<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
--------------------------------------------------
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
Barton M. Biggs James W. Grisham
CHAIRMAN OF THE BOARD VICE PRESIDENT
OF DIRECTORS Michael F. Klein
Warren J. Olsen VICE PRESIDENT
PRESIDENT AND DIRECTOR Harold J. Schaaff, Jr.
Peter J. Chase VICE PRESIDENT
DIRECTOR Joseph P. Stadler
John W. Croghan VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
David B. Gill SECRETARY
DIRECTOR James R. Rooney
Graham E. Jones TREASURER
DIRECTOR Belinda A. Brady
John A. Levin ASSISTANT TREASURER
DIRECTOR
William G. Morton, Jr.
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.
----------
FIRST QUARTER REPORT
MARCH 31, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the three months ended March 31, 1997, The Latin American Discovery Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
16.79% compared with 15.17% for the Morgan Stanley Capital International
Emerging Markets Global Latin America Index (the "Index"). For the one year
ended March 31, 1997, the Fund had a total return, based on net asset value per
share, of 49.21% compared to 33.33% for the Index. For the period since
commencement of operations on June 23, 1992 through March 31, 1997, the Fund's
total return, based on net asset value per share, was 121.96% compared with
74.13% for the Index. On March 31, 1997, the closing price of the Fund's shares
on the New York Stock Exchange was $15 1/8 representing a 12.3% discount to the
Fund's net asset value per share.
ARGENTINA
Argentina was one of the region's laggards, as a strong fourth quarter
performance translated into relatively rich valuations heading into the quarter.
Further, as U.S. interest rate turbulence shook the region in March, this
particularly vulnerable market sold off the most.
Economically, the country is continuing its dramatic investment-led recovery
from the recession of 1995, and we are quite encouraged by the great strides the
economy has made in restructuring itself during the turmoil. An agricultural
boom is underway, investments in mining and infrastructure and energy are
accelerating, and nascent signs of a modest consumer recovery are beginning to
be felt.
BRAZIL
Brazil, once again, was one of the region's top performers. The market's
major catalyst was the first stage approval of President Cardoso's re-election
bill making its way through congress. This is a significant event, as it
increases the likelihood of his being president for another term through the end
of the decade. Further, advances were made in preparing mining giant CVRD for
privatization, expected in April/May of this year, and this further demonstrated
the government's seriousness about market reforms and privatization.
The trade balance continued to worsen, but the market was dominated by positive
events and didn't seem to care about the negative implications of a
deteriorating trade account. We are monitoring this closely, and expect to see
some action on the part of the government to at least slow the deteriorating
trend. Nevertheless, progress being made in the all-important telecommunications
and electric utility sectors is so dramatic that the stock market should
continue to advance in spite of the trade concerns. The government has
demonstrated a remarkable ability to enhance shareholder value in the sectors in
which it has controlling stakes in publicly listed companies, and this has been
the single most important engine propelling the stock market. We see no signs of
this trend abating.
CHILE
Chile posted strong gains for the first time in many quarters. The region
benefited from an oversold position coming into the quarter as well as a
surprisingly early interest cut by the monetary authorities. While valuations
are not terrifically compelling nor earnings growth especially robust, the
market is still being driven by expectations of a further loosening of monetary
policy. Our outlook on the market is the most constructive it has been in years,
and we expect it to continue performing well in the backdrop of a monetary
easing during the next few quarters.
COLOMBIA
Colombia was the region's leader, an event that was driven by the cheapest
valuation profile coming into the quarter and an unexpected tax imposed on fixed
income investment that led to increased investments in equities. The country
continues to be plagued by macro-political travails, as much-maligned President
Samper declared an economic state of emergency that was subsequently challenged
by congress. Nevertheless, there is selected progress being made at the
corporate level in terms of information disclosure and shareholder value
orientation, and we are targeting those opportunities in our portfolio.
MEXICO
Mexico had somewhat of a spotty quarter, as no real sustained trend emerged
within the market. The biggest stock market event/surprise was the reemergence
of telecommunications giant Telmex as
2
<PAGE>
the leading bellwether for the market, advancing roughly 20% on the quarter
amidst the first stage of full-fledged competition in its corporate history. Its
strong showing masked a stock market performance that was in fact weaker than it
appeared. Adverse U.S. interest rate moves caused market jitters later in the
quarter, wiping out prior gains in interest rate-sensitive sectors such as
banking and construction. On the political front, the three leading parties are
gearing up their campaigns for the important congressional and mayoral elections
in mid-summer, and the outlook as of this writing is unclear. While there could
be some market choppiness leading up to the elections, we do not expect material
economic impact from the outcome regardless of who emerges victorious.
