Latin America
Smaller Companies Fund, Inc.
October 31, 1998
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.
From the Portfolio Manager 1
Portfolio Highlights 3
Portfolio of Investments 4
Statement of Assets and Liabilities 6
Statement of Operations 7
Statement of Changes in Net Assets 8
Financial Highlights 9
Notes to Financial Statements 10
Report of Independent Auditors 15
Additional Information 16
This report is sent to the stockholders of the Latin America Smaller Companies
Fund, Inc. for their information. It is not a prospectus, circular or 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 October, 1998
Dear Stockholder:
Performance
During the period under review the net asset value of a share of the
Fund fell by 48.36%. This decline reflects both the continuing influence from
Asia on emerging markets around the world and the extent to which the stocks of
smaller Latin American companies have continued to underperform their larger
counterparts. In such a turbulent environment when markets have been slipping
persistently over the course of the twelve months under review the traded
volumes of Latin American stocks have continued to fall. This has had an adverse
impact on the prices of smaller companies stocks, as stock sales in illiquid
markets exaggerate the negative market impact. Partly in mitigation of this we
have made active use of the ability of the Fund to invest up to 20% of its
assets in the stocks of larger capitalization companies. This strategy has
provided the Fund with some protection in such turbulent markets.
Economic review
The most obvious impact of the Asian crisis in Latin America has been
the attachment of a greater premium to emerging country risk. This has meant
that interest rates have had to rise across the continent, principally as a
means of protecting currencies. At the time of writing domestic interest rates
in Brazil remain at punitively high levels of approximately 40%, squeezing life
out of the economy and pushing it into what looks as if it might be a severe
recession. Estimates for GDP growth in the first half of 1999 suggest that the
economy may contract by as much as 5%, but that in the second half there may be
some scope for a recovery. It should be borne in mind that there is a historical
precedent for Brazil to withstand comparatively short periods of economic
contraction, before returning to trend growth. The more worrying aspect of
Brazil over the last year has been the deterioration of foreign exchange
reserves. These reserves are the primary means of supporting the currency in
times of attack from overseas, and have fallen from a high of approximately $70
billion to their current level around $40 billion. The main reason for this is
the requirement of the Banco Central do Brasil to sterilize any short-term
capital outflows. Longer-term capital will only return to the country if the
government can respond to the demands of the IMF and impose much stricter fiscal
discipline, to bring down the budget deficit which has ballooned over the course
of the last twelve months to 7% of GDP. This will be the main item on which to
focus in the coming year.
As in Brazil, so in Argentina and Mexico, the other two large economies in the
region, although not to the same extent. The need to push up interest rates in
both countries has seen both economies slow down over the course of the year,
but from comparatively high bases, and neither should see their economy slip
into recession. The one particular area of weakness that has affected both
countries, in addition to the influence from Brazil, has been lower commodity
prices. The worst impact of this has been the lower oil price in Mexico, which
has also impacted on Venezuela to a severe degree, since this accounts for a
large proportion of fiscal revenues. The Mexican government has had to revise
down rapidly its forecast for GDP growth and fiscal revenues for 1999 because
the international price has fallen so sharply. To a lesser degree there has been
a subsidiary impact on the economies of Chile and Peru. Both of these had only
just begun to work out the worst effects of El Nino, but since both rely to a
greater degree than most other countries in the region on export earnings from
commodity sales, both suffered accordingly.
<PAGE>
Latin America Smaller Companies Fund, Inc.
From the Portfolio Manager (continued) October, 1998
Perhaps the strongest economy in the region over the last twelve months has been
Argentina, where the benefits of the currency board system have insulated it
from the worst of the Brazilian and Asian problems. Only in recent months has
the economy started to slow, but even the ongoing threat of further weakness in
export demand from Brazil has not yet pushed that economy into recession. This
is one of the reasons why the Latin America Smaller Companies Fund has retained
a relatively high exposure to this country over the last year.
Underlying all the economic weaknesses of Latin America at the moment, and
providing some comfort, is the undoubted willingness of the G7 countries, the
IMF and particularly the Federal Reserve, to take action to prevent Latin
America following Asia. With three interest rate cuts in quick succession in
late 1998, this eases some of the pressure on the region, especially those
countries with the highest stock of sovereign debt. Looking to 1999, action by
developed countries' central banks will provide further support, but the
emphasis will shift to domestic economic management. The ability of economies to
weather the storm is now in the hands of local rather than international
policy-makers.
