedently severe drought affected the supply of reservoir water
and, with it, the cost at which electric utilities generate electricity. As a
result, revenues fell and costs increased, causing a severe deterioration in
profits and, consequently, the stock prices of the entire sector. Fourth, the
price of pulp fell dramatically in 1996, and this adversely affected the profits
of a couple of important companies, CMPC and Copec.
For 1997 we are more optimistic on the Chilean market than we have been in the
past given that market sentiment is extremely negative, the above confluence of
events is not likely to be repeated, and the country is underowned by dedicated
Latin American investors. Nevertheless, we find more attractive long-term
opportunities in other markets, and therefore are still relatively underweight
the market overall.
COLOMBIA
Colombia registered a modest rise during the fourth quarter, primarily a
function of the currency, which appreciated noticeably against the dollar. The
market, however, was able to weather a year plagued with political strife, fear
of economic sanctions from the U.S. and a slowing economy, and still extract
respectable gains. The Fund remains overweight Colombia, focusing on a few names
which offer outstanding value and exposure to key sectors in the economy.
MEXICO
The Mexican market's weak fourth quarter performance was due to concerns
over changing accounting practices and lower margins in the banking sector, a
continued sluggish recovery of the Mexican consumer and disappointing corporate
earnings reports. Interest rates remained stable throughout the fourth quarter
but there was a good deal of volatility in the stock market. This was partially
caused by the peso's 4.5% nominal devaluation- the strongest in any quarter of
1996.
For 1996 overall, the peso actually surprised estimates strengthening over 23%
in real terms. GDP growth at 4.5% was also a positive surprise finishing the
year stronger than expectations at the beginning of the year. Unemployment fell
from 6.4% to below 5%, and the annual inflation rate dropped in half. For 1997
inflation should fall again from 28% to 18% and real interest rates are expected
to decline slightly. The trade balance is expected to worsen in 1997 but should
remain in surplus. The current account balance will remain in negative territory
but should be easily financed. The peso should weaken in line with inflation for
1997. GDP growth should be similar to that registered in 1996. Political risk
should increase throughout the year as the PRI may lose control of Congress and
will probably lose the mayoral race in Mexico City. Despite the rising political
risk, macroeconomic policy remains very sound and opposition victories by the
PAN will mean more of the same in economic policy terms.
The market continues to look attractive on a valuation basis after a weak fourth
quarter highlighted by underperformance in some of the large cap names. This
will be balanced by a continued weak consumer recovery and uncertainty about
accounting changes in the banking sector and competition in the
telecommunications sector. Under this scenario the Fund is emphasizing the food
and beverage, cement and media sectors.
PERU
Unexpectedly weak economic data exacerbated by a high profile guerrilla
incident led the Peruvian market to experience a sharp correction in the fourth
quarter and to end the year as one of the poorest performing in the region. The
government-induced recession engineered at the end of 1995 to halt a mounting
current account problem extended longer than anticipated and inflation proved
difficult to tackle in 1996, accumulating to a higher figure than in 1995. The
Fund reduced its holdings in the country during the third and fourth quarters,
though anticipates a brighter outlook for the economy and market in 1997.
VENEZUELA
The Venezuelan market was the star performer in Latin America during 1996,
following the country's dramatic shift to free-market economic policies. The
AGENDA VENEZUELA, a plan launched in April, eliminated price and exchange
controls, reactivated the privatization program and vowed to address the
critical inflation and fiscal problems. The strength in the price of oil,
Venezuela's mainstay, along with surprisingly healthy tax collections
contributed to an unexpected
4
<PAGE>
primary surplus of roughly 0.9% for 1996. The fourth quarter saw the successful
execution of key asset sales by the public sector in the telecommunications and
banking sectors, though marginally disappointed on the inflation front, which
remained sticky at around the 3% per month level. The Fund maintained an
overweight in the country throughout the quarter, emphasizing utility companies,
and looks to a 1997 where recovery of the domestic economy, further progress on
inflation and other reform, and the real appreciation of the exchange rate
should benefit stocks.
Overall, we are positive on 1997. GNP growth should be higher and inflation
should be lower throughout the region. Valuations are among the cheapest in the
world. Finally, we expect strong earnings growth and a return of capital to the
region.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Robert L. Meyer
PORTFOLIO MANAGER
[SIGNATURE]
Andy Skov
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
MORGAN STANLEY GROUP INC., THE DIRECT PARENT COMPANY OF THE FUND'S INVESTMENT
ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., RECENTLY ANNOUNCED ITS INTENTION
TO MERGE WITH DEAN WITTER, DISCOVER & CO. TO FORM MORGAN STANLEY, DEAN WITTER,
DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE TRANSACTION WILL CLOSE IN
MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT INC. WILL BE A SUBSIDIARY
OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
5
<PAGE>
The Latin American Discovery Fund, Inc.
