<PAGE>
----------------------------------------------------------
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
----------------------------------------------------------
SEMI-ANNUAL REPORT
JUNE 30, 2000
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
Harold J. Schaaff, Jr.
PRESIDENT AND DIRECTOR
John D. Barrett II
DIRECTOR
Gerard E. Jones
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
Andrew McNally IV
DIRECTOR
William G. Morton, Jr.
DIRECTOR
Samuel T. Reeves
DIRECTOR
Fergus Reid
DIRECTOR
Frederick O. Robertshaw
DIRECTOR
Stefanie V. Chang
VICE PRESIDENT
Arthur J. Lev
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
Clifford Chance Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
--------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
================================================================================
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/im.
<PAGE>
LETTER TO SHAREHOLDERS
---------
For the six months ended June 30, 2000, The Latin American Discovery Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of 0.32%
compared with -3.75% for the Morgan Stanley Capital International (MSCI)
Emerging Markets Free Latin American Index ("the Index"). For the period from
commencement of operations on June 23, 1992 through June 30, 2000, the Fund's
total return, based on net asset value per share, was 215.06% compared with
119.88% for the Index. On June 30, 2000, the closing price of the Fund's shares
on the New York Stock Exchange was $10 3/16 , representing a 27.7% discount to
the Fund's net asset value per share.
Outperformance relative to the Index for the first half of 2000 was attributable
to both stock selection and country allocation. Strong stock selection in
Argentina and Brazil, notably telecommunications services providers, contributed
positively to performance. Our underweight stance in Colombia (-35.2%) also
added to performance. Stock selection in Chile and Mexico detracted from
performance.
Latin American markets advanced at the beginning of the year as investors
rewarded continued signs of macroeconomic improvements in the region and steps
towards increasing fiscal responsibility. However, many first quarter gains were
given back during the second quarter of 2000, amidst the backdrop of poor
performance and massive volatility in the developed markets. Technology stocks
were particularly hit, declining in sympathy with some of the NASDAQ's sharp
falls during the quarter. Latin American markets declined as the region's
positive economic fundamentals were overshadowed by investor concerns over
higher U.S. interest rates and tighter global liquidity. The markets rebounded
toward quarter end as good U.S. economic numbers allayed investor concerns
surrounding inflation and necessary interest rate hikes. Notable events during
these past six months included Telefonica de Espana's (TEF) tender offers for
its Latin American subsidiaries and changes in ownership within the Mexican
banking sector. We are encouraged by signs of economic recovery and we believe
corporate restructuring and the possibility for lower real interest rates should
lead to improved earnings for many Latin companies.
Equities in Brazil were relatively flat during the first half of 2000, as
positive economic fundamentals and the country's commitment to adopt greater
fiscal discipline and to meet IMF targets were eclipsed by investor skittishness
and the volatile performance of technology and telecom stocks. During the second
quarter, Brazil's performance on the fiscal primary surplus, inflation, and
industrial production figures surpassed expectations. The government
demonstrated perseverance towards fiscal constraint and improving corporate
governance, as evidenced by Congress' passage of the Minimum Wage Bill and Lower
House approval of a corporate legislation bill. Investor sentiment during the
second quarter was aggravated by a Supreme Court case on retroactive monetary
readjustment to workers' accounts, with a potential fiscal cost to the
government of U.S. $30 billion. Investor sentiment was also weighed down by the
sharp declines in NASDAQ, but market confidence was restored in June as investor
concerns regarding sharp U.S. interest rate hikes were allayed and Brazil
continued to reveal positive economic developments. The Central Bank proved
aggressive in June 2000, surprising the market by lowering the benchmark Selic
rate by 100 basis points to 17.5%. It also lowered reserve requirements while
adopting an easing bias for its monetary stance. We continue to overweight
Brazil, as we are encouraged by positive economic fundamentals, improving
corporate governance and fiscal responsibility, and Brazil's likelihood of
meeting IMF targets.
