<PAGE>
-------------------------------------------------------
THE LATIN AMERICAN DISCOVERY
FUND, INC.
-------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 1999
MORGAN STANLEY DEAN WITTER
INVESTMENT 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
Mary E. Mullin
SECRETARY
Belinda A. Brady
ASSISTANT TREASURER
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment 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
- -------------------------------------------------------------------------------
CUSTODIAN
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 or visit our website at
www.msdw.com/institutional/investmentmanagement.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the six months ended June 30, 1999, The Latin American Discovery Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of 39.22%
compared with 33.28% for the Morgan Stanley Capital International (MSCI)
Emerging Markets Global Latin America Index and 31.03% for the MSCI Emerging
Markets Free Latin America Index (the "Index"). For the period since
commencement of operations on June 23, 1992 through June 30, 1999, the Fund's
total return, based on net asset value per share, was 151.61% compared with
54.35% for the MSCI Emerging Markets Global Latin America Index and 88.39% for
the MSCI Emerging Markets Free Latin America Index. On June 30, 1999, the
closing price of the Fund's shares on the New York Stock Exchange was $9 3/8,
representing a 17.4% discount to the Fund's net asset value per share.
During the last quarter, the Brazilian Securities Commission has introduced
regulations prohibiting foreign investors from owning a certain class of shares.
Because of the introduction of this restriction, we have changed to a benchmark
that is more representative of the investments available to foreign investors
such as the Fund.
Effective June 30, 1999, the benchmark for the Fund has been changed from the
MSCI Emerging Markets Global Latin America Index to the MSCI Emerging Markets
Free Latin America Index.
Outperformance relative to the Index was largely attributable to our strong
stock selection in Brazil, Mexico and Venezuela. Our overweight position in
Mexico (+52.3%) coupled with our underweight stance in Colombia (-17.3%) also
contributed to performance.
Latin American markets benefited from a rebound in commodity prices including
oil (Mexico, Colombia, and Venezuela), copper (Chile and Peru) and pulp and
paper (Brazil and Chile). More recently, stock valuations declined as U.S.
inflation worries led investors to begin pricing in the possibility of an
increase in the U.S. Fed Funds interest rate. However, floating exchange rates,
improved fiscal scenarios and increased foreign direct investment may serve as
mitigating factors, precluding any significant impact of the Fed's 25 basis
point hike on June 30th on Latin currencies or interest rates. Valuations in
Latin America are compelling and the return of global economic growth and
liquidity coupled with corporate restructuring and the possibility for lower
real interest rates should lead to improved earnings for many Latin companies.
The most notable market event which took place during the first half of the year
was the devaluation of the Brazilian currency, the real. The truly amazing
aspect of the devaluation was not that it occurred, but that the equity market
rebounded very quickly thereafter. The currency fell 40% in January, but
retraced some of its decline, ending the first quarter down 30%. Defying
expectations, the equity market gained 5.5% in U.S. dollar terms by March
month-end and 18.7% by June month-end. Fueling the market was the unexpected
appointment of Arminio Fraga, the former portfolio manager of George Soros'
Quantum Emerging Markets Growth Fund, as head of the Central Bank. Fraga offers
financial market expertise and shareholder focus, which has aided market
sentiment. Additionally, Fraga has been successful in preventing foreign
commercial banks from terminating loans to Brazilian institutions.
Brazil's market has also been supported by contained inflation numbers, the
easing of interest rates and progress regarding privatization and measures to
reduce the fiscal deficit. We anticipate lower inflation and better than
expected economic performance to allow for continued domestic interest rate
reductions and, in turn, for a contraction in the country risk premium. The
expected reduction in real interest rates is requisite for controlling the
fiscal deficit and for stemming the growth in the stock of public sector debt.
However, we are concerned about the pace of interest rate declines given the
fractious nature of Brazilian politics that often hinders the adoption of
contentious fiscal reforms. We continue to modestly overweight Brazil, focusing
on the telecommunications sector. The privatization of the telecom sector last
year allowed for the introduction of much new efficiency, fostering margin
expansion under the new managements. The inelasticity of the telecom sector to a
weak economy coupled with pent-up demand for telecom services should allow for
strong top-line growth. Both of these factors make a strong case for grossly
improved returns on capital for these companies.
