<PAGE>
- ------------------------------------------------------------------------------
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
- ------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 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
TREASURER
Robin L. Conkey
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 year ended December 31, 1999, The Latin American Discovery Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of
73.78% compared with 65.45% for the Morgan Stanley Capital International
(MSCI) Emerging Markets Global Latin America Index and 58.89% for the MSCI
Emerging Markets Free Latin America Index. For the period from commencement
of operations on June 23, 1992 through December 31, 1999, the Fund's total
return, based on net asset value per share, was 214.06% compared with 113.12%
for the MSCI Emerging Markets Global Latin America Index and 128.45% for the
MSCI Emerging Markets Free Latin America Index. On December 31, 1999, the
closing price of the Fund's shares on the New York Stock Exchange was $10
11/16 , representing a 24.2% discount to the Fund's net asset value per share.
Outperformance relative to the MSCI Emerging Markets Free Latin America Index
(the "Index") was attributable to both strong stock selection and country
allocation. Stock selection in Brazilian and Mexican equities contributed
markedly to performance. Stock selection in Argentina and Venezuela also
added to performance. Our overweight position in Brazil (+67.2%) and our
underweight stance in Chile (+39.0%), Colombia (-13.7%) and Peru (+18.9%)
contributed positively to performance. Detracting from performance was stock
selection in Chile.
After the darkness of the second half of 1998, the sun shone brilliantly on
1999, ushering in a renaissance of the Latin markets. The series of emerging
market crises that began in Asia in October 1997 culminated with the
devaluation of the Brazilian real on January 13, 1999. In the weeks leading
up to the devaluation, sentiment towards and stock valuations in Latin
markets neared the lowest levels since the debt crisis of the 1980s. As a
result, once the anticipated devaluation finally occurred, all markets staged
a significant rally, relieved that the bad news had passed. In the coming
months, Latin governments demonstrated sensible and sound economic (monetary
and fiscal) management, allowing for lower risk premiums demanded by both
domestic and external investors. Real interest rates (both domestic and the
external Brady bonds) contracted significantly off their January highs
engendering a less severe recession in 1999 and setting the stage for an
economically strong 2000. We expect regional growth of 3-3.5% in 2000
compared with 0.1% in 1999.
In Brazil, the government's reaction to the crisis was swift and reassuring.
Within weeks after the devaluation, Arminio Fraga was recruited and appointed
as president of the Central Bank. Fraga, a former portfolio manager at Soros
Funds Management and previously a well-respected university professor in
Brazil, brought needed credibility to the position. He elucidated a new
monetary policy that seemed plausible. This prevented foreign commercial
banks from fully terminating loans to Brazilian institutions. In addition,
President Cardoso and his government took decisive action to ensure a primary
fiscal surplus large enough to offset the heavy interest service component on
government debt. The markets were greatly concerned about the solvency of the
Brazilian government, as interest rates over 40% for an extended period and
government debt/GDP at 50% made solvency doubtful. Fraga's appointment and
the government's measures allowed the currency to stabilize and for inflation
to remain surprisingly low, enabling domestic interest rates to fall to 19%
by year-end.
At the corporate level, 1999 was a disappointing year from a dollar earnings
perspective for most Brazilian companies, although not as poor as might have
been expected, setting the stage for a very strong 2000. Our strategic
allocation to the telecommunications sector worked favorably as robust
subscriber growth provided strong revenue growth in a weak economic period.
Moreover, increased efficiency in capital investments ensured improving rates
of return on capital. The telecommunications sector was re-rated globally.
Investors increasingly recognized the potential growth for telecommunications
given the growth in wireless communication plus transmission of data with
growth in the internet.
In Mexico, from the very beginning of 1999, the government proved to the
financial markets its willingness to make tough decisions to remain
financially viable, risking political support in an election year. With some
thirty percent of fiscal revenues derived from oil, the price of which was at
cyclical lows, the government significantly cut back spending so that the
fiscal deficit would remain at 1.5% of GDP for the year. Also, in every
previous election year, the incoming government has traditionally appointed a
new president of the central bank, making the concept of independent monetary
policy (and the credibility in fighting inflation) a dubious one. In this
cycle, the central bank president would remain in office until 2002, thus
spanning both administrations. Both of these announcements allowed Mexico to
de-couple from Brazil in perceived sovereign risk and market performance.
