<PAGE>
- --------------------------------------------------------------------------------
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1998
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
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
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.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the year ended December 31, 1998, The Latin American Discovery Fund, Inc.
(The "Fund") had a total return, based on net asset value per share, of -33.53%
compared with -35.29% 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, 1998, the
Fund's total return, based on net asset value per share, was 80.72% compared
with 28.81% for the Index. On December 31, 1998, the closing price of the
Fund's shares on the New York Stock Exchange was $6 3/16, representing a 24.4%
discount to the net asset value per share.
This past year was one of the most challenging years for Latin American and
emerging economies in recent memory. For the three months ended December 31,
1998, the Fund had a total return of 10.8% compared to 7.2% for the Index.
Outperformance relative to the Index was largely attributable to outstanding
stock selection in Brazil, Chile, and Mexico. The star performers included
Brazilian telecoms, Chilean banks, and Mexican consumer-related companies such
as Kimberly Clark (household paper products) and Femsa (beverages).
The combination of a sharp drop in commodity prices (particularly oil, copper,
and coffee) and in net external financing to the emerging world forced Latin
American countries to tighten financial policies, weaken exchange rates, and
raise interest rates. As a result, real GDP growth across the region
decelerated to about 2.1% in 1998, or less than half of the growth recorded in
1997.
Throughout the first half of the year, it became increasingly evident that a
deterioration in trade (commodity prices) and perhaps lower capital inflows
would negatively impinge upon the economic performance of the Latin economies.
However, most of the Asian countries in crisis implemented stabilization and
reform programs, supported by the IMF, which buoyed the emerging markets.
These programs gave an initial impression that the financial implosion had been
contained within the Asian sphere. Confidence picked up, as did capital flows
to Latin America (led by Brazil), which received record net inflows through
July. Such inflows allowed these economies to partly finance their trade
deficits, even allowing economic activity to expand (most notably in Argentina
and Mexico) in Latin America while Asia fell into a deep recession.
But then came the third quarter, where all the trouble spots in the world
erupted in a chain of contagion. The weakness of the Japanese Yen fueled a
speculative attack against the Hong Kong Dollar, reigniting concerns about the
Chinese Renminbi. Growing risk aversion and tighter liquidity conditions were
detrimental to Russia: not even a larger IMF program was able to arrest foreign
investors' concern and hence departure out of the local and equity markets
there. The suspension of official support led to the collapse of the ruble and
a default on sovereign debt.
Russia's crisis placed enormous pressure on Brazil, triggering a major run on
the Real. The adverse financial effects this had on global financial
institutions resulted in an explosion in credit spreads in emerging debt, while
large capital outflows brought Brazil to the brink of implosion.
By the fourth quarter, it became clear to most market participants that Brazil's
twin deficits (fiscal and current account) were unsustainable. Foreign funding
would not be forthcoming without a substantial improvement on either the fiscal
front or a change in the exchange rate policy.
Financial market participants pressured Brazil's currency, making continual
capital outflow a problem. To instill confidence, the government announced a
series of fiscal measures to raise revenues and cut costs. Once again, it
seemed Brazil would pull itself out of its problems especially once the IMF
became a lender of last resort. Their support came in the form of a
multilateral $41.5 billion package to shore up reserves. In early to mid
November, we raised our Brazilian exposure significantly in light of these
seemingly positive events.
On December 2nd, however, the government lost an important vote to structurally
improve the public social security deficit. This showed the world that despite
its woes, the country's legislature was still not willing to take harsh measures
against their own interests. It was after this disappointment that we adjusted
our Brazilian position from a 4% overweight to a 2% underweight. On a macro
basis, it was becoming increasingly hard to identify a catalyst for Brazil to
perform well, and yet the lack of opportunity in other markets kept us close to
the Index's weighting. On the stock level, Brazilian equities were attractively
valued,
2
<PAGE>
specifically the telecommunications sector in which we remain significantly
overweight.
Overall, we remain concerned about the fragility of the Brazilian economy and
the potential knock-on effect on other Latin economies - specifically Argentina
and Mexico, the latter due to a weaker currency and higher interest rates. The
viability of the Brazilian Real strongly hinges on political will and capital
inflows to avoid a new crisis. Having devalued by some 25% already in January
1999, it now has removed one of the greatest fears overhanging the region.
However, for rational markets to prevail and for equity prices to reflect a
better longer-term economic reality, Brazil needs to deliver on further fiscal
reforms allowing domestic interest rates to come down to levels below 20%.
