<PAGE>
- --------------------------------------------------------------------------------
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
THE LATIN AMERICAN DISCOVERY FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs
CHAIRMAN OF THE BOARD
OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
3 Chase MetroTech Center
Brooklyn, New York 11245
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(800) 730-6001
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the six months ended June 30, 1998, The Latin American Discovery Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of -14.19%
compared with -19.88% for the Morgan Stanley Capital International (MSCI)
Emerging Markets Global Latin America Index (the "Index"). For the one year
ended June 30, 1998, and for the period since commencement of operations on June
23, 1992 through June 30, 1998, the Fund's total return, based on net asset
value per share, was -15.27% and 133.31%, respectively, compared with -24.92%
and 59.48%, respectively, for the Index. On June 30, 1998, the closing price of
the Fund's shares on the New York Stock Exchange was $9.50 representing a 11.5%
discount to the net asset value per share.
The recent turmoil in the emerging markets has led to steep declines in all
Latin markets. The largest contributors to the Fund's outperformance relative to
the benchmark were our underweight position in Venezuela and strong stock
selection, specifically in Brazil and Argentina.
The Latin region fell 20.0% during the second quarter driven by returns in
Venezuela (-40.2%), Brazil (-22.0%), and Chile (-21.7%). Peru was the best
performing Latin market, falling 4.7%. Rounding out the region, Argentina fell
17.6%, Colombia declined 9.4%, and Mexico dropped 16.9%. Declining commodity
prices (particularly oil and copper) and political noise surrounding upcoming
presidential elections (Brazil and Venezuela) have negatively affected these
markets.
Weak fiscal fundamentals coupled with an increase in political uncertainty has
led to Brazil's continued descent. Particularly because this is an election
year, we lack confidence that the government will strengthen its fiscal
position. Political jitters were apparent in early June when President Cardoso's
opposition (left-wing party candidate Lula) began to gain popularity. President
Cardoso's drop in the polls largely reflected social malaise resulting from the
mishandling of the drought and famine conditions in the Northeast, fires in the
Amazon forest, growing unemployment and unfortunate statements regarding the
working ethics of those who are eligible to retire. During the second quarter,
we trimmed our Brazilian holdings, bringing us to a more modest overweight
position (+5%). While Brazil offers attractive value and growth opportunities on
a stock level, we are cautious with respect to its widening fiscal deficit and
vulnerable currency. We continue to focus on the telecom sector given its strong
operating earnings growth and privatization potential.
The Mexican equities market faltered due to declining oil prices and a reduction
in capital inflows. Over the past 12 months, the average oil export price for
Mexico has declined nearly 40%. While the oil shock has contributed to a wider
trade deficit, the shock has been particularly detrimental for fiscal
performance as oil represents 32% of Mexico's total revenues. Because of
attractive valuations introduced during the second quarter in selected stocks,
we increased our exposure from a market-neutral posture to a modest overweight
position. In spite of the oil price squeeze, we expect gross domestic product
growth to remain healthy fueled by strong consumer demand. Thus, our focus is
on the consumer-related industries, such as beverages and retailers.
Argentina was dragged down in sympathy with the region and concern about a
widening trade deficit. We increased our Argentine exposure to a modest
underweight position. We are encouraged by Argentina's strong economic activity,
low inflation, increasing international reserves, and improving fiscal deficit.
In Argentina, we are focusing on the telecom companies which offer strong
operating earnings growth.
The Chilean market's decline was driven by high domestic interest rates,
commodity price deflation, and weak demand from Asia for copper, forestry
products, and fishmeal. Interest rates have been continually raised by the
central bank since the beginning of 1998 in an effort to defend the Chilean peso
and narrow the country's trade deficit. The high interest rates have hindered
stock market returns, as local investors prefer to tap the fixed-income market
and foreign investors remain sidelined awaiting signs of a rate cut.
In the other markets, while the Colombia stock market greeted President-elect
Pastrana's June 21 win with optimism, lending rates averaging 15%, the highest
levels in 13 years, dampened investor sentiment. In April, we exited both the
Peruvian and Venezuelan markets. In Peru, deteriorating external accounts and
slow growth have hindered the market. In Venezuela, higher interest rates, a
tense political environment, and overvalued currency concerns led to our
decision to eliminate our exposure to the market.
