<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Michael F. Klein Stefanie V. Chang
PRESIDENT AND DIRECTOR VICE PRESIDENT
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Valerie Y. Lewis
DIRECTOR SECRETARY
Graham E. Jones Joanna M. Haigney
DIRECTOR TREASURER
John A. Levin Belinda A. Brady
DIRECTOR 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
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, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, The Latin American Discovery Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of 43.06%
compared with 31.66% 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, 1997, the
Fund's total return, based on net asset value per share, was 171.89% compared
with 99.05% for the Index. On December 31, 1997, the closing price of the
Fund's shares on the New York Stock Exchange was $17.94 representing a 11.8%
discount to the net asset value per share.
The continuation of the Asian crisis and its contagion throughout the emerging
markets resulted in poor performance across all the Latin markets. The
Portfolio declined 8.3% versus a fall of 10.7% for the Index during the quarter.
The largest contributors to the Fund's outperformance relative to its benchmark
were strong stock selection in Mexico, where we are focusing on the consumer
related companies, and increasing our Brazil exposure to an overweight position
at November month-end such that we were able to take full advantage of the
December rally.
The Brazilian stock market fell 15.1% during the quarter, with most of the
decline occurring during the first half of the quarter. Brazil was particularly
vulnerable to the contagion as it follows a fixed exchange rate regime and has
both a large current account and fiscal deficit. Additionally, given that the
Brazilian market had performed well prior to the Asian crisis, investors took
profits as Brazil's risk premium increased.
Nevertheless, Brazil was able to pull away from its recent Asian focus and look
to the strong U.S. market as well as its own good news to begin recouping its
losses. The positive moves made by the authorities which supported the equity
market included an aggressive, well thought out response to the crisis,
including the doubling of interest rates and a significant tightening of fiscal
policy. Even the Brazilian Congress lent a hand in building confidence. Not
only was the fiscal package quickly passed with few amendments but, the Asian
currency crisis provided the spur for action on the reform process. Since the
eruption of the crisis in late-October, the Lower House has passed the
administrative reform package, which allows government at all levels (federal,
state, and city) to fire workers when payroll costs exceed 60% of total costs.
Mexico was the best performing market in this region, declining 3.6%. Mexico is
less vulnerable to the Asian crisis, as most of its exports are sent to the U.S.
Another positive for Mexico has been its economic strength, as its economy
expanded 8.1% during the third quarter. Additionally, while the Mexican Peso
was briefly under pressure as a result of a currency contagion from Asia, it was
able to recover nicely with the aid of the central bank.
The Chilean market fell 18.3% as a result of commodity deflation. Given the
woes in Asia, prices for copper, pulp and paper have fallen. As Chile's
economic structure is dependent on commodity prices, the recent price cuts have
negatively impacted Chile's economy and equity market.
In the other markets, none were immune to the Asian contagion. Argentina and
Colombia fell 8.3% and 6.3%, respectively, in sympathy with the region.
Venezuela fell 18.5% fueled by weakening oil prices.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
/s/ Robert L. Meyer
Robert L. Meyer
PORTFOLIO MANAGER
/s/ Andy Skov
Andy Skov
PORTFOLIO MANAGER
January 1998
2
<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
INVESTMENT SUMMARY AS OF DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
HISTORICAL TOTAL RETURN (%)
INFORMATION -----------------------------------------------------------------------------
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>
ONE YEAR 49.08% 49.08% 43.06% 43.06% 31.66% 31.66%
FIVE YEAR 155.16+ 20.60+ 151.72+ 20.28+ 103.65 15.29
SINCE INCEPTION* 139.78+ 17.15+ 171.89+ 19.84+ 99.05 13.27
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
1992* 1993 1994 1995 1996 1997
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share. . . . . $ 15.23 $ 23.31 $ 17.16 $ 10.98 $ 14.77 $ 20.34
Market Value Per Share . . . . . . $ 13.25 $ 27.13 $ 18.25 $ 9.88 $ 12.50 $ 17.94
Premium/(Discount) . . . . . . . . -13.0% 16.4% 6.4% -10.0% -15.4% -11.8%
Income Dividends . . . . . . . . . - - $ 0.00# - $ 0.16 -
Capital Gains Distributions. . . . - - $ 5.74 $ 0.45 $ 1.14 $ 0.70
Fund Total Return (2). . . . . . . 8.01% 65.36%+ -0.14% -27.61%+ 47.19% 43.06%
Index Total Return (3) . . . . . . -2.26% 52.29% -3.69% -13.53% 21.96% 31.66%
</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 $0.01 per share.