In order to avoid balance of payments and external debt problems, Latin American
countries will have to adjust even more in 1999. This is because current
foreign exchange earnings (from lower export volume growth, lower commodity
prices, and lower external financing) would, without adjustment, fall short of
scheduled external debt service obligations ($123 billion, of which about half
corresponds to principal). In light of the projected drop in external
financing, Latin America will have to reduce its aggregate current account
deficit probably by about $15 billion to $65.3 billion in 1999. The brunt of
the external adjustment will have to be borne by countries exhibiting the
largest external financing requirements (such as Brazil) or those most
vulnerable to lower commodity prices (Venezuela, Chile, Mexico, Colombia, and
Peru).
Oil prices have been particularly weak in 1998 and the most vulnerable countries
to lower oil prices are Venezuela, Mexico, and Colombia. It is worth
highlighting that for every $1 per barrel that the price of crude falls,
reserves and fiscal positions worsen by $2.1 billion and 0.16% of regional GDP,
respectively. However, we feel that oil prices bottomed early in the fourth
quarter and as with Brazil, believe the worst is over.
With respect to politics, a new cycle of presidential elections are scheduled
for 1999 (Argentina and Chile) and 2000 (Mexico and Peru). We believe these
elections are unlikely to steer the countries away from their macroeconomic
focus.
Most Latin economies have already initiated their adjustment and lower growth
cycle, some in the third quarter, others in the fourth quarter of 1998. The
adjustment is likely to reach its harshest phase during the first quarter of
1999, followed by some recovery in the second half of 1999. This would set the
stage for regional economic expansion in 2000. We believe Latin equity markets
may recover sooner than their economies.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
January 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.
- --------------------------------------------------------------------------------
EFFECTIVE NOVEMBER 1998, MICHAEL PERL HAS JOINED ROBERT MEYER AND ANDY SKOV IN
THE DAY-TO-DAY MANAGEMENT OF THE FUND'S ASSETS. MICHAEL PERL JOINED MORGAN
STANLEY DEAN WITTER ("MSDW") INVESTMENT MANAGEMENT IN 1998. HE IS A VICE
PRESIDENT AND PORTFOLIO MANAGER IN THE EMERGING MARKETS EQUITY GROUP. PRIOR TO
JOINING MSDW INVESTMENT MANAGEMENT, HE WORKED AS A LATIN AMERICAN PORTFOLIO
MANAGER AT BANKERS TRUST AUSTRALIA FROM 1992 TO 1998. HE GRADUATED FROM THE
UNIVERSITY OF NEW SOUTH WALES WITH A BACHELOR OF COMMERCE (HONORS), MAJORING IN
FINANCE, ACCOUNTING AND TAXATION.
3
<PAGE>
The Latin American Discovery Fund, Inc.
Investment Summary as of December 31, 1998 (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 -43.06% -43.06% -33.53% -33.53% -35.29% -35.29%
Five Year -34.31+ -8.06+ 1.18+ 0.23+ -13.46 2.85
Since Inception* 36.54+ 4.89+ 80.72+ 9.49+ 28.81 3.96
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992* 1993 1994 1995 1996 1997 1998
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>>
Net Asset Value Per Share. . . . . $ 15.23 $ 23.31 $ 17.16 $ 10.98 $ 14.77 $ 20.34 $ 8.19
Market Value Per Share . . . . . . $ 13.25 $ 27.13 $ 18.25 $ 9.88 $ 12.50 $ 17.94 $ 6.19
Premium/(Discount) . . . . . . . . -13.0% 16.4% 6.4% -10.0% -15.4% -11.8% -24.4%
Income Dividends . . . . . . . . . -- -- $ 0.00# -- $ 0.16 -- $ 0.08
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%
Index Total Return (3) . . . . . . -2.26% 52.29% -3.69% -13.53% 21.96% 31.66% -35.29%
</TABLE>
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) The Morgan Stanley Capital International Emerging Markets Global Latin
America Index (MSCI EMG Latin America Index) is a broad based market cap
weighted composite index covering at least 60% of markets in Mexico,
Argentina, Brazil, Chile, Colombia, Peru and Venezuela, including
dividends.
* The Fund commenced operations on June 23, 1992.
# Amount is less than $0.01 per share.
+ This return excludes the effect of the rights issued in connection with the
Rights Offerings.
4
<PAGE>
The Latin American Discovery Fund, Inc.
