THE KOREA FUND, INC.
Annual Report
June 30, 1996
A closed-end investment company seeking long-term appreciation of capital
through investment in Korean securities.
<PAGE>
The Korea Fund, Inc.
Investment objective and policies
o long-term capital appreciation through investment in Korean securities
Investment characteristics
o investments in a broad spectrum of Korean industries
o closed-end investment company
o first United States investment company authorized to invest in Korean
securities
o a vehicle for international diversification through participation in the
Korean economy
General Information
Executive offices
The Korea Fund, Inc.
345 Park Avenue
New York, NY 10154
Telephone:
For Fund Information: 1-800-349-4281
Transfer agent, registrar and dividend
reinvestment plan agent
For account information: 1-800-426-5523
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
Custodian
Brown Brothers Harriman & Co.
Subcustodian-Citibank, N.A.--Seoul office
Legal counsel
Debevoise & Plimpton
Independent Accountants
Coopers & Lybrand L.L.P.
New York Stock Exchange Symbol -- KF
Contents
In Brief 3
Letter to Shareholders 3
Other Information 6
Investment Summary 7
Portfolio Summary 8
Investment Performance 9
Investment Portfolio 11
Financial Statements 20
Financial Highlights 23
Notes to Financial Statements 24
Report of Independent Accountants 27
Tax Information 28
Dividend Reinvestment and
Cash Purchase Plan 29
Officers and Directors 31
Comparisons between changes in the Fund's net asset value per share and changes
in the Korea Stock Exchange Index should be considered in light of the Fund's
investment policy and objective, the characteristics and quality of the Fund's
investments, the size of the Fund, and variations in the won/dollar exchange
rate.
This report is sent to the shareholders of The Korea Fund, Inc. for their
information. It is not a prospectus, circular, or representation intended for
use in the purchase or sale of shares of the Fund or of any securities mentioned
in the report.
2
<PAGE>
In Brief
o The Korean stock market fell over the 12 months ended June 30, 1996, as
revelations of government corruption and concern over the direction of the
economy combined to sour the investment climate. In addition, the Korean
won fell over the period, further decreasing returns to U.S. dollar-based
investors. In this environment, the Korea Fund provided a total return of
negative 5.09%.
o The Fund continued to focus sharply on those companies we feel are
positioned to perform well under a variety of economic conditions; the
Fund's top ten holdings represented approximately 53% of the portfolio on
June 30.
o We believe the recent sharp decline in stock prices was unmerited and
remain bullish on Korean stocks over the medium to long term. The economy
is growing at an annual rate of 7% -- modest by Korean standards but well
above most other world economies. The trade outlook stands to improve, the
rate of Korean inflation appears to have stabilized at a manageable level,
and the interest rate outlook is positive.
Letter to Shareholders
Dear Shareholders:
The Korean stock market fell over the twelve months ended June 30, 1996.
The KOSPI went from its June 30, 1995, level of 894.41 to 823.53 at the end of
the period, a decline of 7.92%. Revelations of government corruption and concern
over the direction of the economy combined to sour the investment climate. In
addition, the Korean won fell over the period, further decreasing returns to
U.S. dollar-based investors. In this environment, the Korea Fund provided a
total return of -5.09%, reflecting a decline in the Fund's net asset value from
$19.89 to $18.52 and the reinvestment of $0.36 per share in capital gain and
$0.06 in dividend distributions. The Fund's publicly traded shares ended the
period at $21.13, up from $19.63 a year ago, contributing to a total return of
9.73%. The Fund's NYSE price -- a barometer of market interest -- represented a
14.1% premium over NAV as of June 30.
Investment Environment
At the beginning of the fiscal period, Korea was characterized by a
hospitable investment environment, which included stable inflation levels and
declining interest rates. Economic growth was healthy, spurred by strong exports
and capital spending, and the Korean stock market was on an upward trajectory.
As last summer progressed, however, corporate investment in facilities tapered
off, while slow global growth began to impact Korea's export-driven economy.
Market sentiment shifted in the direction of companies oriented towards domestic
consumers and infrastructure investment.
The market was drained of any remaining upward momentum by the news last
fall that two former Korean presidents had been implicated in illegal slush fund
operations. Perhaps more important over the long term, the investigation and
arrest of Messrs. Roh and Chun demonstrated the government's willingness to deal
with such illicit activity. Moreover, recent reforms with respect to financial
disclosure should promote the separation of business and politics in Korea,
furthering the country's attractiveness as an investment arena. Additional
factors weighing on the market entering 1996 were North Korea's deteriorating
economy and a decline
3
<PAGE>
in the Japanese yen that promised to make Korean exporters less competitive
in world markets.