The Fund is overweight Mexico, based on promising trends in consumer spending
and consumer lending. Investor fears induced by higher U.S. interest rates and a
U.S. economic slowdown (more than 80% of Mexico's exports are to the U.S.) and
uncertainty regarding the presidential election on July 2, 2000 weighed down
equities during the first half of the year. Equities rallied during June 2000 as
investor concerns regarding higher U.S. rates were allayed and sentiment focused
on continued signs of a robust domestic economic recovery. Recent highlights
include the approved takeover of Mexican bank GF Bancomer by Spain's Banco
Bilbao Vizcaya Argentaria (BBVA), which we believe may foster an expansion of
bank credit, spearheading further GDP growth. Strong U.S. economic performance
and high oil prices have also benefited Mexico, as the U.S. is the largest
market for Mexican exports and oil is one of Mexico's largest exports. The
Mexican peso was increasingly volatile during the second quarter and lost ground
prior to the presidential elections on July 2, 2000. Although we are cautiously
monitoring pressures on the peso, we believe a weaker peso may help Mexico's
trade balance, which remains vulnerable when oil exports are excluded. We
anticipate equities should fare well following a more certain post-election
scenario, which should restore investor confidence. We are likely to add to
equities in Mexico, notably to media, telecom and conglomerate industries, as we
believe equities shall continue to be supported by positive economic trends
coupled with attractive valuations and companies with great earnings growth
potential.
Argentine equities fell 3.4%, as economic growth remained limited and market
sentiment depressed. Market confidence was boosted toward the end of May when
the government announced a set of measures to improve the country's fiscal woes.
These initiatives included spending cuts (e.g. public
2
<PAGE>
sector payroll) and structural reforms (e.g. health care system). However, the
practical application of the government's proposed spending cuts remains
circumspect. Our underweight position in Argentina is based on our preference
for better risk-reward profiles at both the stock and country level in other
Latin American markets.
Chile's market declined 7.3%, despite some support from the government's removal
of capital controls (abolition of the one-year holding period on foreign
capital) and tax incentives. Equities fell as the market seemed to have already
priced in recent measures toward opening the economy. We remain underweight
Chile as we believe Chilean equities are relatively expensive compared to other
Latin American assets.
Venezuelan equities led the Latin American region during the first half of 2000,
gaining 19.0%. Equities have been supported by strong oil prices, positive
trends in GDP and industrial production growth for the first quarter of 2000.
However, we believe the current high oil price environment and related revenues
coupled with higher government expenditure may threaten inflation and foreign
exchange targets. We find it difficult to be enthusiastic about present
investment opportunities in Venezuela and maintain an underweight position in
this market.
Turning to other markets, we remain underweight Colombia and Peru. Colombian
equities lost 35.2%, as rising interest rates and possible shortfalls in
privatization revenues have been the main threats to economic recovery. A sharp
deterioration in the political environment, including allegations of improper
campaign financing by President Pastrana, have stymied the passage of important
fiscal reforms. Although assets are attractively valued, our interest is
tempered by a lack of positive catalysts for the equity market in the near term.
Equities in Peru fell 3.1%, as contentious presidential elections during the
second quarter, including the still contested run-off election on May 28, 2000,
seem to have dampened investor sentiment. A delegation from the Organization of
American States (OAS) has arrived in Peru and will likely suggest political
reforms for implementation in the near future. We maintain an underweight stance
and find limited opportunities in this market, particularly as telecom services
provider Telefonica del Peru (TDP) will leave the benchmark indices following
the close of parent company TEF's tender for TDP shares.
Sincerely,
/s/ Harold J. Schaaff, Jr.
Harold J. Schaaff, Jr.
PRESIDENT AND DIRECTOR
July 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.
FOREIGN INVESTING INVOLVES CERTAIN RISKS, INCLUDING CURRENCY FLUCTUATIONS AND
CONTROLS, RESTRICTIONS ON FOREIGN INVESTMENTS, LESS GOVERNMENTAL SUPERVISION AND
REGULATION, LESS LIQUIDITY AND THE POTENTIAL FOR MARKET VOLATILITY AND POLITICAL
INSTABILITY.
--------------------------------------------------------------------------------
DAILY NET ASSET AND MARKET VALUES, AS WELL AS MONTHLY PORTFOLIO INFORMATION FOR
THE FUND, ARE AVAILABLE ON OUR WEBSITE AT www.msdw.com/im.
3
<PAGE>
The Latin American Discovery Fund, Inc.
