<PAGE>
LATIN AMERICA
SMALLER COMPANIES FUND, INC.
[GRAPHIC OMITTED]
April 30, 1998
SEMI-ANNUAL REPORT
AMERICAN EXPRESS ASSET MANAGEMENT INTERNATIONAL INC.
Regulated by IMRO
Affiliated Offices in London, Minneapolis,
Hong Kong, Singapore, Tokyo
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
From the Portfolio Manager.................................. 2
Portfolio Highlights........................................ 4
Portfolio of Investments.................................... 5
Statement of Assets and Liabilities......................... 7
Statement of Operations..................................... 8
Statement of Changes in Net Assets.......................... 9
Financial Highlights........................................ 10
Notes to Financial Statements............................... 11
Quarterly Results of Operations............................. 15
Additional Information...................................... 16
Results of Shareholder Meeting.............................. 17
</TABLE>
------------------------------------
This report is sent to the shareholders of the Latin America Smaller Companies
Fund, Inc. for their information. It is not a prospectus, circular or
representation intended for use in the purchase or sale of shares of the Fund or
of any securities mentioned in the report.
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
FROM THE PORTFOLIO MANAGER APRIL, 1998
Dear Shareholder:
The Latin America Smaller Companies Fund, Inc. (the "Fund") is a
diversified, closed-end management investment fund designed for investors to
participate in the securities markets in Latin America. The Fund's objective is
long-term capital appreciation, through investments in a broad spectrum of Latin
American industries. This objective and the Fund's policy to invest, under
normal market conditions, at least 80% of its total assets in the equity
securities of Latin American issuers that at the time of purchase have a market
capitalization of less than U.S. $500 million, are fundamental policies which
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities. Because any investment involves risk,
achieving this objective cannot be guaranteed.
MARKET REVIEW
During the period under review the net asset value of a share of the Fund
fell by 5.23%. The last six months have been characterized by significant
volatility, following a turbulent period during which the Latin American markets
had been badly affected by what is now known as 'Asian contagion'. The sharp
bounce in the Asian markets during the last three months was mirrored by a
recovery in Latin America which, while not as sharp as in Asia, was nonetheless
a recovery. On a day-to-day basis the smaller companies sector behaves more
independently of its larger counterparts, although both sets of stocks have
performed more in line with each other in recent months than for some time.
Currently, both the smaller and larger companies are being affected by further
volatility in the emerging world. However, looking ahead, as growth is prolonged
in Argentina and Mexico, and with prospects for stronger growth in Brazil, the
Fund's holdings in these countries should benefit.
ECONOMIC AND POLITICAL REVIEW
A strong jump in unemployment combined with the high fiscal costs of an
extremely tight monetary policy motivated BRAZIL to bring down interest rates
rapidly over the last six months. Their strategy proved successful in many
respects as the relatively short period of extremely high real rates restored
foreign exchange reserves to record levels. Economic growth slowed, helping to
bring down the forecast trade deficit, although the slowdown in GDP was less
severe than generally assumed last fall. However, the fiscal spending cuts
passed late in 1997 have not had a noticeable impact on the deficit which
continues to climb. This deterioration has focused attention on the progress of
reform legislation that moved ahead during the period but now shows signs of
slowing as some pressure has been lifted. The death of two key members of the
government coalition in April suggests a resumption of the stronger pace is
unlikely before the October elections. Although President Cardoso will miss the
support of these individuals during his re-election campaign, there continues to
be no viable opposition candidate at this point.
ARGENTINA continued to enjoy robust economic growth over the last six
months, fueling import growth. Because a healthy portion of Argentina's exports
are tied to commodity prices that are depressed, the country's trade deficit has
deteriorated more rapidly than expected. With the deficit above the $12 billion
target set with the IMF, Argentina is under pressure to slow the economy to
moderate the trade deficit. So far, officials have resisted these steps as they
see the low level of consumer imports as a moderating factor and expect
improvements in exports in the near term. Argentina's other economic measures
remain comfortably within IMF goals and the country may well choose to wait
before taking any action.
Economic growth has also been strong in MEXICO and corporations have
generally reported good earnings results in the latest reporting period. This
was particularly true in the consumer-related sectors which were fueled by
rising real incomes and low unemployment. However, when combined with weak oil
export prices, this strength has led to deterioration in trade figures, higher-
than-expected inflation and a weaker peso. The government successfully responded
to these weaknesses by twice cutting budgeted fiscal expenditures and by
tightening monetary policy.
