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OMB APPROVAL
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OMB Number: 3235-0570
Expires: November 30, 2005
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hours per response....... 5.0
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06574
---------------------------------------------
The Latin American Discovery, Inc.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1221 AVENUE OF THE AMERICAS 22ND FLOOR NEW YORK, NY 10020
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
RONALD E. ROBISON
1221 AVENUE OF THE AMERICAS 34TH FLOOR NEW YORK, NY 10020
-------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 1-800-221-6726
----------------------------
Date of fiscal year end: 12/31
--------------------------
Date of reporting period: 6/30/03
-------------------------
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Fund's semi-annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows:
SEMI-ANNUAL REPORT
THE LATIN AMERICAN DISCOVERY FUND, INC.
JUNE 30, 2003
DIRECTORS
MICHAEL BOZIC RONALD E. ROBISON
CHARLES A. FIUMEFREDDO EXECUTIVE VICE PRESIDENT
EDWIN J. GARN AND PRINCIPAL EXECUTIVE
WAYNE E. HEDIEN OFFICER
JAMES F. HIGGINS
DR. MANUEL H. JOHNSON JOSEPH McALINDEN
JOSEPH J. KEARNS VICE PRESIDENT
MICHAEL NUGENT
PHILIP J. PURCELL BARRY FINK
FERGUS REID VICE PRESIDENT
OFFICERS STEFANIE V. CHANG
CHARLES A. FIUMEFREDDO VICE PRESIDENT
CHAIRMAN OF THE BOARD
JAMES W. GARRETT [MORGAN STANLEY LOGO]
MITCHELL M. MERIN TREASURER AND CHIEF
PRESIDENT FINANCIAL OFFICER
MICHAEL LEARY
ASSISTANT TREASURER
THE LATIN AMERICAN DISCOVERY
MARY E. MULLIN FUND, INC.
SECRETARY
INVESTMENT ADVISER
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
ADMINISTRATOR
JPMORGAN INVESTOR SERVICES
73 TREMONT STREET
BOSTON, MASSACHUSETTS 02108
CUSTODIAN
JPMORGAN CHASE BANK
270 PARK AVENUE
NEW YORK, NEW YORK 10017
STOCKHOLDER SERVICING AGENT
AMERICAN STOCK TRANSFER & TRUST COMPANY
59 MAIDEN LANE
NEW YORK, NEW YORK 10030
(800) 278-4353
LEGAL COUNSEL
CLIFFORD CHANCE US LLP
200 PARK AVENUE
NEW YORK, NEW YORK 10166
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
FOR ADDITIONAL FUND INFORMATION,
INCLUDING THE FUND'S NET ASSET VALUE PER
SHARE AND INFORMATION REGARDING THE
INVESTMENTS COMPRISING THE FUND'S
PORTFOLIO, PLEASE CALL 1-800-221-6726 OR
VISIT OUR WEBSITE AT
www.morganstanley.com/im.
MORGAN STANLEY
INVESTMENT MANAGEMENT INC.
(C) 2003 MORGAN STANLEY INVESTMENT ADVISER
THE LATIN AMERICAN DISCOVERY FUND, INC.
Overview
LETTER TO STOCKHOLDERS
PERFORMANCE
For the six months ended June 30, 2003, The Latin America Discovery Fund, Inc.
(the "Fund") had a total return of 20.33%, compared to 24.24% for the Morgan
Stanley Capital International (MSCI) Emerging Markets Free Latin America Index
(the "Index"). On June 30, 2003, the closing price of the Fund's shares on the
New York Stock Exchange was $9.38, representing a 16.1% discount to the Fund's
net asset value per share.
FACTORS AFFECTING PERFORMANCE
- Brazil (+31.4%, Index return) and Mexico (+15.4%), the two largest
countries in terms of market capitalization, led the region. The smaller
market of Venezuela (+70.7%) was also a strong contributor. The smaller,
less liquid markets of Chile (+27.8%), Peru (+16.3%), Colombia (+26.4%)
and Argentina (+50.1%) also posted positive returns.
- Overall the region's performance for the first six months was
characterized by a muted first quarter where it returned a relatively flat
+0.2% and a strong second quarter as it surged +24.0%.
- In terms of relative performance, the Funds underweight position in the
outperforming markets of Brazil and Chile were among the largest
detractors.
- Positive contributors came from stock selection in Mexico and our holdings
in Peru, where both country and stock selection added value.