We are overweight Mexico due to good economic management and attractive stock
opportunities. A stronger peso coupled with better than expected consumer demand
should allow for positive U.S. dollar earnings surprises from domestic consumer
plays (e.g. beverages, cement, media, retail). Stronger oil prices may
2
<PAGE>
also support the equity market in the near term. Our focus on consumer-related
industries in Mexico includes stock selections such as Cemex, which is the
largest cement company in the Americas and one of the three largest in the
world. Cemex is valued in line with its global peers but offers higher earnings
growth and return on equity. High free cashflow growth enables Cemex to take
advantage of opportune global acquisitions and we believe Cemex's high operating
margins are sustainable. One of the risks affecting Mexico is the politics ahead
of next year's presidential election and its effect on the country risk premium.
Secondly, a continued positive performance in the trend of the balance of trade
is necessary to sustain the peso at current levels.
Despite election year uncertainties, as a new President will come into power in
October, Argentine equities rose 24.8%. The rally was spurred in part due to
record trading when Spain's Repsol bid $13.5 billion for the remaining (85%)
shares of Argentine oil producer YPF. The offer, at a 25% premium to the stock's
previous day closing price, fueled advances in the market on speculation
investors would purchase other Argentine shares with YPF proceeds. YPF was
removed from Argentina's Merval index on June 23, reducing the market's free
float and thereby magnifying the potential effect of future inflows on the
market. We maintain our underweight position in Argentina, as we expect economic
growth will continue to be subdued by poor economic fundamentals in Brazil and a
perceived lack of fiscal discipline. We continue to focus on those few core
companies (beer producing Quilmes, Telefonica Argentina and Telecom Argentina),
which, we believe, have greater long-term growth potential mitigating somewhat
negative economic trends.
Chile's market rose 28.7%, with declining interest rates and a rebound in pulp
prices helping drive advances. Over the course of the second quarter,
multi-billion dollar bids for electric utilities (e.g. Spain's Endesa acquired
Endesa Chile) initially lifted the market until investors later sought to lock
in gains. Although we have confidence in the macro management of the Chilean
economy, we foresee extremely weak consumer and industrial sectors over the next
twelve months. Despite the bottoming of both the economy and commodity prices
(copper), we remain underweight due to a lack of investable opportunities.
After falling 13.3% during the first quarter due to uncertainty over president
Chavez' policies and prospects of a currency devaluation, Venezuela rallied to
end the first half of 1999 up 15.5%. We added to our exposure in Venezuela
during the second quarter due to a better oil price environment that sustains
the currency, however we remain modestly underweight. Although low valuations
already reflect, to some extent, negative market and stock news, political
doubts temper the attractiveness of liquid market proxies. We are skeptical of
the new government's ability to deliver stated reforms and needed policies.
Turning to other markets, we remain underweight Colombia and Peru. Colombian
equities lost 17.3%, as the economy's lackluster prospects have been exacerbated
by concerns in the financial sector and bank weakness. Peru rose 19.8% given the
economic rebound on the renewed strength in commodity prices. However, most of
the growth expected for this year will be skewed towards agriculture, mining
investment and fishing production, which have exhibited healthy trends, while
the second half of 1999 looks less promising for secondary sectors such as
consumer manufacturing and banking.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
JULY 1999
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
- -------------------------------------------------------------------------------
DAILY NET ASSET AND MARKET VALUES, AS WELL AS MONTHLY PORTFOLIO INFORMATION FOR
THE FUND, ARE AVAILABLE ON OUR WEBSITE AT
www.msdw.com/institutional/investmentmanagement.
3
<PAGE>
The Latin American Discovery Fund, Inc.
