<PAGE>
----------------------------------
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
----------------------------------
FIRST QUARTER REPORT
MARCH 31, 1999
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
INVESTMENT ADVISER
THE LATIN AMERICAN DISCOVERY FUND, INC.
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- -------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS
Stefanie V. Chang
Michael F. Klein VICE PRESIDENT AND ACTING
PRESIDENT AND DIRECTOR SECRETARY
Peter J. Chase Harold J. Schaaff, Jr.
DIRECTOR VICE PRESIDENT
John W. Croghan Joseph P. Stadler
DIRECTOR VICE PRESIDENT
David B. Gill Joanna M. Haigney
DIRECTOR TREASURER
Graham E. Jones Belinda A. Brady
DIRECTOR ASSISTANT TREASURER
John A. Levin
DIRECTOR
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INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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U.S. ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
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CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
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SHAREHOLDER SERVICING AGENT
Boston Equiserve
Investor Relations Department
P.O. Box 644
Boston, Massachusetts 02102-0644
(800) 730-6001
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LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
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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 three months ended March 31, 1999, The Latin American Discovery Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
17.09% compared with 15.69% 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 March 31, 1999, the Fund's
total return, based on net asset value per share, was 111.62% compared with
49.02% for the Index. On March 31, 1999, the closing price of the Fund's shares
on the New York Stock Exchange was $8 1/4, representing a 14.0% discount to the
Fund's net asset value per share.
Outperformance relative to the Index for the three months ended March 31, 1999
was largely attributable to our Mexican positions. Overweighting the country was
favorable, as Mexico was the best performing Latin market during the first
quarter gaining 29.9%. Additionally, our Mexican stock selection was strong.
Underweighting Colombia (-14.2%) and Venezuela (-13.3%) also helped performance.
Less favorable was our stock selection in Brazil and Chile.
The first quarter of 1999 was the watershed for the Latin markets. Characterized
by strong performance, the turning point in the markets occurred with the
devaluation of the Brazilian real. On January 21, the Brazilian authorities
abandoned the currency peg that was put in place in mid-1994. With dollar
reserves plummeting daily, pressure from capital flight had become too great.
The Brazilian devaluation had long been expected and much of the risk premium
attached to such an event had been priced into the market. Consequently, with
this event behind it, the market looked forward to a more encouraging future
both for Brazil and the region as a whole. Many observers were amazed to see the
Brazilian equity market gain 5.5% in U.S. dollar terms over the first quarter.
However, in the weeks after the devaluation, the Brazilian government took
decisive action to ensure new, strong management of the central bank as well as
aggressively passing measures through congress that were essential in achieving
the primary fiscal targets agreed upon with the IMF.
With regard to the central bank, Arminio Fraga, former portfolio manager for
Soros Funds Management's Quantum Emerging Growth Fund was appointed as its head.
Fraga offers financial expertise and a more reliable currency management
technique. The move was taken to be so positive that most foreign banks with
Brazilian exposure decided to roll over most of their credit to Brazilian
institutions and in addition, welcomed the notion of a sovereign bond issue.
These developments ensured that confidence both domestically and externally
improved dramatically. Inflation has remained surprisingly subdued and the
currency has rallied off its lows.
We are confident that Brazil has avoided insolvency in the near-term and are
more optimistic on the country's ability to avoid debt default over time.
However, Brazil's continued solvency will be contingent upon the government's
ability to keep real interest rates low (below 15%) and the primary fiscal
surplus high (above 3% gross domestic product). Should the government achieve
this, the growth in the stock of public debt (now at 49% gross domestic product)
will be contained and the debt restructuring avoided. To ensure that rates do
remain low, congress and the executive (President Cardoso and his cabinet) must
be seen to be acting responsibly. Legislation must pass that allows for a social
security system and tax reforms. We do want to point out that none of these
measures is necessary for the government to achieve their fiscal targets with
the IMF for this year. They are important, however, for the longer-term health
of the economy, and hence guide market sentiment.
Over the course of the first quarter, we have added to our Brazilian exposure
and are now overweight the Index. Within Brazil, we are focusing on the
telecommunications industry that offers strong management, high pent-up demand,
and room for cost efficiencies. Telebras is one such example. Telebras was the
former holding company for the Brazilian telecommunications sector. The company
was privatized during the past summer, and split into 12 separate companies.
Through the purchase of the aggregated Telebras security, we are able to tap
into all 12 companies, taking advantage of reduced transaction charges and
increased liquidity. Telebras offers a great potential for revenue growth and
significant margin expansion.
