<Page>
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: 6/30/04
-------------------------
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.
<Page>
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:
<Page>
SEMI-ANNUAL REPORT
THE LATIN AMERICAN DISCOVERY FUND, INC.
JUNE 30, 2004
DIRECTORS
CHARLES A. FIUMEFREDDO JOSEPH J. MCALINDEN
MICHAEL BOZIC VICE PRESIDENT
EDWIN J. GARN
WAYNE E. HEDIEN BARRY FINK
JAMES F. HIGGINS VICE PRESIDENT
DR. MANUEL H. JOHNSON
JOSEPH J. KEARNS STEFANIE V. CHANG
MICHAEL NUGENT VICE PRESIDENT
FERGUS REID
AMY R. DOBERMAN
OFFICERS VICE PRESIDENT [MORGAN STANLEY LOGO]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD JAMES W. GARRETT
TREASURER AND CHIEF THE LATIN AMERICAN DISCOVERY
MITCHELL M. MERIN FINANCIAL OFFICER FUND, INC.
PRESIDENT
MICHAEL J. LEARY
RONALD E. ROBISON ASSISTANT TREASURER MORGAN STANLEY
EXECUTIVE VICE PRESIDENT INVESTMENT MANAGEMENT INC.
AND PRINCIPAL EXECUTIVE MARY E. MULLIN INVESTMENT ADVISER
OFFICER SECRETARY
INVESTMENT ADVISER
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
ADMINISTRATOR
JPMORGAN INVESTOR SERVICES COMPANY
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
1 (800) 278-4353
LEGAL COUNSEL
CLIFFORD CHANCE US LLP
31 WEST 52ND STREET
NEW YORK, NEW YORK 10019
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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.
(C) 2003 MORGAN STANLEY
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
LETTER TO STOCKHOLDERS
Overview
PERFORMANCE
For the six months ended June 30, 2004, The Latin American Discovery Fund, Inc.
(the "Fund") had a total return, based on net asset value per share of 3.01%,
compared to -1.56% for the Morgan Stanley Capital International (MSCI) Emerging
Markets Free Latin America Net Index (the "Index"). On June 30, 2004, the
closing price of the Fund's shares on the New York Stock Exchange was $12.69,
representing a 16.1% discount to the Fund's net asset value per share.
FACTORS AFFECTING PERFORMANCE
- Overall, country allocation and stock selection results were positive
contributors to relative performance.
- Latin American equities had mixed results for the six months ended June
30, 2004 rallying in the first half of the period while underperforming
in the second half. The asset class, despite weakness in Brazil started
the year strong as it continued to re-rate given a recovery in global
growth, improved domestic economies, rising corporate earnings and
attractive valuations.
- After many months of relative tranquility, volatility in Latin America
spiked in the second quarter with the class coming under selling pressure
in April and May before stabilizing in June.
- Latin American markets finished the period in review down 1.6% (Index
return) after gaining 73.5% in 2003 and another 7.1% in the first three
months of 2004.
- The recent difficulties in Latin America were primarily due to exogenous
factors, namely fears of future U.S. interest rate hikes, instability in
Iraq and slower global growth. Concerns of a Chinese economic slowdown
also put significant pressure on commodity prices leading to a sell-off
of gold and copper-producing countries such as Peru and Chile.
MANAGEMENT STRATEGIES
- We remain positive on Latin American markets, as valuations and
fundamentals remain attractive, particularly after the recent sell-off.
- We believe markets are structurally better positioned to withstand the
tough global environment given flexible and competitive exchange rates,
current account surpluses and fiscal discipline. Markets are
significantly cheaper while stronger fiscal positions and lower interest
rates are a boost to regional growth prospects. In 2004, regional growth
is expected to average between 3.5% and 4.0%.
- Latin America's economic recovery has been both export-driven as well as
consumer-led, which marks an improvement from foreign investment-led
cycles of the late 1990s.