2
<PAGE>
We are optimistic that capital flows will return to this region as Latin America
offers the best fundamentals of all the emerging markets. Latin America sells
at 10 times 1999 estimated earnings on forecast U.S. dollar earnings per share
growth of 15%.
Beginning with this report, we are discontinuing our practice of designating an
individual portfolio manager to sign our reports to shareholders in order to
better reflect the "Team" investment approach of the Fund's investment adviser,
Morgan Stanley Asset Management ("MSAM"). The global emerging markets team at
MSAM has general oversight of the investment management of the Fund. Robert L.
Meyer and Andy Skov continue to have primary responsibility for the day-to-day
management of the Fund's assets.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
July 1998
3
<PAGE>
The Latin American Discovery Fund, Inc.
Investement Summary as of June 30, 1998 (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 -13.85% -- -14.19% -- -19.88% --
One Year -18.72 -18.72% -15.27 -15.27% -24.92 -24.92%
Five Year 73.89+ 11.70+ 83.07+ 12.86+ 51.93 8.72
Since Inception* 106.57+ 12.80+ 133.31+ 15.11+ 59.48 8.06
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
JUNE 30,
1992* 1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . $ 15.23 $ 23.31 $ 17.16 $ 10.98 $ 14.77 $ 20.34 $ 10.73
Market Value Per Share . . . . $ 13.25 $ 27.13 $ 18.25 $ 9.88 $ 12.50 $ 17.94 $ 9.50
Premium/(Discount) . . . . . . -13.0% 16.4% 6.4% -10.0% -15.4% -11.8% -11.5%
Income Dividends . . . . . . . -- -- $ 0.00# -- $ 0.16 -- --
Capital Gains Distributions. . -- -- $ 5.74 $ 0.45 $ 1.14 $ 0.70 $ 6.67
Fund Total Return (2). . . . . 8.01% 65.36%+ -0.14% -27.61%+ 47.19% 43.06% -14.19%
Index Total Return (3) . . . . -2.26% 52.29% -3.69% -13.53% 21.96% 31.66% -19.88%
</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 Offerings.
4
<PAGE>
The Latin American Discovery Fund, Inc.
Portfolio Summary as of June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (92.9%)
Short-Term Investments (7.1%)
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[CHART]
<TABLE>
<S> <C>
Banking (4.5%)
Beverages & Tobacco (9.3%)
Broadcasting & Publishing (4.8%)
Building Materials &
Components (4.6%)
Energy Sources (1.9%)
Forest Products & Paper (2.4%)
Merchandising (3.8%)
Metals -- Steel (2.7%)
Telecommunications (40.8%)
Utilities -- Electrical & Gas (13.8%)
Other (11.4%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Brazil (43.9%)
Mexico (32.5%)
Argentina (9.5%)
Chile (7.2%)
Colombia (0.6%)
Other (6.3%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. CRT `A' (Brazil) 12.0%
2. Telebras (Brazil) 10.2
3. Telmex `L' (Mexico) 7.2
4. FEMSA (Mexico) 7.2
5. Cemig (Brazil) 6.5
6. Televisa (Mexico) 4.4
7. Telefonica Argentina (Argentina) 4.3
8. Cemex (Mexico) 4.3
9. Telecom Argentina (Argentina) 4.2
10. Kimberly Clark de Mexico (Mexico) 2.4
----
62.7%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS (UNAUDITED)
- ---------
JUNE 30, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.1%)
(Unless otherwise noted)
- ---------------------------------------------------------------------------
ARGENTINA (9.5%)
BANKING
Banco del Suquia 1 U.S.$ -- @
------------
ENERGY SOURCES
YPF ADR 44,185 1,328
------------
TELECOMMUNICATIONS
Telecom Argentina ADR 191,130 5,698
Telefonica Argentina ADR 182,362 5,916
------------
11,614
------------
12,942
------------
- ---------------------------------------------------------------------------
BRAZIL (43.9%)
BANKING
(a,b)Banco Nacional (Preferred) 95,420,000 4
Unibanco (Preferred) GDR 71,002 2,095
------------
2,099
------------
BUILDING MATERIALS & COMPONENTS
Cia Cimento Portland Itau
(Preferred) 2,435,000 432
------------
ENERGY SOURCES
Petrobras (Preferred) 219,000 40
Petrobras ADR 144A 69,515 1,297
------------
1,337
------------
MERCHANDISING
Globex Utilidades (Preferred) 14,200 123
(a)Lojas Arapua (Preferred) 41,337,400 26
(a)Lojas Arapua (Preferred) ADR 20,775 11
Lojas Renner (Preferred) 32,504,000 956
------------
1,116
------------
METALS -- STEEL
(a,b)CVRD Bonus 116,420 -- @
CVRD (Preferred) 33,800 672
CVRD (Preferred) ADR 77,750 1,644
(a)Gerdau (Preferred) 98,533,422 1,363
------------
3,679
------------
MULTI-INDUSTRY
(a)Iven (Preferred) 1,268,500 635
------------
REAL ESTATE
Rossi Residencial GDR 144A 139,272 696
Rossi Residencial GDS
(Registered) 269,535 1,348
------------
2,044
------------
TELECOMMUNICATIONS
CRT (Preferred) 'A' 15,008,888 16,364
Telebras (Preferred) 105,315,740 11,456
Telebras (Preferred) ADR 22,767 2,486