Investment Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
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>
ONE YEAR 38.50% 38.50% 47.19% 47.19% 21.96% 21.96%
SINCE INCEPTION* 60.84+ 11.07+ 90.05+ 15.24+ 51.19 9.56
</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>
YEAR ENDED DECEMBER 31:
1992* 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Net Asset Value Per Share $15.23 $23.31 $17.16 $10.98 $14.77
Market Value Per Share $13.25 $27.13 $18.25 $9.88 $12.50
Premium/(Discount) -13.0% 16.4% 6.4% -10.0% -15.4%
Income Dividends - - $0.00# - $0.16
Capital Gains Distributions - - $5.74 $0.45 $1.14
Fund Total Return (2) 8.01% 65.36%+ -0.14% -27.61%+ 47.19%
Index Total Return (1)(3) -2.26% 52.29% -3.69% -13.53% 21.96%
</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. 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.
# Amount is less than $0.01 per share.
+ This return excludes the effect of dilution in connection with the Rights
Offering.
6
<PAGE>
The Latin American Discovery Fund, Inc.
Portfolio Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Equity Securities 95.8%
Short-Term Investments 4.2%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Banking 11.3%
Beverages & Tobacco 9.9%
Broadcasting & Publishing 5.1%
Building Materials & Components 3.3%
Energy Sources 4.4%
Merchandising 9.5%
Metals - Steel 4.5%
Multi-Industry 3.2%
Telecommunications 26.1%
Utilities - Electrical & Gas 16.5%
Other 6.2%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Brazil 43.7%
Mexico 30.4%
Argentina 12.0%
Venezuela 5.3%
Colombia 4.9%
Chile 4.3%
Peru 1.3%
Other -1.9%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
-----------------
<C> <S> <C>
1. Telebras 9.8%
2. Eletrobras 8.1
3. Telefonica Argentina ADR 5.9
4. CANTV ADR 3.7
5. Televisa CPO GDR 3.6
<CAPTION>
PERCENT OF
NET ASSETS
-----------------
<C> <S> <C>
6. FEMSA 'B' 3.6%
7. Cemex 3.3
8. Lojas Renner 3.1
9. Banco de Colombia 3.0
10. Petrobras 2.9
---
47.0%
---
---
</TABLE>
- --------------------------------------------------------------------------------
*Excludes short-term investments.
7
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
COMMON STOCKS (101.5%)
(Unless otherwise noted)
- --------------------------------------------------
- ----------
ARGENTINA (12.0%)
BANKING
Banco Del Suquia 518,938 U.S.$ 986
+Banco de Galicia ADR 83,070 2,015
--------------
3,001
--------------
BEVERAGES & TOBACCO
Quilmes 61,960 496
--------------
ENERGY SOURCES
YPF ADR 107,920 2,725
--------------
METALS -- STEEL
+Siderar 'A' 615,541 1,773
Siderar ADR 38,834 912
--------------
2,685
--------------
TELECOMMUNICATIONS
*Argentine Cellular Communications 454,000 4
Telecom Argentina ADR 38,332 1,548
Telefonica Argentina ADR 389,490 10,078
--------------
11,630
--------------
20,537
--------------
- ---------------------------------------------------------
- ------------
BRAZIL (43.7%)
BANKING
DOUBLE ANGLE BRACKETBanco Bradesco
(Preferred) 350,916,608 2,543
*DOUBLE ANGLE BRACKET+Banco Nacional
(Preferred) 95,420,000 4
DOUBLE ANGLE BRACKETItaubanco
(Preferred) 7,391,100 3,201
--------------
5,748
--------------
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
BROADCASTING & PUBLISHING
+Multicanal Participaccoes ADR 139,710 1,790
--------------
ENERGY SOURCES
DOUBLE ANGLE BRACKETPetrobras
(Preferred) 30,748,000 4,897
--------------
MERCHANDISING
+Bompreco GDR 54,650 977
DOUBLE ANGLE BRACKET+Casa Anglo
(Preferred) 17,620,000 534
DOUBLE ANGLE BRACKET+Globex
(Preferred) 3,160 51
DOUBLE ANGLE BRACKETLojas Americanas
(Preferred) 12,434,000 164
DOUBLE ANGLE BRACKET+Lojas Arapua
(Preferred) 51,530,000 952
DOUBLE ANGLE BRACKETLojas Renner
(Preferred) 115,264,000 5,325
#Pao de Acucar ADR 35,908 626
Pao de Acucar GDR 21,515 375
--------------
9,004
--------------
METALS -- NON-FERROUS
DOUBLE ANGLE BRACKETCVRD (Preferred) 99,508 1,915
--------------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
TELECOMMUNICATIONS
DOUBLE ANGLE BRACKET+CRT (Preferred) 5,262,700 U.S.$ 4,047
Telebras 97,838,000 7,015
DOUBLE ANGLE BRACKETTelebras
(Preferred) 67,222,740 5,175
DOUBLE ANGLE BRACKETTelebras
(Preferred) ADR 60,675 4,642
Telesp 4,067,256 879
DOUBLE ANGLE BRACKETTelesp (Preferred) 4,720,000 1,022
--------------
22,780
--------------
TEXTILES & APPAREL
DOUBLE ANGLE BRACKETCoteminas
(Preferred) 8,055,000 2,571
--------------
UTILITIES -- ELECTRICAL & GAS
#+Celesc (Preferred) GDS 10,955 991
Cemig 83,312,000 2,838
#Cemig ADR 21,310 726
Copel 22,847,000 242
**+CPFL (Rights) 198,579 1
DOUBLE ANGLE BRACKET+CPFL (Preferred) 31,563,000 2,883
Eletrobras ADR 46,820 834
DOUBLE ANGLE BRACKETEletrobras
(Preferred) ADR 38,230 710
Eletrobras 'B' 28,124,000 10,069
DOUBLE ANGLE BRACKETEletrobras 'B'
(Preferred) 6,251,000 2,322
Light 1,748,000 621
*+Lightpar 16,725,000 4,056
--------------
26,293
--------------
74,998
--------------
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
- ---------------------------------------------------------
- ------------
CHILE (3.9%)
BEVERAGES & TOBACCO
CCU ADR 200,660 3,236
--------------
INVESTMENT COMPANY
Citicorp Chile Financiero 4,339 78
--------------
MERCHANDISING
Santa Isabel ADR 143,505 3,247
--------------
6,561
--------------
- ---------------------------------------------------------
- ------------
COLOMBIA (4.9%)
BANKING
Banco de Colombia 12,307,104 5,076