Portfolio Summary as of December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Short-Term Investments (9.6%)
Equity Securities (90.4%)
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
[CHART]
<TABLE>
<S> <C>
Other (20.3%)
Utilities -- Electrical & Gas (12.7%)
Telecommunications -- Wireless (4.4%)
Telecommunications -- Integrated (26.2%)
Banking (4.5%)
Beverages & Tobacco (11.3%)
Broadcasting & Publishing (3.8%)
Energy Sources (5.0%)
Health & Personal Care (4.2%)
Merchandising (3.9%)
Metals -- Steel (3.7%)
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Other (8.1%)
Colombia (0.6%)
Venezuela (1.0%)
Peru (1.8%)
Chile (9.1%)
Argentina (10.4%)
Mexico (37.0%)
Brazil (32.0%)
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Telmex (Mexico) 9.6%
2. FEMSA (Mexico) 6.1
3. Kimberly (Mexico) 4.2
4. Televisa (Mexico) 3.9
5. Cemig (Brazil) 3.9
6. CRT (Brazil) 3.8
7. YPF (Argentina) 3.6
8. Copel (Brazil) 3.4
9. CVRD (Brazil) 2.8
10. Quilmes Industrial (Argentina) 2.6
----
43.9%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.9%)
(Unless otherwise noted)
- --------------------------------------------------------------------------------
ARGENTINA (10.4%)
BANKING
(a) Banco del Suquia 1 U.S.$ --@
---------------
BEVERAGES & TOBACCO
Quilmes Industrial ADR 278,940 2,598
---------------
ENERGY SOURCES
YPF ADR 128,425 3,588
---------------
TELECOMMUNICATIONS -- INTEGRATED
Telecom Argentina ADR 89,428 2,459
Telefonica Argentina ADR 61,072 1,706
---------------
4,165
---------------
10,351
---------------
- --------------------------------------------------------------------------------
BRAZIL (32.0%)
BANKING
(a,c)Banco Nacional (Preferred) 95,420,000 4
Banespa (Preferred) 10,821,000 448
Itaubanco (Preferred) 1,504,034 734
Unibanco (Preferred) GDR 57,108 825
---------------
2,011
---------------
ENERGY SOURCES
Petrobras (Preferred) 4,072,579 462
Petrobras (Preferred) ADR 10,474 119
(b) Petrobras (Preferred) ADR 69,515 790
---------------
1,371
---------------
FOREST PRODUCTS & PAPER
Aracruz Celulose ADR 64,880 519
---------------
MERCHANDISING
Globex Utilidades (Preferred) 14,200 49
(a) Lojas Arapua (Preferred) 41,337,400 11
(a,b)Lojas Arapua (Preferred) ADR 20,775 --
(a) Renner Participacoes (Preferred) 32,504,000 23
---------------
83
---------------
METALS -- STEEL
CVRD 5,000 46
CVRD (Preferred) 'A' 131,491 1,687
CVRD (Preferred) ADR 78,470 1,010
(a) CVRD Bonus 116,420 --@
Gerdau (Preferred) 98,533,422 734
Usiminas (Preferred) 111,200 246
---------------
3,723
---------------
MULTI-INDUSTRY
(a) Iven (Preferred) 1,268,500 252
---------------
REAL ESTATE
(b) Rossi Residencial GDR 176,972 155
Rossi Residencial GDS (Registered) 269,535 236
---------------
391
---------------
TELECOMMUNICATIONS -- INTEGRATED
CRT (Preferred) 'A' 10,511,166 3,784
(a) Tele Centro-Sul (Preferred) 140,439,390 1,219
Telebras (Preferred) 116,126,790 13
(a) Telebras Holders 25,982 1,889
Telesp (Preferred) 10,142,800 1,383
---------------
8,288
---------------
TELECOMMUNICATIONS -- LONG DISTANCE
(a) Embratel (Preferred) 145,340,000 1,985
---------------
TELECOMMUNICATIONS -- WIRELESS
(a) Tele Celular Sul (Preferred) 126,995,790 214
(a) Tele Leste Celular (Preferred) 787,883,000 457
(a) Tele Leste Celular ADR 2,185 62
(a) Tele Nordeste Celular (Preferred) 460,494,900 419
(a) Tele Norte Celular (Preferred) 719,139,000 333
(a) Tele Norte-Leste (Preferred) 119,990,000 1,500
(a) Tele Sudeste Celular (Preferred) 119,308,790 504
(a) Tele Sudeste Celular ADR 15,520 321
(a) Telesp Celular (Preferred) 78,094,790 575
---------------
4,385
---------------
TEXTILES & APPAREL
Coteminas 5,426,400 584
(b) Coteminas ADR 9,305 44
---------------
628
---------------
UTILITIES -- ELECTRICAL & GAS
Cemig (Preferred) 110,520,003 2,104
Cemig (Preferred) ADR 91,243 1,737
(a) CERJ 3,637,800,000 1,204
Copel (Preferred) 'B' 374,625,400 2,698
Copel (Preferred) ADR 90,470 644
---------------
8,387
---------------
32,023
---------------
- --------------------------------------------------------------------------------
CHILE (9.1%)
BANKING
Banco Edwards ADR 7,740 85
Banco Santander Chile ADR 14,900 218
Banco Santiago ADR 14,300 213
(a) Citicorp-Chile Financiero Fund 3,640 73
---------------
589
---------------
BEVERAGES & TOBACCO
CCU ADR 54,925 1,057
---------------
FOOD & HOUSEHOLD PRODUCTS
D&S ADR 37,675 433
---------------
MERCHANDISING
Santa Isabel ADR 44,705 296
---------------
MULTI-INDUSTRY
Quinenco ADR 51,020 408
---------------
TELECOMMUNICATIONS -- INTEGRATED
CTC ADR 65,755 1,361
---------------
UTILITIES -- ELECTRICAL & GAS
Chilectra ADR 103,090 2,217
Endesa ADR 100,480 1,143
Enersis ADR 51,540 1,330
Gener ADR 13,680 219
---------------
4,909
---------------
9,053
---------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COLOMBIA (0.6%)
BANKING