2
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
FROM THE PORTFOLIO MANAGER (CONTINUED) APRIL, 1998
Fortunately, Mexico does not have significant short-term debt levels, a large
current account deficit nor excessive external funding needs. On the political
front, the administration's proposal to establish political autonomy for the
Central Bank and give it formal responsibility for inflation and peso stability
would be positive if enacted.
After starting the year with unexpected volatility in its exchange rate,
CHILE'S monetary tightening has stabilized the currency although at the cost of
slower economic growth. Interest rates have not yet been eased despite clear
evidence of slower growth with a resulting lowering of corporate earnings
expectations. The market expects rates could begin to fall late this summer;
however, unless copper prices rebound, Chile's current account deficit will
remain high and a rate decline could be postponed. In addition, the Central Bank
may keep policies tighter for longer than expected owing to political concerns.
Although presidential elections will not take place until next year, a lack of
cohesion in the current center-left coalition may encourage the government to
seek easier monetary/fiscal policies next year making the Central Bank more
likely to keep policy tight longer this year. Owing to these risks, and the fact
that Chile remains the most exposed to shocks from Asia given its higher level
of trade activity, the Fund continues to have low exposure to Chile.
OUTLOOK AND STRATEGY
During the rest of the year, the region will continue to be sensitive to
the major events taking place in Brazil. With the end of the effective
legislative calendar approaching in June, progress on privatizations in the
electric utility and telephone sectors will become more critical. Without a
meaningful social security reform bill, as now appears likely, foreign investor
sentiment will be most influenced by the success or failure of divestitures. The
Brazilian elections this fall will still be closely watched. Given the lack of
credible opposition to President Cardoso's re-election, the outcome will be
analyzed more for its implications for the ability of the government to return
quickly to a meaningful reform agenda. Trends in commodity prices will also
influence prospects for the region whether it is oil in Argentina, Venezuela and
Mexico, agricultural prices in Brazil and Argentina or metal prices for the
Andean countries.
The Latin American markets will also remain dependent on events outside the
region. Interest rate trends globally and especially in the United States will
be important with Latin America benefiting from stable or lower rates. Any
renewed turmoil in Asian markets would set back Latin America as investors would
likely respond by lowering exposures to emerging markets worldwide, especially
if developed markets remain relatively calm. Should such an event take place,
investors looking for emerging markets with reasonable prospects for strong
near- and intermediate-term economic growth should continue to find the best
prospects in Latin American countries.
Over the last few months the exposure of the Fund to Brazil has been
increased slightly, with the Fund taking advantage of its ability to invest some
of its assets in the stocks of larger companies. In this respect the addition of
holdings in two regional telecommunications companies, Telerj and Telemig,
constitutes an increase in exposure to the 'privatization' sector in Brazil, one
of the most attractive areas for investment at the moment. At the same time, the
Fund's holdings in Mexico have been streamlined, following extensive fundamental
analysis in Mexico of the companies in which the Fund is invested. The Fund
retains its high exposure to the country, but now has much better focus. Looking
ahead, we are very comfortable with the current composition of the Fund,
positioned as it is to reap the benefits of further improvements in the outlook
for economic growth in the region.
Sincerely,
/s/ Ian King
IAN KING
Portfolio Manager
3
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS APRIL 30, 1998 (UNAUDITED)
ASSET DISTRIBUTION (BY COUNTRY) ASSET DISTRIBUTION (BY INSTRUMENT)
Percentages based on total investments Percentages based on total investments
[Pie Chart] [Pie Chart]
Brazil 28.1% Common Stocks 63.5%
Peru 8.3% Commercial Paper 8.4%
Mexico 30.9% Preferred Stocks 28.1%
Chile 6.7%
Argentina 17.6%
United States 8.4%
INDUSTRY BREAKDOWN
Percentages based on total investments
[Pie Chart]
Banking/Finance 6.1%
Utility 6.5%
Food and Beverages 8.6%
Transportation 9.0%
Construction and Building Materials 6.6%
Metals and Mining 11.6%
Household Appliances 2.9%
Capital Goods 1.9%
Automobile and Accessories 3.9%
Forest Products 2.1%
Pharmaceutical 2.1%
Telecommunications 9.5%
Leisure 3.3%
Chemicals 3.8%
Retail 3.7%
Commercial Paper 8.4%
Other Stocks 6.0%
Computers 0.5%
Diversified 3.5%
<TABLE>
<CAPTION>
PERCENTAGE OF
TOP TEN HOLDINGS NET ASSETS
- ------------------------------------------------------------------------