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
Executive Vice President--
Principal Executive Officer
July 2004
2
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
STATEMENT OF NET ASSETS
June 30, 2004 (unaudited)
<Table>
<Caption>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
COMMON STOCKS (98.2%)
(UNLESS OTHERWISE NOTED)
- ---------------------------------------------------------------------------------
ARGENTINA (1.6%)
ENERGY EQUIPMENT & SERVICES
Tenaris SA ADR 64,657 $ 2,118
- ---------------------------------------------------------------------------------
BRAZIL (47.6%)
AEROSPACE & DEFENSE
Embraer ADR 55,900 1,598
Embraer (Preference) 10,000 72
- ---------------------------------------------------------------------------------
1,670
- ---------------------------------------------------------------------------------
AIRLINES
Gol Linhas Aereas
Inteligentes SA ADR (a)32,000 544
- ---------------------------------------------------------------------------------
COMMERCIAL BANKS
Banco Bradesco SA
(Preference) (a)49,455 2,281
Banco Bradesco SA ADR 71,402 3,281
Banco Itau Holding Financeira
SA ADR 109,091 5,088
Banco Itau SA (Preference) 25,793,469 2,387
Unibanco GDR 68,150 1,347
- ---------------------------------------------------------------------------------
14,384
- ---------------------------------------------------------------------------------
ELECTRIC UTILITIES
CEMIG SA (Preference) 118,472,000 1,776
CEMIG SA ADR 137,133 2,060
- ---------------------------------------------------------------------------------
3,836
- ---------------------------------------------------------------------------------
FOOD & STAPLES
Cia Brasileira de Distribuicao
Grupo Pao de Acucar ADR 118,900 2,057
- ---------------------------------------------------------------------------------
METALS & MINING
CSN 38,804 474
CSN ADR 19,888 242
CVRD ADR (b)11,290 537
CVRD (Preference), 'A' 4,732 185
CVRD (Preference) ADR 192,629 7,532
Gerdau SA (Preference) 10,834 130
Gerdau SA ADR 206,290 2,500
USIMINAS SA (Preference), 'A' 197,449 2,053
- ---------------------------------------------------------------------------------
13,653
- ---------------------------------------------------------------------------------
OIL & GAS
Petrobras SA ADR 231,342 6,494
Petrobras SA (Preference) 17,342 432
Petrobras SA (Preference)
ADR 362,298 9,130
- ---------------------------------------------------------------------------------
16,056
- ---------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS
Aracruz Celulose SA ADR 17,900 584
Votorantim Celulose e Papel
SA ADR 74,710 $ 2,376
Votorantim Celulose e Papel
SA (Preference) 6,608,000 418
- ---------------------------------------------------------------------------------
3,378
- ---------------------------------------------------------------------------------
PHARMACEUTICALS
Natura Cosmeticos SA (a)66,000 1,065
- ---------------------------------------------------------------------------------
ROAD & RAIL
All America Latina Logistica SA
(Preference) (a)60,000 1,013
- ---------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES
Embratel Participacoes
SA (Preference) 266,500,000 742
- ---------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES
Telesp Celular Participacoes
SA ADR (a)289,369 2,280
Telesp Celular Participacoes
SA (Preference) (a)1,462,694,945 4,609
- ---------------------------------------------------------------------------------
6,889
- ---------------------------------------------------------------------------------
65,287
=================================================================================
CHILE (4.3%)
COMMERCIAL BANKS
Banco Santander Santiago
Chile SA ADR 89,852 2,399
- ---------------------------------------------------------------------------------
ELECTRIC UTILITIES
Enersis SA ADR 587,900 3,504
- ---------------------------------------------------------------------------------
5,903
=================================================================================
COLOMBIA (0.8%)
COMMERCIAL BANKS
BanColombia SA ADR 159,500 1,065
=================================================================================
MEXICO (40.6%)
BEVERAGES
Coca-Cola Femsa SA ADR 112,400 2,494
Femsa ADR 39,500 1,811
- ---------------------------------------------------------------------------------
4,305
- ---------------------------------------------------------------------------------
CONSTRUCTION MATERIALS
Cemex SA 390,189 2,269
Cemex SA ADR 73,827 2,148
- ---------------------------------------------------------------------------------
4,417
- ---------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES
America Movil SA de CV,
'L' ADR 505,119 18,371
- ---------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES
Carso Global Telecom
SA de CV, 'A1' (a)271,344 399
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 3
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
STATEMENT OF NET ASSETS (CONT'D)
June 30, 2004 (unaudited)
<Table>
<Caption>
VALUE
SHARES (000)
- ---------------------------------------------------------------------------------
MEXICO (CONT'D)
DIVERSIFIED TELECOMMUNICATION SERVICES
(CONT'D)
Telmex, 'L' ADR 166,092 $ 5,526
- ---------------------------------------------------------------------------------
5,925
- ---------------------------------------------------------------------------------
FOOD & STAPLES
Wal-Mart de Mexico
SA de CV ADR 11,398 338
Wal-Mart de Mexico
SA de CV, 'V' 3,117,919 9,283
- ---------------------------------------------------------------------------------
9,621
- ---------------------------------------------------------------------------------
HOUSEHOLD DURABLES
Corporacion Geo SA de CV, 'B' (a)544,800 719
- ---------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES
Alfa SA de CV, 'A' 197,100 664
- ---------------------------------------------------------------------------------
MEDIA
Grupo Televisa SA ADR 218,000 9,869
- ---------------------------------------------------------------------------------
METALS & MINING
Grupo Mexico SA, 'B' (a)227,400 712
- ---------------------------------------------------------------------------------
TRANSPORTATION INFRASTRUCTURE
Grupo Aeroportuario del
Sureste SA de CV ADR 54,560 1,009
- ---------------------------------------------------------------------------------
55,612
=================================================================================
PERU (0.8%)
METALS & MINING
Cia de Minas Buenaventura SA
ADR 50,400 1,114
=================================================================================
VENEZUELA (2.5%)
DIVERSIFIED TELECOMMUNICATION SERVICES
CANTV, 'D' ADR 171,330 3,452
=================================================================================
TOTAL COMMON STOCKS
(Cost $116,497) 134,551
=================================================================================
<Caption>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.6%)
UNITED STATES (1.6%)
REPURCHASE AGREEMENT
J.P. Morgan Securities, Inc., 1.25%,
dated 6/30/04, due 7/1/04,
repurchase price $2,272
(Cost $2,272) $ (c)2,272 2,272
=================================================================================
<Caption>
VALUE
(000)
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(Cost $118,769) $ 136,823
=================================================================================
<Caption>
AMOUNT
(000)
- ---------------------------------------------------------------------------------
OTHER ASSETS (1.0%)
Receivable for Investments
Sold $ 964
Dividends Receivable 334
Foreign Currency
(Cost $106) 108
Net Unrealized Appreciation on
Foreign Currency Exchange
Contracts 1
Other 10 1,417
=================================================================================
LIABILITIES (-0.8%)
Payable For:
Investments Purchased (720)
Dividends Declared (177)
Advisory Fees (126)
Directors' Fees and
Expenses (25)
Administrative Fees (9)
Custodian Fees (7)
Bank Overdraft (1)
Other Liabilities (117) (1,182)
=================================================================================
NET ASSETS (100%)
Applicable to 9,057,363, issued and
outstanding $ 0.01 par value shares
(100,000,000 shares authorized) $137,058
=================================================================================
NET ASSET VALUE PER SHARE $ 15.13
=================================================================================
AT JUNE 30, 2004, NET ASSETS CONSISTED OF:
Common Stock $ 91
Paid-in Capital 122,923
Undistributed (Distributions in Excess of)
Net Investment Income 1,561
Accumulated Net Realized Gain (Loss) (5,569)
Unrealized Appreciation (Depreciation)
on Investments, Foreign Currency,
Exchange Contracts and Translations 18,052
=================================================================================
TOTAL NET ASSETS $137,058
=================================================================================
</Table>
(a) Non-income producing.
(b) Security was valued at fair value - At June 30, 2004, the Fund held fair
valued securities valued at $537,000 representing 0.4% of net assets.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of this statement of
net assets. The investment in the repurchase agreement is through
participation in a joint account with affiliated funds.