Investment Summary as of June 30, 1999 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
---------------------------------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) MSCI EMF LA INDEX (3) MSCI EMG LA INDEX (4)
---------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR TO DATE 52.08% -- 39.22% -- 31.03% -- 33.28% --
ONE YEAR 0.52 0.52% 7.84 7.84% 6.02 6.02% 7.65 7.65%
FIVE YEAR 24.83+ 4.54+ 51.15+ 8.61+ 24.33 4.45 21.75 4.02
SINCE INCEPTION* 107.65+ 10.97+ 151.61+ 14.04+ 88.39 9.44 54.35 8.00
</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 1999
----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share .......... $15.23 $23.31 $17.16 $10.98 $14.77 $20.34 $8.19 $11.36
Market Value Per Share ............. $13.25 $27.13 $18.25 $9.88 $12.50 $17.94 $6.19 $9.38
Premium/(Discount) ................. -13.0% 16.4% 6.4% -10.0% -15.4% -11.8% -24.4% -17.4%
Income Dividends ................... -- -- $0.00# -- $0.16 -- $0.08 $0.03
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% -33.53% 39.22%
MSCI EMF LA Index Total Return(3) .. 2.00% 53.92% 0.64% -12.83% 22.21% 31.64% -35.11% 31.03%
MSCI EMG LA Index Total Return(4) .. -2.26% 52.29% -3.69% -13.53% 21.96% 31.66% -35.29% 33.28%
</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 Free Latin
America Index (MSCI EMF LA Index) is a broad based market cap weighted
composite index covering at least 60% of markets in Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela. The Index takes into account
local market restrictions on share ownership by foreigners.
(4) The Morgan Stanley Capital International Emerging Markets Global Latin
America Index (MSCI EMG LA Index) is a broad based market cap weighted
composite index covering at least 60% of markets in Argentina, Brazil,
Chile, Colombia, Mexico, 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.
Investment Summary as of June 30, 1999 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[PIE CHART
<TABLE>
<S> <C>
Equirty Securities (93.8%)
Short-Term Investments (6.2%)
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[PIE CHART]
<TABLE>
<S> <C>
Banking (6.7%)
Beverages and Tobacco (8.9%)
Broadcasting & Publishing (4.5%)
Building Materials & Components (6.9%)
Engery Sources (4.1%)
Merchandising (4.5%)
Metals (4.7%)
Telecommunications -- Integrated (29.6%)
Telecommunications -- Wireless (4.2%)
Utilities -- Electrical & Gas (10.3%)
Other (15.6%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[PIE CHART]
<TABLE>
<S> <C>
Argentina (6.3%)
Brazil (34.8%)
Chile (9.1%)
Colombia (0.4%)
Mexico (44.5%)
Other (1.7%)
Peru (1.1%)
Venezuela (2.1%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Telmex (Mexico) 10.7%
2. Cemex (Mexico) 6.5
3. Televisa (Mexico) 4.5
4. FEMSA (Mexico) 4.5
5. Petrobras (Brazil) 4.1
6. Kimberly (Mexico) 3.9
7. CVRD (Brazil) 2.9
8. Embratel (Brazil) 2.7
9. Telecom Argentina (Argentina) 2.6
10. Copel (Brazil) 2.6
----
45.0%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- --------
STATEMENT OF NET ASSETS (UNAUDITED)
- --------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.7%)
(Unless otherwise noted)
- ------------------------------------------------------------------------
ARGENTINA (6.3%)
BANKING
(a)Banco del Suquia 1 U.S.$ --@
Banco Rio de La Plata ADR 50,040 476
------------
476
------------
BEVERAGES & TOBACCO
Quilmes Industrial ADR 211,815 2,621
------------
TELECOMMUNICATIONS-- INTEGRATED
Telecom Argentina ADR 131,778 3,525
Telefonica Argentina ADR 57,532 1,805
------------
5,330
------------
8,427
------------
- ------------------------------------------------------------------------
BRAZIL (34.8%)
BANKING
Banco Bradesco (Preferred) 30,340,000 153
(a,c)Banco Nacional (Preferred) 95,420,000 3
Itaubanco (Preferred) 2,284,034 1,168
Unibanco (Preferred) GDR 85,248 2,051
------------
3,375
------------
ENERGY SOURCES
Petrobras (Preferred) 28,649,579 4,437
Petrobras (Preferred) ADR 32,940 507
(b)Petrobras (Preferred) ADR 30,795 481
------------
5,425
------------
MERCHANDISING
Globex Utilidades (Preferred) 14,200 74
(a)Lojas Arapua (Preferred) 41,337,400 --@
(a)Lojas Arapua (Preferred) ADR 20,775 --@
------------
74
------------
METALS -- STEEL
CSN 38,791,000 1,014
CVRD 5,000 70
CVRD (Preferred) 'A' 148,591 2,939
(a)CVRD (Preferred) ADR 44,830 891
CVRD Bonus 116,420 --@
Gerdau (Preferred) 62,652,422 1,044
Usiminas (Preferred) 111,200 375
------------
6,333
------------
MULTI-INDUSTRY
Iven (Preferred) 1,268,500 165
------------
REAL ESTATE
(b)Rossi Residencial GDR 176,972 199
(a,c)Rossi Residencial GDS
(Registered) 269,535 303
502
------------
TELECOMMUNICATIONS -- INTEGRATED
(a)CRT (Preferred) 'A' 10,741,366 2,635
Tele Centro-Sul (Preferred) 73,125,250 810
Tele Norte-Leste (Preferred) 104,416,000 1,888
Tele Norte-Leste (Preferred) ADR 53,029 984