Investment Summary as of June 30, 2000 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION TOTAL RETURN(%)
------------------------------------------------------------------
MARKET VALUE(1) NET ASSET VALUE(2) MSCI EMF LA INDEX(3)
-------------------- -------------------------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
YEAR TO DATE -4.18% -- 0.32% -- -3.75% --
ONE YEAR 9.76 9.76% 25.20 25.20% 16.71 16.71%
FIVE YEAR 86.62 13.29 151.54 20.26 59.20 9.75
SINCE INCEPTION* 127.93 10.81 215.06 15.37 119.88 10.32
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
--------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
[CHART]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
JUNE 30,
1992* 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ----------
<S> <C> <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 $14.09
Market Value Per Share ......................... $13.25 $27.13 $18.25 $ 9.88 $12.50 $17.94 $6.19 $10.69 $10.19
Premium/(Discount) ............................. -13.0% 16.4% 6.4% -10.0% -15.4% -11.8% -24.4% -24.2% -27.7%
Income Dividends ............................... -- -- $ 0.00# -- $ 0.16 -- $0.08 $ 0.09 $ 0.05
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% 0.32%
MSCI EMF LA Index
Total Return (3) ............................... 2.00% 53.92% 0.64% -12.83% 22.21% 31.64% -35.11% 58.89% -3.75%
</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.
* 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 June 30, 2000 (Unaudited)
================================================================================
DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities 97.6%
Short-Term Investments 2.4%
</TABLE>
--------------------------------------------------------------------------------
INDUSTRIES
[CHART]
<TABLE>
<S> <C>
Banks (8.9%)
Beverages (7.7%)
Construction Materials (4.1%)
Diversified Telecommunication Services (33.1%)
Electric Utilities (7.0%)
Media (4.7%)
Metals & Mining (6.0%)
Multiline Retail (4.1%)
Oil & Gas (4.8%)
Wireless Telecommunication Services (7.4%)
Other (12.2%)
</TABLE>
--------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
[CHART]
<TABLE>
<S> <C>
Mexico (42.9%)
Brazil (42.3%)
Chile (6.9%)
Argentina (3.5%)
United States (2.2%)
Venezuela (1.6%)
Colombia (0.2%)
Other (0.4%)
</TABLE>
--------------------------------------------------------------------------------
TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
------------
<S> <C>
1. Telmex (Mexico) 14.5%
2. Petrobras (Brazil) 4.8
3. Televisa (Mexico) 4.3
4. Cemex (Mexico) 4.1
5. Tele Norte-Leste (Brazil) 3.7
6. FEMSA (Mexico) 3.3
7. Embratel (Brazil) 3.3
8. Telsp Celular (Brazil) 3.2
9. Celular CRT Participaos (Brazil) 3.1
10. Wal-Mart de Mexico (Mexico) 3.1
----
47.4%
====
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
---------
STATEMENT OF NET ASSETS (UNAUDITED)
---------
JUNE 30, 2000
<TABLE>
<CAPTION>
VALUE
SHARES (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS(97.4%)
(UNLESS OTHERWISE NOTED)
---------------------------------------------------------------------------------------------
ARGENTINA(3.5%)
BANKS
Banco Rio De La Plata ADR 50,695 U.S.$ 741
---------------
BEVERAGES
Quilmes Industrial ADR 164,355 1,829
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Telecom Argentina ADR 114,389 3,146
---------------
5,716
---------------
---------------------------------------------------------------------------------------------
BRAZIL(42.3%)
BANKS
Banco Bradesco (Preferred) 246,801,099 2,149
Banco Bradesco ADR 3,700 32
(a,b)Banco Nacional (Preferred) 95,420,000 3
Itaubanco (Preferred) 22,840,340 2,007
Unibanco (Preferred) GDR 63,838 1,835
---------------
6,026
---------------
BEVERAGES
Brahma (Preferred) 870,000 738
Brahma (Preferred) ADR 50,840 864
---------------
1,602
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES
(a)Companhia Riograndense de Telecomunicacoes (Preferred) 5,291,866 1,790
Embratel (Preferred) 120,161,000 2,872
Embratel ADR 102,375 2,419
Tele Centro-Sul (Preferred) 73,125,250 1,058
Tele Centro-Sul ADR 5,260 384
Tele Norte-Leste (Preferred) 111,158,680 2,604
Tele Norte-Leste (Preferred) ADR 143,636 3,393