Stocks received a boost in the wake of April's parliamentary elections, as
the incumbent party promulgated reforms designed to promote expanded foreign
participation in Korea's equity markets. However, after a brief rally, stocks in
the aggregate returned to their pre-election levels, falling by more than 20% as
uncertainty over the direction of the economy predominated. An expanding trade
deficit, a move up in interest rates, and a dimming outlook for corporate
earnings contributed to concern. On the trade front, the dismal supply/demand
outlook worldwide for semiconductors in particular cast a pall over market
sentiment, as 18% of Korean exports are related to that industry. Reflecting
this negativity, stock trading on the Korean exchange has recently been running
at one-half the volume attained during the April rally.
Portfolio Strategy
The Fund continued over the fiscal period to utilize intensive fundamental
research to identify well-managed companies with promising long-term growth
prospects. We focus sharply on those companies we feel are positioned to perform
well under a variety of economic conditions, and the Fund's top ten holdings
represent approximately 53% of the portfolio. We generally take a buy and hold
approach, especially with respect to these "core" portfolio holdings.
This philosophy aside, we have trimmed our long-standing position in
Samsung Electronics, a flagship Korean company, from roughly 17% of the
portfolio on June 30, 1995, to approximately 6% at the end of the period.
Samsung has the largest share of memory chips in the world and derives 80% of
its income from semiconductors. While we still like Samsung's prospects over the
long term, export-oriented companies in general and semiconductor manufacturers
in particular are facing a difficult environment.
In general, the Fund is moving away from semiconductor companies and other
export-based groups. Instead, we are focusing more heavily on consumer-based
sectors and other domestically oriented industries, such as banking, food,
pharmaceuticals, and securities/brokerage, in view of slowing exports. Recent
additions to the Fund include Tongyang Nylon (textiles), Tae Young Corp.
(construction), and Dongwon Industries (food processing). The Fund's
fixed-income position, which had been at around 5% as 1996 began, has been
reduced to the 2% range as we took advantage of earlier bond market strength and
falling interest rates to take some profits.
Outlook
We believe the recent sharp decline in stock prices was unmerited and
remain bullish on Korean stocks over the medium to long term. For starters, the
underpinnings to a healthy economy remain in place. The economy is growing at an
annual rate of 7% -- modest by Korean standards but hardly recessionary and well
above most other world economies. Also, the trade outlook stands to improve, as
purchases by Korean industry of U.S. and Japanese manufacturing equipment have
slowed and global growth has picked up.
The rate of Korean inflation appears to have stabilized at a manageable
level of 5 - 5 1/2%, giving interest rates much room to decline. The rate on the
benchmark three-year bond is approximately 12%, high by global standards.
Moreover, the interest rate outlook is enhanced by two factors. First, the
opening of Korea's bond market to international investors should foster greater
stability -- a key concern in a market where rates have traversed a 20
percentage point span over the last decade. Second, Korea's impending
Organization for Economic Cooperation and Development "OECD" membership should
result in an improved credit standing and a lower rate structure. Lower interest
rates would translate directly into improved corporate results.
4
<PAGE>
Korea remains well-positioned for long-term growth, with a central location
amongst such economic giants as Japan, Russia, and China, a highly educated
workforce, and important economic reforms in place. The opening of Korea's
economy should over time spawn new global competitors that will present
attractive investment opportunities. In addition, while Korea is no longer an
"emerging" market in the usual sense of the word, its stock market
capitalization as a percent of GDP is smaller than those of its Asian peers,
giving an indication of the future potential for Korean equities.
In our view, the recent weakness in the Korean stock market has created
some opportunities to buy strong companies at more favorable prices, and we will
look for chances to do so going forward. The Korea Fund continues to provide a
vehicle for investors seeking access to one of the most dynamic economies in the
world, and we believe the Fund is well-positioned to benefit from the many
positive developments taking place in Korea and the region. Thank you for your
investment and do not hesitate to call with any questions or comments.
Sincerely,
/s/Nicholas Bratt /s/Juris Padegs
Nicholas Bratt Juris Padegs
President Chairman of the Board
5
<PAGE>
Other Information
Investment Manager
The investment manager and administrator of The Korea Fund, Inc. (the
"Fund") is Scudder, Stevens & Clark, Inc. ("Scudder"), one of the most
experienced investment management and investment counsel firms in the United
States. Established in 1919, the firm provides investment counsel for
individuals, investment companies and institutions. Scudder has offices
throughout the United States and subsidiaries in London and Tokyo.