Telebras Holders 18,339 1,654
Telesp (Preferred) 7,397,373 874
Telesp ADR 54,150 1,239
------------
10,084
------------
TELECOMMUNICATIONS -- LONG DISTANCE
Embratel (Preferred) 126,677,000 1,747
Embratel ADR 137,335 1,905
------------
3,652
------------
TELECOMMUNICATIONS -- WIRELESS
(a)Celular CRT 14,043,266 1,905
Tele Leste Celular (Preferred) 787,883,000 481
Tele Leste Celular ADR 2,185 65
Tele Nordeste Celular (Preferred) 164,776,900 222
Tele Norte Celular (Preferred) 719,139,000 414
Tele Sudeste Celular (Preferred) 119,308,790 674
Tele Sudeste Celular ADR 3,180 92
(a)Telesp Celular (Preferred) 78,094,790 808
(a)Telesp Celular ADR 37,810 1,011
------------
5,672
------------
TEXTILES & APPAREL
Coteminas 5,426,400 276
(b)Coteminas ADR 9,305 23
------------
299
------------
UTILITIES -- ELECTRICAL & GAS
Cemig (Preferred) 84,247,003 1,771
Cemig (Preferred) ADR 79,168 1,682
(a)CERJ 3,981,800,000 945
Copel (Preferred) 'B' 359,903,400 2,929
Copel (Preferred) ADR 64,820 543
Eletrobras 59,050,000 1,115
Eletrobras (Preferred) 'B' 43,645,880 881
Eletrobras ADR 14,130 136
Eletrobras ADR (Preferred) 86,170 867
------------
10,869
------------
46,450
------------
- ------------------------------------------------------------------------
CHILE (8.5%)
BANKING
Banco Edwards ADR 54,789 794
Banco Santander Chile ADR 14,900 231
Banco Santiago ADR 28,795 553
(a)Citicorp-Chile Financiero Fund 2,781 53
------------
1,631
------------
BEVERAGES & TOBACCO
CCU ADR 59,200 1,695
------------
FOOD & HOUSEHOLD PRODUCTS
D&S ADR 37,675 706
------------
MERCHANDISING
(a)Santa Isabel ADR 44,705 453
------------
MULTI-INDUSTRY
Quinenco ADR 56,020 525
------------
- ------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ------------------------------------------------------------------------
<S> <C> <C>
CHILE (CONTINUED)
TELECOMMUNICATIONS -- INTEGRATED
CTC ADR1 37,052 U.S. $3,392
-------------
UTILITIES -- ELECTRICAL & GAS
Chilectra ADR 103,165 2,166
Enersis ADR 30,673 702
-------------
2,868
-------------
11,270
-------------
- --------------------------------------------------------------------------
COLOMBIA (0.4%)
BEVERAGES & TOBACCO
Bavaria 87,449 328
Valores Bavaria 174,928 146
-------------
474
-------------
FINANCIAL SERVICES
Corfivalle 2 --@
-------------
474
-------------
- --------------------------------------------------------------------------
MEXICO (44.5%)
BANKING
(a)Banacci 'L' 645,651 1,576
Bancomer 'B' 2,525,232 919
(a)Banorte 'O' 684,441 988
-------------
3,483
-------------
BEVERAGES & TOBACCO
FEMSA 875,134 3,501
FEMSA ADR 61,743 2,462
Grupo Modelo 'C' 381,300 1,089
-------------
7,052
-------------
BROADCASTING & PUBLISHING
(a)Televisa CPO GDR 133,455 5,980
-------------
BUILDING MATERIALS & COMPONENTS
Cemex 'B' 553,320 2,748
Cemex 'B' ADR 327,697 3,236
Cemex CPO 477,832 2,363
Cemex CPO ADR 35,420 337
Vitro ADR 111,592 572
-------------
9,256
-------------
CONSTRUCTION & HOUSING
Empresas ICA Sociedad
Controladora 338,901 374
-------------
ENERGY EQUIPMENT & SERVICES
Tamsa ADR 41,372 450
-------------
FOOD & HOUSEHOLD PRODUCTS
Grupo Industrial Bimbo 'A' 163,732 363
(a)Seminis, Inc. 'A' 69,300 1,044
-------------
1,407
-------------
HEALTH & PERSONAL CARE
Kimberly 'A' 1,256,024 5,172
-------------
MACHINERY & ENGINEERING
ICA ADR 71,070 480
-------------
MERCHANDISING
(a)Cifra 'C' 947,927 1,736
Cifra 'V' 513,326 997
(a)Cifra 'V' ADR 18,450 354
Soriana 'B' 515,985 2,431
-------------
5,518
-------------
MULTI-INDUSTRY
Alfa 'A' 504,134 2,095
(a)Grupo Carso 'A1' 393,785 1,826
-------------
3,921
-------------
RECREATION, OTHER CONSUMER GOODS
(a)Blockbuster de Mexico ADR 40,000 --@
-------------
TELECOMMUNICATIONS -- INTEGRATED
(a)Carso Global Telecom 329,266 2,086
Telmex 'L' ADR 176,027 14,225
-------------
16,311
-------------
59,404
-------------
- --------------------------------------------------------------------------
PERU (1.1%)
TELECOMMUNICATIONS -- INTEGRATED
Tel Peru 'B' ADR 100,567 1,521
-------------
- --------------------------------------------------------------------------
VENEZUELA (2.1%)
TELECOMMUNICATIONS -- INTEGRATED
CANTV ADR 103,515 2,821
-------------
- --------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$129,025) 130,367
-------------
- --------------------------------------------------------------------------
<CAPTION>
NO.OF
RIGHTS
- --------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.0%)
- --------------------------------------------------------------------------
BRAZIL (0.0%)
TELECOMMUNICATIONS -- WIRELESS
(a,c)Celular CRT (Preferred), expiring
5/7/99
(Cost U.S.$--) 4,500,986 --@
-------------
- --------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS (6.3%)
- --------------------------------------------------------------------------
CHILE (0.6%)
TIME DEPOSIT