(a)Telerj Celular (Preferred) 'B' 23,744,000 1,412
(a)Telesp Celular (Preferred) 'B' 19,381,000 1,609
------------
33,327
------------
TEXTILES & APPAREL
Coteminas 5,426,400 U.S.$ 1,478
Coteminas ADR 144A 9,305 127
Encorpar 8,492,000 21
------------
1,626
------------
UTILITIES -- ELECTRICAL & GAS
Cemig (Preferred) 199,790,955 6,219
Cemig (Preferred) ADR 85,009 2,631
(a)CERJ 3,637,800,000 1,793
Copel (Preferred) 'B' 320,284,400 2,991
Gerasul 72,348,000 98
------------
13,732
------------
60,027
------------
- ---------------------------------------------------------------------------
CHILE (6.6%)
BANKING
Banco Edwards ADR 7,740 110
Banco Santander Chile ADR 14,900 192
Banco Santiago ADR 14,300 239
------------
541
------------
BEVERAGES & TOBACCO
CCU ADR 54,925 1,160
------------
FOOD & HOUSEHOLD PRODUCTS
D&S ADR 37,675 565
------------
MERCHANDISING
Santa Isabel ADR 44,705 492
------------
MULTI-INDUSTRY
(a) Citicorp-Chile Financiero Fund 3,790 72
------------
TELECOMMUNICATIONS
CTC ADR 30,685 623
Quinenco ADR 51,020 460
------------
1,083
------------
UTILITIES -- ELECTRICAL & GAS
Chilectra ADR 103,090 2,191
Endesa ADR 100,480 1,432
Enersis ADR 51,540 1,259
Gener ADR 13,680 250
------------
5,132
------------
9,045
------------
- ---------------------------------------------------------------------------
COLOMBIA (0.6%)
BANKING
Bancolombia (Preferred) 1,081 2
------------
BEVERAGES & TOBACCO
Bavaria 87,449 511
Valores Bavaria 159,679 274
------------
785
------------
FINANCIAL SERVICES
Corfivalle 2 -- @
------------
787
------------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
MEXICO (32.5%)
BANKING
(a)Banacci 'B' 426,630 U.S.$ 830
(a)Banacci 'L' 645,651 1,041
Bancomer 'B' 4,531,997 1,689
------------
3,560
------------
BEVERAGES & TOBACCO
(a)FEMSA 210,694 6,562
(a)FEMSA ADR 103,468 3,259
Grupo Modelo 'C' 106,975 898
------------
10,719
------------
BROADCASTING & PUBLISHING
(a)Televisa CPO GDR 161,192 6,065
TV Azteca ADR 41,886 453
------------
6,518
------------
BUILDING MATERIALS & COMPONENTS
Cemex 'B' 290,995 1,283
Cemex 'B' ADR 199,837 1,763
Cemex CPO 740,327 2,775
------------
5,821
------------
FOOD & HOUSEHOLD PRODUCTS
Bimbo 'A' 333,690 661
------------
FOREST PRODUCTS & PAPER
Kimberly Clark de Mexico 'A' 916,959 3,238
------------
MERCHANDISING
Cifra 'C' 239,362 332
Cifra 'V' 716,002 1,064
Cifra 'V' ADR 3,970 58
Soriana 'B' 731,935 2,101
------------
3,555
------------
MULTI-INDUSTRY
Grupo Carso 'A1' 146,440 602
------------
RECREATION -- OTHER CONSUMER GOODS
(b)Blockbuster de Mexico ADR 40,000 -- @
------------
TELECOMMUNICATIONS
Telmex 'L' ADR 204,348 9,822
------------
44,496
------------
- ---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$146,523) 127,297
------------
- ---------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (6.0%)
- ---------------------------------------------------------------------------
<S> <C> <C>
CHILE (0.6%)
TIME DEPOSIT
Citibank 8.50%, 8/31/98 CLP 344,500 742
------------
- ---------------------------------------------------------------------------
UNITED STATES (5.4%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 5.40%,
dated 6/30/98, due 7/1/98,
to be repurchased at
U.S.$7,417, collateralized
by U.S.$4,610, United
States Treasury Bonds, 11.25%,
due 2/15/15, valued at U.S.$7,579
(Cost U.S.$7,416) U.S.$ 7,416 U.S.$ 7,416
------------
- ---------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$8,172) 8,158
------------
- ---------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.2%)
Argentine Peso ARP 607 607
Brazilian Real BRL 483 418
Chilean Peso CLP 133 -- @
Colombian Peso COP 9,991 7
Mexican Peso MXP 4,257 473
Peruvian New Sol PSS 107 37
Venezuelan Bolivar VEB 25,608 46
------------
(Cost U.S.$1,594) 1,588
------------
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost U.S.$156,289) 137,043
------------
- ---------------------------------------------------------------------------
OTHER ASSETS (0.7%)
Receivable for Investments
Sold U.S.$ 553
Dividends Receivable 366
Interest Receivable 4
Other Assets 50 973
----------- ------------
- ---------------------------------------------------------------------------
LIABILITIES (-1.0%)
Deferred Chilean Taxes (14)
Payable For:
Chilean Taxes (624)
Custodian Fees (164)
Distributions Declared (139)
Investment Advisory Fees (132)
Investments Purchased (76)
Professional Fees (63)
Shareholder Reporting
Expenses (41)
Bank Overdraft (38)
Administrative Fees (33)
Directors' Fees and Expenses (31)
Other Liabilities (18) (1,359)
----------- ------------