Political review
As we stated in the last annual letter to stockholders, the election in Brazil
has been the main political event of the last twelve months. This has drawn the
attention of investors around the world, in both the emerging and the developed
market asset classes. The re-election of President Fernando Henrique Cardoso is
seen as one of the most positive developments across the continent, as he and
his team are in the unique position of being popular with both the populace and
foreign investors alike. His task is now to address the structural economic
problems in his country, especially the system of fiscal revenue collection. In
this respect the support of the new Congress in 1999 will be crucial and it is
here that the greatest threat to Brazil lies. If new legislation to reform the
fiscal system cannot be enacted, because of an intransigent Congress, then the
country will fall short of its IMF targets. Further pressure on foreign exchange
reserves and the currency would accumulate on any signs of frailty, threatening
the currently comparatively stable status quo.
Outlook
While the proposal to liquidate has been pending, we have continued to manage
the Fund prudently in accordance with its existing guidelines. As of the date
this letter is being written, the Liquidation Plan has been approved and we are
proceeding with an orderly disposal of the Fund's assets and distribution to
stockholders.
Sincerely,
/s/ IAN KING
IAN KING
Portfolio Manager
<PAGE>
Latin America Smaller Companies Fund, Inc.
Portfolio Highlights October, 1998 (unaudited)
ASSET DISTRIBUTION (BY COUNTRY) (a pie chart appears here)
Percentages based on total investments
Peru 9.0%
Chile 8.8
United States 15.0
Argentina 14.5
Brazil 26.0
Mexico 26.7
ASSET DISTRIBUTION (BY INSTRUMENT) (a pie chart appears here)
Percentages based on total investments
Commercial Paper 15.0%
Common Stocks 58.9
Preferred Stocks 26.1
INDUSTRY BREAKDOWN (a pie chart appears here)
Percentages based on total investments
Retail 1.1%
Commercial Paper 15.0
Telecommunications 12.9
Food and Beverages 11.8
Metal and Mining 11.4
Other Stocks 6.9
Transportation 6.8
Utility 4.8
Banking/Finance 4.5
Construction and Building Materials 4.3
Chemicals 4.3
Automobile and Accessories 3.3
Capital Goods 3.3
Pharmaceuticals 2.8
Household Appliances 2.6
Forest Products 2.2
Leisure Products 2.0
Percentage of
TOP TEN HOLDINGS Net Assets
1 General Electric Capital Corporation 14.9%
2 Telefonica de Argentina, ADR 6.1
3 Perdigao, S.A. 5.3
4 Transportacion Maritima Mexicana, S.A. de C.V., ADR (TMM) 3.9
5 Tubos de Acero de Mexico S.A., ADR (TAMSA) 3.9
6 Corporacion Interamericana de Entretenimiento S.A., Series B 3.7
7 Vina Concha y Toro, S.A., ADR 3.7
8 Compania Vale do Rio Doce 3.3
9 Ferreyros, S.A. 3.3
10 Laboratorios de Chile, ADR 2.9
---------
51.0%
<PAGE>
Latin America Smaller Companies Fund, Inc.
Portfolio of Investments October 31, 1998
Value
Shares (Note 1)
COMMON STOCKS -- 58.6%
Argentina -- 14.4%
4 Astra Cia Argentina De Petroleo S.A. $ 5
750,000 Atanor, S.A. 510,168
319,076 Banco Del Suquia, S.A. 408,552
15,259 Corporacion Cementaria Argentina (CORCEMAR) 76,320
932,128 Indupa, S.A. 568,786
181,189 Juan Minetti, S.A. 516,558
47,000 Telefonica de Argentina, ADR 1,553,938
------------
3,634,327
------------
Chile -- 8.7%
50,000 Laboratorios de Chile, ADR 725,000
100,000 Maderas y Sinteticas, ADR (MASISA) 550,000
36,000 Vina Concha y Toro, S.A., ADR 924,750
------------
2,199,750
------------
Mexico -- 26.5%
459,800 Corporacion Interamericana de Entretenimiento S.A.,
Series B+ 925,696
61,306 Corporacion Interamericana de Entretenimiento S.A.,
Series L 90,976
600,000 Grupo Elektra, S.A. de C.V. 265,334
1,965,600 Grupo Emp Privado Mexicano, Series B 719,501
575,000 Grupo Financiero Banorte S.A. de C.V., Series B+ 350,416
61,000 Grupo Iusacell S.A., ADR, Series L + 419,375
110,000 Grupo Radio Centro, ADR 501,875
200,000 Industrias Campos Hermanos, S.A., Series B + 461,021
345,000 Sanluis Corporacion, S.A. de C.V. 494,222
520,000 Sistema Argos, S.A., Series B 499,011
225,000 Transportacion Maritima Mexicana, S.A. de C.V.,
ADR (TMM) 998,437
115,000 Tubos de Acero de Mexico S.A., ADR (TAMSA) + 977,500
------------
6,703,364
------------
Peru -- 9.0%
200,000 Banco Wiese, ADR 362,500
42,000 Cementos Lima, S.A. 493,023
845,578 Ferreyros, S.A. 823,946
470,712 Minsur, S.A. 590,595
------------
2,270,064
------------
TOTAL COMMON STOCKS (Cost $24,488,276) 14,807,505
------------
Latin America Smaller Companies Fund, Inc.