Citibank 5.0%, 9/13/99 CLP 27 772
-------------
- --------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the finanical statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (5.7%)
Repurchase Agreement
Chase Securities, Inc. 4.55%,
dated 6/30/99, due
7/01/99, to be
repurchased at
U.S.$7,624, collateralized
by U.S.$7,080 United
States Treasury Bonds,
7.25%, due 5/15/16,
valued at U.S.$7,868
(Cost U.S.$7,623) U.S.$ 7,623 U.S.$ 7,623
--------------
- ---------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$8,424) 8,395
--------------
- ---------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.1%)
Argentine Peso ARP 42 42
Brazil Real BRL 231 131
Chilean Peso CLP 1,119 2
Colombian Peso COP 42 --@
Mexican Peso MXP 39 4
--------------
(Cost U.S.$180) 179
--------------
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS (104.1%)
(Cost U.S.$137,629) 138,941
--------------
- ---------------------------------------------------------------------------
OTHER ASSETS (2.3%)
Receivable for Investments
Sold U.S.$ 2,467
Dividends Receivable 598
Unrealized Gain on Foreign
Currency Exchange Contracts 2
Interest Receivable 1
Other Assets 52 3,120
-------------- --------------
- ---------------------------------------------------------------------------
LIABILITIES (-6.4%)
Deferred Chilean Taxes (14)
Payable For:
Investments Purchased (7,123)
Chilean Taxes (615)
Dividends Declared (402)
Investment Advisory Fees (123)
Professional Fees (65)
Custodian Fees (57)
Directors' Fees and Expenses (49)
Shareholder Reporting
Expenses (44)
Administrative Fees (22)
Other Liabilities (24) (8,524)
-------------- --------------
- ---------------------------------------------------------------------------
<CAPTION>
AMOUNT
(000)
- ---------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
Applicable to 11,756,125, issued and
outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$ 133,523
----------------
----------------
- ---------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 11.36
----------------
----------------
- ---------------------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
Common Stock U.S.$ 117
Capital Surplus 157,667
Undistributed Net Investment Income 499
Accumulated Net Realized Loss (26,013)
Unrealized Appreciation on Investments and
Foreign Currency Translations 1,253
- ---------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 133,523
----------------
----------------
- ---------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing
(b) -- 144A Security -- certain conditions for public sale may exist
(c) -- 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, 1999,
the Fund is obligated to receive foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN
(000) (000) DATE (000) (000) (000)
- ------------ ---------- -------------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
U.S. $1,118 U.S.$1,118 07/01/99 MXP 10,551 U.S.$1,120 U.S.$2
---------- ---------- ------
---------- ---------- ------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
JUNE 30, 1999 EXCHANGE RATES:
- --------------------------------------------------------------------------------
<S> <C> <C>
ARP Argentine Peso 1.000 = U.S. $ 1.00
BRL Brazilian Real 1.770 = U.S. $ 1.00
CLP Chilean Peso 518.100 = U.S. $ 1.00
COP Colombian Peso 1,737.500 = U.S. $ 1.00
MXP Mexican Peso 9.423 = U.S. $ 1.00
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the finanical statements.
8
<PAGE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- JUNE 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- -----------------------------------------------------------------------
<S> <C> <C>
Banking U.S.$ 8,965 6.7 %
Beverages & Tobacco 11,842 8.9
Broadcasting & Publishing 5,980 4.5
Building Materials & Components 9,256 6.9
Construction & Housing 374 0.3
Energy Equipment & Services 450 0.3
Energy Sources 5,425 4.1
Food & Household Products 2,113 1.6
Health & Personal Care 5,172 3.9
Machinery & Engineering 480 0.4
Merchandising 6,045 4.5
Metals -- Steel 6,333 4.7
Multi-Industry 4,611 3.5
Real Estate 502 0.4
Telecommunications -- Integrated 39,459 29.6
Telecommunications -- Long Distance 3,652 2.7
Telecommunications -- Wireless 5,672 4.2
Textiles & Apparel 299 0.2
Utilities -- Electrical & Gas 13,737 10.3
Other 8,574 6.4
------------ -------
U.S.$138,941 104.1 %
------------ -------
------------ -------
- -----------------------------------------------------------------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
JUNE 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
(000) ASSETS
- -----------------------------------------------------------------------
<S> <C> <C>
Argentina U.S.$ 8,427 6.3 %
Brazil 46,450 34.8
Chile 12,042 9.1
Colombia 474 0.4
Mexico 59,404 44.5
Peru 1,521 1.1
United States (short-term investment) 7,623 5.7