Mexico also continues to benefit greatly from the trade agreement, with much
of 1999's growth fuelled by strong exports, up 25% for the year. Mexico's
competitiveness and improving productivity continues to attract foreign
investment, providing support for the peso and helping to reduce price
inflation. For 1999, Mexico's inflation rate was 12.3% which beat the
government's and the market's forecast of 13%.
At the corporate level, Mexican earnings surprised positively in every
quarter of 1999. Some of the consumer companies we invest in had raised
prices in nominal terms at the beginning of the year and, due to inflation
surprising on the low side, this translated to real peso price increases and
boosted margins. Moreover, the new generation of Mexican management, often
U.S.-educated and very focussed on capital efficiency, continued to
demonstrate margin improvement due to cost-cutting and efficiency gains.
Together, the stronger earnings in real peso terms plus a currency that
appreciated by 4% in nominal terms meant that the U.S. dollar effect appeared
particularly buoyant.
2
<PAGE>
Chile had an economically difficult year, with GDP shrinking 1.2% and
industrial production contracting 5% after contracting 1% in 1998. A
combination of negative factors caused this. Some of these included commodity
prices reaching their cyclical lows (especially copper and pulp), the worst
drought in a decade, poor demand for Chilean exports particularly from Asia
in 1998 and, finally, beginning the year with extremely high real interest
rates post the Russian crisis. All of these factors led to a plunge in
consumer confidence. Over the course of the year, monetary policy was eased
significantly with real interest rates now at historical lows of 5%. Monetary
easing coupled with weaker exports caused a 12% slippage in the currency and
more importantly, an abandonment of the currency band. However, the economy
started showing signs of a nascent recovery in the fourth quarter, which we
expect to extend to strong growth in 2000.
Like its neighbors, Argentina's economy contracted 3.8% in 1999 with price
deflation of 1.2% and real interest rates over 12%, the highest level since a
short period in 1995. Argentina has considerable dependence on foreign
capital to roll over its public debt, the stock of which stands at 45% of
GDP. Therefore, high interest rates are required to ensure domestic money
remains in the country. While high interest rates relieve pressure on the
currency, they may threaten the currency board's existence. Again, the fourth
quarter showed impressive signs of a renaissance in this economy and the
outlook for the next twelve months is very positive. Another positive factor
was the smooth transition to a new president after the elections in October.
Argentina's new president, Fernando de la Rua, replaced President Carlos
Menem who had been in power for over a decade. De la Rua is from the
Alliance, a combination of two opposition parties and had beaten the
governing Peronist party for the first time. Importantly though, the latter
still controls the senate and our concern was that legislative reform,
particularly in the labor market, would be difficult to get through. This
proved to be incorrect as the new budget was successfully steered through in
late December. Consequently, from a political perspective, we have become
more comfortable in this market.
The most significant event from an equity market perspective was the $10
billion takeover of oil company YPF, one of the major stocks listed in
Argentina. Repsol of Spain bid at a 30% premium to the market, providing us
with strong returns on our holding.
We expect overall GDP growth for the region in the vicinity of 3.5% compared
to 0.1% in 1999. Moreover, the foreign direct investment coming into the
region is supportive of currency and hence dollar equity returns. The region
will still run a current account deficit of over 3%, so despite the
improvement, it will still be subject to the whim of global capital markets.
If the U.S. Federal Reserve engineers a global hard-landing, with a
concurrent reversal in risk-appetite, this would hinder market performance
from these levels. We believe valuations are still cheap on a global
comparison but the discount has narrowed off the extreme lows of early 1999.
As far as our economic outlook for 2000 and beyond, we are the most
optimistic we have been in a long time. Commodity prices have rebounded off
their lows as have the economies of Europe and Asia and, overall, the current
account picture for all the economies has significantly improved. Moreover,
the level of risk aversion to Latin America that grew after the crises in
Asia, Russia and Brazil has dissipated, as the response by Latin governments
was a disciplined one. This process is still in an evolutionary state and
further contraction in discount rates should propel equity valuations higher.