Bancolombia (Preferred) 1,081 U.S.$ 1
---------------
BEVERAGES & TOBACCO
Bavaria 87,449 439
Valores Bavaria 159,679 170
---------------
609
---------------
FINANCIAL SERVICES
Corfivalle 2 --@
---------------
610
---------------
- --------------------------------------------------------------------------------
MEXICO (37.0%)
BANKING
(a) Banacci 'L' 645,651 744
Bancomer 'B' 2,556,207 547
(a) Banorte 'B' 684,441 588
---------------
1,879
---------------
BEVERAGES & TOBACCO
FEMSA 1,469,871 3,987
FEMSA ADR 78,658 2,094
Grupo Modelo 'C' 427,900 904
---------------
6,985
---------------
BROADCASTING & PUBLISHING
(a) Televisa CPO GDR 155,943 3,850
---------------
BUILDING MATERIALS & COMPONENTS
Cemex 'B' 290,995 719
Cemex 'B' ADR 217,197 1,059
Cemex CPO 143,257 309
---------------
2,087
---------------
ENERGY EQUIPMENT & SERVICES
Tamsa ADR 90,173 580
---------------
FOOD & HOUSEHOLD PRODUCTS
Grupo Industrial Bimbo 'A' 624,755 1,199
Vitro ADR 111,592 509
---------------
1,708
---------------
HEALTH & PERSONAL CARE
Kimberly 'A' 1,316,261 4,182
---------------
MERCHANDISING
(a) Cifra 'C' 947,927 1,157
Cifra 'V' 513,326 622
Cifra 'V' ADR 12,250 149
Soriana 'B' 511,464 1,628
---------------
3,556
---------------
MULTI-INDUSTRY
Alfa 'A' 422,920 1,192
Grupo Carso 'A1' 393,785 1,337
---------------
2,529
---------------
RECREATION, OTHER CONSUMER GOODS
(a) Blockbuster de Mexico ADR 40,000 --@
---------------
TELECOMMUNICATIONS -- INTEGRATED
Telmex 'L' ADR 196,490 9,567
---------------
36,923
---------------
- --------------------------------------------------------------------------------
PERU (1.8%)
TELECOMMUNICATIONS -- INTEGRATED
Tel Peru 'B' ADR 144,267 1,830
---------------
- --------------------------------------------------------------------------------
VENEZUELA (1.0%)
TELECOMMUNICATIONS -- INTEGRATED
CANTV ADR 56,965 1,014
---------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$126,016) 91,804
---------------
- --------------------------------------------------------------------------------
RIGHTS (0.0%)
- --------------------------------------------------------------------------------
BRAZIL (0.0%)
(a) CERJ
(Cost U.S.$--) 70 --@
---------------
- --------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS (8.4%)
- --------------------------------------------------------------------------------
CHILE (0.8%)
TIME DEPOSIT
Citicorp 13.80%, 1/6/99 CLP 26 807
---------------
- --------------------------------------------------------------------------------
UNITED STATES (7.6%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 4.45%,
dated 12/31/98, due 1/4/99,
to be repurchased at U.S.$7,644,
collateralized by U.S.$5,560,
United States Treasury Bonds,
4.45%, due 5/15/17, valued at
U.S.$7,796
(Cost U.S.$7,640) U.S.$ 7,640 7,640
---------------
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$8,426) 8,447
---------------
- --------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (1.3%)
Brazil Real BRL 1,456 1,205
Chilean Peso CLP 129 1
Colombian Peso COP 54 --@
Mexican Peso MXP 923 93
---------------
(Cost U.S.$1,299) 1,299
---------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.6%)
(Cost U.S.$135,741) 101,550
---------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER ASSETS (0.4%)
Dividends Receivable U.S.$ 318
Interest Receivable 2
Other Assets 35 U.S.$ 355
---------------
- --------------------------------------------------------------------------------
LIABILITIES (-2.0%)
Deferred Chilean Taxes (14)
Payable For:
Dividends Declared (1,045)
Chilean Taxes (624)
Investment Advisory Fees (100)
Professional Fees (79)
Shareholder Reporting Expenses (41)
Administrative Fees (28)
Directors' Fees and Expenses (28)
Custodian Fees (21)
Other Liabilities (7) (1,973)
--------------- ---------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 12,193,325, issued
and outstanding U.S.$0.01 par
value shares (100,000,000 shares
authorized) U.S.$ 99,918
---------------
---------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 8.19
---------------
---------------
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Common Stock U.S.$ 122
Capital Surplus 161,155
Distributions in Excess of Net
Investment Income (89)
Accumulated Net Realized Loss (27,069)
Unrealized Depreciation on
Investments and Foreign
Currency Translations (net of
accrued foreign taxes of U.S.$14
on unrealized appreciation) (34,201)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 99,918
---------------
- --------------------------------------------------------------------------------
(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.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 EXCHANGE RATES:
- --------------------------------------------------------------------------------
BRL Brazilian Real 1.208 = U.S. $1.00
CLP Chilean Peso 473.250 = U.S. $1.00