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
(000)
- ---------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
Applicable to 12,736,125, issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$ 136,643
-------------
-------------
- ---------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 10.73
-------------
-------------
- ---------------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------
Common Stock 127
Capital Surplus 164,613
Undistributed Net Investment Income 588
Accumulated Net Realized Loss (9,419)
Unrealized Depreciation on Investments
and Foreign Currency Translations (net
of accrued foreign taxes of U.S.$14 on
unrealized appreciation) (19,266)
- ---------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 136,643
-------------
-------------
- ---------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- Securities valued at fair value -- see note A-1 to
financial statements.
@ -- Value is less than U.S.$500.
144A -- Certain conditions for public sale may exist.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
- ---------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
- ---------------------------------------------------------------------------
Under the terms of foreign currency exchange contracts
open at June 30, 1998, the Fund is obligated to deliver
foreign currency in exchange for U.S. dollars as
indicated below:
<TABLE>
<CAPTION>
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE LOSS
(000) (000) DATE (000) (000) (000)
- ---------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
MXP 2,617 U.S.$ 291 07/01/98 U.S.$ 291 U.S.$ 291 U.S.$ --
--------- --------- ----------
--------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
JUNE 30, 1998 EXCHANGE RATES:
- ---------------------------------------------------------------------------
<S> <C> <C>
ARP Argentine Peso 1.000 = U.S. $ 1.00
BRL Brazilian Real 1.157 = U.S. $ 1.00
CLP Chilean Peso 468.000 = U.S. $ 1.00
COP Colombian Peso 1,369,605 = U.S. $ 1.00
MXP Mexican Peso 8.991 = U.S. $ 1.00
PSS Peruvian New Sole 2.938 = U.S. $ 1.00
VEB Venezuelan Bolivar 553.000 = U.S. $ 1.00
- ---------------------------------------------------------------------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- JUNE 30, 1998
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- ----------------------------------------------------------------------------
<S> <C> <C>
Banking U.S. $ 6,202 4.5%
Beverages & Tobacco 12,664 9.3
Broadcasting & Publishing 6,518 4.8
Building Materials & Components 6,253 4.6
Energy Sources 2,665 1.9
Food & Household Products 1,226 0.9
Forest Products & Paper 3,238 2.4
Merchandising 5,163 3.8
Metals -- Steel 3,679 2.7
Multi-Industry 1,309 1.0
Real Estate 2,044 1.5
Telecommunications 55,846 40.8
Textiles & Apparel 1,626 1.2
Utilities -- Electrical & Gas 18,864 13.8
Other 9,746 7.1
-------------- ------
U.S. $ 137,043 100.3%
-------------- ------
-------------- ------
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
JUNE 30, 1998
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- ----------------------------------------------------------------------------
<S> <C> <C>
Argentina U.S. $ 12,942 9.5%
Brazil 60,027 43.9
Chile 9,787 7.2
Colombia 787 0.6
Mexico 44,496 32.5
United States (short-term investment) 7,416 5.4
Other 1,588 1.2
-------------- -------
U.S. $ 137,043 100.3%
------------- -------
------------- -------
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 2,473
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
Less: Foreign Taxes Withheld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (86)
- ---------------------------------------------------------------------------------------------------------------------
Total Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,611
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Custodian Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Country Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Brazilian Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Shareholder Reporting Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Chilean Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Colombian Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Directors' Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
- ---------------------------------------------------------------------------------------------------------------------
Total Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,484
- ---------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,127