Finally, as a matter of fundamental policy as set forth in the Fund's
Prospectus dated September 13, 1995, the Fund is permitted to invest more
than 25% of its assets in the telecommunications industry. The Board of
Directors had previously established a 40% limitation on investments in such
industry, and the Fund announced this limitation in a letter to stockholders
dated June 11, 1997. At a meeting held on February 18, 2000, the Board of
Directors of the Fund approved an increase in such limitation from 40% to
50%. Pursuant to this new non-fundamental policy, the Fund may not invest
more than 50% of its assets in the telecommunications industry. In approving
this new policy, the Board considered the recent growth of the
telecommunications sector in the Latin American market, the investment
manager's views on the future prospects for the sector, the returns on
investment anticipated by the investment manager, and the quality,
availability and liquidity of securities issued by Latin American
telecommunications companies.
Sincerely,
/s/Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
January 2000
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 December 31, 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)
---------------------- --------------------- --------------------- ----------------------
ANNUAL ANNUAL ANNUAL ANNUAL
CUMULATIVE AVERAGE CUMULATIVE AVERAGE CUMULATIVE AVERAGE CUMULATIVE AVERAGE
---------- ------- ---------- ------- ---------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ONE YEAR 74.23% 74.23% 73.78% 73.78% 58.89% 58.89% 65.45% 65.45%
FIVE YEAR 25.40 4.63 76.08 11.98 44.59 7.65 48.65 8.25
SINCE INCEPTION* 137.88 12.20 214.06 16.42 128.45 11.61 113.12 10.58
</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 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 $14.11
Market Value Per Share . . . . . . . . $13.25 $27.13 $18.25 $ 9.88 $12.50 $17.94 $ 6.19 $10.69
Premium/(Discount) . . . . . . . . . . -13.0% 16.4% 6.4% -10.0% -15.4% -11.8% -24.4% -24.2%
Income Dividends . . . . . . . . . . . -- -- $ 0.00# -- $ 0.16 -- $ 0.08 $ 0.09
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% 73.78%
MSCI EMF LA Index Total Return (3) . . 2.00% 53.92% 0.64% -12.83% 22.21% 31.64% -35.11% 58.89%
MSCI EMG LA Index Total Return (4) . . -2.26% 52.29% -3.69% -13.53% 21.96% 31.66% -35.29% 65.45%
</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 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 for specific securities or classes of shares that may be
excluded from or limited for foreign investor ownership.
(4) The Morgan Stanley Capital International Emerging Markets Global Latin
America Index includes the same markets as the Morgan Stanley Capital
International Emerging Markets Free Latin America Index, but does not
take into account local market restrictions on share ownership by
foreigners.
* 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, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (96.0%)
Short-Term Investments (4.0%)
</TABLE>
- -------------------------------------------------------------------------------
INDUSTRIES
[CHART]
<TABLE>
<S> <C>
Other (16.0%)
Utilities -- Electrical & Gas (7.8%)
Telecommunications -- Wireless (3.5%)
Telecommunications -- Integrated (33.7%)
Banking (7.9%)
Beverages & Tobacco (7.5%)
Broadcasting & Publishing (4.3%)
Building Materials & Components (4.9%)
Energy Sources (4.2%)
Merchandising (3.7%)
Metals -- Steel (6.5%)
</TABLE>
- -------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Other (-0.6%)
Columbia (0.3%)
Peru (1.2%)
Venezuela (1.6%)
United States (3.8%)
Argentina (6.1%)
Chile (7.9%)
Brazil (37.2%)
Mexico (42.5%)
</TABLE>
- -------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Telmex (Mexico) 12.7%
2. Cemex (Mexico) 4.9
3. Televisa (Mexico) 4.3
4. Petrobras (Brazil) 4.2
5. Telesp (Brazil) 3.9
6. CVRD (Brazil) 3.4%
7. FEMSA (Mexico) 3.3
8. Kimberly (Mexico) 3.0
9. Telecom Argentina (Argentina) 2.4
10. Tele Norte-Leste (Brazil) 2.4
----
44.5%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.6%)
(Unless otherwise noted)