MANAGEMENT STRATEGIES
- In terms of portfolio positioning, we have increased the beta in our
Brazil portfolio over the past few months and are overweight the market.
On a relative basis, we are now overweight in Mexico, Brazil and
Venezuela, and we remain underweight the rest of the region given relative
valuations and growth outlook.
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
Executive Vice President and Principal Executive Officer
July 2003
2
THE LATIN AMERICAN DISCOVERY FUND, INC.
STATEMENT OF NET ASSETS
June 30, 2003 (unaudited)
STATEMENT OF NET ASSETS
VALUE
SHARES (000)
---------------------------------------------------------------------------------------------------------------
COMMON STOCKS(98.6%)
(UNLESS OTHERWISE NOTED)
===============================================================================================================
ARGENTINA(2.3%)
ENERGY EQUIPMENT & SERVICES
Tenaris SA ADR 106,857(a) $ 2,725
===============================================================================================================
BRAZIL(43.6%)
BANKS
Banco Bradesco SA ADR 121,823 2,276
Banco Itau SA (Preferred) 9,504,000 639
Banco Itau SA ADR 106,784 3,620
Banco Nacional SA (Preferred) 95,420,000(a),(b) --@
Unibanco ADR 21,900 376
---------------------------------------------------------------------------------------------------------------
6,911
---------------------------------------------------------------------------------------------------------------
BEVERAGES
AmBev (Preferred) ADR 477,632 9,720
---------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Brasil Telecom Participacoes SA
(Preferred) 9,865,000 74
Brasil Telecom Participacoes SA ADR 68,495 2,565
Brasil Telecom SA 1,196,805 5
Tele Norte Leste Participacoes SA ADR 157,000 1,834
Tele Norte Leste Participacoes SA 20,277,000 237
---------------------------------------------------------------------------------------------------------------
4,715
---------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES
CEMIG (Preferred) 22,172,000 206
CEMIG ADR 155,453 1,435
---------------------------------------------------------------------------------------------------------------
1,641
---------------------------------------------------------------------------------------------------------------
FOOD & STAPLES
Companhia Brasileira de
Distribuicao Grupo Pao de Acucar ADR 31,300 480
---------------------------------------------------------------------------------------------------------------
METALS & MINING
CSN ADR 92,792 2,302
CVRD (Bonus Shares) 116,420 --@
CVRD (Preferred) ADR 179,429 4,979
CVRD ADR 89,590 2,657
Gerdau SA ADR 166,795 1,960
Usinas Siderurgicas De Minas Gerais SA 8,572 40
---------------------------------------------------------------------------------------------------------------
11,938
---------------------------------------------------------------------------------------------------------------
MULTILINE RETAIL
Lojas Arapua SA (Preferred) 41,337,400(a),(b) --@
Lojas Arapua SA GDR 20,775(a),(b) $ --@
---------------------------------------------------------------------------------------------------------------
--@
---------------------------------------------------------------------------------------------------------------
OIL & GAS
Petrobras SA ADR 457,942 9,049
Petrobras SA (Preferred) 5,479 98
Petrobras SA (Preferred) ADR 294,796 5,236
---------------------------------------------------------------------------------------------------------------
14,383
---------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS
Aracruz Celulose SA ADR 52,800 1,112
Klabin SA (Preferred) 248,000(a) 257
Votorantim Celulose e Papel SA (Preferred) 6,608,000 256
Votorantim Celulose e Papel SA ADR 40,410 782
---------------------------------------------------------------------------------------------------------------
2,407
---------------------------------------------------------------------------------------------------------------
52,195
===============================================================================================================
CHILE(5.7%)
BANKS
Banco Santiago SA ADR 86,452 1,764
---------------------------------------------------------------------------------------------------------------
BEVERAGES
CCU SA ADR 93,700 1,508
---------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES
Banco de Chile ADR 60,237 1,178
---------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Cia de Telecomunicaciones de Chile SA ADR 137,900(a) 1,627
---------------------------------------------------------------------------------------------------------------
FOOD & STAPLES
Distribucion y Servicio D&S SA ADR 54,575 698
---------------------------------------------------------------------------------------------------------------
6,775
===============================================================================================================
MEXICO(44.7%)
BANKS
Grupo Financiero Banorte SA 175,600 495
Grupo Financiero BBVA Bancomer, 'B' 7,263,402(a) 6,133
---------------------------------------------------------------------------------------------------------------
6,628
---------------------------------------------------------------------------------------------------------------
BEVERAGES
Coca-Cola Femsa SA 37,300(a) 802
Femsa ADR 37,953 1,564
Femsa UBD 770,519 3,168
---------------------------------------------------------------------------------------------------------------
5,534
---------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS
Cemex SA 556,662 2,480
---------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Carso Global Telecom SA de CV 316,444(a) 402
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
THE LATIN AMERICAN DISCOVERY FUND, INC.