While Mexico performed as poorly as Brazil in 1998, its strong economic
position, coupled with increasing oil prices, have allowed Mexico to
differentiate itself from the rest of Latin America in the first quarter of
1999. The strength in oil prices has removed any constraints that were weighing
on the government's fiscal balance and consistently lower than expected
inflation allowed the peso to rally 7% in real terms. Given its better than
2
<PAGE>
expected economy, stronger currency and lower domestic interest rates, dollar
earnings estimates for Mexico were revised upwards, providing a further boost to
the market.
Within Mexico, we are focusing on consumer-related industries, such as
telecommunications, broadcasting and publishing, beverages, retailing, and
health and personal care. Telmex, one of our holdings, is an integrated
telecommunications provider for Mexico. The company offers excellent management
which focuses on profitability, ensuring the enhancement of shareholder value.
We also own Televisa, the largest media conglomerate in Mexico, which includes a
television network, publishing, radio and music companies. Televisa offers a
favorable combination of cost reductions, ratings momentum and improved
management focus. Upside exists for tariff increases as advertising rates in
Mexico are among the cheapest in the world.
Argentina's market lagged, gaining only 4.7% during the first quarter. We are
underweight Argentina, owing to potential internal and external risks.
Endogenous risks include election year uncertainties, as a new President will
come into power in October, a deteriorating current account, and the economy's
direct link to Brazil. While Brazil has been improving, any set-back will hinder
Argentina's progress. Exogenous risks include a weak commodity cycle and a rise
in U.S. interest rates. Within Argentina, we are invested in the energy sector,
specifically YPF, the country's largest integrated oil and gas company, and in
the telecommunications sector.
Chile's market rose 16.3%, largely driven by an interest rate cut, increased
demand for pulp from Asian markets, and a critical change in company by-laws for
energy-giant Enersis. We are underweight Chile given its slowing economy and
lackluster corporate earnings. Chile's lack of export diversification has
hindered it economically given the country's dependence on commodities.
Specifically, weak copper prices remain a concern.
Turning to other countries, domestic factors including high interest rates,
inflation and a slowing economy have resulted in our Colombian underweight. We
are also underweight Peru and Venezuela. Peru, like Chile, is highly commodity
dependent (particularly copper) and thus has been negatively impacted by low
commodity prices. Concerns regarding Venezuela include uncertainty over
President Chavez's policies, its oil price dependence, and prospects of a
currency devaluation.
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 March
31, 1999, the Fund repurchased 788,400 shares or 6.19% of its Common Stock at an
average price per share of $6.44 and an average discount of 20.07% from the 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.
Sincerely,
/s/Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
April 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.
3
<PAGE>
The Latin America Discovery Fund, Inc.
Investment Summary as of March 31, 1999 (Unaudited)
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<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>
FISCAL YEAR TO DATE 33.33% -- 17.09% -- 15.69% --
ONE YEAR -30.16 -30.16% -25.63 -25.63% -25.27 -25.27%
FIVE YEAR 6.82+ 1.33+ 7.64+ 1.48+ -3.66 -0.74
SINCE INCEPTION* 82.05+ 9.25+ 111.62+ 11.70+ 49.02 6.07
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- -------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
ENDED
MARCH 31,
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 $ 9.59
Market Value Per Share.......... $13.25 $27.13 $18.25 $ 9.88 $12.50 $17.94 $ 6.19 $ 8.25
Premium/(Discount).............. -13.0% 16.4% 6.4% -10.0% -15.4% -11.8% -24.4% -14.0%
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% 17.09%
Index Total Return (3).......... -2.26% 52.29% -3.69% -13.53% 21.96% 31.66% -35.29% 15.69%
</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 $0.01 per share.
+ This return excludes the effect of the rights issued in connection with the
Rights Offerings.
4
<PAGE>
The Latin America Discovery Fund, Inc.