- -------------------------------------------------------------------------------
ARGENTINA (6.1%)
BANKING
Banco del Suquia 1 U.S.$ --@
Banco Rio De La Plata ADR 50,695 618
--------------
618
--------------
BEVERAGES & TOBACCO
Quilmes Industrial ADR 164,355 1,962
--------------
TELECOMMUNICATIONS -- INTEGRATED
Telecom Argentina ADR 114,826 3,933
Telefonica Argentina ADR 115,317 3,560
--------------
7,493
--------------
10,073
--------------
- -------------------------------------------------------------------------------
BRAZIL (37.1%)
BANKING
Banco Bradesco (Preferred) 288,580,000 2,263
Banco Bradesco ADR 3,700 29
(a,c)Banco Nacional (Preferred) 95,420,000 3
Itaubanco (Preferred) 22,840,340 1,960
Unibanco (Preferred) GDR 36,838 1,110
--------------
5,365
--------------
BEVERAGES & TOBACCO
Brahma (Preferred) 648,000 474
Brahma (Preferred) ADR 22,300 312
--------------
786
--------------
ENERGY SOURCES
Petrobras (Preferred) 20,841,579 5,307
(b)Petrobras (Preferred) ADR 30,795 789
Petrobras (Preferred) ADR 36,125 927
--------------
7,023
--------------
FOREST PRODUCTS & PAPER
Aracruz Celulose ADR 57,068 1,498
--------------
MERCHANDISING
Globex Utilidades (Preferred) 14,200 114
(a,b)Lojas Arapau (Preferred) 41,337,400 --@
(a)Lojas Arupau (Preferred) ADR 20,775 --@
--------------
114
--------------
METALS -- STEEL
CSN 40,691,000 1,577
CVRD 5,000 116
CVRD (Preferred) ADR 47,230 1,305
CVRD (Preferred) 'A' 150,191 4,157
CVRD Bonus 116,420 --@
Gerdau (Preferred) 64,152,422 1,704
Itausa Investimentos Itau
(Preferred) 1,253,000 1,297
Usiminas (Preferred) 111,200 603
(a)Usiminas ADR 1,038 6
-------------
10,765
-------------
REAL ESTATE
Rossi Residential GDS
(Registered) 269,535 321
(a,b)Rossi Residential GDR 176,972 210
-------------
531
-------------
TELECOMMUNICATIONS -- INTEGRATED
(a)CRT (Preferred) 'A' 13,267,366 2,313
(a)Celular CRT (Preferred) 'A' 9,631,866 2,986
Tele Centro-Sul (Preferred) 73,125,250 1,335
Tele Centro-Sul ADR 100 9
Tele Norte-Leste (Preferred) 99,507,000 2,672
Tele Norte-Leste (Preferred) ADR 49,129 1,253
Telebras (Preferred) ADR 7,200 925
Telesp (Preferred) 74,885,359 1,816
Telesp ADR 192,660 4,708
-------------
18,017
-------------
TELECOMMUNICATIONS -- LONG DISTANCE
Embratel (Preferred) 107,813,000 2,775
Embratel ADR 1,975 54
-------------
2,829
-------------
TELECOMMUNICATIONS -- WIRELESS
Tele Leste Celular (Preferred) 787,883,000 646
Tele Leste Celular ADR 2,185 93
Tele Nordeste Celular
(Preferred) 126,448,900 329
Tele Norte Celular (Preferred) 719,139,000 617
Tele Sudeste Celular ADR 3,180 123
Tele Sudeste Celular (Preferred) 119,308,790 882
Telesp Celular ADR 28,300 1,199
Telesp Celular (Preferred) 78,094,790 1,383
-------------
5,272
-------------
TEXTILES & APPAREL
Coteminas 5,426,400 346
(a,b,c)Coteminas ADR 9,305 26
-------------
372
-------------
UTILITIES -- ELECTRICAL & GAS
Cemig ADR 60,393 1,359
Cemig (Preferred) 29,260,003 656
Centrais Electricas Brasileiras
(Preferred) 'B' 31,902,080 761
CERJ 4,209,300,000 1,282
Copel (Preferred) ADR 30,166 281
Copel (Preferred) 'B' 266,861,500 2,585
Electrobras 43,906,000 960
Electrobras ADR 14,130 157
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
BRAZIL (CONTINUED)
UTILITIES -- ELECTRICAL & GAS (CONTINUED)
Electrobras (Preferred) ADR 74,680 U.S.$ 897
--------------
8,938
--------------
61,510
--------------
- -------------------------------------------------------------------------------
CHILE (7.4%)
BANKING
Banco Edwards ADR 69,853 1,161
Banco Santander Chile ADR 14,900 227
Banco Santiago ADR 28,795 616
-------------
2,004
-------------
BEVERAGES & TOBACCO
CCU ADR 59,200 1,898
-------------
FOOD & HOUSEHOLD
D&S ADR 37,675 735
-------------
MERCHANDISING
Santa Isabel ADR 44,705 436
-------------
MULTI-INDUSTRY
Quinenco ADR 56,020 623
-------------
TELECOMMUNICATIONS -- INTEGRATED
CTC ADR 137,052 2,501
-------------
UTILITIES -- ELECTRICAL & GAS
Chilectra ADR 103,165 2,063
Endesa ADR 56,909 807
Enersis ADR 48,748 1,146
-------------
4,016
-------------
12,213
-------------
- -------------------------------------------------------------------------------
COLOMBIA (0.3%)
BEVERAGES & TOBACCO