In addition to the Fund, Scudder also manages the assets of six other
closed-end investment companies which invest in foreign securities and are
traded on the New York Stock Exchange: The Argentina Fund, The Brazil Fund, The
Latin America Dollar Income Fund, Scudder New Asia Fund, Scudder New Europe
Fund, and Scudder World Income Opportunities Fund.
Korean Adviser
Daewoo Capital Management Co., Ltd., registered under the U.S. Investment
Advisers Act of 1940, acts as Korean adviser to Scudder, Stevens & Clark, Inc.,
the Fund's investment manager. Daewoo Capital Management Co., Ltd. is a
subsidiary of Daewoo Securities Co., Ltd., the largest Korean securities firm,
and an affiliate of Daewoo Research Institute.
Daewoo Capital Management Co., Ltd. provides investment advice, research,
and assistance to Scudder. The Daewoo staff makes specific investment
recommendations, which are then evaluated by Scudder's research department and
portfolio managers in light of their own expertise and information from other
sources in making investment decisions for the Fund.
A Team Approach to Investing
The Korea Fund, Inc. is managed by a team of Scudder investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and select
securities for the Fund. They are supported by Scudder's large staff of
economists, research analysts, traders, and other investment specialists who
work in Scudder's offices across the United States and abroad. We believe our
team approach benefits Fund investors by bringing together many disciplines and
leveraging Scudder's extensive resources.
Lead Portfolio Manager John J. Lee has set Fund investment strategy and
overseen its daily operation since 1991, the year he joined Scudder's global
equity area. Nicholas Bratt, Portfolio Manager, has been a member of the
Portfolio team since 1984 and has over 20 years of experience in worldwide
investing. Mr. Bratt, who has been at Scudder since 1976, is the Director of
Scudder's Global Equity Department.
Dividend Reinvestment and Cash Purchase Plan
The Fund's Dividend Reinvestment and Cash Purchase Plan offers you a
convenient way to have your dividends and capital gain distributions reinvested
in shares of the Fund. We believe this Plan is attractive for shareholders. Its
features are more fully described on page 29.
Net Asset Value
The Fund's NAV is published every Monday in The Wall Street Journal under
the heading "Closed End Funds." The Fund's NAV is also published in The New York
Times and Barron's.
As a service to overseas shareholders, the Fund's NAV is listed daily in
The Financial Times ("FT"). For your information, the NAV of the Fund and other
Scudder closed-end funds can be found in the "FT Managed Funds Service" section
under the heading "Other Offshore Funds" below the Scudder, Stevens & Clark,
Inc. banner.
6
<PAGE>
THE KOREA FUND, INC.
PERFORMANCE UPDATE as of June 30, 1996
- ----------------------------------------------------------------
HISTORICAL INFORMATION LIFE OF FUND
- ----------------------------------------------------------------
Total Return (%)
- --------------------------------------------------------------------------------
Market Value Net Asset Value (a)
--------------- -----------------------
Cumulative Average Cumulative Average
Annual Annual
-------------------------- ---------------------------
Current Quarter 0.60 - -6.65 -
One Year 9.73 9.73 -5.09 -5.09
Three Year 52.27 15.05 75.65 20.66
Five Year 70.03 11.20 105.02 15.44
Ten Year 215.89 12.19 313.06 15.24
Index (c)
- ------------------------
Cumulative Average
Annual
- ------------------------
-4.99 -
-7.92 -7.92
9.97 3.22
36.06 6.35
238.40 12.96
- -----------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
- -----------------------------------------------------------------
A chart in the form of a bar graph appears here,
illustrating the Fund Total Return (%) and Index Total
Return (%) with the exact data points listed in the table
below.
YEARLY PERIODS ENDED JUNE 30
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------------------------------------------------------------------------------
NET ASSET VALUE
(b)............... $11.13 $13.97 $16.84 $14.45 $10.27 $10.75 $11.40 $18.66 $19.89 $18.52
INCOME DIVIDENDS.. $ .01 $ .29 $ .11 $ .08 $ - $ .06 $ .04 $ .01 $ - $ .06
CAPITAL GAINS
DISTRIBUTIONS..... $ .03 $ .68 $ 1.74 $ 1.88 $ 2.20 $ .34 $ .20 $ - $ .15 $ .36
FUND TOTAL
RETURN (%)........ 49.77 31.17 33.21 -9.52 -14.91 7.87 8.20 63.77 13.00 -5.09
</TABLE>
(a) Total investment returns reflect changes in net asset value per share during
each period and assumes that dividends and capital gains distributions, if
any, were reinvested. These percentages are not an indication of the
performance of a shareholder's investment in the Fund based on market price.