STATEMENT OF NET ASSETS
June 30, 2003 (unaudited)
STATEMENT OF NET ASSETS (CONT'D)
VALUE
SHARES (000)
----------------------------------------------------------------------------------------------------------
MEXICO (CONT'D)
DIVERSIFIED TELECOMMUNICATION SERVICES (CONT'D)
Telmex 'L' SA ADR 478,892 $ 15,047
----------------------------------------------------------------------------------------------------------
15,449
----------------------------------------------------------------------------------------------------------
FOOD & STAPLES
Wal-Mart de Mexico SA ADR 11,250 332
Wal-Mart de Mexico SA, 'C' 1,163,560 3,127
Wal-Mart de Mexico SA, 'V' 2,066,955 6,090
----------------------------------------------------------------------------------------------------------
9,549
----------------------------------------------------------------------------------------------------------
TRANSPORTATION INFRASTRUCTURE
Grupo Aeroportuario del Sureste SA ADR 102,360 1,497
----------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES
America Movil SA ADR 640,019 12,000
America Telecom SA, 'A1' 316,444(a) 297
----------------------------------------------------------------------------------------------------------
12,297
----------------------------------------------------------------------------------------------------------
53,434
==========================================================================================================
PERU(0.8%)
METALS & MINING
Buenaventura SA ADR 32,000 963
==========================================================================================================
VENEZUELA(1.5%)
DIVERSIFIED TELECOMMUNICATION SERVICES
CANTV, 'D' ADR 142,730 1,783
==========================================================================================================
TOTAL COMMON STOCKS
(Cost $110,894) 117,875
==========================================================================================================
FACE
AMOUNT
(000)
----------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT(1.5%)
==========================================================================================================
UNITED STATES(1.5%)
REPURCHASE AGREEMENT
J.P. Morgan Securities, Inc.,
1.05%, dated 6/30/03, due
7/1/03 (Cost $1,832) $ 1,832(c) 1,832
==========================================================================================================
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN(0.1%)
==========================================================================================================
Brazilian Real BRL 337 119
Mexican Peso MXN 524 50
----------------------------------------------------------------------------------------------------------
TOTAL FOREIGN CURRENCY
(Cost $169) 169
==========================================================================================================
AMOUNT VALUE
(000) (000)
----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS(100.2%)
(Cost $112,895) $ 119,876
==========================================================================================================
OTHER ASSETS (0.4%)
Dividends Receivable $ 214
Receivable for Investments Sold 209
Other 16 439
==========================================================================================================
LIABILITIES (-0.6%)
Payable For:
Dividends Declared (451)
Investment Advisory Fees (114)
Investments Purchased (40)
Professional Fees (35)
Directors' Fees and Expenses (27)
Stockholder Reporting Expenses (15)
Custodian Fees (11)
Administrative Fees (7)
Bank Overdraft (2)
Other Liabilities (8) (710)
==========================================================================================================
NET ASSETS (100%)
Applicable to 10,694,967 issued and outstanding
$0.01 par value shares (100,000,000 shares authorized) $ 119,605
==========================================================================================================
NET ASSET VALUE PER SHARE $ 11.18
==========================================================================================================
AT JUNE 30, 2003, NET ASSETS CONSISTED OF:
Common Stock $ 107
Paid-in Capital 146,531
Undistributed (Distributions in Excess of) Net
Investment Income 1,491
Accumulated Net Realized Gain (Loss) (35,507)
Unrealized Appreciation (Depreciation) on
Investments and Foreign Currency
Translations 6,983
==========================================================================================================
TOTAL NET ASSETS $ 119,605
==========================================================================================================
(a) -- Non-income producing
(b) -- Securities valued at fair value - see note A-1 to financial statements.
At June 30, 2003, the Fund held fair-valued securities representing less
than 0.01% of net assets.