PERU
Peru posted a very strong gain for the quarter, after a dismal showing in
the fourth quarter of 1996. While the hostage crisis persists, as of the date of
this letter, but has receded in visibility, the country appears to be gaining
momentum on the economic front. Interest rates are on the decline and the
all-important fishing and mining industries are accelerating.
VENEZUELA
Venezuela was easily the laggard of the region, after posting an
extraordinary gain in 1996. The market was beset by uncertainty over salary
negotiations of public sector employees and private company unions, as well as
by concern that the government might waver in its commitment to following
through on free market reforms begun last year. While we think that the
aforementioned concerns have been a bit overdone, we remain relatively neutral
on the market and will await clearer signals of government behavior before
taking a more constructive posture.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Robert L. Meyer
PORTFOLIO MANAGER
[SIGNATURE]
Andy Skov
PORTFOLIO MANAGER
April 1997
3
<PAGE>
The Latin American Discovery Fund, Inc.
Investment Summary as of March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
-------------------------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
--------------------------- --------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
--------------------------- --------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO
DATE 21.00% -- 16.79% -- 15.17% --
ONE YEAR 42.36 42.36% 49.21 49.21% 33.33 33.33%
SINCE INCEPTION* 94.62+ 14.97+ 121.96+ 18.18+ 74.13 12.32
</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:
TOTAL RETURN
THREE MONTHS ENDED
1992* 1993 1994 1995 1996 MARCH 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share $15.23 $23.31 $17.16 $10.98 $14.77 $17.25
Market Value Per Share $13.25 $27.13 $18.25 $9.88 $12.50 $15.13
Premium/(Discount) -13.0% 16.4% 6.4% -10.0% -15.4% -12.3%
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% 16.79%
Index Total Return (3) -2.26% 52.29% -3.69% -13.53% 21.96% 15.17%
The Latin American Discovery Fund, Inc. (2)
MSCI EMG Latin America Index (3)
</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, including
dividends.
* The Fund commenced operations on June 23, 1992.
# Amount is less than $0.01 per share.
+ This return excludes the effect of the rights issued in connection with the
Rights Offering.
4
<PAGE>
The Latin American Discovery Fund, Inc.
Portfolio Summary as of March 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Equity Securities 98.9%
Short-Term Investments 1.1%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Banking 6.6%
Beverages & Tobacco 14.7%
Broadcasting & Publishing 2.3%
Building Materials & Components 2.0%
Energy Sources 4.4%
Merchandising 7.8%
Metals - Steel 4.8%
Multi-Industry 2.2%
Telecommunications 24.7%
Utilities - Electrical & Gas 20.3%
Other 10.2%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Brazil 44.5%
Mexico 27.9%
Chile 10.9%
Argentina 10.4%
Colombia 3.7%
Venezuela 1.4%
Peru 0.6%
Other 0.6%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
-------------
<C> <S> <C>
1. Telebras 8.2%
2. CRT 7.9
3. Eletrobras 6.8
4. FEMSA 5.8
5. Telmex ADR 5.7
<CAPTION>
PERCENT OF
NET ASSETS
-------------
<C> <S> <C>
6. Cemig 3.9%
7. Lojas Arapua 2.8
8. Petrobras 2.6
9. CCU ADR 2.5
10. Televisa CPO GDR 2.3
---
48.5%
---
---
</TABLE>
5
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
MARCH 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- --------------------------------------------------------
- ------------
COMMON STOCKS (98.8%)
(Unless otherwise noted)
- --------------------------------------------------
- ----------
ARGENTINA (10.4%)
BANKING
Banco del Suquia 482,938 U.S.$ 1,473
--------------
BEVERAGES & TOBACCO
Quilmes (Registered) 61,960 626
Quilmes ADR 42,834 487
--------------