(b) Net asset value per share through 1988 has bee adjusted for a 200% stock
dividend paid in October 1988.
(c) Korea Stock Price Index ("KOSPI")
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE OF THE FUND.
7
<PAGE>
PORTFOLIO SUMMARY as of June 30, 1996
- ---------------------------------------------------------------------------
DIVERSIFICATION
- ---------------------------------------------------------------------------
Common Stocks 88%
Convertible Bonds 7%
Preferred Stocks 3%
Corporate Bonds 2%
- --------------------------------------
100%
- --------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
SECTORS
Sector breakdown of the Fund's equity securities
- --------------------------------------------------------------------------
Communications 22%
Financial 21%
Technology 11%
Durables 8%
Manufacturing 7%
Construction 6%
Consumer Staples 6%
Consumer Discretionary 4%
Health 4%
Other 11%
- ---------------------------------------------
100%
- ---------------------------------------------
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
10 LARGEST EQUITY HOLDINGS
(53% OF PORTFOLIO)
- --------------------------------------------------------------------------
1. KOREA MOBILE TELECOM
Mobile telecommunication company
2. SAMSUNG FIRE & MARINE INSURANCE CO.
Insurance company
3. SAMSUNG ELECTRONICS CO., Ltd.
Major electronics manufacturer
4. SAMSUNG DISPLAY DEVICES
Leading manufacturer of CRT and picture tubes
5. KOREA LONG TERM CREDIT BANK
Major commercial bank
6. HYUNDAI MOTOR SERVICES CO., LTD.
Auto parts and services
7. KOREA ELECTRIC POWER CO.
Electric utility
8. KEUM KANG CO., LTD.
Construction company and manufacturer of building materials
9. HANSOL PAPER MANUFACTURING CO., LTD.
Korea's largest paper manufacturer
10. SHINSEGAE
Major department store chain
8
<PAGE>
The Korea Fund, Inc.
Investment Performance
KOREA FUND INVESTMENT PERFORMANCE
History (in terms of N.Y.S.E. Value) of a $10,000 Investment in Fund Shares
vs. the S&P 500 Index*
The Korea Fund, Inc.
Investment Performance
- --------------------------------------------------------------------------------
LINE CHART OMITTED
CHART TITLE: KOREA FUND INVESTMENT PERFORMANCE
History (in terms of N.Y.S.E. Value) of a $10,000 Investment in Fund Shares
vs. the S&P 500 Index*
CHART PERIOD: (8/84 - 6/96)
CHART DATA:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
TOTAL SHARE CAPITAL GAINS DISTRIBUTION SHARE VALUE OF INITIAL S&P TOTAL
VALUE ($92,999) REINVESTED ($80,738) INVESTMENT ($52,813) RETURN ($59,211)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10942 10942 10942 10000
11983 11983 11983 9972
11875 11875 11875 10159
11458 11458 11458 11095
12292 12292 12292 11906
11787 11250 11250 11422
15393 14692 14692 13395
20632 19692 19692 15286
29440 27817 27817 16186
32537 30709 30625 15054
30103 28411 28333 15905
56221 53061 52917 19304
62087 58597 58438 20265
67523 63039 62396 21689
51016 47628 45938 16801
73921 69011 66563 17755
65476 61127 58958 18925
59075 54750 50000 18993
80516 74621 65625 19608
108121 100205 88125 21000
97003 89900 79063 22837
133542 123540 105000 25283
111177 102850 85938 25801
73983 68442 57188 25017
71557 66198 55313 26571
44506 41173 30625 22930
48402 44777 31250 24976
56630 52389 36563 28611
54694 50598 35313 28520
57251 52736 36250 30052
50380 46407 31563 32576
47387 43650 29688 31761
45392 41813 28438 32345
49876 45787 30625 33368
57001 52328 35000 35054
52421 48123 32188 36585
61073 56066 37500 36763
59037 54197 36250 37711
97766 89706 60000 38587
78417 71951 48125 37122
89619 82230 55000 37277
107003 98181 65313 39097
93227 85541 56875 39091
87592 80371 53438 42897
84754 73790 49063 46995
96871 84340 55313 50730
96850 84082 55000 53785
92448 80261 52500 56670
92999 80738 52813 59211
</TABLE>
9
<PAGE>
The Korea Fund, Inc.