(c) -- The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of this
statement of net assets. The investment in the repurchase agreement is
through participation in a joint account with affiliated funds.
@ -- Value is less than $500.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
UBD -- Unit
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
THE LATIN AMERICAN DISCOVERY FUND, INC.
STATEMENT OF NET ASSETS
June 30, 2003 (unaudited)
STATEMENT OF NET ASSETS (CONT'D)
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
The Fund had the following foreign currency exchange contract(s) open at
period end:
CURRENCY IN NET
TO EXCHANGE UNREALIZED
DELIVER VALUE SETTLEMENT FOR VALUE GAIN (LOSS)
(000) (000) DATE (000) (000) (000)
----------------------------------------------------------------------------
MXN524 $ 50 7/1/03 US$50 $ 50 $ --@
============================================================================
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION -- JUNE 30, 2003
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
-------------------------------------------------------------------
Banks $ 15,303 12.8%
Beverages 16,762 14.0
Construction Materials 2,480 2.1
Diversified Financial Services 1,178 1.0
Diversified Telecommunication Services 23,574 19.6
Electric Utilities 1,641 1.4
Energy Equipment & Services 2,725 2.3
Food & Staples 10,727 9.0
Metals & Mining 12,901 10.8
Oil & Gas 14,383 12.0
Paper & Forest Products 2,407 2.0
Transportation Infrastructure 1,497 1.2
Wireless Telecommunication Services 12,297 10.3
Other 2,001 1.7
-------------------------------------------------------------------
$ 119,876 100.2%
===================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
THE LATIN AMERICAN DISCOVERY FUND, INC.
Financial Statements
STATEMENT OF OPERATIONS
SIX MONTHS ENDED
JUNE 30, 2003
(UNAUDITED)
(000)
----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 2,343
Interest 13
================================================================================================================
TOTAL INCOME 2,356
================================================================================================================
EXPENSES
Investment Advisory Fees 607
Professional Fees 66
Administrative Fees 22
Custodian Fees 14
Stockholder Reporting Expenses 10
Country Tax Expense 3
Directors' Fees and Expenses 2
Other Expenses 21
================================================================================================================
TOTAL EXPENSES 745
================================================================================================================
NET INVESTMENT INCOME (LOSS) 1,611
================================================================================================================
NET REALIZED GAIN (LOSS) ON:
Investments 2,208
Foreign Currency Transactions 24
================================================================================================================
NET REALIZED GAIN (LOSS) 2,232
================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON:
Investments 16,341
Foreign Currency Translations 7
================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 16,348
================================================================================================================
NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 18,580
================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 20,191
================================================================================================================
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
JUNE 30, 2003 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2002
(000) (000)
----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss) $ 1,611 $ 1,917
Net Realized Gain (Loss) 2,232 (21,677)
Change in Unrealized Appreciation (Depreciation) 16,348 (6,430)
================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 20,191 (26,190)
================================================================================================================
Distributions from and/or in excess of:
Net Investment Income (451) (1,757)
================================================================================================================
Capital Share Transactions:
Repurchase of Shares (48,566 and 109,872 shares, respectively) (385) (995)
================================================================================================================
TOTAL INCREASE (DECREASE) 19,355 (28,942)
================================================================================================================
Net Assets:
Beginning of Period 100,250 129,192
================================================================================================================
END OF PERIOD (INCLUDING UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF)
NET INVESTMENT INCOME OF $1,491 AND $331, RESPECTIVELY) $ 119,605 $ 100,250
================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
THE LATIN AMERICAN DISCOVERY FUND, INC.