--------------
BEVERAGES & TOBACCO
Bavaria 808,471 3,294
--------------
MULTI-INDUSTRY
Corfivalle 2 --
--------------
8,370
--------------
- ---------------------------------------------------------
- ------------
MEXICO (30.4%)
BANKING
Banacci 'B' 977,860 2,061
Banacci 'L' 645,651 1,225
#+Bancomer 'B' ADR 286,441 2,327
--------------
5,613
--------------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
MEXICO (CONTINUED)
BEVERAGES & TOBACCO
Coke-FEMSA ADR 130,500 U.S.$ 3,768
FEMSA 'B' 1,801,220 6,168
--------------
9,936
--------------
BROADCASTING & PUBLISHING
+Radio Centro ADR 119,425 821
+Televisa CPO GDR 241,575 6,190
--------------
7,011
--------------
BUILDING MATERIALS & COMPONENTS
Cemex CPO 1,087,362 3,889
Cemex CPO ADR 97,517 700
Cemex 'B' 254,305 990
--------------
5,579
--------------
CONSTRUCTION & HOUSING
+ICA ADR 129,920 1,900
--------------
FINANCIAL SERVICES
+Banorte 'B' 913,940 904
--------------
FOOD & HOUSEHOLD PRODUCTS
+Gruma 'B' 365,440 2,225
Maseca 'B' 1,616,290 2,042
--------------
4,267
--------------
MERCHANDISING
+Cifra 'C' 273,880 335
+Comerci ADR 55,650 995
Grupo Casa Autrey ADR 106,175 2,070
+Sears de Mexico 'B1' 373,650 640
--------------
4,040
--------------
METALS -- STEEL
+Industrias Campo Hermanos 241,240 745
+Tamsa ADR 272,325 4,323
--------------
5,068
--------------
MULTI-INDUSTRY
+Desc ADR 53,435 1,175
Carso 'A1' 623,690 3,283
Carso 'A1' ADR 16,390 172
--------------
4,630
--------------
RECREATION, OTHER CONSUMER GOODS
+Interamericana 572,740 1,544
Mexicano de Videos 'B' ADR 40,000 15
--------------
1,559
--------------
TELECOMMUNICATIONS
Telmex 'L' ADR 51,640 1,704
--------------
52,211
--------------
- ---------------------------------------------------------
- ------------
PERU (1.3%)
TELECOMMUNICATIONS
Telefonica del Peru ADR 77,650 1,466
Telefonica del Peru 'B' 428,190 797
--------------
2,263
--------------
- ---------------------------------------------------------
- ------------
VENEZUELA (5.3%)
MULTI-INDUSTRY
+Sivensa ADR 217,210 816
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
TELECOMMUNICATIONS
+CANTV ADR 226,670 U.S.$ 6,375
--------------
UTILITIES -- ELECTRICAL & GAS
Electricidad de Caracas 1,889,021 1,916
--------------
9,107
--------------
- ---------------------------------------------------------
- ------------
TOTAL COMMON STOCKS
(Cost U.S. $161,947) 174,047
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
SHORT-TERM INVESTMENTS (3.0%)
- ---------------------------------------------------------
- ------------
CHILE (0.4%)
- ---------------------------------------------------------
- ------------
TIME DEPOSIT
Pacto Citicorp A.V. 0.96%, 1/8/97 CLP 292,174 690
--------------
- ---------------------------------------------------------
- ------------
UNITED STATES (2.6%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 5.95%, dated
12/31/96, due 1/2/97, to be
repurchased at U.S. $4,543,
collateralized by U.S. $4,340 United
States Treasury Bonds, 7.25%, due
5/15/16, valued at U.S. $4,628 U.S.$ 4,541 4,541
--------------
- ---------------------------------------------------------
- ------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S. $5,232) 5,231
--------------
- ---------------------------------------------------------
- ------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.4%)
Argentine Peso ARP 2 2
Chilean Peso CLP 185 --
Mexican Peso MXP 10,724 1,360
Peruvian New Sol PSS 26 10
Venezuelan Bolivar VEB 486,679 1,022
--------------
(Cost U.S. $2,404) 2,394
--------------
- ---------------------------------------------------------
- ------------
TOTAL INVESTMENTS (105.9%)
(Cost U.S. $169,583) 181,672
--------------
- ---------------------------------------------------------
- ------------
<CAPTION>
AMOUNT AMOUNT
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
OTHER ASSETS (4.7%)
Receivable for Investments Sold U.S.$ 7,477
Dividends Receivable 561
Deferred Organization Costs 32
Interest Receivable 1
Other Assets 39 8,110
--------------- --------------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
LIABILITIES (-10.6%)
Deferred Chilean Taxes U.S.$ (18)
Payable for:
Dividends Declared U.S.$ (15,071)
Investments Purchased (1,714)
Chilean Taxes (626)
Bank Overdraft (332)
Investment Advisory Fees (166)
Custodian Fees (80)
Professional Fees (70)
Shareholder Reporting Expenses (62)
Administrative Fees (31)
Directors' Fees and Expenses (24)
Net Unrealized Loss on Forward Foreign
Currency Exchange Contracts (2) (18,178)
--------------- --------------
- ---------------------------------------------------------
- ------------
NET ASSETS (100%)
Applicable to 11,617,984 issued and outstanding U.S.
$.01 par value shares (100,000,000 shares authorized) U.S.$ 171,586
--------------
--------------
- ---------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE U.S.$ 14.77
--------------
--------------
- ---------------------------------------------------------
- ------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
Common Stock U.S.$ 116
Capital Surplus 152,705
Accumulated Net Investment Loss (680)
Accumulated Net Realized Gain 7,385
Unrealized Appreciation on Investments and Foreign
Currency Translations (net of accrued foreign tax of
U.S.$20 on unrealized appreciation) 12,060
- ---------------------------------------------------------
- ------------