Portfolio of Investments (continued) October 31, 1998
Value
Shares (Note 1)
PREFERRED STOCKS - 25.9%
Brazil - 25.9%
224,030,001 Bombril Cirio, S.A. $646,042
276,047 Centrais Eletricas de Santa Catarina, S.A.,
Series B (CELESC) 155,044
80,000,000 Ceval Alimentos, S.A. 201,190
2,100,000,000 Compania de Electricidade do Estado do Rio de
Janeiro 686,562
55,000 Compania Vale do Rio Doce 829,910
25,000,000 Elektro Elet E Ser NPV 356,694
800,000 Marcopolo, S.A. 717,579
1,100,000,000 Perdigao, S.A. 1,337,078
2,000,000,000 Randon Participacoes, S.A. + 335,317
8,900 Telebras - ADR Block 675,844
8,000,000 Telecomunicacoes de Minas Gerais, Series B
(TELEMIG) 247,464
8,000,000 Telemig Celular S.A., Series C 75,111
9,000,000 Telerj Celular S.A., Series B 279,152
------------
TOTAL PREFERRED STOCKS (Cost $15,790,185) 6,542,987
------------
Face Value
SHORT-TERM INSTRUMENTS - 14.9%
Commercial Paper - 14.9% - (Cost $3,779,000)
$3,779,000 General Electric Capital Corporation
5.700%, due 11/02/1998 3,779,000
------------
TOTAL INVESTMENTS (Cost $44,057,461*) 99.4% 25,129,492
OTHER ASSETS AND LIABILITIES (NET) 0.6 150,330
------------- ------------
NET ASSETS 100.0% $ 25,279,822
============= ============
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
ADR American Depositary Receipt.
See Notes to Financial Statements.
<PAGE>
Latin America Smaller Companies Fund, Inc.
Statement of Assets and Liabilities October 31, 1998
ASSETS:
Investments, at value (Cost $44,057,461) (Note 1)
See accompanying schedule $25,129,492
Receivable for Investments sold 139,270
Cash and foreign currency (Cost $707) 856
Dividends and interest receivable 97,097
Unamortized organization costs (Note 5) 32,294
Other Assets 14,025
---------------------
Total Assets 25,413,034
=====================
LIABILITIES:
Legal and audit fees payable 41,813
Investment advisory fee payable (Note 2) 25,374
Custodian fees payable (Note 2) 10,000
Administration fee payable (Note 2) 8,333
Transfer agent fees payable (Note 2) 8,168
Accrued Directors' fees and expenses payable (Note 2) 6,066
--------------
Accrued expenses and other payables 33,458
--------------
Total Liabilities 133,212
=====================
NET ASSETS $25,279,822
=====================
NET ASSETS consist of:
Distributions in excess of net investment income $(13,402)
Accumulated net realized loss on securities, forward foreign currency
contracts and foreign currencies (10,746,044) Net unrealized
depreciation of
securities, foreign currencies and net other assets(18,929,601) Par value
of common stock 4,007 Paid-in capital in excess of par value of common
stock 54,964,862
TOTAL NET ASSETS $25,279,822
=====================
NET ASSET VALUE:
Net asset value per share
($25,279,822 / 4,007,169 shares of common
stock outstanding) $6.31
=====================
See Notes to Financial Statements.
<PAGE>
Latin America Smaller Companies Fund, Inc.