<S> <C>
1. General Electric Capital Corporation 8.5%
2. Tubos de Acero de Mexico S.A., ADR (TAMSA)+ 4.6
3. Sanluis Corporacion, S.A. de C.V. 3.9
4. Perdigao, S.A. 3.9
5. Telefonica de Argentina, ADR 3.9
6. Corporacion Interamericana de Entretenimiento, S.A., 3.8
Series B
7. Transportacion Maritima Mexicana, S.A. de C.V., ADR 3.7
(TMM)
8. Grupo Elektra, S.A. de C.V. 3.7
9. Sociedad Comercial del Plata 3.5
10. Grupo Radio Centro, ADR 3.3
----
42.8%
</TABLE>
4
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 64.1%
ARGENTINA -- 17.8%
750,000 Atanor, S.A. $ 877,631
319,076 Banco Del Suquia, S.A. 845,680
250,000 Corporacion Cementaria Argentina (CORCEMAR) 1,500,218
932,128 Indupa, S.A. 908,957
164,717 Juan Minetti, S.A. 691,913
1,133,333 Sociedad Comercial del Plata 1,620,901
47,000 Telefonica de Argentina, ADR 1,812,437
-----------
8,257,737
-----------
CHILE -- 6.7%
50,000 Laboratorios de Chile, ADR 987,500
100,000 Maderas y Sinteticas, ADR (MASISA) 956,250
36,000 Vina Concha y Toro, S.A., ADR 1,170,000
-----------
3,113,750
-----------
MEXICO -- 31.2%
400,000 Acer Computec Latino America, S.A.+ 235,849
459,800 Corporacion Interamericana de Entretenimiento, S.A., Series
B 1,778,481
1,200,000 Grupo Elektra, S.A. de C.V. 1,709,434
575,000 Grupo Financiero Banorte S.A. de C.V., Series B+ 947,936
1,965,600 Grupo Industrial Camesa, S.A., Series B+ 1,019,887
110,000 Grupo Radio Centro, ADR 1,540,000
200,000 Industrias Campos Hermanos, S.A., Series B+ 988,208
345,000 Sanluis Corporacion, S.A. de C.V. 1,830,778
520,000 Sistema Argos, S.A., Series B 593,585
225,000 Transportacion Maritima Mexicana, S.A. de C.V., ADR (TMM) 1,729,688
115,000 Tubos de Acero de Mexico S.A., ADR (TAMSA)+ 2,113,125
-----------
14,486,971
-----------
PERU -- 8.4%
200,000 Banco Wiese, ADR 1,075,000
40,000 Cementos Lima, S.A. 879,845
711,956 Ferreyros, S.A. 894,512
451,627 Minsur, S.A. 1,018,178
-----------
3,867,535
-----------
TOTAL COMMON STOCKS (COST $28,353,182) 29,725,993
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) APRIL 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS -- 28.3%
BRAZIL -- 28.3%
224,030,001 Bombril Cirio, S.A. $ 1,371,232
276,047 Centrais Eletricas de Santa Catarina, S.A., Series B
(CELESC) 323,441
80,000,000 Ceval Alimentos, S.A. 440,694
25,000,000 Cesp-Cia Energetica Sao Paulo 1,213,221
2,100,000,000 Compania de Electricidade do Estado do Rio de Janeiro 1,524,068
55,000 Compania Vale do Rio Doce 1,298,474
8,000,000 Marcopolo, S.A. 1,503,957
1,100,000,000 Perdigao, S.A. 1,827,482
2,000,000,000 Randon Participacoes, S.A.+ 996,808
9,000,000 Telecomunicacoes do Rio de Janeiro S.A. (TELERJ) 1,416,518
8,000,000 Telecomunicacoes de Minas Gerais, Series B (TELEMIG) 1,234,643
-----------
TOTAL PREFERRED STOCKS (COST $16,717,724) 13,150,538
-----------
FACE VALUE
- --------------------------------------------------------------------------------------------
SHORT-TERM INSTRUMENTS -- 8.5%
COMMERCIAL PAPER -- 8.5% (COST $3,942,000)
$3,942,000 General Electric Capital Corporation, 5.550% due 05/01/1998 3,942,000
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $49,012,906*) 100.9% 46,818,531
OTHER ASSETS AND LIABILITIES (NET) (0.9) (420,382)
- --------------------------------------------------------------------------------------------
NET ASSETS 100.0% $46,398,149
============================================================================================
</TABLE>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
ADR -- American Depositary Receipt.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $49,012,906) (Note 1)
See accompanying schedule $46,818,531
Cash 269,243
Dividends and interest receivable 232,097
Unamortized organization costs (Note 5) 48,267
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS 47,368,138
===============================================================================================
LIABILITIES:
Payable investments purchased $830,831
Investment advisory fee payable (Note 2) 47,084
Legal and audit fees payable 24,503
Custodian fees payable (Note 2) 10,831
Transfer agent fees payable (Note 2) 10,140
Accrued Directors' fees and expenses (Note 2) 9,541
Administration fee payable (Note 2) 8,333
Accrued expenses and other payables 28,726
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 969,989
===============================================================================================
NET ASSETS $46,398,149
===============================================================================================
NET ASSETS CONSIST OF:
Distributions in excess of net investment income $(1,507,138)
Accumulated net realized loss on securities, forward
foreign currency contracts and foreign currencies (4,785,108)
Net unrealized depreciation of securities, foreign
currencies and net other assets (2,278,474)
Par value of common stock 4,007
Paid-in capital in excess of par value of common stock 54,964,862
- -----------------------------------------------------------------------------------------------
TOTAL NET ASSETS $46,398,149