Telebras (Preferred) ADR 41,100 3,992
Telecomunicacoes de Parana (Preferred) 2,936,500 1,005
---------------
19,517
---------------
ELECTRIC UTILITIES
Cemig ADR 60,393 1,045
Cemig (Preferred) 35,240,003 615
(a)CERJ 4,209,300,000 1,634
Copel (Preferred) ADR 16 --@
Copel (Preferred) 'B' 209,619,500 1,976
Electrobras 43,906,000 901
Electrobras ADR 14,130 144
Electrobras (Preferred) ADR 88,840 980
Eletrobras (Preferred) 'B' 31,902,080 706
---------------
8,001
---------------
INDUSTRIAL CONGLOMERATES
Itausa Investimentos Itau (Preferred) 1,284,010 1,246
---------------
---------------------------------------------------------------------------------------------
METALS & MINING
CSN 64,667,500 2,029
CSN ADR 6,800 209
CVRD 5,000 125
CVRD (Preferred) ADR 47,230 1,334
CVRD (Preferred) 'A' 123,861 3,496
Gerdau (Preferred) 128,304,844 1,565
Usiminas (Preferred) 111,200 514
Usiminas ADR 1,038 5
---------------
9,277
---------------
MULTILINE RETAIL
Globex Utilidades (Preferred) 12,352 116
(a)Lojas Arapua (Preferred) 41,337,400 --@
(a,c)Lojas Arupua (Preferred) ADR 20,775 --@
---------------
116
---------------
OIL & GAS
Petrobras (Preferred) 169,136 5,111
Petrobras (Preferred) ADR 66,920 2,022
Petrobras 21,400 622
---------------
7,755
---------------
PAPER & FOREST PRODUCTS
Aracruz Celulose ADR 90,668 1,751
Votorantim Celulose e Papel ADR 36,990 680
---------------
2,431
---------------
REAL ESTATE
(c)Rossi Residential GDR 424,807 425
---------------
TEXTILES & APPAREL
Coteminas 5,351,200 311
(b,c)Coteminas ADR 9,305 27
---------------
338
---------------
WIRELESS TELECOMMUNICATION SERVICES
(a)Celular CRT Participaos (Preferred) 11,547,066 5,058
(a)Tele Leste Celular (Preferred) 717,599,039 637
Tele Leste Celular ADR 2,185 97
Tele Nordeste Celular (Preferred) 77,391,900 287
Tele Norte Celular (Preferred) 611,474,200 620
Telesp Celular ADR 85,800 3,850
Telesp Celular (Preferred) "B" 78,099,253 1,412
---------------
11,961
---------------
68,695
---------------
---------------------------------------------------------------------------------------------
CHILE(6.4%)
BANKS
(a)Banco Edwards ADR 69,853 943
Banco Santander Chile ADR 14,900 238
Banco Santiago ADR 28,795 515
---------------
1,696
---------------
BEVERAGES
CCU ADR 59,200 1,343
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES
CTC ADR 135,952 2,464
---------------
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
CHILE(CONTINUED)
ELECTRIC UTILITIES
Chilectra ADR 103,165 U.S.$ 1,632
(a)Endesa ADR 56,909 630
(a)Enersis ADR 57,548 1,147
---------------
3,409
---------------
FOOD & DRUG RETAILING
D&S ADR 37,675 655
Santa Isabel ADR 44,675 349
---------------
1,004
---------------
INDUSTRIAL CONGLOMERATES
Quinenco ADR 56,020 546
---------------
10,462
---------------
---------------------------------------------------------------------------------------------
COLOMBIA(0.2%)
BEVERAGES
Bavaria 96,960 305
Valores Bavaria 76,519 57
---------------
362
---------------
---------------------------------------------------------------------------------------------
MEXICO(42.9%)
BANKS
(a)Bancomer 'O' 3,547,752 1,803
(a)Banmex 'L' 645,651 2,611
(a)Banorte 'O' 684,441 946
(a)Grupo Financiero 142,520 608
---------------
5,968
---------------
BEVERAGES
(a)FEMSA 752,319 3,211
(a)FEMSA ADR 51,493 2,217
Grupo Modelo 'C' 535,000 1,199
Panamerican Beverages, Inc. 'A' 35,600 532
(a)Pepsi-Gemex GDR 35,400 157
---------------
7,316
---------------
CONSTRUCTION & ENGINEERING
(a)Empresas ICA Sociedad Controladora 364,718 103
(a)ICA ADR 71,070 120
---------------
223
---------------
CONSTRUCTION MATERIALS
Cemex ADR 152,254 3,559
Cemex CPO 663,787 3,113
---------------
6,672
---------------
CONTAINERS & PACKAGING
Vitro ADR 111,592 356
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES
(a)Carso Global Telecom 916,744 2,608
Telmex 'L' ADR 411,664 23,516
---------------
26,124
---------------
FOOD PRODUCTS
Grupo Industrial Bimbo 'A' 163,732 258
---------------
INDUSTRIAL CONGLOMERATES
Alfa 'A' 883,849 2,025
(a)Grupo Carso 'A1' 476,245 1,689
---------------
3,714
---------------
---------------------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS
Grupo Mexicano de Video ADR 40,000 --@
---------------
MACHINERY
Tamsa ADR 44,212 613
---------------
MEDIA
(a)CIE 188,300 737
(a)Televisa CPO GDR 100,646 6,938
---------------
7,675
---------------
METALS & MINING
(a)Grupo Mexico 'B' 170,610 480
---------------
MULTILINE RETAIL
(a)Grupo Sanborns 187,350 301
(a)Soriana 'B' 329,585 1,313
(a)Wal-mart De Mexico 'C' 978,227 2,256
(a)Wal-mart De Mexico 'V' 1,045,261 2,453
(a)Wal-mart De Mexico ADR 11,250 264
---------------
6,587
---------------
PAPER & FOREST PRODUCTS
Kimberly 'A' 1,334,074 3,796
---------------
69,782
---------------
---------------------------------------------------------------------------------------------
UNITED STATES(0.5%)
FOOD PRODUCTS
Seminis, Inc. 'A' 53,575 141
---------------
INTERNET SOFTWARE & SERVICES
(a)StarMedia Network Inc. 31,900 602
---------------
743
---------------
---------------------------------------------------------------------------------------------
VENEZUELA(1.6%)
DIVERSIFIED TELECOMMUNICATION SERVICES
CANTV ADR 93,995 2,555
---------------
---------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost U.S.$137,828) 158,315
---------------
---------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS(2.2%)
---------------------------------------------------------------------------------------------
CHILE(0.5%)
TIME DEPOSIT
Citibank
5.41%, 07/11/00 CLP 425 841
---------------
MUTUAL FUND
Citi Corp. Cash Fund 18 40
---------------
881
---------------
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES(1.7%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 6.15%
dated 6/30/00, due
7/03/00, to be
repurchased at
U.S.$2,756, collateralized
by U.S.$1,940 United
States Treasury Notes,
13.25%, due 5/15/14,
valued at U.S.$2,863 U.S.$ 2,755 U.S.$ 2,755
---------------
---------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost U.S.$3,635) 3,636
---------------
---------------------------------------------------------------------------------------------
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN(0.2%)
Brazil Real BRL 496 275
Chilean Peso CLP 306 1
Mexican Peso MXP 129 13
---------------
(Cost U.S.$287) 289
---------------
---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS(99.8%)
(Cost $141,750) 162,240
---------------
---------------------------------------------------------------------------------------------
<CAPTION>
AMOUNT AMOUNT
(000) (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
OTHER ASSETS (1.8%)
Cash U.S.$ 15
Receivable for Investments Sold 2,328
Dividends Receivable 470
Interest Receivable 71
Foreign Withholding Tax Reclaim Receivable 5
Other 44 2,933
--------------- ---------------
---------------------------------------------------------------------------------------------
LIABILITIES (-1.6%)
Payable For:
Investments Purchased (923)
Chilean Taxes (638)
Dividends Declared (599)
Investment Advisory Fees (149)
Directors' Fees and Expenses (67)
Professional Fees (49)
Administrative Fees (48)
Custodian Fees (41)
Shareholder Reporting Expenses (39)
Other Liabilities (31) (2,584)
---------------
---------------------------------------------------------------------------------------------
<CAPTION>
AMOUNT
(000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS (100%)
Applicable to 11,536,125, issued and
outstanding U.S.$ 0.01 par value shares
(100,000,000 shares authorized) U.S.$ 162,589
===============
---------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE U.S.$ 14.09
===============
---------------------------------------------------------------------------------------------
AT JUNE 30, 2000, NET ASSETS CONSISTED OF:
---------------------------------------------------------------------------------------------
Common Stock U.S.$ 115
Capital Surplus 154,984
Undistributed Net Investment Income 550
Accumulated Net Realized Loss (13,550)
Unrealized Appreciation on Investments and Foreign Currency Translations 20,490
---------------------------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 162,589
===============
---------------------------------------------------------------------------------------------
</TABLE>
(a) -- Non-income producing.