ADR American Depositary Receipt
GDR Global Depositary Receipt
4 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
STATEMENT OF NET ASSETS (CONT'D)
June 30, 2004 (unaudited)
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
The Fund had the following foreign currency exchange contract(s) open at
period end:
<Table>
<Caption>
NET
CURRENCY IN UNREALIZED
TO EXCHANGE APPRECIATION
DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION)
(000) (000) DATE (000) (000) (000)
- -----------------------------------------------------------------------------
US$ 297 $ 297 7/1/04 BRL 920 $ 298 $ 1
</Table>
BRL- Brazilian Real
SUMMARY OF TOTAL INVESTMENTS BY INDUSTRY
CLASSIFICATION - JUNE 30, 2004
<Table>
<Caption>
PERCENT
VALUE OF NET
INDUSTRY (000) ASSETS
- ------------------------------------------------------------------------
Diversified Financial Services $ 18,371 13.4%
Commercial Banks 17,848 13.0
Oil & Gas 16,056 11.7
Metals & Mining 15,479 11.3
Food & Staples 11,678 8.5
Media 9,869 7.2
Diversified Telecommunication
Services 9,377 6.8
Electric Utilities 7,340 5.4
Wireless Telecommunication
Services 6,889 5.0
Construction Materials 4,417 3.2
Beverages 4,305 3.1
Paper & Forest Products 3,378 2.5
Energy Equipment & Services 2,118 1.6
Aerospace & Defense 1,670 1.2
Other 8,028 5.9
- ------------------------------------------------------------------------
$136,823 99.8%
========================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 5
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
Financial Statements
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2004
(UNAUDITED)
STATEMENT OF OPERATIONS (000)
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 2,693
Interest 12
========================================================================================================================
TOTAL INCOME 2,705
========================================================================================================================
EXPENSES
Investment Advisory Fees 853
Professional Fees 57
Stockholder Reporting Expenses 41
Custodian Fees 39
Administrative Fees 37
Proxy Expenses 37
Directors' Fees and Expenses 1
Other Expenses 33
========================================================================================================================
TOTAL EXPENSES 1,098
========================================================================================================================
NET INVESTMENT INCOME (LOSS) 1,607
========================================================================================================================
NET REALIZED GAIN (LOSS) ON:
Investments 14,888
Foreign Currency Transactions (58)
========================================================================================================================
NET REALIZED GAIN (LOSS) 14,830
========================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON:
Investments (12,869)
Foreign Currency Translations 1
========================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (12,868)
========================================================================================================================
NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,962
========================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,569
========================================================================================================================
</Table>
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2004 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2003
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss) $ 1,607 $ 2,905
Net Realized Gain (Loss) 14,830 17,330
Change in Unrealized Appreciation (Depreciation) (12,868) 40,285
========================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,569 60,520
========================================================================================================================
Distributions from and/or in excess of:
Net Investment Income (176) (3,115)
========================================================================================================================
Capital Share Transactions:
Repurchase of Shares (1,624,041 and 62,129 shares, respectively) (23,466) (524)
========================================================================================================================
TOTAL INCREASE (DECREASE) (20,073) 56,881
========================================================================================================================
Net Assets:
Beginning of Period 157,131 100,250
========================================================================================================================
END OF PERIOD (INCLUDING UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF) NET
INVESTMENT INCOME OF $1,561 AND $130, RESPECTIVELY) $137,058 $157,131
========================================================================================================================
</Table>
6 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
SELECTED PER SHARE DATA AND RATIOS
Financial Highlights
<Table>
<Caption>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2004 --------------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.71 $ 9.33 $ 11.90 $ 12.04 $ 14.11 $ 8.19
- -------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.16+ 0.27+ 0.18+ 0.32 0.04 0.13
Net Realized and Unrealized Gain (Loss) on
Investments 0.14 5.39 (2.61) (0.41) (2.16) 5.83
- -------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.30 5.66 (2.43) (0.09) (2.12) 5.96
- -------------------------------------------------------------------------------------------------------------------------------
Distributions from and/or in excess of:
Net Investment Income (0.02) (0.29) (0.16) (0.11) (0.10) (0.09)
- -------------------------------------------------------------------------------------------------------------------------------
Anti-Dilutive Effect of Share Repurchase Program 0.14 0.01 0.02 0.06 0.15 0.05
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.13 $ 14.71 $ 9.33 $ 11.90 $ 12.04 $ 14.11
===============================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD $ 12.69 $ 12.79 $ 7.60 $ 9.70 $ 9.50 $ 10.69
===============================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value (0.64)%** 72.01% (20.15)% 3.23% (10.33)% 74.23%
Net Asset Value (1) 3.01%** 61.12% (20.08)% (0.08)% (13.86)% 73.78%
===============================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) $137,058 $157,131 $100,250 $129,192 $134,283 $165,901
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.48%* 1.47% 1.58% 1.75% 1.63% 1.68%
Ratio of Net Investment Income (Loss) to Average
Net Assets 2.16%* 2.40% 1.66% 2.59% 0.26% 1.24%
Portfolio Turnover Rate 39%** 71% 53% 32% 46% 77%
- -------------------------------------------------------------------------------------------------------------------------------
</Table>
(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
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2004 (unaudited)
The Latin American Discovery Fund, Inc. (the "Fund") was incorporated on
November 12, 1991 and is registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940 (the "1940 Act"), 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.