Venezuela 2,821 2.1
Other 179 0.1
------------ -------
U.S.$138,941 104.1 %
------------ -------
------------ -------
- -----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends .................................................................. U.S.$ 1,914
Interest ................................................................... 66
Less: Foreign Taxes Withheld ............................................... (17)
- ------------------------------------------------------------------------------------------------------------
Total Income ............................................................. 1,963
- ------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees ................................................... 648
Custodian Fees ............................................................. 59
Country Tax Expense ........................................................ 5
Administrative Fees ........................................................ 69
Professional Fees .......................................................... 61
Shareholder Reporting Expenses ............................................. 41
Chileean Administrative Fees ............................................... 14
Annual Meeting and Proxy Expenses .......................................... 17
Directors' Fees and Expenses ............................................... 30
Transfer Agent Fees ........................................................ 5
Other Expenses ............................................................. 24
Total Expenses ........................................................... 973
- ------------------------------------------------------------------------------------------------------------
Net Investment Income .................................................. 990
- ------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold ................................................. 1,267
Foreign Currency Transactions .............................................. (211)
- ------------------------------------------------------------------------------------------------------------
Net Realized Gain ........................................................ 1,056
- ------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments ................................................ 35,516
Appreciation on Foreign Currency Translations .............................. (62)
- ------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation ........................... 35,454
- ------------------------------------------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation ........... 36,510
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ....................... U.S.$ 37,500
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1998
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income ...................................................................... U.S.$ 990 U.S.$ 1,801
Net Realized Gain (Loss) ................................................................... 1,056 (18,537)
Change in Unrealized Appreciation/Depreciation ............................................. 35,454 (49,556)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations ............................ 37,500 (66,292)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income ...................................................................... (402) (956)
In Excess of Net Investment Income ......................................................... -- (89)
Net Realized Gain .......................................................................... -- (50,392)
In Excess of Net Realized Gain ............................................................. -- (27,069)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions ........................................................................ (402) (78,506)
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (5,049 shares) ............................................... -- 11,919
Repurchase of Shares(437,200 and 542,800 shares, respectively) ............................. (3,493) (3,463)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions ............ (3,493) 8,456
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) .................................................................. 33,605 (136,342)
Net Assets:
Beginning of Period ........................................................................ 99,918 236,260
- ----------------------------------------------------------------------------------------------------------------------------------
End of Period (including undistributed net investment income/distributions in excess
of net investment income of U.S.$499 and U.S.$(89), respectively) ........................ U.S.$133,523 U.S.$ 99,918