Statement of Operations
For the Year Ended October 31, 1998
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes
of $26,509) $945,495
Interest 151,030
=====================
Total Investment Income 1,096,525
=====================
EXPENSES:
Investment advisory fee (Note 2) $493,846
Legal and audit fees 120,435
Administration fee (Note 2) 100,000
Custodian fees (Note 2) 74,320
Transfer agent fees (Note 2) 51,529
Directors' fees and expenses (Note 2) 47,350
Stockholder reports expense 46,002
Amortization of organization costs (Note 5) 31,686
Other 26,562
-----------
Total Expenses 991,730
---------------------
NET INVESTMENT INCOME 104,795
=====================
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(Notes 1 and 3):
Net realized loss on:
Securities (4,351,592)
Foreign currencies and net other assets (36,821)
---------------------
Net realized loss on investments during the year (4,388,413)
---------------------
Net change in unrealized appreciation/(depreciation) of:
Securities (19,730,030)
Foreign currencies and net other assets 4,144
---------------------
Net change in unrealized depreciation of investments
during the year (19,725,886)
=====================
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (24,114,299)
=====================
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(24,009,504)
=====================
See Notes to Financial Statements.
<PAGE>
Latin America Smaller Companies Fund, Inc.
Statement of Changes in Net Assets
Year Year
Ended Ended
10/31/98 10/31/97
Net investment income/(loss) $104,795 $(40,792)
Net realized loss on securities, forward foreign
currency contracts, foreign
currencies and net other assets during the year (4,388,413) (2,258,902)
Net change in unrealized appreciation/(depreciation)
of securities, forward foreign currency
contracts, foreign currencies and net other assets
during the year (19,725,886) 5,500,402
----------- -----------
Net increase/(decrease) in net assets resulting
from operations (24,009,504) 3,200,708
Distributions to stockholders from net investment
income (1,264,663) (599,586)
Distributions in excess of net investment income -- (287)
----------- -----------
Net increase/(decrease) in net assets (25,274,167) 2,600,835
----------- -----------
NET ASSETS:
Beginning of year 50,553,989 47,953,154
----------- -----------
End of year (including distributions in
excess of net investment income
of ($13,402) and ($316,556), respectively) $25,279,822 $50,553,989
=========== ===========
See Notes to Financial Statements.
<PAGE>
Latin America Smaller Companies Fund, Inc.
Financial Highlights
For a Fund share outstanding throughout each period.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year Year Year Period
Ended Ended Ended Ended
10/31/98 10/31/97 10/31/96 10/31/95*
Net Asset Value, beginning of period $ 12.62 $ 11.97 $ 11.56 $ 13.95
------------ ----------- --------- ----------
Income from investment operations:
Net investment income/(loss) 0.03 (0.01) 0.00# 0.21
Net realized and unrealized
gain/(loss) on investments (6.02) 0.81 0.61 (2.37)
------------ ----------- --------- ----------
Total from investment operations (5.99) 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 $ 6.31 $ 12.62 $ 11.97 $ 11.56
============ =========== ========= ==========
Market Value, end of period $ 5.13 $ 10.00 $ 9.75 $ 9.50
============ =========== ========= ==========
Total return + (47.07)% 3.85% 4.49% (36.67)%
============ =========== ========= ==========
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $25,280 $50,554 $47,953 $46,314
Ratio of operating expenses
to average net assets 2.51% 2.30% 2.22% 2.43%**
Ratio of net investment income/(loss)
to average net assets 0.27% (0.08)% 0.04% 1.68%**
Portfolio turnover rate 49% 39% 22% 7%
* 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, respectively.
</TABLE>
See Notes to Financial Statements.
<PAGE>
Latin America Smaller Companies Fund, Inc.
Notes to Financial Statements
1. Significant Accounting Policies
Latin America Smaller Companies 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
<PAGE>
Latin America Smaller Companies Fund, Inc.
Notes to Financial Statements (continued)
appreciation/(depreciation) of foreign 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 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 Stockholders: The Fund intends to distribute
annually to stockholders 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, 1998, permanent differences resulting from
book and tax accounting for forward foreign currency contracts and currency
transactions were reclassified from accumulated net realized loss to
distributions in excess of net investment income in the amount of $1,463,022.
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 stockholders. Therefore, no Federal income tax provision is required.
<PAGE>
Latin America Smaller Companies Fund, Inc.
Notes to Financial Statements (continued)
2. Investment Advisory Fee, Administration Fee and Other Related Party
Transactions
American Express Asset Management International Inc. ("AEAMI"), 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% 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
stockholder servicing agent for the Fund's common stock that is beneficially
owned by investors in Japan.