+ This return excludes the effect of the rights issued in connection with the
Rights Offerings.
3
<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
INVESTMENT SUMMARY AS OF DECEMBER 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities 96.1%
Short-Term Investments 3.9%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS (UNAUDITED)
[CHART]
<TABLE>
<S> <C>
Banking 10.3%
Beverages & Tobacco 8.6%
Broadcasting & Publishing 7.1%
Energy Sources 5.4%
Forest Products & Paper 4.0%
Merchandising 4.7%
Metals -- Non-Ferrous 3.6%
Retail -- Major Department Stores 3.3%
Telecommunications 36.8%
Utilities -- Electrical & Gas 5.5%
Other 10.7%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<CAPTION>
<S> <C>
Brazil 44.5%
Mexico 34.4%
Argentina 8.4%
Chile 5.4%
Venezuela 1.8%
Peru 1.7%
Colombia 1.3%
Other 2.5%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
Percent of
Net Assets
----------
<S> <C>
1. Telebras (Brazil) 11.8%
2. CRT (Brazil) 11.3
3. Telmex (Mexico) 7.3
4. FEMSA (Mexico) 4.8
5. Kimberly (Argentina) 4.0
6. Televisa (Mexico) 3.9
7. Petrobras (Mexico) 3.4
8. Soriana (Brazil) 3.3
9. TV Azteca (Mexico) 3.3
10. Telfonica Argentina (Argentina) 3.0
-----
56.1%
-----
-----
</TABLE>
4
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSTES
- --------------------------------------------------------------------------------
DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.2%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
ARGENTINA (8.4%)
BANKING
Banco del Suquia 346,217 U.S. $ 900
(a) Banco Rio de La Plata ADR 178,865 2,504
------------
3,404
------------
ENERGY SOURCES
YPF ADR 133,960 4,580
------------
METALS - STEEL
(a) Acindar 533,817 1,271
Siderar 'A' 44,587 189
Siderar ADR 26,849 913
------------
2,373
------------
TELECOMMUNICATIONS
Telecom Argentina ADR 67,895 2,427
Telefonica Argentina ADR 191,535 7,135
------------
9,562
------------
19,919
------------
- --------------------------------------------------------------------------------
BRAZIL (44.5%)
BANKING
Banco Bradesco (Preferred) 385,158,000 3,796
(a,b)Banco Bradesco (Rights) 385,158,000 35
(a,b)Banco Nacional (Preferred) 95,420,000 4
(a) Unibanco (Preferred) GDR 371,130 11,946
------------
15,781
------------
BUILDING MATERIALS & COMPONENTS
Cia Cimento Portland Itau 3,721,000 717
------------
CONSTRUCTION & HOUSING
(a) Rossi Residencial GDR 144A 204,960 999
(a) Rossi Residencial GDS 269,535 1,314
------------
2,313
------------
ENERGY SOURCES
Petrobras (Preferred) 21,666,000 5,067
(a) Petrobras ADR 144A 129,515 3,092
------------
8,159
------------
MERCHANDISING
Globex Utilidades (Preferred) 14,200 83
Lojas Arapua (Preferred) 41,337,400 148
Lojas Arapua (Preferred) ADR 20,775 70
Lojas Renner (Preferred) 49,341,000 1,547
------------
1,848
------------
METALS - NON-FERROUS
CVRD (Preferred) 243,920 4,907
CVRD (Preferred) ADR 177,960 3,503
(a,b)CVRD Bonus 116,420 --
------------
8,410
------------
METALS - STEEL
Gerdau (Preferred) 156,382,922 1,962
------------
MULTI-INDUSTRY
IVEN (Preferred) 1,268,500 722
------------
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS
(a) CRT (Preferred) 'A' 21,656,005 U.S. $26,681
Telebras (Preferred) 165,106,740 18,832
Telebras (Preferred) ADR 78,302 9,117
------------
54,630
------------
TEXTILES & APPAREL