Such policies are consistently followed by the Fund in the preparation of its
financial statements. Accounting principles generally accepted in the United
States 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: Equity securities listed on a U.S. exchange are valued
at the latest quoted sales price on the valuation date. Equity securities
listed or traded on NASDAQ, for which market quotations are available, are
valued at the NASDAQ Official Closing Price. Securities listed on a foreign
exchange are valued at their closing price. Unlisted securities and listed
securities not traded on the valuation date for which market quotations are
readily available are valued at the mean between the current bid and asked
prices obtained from reputable brokers. Debt securities purchased with
remaining maturities of 60 days or less are valued at amortized cost, if it
approximates value.
All other securities and investments for which market values are not
readily available, including restricted securities, and those securities
for which it is inappropriate to determine prices in accordance with the
aforementioned procedures, are valued at fair value as determined in good
faith under procedures adopted by the Board of Directors, although the
actual calculations may be done by others. Factors considered in making
this determination may include, but are not limited to, information
obtained by contacting the issuer, analysts, or the appropriate stock
exchange (for exchange-traded securities), analysis of the issuer's
financial statements or other available documents and, if necessary,
available information concerning other securities in similar circumstances.
Most foreign markets close before the New York Stock Exchange (NYSE).
Occasionally, developments that could affect the closing prices of
securities and other assets may occur between the times at which valuations
of such securities are determined (that is, close of the foreign market on
which the securities trade) and the close of business on the NYSE. If these
developments are expected to materially affect the value of the securities,
the valuations may be adjusted to reflect the estimated fair value as of
the close of the NYSE, as determined in good faith under procedures
established by the Board of Directors.
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.
8
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
June 30, 2004 (unaudited)
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 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 & Co., 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. An employee of the Administrator is an Officer of the Fund.
D. CUSTODIAN: JPMorgan Chase Bank serves as custodian for the Fund. The
Custodian holds cash, securities, and other assets of the Fund as required by
the 1940 Act. 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.
9
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
June 30, 2004 (unaudited)
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 ordinary income for tax purposes. The tax
character of distributions paid during 2003 and 2002 were as follows:
<Table>
<Caption>
2003 DISTRIBUTIONS 2002 DISTRIBUTIONS
PAID FROM: PAID FROM:
(000) (000)
- ---------------------------- --------------------------
LONG-TERM LONG-TERM
ORDINARY CAPITAL ORDINARY CAPITAL
INCOME GAIN INCOME GAIN
- ---------------------------------------------------------
$3,115 $-- $1,757 $--
</Table>
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.
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 book and tax basis differences may result in reclassifications among
undistributed (distributions in excess of) net investment income (or accumulated
net investment loss), accumulated net realized gain (loss) and paid-in capital.
At December 31, 2003, the components of distributable earnings on a tax basis
were as follows:
<Table>
<Caption>
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY INCOME LONG-TERM CAPITAL GAIN
(000) (000)
- -------------------------------------------------------
$176 $--
- -------------------------------------------------------
</Table>
At June 30, 2004, the U.S. Federal income tax cost basis of investments was
$118,769,000 and, accordingly, net unrealized appreciation for U.S. Federal
income tax purposes was $18,054,000 of which $20,890,000 related to appreciated
securities and $2,836,000 related to depreciated securities.
At December 31, 2003, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $18,659,000 available to offset future
capital gains, all of which will expire on December 31, 2010.
To the extent that capital loss carryforwards are used to offset any future
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by the Fund for gains realized and not distributed. 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, 2003, the Fund deferred to January
1, 2004, for U.S. Federal income tax purposes, post-October currency losses of
$4,000.