- ---------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (145)
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (436)
- ---------------------------------------------------------------------------------------------------------------------
Net Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (581)
- ---------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (34,654)
Appreciation on Foreign Currency Translations . . . . . . . . . . . . . . . . . . . . . . . . . . 33
- ---------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . (34,621)
- ---------------------------------------------------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . . . . (35,202)
- ---------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . U.S.$ (34,075)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 1,127 U.S.$ (161)
Net Realized Gain (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . . (581) 69,681
Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . . . . (34,621) 3,295
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations . . . . . . . (34,075) 72,815
- ---------------------------------------------------------------------------------------------------------------------
Distributions:
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,461) (8,141)
- ---------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (1,118,141 shares). . . . . . . . . . . . . . . 11,919 --
- ---------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . . . . . . . . . (99,617) 64,674
Net Assets:
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,260 171,586
- ---------------------------------------------------------------------------------------------------------------------
End of Period (including undistributed net investment income
(accumulated net investment loss) of U.S.$588 and U.S.$(539),
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$136,643 U.S.$ 236,260
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA JUNE 30, 1998 ---------------------------------------------------------------------------
AND RATIOS: (UNAUDITED) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD U.S.$ 20.34 U.S.$ 14.77 U.S.$ 10.98 U.S.$ 17.16 U.S.$ 23.31 U.S.$ 15.23
- ------------------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . -- -- -- (0.07) -- (0.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) . . . . 0.09 (0.01) 0.18 0.05 (0.18) 0.04
Net Realized and Unrealized Gain
(Loss) on Investments. . . . . . . (3.03) 6.28 4.91 (4.63) (0.25) 9.84
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations . . . . . . . . . . (2.94) 6.27 5.09 (4.58) (0.43) 9.88
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . -- -- (0.16) -- (0.00)# --
Net Realized Gain. . . . . . . . . (6.67) (0.70) (1.14) (0.44) (5.74) --
In Excess of Net Realized Gain . . -- -- -- (0.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . (6.67) (0.70) (1.30) (0.45) (5.74) --
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset
Value from Capital Shares
Transactions . . . . . . . . . . . -- -- -- (1.08)++ 0.02+ (1.74)++
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . U.S.$ 10.73 U.S.$ 20.34 U.S.$ 14.77 U.S.$ 10.98 U.S.$ 17.16 U.S.$ 23.31
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD U.S.$ 9.50 U.S.$ 17.94 U.S.$ 12.50 U.S.$ 9.88 U.S.$ 18.25 U.S.$ 27.13
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . (13.85)% 49.08% 38.50% (38.78)%+++ (8.75)% 121.17%+++
Net Asset Value (1). . . . . . . . (14.19)% 43.06% 47.19% (27.61)%+++ (0.14)% 65.36%+++
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(THOUSANDS). . . . . . . . . . . . U.S.$ 136,643 U.S.$ 236,260 U.S.$ 171,586 U.S.$127,616 U.S.$135,273 U.S.$180,348
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.92%* 1.82% 1.81% 2.17% 2.15% 2.23%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . 1.46%* (0.07)% 1.24% 0.31% (0.77)% 0.22%
Portfolio Turnover Rate. . . . . . . 85% 259% 186% 122% 70% 56%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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 the rights issued 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. This percentage is 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.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
- -------------
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 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) on
investments and foreign currency translations in the Statement of Net
Assets. The change in unrealized currency gains (losses) for the period is
reflected in the Statement of Operations.