Investment Performance
- --------------------------------------------------------------------------------
LINE CHART OMITTED
CHART TITLE: KOREA FUND INVESTMENT PERFORMANCE (Cont'd)
History (in terms of Net Asset Value) of a $10,000 Investment in Fund Shares*
CHART PERIOD: (8/84 - 6/96)
CHART DATA:
-------------------------------------------------------------------------------
TOTAL NET ASSET CAPITAL GAINS DISTRIBUTIONS NET ASSET VALUE OF INITIAL
VALUE ($92,365) REINVESTED ($80,416) INVESTMENT ($53,468)
-------------------------------------------------------------------------------
10000 10000 10000
10072 10072 10072
10269 10269 10269
10197 10197 10197
10305 10305 10305
10083 9624 9624
12599 12025 12025
16796 16030 16030
21224 20054 20054
23020 21726 21667
23315 22004 21944
31873 30082 30000
31788 30001 29919
31515 29422 29122
33685 31447 30332
38620 36055 34776
41695 38926 37545
40580 37609 34346
52539 48693 42823
62236 57679 50726
55541 51474 45269
65403 60505 51425
64511 59679 49866
60372 55851 46667
50252 46489 38844
42973 39754 29570
46216 42755 29839
45050 41676 29086
42760 39558 27608
45385 41806 28737
45269 41699 28360
54323 50039 34032
46127 42489 28898
42992 39467 26398
46494 42683 28548
46844 43004 28763
49909 45817 30645
50128 46018 30780
72887 66877 44731
74814 68646 45914
81735 74996 50161
94468 86679 57661
90991 83489 55511
91123 83610 55591
92364 80416 53468
104044 90585 59409
94862 82356 53871
93916 81535 53333
87667 76110 49785
The data set forth in these graphs should not be construed as an indication of
the record of a shareholder's investment in the Fund based on market prices; nor
should it be construed as a representation of the future performance of the
Fund's net asset value.
* The Korea Fund, Inc. performance charts make the following key assumptions:
1. The data have been adjusted to reflect a 200% stock dividend paid in
October 1988.
2. Investment income and capital gains reinvested at the greater of the
following on the valuation date:
(a) Net asset value per share or
(b) 95% of the mean market price per share.
3. No adjustments have been made for U.S. income taxes. Korean taxes are
reflected.
4. Initial $10,000 investment was made at initial public offering price and at
initial net asset value price.
The Standard & Poor's 500 Stock Index is a widely followed, unmanaged index
of 500 industrial, transportation, utility and financial companies widely
regarded as representative of the equity market in general.
10
<PAGE>
[LOGO]The Korea Fund, Inc.
<TABLE>
Investment Portfolio as of June 30, 1996
<CAPTION>
==========================================================================================================
Principal Market
Amount(e) Value($)
- ----------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 0.3%
<S> <C> <C>
U.S. $1,812,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 6/28/96 at 5.45%, to be
repurchased at $1,812,823 on 7/1/96,
collateralized by a $1,817,000 U.S. Treasury
Note, 6.125%, 5/15/98 (Cost $1,812,000) ........... 1,812,000
----------
- ----------------------------------------------------------------------------------------------------------
CORPORATE BONDS 2.2%
METALS & MINERALS
10,000,000,000 Korea Tungsten Exchange Bond, Zero Coupon
with 36.03% bonus interest at maturity,
11/11/98 (c)(f) (Cost $13,852,941) ................ 13,120,027
----------
- ----------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 6.4%
CONSUMER STAPLES 1.8%
Alcohol & Tobacco 0.7% 3,000,000,000 Jinro Ltd., 2% with 14.36% bonus interest at
maturity, 9/30/98 (Leading producer of Soju,
a distilled spirit) (c)(f) ....................... 3,987,242
----------
Food & Beverage 0.5% 800,000,000 Crown Confectionery Co., 3% with 16.28% bonus
interest at maturity, 12/31/97 (Major producer.... 1,008,289
of snacks) (c)(f)
2,000,000,000 Haitai Confectionery Co., 1% with 12.69% bonus
interest at maturity, 6/30/98 (Major producer
of snacks) (c)(f) ................................ 2,256,888
---------
3,265,177
----------
Textiles 0.6% U.S.$ 1,000,000 Kolon Industries, Inc., 0.25%, 12/31/04 (Leading
manufacturer of nylon, polyester yarn
and fabrics) ..................................... 507,500
2,400,000,000 Kukje Corp., 12% with 4.62% bonus interest at
maturity, 12/31/97 (Shoe manufacturer) (c)(f) .... 3,085,109
----------
3,592,609
----------
HEALTH 0.7%
Pharmaceuticals 3,000,000,000 Korea Green Cross Corp., 1% with 11.88% bonus
interest at maturity, 12/31/97 (Leading
ethical drug producer) (c)(f) ................... 3,545,833
----------
400,000,000 Yuhan Corp., 5.5% with 25.41% bonus interest at
maturity, 12/31/97 (Pharmaceutical
company) (c)(f) .................................. 558,481
----------
4,104,314
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
[LOGO]The Korea Fund, Inc.