F. CONTRACTUAL OBLIGATIONS: The Fund enters into contracts that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
G. OTHER: During six months ended June 30, 2004, the Fund made purchases and
sales totaling approximately $55,848,000 and $78,058,000, 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.
For the six months ended June 30, 2004, the Fund incurred $21,000 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, 2004, the Fund repurchased 21,830 of its shares at an average discount
of 15.96% from net asset value per share. Since the inception of the program,
the Fund has repurchased 2,076,553 of its shares at an average discount of
19.35% from net asset value per share. The Fund expects to continue to
repurchase its outstanding shares at such time and in such amounts as it
believes will further the accomplishment of the foregoing objectives, subject to
review by the Board of Directors.
On October 23, 2003, the Board of Directors of the Fund authorized the Fund to
conduct a tender offer during the first quarter of 2004 for up to 15% of the
Funds shares, at a price equal to 95% of the Fund's net asset value per share
("NAV") on the last day of the tender period. The tender offer materials will be
mailed to shareholders of the Fund.
On March 16, 2004, the Fund completed the tender offer. The Fund accepted
1,602,211 shares for payment which represented 15% of the Fund's then
outstanding shares. Final payment was made on March 24, 2004 at $14.48 per
share, representing 95% of the NAV per share on March 16, 2004.
On June 21, 2004 the Officers of the Fund, pursuant to authority granted by the
Board of Directors declared a distribution of $0.0195 per share, derived from
net investment income, payable on July 15, 2004, to stockholders of record on
June 30, 2004.
10
<Page>
THE LATIN AMERICAN DISCOVERY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
June 30, 2004 (unaudited)
H. SUPPLEMENTAL PROXY INFORMATION:
The Annual Meeting of the Stockholders of the Fund was held on June 22, 2004.
The following is a summary of the proposal presented and the total number of
shares voted:
PROPOSAL:
1. To elect the following Directors:
<Table>
<Caption>
VOTES IN VOTES
FAVOR OF AGAINST
-----------------------------
Wayne E. Hedien 5,198,839 2,114,350
James F. Higgins 5,199,076 2,114,114
Dr. Manuel H. Johnson 5,199,076 2,114,114
</Table>
2. The Fund's investment advisory agreement with Morgan Stanley
Investment Management, Inc. shall be terminated immediately:
<Table>
<Caption>
VOTES IN VOTES VOTES
FAVOR OF AGAINST ABSTAINED
- ------------------------------------------------------
1,951,967 2,385,635 486,336
</Table>
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A copy of (1) the Fund's policies and procedures with respect to the voting of
proxies relating to the Fund's portfolio securities; and (2) how the Fund voted
proxies relating to portfolio securities during the most recent twelve-month
period ended June 30, 2004 is available without charge, upon request, by calling
1-800-548-7786 or by visiting our website at www.morganstanley.com/im. This
information is also available on the Securities and Exchange Commission's
website at www.sec.gov.
11
<Page>
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
<Page>
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. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS MORGAN STANLEY CLOSED-END FUNDS SHARE
REPURCHASE PROGRAM
The Latin America Discovery Fund, Inc.*
1/1/04-6/30/04
<Table>
<Caption>
TOTAL NUMBER OF SHARES MAXIMUM NUMBER OF
PURCHASED AS PART OF SHARES THAT MAY YET BE
TOTAL NUMBER OF SHARES AVERAGE PRICE PAID PUBLICLY ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD PURCHASED PER SHARE OR PROGRAMS PLANS OR PROGRAMS
------ --------- --------- ----------- -----------------
January -- -- -- Unlimited
February -- -- -- Unlimited
March -- -- -- Unlimited
April 6,341 $13.55 6,341 Unlimited
May 13,025 $11.33 13,025 Unlimited
June 2,465 $12.36 2,465 Unlimited
</Table>
* The Share Repurchase Program commenced on 9/15/1998
** The Fund expects to continue to repurchase its outstanding shares at such
time and in such amounts as it believes will further the accomplishment of
the foregoing objectives, subject to review by the Board of Directors.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) 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.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 11. 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.
<Page>
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: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2004
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: /s/ Ronald E. Robison
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: August 19, 2004
By: /s/ James W. Garrett
Name: James W. Garrett
Title: Principal Financial Officer
Date: August 19, 2004