COP Colombian Peso 1,554.000 = U.S. $1.00
MXP Mexican Peso 9.898 = U.S. $1.00
- --------------------------------------------------------------------------------
</TABLE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
Banking U.S.$ 4,480 4.5%
Beverages & Tobacco 11,249 11.3
Broadcasting & Publishing 3,850 3.8
Building Materials & Components 2,087 2.1
Energy 644 0.6
Energy Equipment & Services 580 0.6
Energy Sources 4,959 5.0
Food & Household Products 2,141 2.1
Forest Products & Paper 519 0.5
Health & Personal Care 4,182 4.2
Merchandising 3,935 3.9
Metals -- Steel 3,723 3.7
Multi-Industry 3,189 3.2
Real Estate 391 0.4
Telecommunications -- Integrated 26,225 26.2
Telecommunications -- Long Distance 1,985 2.0
Telecommunications -- Wireless 4,385 4.4
Textiles & Apparel 628 0.6
Utilities -- Electrical & Gas 12,652 12.7
Other 9,746 9.8
--------------- --------
U.S.$ 101,550 101.6%
--------------- --------
--------------- --------
- --------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
DECEMBER 31, 1998
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- --------------------------------------------------------------------------------
<S> <C> <C>
Argentina U.S.$ 10,351 10.4%
Brazil 32,023 32.0
Chile 9,053 9.1
Colombia 610 0.6
Mexico 36,923 37.0
Peru 1,830 1.8
United States (short-term investment) 7,640 7.6
Venezuela 1,014 1.0
Other 2,106 2.1
--------------- --------
U.S.$ 101,550 101.6%
--------------- --------
--------------- --------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
STATEMENT OF OPERATIONS (000)
- ----------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 3,984
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467
Less: Foreign Taxes Withheld . . . . . . . . . . . . . . . . . . . . . . . . (92)
- ----------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,359
- ----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 1,533
Country Tax Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Administrative Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Professional Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Shareholder Reporting Expenses . . . . . . . . . . . . . . . . . . . . . . . 76
Brazilian Administrative Fees. . . . . . . . . . . . . . . . . . . . . . . . 68
Chilean Administrative Fees. . . . . . . . . . . . . . . . . . . . . . . . . 28
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 15
Transfer Agent Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
- ----------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,558
- ----------------------------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . . . . . . . . . . . . . . . . 1,801
- ----------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . (18,231)
Foreign Currency Transactions. . . . . . . . . . . . . . . . . . . . . . . . (306)
- ----------------------------------------------------------------------------------------------------
Net Realized Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,537)
- ----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments. . . . . . . . . . . . . . . . . . . . . . . . . (49,604)
Appreciation on Foreign Currency Translations. . . . . . . . . . . . . . . . 48
- ----------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . (49,556)
- ----------------------------------------------------------------------------------------------------
Net Realized Loss and Change in Unrealized Appreciation/Depreciation . . . . . . (68,093)
- ----------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . U.S.$ (66,292)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss) . . . . . . . . . . . . . . U.S.$ 1,801 U.S.$ (161)
Net Realized Gain (Loss) . . . . . . . . . . . . . . . . (18,537) 69,681
Change in Unrealized Appreciation/Depreciation . . . . . (49,556) 3,295
- ----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . . . (66,292) 72,815
- ----------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income. . . . . . . . . . . . . . . . . . (956) --
In Excess of Net Investment Income . . . . . . . . . . . (89) --
Net Realized Gain. . . . . . . . . . . . . . . . . . . . (50,392) (8,141)
In Excess of Net Realized Gain . . . . . . . . . . . . . (27,069) --
- ----------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . . (78,506) (8,141)
- ----------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (1,118,141 and 0 shares,
respectively). . . . . . . . . . . . . . . . . . . . . 11,919 --
Repurchase of Shares (542,800 and 0 shares,
respectively). . . . . . . . . . . . . . . . . . . . . (3,463) --
- ----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Capital
Share Transactions . . . . . . . . . . . . . . . . . . 8,456 --
- ----------------------------------------------------------------------------------------------------