(b) -- Securities valued at fair value see note A-1 to financial statements.
(c) -- 144A Security Certain conditions for public sale may exist.
@ -- Value is less than U.S. $500.
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
JUNE 30, 2000 EXCHANGE RATES:
---------------------------------------------------------------------------------------------
<S> <C> <C>
BRL Brazilian Real 1.804 = U.S. $1.00
CLP Chilean Peso 538.550 = U.S. $1.00
MXP Mexican Peso 9.842 = U.S. $1.00
---------------------------------------------------------------------------------------------
</TABLE>
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at June 30, 2000,
the Fund is obligated to deliver and receive foreign currency in exchange for
U.S. dollars as indicated below:
<TABLE>
<CAPTION>
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S.$ 61 U.S.$ 61 07/03/00 BRL 111 U.S.$ 61 U.S.$ --
433 433 07/03/00 MXP 4,259 433 --
BRL 1,208 670 07/05/00 U.S.$ 670 670 --
------------ ------------ -----------
U.S.$ 1,164 U.S.$ 1,164 U.S.$ --
============ ============ ===========
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- JUNE 30, 2000
<TABLE>
<CAPTION>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
---------------------------------------------------------------------------------------------
<S> <C> <C>
Banks U.S.$ 14,431 8.9%
Beverages 12,452 7.7
Construction & Engineering 223 0.1
Construction Materials 6,672 4.1
Containers & Packaging 356 0.2
Diversified Telecommunication Services 53,806 33.1
Electric Utilities 11,410 7.0
Food Drug & Retailing 1,004 0.6
Food Products 399 0.2
Industrial Conglomerates 5,506 3.4
Internet Software & Services 602 0.4
Machinery 613 0.4
Media 7,675 4.7
Metals & Mining 9,757 6.0
Multiline Retail 6,703 4.1
Oil & Gas 7,755 4.8
Paper & Forest Products 6,227 3.8
Real Estate 425 0.3
Textiles & Apparel 338 0.2
Wireless Telecommunication Services 11,961 7.4
Other 3,925 2.4
--------------- ---------------
U.S.$ 162,240 99.8%
=============== ===============
---------------------------------------------------------------------------------------------
<CAPTION>
SUMMARY OF TOTAL INVESTMENTS BY COUNTRY --
JUNE 30, 2000
PERCENT
VALUE OF NET
COUNTRY (000) ASSETS
---------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina U.S.$ 5,716 3.5%
Brazil 68,695 42.3
Chile 11,343 6.9
Colombia 362 0.2
Mexico 69,782 42.9
United States 3,498 2.2
Venezuela 2,555 1.6
Other 289 0.2
--------------- ---------------
U.S.$ 162,240 99.8%
=============== ===============
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
--------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Dividends .......................................................... U.S.$ 1,678
Interest ........................................................... 270
Less: Foreign Taxes Withheld ....................................... (18)
--------------------------------------------------------------------------------------
Total Income ....................................................... 1,930
--------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees ........................................... 948
Administrative Fees ................................................ 117
Professional Fees .................................................. 53
Custodian Fees ..................................................... 43
Country Tax Expense ................................................ 34
Shareholder Reporting Expenses ..................................... 34
Directors' Fees and Expenses ....................................... 15
Transfer Agent Fees ................................................ 10
Other Expenses ..................................................... 53
--------------------------------------------------------------------------------------
Total Expenses ..................................................... 1,307
--------------------------------------------------------------------------------------
Net Investment Income .............................................. 623
--------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS)
Investment Securities Sold ......................................... 6,771
Foreign Currency Transactions ...................................... (33)
--------------------------------------------------------------------------------------
Net Realized Gain .................................................. 6,738
--------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Depreciation on Investments ........................................ (7,932)
Appreciation on Foreign Currency Translations ...................... 60
--------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation ..................... (7,872)
--------------------------------------------------------------------------------------
Net Realized Gain and Change in Unrealized Appreciation/Depreciation (1,134)
--------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... U.S.$ (511)
======================================================================================
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income ................................................ U.S.$ 623 U.S.$ 1,511
Net Realized Gain .................................................... 6,738 6,461