<TABLE>
Investment Portfolio (continued)
<CAPTION>
===========================================================================================================
Principal Market
Amount(e) Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
MANUFACTURING 0.8%
Containers & Paper 4,000,000,000 Hansol Paper Manufacturing Co., Ltd., 3% with
28.24% bonus interest at maturity, 12/31/99
(Korea's largest paper manufacturer) (c)(f) ....... 4,688,666
----------
ENERGY 1.0%
Oil & Gas Production 2,000,000,000 Yukong, Ltd., 2% with 8.15% bonus interest at
maturity, 12/31/97 (Korea's largest oil
refiner) (c)(f) ................................... 2,318,739
3,000,000,000 Yukong, Ltd., 1% with 13.92% bonus interest at
maturity, 12/31/98 (c)(f) ......................... 3,263,747
----------
5,582,486
----------
METALS & MINERALS 0.4%
Steel & Metals 1,000,000,000 Kangwon Industry, 6% with 19.52% bonus interest
at maturity, 6/30/97 (Steel company) (c)(f) ....... 1,414,095
500,000,000 Sammi Steel, 4% with 20.57% bonus interest at
maturity, 12/31/97
(Specialty steel company) (c)(f) .................. 660,673
----------
2,074,768
----------
CONSTRUCTION 0.2%
Miscellaneous 1,000,000,000 Sungwon Construction, 5% with 21.11% bonus
interest at maturity, 12/31/97
(Construction company) (c)(f) ..................... 1,343,259
----------
UTILITIES 1.5%
Electric Utilities 5,000,000,000 Korea Electric Power Co., 1% with 9.98% bonus
interest at maturity, 12/31/97
(Electric utility) (c)(f) ......................... 5,815,125
2,300,000,000 Korea Electric Power Co., Zero Coupon with 30.5%
bonus interest at maturity, 12/31/98 (c)(f) ....... 2,775,824
----------
8,590,949
----------
TOTAL CONVERTIBLE BONDS (Cost $41,504,920) .......... 37,229,470
----------
- -----------------------------------------------------------------------------------------------------------
PREFERRED STOCKS 3.4% Shares
------
CONSUMER DISCRETIONARY 0.1%
Apparel & Shoes 10,700 BYC (Leading maker of under garments) (c) ........... 567,184
----------
CONSUMER STAPLES 0.7%
Alcohol & Tobacco 0.1% 5,800 Jinro, Ltd. ......................................... 53,982
46,165 Oriental Brewery Co., Ltd.
(Korea's largest brewery) (g) ..................... 682,914
----------
736,896
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Food & Beverage 0.3% 70,690 Cheil Food and Chemical Co., Ltd. (Korea's
leading sugar refiner and major integrated
food processor) .................................. 1,838,707
----------
Package Goods/Cosmetics 0.1% 56,070 Pacific Corp. (Leading cosmetics producer) .......... 435,455
----------
Textiles 0.2% 133,230 Kolon Industries, Inc. .............................. 1,220,290
38,165 Kolon Industries, Inc. Rights (c)(g) ................ 159,962
----------
1,380,252
----------
HEALTH 0.1%
Pharmaceuticals 6,700 Korea Green Cross Corp. ............................. 260,170
4,700 Shin Poong Pharmaceutical Co., Ltd.
(Specialized drug producer) (c) ................... 77,638
----------
337,808
----------
FINANCIAL 1.0%
Insurance 0.5% 6,175 Samsung Fire & Marine Insurance Co.
(Insurance company) (d) ........................... 2,428,285
----------
Other Financial
Companies 0.5% 87,310 Shin Young Securities (Securities company) .......... 870,732
252,000 Ssangyong Investment & Securities
(Securities company) ............................. 2,336,095
----------
3,206,827
----------
DURABLES 0.4%
Automobiles 0.3% 99,130 Mando Machinery Corp.