The Fund intends to use derivatives more actively than it has in the past. The
Fund intends to engage in transactions in futures contracts on foreign
currencies, stock indices, as
11
<PAGE>
well as in options, swaps and structured notes. Consistent with the Fund's
investment objectives and policies, the Fund intends to use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments and their associated risks
that the Fund intends to utilize:
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
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 investment securities sold in the financial statements.
7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or when-issued or delayed-delivery basis may involve a
risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
8. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security, instrument or basket of
instruments underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each
measurement period, but prior to termination, are recorded as realized
gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.
12
<PAGE>
9. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. Structured Securities generally
will expose the Fund to credit risks of the underlying instruments as well
as of the issuer of the structured security. Structured Securities are
typically sold in private placement transactions with no active trading
market. Investments in structured securities may be more volatile than
their underlying instruments, however, any loss is limited to the amount of
the original investment.
10. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
11. 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, net operating losses, 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 corporate affiliate Chase Global
Funds Services Company (the "Administrator"), provides administrative services
to the Fund under an Administration Agreement. Under the Administration
Agreement, the Administrator is paid a fee computed weekly and payable monthly
at an annual rate of 0.08% 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 0.125% 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 0.25% 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 0.25% 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 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 six
months ended June 30,1998,
13
<PAGE>
the Fund incurred custodian fees of $94,000 with the International Custodian, of
which $93,000 was payable to the International Custodian at June 30, 1998. In
addition, for the six months ended June 30,1998, the Fund has earned interest
income of $2,000 and incurred interest expense of $4,000, on balances with the
International Custodian.
F. During the six months ended June 30, 1998, the Fund made purchases and
sales totaling approximately $133,282,000 and $200,936,000, 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 six months ended June 30, 1998, the Fund
placed a portion of its portfolio transactions with affiliated broker/dealers.
Accordingly, the Fund incurred brokerage commissions of $27,000 with Morgan
Stanley & Co. Incorporated, an affiliate of the Adviser, for the six months
ended June 30, 1998. At June 30, 1998, the U.S. Federal income tax cost basis of
securities was $154,695,000 and, accordingly, net unrealized depreciation for
U.S. Federal income tax purposes was $19,240,000 of which $1,501,000 related to
appreciated securities and $20,741,000 related to depreciated securities.
G. 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.
H. 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
maybe subject to substantial governmental involvement in the economy and greater
social, economic and political uncertainty.
I. 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 June 30,
1998, totaled $23,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
J. During June 1998, the Board declared a distribution of $0.01 per share,
derived from net realized gains, payable on July 15, 1998, to shareholders of
record on June 30, 1998. Also in June, the Board of Directors amended your
Fund's by-laws to require advance notice of any proposals to be made at
stockholders' meetings. For annual meetings the notice must be given to the
Fund's secretary at least 60 days before the anniversary date of the previous
year's annual meeting. This year's annual meeting of stockholders was held on
June 24. This provision was adopted to permit the Fund's stockholders and
Directors to consider every stockholder proposal on an informed basis and in an
organized fashion, taking into account the interests of all affected
constituencies.
K. Supplemental Proxy Information
The Annual Meeting of the Stockholders of The Latin American Discovery Fund,
Inc. was held on June 24, 1998. The following is a summary of each proposal
presented and the total number of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES AUTHORITY VOTES
PROPOSAL: FAVOR OF AGAINST WITHHELD ABSTAINED
- --------- --------- ------- -------- ---------
<S> <C> <C> <C> <C>
1. To elect the following Directors: Michael F. Klein. . . . . . . 9,406,504 -- 102,827 --
Barton M. Biggs . . . . . . . 9,438,331 -- 71,001 --
John A. Levin . . . . . . . . 9,433,203 -- 76,128 --
William G. Morton, Jr.. . . . 9,426,595 -- 82,736 --
2. To ratify the selection of PricewaterhouseCoopers
LLP as independent accountants of the Fund. . . . . . . . . . . 9,469,578 22,090 -- 17,663
</TABLE>
14
<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
1-800-730-6001
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