TOTAL NET ASSETS U.S.$ 171,586
--------------
--------------
- ---------------------------------------------------------
- ------------
</TABLE>
+ -- Non-income producing.
* -- Security valued at fair value -- see note A-1 to financial statements.
** -- Security valued at fair value as determined based on the market value of
the underlying security less subscription costs.
DOUBLE ANGLE BRACKET -- Non-voting stock.
# -- 144A Security -- certain conditions for public sale may exist.
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
- ---------------------------------------------------------
- ------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996 EXCHANGE RATES:
<S> <C> <C>
- ----------------------------------------------------
ARP Argentine Peso 1.000 = U.S. $1.00
BRL Brazilian Real 1.039 = U.S. $1.00
CLP Chilean Peso 424.350 = U.S. $1.00
COP Colombian Peso 1,006.200 = U.S. $1.00
MXP Mexican Peso 7.885 = U.S. $1.00
PSS Peruvian New Sol 2.612 = U.S. $1.00
Venezuelan
VEB Bolivar 476.255 = U.S. $1.00
- ----------------------------------------------------
- ------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT
INFORMATION:
Under the terms of forward foreign currency
exchange contracts open at December 31, 1996,
the Fund is obligated to deliver foreign
currency in exchange for U.S. dollars as
indicated below:
</TABLE>
<TABLE>
<CAPTION>
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR LOSS
(000) (000) DATE (000) (000)
- ----------- --------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
BRL 850 $ 818 1/2/97 $ 818 $ --
VEB 486,681 1,022 1/2/97 1,020 (2)
--------- ------ ---
$ 1,840 $ 1,838 $ (2)
--------- ------ ---
--------- ------ ---
- ---------------------------------------------------------
- ------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
<S> <C> <C>
- ---------------------------------------------------------------
- ------------
Banking U.S.$ 19,438 11.3%
Beverages & Tobacco 16,962 9.9
Broadcasting & Publishing 8,801 5.1
Building Materials & Components 5,579 3.3
Construction & Housing 1,900 1.1
Energy Sources 7,622 4.4
Financial Services 904 0.5
Food & Household Products 4,267 2.5
Merchandising 16,291 9.5
Metals -- Non-Ferrous 1,915 1.1
Metals -- Steel 7,753 4.5
Multi-Industry 5,446 3.2
Recreation, Other Consumer Goods 1,559 0.9
Telecommunications 44,752 26.1
Textiles & Apparel 2,571 1.5
Utilities -- Electrical & Gas 28,209 16.5
Other 7,703 4.5
------------ -------
U.S.$181,672 105.9%
------------ -------
------------ -------
- ---------------------------------------------------------
- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
STATEMENT OF OPERATIONS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends............................................................................... U.S.$4,491
Interest................................................................................ 782
Less: Foreign Taxes Withheld............................................................ (214)
- ---------------------------------------------------------------------------------------------------------------
Total Income.......................................................................... 5,059
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees................................................................ 1,899
Custodian Fees.......................................................................... 280
U.S. Administrative Fees................................................................ 210
Professional Fees....................................................................... 124
Shareholder Reporting Expenses.......................................................... 99
Brazilian Administrative Fees........................................................... 89
Amortization of Organization Costs...................................................... 63
Annual Meeting and Proxy Expense........................................................ 34
Directors' Fees and Expenses............................................................ 29
Colombian Administrative Fees........................................................... 25
Chilean Administrative Fees............................................................. 23
Other Expenses.......................................................................... 125
- ---------------------------------------------------------------------------------------------------------------
Total Expenses........................................................................ 3,000
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income............................................................. 2,059
- ---------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities................................................................... 39,843
Foreign Currency Transactions........................................................... (252)
- ---------------------------------------------------------------------------------------------------------------
Net Realized Gain................................................................. 39,591
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments............................................................. 17,366
Appreciation on Foreign Currency Translations........................................... 21