(Major auto parts manufacturer) .................. 1,906,346
----------
Tires 0.1% 74,650 Korea Kumho Co. (Korea's largest
tire manufacturer) (g) ........................... 346,011
----------
MANUFACTURING 0.2%
Chemicals 3,700 Han Wha Corp., Ltd. (Leading producer of
explosives and chemicals) ........................ 28,279
70,475 Oriental Chemical Industries Co., Ltd.
(Manufacturer of specialty chemicals) ............ 1,033,842
----------
1,062,121
----------
TECHNOLOGY 0.4%
Electronic Components/
Distributors 9,918 Samsung Display Devices (Leading manufacturer
of CRT and picture tubes) ........................ 402,246
37,039 Samsung Electronics Co., Ltd. (Major electronics
manufacturer) (d) ............................... 1,602,466
11,162 Samsung Electronics Co., Ltd. (New) (b)(d)(g) ....... 449,053
----------
2,453,765
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
[LOGO] The Korea Fund, Inc.
<TABLE>
Investment Portfolio (continued)
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 0.0%
Oil Companies 1,174 Ssangyong Oil Refining Co.
(Major oil refiner)(c) ............................ 12,385
----------
CONSTRUCTION 0.5%
Building Materials 0.2% 50,000 Ssangyong Cement Industrial Co., Ltd.
(Major cement producer) ........................... 607,125
27,000 Sung Shin Cement Co., Ltd.
(Major cement company) ............................ 352,811
----------
959,936
----------
Miscellaneous 0.3% 95,000 Hyundai Engineering & Construction Co.
(Leading general contractor) ...................... 2,049,433
----------
TRANSPORTATION 0.0%
Airlines 20,520 Korean Airlines Co., Ltd. (Airline) ................. 252,959
----------
TOTAL PREFERRED STOCKS (Cost $21,382,560) ........... 19,974,370
----------
- -----------------------------------------------------------------------------------------------------------
COMMON STOCKS 87.7%
CONSUMER DISCRETIONARY 4.0%
Apparel & Shoes 0.5% 52,083 Shin Won (Major apparel manufacturer) ............... 1,592,281
30,000 Ssang Bang Wool Co.
(Leading underwear manufacturer) ................. 1,427,515
----------
3,019,796
----------
Department & Chain
Stores 3.3% 182,591 Hwa Sung Industries (Department store) .............. 4,794,364
152,443 Shinsegae (Major department store chain) ............ 10,335,756
16,571 Shinsegae (New) (b)(g) .............................. 1,031,602
174,599 Taegu Department Store (Department store) ........... 3,379,197
----------
19,540,919
----------
Hotels & Casinos 0.2% 100,000 Hotel Shilla Co. (Luxury hotel and resort
operator) ........................................ 1,183,432
----------
CONSUMER STAPLES 3.5%
Alcohol & Tobacco 0.1% 19,000 Jinro, Ltd. ......................................... 405,202
6,009 Jinro, Ltd. (New) (b)(g) ............................ 120,002
----------
525,204
----------
Food & Beverage 2.5% 123,854 Cheil Food and Chemical Co., Ltd. ................... 8,092,039
120,000 Dongwon Industries Company (Leading deep-sea
fishing and processing company) .................. 2,337,278
32,271 Nhong Shim Co. (Manufacturer of instant noodles
and snacks) ...................................... 1,209,367
48,000 Pulmuone Co., Ltd. (Food producer) .................. 2,633,136
----------
14,271,820
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Textiles 0.9% 20,356 Cheil Industries (Leading woolen yarn and
fabric manufacturer) ............................. 356,330
30,000 Choongnam Spinning Co., Ltd. (Korea's leading
manufacturer of cotton yarn) (g) ................. 447,485
33,500 Hankook Synthetics (Textile manufacturer) (g) ....... 2,155,695
6,700 Hankook Synthetics Rights (c)(g) .................... 60,293
3,040 Taekwang Industrial Co., Ltd.
(Major producer of acrylic fiber) ................ 1,723,866
29,600 Tongyang Nylon (Korea's largest producer
of nylon filament yarn) ......................... 773,570
----------
5,517,239
----------
HEALTH 3.2%
Pharmaceuticals 72,632 Chong Kun Dang Co., Ltd.
(Pharmaceutical company) ......................... 2,954,690
11,011 Daewoong Pharmaceutical Co.