Investment Summary as of March 31, 1999 (Unaudited)
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- -------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
Equity Securities (99.2%)
Short-Term Investments (0.8%)
- -------------------------------------------------------------------------------
SECTORS
[CHART]
Other (12.2%)
Utilities--Electrical & Gas (12.4%)
Telecommunications--Integrated (30.3%)
Banking (5.7%)
Beverages & Tobacco (8.3%)
Broadcasting & Publishing (4.2%)
Building Materials & Components (5.7%)
Energy Sources (8.9%)
Health & Personal Care (3.5%)
Merchandising (4.1%)
Metals--Steel (4.7%)
- -------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
Other (1.1%)
Colombia (0.5%)
Venezuela (0.9%)
Peru (1.1%)
Chile (9.9%)
Argentina (11.1%)
Brazil (35.7%)
Mexico (39.7%)
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<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS*
PERCENT OF PERCENT OF
NET ASSETS NET ASSETS
---------- ----------
<S> <C> <C> <C>
1. Telmex (Mexico) 10.3% 6. FEMSA (Mexico) 3.7%
2. Cemex (Mexico) 5.1% 7. Cemig (Brazil) 3.6
3. Petrobras (Brazil) 4.5% 8. Kimberly (Mexico) 3.5
4. YPF (Argentina) 4.4% 9. Telebras Holders (Brazil) 3.5
5. Televisa (Mexico) 3.9% 10. CVRD (Brazil) 3.4
----
45.9%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- -------
STATEMENT OF NET ASSETS (UNAUDITED)
- -------
MARCH 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
- -------
COMMON STOCKS (98.2%)
(Unless otherwise noted)
- -------------------------------------------------------------------------------
- -------
<S> <C> <C>
ARGENTINA (11.1%)
BANKING
Banco del Suquia 1 U.S.$ -- @
------------
BEVERAGES & TOBACCO
Quilmes Industrial ADR 256,065 2,417
------------
ENERGY SOURCES
YPF ADR 160,100 5,053
------------
MULTI-INDUSTRY
Perez Companc 109,372 514
------------
TELECOMMUNICATIONS--INTEGRATED
Telecom Argentina ADR 105,548 2,896
Telefonica Argentina ADR 61,072 1,848
------------
4,744
------------
12,728
------------
- -------------------------------------------------------------------------------
- -------
BRAZIL (35.7%)
BANKING
Banco Nacional (Preferred) 95,420,000 3
Itaubanco (Preferred) 2,284,034 1,165
Unibanco (Preferred) GDR 75,743 1,458
------------
2,626
------------
ENERGY SOURCES
Petrobras (Preferred) 29,821,579 4,139
Petrobras (Preferred) ADR 39,949 556
(a)Petrobras (Preferred) ADR 30,795 427
------------
5,122
------------
MERCHANDISING
Globex Utilidades (Preferred) 14,200 52
Lojas Arapua (Preferred) 41,337,400 -- @
(a)Lojas Arapua (Preferred) ADR 20,775 -- @
Renner Participacoes (Preferred) 21,864,000 17
------------
69
------------
METALS--STEEL
CSN 38,791,000 656
CVRD 5,000 53
CVRD (Preferred) 'A' 182,691 2,690
CVRD (Preferred) ADR 78,470 1,148
CVRD Bonus 116,420 -- @
Gerdau (Preferred) 62,652,422 646
Usiminas (Preferred) 111,200 190
------------
5,383
------------
MULTI-INDUSTRY
Iven (Preferred) 1,268,500 133
------------
REAL ESTATE
(a)Rossi Residencial GDR 176,972 155
Rossi Residencial GDS (Registered) 269,535 236
------------
391
------------
TELECOMMUNICATIONS--INTEGRATED
CRT (Preferred) 'A' 10,511,166 3,187
Tele Centro-Sul (Preferred) 133,541,390 1,245
Tele Norte-Leste (Preferred) 109,908,000 1,679
Tele Norte-Leste (Preferred) ADR 105,929 U.S.$ 1,629
Telebras (Preferred) 116,126,790 20
Telebras Holders 49,084 3,957
Telesp (Preferred) 71,373 9
------------
11,726
------------
TELECOMMUNICATIONS--LONG DISTANCE
Embratel (Preferred) 139,380,000 2,342
------------
TELECOMMUNICATIONS--WIRELESS
Tele Celular Sul (Preferred) 126,995,790 255
Tele Leste Celular (Preferred) 787,883,000 524
Tele Leste Celular ADR 2,185 70
Tele Nordeste Celular (Preferred) 460,494,900 499
Tele Norte Celular (Preferred) 719,139,000 432
Tele Sudeste Celular (Preferred) 119,308,790 487
Tele Sudeste Celular ADR 15,520 314
Telesp Celular (Preferred) 78,094,790 651
------------
3,232
------------
TEXTILES & APPAREL
Coteminas 5,426,400 307
(a)Coteminas ADR 9,305 27
------------
334
------------
UTILITIES--ELECTRICAL & GAS
Cemig (Preferred) 93,952,003 2,101
Cemig (Preferred) ADR 91,243 2,030
CERJ 3,981,800,000 905
Copel (Preferred) 'B' 361,133,400 2,725
Copel (Preferred) ADR 79,020 593
Eletrobras 27,222,000 531
Eletrobras (Preferred) 'B' 31,908,000 670
------------
9,555
------------
------------
40,913
------------
- -------------------------------------------------------------------------------
- -------
CHILE (9.2%)
BANKING
Banco Edwards ADR 24,790 282
Banco Santander Chile ADR 14,900 224
Banco Santiago ADR 14,300 252
Citicorp-Chile Financiero Fund 3,515 70