- ---------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation.................................... 17,387
- ---------------------------------------------------------------------------------------------------------------
Total Net Realized Gain and Change in Unrealized Appreciation/Depreciation.................. 56,978
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... U.S.$59,037
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income............................................... U.S.$ 2,059 U.S.$ 346
Net Realized Gain (Loss)............................................ 39,591 (20,530)
Change in Unrealized Appreciation/Depreciation...................... 17,387 (19,819)
- ---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations..... 59,037 (40,003)
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............................................... (1,816) --
Net Realized Gain................................................... (13,255) (3,645)
In Excess of Net Realized Gain...................................... -- (119)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions................................................. (15,071) (3,764)
- ---------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Common Stock Issued through Rights Offering (3,100,000 shares)...... -- 27,075
Reinvestment of Distributions (632,902 shares)...................... -- 9,495
Offering Costs on Rights Offering................................... 4 (460)
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Net Increase from Capital Share Transactions........................ 4 36,110
- ---------------------------------------------------------------------------------------------------------------
Total Increase (Decrease)........................................... 43,970 (7,657)
Net Assets:
Beginning of Year................................................... 127,616 135,273
- ---------------------------------------------------------------------------------------------------------------
End of Year (including accumulated net investment loss of U.S. $680
and U.S.$678, respectively)........................................ U.S.$171,586 U.S.$127,616
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
SELECTED PER SHARE DATA AND RATIOS: 1996 1995
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................................ U.S.$ 10.98 U.S.$ 17.16
- -------------------------------------------------------------------------------------------------------------------
Offering Costs.................................................................. -- (0.07)
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss).................................................... 0.18 0.05
Net Realized and Unrealized Gain (Loss) on Investments.......................... 4.91 (4.63)
- -------------------------------------------------------------------------------------------------------------------
Total from Investment Operations............................................ 5.09 (4.58)
- -------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income....................................................... (0.16) --
Net Realized Gains.......................................................... (1.14) (0.44)
In Excess of Net Realized Gains............................................. -- (0.01)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions......................................................... (1.30) (0.45)
- -------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value from Capital Share Transactions.......... -- (1.08)++
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................................. U.S.$ 14.77 U.S.$ 10.98
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD........................................... U.S.$ 12.50 U.S.$ 9.88
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value................................................................ 38.50% (38.78)%+++
Net Asset Value (1)......................................................... 47.19% (27.61)%+++
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)........................................... U.S.$ 171,586 U.S.$ 127,616
- -------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets......................................... 1.81% 2.17%
Ratio of Net Investment Income (Loss) to Average Net Assets..................... 1.24% 0.31%
Portfolio Turnover Rate......................................................... 186% 122%
Average Commission Rate (2)..................................................... $0.0004 N/A
- -------------------------------------------------------------------------------------------------------------------
*Commencement of operations
**Annualized
#Amount is less than U.S.$0.01 per share.
+Increase due to shares issued from reinvestment of distributions.
++Decrease due to shares issued through Rights Offering.
+++This return excludes the effect of dilution in connection with the Rights Offering.
(1)Total investment return based on net asset value per share reflects the effects of changes in net asset value
on the performance of the Fund during each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a shareholder's investment in the
Fund based on market value due to differences between the market price of the stock and the net asset value of
the Fund.