===============================================================================================
NET ASSET VALUE:
Net asset value per share
($46,398,149 / 4,007,169 shares of common stock
outstanding) $11.58
===============================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $6,267) $ 520,643
Interest 77,482
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 598,125
===============================================================================================
EXPENSES:
Investment advisory fee (Note 2) $283,719
Legal and audit fees 56,375
Administration fee (Note 2) 49,886
Custodian fees (Note 2) 38,816
Directors' fees and expenses (Note 2) 21,693
Transfer agent fees (Note 2) 20,953
Amortization of organization costs (Note 5) 15,713
Shareholder reports expense 15,227
Other 21,662
- -----------------------------------------------------------------------------------------------
TOTAL EXPENSES 524,044
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 74,081
===============================================================================================
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain/(loss) on:
Securities 95,233
Forward foreign currency contracts (39,987)
Foreign currencies and net other assets 54,255
- -----------------------------------------------------------------------------------------------
Net realized gain on investments during the period 109,501
- -----------------------------------------------------------------------------------------------
Net change in unrealized appreciation/(depreciation) of:
Securities (2,996,440)
Foreign currencies and net other assets (78,319)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the
period (3,074,759)
===============================================================================================
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (2,965,258)
===============================================================================================
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,891,177)
===============================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
04/30/98 ENDED
(UNAUDITED) 10/31/97
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income/(loss) $ 74,081 $ (40,792)
Net realized gain/(loss) on securities, forward foreign
currency contracts, foreign currencies and net other
assets during the period 109,501 (2,258,902)
Net unrealized appreciation/(depreciation) of securities,
forward foreign currency contracts, foreign currencies and
net other assets during the period (3,074,759) 5,500,402
- ------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
operations (2,891,177) 3,200,708
- ------------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income (1,264,663) (599,586)
Distributions in excess of net investment income -- (287)
- ------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets (4,155,840) 2,600,835
- ------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 50,553,989 47,953,154
- ------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of ($1,507,138) and ($316,556),
respectively) $46,398,149 $50,553,989
================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR PERIOD
04/30/98 ENDED ENDED ENDED
(UNAUDITED) 10/31/97 10/31/96 10/31/95*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $ 12.62 $ 11.97 $ 11.56 $ 13.95
- -------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income/(loss) 0.02 (0.01) 0.00# 0.21
Net realized and unrealized gain/(loss)
on investments (0.74) 0.81 0.61 (2.37)
- -------------------------------------------------------------------------------------------------------------
Total from investment operations (0.72) 0.80 0.61 (2.16)
- -------------------------------------------------------------------------------------------------------------
Distributions from net investment income (0.32) (0.15) (0.20) --
Distributions in excess of net investment
income -- (0.00)# -- --
Offering costs reimbursed/(charged) to
paid-in capital -- -- 0.00# (0.23)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, end of period $ 11.58 $ 12.62 $ 11.97 $ 11.56
=============================================================================================================
Market Value, end of period $ 9.44 $ 10.00 $ 9.75 $ 9.50
=============================================================================================================
Total return+ (2.53)% 3.85% 4.49% (36.67)%
=============================================================================================================
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $46,398 $50,554 $47,953 $46,314
Ratio of operating expenses to average
net assets 2.31%** 2.30% 2.22% 2.43%**
Ratio of net investment income/(loss)
to
average net assets 0.33%** (0.08)% 0.04% 1.68%**
Portfolio turnover rate 34% 39% 22% 7%
Average commission rate paid (a) $0.0001 $0.0001 $0.0001 --
</TABLE>
- ------------
* The Fund commenced operations on November 7, 1994. Beginning Net Asset Value
results from initial offering price of $15.00 per share less commissions and
offering expenses of $1.05 per share.