Total Increase (Decrease). . . . . . . . . . . . . . . . (136,342) 64,674
Net Assets:
Beginning of Period. . . . . . . . . . . . . . . . . . . 236,260 171,586
- ----------------------------------------------------------------------------------------------------
End of Period (including distributions in excess of net
investment income /accumulated net investment loss
of U.S.$89 and U.S.$539, respectively) . . . . . . . . U.S.$ 99,918 U.S.$ 236,260
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA ------------------------------------------------------------------------
AND RATIOS: 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD U.S.$ 20.34 U.S.$ 14.77 U.S.$ 10.98 U.S.$ 17.16 U.S.$ 23.31
- -----------------------------------------------------------------------------------------------------------------------------
Offering Costs -- -- -- (0.07) --
- -----------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.15 (0.01) 0.18 0.05 (0.18)
Net Realized and Unrealized Gain (Loss)
on Investments (5.62) 6.28 4.91 (4.63) (0.25)
- -----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (5.47) 6.27 5.09 (4.58) (0.43)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income (0.07) -- (0.16) -- 0.00#
In Excess of Net Investment Income (0.01) -- -- -- --
Net Realized Gain (4.34) (0.70) (1.14) (0.44) (5.74)
In Excess of Net Realized Gain (2.33) -- -- (0.01) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (6.75) (0.70) (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 0.07 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD U.S.$ 8.19 U.S.$ 20.34 U.S.$ 14.77 U.S.$ 10.98 U.S.$ 17.16
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD U.S.$ 6.19 U.S.$ 17.94 U.S.$ 12.50 U.S.$ 9.88 U.S.$ 18.25
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value (43.06)% 49.08% 38.50% (38.78)%+++ (8.75)%
Net Asset Value (1) (33.53)% 43.06% 47.19% (27.61)%+++ (0.14)%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) U.S.$ 99,918 U.S.$ 236,260 U.S.$ 171,586 U.S.$ 127,616 U.S.$ 135,273
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.93% 1.82% 1.81% 2.17% 2.15%
Ratio of Net Investment Income (Loss) to Average
Net Assets 1.36% (0.07)% 1.24% 0.31% (0.77)%
Portfolio Turnover Rate 178% 259% 186% 122% 70%
- -----------------------------------------------------------------------------------------------------------------------------
</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.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- ----------
The Latin American Discovery Fund, Inc. (the "Fund") was incorporated on
November 12, 1991 and is registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is long-term capital appreciation through
investments primarily in equity securities.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities,
including purchased options, for which market quotations are readily
available are valued at the last sales price on the valuation date, or if
there was no sale on such date at the mean between the current bid and
asked prices. Securities which are traded over-the-counter are valued at
the average of the mean of current bid and asked prices obtained from
reputable brokers. Short-term securities which mature in 60 days or less
are valued at amortized cost. All other securities and assets for which
market values are not readily available (including investments which are
subject to limitations as to their sale) are valued at fair value as
determined in good faith by the Board of Directors ("the Board"), although
the actual calculations may be done by others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly,
no provision for U.S. Federal income taxes is required in the financial
statements. The Fund may be subject to taxes imposed by countries in which
it invests. Such taxes are generally based on income and/or capital gains
earned or repatriated. Taxes are accrued and applied to net investment
income, net realized gains and net unrealized appreciation as such income
and/or gains are earned.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To
the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to determine
the adequacy of the collateral. In the event of default on the obligation
to repurchase, the Fund has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counter-party to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal
proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing
rates of exchange on the valuation date;
- investment transactions and investment income at the prevailing
rates of exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and
balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign currency translations in the Statement of Net
Assets. The change in unrealized currency gains (losses) for the period is
reflected in the Statement of Operations.