Coteminas 6,934,400 2,299
(a) Coteminas ADR 46,305 768
(a) Encorpar 8,492,000 6
------------
3,073
------------
UTILITIES - ELECTRICAL & GAS
Cemig (Preferred) 115,136,000 5,002
Cemig (Preferred) ADR 42,285 1,837
Copel (Preferred) ADR 55,630 762
------------
7,601
------------
105,216
------------
- --------------------------------------------------------------------------------
CHILE (5.1%)
BEVERAGES & TOBACCO
CCU ADR 122,485 3,598
------------
FINANCE
(a) Citicorp-Chile Financiero Fund 3,942 76
------------
MERCHANDISING
Santa Isabel ADR 234,104 4,097
------------
UTILITIES - ELECTRICAL & GAS
Chilectra ADR 154,475 4,287
------------
12,058
------------
- --------------------------------------------------------------------------------
COLOMBIA (1.3%)
BANKING
Banco de Colombia 10,373 3
------------
BEVERAGES & TOBACCO
Bavaria 300,755 3,085
------------
MULTI-INDUSTRY
Corfivalle 2 -@
------------
3,088
------------
- --------------------------------------------------------------------------------
MEXICO (34.4%)
BANKING
(a) Banacci 'B' 825,690 2,474
(a) Banacci 'L' 645,651 1,666
(a) Bancomer 'B' 495,880 323
------------
4,463
------------
BEVERAGES & TOBACCO
FEMSA 'B' 1,327,220 10,670
FEMSA ADR 91,830 734
Grupo Modelo 'C' 137,425 1,153
Panamco 32,350 1,055
------------
13,612
------------
BROADCASTING & PUBLISHING
(a) Televisa CPO GDR 236,119 9,135
(a) TV Azteca ADR 341,406 7,703
------------
16,838
------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
5
<PAGE>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
BUILDING MATERIALS & COMPONENTS
(a) Cemex 'B' 48,215 U.S. $ 257
(a) Cemex 'B' ADR 173,497 1,844
(a) Cemex CPO 739,373 3,348
------------
5,449
------------
FOREST PRODUCTS & PAPER
Kimberly 1,993,934 9,475
------------
MERCHANDISING
Cifra 'C' 1,296,082 2,910
Cifra 'V' ADR 3,556 87
Cifra' V' 884,745 2,176
------------
5,173
------------
RECREATION, OTHER CONSUMER GOODS
(a) Blockbuster de Mexico ADR 40,000 8
(a) Interamericana 149,885 1,164
------------
1,172
------------
RETAIL - MAJOR DEPARTMENT STORES
Soriana 'B' 1,758,305 7,788
------------
TELECOMMUNICATIONS
Telmex 'L' ADR 307,073 17,215
------------
81,185
------------
- --------------------------------------------------------------------------------
PERU (1.7%)
BANKING
Banco Wiese ADR 134,620 673
------------
TELECOMMUNICATIONS
Tel Peru 'B' ADR 139,496 3,252
------------
3,925
------------
- --------------------------------------------------------------------------------
VENEZUELA (1.8%)
BUILDING MATERIALS & COMPONENTS
Sivensa ADR 205,610 860
------------
TELECOMMUNICATIONS
CANTV ADR 55,775 2,322
------------
UTILITIES - ELECTRICAL & GAS
Electricidad de Caracas 960,435 1,152
------------
4,334
------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$214,322) 229,725
------------
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS (3.2%)
- --------------------------------------------------------------------------------
CHILE (0.3%)
TIME DEPOSIT
Citibank 6.00%, 3/2/98 CLP 326,700 U.S. $ 752
------------
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- --------------------------------------------------------------------------------
<S> <S> <C>
UNITED STATES (2.9%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 5.95%,
dated 12/31/97, due 1/2/98,
to be repurchased at U.S.