Bavaria 96,960 424
(a)Valores Bavaria 80,404 69
-------------
493
-------------
FINANCIAL SERVICES
Corfivalle 2 --@
-------------
493
-------------
- -------------------------------------------------------------------------------
MEXICO (42.5%)
BANKING
Bancomer 'O' 3,623,752 1,514
Banamex 'L' 645,651 2,486
(a)Banorte 'O' 684,441 1,032
-------------
5,032
-------------
BEVERAGES & TOBACCO
FEMSA 763,319 3,406
FEMSA ADR 46,393 2,065
Grupo Modelo 'C' 394,300 1,081
-------------
6,552
-------------
BROADCASTING & PUBLISHING
Televisa CPO GDR 104,421 7,127
-------------
BUILDING MATERIALS & COMPONENTS
(a)Cemex ADR 154,679 4,311
Cemex CPO 683,242 3,820
-------------
8,131
-------------
CONSTRUCTION & HOUSING
Empresas ICA Sociedad Controladora 347,351 198
-------------
ENERGY EQUIPMENT & SERVICES
Tamsa ADR 44,212 600
-------------
FOOD & HOUSEHOLD PRODUCTS
(a)Grupo Industrial Bimbo 'A' 163,732 365
-------------
HEALTH & PERSONAL CARE
Kimberly 'A' 1,271,074 4,961
-------------
MACHINERY & ENGINEERING
ICA ADR 71,070 231
-------------
MERCHANDISING
(a)Cifra 'C' 632,027 1,203
Cifra 'V' 932,461 1,869
(a)Cifra 'V' ADR 11,250 225
(a)Soriana 'B' 515,985 2,368
-------------
5,665
-------------
METALS -- NON FERROUS
Grupo Mexico 'B' 343,710 1,702
-------------
MISC. MATERIALS & COMMODITIES
(a)Seminis, Inc. 'A' 69,300 437
Vitro ADR 111,592 614
-------------
1,051
-------------
MULTI-INDUSTRY
(a)Alfa 'A' 439,149 2,061
(a)Grupo Carso 'A1' 616,445 3,069
-------------
5,130
-------------
RECREATION, OTHER CONSUMER GOODS
(a)Blockbuster de Mexico 40,000 --@
-------------
TELECOMMUNICATIONS -- INTEGRATED
Carso Global Telecom 242,136 2,273
Telmex 'L' ADR 186,877 21,024
-------------
23,297
-------------
TELECOMMUNICATIONS -- WIRELESS
(a)Nuevo Grupo Iusacell S.A. 36,740 549
-------------
70,591
-------------
- -------------------------------------------------------------------------------
PERU (1.2%)
TELECOMMUNICATIONS -- INTEGRATED
Tel Peru 'B' ADR 151,317 2,024
-------------
- -------------------------------------------------------------------------------
UNITED STATES (0.4%)
BEVERAGES & TOBACCO
Panamerican Beverages, Inc. 'A' 35,600 732
-------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
VENEZUELA (1.6%)
TELECOMMUNICATIONS -- INTEGRATED
CANTV ADR 107,295 U.S.$ 2,642
------------
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$131,996) 160,278
------------
- -------------------------------------------------------------------------------
<CAPTION>
NO. OF
RIGHTS
- -------------------------------------------------------------------------------
RIGHTS (0.1%)
- -------------------------------------------------------------------------------
BRAZIL (0.1%)
BANKING
(c)Banco Bradesco 298,612,000 141
- -------------------------------------------------------------------------------
TOTAL RIGHTS
(Cost U.S.$--@) 141
------------
- -------------------------------------------------------------------------------
<S> <C> <C>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (3.9%)
- -------------------------------------------------------------------------------
CHILE (0.5%)
Citi Corp. Cash Fund
7.8% 01/12/00 CLP 26,487 50
Depositio Plaza Fijo Time
Deposit 0.67% 01/12/00 413,000 768
------------
818
------------
- -------------------------------------------------------------------------------
UNITED STATES (3.4%)
REPURCHASE AGREEMENT
Chase Securities, Inc. 2.60%,
dated 12/31/99, due
1/3/00, to be
repurchased at
U.S.$5,691,
collaterized by
U.S.$5,820, United
States Treasury Notes,
6.125%, due 12/31/01,
valued at U.S.$5,808 U.S.$ 5,690 5,690
------------
- -------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$6,509) 6,508
------------
- -------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (0.0%)
Brazil Real BRL 40 22
Chilean Peso CLP 561 1
Mexican Peso MXP 287 30
------------
(Cost U.S.$53) 53
------------
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%)
(Cost U.S.$138,558) 166, 980
------------
- -------------------------------------------------------------------------------
OTHER ASSETS (0.4%)
Cash U.S.$ 36
Dividends Receivable 525