** Annualized.
+ Total return represents aggregate total return for the period based on
market value at period end.
# Amount represents less than $0.01 and $(0.01) per share.
(a) Average commission rate paid per share of securities purchased and sold by
the Fund. The ratio of commissions paid to principal trades for the period
ended April 30, 1998, October 31, 1997 and October 31, 1996 were 0.42%,
0.44% and 0.51%, respectively.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Latin America Smaller Companies Fund, Inc. (formerly Latin America Growth
Fund, Inc.) (the "Fund") was incorporated as a Maryland corporation on June 27,
1994. It is a diversified, closed-end management investment company registered
with the Securities and Exchange Commission under the Investment Company Act of
1940, as amended. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements.
Portfolio Valuation: In valuing the Fund's assets, all securities for
which market quotations are readily available are valued (i) at the last sale
price prior to the time of determination if there was a sale on the date of
determination, (ii) at the mean between the last current bid and asked prices if
there was no sales price on such date and bid and asked quotations are
available, and (iii) at the bid price if there was no sales price on such date
and only bid quotations are available. Publicly traded government debt
securities are typically traded internationally on the over-the-counter market,
and are valued at the mean between the last current bid and asked price at the
close of business of that market. In instances where a price determined above is
deemed not to represent fair market value, the price is determined in such
manner as the Board of Directors may prescribe. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term investments having a
maturity of 60 days or less are valued at amortized cost, unless the Board of
Directors determines that such valuation does not constitute fair value. In
valuing assets, prices denominated in foreign currencies are converted to U.S.
dollar equivalents at the current exchange rate. Securities for which reliable
quotations or pricing services are not readily available and all other
securities and assets are valued at fair value in good faith by, or under
procedures established by, the Fund's Board of Directors.
Repurchase Agreements: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Fund's holding period.
This agreement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is potential loss to the
Fund in the event the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible decline
in the value of the underlying securities during the period while the Fund seeks
to assert its rights. The Fund's investment adviser, acting under the
supervision of the Fund's Board of Directors, reviews the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund enters into repurchase agreements to evaluate potential risks.
Foreign Currency: The books and records of the Fund are maintained in U.S.
dollars. Foreign currencies, investments and other assets and liabilities are
translated into U.S. dollars at the exchange rates prevailing at the end of the
period, and purchases and sales of investment securities, income and expenses
are translated on the respective dates of such transactions. Unrealized gains
and losses which result from changes in foreign currency exchange rates have
been included in the unrealized appreciation/(depreciation) of currencies and
net other assets. Net foreign currency gains and losses resulting from changes
in exchange rates include foreign currency gains and losses between trade date
and settlement date on investment securities transactions, foreign currency
transactions and the difference between the amounts of interest and dividends
recorded on the books of the Fund and the amounts actually received. The portion
of foreign currency gains and
11
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
losses related to fluctuation in the exchange rates between the initial purchase
trade date and subsequent sale trade date is included in realized gains and
losses on investment securities sold.
Forward Foreign Currency Contracts: The Fund has entered into forward
foreign currency contracts for purposes other than trading in order to reduce
its exposure to fluctuations in foreign currency exchange on its portfolio
holdings. Forward foreign currency contracts are valued at the forward rate and
are marked-to-market daily. The change in market value is recorded by the Fund
as an unrealized gain or loss. When the contract is closed, the Fund records a
realized gain or loss 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.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's investment securities, but
it does establish a rate of exchange that can be achieved in the future.
Although forward foreign currency contracts limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition, the
Fund could be exposed to risks if the counterparties to the contracts are unable
to meet the terms of their contracts.
Securities Transactions and Investment Income: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis. Dividend income and interest income may be subject to foreign withholding
taxes.
Dividends and Distributions to Shareholders: The Fund intends to
distribute annually to shareholders substantially all of its net investment
income and to distribute any realized capital gains at least annually. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments of
income and gains on various investment securities held by the Fund, timing
differences and differing characterization of distributions made by the Fund.
For the year ended October 31, 1997, permanent differences resulting from
book and tax accounting for forward foreign currency contracts and currency
transactions were reclassified from accumulated net realized loss to
distribution in excess of net investment income in the amount of $430,162.