$6,740, collateralized by
U.S.$6,805, United States
Treasury Notes, 5.625%,
due 2/15/06, valued at
U.S.$6,875 U.S.$ 6,738 U.S. $ 6,738
------------
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$7,480) 7,490
------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.8%)
Argentine Peso ARP 104 104
Chilean Peso CLP 20 -@
Colombian Peso COP 653,274 504
Mexican Peso MXP 14 2
Peruvian New Sol PSS 3,519 1,291
Venezuelan Bolivar VEB 22,727 45
------------
(Cost U.S.$1,986) 1,946
------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(Cost U.S. $223,788) 239,161
------------
- --------------------------------------------------------------------------------
OTHER ASSETS (0.9%)
Receivable for Investments Sold U.S.$ 1,591
Dividends Receivable 360
Interest Receivable 3
Other Assets 44 1,998
----------- ------------
- --------------------------------------------------------------------------------
LIABILITIES (-2.1%)
Deferred Chilean Taxes (14)
Payable For:
Investments Purchased (3,769)
Chilean Taxes (624)
Investment Advisory Fees (208)
Professional Fees (76)
Custodian Fees (49)
Shareholder Reporting Expenses (40)
Director's Fees and Expenses (37)
Administrative Fees (33)
Bank Overdraft (3)
Other Liabilities (46) (4,885)
----------- -------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 11,617,984,
issued and outstanding
U.S.$0.01 par value
shares (100,000,000 shares
authorized) U.S.$ 236,260
-------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 20.34
-------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
AMOUNT
(000)
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
<S> <C>
Common Stock U.S.$ 116
Capital Surplus 152,705
Accumulated Net Investment Loss (539)
Accumulated Net Realized Gain 68,623
Unrealized Appreciation on Investments
and Foreign Currency Translations 15,355
- --------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 236,260
</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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997 EXCHANGE RATES:
- --------------------------------------------------------------------------------
<S> <C> <C>
ARP Argentine Peso 1.000 = U.S. $ 1.00
BRL Brazilian Real 1.116 = U.S. $ 1.00
CLP Chilean Peso 438.500 = U.S. $ 1.00
COP Colombian Peso 1,296.650 = U.S. $ 1.00
MXP Mexican Peso 8.060 = U.S. $ 1.00
PSS Peruvian New Sol 2.726 = U.S. $ 1.00
VEB Venezuelan Bolivar 504.300 = U.S. $ 1.00
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION - DECEMBER 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
Banking U.S.$ 24,324 10.3%
Beverages & Tobacco 20,295 8.6
Broadcasting & Publishing 16,838 7.1
Building Materials & Components 7,026 3.0
Construction & Housing 2,313 1.0
Energy Sources 12,739 5.4
Finance 76 0.0
Forest Products & Paper 9,475 4.0
Merchandising 11,118 4.7
Metals - Non-Ferrous 8,410 3.6
Metals - Steel 4,335 1.8
Multi-Industry 722 0.3
Recreation, Other Consumer Goods 1,172 0.5
Retail - Major Department Stores 7,788 3.3
Telecommunications 86,981 36.8
Textiles & Apparel 3,073 1.3
Utilities - Electrical & Gas 13,040 5.5
Other 9,436 4.0
--------------- ------
U.S.$ 239,161 101.2%
--------------- ------
--------------- ------
</TABLE>
- --------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY -
DECEMBER 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
Argentina U.S.$ 19,919 8.4%
Brazil 105,216 44.5
Chile 12,810 5.4
Colombia 3,088 1.3
Mexico 81,185 34.4
Peru 3,925 1.7
United States (short-term investments) 6,738 2.9
Venezuela 4,334 1.8
Other 1,946 0.8
--------------- ------
U.S.$ 239,161 101.2%
--------------- ------
--------------- ------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
STATEMENT OF OPERATIONS (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 3,589
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332
Less: Foreign Taxes Withheld. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,914
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,577
Custodian Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373
Country Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Brazilian Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Shareholder Reporting Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Chilean Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Annual Meeting and Proxy Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Directors' Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Amortization of Organization Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Colombian Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,075
- ------------------------------------------------------------------------------------------------------------------------------------
Net Investment Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (161)
- ------------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,117
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (436)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,681
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,231
Appreciation on Foreign Currency Translations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,295
- ------------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION . . . . . . . . . . . . . . . . . . . . . 72,976
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$72,815
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net Investment Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ (161) U.S.$ 2,059
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,681 39,591
Change in Unrealized Appreciation/Depreciation. . . . . . . . . . . . . . . . . . . . . 3,295 17,387
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations. . . . . . . . . . . . . . . . . . 72,815 59,037
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (1,816)
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,141) (13,255)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,141) (15,071)
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Offering Costs on Rights Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 4
- ------------------------------------------------------------------------------------------------------------------------------------
Total Increase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,674 43,970
NET ASSETS:
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,586 127,616
- ------------------------------------------------------------------------------------------------------------------------------------
End of Period (including accumulated net investment loss of U.S.$539 and U.S.$680,