------------
828
------------
BEVERAGES & TOBACCO
CCU ADR 54,925 1,198
------------
FOOD & HOUSEHOLD PRODUCTS
D&S ADR 37,675 464
------------
MERCHANDISING
Santa Isabel ADR 44,705 391
------------
MULTI-INDUSTRY
Quinenco ADR 51,020 507
------------
TELECOMMUNICATIONS--INTEGRATED
CTC ADR 103,238 2,432
------------
UTILITIES--ELECTRICAL & GAS
Chilectra ADR 103,165 2,218
Endesa ADR 103,627 1,457
</TABLE>
- -------------------------------------------------------------------------------
- -------
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
- -------
<S> <C> <C>
CHILE (CONTINUED)
UTILITIES--ELECTRICAL & GAS (CONTINUED)
Enersis ADR 37,360 U.S.$ 1,002
------------
4,677
------------
------------
10,497
------------
- -------------------------------------------------------------------------------
- -------
COLOMBIA (0.5%)
BEVERAGES & TOBACCO
Bavaria 87,449 384
Valores Bavaria 159,679 167
------------
551
------------
FINANCIAL SERVICES
Corfivalle 2 -- @
------------
551
------------
- -------------------------------------------------------------------------------
- -------
MEXICO (39.7%)
BANKING
Banacci 'L' 645,651 1,296
Bancomer 'B' 2,556,207 876
Banorte 'B' 684,441 896
------------
3,068
------------
BEVERAGES & TOBACCO
FEMSA 836,980 2,560
FEMSA ADR 55,103 1,705
Grupo Modelo 'C' 427,900 1,097
------------
5,362
------------
BROADCASTING & PUBLISHING
Televisa CPO GDR 143,685 4,508
TV Azteca ADR 47,244 295
------------
4,803
------------
BUILDING MATERIALS & COMPONENTS
Cemex 'B' 587,127 2,465
Cemex 'B' ADR 217,197 1,819
Cemex CPO 384,797 1,571
Vitro ADR 111,592 649
------------
6,504
------------
ENERGY EQUIPMENT & SERVICES
Tamsa ADR 90,173 812
------------
FOOD & HOUSEHOLD PRODUCTS
Grupo Industrial Bimbo 'A' 340,960 760
------------
HEALTH & PERSONAL CARE
Kimberly 'A' 1,070,194 4,032
------------
MERCHANDISING
Cifra 'C' 947,927 1,464
Cifra 'V' 513,326 806
Cifra 'V' ADR 12,250 190
Soriana 'B' 511,464 1,768
------------
4,228
------------
MULTI-INDUSTRY
Alfa 'A' 266,320 809
Grupo Carso 'A1' 393,785 1,618
------------
2,427
------------
RECREATION, OTHER CONSUMER GOODS
Blockbuster de Mexico ADR 40,000 -- @
------------
TELECOMMUNICATIONS--INTEGRATED
Carso Global Telecom 339,546 U.S.$ 1,761
Telmex 'L' ADR 179,628 11,766
------------
13,527
------------
45,523
------------
- -------------------------------------------------------------------------------
- -------
PERU (1.1%)
TELECOMMUNICATIONS--INTEGRATED
Tel Peru 'B' ADR 100,567 1,282
------------
- -------------------------------------------------------------------------------
- -------
VENEZUELA (0.9%)
TELECOMMUNICATIONS--INTEGRATED
CANTV ADR 56,965 1,036
------------
- -------------------------------------------------------------------------------
- -------
TOTAL COMMON STOCKS
(Cost U.S.$126,262) 112,530
------------
- -------------------------------------------------------------------------------
- -------
<CAPTION>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------
- -------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS (0.7%)
- -------------------------------------------------------------------------------
- -------
CHILE (0.7%)
TIME DEPOSIT
Citibank 6.70%, 06/14/99
(Cost U.S.$794) CLP 388,700 803
------------
- -------------------------------------------------------------------------------
- -------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.1%)
Argentine Peso ARP 5 5
Brazil Real BRL 138 81
Chilean Peso CLP 85 -- @
Mexican Peso MXP 97 10
------------
(Cost U.S.$93) 96
------------
- -------------------------------------------------------------------------------
- -------
TOTAL INVESTMENTS (99.0%)
(Cost U.S.$127,149) 113,429
------------
- -------------------------------------------------------------------------------
- -------
OTHER ASSETS AND LIABILITIES (1.0%)
Other Assets U.S.$ 2,587
Liabilities (1,432) 1,155
------------------- ------------
- -------------------------------------------------------------------------------
- -------
NET ASSETS (100%)
Applicable to 11,951,825 issued
and outstanding U.S.$0.01 par value shares
(100,000,000 shares authorized) U.S.$114,584
------------
------------
- -------------------------------------------------------------------------------
- -------
NET ASSET VALUE PER SHARE U.S.$ 9.59
------------
------------
- -------------------------------------------------------------------------------
- -------
</TABLE>
@ -- Value is less than U.S.$500.
(a) -- 144A Security - certain conditions for public sale may exist.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
7