Change in Unrealized Appreciation/Depreciation ....................... (7,872) 62,563
-----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations ...... (511) 70,535
-----------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income ................................................ (599) (1,059)
-----------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Repurchase of Shares (220,000 and 437,200 shares, respectively) ...... (2,202) (3,493)
-----------------------------------------------------------------------------------------------------------
Total Increase (Decrease) ............................................ (3,312) 65,983
Net Assets:
Beginning of Period .................................................. 165,901 99,918
-----------------------------------------------------------------------------------------------------------
End of Period (including undistributed net investment
income of U.S.$550 and U.S.$526, respectively) ....................... U.S.$ 162,589 U.S.$ 165,901
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SELECTED PER SHARE DATA SIX MONTHS
AND RATIOS: ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 2000 ---------------------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... U.S.$ 14.11 U.S.$ 8.19 U.S.$ 20.34 U.S.$ 14.77 U.S.$ 10.98 17.16
----------------------------------------------------------------------------------------------------------------------------------
Offering Costs ............................. -- -- -- -- -- (0.07)
----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) ............... 0.05 0.13 0.15 (0.01) 0.18 0.05
Net Realized and Unrealized Gain (Loss)
on Investments ............................. (0.08) 5.83 (5.62) 6.28 4.91 (4.63)
----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations ........... (0.03) 5.96 (5.47) 6.27 5.09 (4.58)
----------------------------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income ...................... (0.05) (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 ........................ (0.05) (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 . U.S.$ 0.06 0.05 0.07 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ............. U.S.$ 14.09 U.S.$ 14.11 U.S.$ 8.19 U.S.$ 20.34 U.S.$ 14.77 10.98
==================================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD ...... U.S.$ 10.19 U.S.$ 10.69 U.S.$ 6.19 U.S.$ 17.94 U.S.$ 12.50 9.88
==================================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value ............................... (4.18)% 74.23% (43.06)% 49.08% 38.50% (38.78)%+
Net Asset Value (1) ........................ 0.32% 73.78% (33.53)% 43.06% 47.19% (27.61)%+
==================================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) U.S.$162,589 U.S.$165,901 U.S.$ 99,918 U.S.$236,260 U.S.$171,586 127,616
----------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets .... 1.59%* 1.68% 1.93% 1.82% 1.81% 2.17%
Ratio of Net Investment Income (Loss)
to Average Net Assets ...................... 0.76%* 1.24% 1.36% (0.07)% 1.24% 0.31%
Portfolio Turnover Rate .................... 25% 77% 178% 259% 186% 122%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ This return excludes the effect of the rights issued in connection with the
Rights Offering.
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. This percentage is not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
--------
The Latin American Discovery Fund, Inc. (the "Fund") was incorporated on
November 12, 1991 and is registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is long-term capital appreciation through
investments primarily in equity securities.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities,
including purchased options, for which market quotations are readily
available are valued at the last sales price on the valuation date, or if
there was no sale on such date at the mean between the current bid and
asked prices. Securities which are traded over-the-counter are valued at
the average of the mean of current bid and asked prices obtained from
reputable brokers. Short-term securities which mature in 60 days or less
are valued at amortized cost. All other securities and assets for which
market values are not readily available (including investments which are
subject to limitations as to their sale) are valued at fair value as
determined in good faith 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 may 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.
During the six month period ended June 30, 2000, the Fund's investments in the
derivative instruments described above only included foreign currency exchange
contracts.
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 six month period ended June 30, 2000, the Fund made purchases and
sales totaling approximately $39,931,000 and $40,929,000, 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. At June 30, 2000, the U.S. Federal income tax cost basis
of securities was $141,463,000 and, accordingly, net unrealized appreciation for
U.S. Federal income tax purposes was $20,488,000 of which $39,398,000 related to
appreciated securities and $18,910,000 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.