Receivable for Investments Sold 27
Interest Receivable 1
Other Assets 33 622
------------ ------------
- -------------------------------------------------------------------------------
LIABILITIES (-1.0%)
Deferred Chilean Taxes (14)
Payable For:
Dividends Declared (657)
Chilean Taxes (624)
Investment Advisory Fees (142)
Professional Fees (87)
Directors' Fees and Expenses (60)
Shareholder Reporting
Expenses (42)
Administrative Fees (40)
Custodian Fees (21)
Other Liabilities (14) (1,701)
------------ ------------
- -------------------------------------------------------------------------------
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.$165,901
------------
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 14.11
------------
- -------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------
Common Stock U.S.$ 117
Capital Surplus 157,184
Undistributed Net Investment Income 526
Accumulated Net Realized Loss (20,288)
Unrealized Appreciation on Investment and Foreign Currency
Translations (net of accrued foreign taxes of U.S. $14
on unrealized appreciation) 28,362
- -------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$165,901
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
- -------------------------------------------------------------------------------
(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, 1999 EXCHANGE RATES:
- -------------------------------------------------------------------------------
BRL Brazilian Real 1.807 = U.S.$1.00
CLP Chilean Peso 529.750 = U.S.$1.00
MXP Mexican Peso 9.480 = U.S.$1.00
- -------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- DECEMBER 31, 1999
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C>
Banking U.S.$ 13,160 7.9%
Beverages & Tobacco 12,423 7.5
Broadcasting & Publishing 7,127 4.3
Building Materials & Components 8,131 4.9
Construction & Housing 198 0.1
Energy Equipment & Services 600 0.4
Energy Sources 7,023 4.2
Food & Household Products 1,100 0.7
Forest Products & Paper 1,498 0.9
Health & Personal Care 4,961 3.0
Machinery & Engineering 231 0.2
Merchandising 6,215 3.7
Metals -- Non Ferrous 1,702 1.0
Metals -- Steel 10,765 6.5
Misc. Materials & Commodities 1,051 0.6
Multi-Industry 5,753 3.5
Real Estate 531 0.3
Textile & Apparel 372 0.2
Telecommunications -- Integrated 55,974 33.7
Telecommunications -- Long
Distance 2,829 1.7
Telecommunications -- Wireless 5,821 3.5
Utilities -- Electrical & Gas 12,954 7.8
Other 6,561 4.0
------------ -----
U.S.$166,980 100.6%
------------ -----
------------ -----
</TABLE>
- -------------------------------------------------------------------------------
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C>
Argentina U.S.$ 10,073 6.1%
Brazil 61,651 37.2
Chile 13,031 7.9
Colombia 493 0.3
Mexico 70,591 42.5
Peru 2,024 1.2
United States 6,422 3.8
Venezuela 2,642 1.6
Other 53 0.0
------------ -----
U.S.$166,980 100.6%
------------ -----
------------ -----
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
STATEMENT OF OPERATIONS (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 3,407
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Less: Foreign Taxes Withheld . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23)
- ------------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,554
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,385
Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Shareholder Reporting Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Chilean Administrative Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Country Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
- ------------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,043
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,511
- ------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,787
Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (326)
- ------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,461
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,599
Depreciation on Foreign Currency Translations . . . . . . . . . . . . . . . . . . . . . . . . . (36)