Financial Highlights
SELECTED PER SHARE DATA AND RATIOS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2003 -----------------------------------------------------------------
(UNAUDITED) 2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.33 $ 11.90 $ 12.04 $ 14.11 $ 8.19 $ 20.34
---------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.15+ 0.18+ 0.32 0.04 0.13 0.15
Net Realized and Unrealized Gain (Loss) on
Investments 1.73 (2.61) (0.41) (2.16) 5.83 (5.62)
---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.88 (2.43) (0.09) (2.12) 5.96 (5.47)
---------------------------------------------------------------------------------------------------------------------------------
Distributions from and/or in excess of:
Net Investment Income (0.04) (0.16) (0.11) (0.10) (0.09) (0.08)
Net Realized Gain -- -- -- -- -- (6.67)
---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.04) (0.16) (0.11) (0.10) (0.09) (6.75)
---------------------------------------------------------------------------------------------------------------------------------
Anti-Dilutive Effect of Share Repurchase
Program 0.01 0.02 0.06 0.15 0.05 0.07
---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.18 $ 9.33 $ 11.90 $ 12.04 $ 14.11 $ 8.19
=================================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD $ 9.38 $ 7.60 $ 9.70 $ 9.50 $ 10.69 $ 6.19
=================================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value 23.97%** (20.15)% 3.23% (10.33)% 74.23% (43.06)%
Net Asset Value (1) 20.33%** (20.08)% (0.08)% (13.86)% 73.78% (33.53)%
=================================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) $ 119,605 $ 100,250 $ 129,192 $ 134,283 $ 165,901 $ 99,918
---------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.41%* 1.58% 1.75% 1.63% 1.68% 1.93%
Ratio of Net Investment Income to Average Net
Assets 3.05%* 1.66% 2.59% 0.26% 1.24% 1.36%
Portfolio Turnover Rate 24%** 53% 32% 46% 77% 178%
---------------------------------------------------------------------------------------------------------------------------------
(1) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. This percentage is not an indication of the performance of a
stockholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
+ Per share amount is based on average shares outstanding.
* Annualized
** Not Annualized
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
THE LATIN AMERICAN DISCOVERY FUND, INC.
June 30, 2003 (unaudited)
NOTES TO FINANCIAL STATEMENTS
The Latin American Discovery Fund, Inc. (the "Fund") was incorporated on
November 12, 1991 and is registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is long-term capital appreciation through
investments primarily in equity securities.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with accounting principles generally accepted in the United States of
America for investment companies. Such policies are consistently followed by the
Fund in the preparation of its financial statements. Accounting principles
generally accepted in the United States of America may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities,
for which market quotations are readily available are valued at the last
sales price on the valuation date, or if there was no sale on such date at
the mean between the current bid and asked prices. Securities which are
traded over-the-counter are valued at the mean of current bid and asked
prices obtained from reputable brokers. Short-term securities which mature
in 60 days or less are valued at amortized cost. For all other securities
and investments for which market values are not readily available,
including restricted securities, and where prices determined in accordance
with the aforementioned procedures are not reflective of fair market value,
values are determined in good faith, under fair valuation procedures
adopted by the Board of Directors, although actual calculations may be done
by others.
2. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements under
which the Fund lends excess cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian
for the Fund takes possession of the underlying securities (collateral),
with a market value at least equal to the amount of the repurchase
transaction, including principal and accrued interest. To the extent that
any repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy
of the collateral. In the event of default on the obligation to repurchase,
the Fund has the right to liquidate the collateral and apply the proceeds
in satisfaction of the obligation. In the event of default or bankruptcy by
the counterparty to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings.
The Fund, along with other affiliated investment companies, may utilize a
joint trading account for the purpose of entering into one or more
repurchase agreements.
3. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars at the mean of the bid and asked prices of such currencies
against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rates of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rates of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of the securities held at period end.
Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) due to securities transactions
are included in the reported net realized and unrealized gains (losses) on
investment transactions and balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign
currency exchange contracts, disposition of foreign currencies, currency
gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
unrealized currency gains (losses) from valuing foreign currency
denominated assets and liabilities at period end exchange rates are
reflected as a component of unrealized appreciation (depreciation) on
investments and foreign
8
THE LATIN AMERICAN DISCOVERY FUND, INC.
June 30, 2003 (unaudited)
NOTES TO FINANCIAL STATEMENTS (CONT'D)
currency translations in the Statement of Net Assets. The change in
unrealized currency gains (losses) on foreign currency translations for the
period is reflected in the Statement of Operations.
A significant portion of the Fund's net assets consist of securities
denominated in Latin American currencies. Changes in currency exchange
rates will affect the value of and investment income from such securities.
Latin American securities are often subject to greater price volatility,
limited capitalization and liquidity, and higher rates of inflation than
securities of companies based in the United States. In addition, Latin
American securities may be subject to substantial governmental involvement
in the economy and greater social, economic and political uncertainty.
The Fund may use derivatives to achieve its investment objectives. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments that the Fund has utilized
and their associated risks:
4. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
foreign currency exchange contract is an agreement between two parties to
buy or sell currency at a set price on a future date. The market value of
the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed equal to the difference between
the value of the contract at the time it was opened and the value at the
time it was closed. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gain on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis. Dividend income is recorded on
the ex-dividend date (except certain dividends which may be recorded as
soon as the Fund is informed of such dividends) net of applicable
withholding taxes. Distributions to stockholders are recorded on the
ex-dividend date.