(2)For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose the average
commission rate per share it paid for portfolio trades on which commissions were charged. For the year ended
December 31, 1996, the average commission rate paid for trades on which commissions were charged was 0.31% of
the trade amount.
<CAPTION>
SELECTED PER SHARE DATA AND RATIOS: 1994 1993
<S> <C>
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................................ U.S.$ 23.31 U.S.$ 15.23
- --------------------------------------------------------------------------------
Offering Costs.................................................................. -- (0.06)
- --------------------------------------------------------------------------------
Net Investment Income (Loss).................................................... (0.18) 0.04
Net Realized and Unrealized Gain (Loss) on Investments.......................... (0.25) 9.84
- --------------------------------------------------------------------------------
Total from Investment Operations............................................ (0.43) 9.88
- --------------------------------------------------------------------------------
Distributions:
Net Investment Income....................................................... (0.00)# --
Net Realized Gains.......................................................... (5.74) --
In Excess of Net Realized Gains............................................. -- --
- --------------------------------------------------------------------------------
Total Distributions......................................................... (5.74) --
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value from Capital Share Transactions.......... 0.02+ (1.74) ++
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................................. U.S.$ 17.16 U.S.$ 23.31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD........................................... U.S.$ 18.25 U.S.$ 27.13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value................................................................ (8.75)% 121.17%+++
Net Asset Value (1)......................................................... (0.14)% 65.36%+++
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)........................................... U.S.$ 135,273 U.S.$ 180,348
- --------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets......................................... 2.15% 2.23%
Ratio of Net Investment Income (Loss) to Average Net Assets..................... (0.77)% 0.22%
Portfolio Turnover Rate......................................................... 70% 56%
Average Commission Rate (2)..................................................... N/A N/A
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized
#Amount is less than U.S.$0.01 per share.
+Increase due to shares issued from reinvestment of distributions.
++Decrease due to shares issued through Rights Offering.
+++This return excludes the effect of dilution in connection with the Rights Off
(1)Total investment return based on net asset value per share reflects the effe
on the performance of the Fund during each period, and assumes dividends and
reinvested. These percentages are not an indication of the performance of a
Fund based on market value due to differences between the market price of th
the Fund.
(2)For fiscal years beginning on or after September 1, 1995, the Fund is requir
commission rate per share it paid for portfolio trades on which commissions
December 31, 1996, the average commission rate paid for trades on which comm
the trade amount.
<CAPTION>
PERIOD FROM
JUNE 23, 1992*
TO DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS: 1992
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................................ U.S.$ 14.10
- --------------------------------------------------------------------------------
Offering Costs.................................................................. (0.13)
- --------------------------------------------------------------------------------
Net Investment Income (Loss).................................................... (0.06)
Net Realized and Unrealized Gain (Loss) on Investments.......................... 1.32
- --------------------------------------------------------------------------------
Total from Investment Operations............................................ 1.26
- --------------------------------------------------------------------------------
Distributions:
Net Investment Income....................................................... --
Net Realized Gains.......................................................... --
In Excess of Net Realized Gains............................................. --
- --------------------------------------------------------------------------------
Total Distributions......................................................... --
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value from Capital Share Transactions.......... --
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................................. U.S.$ 15.23
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD........................................... U.S.$ 13.25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value................................................................ (8.30)%
Net Asset Value (1)......................................................... 8.01%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)........................................... U.S.$ 87,685
- --------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets......................................... 2.73%**
Ratio of Net Investment Income (Loss) to Average Net Assets..................... (1.02)%**
Portfolio Turnover Rate......................................................... 8%
Average Commission Rate (2)..................................................... N/A
- --------------------------------------------------------------------------------
*Commencement of operations
**Annualized
#Amount is less than U.S.$0.01 per share.
+Increase due to shares issued from reinvestment of distributions.
++Decrease due to shares issued through Rights Offering.
+++This return excludes the effect of dilution in connection with the Rights Off
(1)Total investment return based on net asset value per share reflects the effe
on the performance of the Fund during each period, and assumes dividends and
reinvested. These percentages are not an indication of the performance of a
Fund based on market value due to differences between the market price of th
the Fund.
(2)For fiscal years beginning on or after September 1, 1995, the Fund is requir
commission rate per share it paid for portfolio trades on which commissions
December 31, 1996, the average commission rate paid for trades on which comm
the trade amount.
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- ------------
The Latin American Discovery Fund, Inc. (the "Fund") was incorporated on
November 12, 1991 and is registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is long-term capital appreciation through
investments primarily in equity securities.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all
listed securities, including purchased options, for which market quotations
are readily available are valued at the last sales price on the valuation
date, or if there was no sale on such date, at the mean between the current
bid and asked prices. Securities which are traded over-the-counter are
valued at the average of the mean of current bid and asked prices obtained
from reputable brokers. Short-term securities which mature in 60 days or
less are valued at amortized cost. All other securities and assets for which
market values are not readily available (including investments which are
subject to limitations as to their sale) are valued at fair value as
determined in good faith by the Board of Directors ("the Board"), although
the actual calculations may be done by others.