Federal Income Taxes: The Fund's policy is to comply with the provisions
of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and by distributing substantially all of its taxable income
to its shareholders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED
PARTY TRANSACTIONS
American Express Asset Management International Inc. ("AEAMI"), formerly
IDS International Inc., serves as the Fund's investment adviser pursuant to an
investment advisory agreement (the "Advisory Agreement"). AEAMI provides
investment advisory services to the Fund and is responsible for the management
of the Fund's portfolio of investments in accordance with the Fund's investment
objectives and policies. Under the Advisory Agreement, AEAMI is entitled to
receive a monthly fee at an annual rate of 1.25% of the value of the Fund's
average weekly net assets.
First Data Investor Services Group, Inc. ("Investor Services Group"), a
wholly-owned subsidiary of First Data Corporation, serves as the Fund's U.S.
Administrator (the "U.S. Administrator") pursuant to an administration agreement
(the "Administration Agreement"). Under the Administration Agreement, the U.S.
Administrator is entitled to receive a monthly fee at an annual rate of 0.10%
12
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
of the value of the Fund's average daily net assets, subject to minimum annual
fee of $100,000. Investors Services Group also acts as the Fund's transfer
agent, dividend paying agent and registrar.
The Fund is required under the laws of Brazil, Chile and Colombia to
appoint a local administrator in connection with the Fund's investments in each
such country. Banco Geral, Boston Inversiones Servicios, and Fiducomerico act as
local administrators for the Fund in Brazil, Chile and Colombia, respectively,
pursuant to arrangements established by Boston Safe Deposit and Trust Company
("Boston Safe"), the Fund's custodian.
Boston Safe, an indirect wholly-owned subsidiary of Mellon Bank
Corporation, serves as the Fund's custodian and may employ sub-custodians
outside of the United States.
The Toyo Trust and Banking Company, Limited 4-3, Marunouchi 1-chome,
Chiyoda-ku, Tokyo, Japan, serves as the Fund's dividend paying agent and
shareholder servicing agent for the Fund's common stock that is beneficially
owned by investors in Japan.
No officer, director, or employee of AEAMI, Investor Services Group or any
parent or subsidiary of those corporations receives any compensation from the
Fund for serving as a director or officer of the Fund. The Fund pays each
director who is not a director, an officer or employee of AEAMI, Investor
Services Group or any of their affiliates $7,000 per annum plus $1,000 for each
Regular or Special Board Meeting attended in person or by telephone, plus
related travel and out-of-pocket expenses.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the six months ended April 30, 1998, aggregated
$14,716,550 and $17,064,488, respectively.
At April 30, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $5,671,078 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $7,865,453.
4. SHARES OF CAPITAL STOCK
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock ($0.001 par value). For the six months ended April 30, 1998 and the year
ended October 31, 1997, there were no share transactions. Transactions in shares
outstanding for the Fund were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
October 26, 1994* 7,169 $ 100,008
Initial issuance of shares in public
offering** 4,000,000 55,799,992
- ----------------------------------------------------------------------------------------------------------
Total increase*** 4,007,169 $55,900,000
==========================================================================================================
</TABLE>
* On October 26, 1994, the Fund sold a total of 7,169 shares to Lehman
Brothers Inc. and proceeds to the Fund amounted to $100,008.
** The Fund commenced operations on November 7, 1994.
*** Offering costs of $936,491 were charged to paid-in capital in connection
with the offering of the Fund's shares during the period ended October 31,
1995. Underwriting discounts and commissions paid directly to Lehman
Brothers Inc. and other underwriters amounted to $4,200,000. For the year
ended October 31, 1996, the Fund was reimbursed $12,575 of the original
offering costs of $936,491.
5. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization and offering,
including fees and expenses of registering and qualifying its shares for
distribution under Federal and state securities regulations. All such costs are
being amortized on the straight-line method over a period of five years
13
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
from the commencement of operations of the Fund. In the event that any of the
initial shares of the Fund are redeemed during such amortization period, the
Fund will be reimbursed for any unamortized organization costs in the same
proportion as the number of shares redeemed bears to the number of initial
shares held at the time of redemption.
6. ANTIDISCOUNT MEASURES
The Fund's prospectus provides that if, at any time after the second year
following the initial offering of the Fund's shares of Common Stock, shares of
the Fund's Common Stock publicly trade for a substantial period of time at a
significant discount from the Fund's then current net asset value per share, the
Fund's Board of Directors will consider, at its next regularly scheduled
meeting, authorizing various actions designed to reduce the discount. These
actions may include periodic repurchases of shares, tender offers to purchase
shares from all stockholders at net asset value or recommending to shareholders
conversion to an open-end investment company.