- ------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . . . . . . . . . . 62,563
- ------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . . . 69,024
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . U.S.$ 70,535
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 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.$ 1,511 U.S.$ 1,801
Net Realized Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . . 6,461 (18,537)
Change in Unrealized Appreciation/Depreciation . . . . . . . . . . . . . 62,563 (49,556)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations . . . . . 70,535 (66,292)
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . (1,059) (956)
In Excess of Net Investment Income . . . . . . . . . . . . . . . . . . . -- (89)
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (50,392)
In Excess of Net Realized Gain . . . . . . . . . . . . . . . . . . . . . -- (27,069)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,059) (78,506)
- ------------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Reinvestment of Distributions (0 shares and 1,118,141, respectively) . . -- 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) . . . . . . . . . . . . . . . . . . . . . . . . 65,983 (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 $526 and U.S.$(89), respectively). U.S.$ 165,901 U.S.$ 99,918
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SELECTED PER SHARE DATA ----------------------------------------------------------------------------
AND RATIOS: 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . U.S.$ 8.19 U.S.$ 20.34 U.S.$ 14.77 U.S.$ 10.98 U.S.$ 17.16
- ------------------------------------------------------------------------------------------------------------------------------
Offering Costs . . . . . . . . . . . . . . . . -- -- -- -- (0.07)
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) . . . . . . . . . 0.13 0.15 (0.01) 0.18 0.05
Net Realized and Unrealized Gain (Loss) on
Investments . . . . . . . . . . . . . . . . 5.83 (5.62) 6.28 4.91 (4.63)
- ------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . . 5.96 (5.47) 6.27 5.09 (4.58)
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income . . . . . . . . . . . (0.09) (0.07) -- (0.16) --
In Excess of Net Investment Income . . . . . -- (0.01) -- -- --
Net Realized Gain . . . . . . . . . . . . . -- (4.34) (0.70) (1.14) (0.44)
In Excess of Net Realized Gain . . . . . . . -- (2.33) -- -- (0.01)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . (0.09) (6.75) (0.70) (1.30) (0.45)
- ------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Asset Value due to Shares Issued
through Rights Offering . . . . . . . . . . . -- -- -- -- (1.08)
- ------------------------------------------------------------------------------------------------------------------------------
Anti-Dilutive Effect of Shares Repurchased . . 0.05 0.07 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . U.S.$ 14.11 U.S.$ 8.19 U.S.$ 20.34 U.S.$ 14.77 U.S.$ 10.98
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD . . . . U.S.$ 10.69 U.S.$ 6.19 U.S.$ 17.94 U.S.$ 12.50 U.S.$ 9.88
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value . . . . . . . . . . . . . . . . 74.23% (43.06)% 49.08% 38.50% (38.78)%+
Net Asset Value (1) . . . . . . . . . . . . 73.78% (33.53)% 43.06% 47.19% (27.61)%+
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) . . . . U.S.$165,901 U.S.$99,918 U.S.$236,260 U.S.$171,586 U.S.$127,616
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets . . . 1.68% N/A N/A N/A N/A
Ratio of Expenses Excluding Country Tax
Expense to Average Net Assets . . . . . . . 1.64% 1.93% 1.82% 1.81% 2.17%
Ratio of Net Investment Income (Loss) to
Average Net Assets . . . . . . . . . . . . 1.24% 1.36% (0.07)% 1.24% 0.31%
Portfolio Turnover Rate . . . . . . . . . . . 77% 178% 259% 186% 122%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ 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
DECEMBER 31, 1999
- --------------
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 under procedures approved by the Board of
Directors, 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.