respectively.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$236,260 U.S.$171,586
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
SELECTED PER SHARE DATA AND
RATIOS: 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . U.S.$ 14.77 U.S.$ 10.98 U.S.$ 17.16
- ---------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . . . . . - - (0.07)
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) . . . . . . . . . . . (0.01) 0.18 0.05
Net Realized and Unrealized Gain (Loss) on
Investments. . . . . . . . . . . . . . . . . . . 6.28 4.91 (4.63)
- ---------------------------------------------------------------------------------------------------------------
Total from Investment Operations. . . . . . . 6.27 5.09 (4.58)
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . - (0.16) -
Net Realized Gain. . . . . . . . . . . . . . . . (0.70) (1.14) (0.44)
In Excess of Net Realized Gain . . . . . . . . . - - (0.01)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . (0.70) (1.30) (0.45)
- ---------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value from
Capital Shares Transactions . . . . . . . . . . - - (1.08)++
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . U.S.$ 20.34 U.S.$ 14.77 U.S.$ 10.98
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD . . . . . . U.S.$ 17.94 U.S.$ 12.50 U.S.$ 9.88
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . . . . . 49.08% 38.50% (38.78)%+++
Net Asset Value (1). . . . . . . . . . . . . . . 43.06% 47.19% (27.61)%+++
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Thousands) . . . . . . U.S. $236,260 U.S.$ 171,586 U.S.$ 127,616
- ---------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets . . . . . 1.82% 1.81% 2.17%
Ratio of Net Investment Income to Average Net
Assets . . . . . . . . . . . . . . . . . . . . . (0.07)% 1.24% 0.31%
Portfolio Turnover Rate. . . . . . . . . . . . . . 259% 186% 122%
Average Commission Rate (2):
Per Share. . . . . . . . . . . . . . . . . . . . U.S.$ 0.0007 U.S.$ 0.0004 N/A
As a Percentage of Trade Amount. . . . . . . . . 0.28% 0.31% N/A
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
1994 1993
-----------------------------------------
<S> <C> <C> <C> <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 Gain. . . . . . . . . . . . . . . . (5.74) -
In Excess of Net Realized Gain . . . . . . . . . - -
- -------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . (5.74) -
- -------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value from
Capital Shares 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 to Average Net
Assets . . . . . . . . . . . . . . . . . . . . . (0.77)% 0.22%
Portfolio Turnover Rate. . . . . . . . . . . . . . 70% 56%
Average Commission Rate (2):
Per Share. . . . . . . . . . . . . . . . . . . . N/A N/A
As a Percentage of Trade Amount. . . . . . . . . N/A N/A
- -------------------------------------------------------------------------------------------
</TABLE>
# 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.
(2) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
portfolio trades on which commissions were charged.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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.
10
<PAGE>
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 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. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward 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 un-
11
<PAGE>
derlying security, instrument or basket of instruments, if any, at the date
of default.
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, invested
in by the Fund, generally will have credit risk equivalent to that of the
underlying instruments. 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 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 .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 payable monthly
based on assets under custody, investment purchase and sales activity, plus an
account maintenance fee, plus reimbursement for certain out-of-pocket
12
<PAGE>
expenses. Investment transaction fees vary by country and security type. During
the year ended December 31,1997, the Fund incurred custodian fees of $324,000
with the International Custodian, of which $49,000 was payable to the
International Custodian at December 31, 1997. In addition, for the year ended
December 31,1997, the Fund has incurred interest expense of $43,000, on balances
with the International Custodian.
F. During the year ended December 31, 1997, the Fund made purchases and sales
totaling approximately $557,188,000 and $574,930,000, 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, 1997, the Fund placed
a portion of its portfolio transactions with affiliated broker/dealers.
Accordingly, the Fund incurred brokerage commissions of $129,000 with Morgan
Stanley & Co. Incorporated, an affiliate of the Adviser, for the year ended
December 31, 1997.
At December 31, 1997, the U.S. Federal income tax cost basis of securities was
$228,808,000 and, accordingly, net unrealized appreciation for U.S. Federal
income tax purposes was $8,407,000 of which $26,764,000 related to appreciated
securities and $18,357,000 related to depreciated securities. For the year ended
December 31, 1997, the Fund expects to defer to January 1, 1998 for U.S. Federal
income tax purposes, post-October currency losses of $47,000 and post-October
capital losses of $1,837,000.
G. In connection with its organization the Fund incurred $308,000 of
organization costs. The organization costs were 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
maybe 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, 1997, totaled $31,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
K. During December 1997, the Board declared a distribution of $6.66 per share,
derived from net realized gains, payable on January 9, 1998, to shareholders of
record on December 31, 1997.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1997, the Fund designates $16,490,000 as
long-term capital gain at the 28% tax bracket and $2,348,000 at the 20% tax
bracket.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
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, 1997, 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 five years in the period then ended, 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, 1997 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 18, 1998
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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