7. NON-U.S. SECURITIES
At April 30, 1998, 91.6% of the Fund's net assets were invested in Latin
American securities. There are significant differences between Latin American
and U.S. securities markets, including, among others, greater price volatility,
less liquidity, smaller market capitalization and less government supervision
and regulation in the Latin American securities markets. Consequently,
acquisitions and dispositions by the Fund of securities in these markets may be
inhibited.
8. CAPITAL LOSS CARRYFORWARD
At October 31, 1997, the Fund had available for Federal tax purposes unused
capital losses of $719,350 expiring on October 31, 2003, $1,486,195 expiring on
October 31, 2004 and $2,664,807 expiring on October 31, 2005, respectively,
which can be used to offset future net capital gains.
14
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
================================================================================
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NET REALIZED AND UNREALIZED NET INCREASE/(DECREASE)
NET INVESTMENT GAIN/(LOSS) ON IN NET ASSETS
INCOME/(LOSS) INVESTMENTS RESULTING FROM OPERATIONS
TOTAL TOTAL TOTAL
QUARTER ENDED (000) PER SHARE (000) PER SHARE (000) PER SHARE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR 1997
January 31, 1997........... $(113) $(0.03) $ 3,399 $ 0.85 $ 3,286 $ 0.82
April 30, 1997............. 105 0.03 1,721 0.43 1,826 0.46
July 31, 1997.............. 80 0.02 6,594 1.64 6,673 1.66
October 31, 1997........... (113) (0.03) (8,472) (2.11) (8,584) (2.14)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL.................... $ (41) $(0.01) $ 3,242 $ 0.81 $ 3,201 $ 0.80
=======================================================================================================================
FISCAL YEAR 1998
January 31, 1998........... $(120) $(0.03) $(7,021) $(1.75) $(7,141) $(1.78)
April 30, 1998............. 194 0.05 4,056 1.01 4,250 1.06
- -----------------------------------------------------------------------------------------------------------------------
TOTAL.................... $ 74 $ 0.02 $(2,965) $(0.74) $(2,891) $(0.72)
=======================================================================================================================
</TABLE>
15
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (unaudited)
DIVIDEND REINVESTMENT PLAN
The Fund intends to distribute annually to shareholders substantially all
of its net investment income, and to distribute any net realized capital gains
at least annually. Net investment income for this purpose is income other than
net realized long- and short-term capital gains net of expenses. Pursuant to the
Dividend Reinvestment Plan (the "Plan"), shareholders whose shares of Common
Stock are registered in their own names will be deemed to have elected to have
all distributions automatically reinvested by First Data Investor Services
Group, Inc., (the "Plan Agent") in Fund shares pursuant to the Plan unless such
shareholders elect to receive distributions in cash. Shareholders who elect to
receive distributions in cash will receive all distributions in cash paid by
check in U.S. dollars mailed directly to the shareholder by First Data Investors
Services Group, Inc., as dividend paying agent. In the case of shareholders,
such as banks, brokers or nominees, that hold shares for others who are
beneficial owners, the Plan Agent will administer the Plan on the basis of the
number of shares certified from time to time by the shareholders as representing
the total amount registered in such shareholders' names and held for the account
of beneficial owners that have not elected to receive distributions in cash.