B. ADVISER: Morgan Stanley Investment Management Inc. (the "Adviser") provides
investment advisory services to the Fund under the terms of an Investment
Advisory Agreement (the "Agreement"). Under the Agreement, the Adviser is paid a
fee computed weekly and payable monthly at the annual rate of 1.15% of the
Fund's average weekly net assets.
C. ADMINISTRATOR: JPMorgan Chase Bank, through its corporate affiliate
J.P. Morgan Investor Services Co. (the "Administrator"), provides administrative
services to the Fund under an Administration Agreement. The Administrator is
paid a fee computed weekly and payable monthly at an annual rate of 0.02435% of
the Fund's average weekly net assets, plus $24,000 per annum. In addition, the
Fund is charged for certain out-of-pocket expenses incurred by the Administrator
on its behalf.
D. CUSTODIAN: JPMorgan Chase Bank serves as custodian for the Fund. Custody
fees are payable monthly based on assets held in custody, investment purchases
and sales activity and account maintenance fees, plus reimbursement for certain
out-of-pocket expenses.
E. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify as
a regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the financial
statements. Dividend income and distributions to stockholders are recorded on
the ex-dividend date.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income and/or capital gains earned or repatriated.
Taxes are accrued and applied to net investment income, net realized gains and
net unrealized appreciation as such income and/or gains are earned.
The tax character of distributions paid may differ from the character of
distributions shown on the Statements of Changes in Net Assets due to short-term
capital gains being treated as
9
THE LATIN AMERICAN DISCOVERY FUND, INC.
June 30, 2003 (unaudited)
NOTES TO FINANCIAL STATEMENTS (CONT'D)
ordinary income for tax purposes. The tax character of distributions paid during
2002 and 2001 were as follows:
2002 DISTRIBUTIONS 2001 DISTRIBUTIONS
PAID FROM: PAID FROM:
(000) (000)
----------------------------- --------------------------
LONG-TERM LONG-TERM
ORDINARY CAPITAL ORDINARY CAPITAL
INCOME GAIN INCOME GAIN
----------------------------------------------------------
$ 1,757 $ -- $ 1,140 $ --
The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations, which
may differ from accounting principles generally accepted in the United States of
America. The book/tax differences are considered either temporary or permanent
in nature.
Temporary differences are attributable to differing book and tax treatments for
the timing of the recognition of gains and losses on certain investment
transactions and the timing of the deductibility of certain expenses.
Permanent differences may result in reclassifications among undistributed
(distributions in excess of) net investment income, accumulated net realized
gain (loss) and paid-in capital. Adjustments for permanent book-tax differences,
if any, are not reflected in ending undistributed (distributions in excess of)
net investment income for the purpose of calculating net investment income
(loss) per share in the financial highlights.
At December 31, 2002, the components of distributable earnings on a tax basis
were as follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY INCOME LONG-TERM CAPITAL GAIN
(000) (000)
-----------------------------------------------------
$ 448 $ --
-----------------------------------------------------
At June 30, 2003, the U.S. Federal income tax cost basis of investments
(excluding foreign currency if applicable) was $112,726,000 and, accordingly,
net unrealized appreciation for U.S. Federal income tax purposes was $6,981,000
of which $12,199,000 related to appreciated securities and $5,218,000 related to
depreciated securities.
At December 31, 2002, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $31,378,000 available to offset future
capital gains of which $6,074,000 will expire on December 31, 2006, $2,665,000
will expire on December 31, 2007, $3,525,000 will expire on December 31, 2009
and $19,114,000 will expire on December 31, 2010. To the extent that capital
gains are offset, such gains will not be distributed to the stockholders.
Net capital and currency losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended December 31, 2002, the Fund deferred to January
1, 2003, for U.S. Federal income tax purposes, post-October currency losses of
$73,000 and post-October capital losses of $3,875,000.
F. OTHER: During the six months ended June 30, 2003, the Fund made purchases
and sales totaling approximately $27,126,000 and $25,176,000, respectively, of
investment securities other than long-term U.S. Government securities and
short-term investments. There were no purchases or sales of long-term U.S.
Government securities.
Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage of
their total fees earned as a Director of the Fund. These deferred portions are
treated, based on an election by the Director, as if they were either invested
in the Fund's shares or invested in U.S. Treasury Bills, as defined under the
Plan. At June 30, 2003, the deferred fees payable under the Plan, totaled
$26,300 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets. The deferred portion of Directors' Fees and Expenses
shown on the Statement of Operations is impacted by fluctuations in the market
value of the investments selected by each Director. For the six months ended
June 30, 2003, Directors' Fees and Expenses were increased by $780 due to these
fluctuations.
For the six months ended June 30, 2003, the Fund incurred $30 of brokerage
commissions with Morgan Stanley & Co., an affiliate of the Adviser.
On September 15, 1998, the Fund commenced a share repurchase program for
purposes of enhancing stockholder value and reducing the discount at which the
Fund's shares traded from their net asset value. During the six months ended
June 30, 2003, the Fund repurchased 48,566 of its shares at an average discount
of 16.75% from net asset value per share. Since the inception of the program,
the Fund has repurchased 2,041,159 of its shares at an average discount of
19.38% from net asset value per share. The Fund expects to continue to
repurchase its outstanding shares at such time and in such amounts as it
believes will further the accomplishment of the
10
THE LATIN AMERICAN DISCOVERY FUND, INC.
June 30, 2003 (unaudited)
NOTES TO FINANCIAL STATEMENTS (CONT'D)
foregoing objectives, subject to review by the Board of Directors.
On June 17, 2003 the Officers of the Fund, pursuant to authority granted by the
Board of Directors declared a distribution of $0.0422 per share, derived from
net investment income, payable on July 15, 2003, to stockholders of record on
June 30, 2003.
PROPOSAL:
1. To elect the following Directors, effective July 31, 2003:
VOTES IN VOTES
FAVOR OF AGAINST
--------------------------
1) Michael Bozic 7,818,451 2,061,889
2) Charles A. Fiumefreddo 7,819,102 2,061,238
3) Edwin J. Garn 7,818,305 2,062,036
4) Wayne E. Hedien 7,819,227 2,061,113
5) James F. Higgins 7,819,227 2,061,113
6) Dr. Manuel H. Johnson 7,819,014 2,061,326
7) Philip J. Purcell 7,819,317 2,061,023
2. That stockholders recommend that the Board of Directors act to adopt
interval-fund status for the Fund, under which the Fund will make repurchase
offers at three-month intervals for not less than 10% of the Fund's shares
outstanding at not less than 98% of net asset value (NAV), and to effect the
first such repurchase offer not later than September 20, 2003:
VOTES IN VOTES VOTES
FAVOR OF AGAINST ABSTAINED
4,865,897 3,207,113 55,676
Also effective July 31, 2003, John D. Barrett II, Thomas P. Gerrity,
Gerard E. Jones, Vincent R. McLean, C. Oscar Morong, Jr. and William G. Morton,
Jr. have resigned from the Board of Directors.
11
THE LATIN AMERICAN DISCOVERY FUND, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each stockholder will be deemed to have elected, unless American Stock Transfer
& Trust Company (the "Plan Agent") is otherwise instructed by the stockholder in
writing, to have all distributions automatically reinvested in Fund shares.
Participants in the Plan have the option of making additional voluntary cash
payments to the Plan Agent, annually, in any amount from $100 to $3,000, for
investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
stockholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends or distributions.
In the case of stockholders, such as banks, brokers or nominees, that hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
stockholder as representing the total amount registered in the stockholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Stockholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and stockholders who have
previously withdrawn from the Plan may rejoin at any time. Requests for
additional information or any correspondence concerning the Plan should be
directed to the Plan Agent at:
The Latin American Discovery Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
59 Maiden Lane
New York, New York 10030
1-800-278-4353
12
ITEM 2. CODE OF ETHICS. Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable for semi-annual
reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable for semi-annual
reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable for semi-annual
reports.
ITEM 6. [RESERVED.]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES. Not applicable for semi-annual reports.
ITEM 8. [RESERVED.]
ITEM 9. CONTROLS AND PROCEDURES.
The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
ITEM 10. EXHIBITS.
(a) Code of Ethics - Not applicable for semi-annual reports.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) The Latin American Discovery Fund, Inc.
By: Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2003
By: James W. Garrett
Name: James W. Garrett
Title: Principal Financial Officer
Date: August 19, 2003