2. TAXES: It is the Fund's intention to continue to
qualify as a regulated investment company and distribute all of its taxable
income. Accordingly, no provision for U.S. Federal income taxes is required
in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income and/or capital gains earned or
repatriated. Taxes are accrued and applied to net investment income, net
realized gains and net unrealized appreciation as such income and/or gains
are earned.
3. REPURCHASE AGREEMENTS: In connection with
transactions in repurchase agreements, a bank as custodian for the Fund takes
possession of the underlying securities, with a market value at least equal
to the amount of the repurchase transaction, including principal and accrued
interest. To the extent that any repurchase transaction exceeds one business
day, the value of the collateral is marked-to-market on a daily basis to
determine the adequacy of the collateral. In the event of default on the
obligation to repurchase, the Fund has the right to liquidate the collateral
and apply the proceeds in satisfaction of the obligation. In the event of
default or bankruptcy by the counter-party to the agreement, realization
and/or retention of the collateral or proceeds may be subject to legal
proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and
records of the Fund are maintained in U.S. dollars. Foreign currency amounts
are translated into U.S. dollars at the mean of the bid and asked prices of
such currencies against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of forward foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of investment
income and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent amounts actually received or paid. Net unrealized
currency gains (losses) from valuing foreign currency denominated assets and
liabilities at period end exchange rates are reflected as a component of
unrealized appreciation (depreciation) in the Statement of Net Assets. The
change in unrealized currency gains (losses) for the period is reflected in
the Statement of Operations.
5. FORWARD FOREIGN CURRENCY EXCHANGE
CONTRACTS: The Fund may enter into forward foreign
13
<PAGE>
currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign exchange rates. A
forward foreign currency exchange contract is an agreement between two
parties to buy or sell currency at a set price on a future date. The market
value of the contract will fluctuate with changes in currency exchange
rates. The contract is marked-to-market daily and the change in market value
is recorded by the Fund as unrealized gain or loss. The Fund records
realized gains or losses when the contract is closed equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed. Risk may arise upon entering into these contracts
from the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
6. PURCHASED OPTIONS: The Fund may purchase call
and put options on listed securities or securities traded over the counter.
The Fund may purchase call options on securities to protect against an
increase in the price of the underlying security. The Fund may purchase put
options on securities to protect against a decline in the value of the
underlying security. Possible losses from purchased options cannot exceed
the total amount invested. Realized gains or losses on purchased options are
included with net gain (loss) on securities sold in the financial
statements.
7. OTHER: Security transactions are accounted for on
the date the securities are purchased or sold. Realized gains and losses on
the sale of investment securities are determined on the specific identified
cost basis. Interest income is recognized on the accrual basis. Dividend
income is recorded on the ex-dividend date (except certain dividends which
may be recorded as soon as the Fund is informed of such dividend) net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Distributions to shareholders are recorded on the ex-date.
The amount and character of income and capital gain distributions to be paid
are determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for foreign currency
transactions, foreign taxes on net realized gains and gains on certain
securities of corporations designated as "passive foreign investment
companies". These differences are also primarily due to differing book and
tax treatments of the timing of the recognition of losses on securities and
the timing of the deductibility of certain foreign taxes.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net investment
income (loss), accumulated net realized gain (loss) and capital surplus.
Adjustments for permanent book-tax differences, if any, are not reflected in
ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "Adviser") provides investment
advisory services to the Fund under the terms of an Investment Advisory
Agreement (the "Agreement"). Under the Agreement, the Adviser is paid a fee
computed weekly and payable monthly at the annual rate of 1.15% of the Fund's
average weekly net assets.
C. The Chase Manhattan Bank, through its affiliate Chase Global Funds Services
Company (the "Administrator"), provides administrative services to the Fund
under an Administration Agreement. Under the Administration Agreement, the
Administator is paid a fee computed weekly and payable monthly at an annual rate
of .08% of the Fund's average weekly net assets, plus $65,000 per annum. In
addition, the Fund is charged certain out-of-pocket expenses by the
Administrator. The Chase Manhattan Bank acts as custodian for the Fund's assets
held in the United States.
D. Unibanco-Uniao de Bancos Brasileiros S.A. (the "Brazilian Administrator")
provides administrative services to the Fund under the terms of an
Administration Agreement and is paid a fee computed weekly and payable monthly
at an annual rate of .125% of the Fund's average weekly net assets invested in
Brazil. Bice Chileconsult Agente de Valores S.A. (the "Chilean Administrator")
provides administrative services to the Fund under the terms of a separate
Administration Agreement and is paid an annual fee, computed weekly and payable
monthly, equal to the greater of .25% of the Fund's average weekly net assets
invested in Chile or $20,000. Cititrust S.A. (the "Colombian Administrator")
provides administrative services to the Fund and is paid a fee computed weekly
and payable monthly at an annual rate of .25% of the Fund's average weekly net
assets invested in Colombia.
E. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. Custody fees are
14
<PAGE>
payable monthly based on assets under custody, investment purchase and sales
activity, plus an account maintenance fee, plus reimbursement for certain
out-of-pocket expenses. Investment transaction fees vary by country and security
type. During the year ended December 31, 1996, the Fund incurred custodian fees
of $275,000 with the International Custodian, of which $79,000 was payable to
the International Custodian at December 31, 1996. In addition, for the year
ended December 31, 1996, the Fund has incurred interest expense of $48,000, on
balances with the International Custodian.
F. During the year ended December 31, 1996, the Fund made purchases and sales
totaling approximately $299,694,000 and $309,676,000, respectively, of
investment securities other than long-term U.S. Government securities and
short-term investments. There were no purchases or sales of long-term U.S.
Government securities. During the year ended December 31, 1996, the Fund placed
a portion of its portfolio transactions with affiliated broker/ dealers.
Accordingly, the Fund incurred brokerage commissions of $10,000 with Morgan
Stanley & Co. Incorporated, an affiliate of the U.S. Adviser, for the year ended
December 31, 1996.
At December 31, 1996, the U.S. Federal income tax cost basis of securities was
approximately $167,929,000 and accordingly, net unrealized appreciation for U.S.
Federal income tax purposes was $11,349,000, of which $21,621,000 related to
appreciated securities and $10,272,000 related to depreciated securities. During
the year ended December 31, 1996, the Fund utilized capital loss carryforwards
for U.S. Federal income tax purposes of approximately $17,727,000. For the year
ended December 31, 1996, the Fund expects to defer to January 1, 1997 for U.S.
Federal income tax purposes, post-October currency losses of $29,000.
G. In connection with its organization, the Fund incurred $308,000 of
organization costs. The organization costs are being amortized on a
straight-line basis over a five-year period beginning June 23, 1992, the date
the Fund commenced operations.
H. The Fund issued to its shareholders of record as of the close of business on
September 12, 1995 transferable rights to subscribe for up to an aggregate of
3,100,000 shares of Common Stock of the Fund at a rate of one share of Common
Stock for three Rights held at the subscription price of $9.00 per share. During
September and October 1995, the Fund issued, in total, 3,100,000 shares of
Common Stock on exercise of such Rights. Rights offering costs of $460,000 were
charged directly against the proceeds of the Offering. The Fund was advised that
Morgan Stanley & Co. Incorporated received commissions of $825,000 and
reimbursement of its expenses of $100,000 in connection with its participation
in the Rights Offering.
I. A significant portion of the Fund's net assets consist of securities
denominated in Latin American currencies. Changes in currency exchange rates
will affect the value of and investment income from such securities. Latin
American securities are often subject to greater price volatility, limited
capitalization and liquidity, and higher rates of inflation than securities of
companies based in the United States. In addition, Latin American securities may
be subject to substantial governmental involvement in the economy and greater
social, economic and political uncertainty.
J. Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage of
their total fees earned as a Director of the Fund. These deferred portions are
treated, based on an election by the Director, as if they were either invested
in the Fund's shares or invested in U.S. Treasury Bills, as defined under the
Plan. The deferred fees payable under the Plan, at December 31, 1996, totaled
$16,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
K. During December 1996, the Board declared a distribution of $0.16 per share,
derived from net investment income and $1.14 per share, derived from net
realized gains, payable on January 9, 1997, to shareholders of record on
December 31, 1996.
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FEDERAL TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1996, the Fund designates $8,266,000 as
long-term capital gain and expects to pass through to its shareholders foreign
tax credits of approximately $379,000. In addition, for the year ended December
31, 1996, gross income derived from sources within foreign countries amounted to
$5,226,000.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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To the Shareholders and Board of Directors of
The Latin American Discovery Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The Latin American Discovery Fund, Inc. (the "Fund") at December 31, 1996, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the four years in the period then ended and for the period June 23,
1992 (commencement of operations) through December 31, 1992, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996, by
correspondence with the custodians and brokers, and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1997
16
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder will be deemed to have elected, unless Boston Equiserve (the
"Plan Agent") is otherwise instructed by the shareholder in writing, to have all
distributions automatically reinvested in Fund shares. Participants in the Plan
have the option of making additional voluntary cash payments to the Plan Agent,
annually, in any amount from $100 to $3,000, for investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
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 participating in the
Plan.
Shareholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and shareholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
The Latin American Discovery Fund, Inc.
Boston Equiserve
Dividend Reinvestment and Cash Purchase Plan
P.O. Box 1681
Boston, MA 02105-1681
1-800-442-2001
17