No officer, director, or employee of AEAMI, Investors 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, Investors
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 year ended October 31, 1998, aggregated
$18,135,402 and $20,828,964 respectively.
At October 31, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $601,098 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $19,738,630.
<PAGE>
Latin America Smaller Companies Fund, Inc.
Notes to Financial Statements (continued)
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 year ended October 31, 1998, there were no
share transactions. Transactions in shares outstanding for the Fund were as
follows:
Shares Amount
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
============= ==============
`
* 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 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 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 stockholders conversion to an open-end investment company. No
assurance can be given that the Fund's Board of Directors will convert to an
open-end investment company or that repurchases or tender offers will be made or
that if made, they will reduce or eliminate market discount.
<PAGE>
Latin America Smaller Companies Fund, Inc.
Notes to Financial Statements (continued)
At each quarterly Board meeting beginning in November 1996, the Board has
discussed the fact that the Fund's common stock has traded at a discount to net
asset value. While noting that the Fund's discount is in the range experienced
by similar closed-end funds, the Board has considered various alternatives in an
effort to reduce or eliminate the discount. At two Special Board Meetings held
in September 1998, the Board considered a number of approaches to reduce or
eliminate the discount, and after discussing all relevant factors concluded that
the continued operation of the Fund was not in the best interests of the Fund
and its stockholders. Accordingly, the Board subsequently adopted resolutions
approving a plan of complete liquidation and dissolution of the Fund (The
"Liquidation Plan"). The Liquidation Plan was approved by the stockholders of
the Fund on December 15, 1998. (See Results of Special Stockholder Meeting on
page 17.)
7. Non-U.S. Securities
At October 31, 1998, 84.5% 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, 1998, 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 , $2,664,807 expiring on October 31, 2005, and $5,875,692
expiring on October 31, 2006, respectively, which can be used to offset future
net capital gains.
<PAGE>
Latin America Smaller Companies Fund, Inc.
Independent Auditor's Letter
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Stockholders of Latin America Smaller Companies
Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Latin America Smaller Companies Fund, Inc., including the schedule of portfolio
investments as of October 31, 1998, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
three years in the period then ended and for the period from November 7, 1994
(commencement of operations) to October 31, 1995. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1998, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Latin America Smaller Companies Fund, Inc., at October 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the three years in the period then ended and for the period from November 7,
1994 (commencement of operations) to October 31, 1995, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
December 15, 1998
<PAGE>
Latin America Smaller Companies Fund, Inc.
Additional Information
Dividend Reinvestment Plan
The Fund intends to distribute annually to stockholders 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"), stockholders 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
stockholders elect to receive distributions in cash. Stockholders who elect to
receive distributions in cash will receive all distributions in cash paid by
check in U.S. dollars mailed directly to the stockholders by First Data
Investors Services Group, Inc., as dividend paying agent. In the case of
stockholders, 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 stockholders as
representing the total amount registered in such stockholders' 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 stockholders 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 stockholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by stockholders 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 stockholder'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 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 Stockholder Meeting
The Special Stockholder Meeting held December 15, 1998 resulted in approval
of a plan of complete liquidation and dissolution of the Fund (the "Liquidation
Plan"). A total of 2,624,069 votes were cast in favor of the proposal to approve
the Liquidation Plan, 21,610 were cast against the Liquidation Plan, and 6,500
votes abstained.
<PAGE>
Latin America Smaller Companies Fund, Inc.
One Exchange Place
Boston, MA 02109
Directors and Officers
Peter L. Lamaison
Chairman of the Board
Philip H. Didriksen, Jr.
Director
Rodman L. Drake
Director
Kathleen C. McClave
Director
Peer Pedersen
Director
Ian King
Vice President
and Investment Officer
Coleen Downs Dinneen, Esq.
Secretary
Michael Kardok
Treasurer
Fund Counsel
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Investment Adviser
American Express Asset Management International Inc.
11th Floor Dashwood House
69 Old Broad Street
London EC2M 1Qs
United Kingdom
Investor Relations
1-800-310-8239
(Recorded Market Commentary)
1-612-671-2334
(To request additional information)
Administrator and
Transfer Agent
First Data Investor Services Group, Inc.
One Exchange Place
Boston, MA 02109-2873
Shareholder Service Number
1-800-331-1710
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
Custodian
Boston Safe Deposit & Trust Company
One Boston Place
Boston, MA 02108
<PAGE>