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanyng notes are an integral part of the financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA 1999 ------------------------------------------
AND RATIOS: (UNAUDITED) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... U.S.$ 8.19 U.S.$ 20.34 U.S.$ 14.77
- ---------------------------------------------------------------------------------------------------------
Offering Costs ............................. -- -- --
- ---------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) ............... 0.08 0.15 (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments ..................... 3.07 (5.62) 6.28
- ---------------------------------------------------------------------------------------------------------
Total from Investment Operations ........ 3.15 (5.47) 6.27
- ---------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income ..................... (0.03) (0.07) --
In Excess of Net Investment Income ........ -- (0.01) --
Net Realized Gain ......................... -- (4.34) (0.07)
In Excess of Net Realized Gain ............ -- (2.33) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions ..................... (0.03) (6.75) (0.70)
- ---------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value
from Capital Shares Transactions ......... -- -- --
Anti-Dilutive Effect of Shares
Repurchased ............................... 0.05 0.07 --
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ............. U.S.$ 11.36 U.S.$ 8.19 U.S.$ 20.34
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD ...... U.S.$ 9.38 U.S.$ 6.19 U.S.$ 17.94
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value .............................. 52.08% (43.06)% 49.08%
Net Asset Value (1) ....................... 39.22% (33.53)% 43.06%
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) ...... U.S.$133,523 U.S.$ 99,918 U.S.$236,260
- ---------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets .... 1.74%* 1.93% 1.82%
Ratio of Net Investment Income
to Average Net Assets .................... 1.77%* 1.36% (0.07)%
Portfolio Turnover Rate .................... 50% 178% 259%
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA ---------------------------------------------------------
AND RATIOS: 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... U.S.$ 10.98 U.S.$ 17.16 U.S.$ 23.31
- ---------------------------------------------------------------------------------------------------------
Offering Costs ............................. -- (0.07) --
- ---------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) ............... 0.18 0.05 (0.18)
Net Realized and Unrealized Gain
(Loss) on Investments ..................... 4.91 (4.63) 0.25
- ---------------------------------------------------------------------------------------------------------
Total from Investment Operations ........ 5.09 (4.58) 0.43
- ---------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income ..................... (0.16) -- 0.00#
In Excess of Net Investment Income ........ (1.14) (0.44) (5.74)
Net Realized Gain ......................... -- (0.01) --
In Excess of Net Realized Gain ............ -- (0.01) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions ..................... (1.30) (0.45) (5.74)
- ---------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Asset Value
from Capital Shares Transactions ......... -- (1.08)++ 0.02+
Anti-Dilutive Effect of Shares
Repurchased ............................... -- -- --
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ............. U.S.$ 14.77 U.S.$ 10.98 U.S.$ 17.16
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD ...... U.S.$ 12.50 U.S.$ 9.88 U.S.$ 18.25
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value .............................. 38.50% (38.78)%+++ (8.75)%
Net Asset Value (1) ....................... 47.19% (27.61)%+++ (0.14)%
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) ...... U.S.$171,586 U.S.$127,616 U.S.$135,273
- ---------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets .... 1.81%* 2.17% 2.15%
Ratio of Net Investment Income
to Average Net Assets .................... 1.24%* 0.31% (0.77)%
Portfolio Turnover Rate .................... 186% 122% 70%
- ---------------------------------------------------------------------------------------------------------
</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.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
- ----------
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 may use derivatives to achieve its investment objective. The Fund
may engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in
12
<PAGE>
options, swaps and structured notes. Consistent with the Fund's investment
objectives and policies, the Fund may use derivatives for non-hedging as well as
hedging purposes.