The Fund 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
11
<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 and their associated risks
that the Fund may utilize:
5. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
6. PURCHASED OPTIONS: The Fund may purchase call and put options on listed
securities or securities traded over the counter. The Fund may purchase
call options on securities to protect against an increase in the price of
the underlying security. The Fund may purchase put options on securities to
protect against a decline in the value of the underlying security. Possible
losses from purchased options cannot exceed the total amount invested.
Realized gains or losses on purchased options are included with net gain
(loss) on investment securities sold in the financial statements.
7. FORWARD COMMITMENTS AND WHEN-ISSUED/DELAYED DELIVERY SECURITIES: The Fund
may make forward commitments to purchase or sell securities. Payment and
delivery for securities which have been purchased or sold on a forward
commitment basis can take place a month or more (not to exceed 120 days)
after the date of the transaction. Additionally, the Fund may purchase
securities on a when-issued or delayed delivery basis. Securities purchased
on a when-issued or delayed delivery basis are purchased for delivery
beyond the normal settlement date at a stated price and yield, and no
income accrues to the Fund on such securities prior to delivery. When the
Fund enters into a purchase transaction on a when-issued or delayed
delivery basis, it either establishes a segregated account in which it
maintains liquid assets in an amount at least equal in value to the Fund's
commitments to purchase such securities or denotes such securities on the
custody statement for its regular custody account. Purchasing securities on
a forward commitment or when-issued or delayed-delivery basis may involve a
risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss
at the time of delivery.
8. SWAP AGREEMENTS: The Fund may enter into swap agreements to exchange the
return generated by one security, instrument or basket of instruments for
the return generated by another security, instrument or basket of
instruments. The following summarizes swaps which may be entered into by
the Fund:
INTEREST RATE SWAPS: Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal
amount. Net periodic interest payments to be received or paid are accrued
daily and are recorded in the Statement of Operations as an adjustment to
interest income. Interest rate swaps are marked-to-market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized appreciation or depreciation in the Statement of Operations.
TOTAL RETURN SWAPS: Total return swaps involve commitments to pay interest
in exchange for a market-linked return based on a notional amount. To the
extent the total return of the security, instrument or basket of
instruments underlying the transaction exceeds or falls short of the
offsetting interest obligation, the Fund will receive a payment from or
make a payment to the counterparty, respectively. Total return swaps are
marked-to-market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each
measurement period, but prior to termination, are recorded as realized
gains or losses in the Statement of Operations.
Realized gains or losses on maturity or termination of interest rate and
total return swaps are presented in the Statement of Operations. Because
there is no organized market for these swap agreements, the value reported
in the Statement of Net Assets may differ from that which would be realized
in the event the Fund terminated its position in the agreement. Risks may
arise upon entering into these agreements from the potential inability of
the counterparties to meet the terms of the agreements and are generally
limited to the amount of net interest payments to be received and/or
favorable movements in the value of the underlying security, instrument or
basket of instruments, if any, at the date of default.
12
<PAGE>
9. STRUCTURED SECURITIES: The Fund may invest in interests in entities
organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with or purchase by an entity of
specified instruments and the issuance by that entity of one or more
classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. Structured Securities generally
will expose the Fund to credit risks of the underlying instruments as well
as of the issuer of the Structured Security. Structured Securities are
typically sold in private placement transactions with no active trading
market. Investments in structured securities may be more volatile than
their underlying instruments, however, any loss is limited to the amount of
the original investment.
10. OVER-THE-COUNTER TRADING: Derivative instruments that may be purchased or
sold by the Fund are expected to regularly consist of instruments not
traded on an exchange. The risk of nonperformance by the obligor on such an
instrument may be greater, and the ease with which the Fund can dispose of
or enter into closing transactions with respect to such an instrument may
be less, than in the case of an exchange-traded instrument. In addition,
significant disparities may exist between bid and asked prices for
derivative instruments that are not traded on an exchange. Derivative
instruments not traded on exchanges are also not subject to the same type
of government regulation as exchange traded instruments, and many of the
protections afforded to participants in a regulated environment may not be
available in connection with such transactions.
11. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis. Dividend income is recorded on
the ex-dividend date (except certain dividends which may be recorded as
soon as the Fund is informed of such dividend) net of applicable
withholding taxes where recovery of such taxes is not reasonably assured.
Distributions to shareholders are recorded on the ex-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. Unibanco-Uniao de Bancos Brasileiros S.A. (the "Brazilian
Administrator") provides administrative services to the Fund under the terms
of an Administration Agreement and is paid a fee computed weekly and payable
monthly at an annual rate of 0.125% of the Fund's average weekly net assets
invested in Brazil. Bice Chileconsult Agente de Valores S.A. (the "Chilean
Administrator") provides administrative services to the Fund under the terms
of a separate Administration Agreement and is paid an annual fee, computed
weekly and payable monthly, equal to the greater of 0.25% of the Fund's
average weekly net assets invested in Chile or $20,000. Cititrust S.A. (the
"Colombian Administrator") provides administrative services to the Fund and
is paid a fee computed weekly and payable monthly at an annual rate of 0.25%
of the Fund's average weekly net assets invested in Colombia.
E. The Chase Manhattan Bank and its affiliates serve as custodian for the
Fund. The Fund's assets held outside the United States have been held by Morgan
Stanley Trust Company ("MSTC"), which was an affiliate of the Adviser prior to
October 1, 1998. On October 1, 1998, MSTC was acquired by the Chase Manhattan
Bank. 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. Through September 30, 1998,
the Fund paid MSTC fees of approximately $109,000.
13
<PAGE>
F. During the year ended December 31, 1998, the Fund made purchases and sales
totaling approximately $230,874,000 and $290,958,000, 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, 1998, the Fund placed
a portion of its portfolio transactions with affiliated broker/ dealers.
Accordingly, the Fund incurred brokerage commissions of $39,000 with Morgan
Stanley & Co. Incorporated, an affiliate of the Adviser, for the year ended
December 31, 1998. At December 31, 1998, the U.S. Federal income tax cost basis
of securities was $138,051,000 and, accordingly, net unrealized depreciation for
U.S. Federal income tax purposes was $40,179,000 of which $2,379,000 related to
appreciated securities and $37,800,000 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. For the year ended December 31, 1998 the Fund intends to elect to
defer to January 1, 1999 for U.S. Federal income tax purposes, post-October
capital losses of $9,408,000.
G. The Fund issued to its shareholders of record as of the close of business
on September 12, 1995 transferable rights to subscribe for up to an aggregate of
3,100,000 shares of Common Stock of the Fund at a rate of one share of Common
Stock for three Rights held at the subscription price of $9.00 per share. During
September and October 1995, the Fund issued, in total, 3,100,000 shares of
Common Stock on exercise of such Rights. Rights offering costs of $460,000 were
charged directly against the proceeds of the Offering. The Fund was advised that
Morgan Stanley & Co. Incorporated received commissions of $825,000 and
reimbursement of its expenses of $100,000 in connection with its participation
in the Rights Offering.
H. A significant portion of the Fund's net assets consist of securities
denominated in Latin American currencies. Changes in currency exchange rates
will affect the value of and investment income from such securities. Latin
American securities are often subject to greater price volatility, limited
capitalization and liquidity, and higher rates of inflation than securities of
companies based in the United States. In addition, Latin American securities
maybe subject to substantial governmental involvement in the economy and greater
social, economic and political uncertainty.
I. Each Director of the Fund who is not an officer of the Fund or an
affiliated person as defined under the Investment Company Act of 1940, as
amended, may elect to participate in the Directors' Deferred Compensation Plan
(the "Plan"). Under the Plan, such Directors may elect to defer payment of a
percentage of their total fees earned as a Director of the Fund. These deferred
portions are treated, based on an election by the Director, as if they were
either invested in the Fund's shares or invested in U.S. Treasury Bills, as
defined under the Plan. The deferred fees payable under the Plan, at December
31, 1998, totaled $29,000 and are included in Payable for Directors' Fees and
Expenses on the Statement of Net Assets.
J. 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. From that date through December
31, 1998, the Fund repurchased 542,800 shares or 4.26% of its Common Stock at an
average price per share of $6.33 and an average discount of 21.27% 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.
K. During December 1998, the Board declared distributions of $0.08 per share,
derived from net investment income, payable on January 8, 1999, to shareholders
of record on December 31, 1998.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED):
For the year ended December 31, 1998, the Fund designates $139,000 as
long-term capital gain at the 20% tax bracket.
14
<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, 1998, 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, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 8, 1999
15
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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.
16
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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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