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 June 30, 2000, the deferred fees payable under the Plan, totaled
$67,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
I. On September 15, 1998, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which the
Fund's shares traded from their net asset value. For the six month period ended
June 30, 2000, the Fund repurchased 220,000 shares or 1.87% of its Common Stock
at an average price per share of $9.96, excluding $11,000 in commissions paid,
and an average discount of 22.61% from net asset value per share. 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, excluding $82,000 in
commissions paid, and an average discount of 15.58% from net asset value per
share. Since the inception of the program, the Fund has repurchased 1,200,000
shares or 9.42% of its Common Stock at an average price per share of $7.58,
excluding $167,000 in commissions paid, and an average discount of 19.44% from
net asset value per share. The Fund expects to continue to repurchase its
outstanding shares at such time and in such amounts as it believes will further
the accomplishment of the foregoing objectives, subject to review by the Board.
J. During June 2000, the Board of Directors declared a distribution of $0.0519
per share, derived from net investment income, payable on July 11, 2000, to
shareholders of record on June 30, 2000.
15
<PAGE>
K. Supplemental Proxy Information
The Annual Meeting of the Stockholders of the Fund was held on June 15, 2000.
The following is a summary of the proposal presented and the total number of
shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES VOTES
PROPOSAL: FAVOR OF AGAINST ABSTAINED
--------- -------- ------- ---------
<S> <C> <C> <C>
1. To elect the following Directors: Andrew McNally IV ................ 8,263,273 90,219 --
Frederick O. Robertshaw .......... 8,255,317 98,175 --
Harold J. Schaaff, Jr ............ 8,245,966 107,526 --
Fergus Reid ...................... 8,245,221 108,271 --
Graham E. Jones .................. 8,254,229 99,263 --
John D. Barrett II ............... 8,257,109 96,383 --
Samuel T. Reeves. ................ 7,770,123 583,369 --
Gerard E. Jones .................. 8,245,429 108,063 --
</TABLE>
The Annual Meeting of the Stockholders of the Fund was reconvened on August 1,
2000. The following is a summary of the proposal presented and the total number
of shares voted:
<TABLE>
<CAPTION>
VOTES IN VOTES VOTES
PROPOSAL: FAVOR OF AGAINST ABSTAINED
--------- -------- ------- ---------
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP as independent
accountants of the Fund ............................................. 8,620,095 376,693 20,974
</TABLE>
--------------------------------------------------------------------------------
CHANGE IN INDEPENDENT ACCOUNTANTS:
ON JULY 5, 2000, PRICEWATERHOUSECOOPERS LLP RESIGNED AS INDEPENDENT ACCOUNTANTS
OF THE FUND. THE REPORTS OF PRICEWATERHOUSECOOPERS LLP ON THE FINANCIAL
STATEMENTS OF THE FUND FOR THE PAST TWO FISCAL YEARS CONTAINED NO ADVERSE
OPINION OR DISCLAIMER OF OPINION AND WERE NOT QUALIFIED OR MODIFIED AS TO
UNCERTAINTY, AUDIT SCOPE OR ACCOUNTING PRINCIPLE. IN CONNECTION WITH ITS AUDITS
FOR THE TWO MOST RECENT FISCAL YEARS AND THROUGH JULY 5, 2000, THERE HAVE BEEN
NO DISAGREEMENTS WITH PRICEWATERHOUSECOOPERS LLP ON ANY MATTER OF ACCOUNTING
PRINCIPLES OR PRACTICES, FINANCIAL STATEMENT DISCLOSURE, OR AUDITING SCOPE OR
PROCEDURE, WHICH DISAGREEMENTS, IF NOT RESOLVED TO THE SATISFACTION OF
PRICEWATERHOUSECOOPERS LLP, WOULD HAVE CAUSED THEM TO MAKE REFERENCE THERETO IN
THEIR REPORT ON THE FINANCIAL STATEMENTS FOR SUCH YEARS. THE FUND, WITH THE
APPROVAL OF ITS BOARD OF DIRECTORS, AUDIT COMMITTEE AND SHAREHOLDERS, ENGAGED
ERNST & YOUNG LLP AS INDEPENDENT ACCOUNTANTS AS OF AUGUST 1, 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