Following is a description of derivative instruments that the Fund may utilize
and their associated risks:
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.
13
<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-dividend 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 Dean Witter Investment 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.
D. 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. The Chase Manhattan Bank serves as custodian for the Fund. Custody fees are
payable monthly based on assets held in custody, investment purchases and sales
activity and account maintenance fees, plus reimbursement for certain
out-of-pocket expenses.
F. During the six months ended June 30, 1999, the Fund made purchases and
sales totaling approximately $55,890,000 and $54,108,000, 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, 1999, the Fund
placed a portion of its portfolio transactions with affiliated broker/ dealers.
Accordingly, the Fund incurred brokerage commissions of $3,000 with Morgan
Stanley & Co. Incorpo-
14
<PAGE>
rated, an affiliate of the Adviser, for the six months ended June 30, 1999. At
June 30, 1999, the U.S. Federal income tax cost basis of securities was
$137,449,000 and, accordingly, net unrealized appreciation for U.S. Federal
income tax purposes was $1,312,000 of which $26,310,000 related to appreciated
securities and $24,998,000 related to depreciated securities. At December 31,
1998, the Fund had a capital loss carryforward for U.S. Federal income tax
purposes of approximately $14,061,000 available to offset future capital gains
all of which will expire on December 31, 2006. To the extent that capital gains
are offset, such gains will not be distributed to the shareholders.
G. 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.
H. 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,
1999, totaled $46,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
I. On September 15, 1998, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which the
Fund's shares traded from their net asset value. For the six months ended June
30, 1999, the Fund repurchased 437,200 shares of its Common Stock at an average
price per share of $7.94 and an average discount of 15.58% from net asset value
per share. The Fund expects to continue to repurchase its outstanding shares at
such time and in such amounts as it believes will further the accomplishment of
the foregoing objectives, subject to review by the Board.
J. During June 1999, the Board declared a distribution of $0.0342 per share,
derived from net investment income, payable on July 9, 1999, to shareholders
of record on June 30, 1999.
K. Supplemental Proxy Information
The Annual Meeting of the Stockholders of The Latin American Discovery Fund,
Inc. was held on June 21, 1999. 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: Peter J. Chase..................... 7,358,722 -- 120,630 --
David B. Gill...................... 7,348,197 -- 131,154 --
Michael F. Klein................... 7,373,612 -- 105,739 --
2. To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the Fund............................................. 7,399,235 60,157 -- 19,960
</TABLE>
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<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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<PAGE>
YEAR 2000 DISCLOSURE (UNAUDITED):
The investment advisory services provided to the Fund by the Adviser depend on
the smooth operation of its computer systems. Many computer and software systems
in use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the handling of securities trades, pricing and
account services. The Adviser has been actively working on necessary changes to
its own computer systems to deal with the year 2000 problem and expects that its
systems will be adapted before that date. There can be no assurance, however,
that the Adviser will be successful. In addition, other unaffiliated service
providers may be faced with similar problems. The Adviser is monitoring their
remedial efforts, but, there can be no assurance that they and the services they
provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the Fund
invests may be detrimentally affected by computer failures throughout the
financial services industry beginning January 1, 2000. Improperly functioning
trading systems may result in settlement problems and liquidity issues. In
addition, corporate and governmental data processing errors may result in
production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S.
and foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.
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