Investors that own shares registered in the name of a bank, broker or other
nominee should consult with such nominee as to participation in the Plan through
such nominee, and may be required to have their shares registered in their own
names in order to participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the Directors of the Fund declare an income dividend or a capital gains
distribution payable either in the Fund's Common Stock or in cash,
non-participants in the Plan will receive cash and participants in the Plan will
receive Common Stock, to be issued by the Fund or purchased by the Plan Agent in
the open market, as provided below. If the market price per share on the
valuation date equals or exceeds the net asset value per share on that date, the
Fund will issue new shares to participants at net asset value, provided,
however, if the net asset value is less than 95% of the market price on the
valuation date, then such shares will be issued at 95% of the market price. The
valuation date will be the dividend or distribution payment date or, if that
date is not a trading day on the exchange on which the Fund's shares are listed,
the next preceding trading day. If net asset value exceeds the market price of
Fund shares at such time, or if the Fund should declare an income dividend or
capital gains distribution payable only in cash, the Plan Agent will, as agent
for the participants, buy Fund shares in the open market, for the participant's
accounts on, or shortly after, the payment date. If, before the Plan Agent has
completed its purchases, the market price exceeds the net asset value of a Fund
share, the average per share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's shares, resulting in the acquisition of fewer
shares than if the distribution had been paid in shares issued by the Fund on
the dividend payment date. Because of the foregoing difficulty with respect to
open-market purchases, the Plan provides that if the Plan Agent is unable to
invest the full dividend amount in open-market purchases during the purchase
period or if the market discount shifts to a market premium during the purchase
period, the Plan Agent will cease making open-market purchases and will receive
the uninvested portion of the dividend amount in newly issued shares at the
close of business on the last purchase date.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for personal and U.S. Federal tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in the name of
the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of the reinvestment
of dividends and capital gains distributions will be paid by the Fund. There
will be no brokerage charges with respect to shares issued directly by the Fund
as a result of dividends or capital gains distributions payable either in stock
or in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect
16
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (unaudited) (CONTINUED)
to the Plan Agent's open market purchases in connection with the reinvestment of
dividends and capital gains distributions made by the participant. Brokerage
charges for purchasing small amounts of stock for individual accounts through
the Plan are expected to be less than the usual brokerage charges for such
transactions, because the Plan Agent will be purchasing stock for all
participants in blocks and pro-rating the lower commission thus attainable.
The receipt of dividends and distributions under the Plan will not relieve
participants of any U.S. Federal income tax which may be payable on such
dividends or distributions.
Experience under the Plan may indicate that changes in the Plan are
desirable. Accordingly, the Fund and the Plan Agent reserve the right to
terminate the Plan as applied to any dividend or distribution paid subsequent to
notice of the termination sent to members of the Plan at least thirty days
before the record date for such dividend or distribution. The Plan also may be
amended by the Fund or Plan Agent, but (except when necessary or appropriate to
comply with applicable law, rules or policies of a regulatory authority) only by
at least thirty days' written notice to participants in the Plan. All
correspondence concerning the Plan should be directed to the Plan Agent at P.O.
Box 1376, Boston, Massachusetts 02104.
- --------------------------------------------------------------------------------
RESULTS OF SHAREHOLDER MEETING
On February 11, 1998, the Fund held an Annual Meeting of Shareholders to
consider (1) the election of two directors, (2) the ratification of the
selection of Ernst & Young LLP as independent auditors and (3) the approval of
an amendment to the Fund's charter to change the name of the Fund to Latin
America Smaller Companies Fund, Inc. The results of each proposal are as
follows:
PROPOSAL 1: ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
NAME FOR AGAINST
---- --------- -------
<S> <C> <C>
Philip H. Didriksen 2,280,126 580,457
Peter L. Lamaison 2,265,835 594,748
</TABLE>
PROPOSAL 2: SELECTION OF INDEPENDENT AUDITORS
Voted:
FOR 2,289,625
AGAINST 27,957
ABSTAIN 543,001
PROPOSAL 3: AMENDMENT TO THE FUND'S CHARTER TO CHANGE THE NAME OF
THE FUND TO LATIN AMERICA SMALLER COMPANIES FUND, INC.
Voted:
FOR 2,234,217
AGAINST 73,568
ABSTAIN 552,798
17
<PAGE>
LATIN AMERICA SMALLER COMPANIES FUND, INC.
One Exchange Place
Boston, MA 02109
<TABLE>
<S> <C>
DIRECTORS AND OFFICERS INVESTMENT ADVISER
Peter L. Lamaison American Express Asset Management
Chairman of the Board International Inc.
11th Floor Dashwood House
Philip H. Didriksen, Jr. 69 Old Broad Street
Director London EC2M 1Qs
United Kingdom
Rodman L. Drake
Director INVESTOR RELATIONS
1-800-310-8239
Kathleen C. McClave (Recorded Market Commentary)
Director 1-612-671-2334
(To request additional information)
Peer Pedersen
Director
Ian King ADMINISTRATOR AND
Vice President TRANSFER AGENT
and Investment Officer
First Data Investor Services Group, Inc.
Coleen Downs Dinneen, Esq. One Exchange Place
Secretary Boston, MA 02109-2873
Michael Kardok SHAREHOLDER SERVICE NUMBER
Treasurer 1-800-331-1710
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
FUND COUNSEL CUSTODIAN
Shereff, Friedman, Hoffman & Goodman, LLP Boston Safe Deposit & Trust Company
919 Third Avenue One Boston Place
New York, NY 10022 Boston, MA 02108
</TABLE>