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: The Fund may enter into repurchase agreements
under which the Fund lends excess cash and takes possession of securities
with an agreement that the counterparty will repurchase such securities.
In connection with transactions in repurchase agreements, a bank as
custodian for the Fund takes possession of the underlying securities
(collateral), 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 counterparty 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) due to securities transactions
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
12
<PAGE>
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) on foreign
currency translations for the period is reflected in the Statement of
Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S.
dollar denominated transactions as a result of, among other factors, the
possibility of lower levels of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
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 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 assets as segregated on the Fund's records. 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
13
<PAGE>
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.
Risks also arise from potential losses from adverse market movements, and
such losses could exceed the related amounts shown in the Statement of
Net Assets.
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: Securities and other 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.
The Fund did not invest in Purchased Options, Forward Commitments and
When-Issued/Delayed Delivery Securities, Swap Agreements, Structured Securities
or participate in Over-the-Counter Securities during the year ended December
31, 1999.
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 by the Fund are determined in accordance with Federal income tax
regulations, which may differ from generally accepted accounting
principles. The book/tax differences are either considered temporary or
permanent in nature.
Temporary differences are attributable to differing book and tax
treatments for the timing of the recognition of gains and losses on
certain investment transactions and the timing of the deductibility of
certain expenses.
Permanent book and tax basis differences may result in reclassifications
among undistributed net investment income (loss), accumulated net
realized gain (loss) and paid in capital.
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.
14
<PAGE>
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 year ended December 31, 1999, the Fund made purchases and
sales totaling approximately $90,197,000 and $90,913,000, 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 1999, the Fund placed a portion of its
portfolio transactions with affiliated broker/dealers. Accordingly, the Fund
incurred brokerage commissions of $1,000 with Morgan Stanley & Co.
Incorporated, an affiliate of the Adviser, for the year ended December 31,
1999. At December 31, 1999, the U.S. Federal income tax cost basis of
securities was $142,067,000 and, accordingly, net unrealized appreciation for
U.S. Federal income tax purposes was $24,860,000 of which $45,934,000 related
to appreciated securities and $21,074,000 related to depreciated securities.
At December 31, 1999, the Fund had a capital loss carryforward for U.S.
Federal income tax purposes of approximately $16,727,000 available to offset
future capital gains of which $14,061,000 will expire on December 31, 2006
and $2,666,000 will expire on December 31, 2007. To the extent that capital
gains are offset, such gains will not be distributed to the shareholders. For
the year ended December 31, 1999, the Fund intends to elect to defer to
January 1, 2000, for U.S. Federal income tax purposes, post-October currency
losses of $26,000.
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 may be 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. At December 31, 1999, the deferred fees
payable under the Plan, totaled $60,000 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 year ended
December 31, 1999, the Fund repurchased 437,200 shares or 3.59% of its Common
Stock at an average price per share of $7.94, including $82,000 in
commissions paid, and an average discount of 15.58% from net asset value per
share. For the year ended 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,
including $74,000 in commissions paid, 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.
J. During December 1999, the Board of Directors declared a distribution of
$0.06 per share, derived from net investment income, payable on January 14,
2000, to shareholders of record on December 21, 1999.
15
<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, 1999,
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 accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States,
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, 1999 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 18, 2000
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. 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
17