1,113
--------------
ENERGY SOURCES
YPF ADR 138,845 3,679
--------------
FOOD & HOUSEHOLD PRODUCTS
Cresud ADR 109,350 2,050
Disco ADR 21,446 700
--------------
2,750
--------------
METALS -- STEEL
Acindar 1,084,150 2,169
Siderar 615,541 2,130
Siderar ADR 144A 31,274 868
--------------
5,167
--------------
REAL ESTATE
IRSA GDR (Registered) 52,150 1,943
--------------
TELECOMMUNICATIONS
Argentine Cellular Communications 454,000 5
Telecom Argentina ADR 16,372 753
Telefonica Argentina ADR 134,775 3,959
--------------
4,717
--------------
20,842
--------------
- --------------------------------------------------------
- ------------
BRAZIL (44.5%)
APPLIANCES & HOUSEHOLD DURABLES
Brasmotor (Preferred) 3,585,000 1,025
--------------
BANKING
Banco Bradesco (Preferred) 362,099,608 2,991
Banco Nacional (Preferred) 95,420,000 5
Itaubanco (Preferred) 4,606,100 2,383
--------------
5,379
--------------
BEVERAGES & TOBACCO
Brahma (Preferred) 788,000 514
Brahma (Preferred) ADR 35,590 463
Souza Cruz 29,100 243
--------------
1,220
--------------
- --------------------------------------------------------
- ------------
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------
- ------------
<S> <C> <C>
ENERGY SOURCES
Petrobras (Preferred) 26,246,000 U.S.$ 5,216
--------------
MERCHANDISING
Bompreco (Preferred) GDR 144A 39,400 975
Lojas Arapua 20,775 478
Lojas Arapua (Preferred) 214,895,000 5,072
Lojas Renner (Preferred) 79,420,000 4,161
--------------
10,686
--------------
METALS -- NON-FERROUS
CVRD (Preferred) 116,420 2,649
CVRD (Preferred) ADR 1,320 30
--------------
2,679
--------------
TELECOMMUNICATIONS
CRT (Preferred) 'A' 13,628,800 15,826
Telebras 43,339,000 4,369
Telebras (Preferred) 56,940,740 5,892
Telebras (Preferred) ADR 59,465 6,088
--------------
32,175
--------------
TEXTILES & APPAREL
Coteminas (Preferred) 5,346,000 2,140
--------------
UTILITIES -- ELECTRICAL & GAS
Celesc (Preferred) 'B' 309,000 353
Celesc (Preferred) GDR 144A 18,645 2,126
Cemig (Preferred) 158,099,000 6,508
Cemig (Preferred) ADR 32,240 1,333
Copel (Preferred) 'B' 63,800,000 964
CPFL (Preferred) 9,553,969 1,136
Eletrobras 26,195,000 10,832
Eletrobras (Preferred) 'B' 3,696,000 1,591
Eletrobras ADR 46,560 966
Eletrobras (Preferred) 'B' ADR 14,640 314
Lightpar 8,038,000 2,428
--------------
28,551
--------------
89,071
--------------
- --------------------------------------------------------
- ------------
CHILE (10.5%)
BANKING
Banco Santander ADR 59,135 991
Banco Edwards ADR 19,620 412
--------------
1,403
--------------
BEVERAGES & TOBACCO
Andina ADR 37,825 1,404
CCU ADR 250,440 4,946
--------------
6,350
--------------
- --------------------------------------------------------
- ------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------
- ------------
<S> <C> <C>
CHILE (CONTINUED)
MERCHANDISING
Santa Isabel ADR 151,085 U.S.$ 3,909
--------------
UTILITIES -- ELECTRICAL & GAS
Chilectra ADR 48,051 3,038
Chilgener ADR 26,420 680
Endesa ADR 93,240 1,772
Enersis ADR 122,098 3,877
--------------
9,367
--------------
21,029
--------------
- --------------------------------------------------------
- ------------
COLOMBIA (3.5%)
BANKING
Banco de Colombia 7,142,688 2,854
--------------
BEVERAGES & TOBACCO
Bavaria 644,558 4,190
--------------
MULTI-INDUSTRY
Corfivalle 2 --@
--------------
7,044
--------------
- --------------------------------------------------------
- ------------
MEXICO (27.9%)
BANKING
Banacci 'B' 126,990 290
Banacci 'L' 645,651 1,309
Bancomer 'B' ADR 144A 60,178 436
Bancomer 'B' 258,500 92
--------------
2,127
--------------
BEVERAGES & TOBACCO
Coke-FEMSA ADR 51,235 1,844
FEMSA 'B' 2,520,540 11,169
FEMSA ADR 144A 91,830 406
Panamco 59,000 3,164
--------------
16,583
--------------
BROADCASTING & PUBLISHING
Televisa CPO GDR 182,310 4,535
--------------
BUILDING MATERIALS & COMPONENTS
Apasco 152,580 1,036
Cemex 'B' 139,315 563
Cemex CPO 660,062 2,420
--------------
4,019
--------------
CONSTRUCTION & HOUSING
ICA ADR 129,135 2,050
--------------
FINANCIAL SERVICES
Banorte 'B' 1,448,691 1,505
--------------
FOOD & HOUSEHOLD PRODUCTS
Maseca 'B' 693,160 719
--------------
MANUFACTURING
Vitro ADR 119,350 880
--------------
- --------------------------------------------------------
- ------------
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------
- ------------
<S> <C> <C>
MERCHANDISING
Casa Autrey ADR 55,255 U.S.$ 1,022
Sears de Mexico 'B1' 54,200 90
--------------
1,112
--------------
METALS -- STEEL
Hylsamex 'B' GDR 39,480 1,125
Tamsa ADR 194,585 3,332
--------------
4,457
--------------
MULTI-INDUSTRY
Carso 'A1' 572,910 3,364
Desc ADR 39,900 1,047
--------------
4,411
--------------
RECREATION, OTHER CONSUMER GOODS
Interamericana (Cieb) 558,740 2,084
Mexicano de Videos 'B' ADR 40,000 13
--------------
2,097
--------------
TELECOMMUNICATIONS
Telmex ADR 294,310 11,331
--------------
55,826
--------------
- --------------------------------------------------------
- ------------
PERU (0.6%)
TELECOMMUNICATIONS
Tel Peru 'B' ADR 58,040 1,291
--------------
- --------------------------------------------------------
- ------------
VENEZUELA (1.4%)
UTILITIES -- ELECTRICAL & GAS
Electricidad de Caracas 2,550,621 2,765
--------------
- --------------------------------------------------------
- ------------
TOTAL COMMON STOCKS
(Cost U.S. $176,314) 197,868
--------------
- --------------------------------------------------------
- ------------
SHORT-TERM INVESTMENTS (0.9%)
- --------------------------------------------------------
- ------------
CHILE (0.4%)
INVESTMENT COMPANY
Citicorp Chile Financiero 3,888 73
--------------
- --------------------------------------------------------
- ------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- --------------------------------------------------------
- ------------
TIME DEPOSIT
Pacto Citicorp A.V. 1.30%, 4/9/97 CLP 300,339 723
--------------
796
--------------
- --------------------------------------------------------
- ------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- --------------------------------------------------------
- ------------
UNITED STATES (0.5%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 6.00%, dated
3/31/97, due 4/1/97, to be
repurchased at U.S. $1,061,
collateralized by United States
Treasury Bonds, 11.25%, due 2/15/05,
valued at U.S. $1,087 U.S.$ 1,061 U.S.$ 1,061
--------------
- --------------------------------------------------------
- ------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S. $1,854) 1,857
--------------
- --------------------------------------------------------
- ------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.2%)
Argentine Peso ARP 61 61
Chilean Peso CLP 30 --@
Colombian Peso COP 330,755 312
Mexican Peso MXP 90 11
Peruvian New Sol PSS 7 3
Venezuelan Bolivar VEB 5 --@
--------------
(Cost U.S. $387) 387
--------------
- --------------------------------------------------------
- ------------
TOTAL INVESTMENTS (99.9%)
(Cost U.S. $178,555) 200,112
--------------
- --------------------------------------------------------
- ------------
OTHER ASSETS AND LIABILITIES (0.1%)
Other Assets U.S.$ 7,953
Liabilities (7,682) 271
--------------- --------------
- --------------------------------------------------------
- ------------
NET ASSETS (100%)
Applicable to 11,617,984 issued and outstanding U.S.
$0.01 par value shares (100,000,000 shares
authorized) U.S.$ 200,383
--------------
--------------
- --------------------------------------------------------
- ------------
NET ASSET VALUE PER SHARE U.S.$ 17.25
--------------
--------------
- --------------------------------------------------------
- ------------
</TABLE>
@ -- Value is less than U.S. $500.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
8