(Pharmaceutical company) ......................... 471,008
159,500 Dong-A Pharmaceutical (Pharmaceutical company) ...... 4,089,744
11,068 Korea Green Cross Corp. ............................. 1,185,662
126,621 Yuhan Corporation ................................... 7,648,458
27,565 Yuhan Corporation (New) (Common 1) (b)(g) ........... 1,444,172
15,418 Yuhan Corporation (New) (Common 2) (b)(g) ........... 802,071
----------
18,595,805
----------
COMMUNICATIONS 21.2%
Cellular Telephone 100,702 Korea Mobile Telecom
(Mobile telecommunication company) (d) ............ 123,940,923
----------
FINANCIAL 19.3%
Banks 7.4% 260,650 Cheju Bank (Regional bank) .......................... 3,309,535
3,381 Daegu Bank (Regional bank) (New) (b) ................ 47,097
134,691 Kookmin Bank (Major commercial bank) ................ 2,490,588
428,454 Korea Exchange Bank (Major commercial bank) ......... 4,912,010
200,000 Korea First Bank (Major commercial bank) (g) ........ 1,651,874
385,000 Korea Housing Bank
(Major commercial bank) (New) (b) ................. 8,970,044
584,315 Korea Long Term Credit Bank
(Major commercial bank) ........................... 15,126,498
365,585 Shin Han Bank (Major commercial bank) ............... 6,669,943
----------
43,177,589
----------
Insurance 10.4% 45,356 Daehan Fire & Marine Insurance Co., Ltd.
(Insurance company) ............................... 1,889,833
44,656 Hyundai Fire and Marine Insurance
(Insurance company) ............................... 3,082,761
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
[LOGO] The Korea Fund, Inc.
<TABLE>
Investment Portfolio (continued)
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
49,912 LG Insurance Co. (Insurance company) ................ 5,076,114
68,967 Samsung Fire & Marine Insurance Co. (d) ............. 50,657,418
----------
60,706,126
----------
Other Financial
Companies 1.5% 14,638 Boo Kook Securities (Securities company) ............ 180,449
178,224 Hyundai Securities (Securities company) (g) ......... 4,130,438
14,578 Hyundai Securities Rights (c) (g) ................... 55,710
50,000 LG Securities Co., Ltd.
(Securities company) (g) ......................... 899,901
145,000 Shinyoung Securities (Securities company) ........... 3,038,708
27,081 Ssangyong Investment & Securities Co.
(Securities company) ............................. 487,405
----------
8,792,611
----------
SERVICE INDUSTRIES 1.2%
Miscellaneous Commercial
Services 243,132 Samsung Co., Ltd. (Trading company) ................. 5,185,138
44,589 Samsung Co., Ltd. (New) (b)(c)(g) ................... 874,094
45,003 Sunkyong Ltd. (Trading company) ..................... 926,467
----------
6,985,699
----------
DURABLES 7.2%
Automobiles 5.1% 116,209 Hyundai Motor Co., Ltd.
(Korea's largest auto manufacturer) .............. 4,383,624
423,380 Hyundai Motor Services Co., Ltd.
(Auto parts and services) ........................ 14,926,859
113,341 Mando Machinery Corp.
(Major auto parts manufacturer) .................. 5,588,808
35,000 Samlip Industries (Auto parts manufacturer) ......... 1,208,087
90,000 Yoosung Enterprise (Leading manufacturer of
engine parts) ................................... 3,827,663
----------
29,935,041
----------
Leasing Companies 0.3% 93,000 Korea Development Leasing Co.
(Largest leasing company in Korea) ............... 2,120,932
----------
Telecommunications
Equipment 0.1% 5,050 LG Information & Communication (Electronic
telephone manufacturer) (New) (b)(c)(g) .......... 539,450
----------
Tires 1.7% 163,416 Hankook Tire Manufacturing Co., Ltd.
(Major tire manufacturer) ........................ 7,453,640
42,995 Hankook Tire Manufacturing Co., Ltd.
(New) (Common 1) (b)(g) .......................... 1,844,460
11,569 Hankook Tire Manufacturing Co., Ltd. (New)
(Common 2) (b) (g) ............................... 477,763
----------
9,775,863
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
MANUFACTURING 5.5%
Chemicals 2.2% 85,550 Hanwha Co. (Producer of explosives and
petrochemicals) .................................. 1,402,632
37,540 Korea Chemical Co. (Paint company) .................. 3,864,140
150,009 LG Chemical Ltd. (Korea's largest integrated
chemical company) ................................ 2,367,006
70,000 Namhae Chemical Co. (Chemical producer) ............. 3,607,002
50,047 Oriental Chemical Industries Co., Ltd. .............. 1,758,308
4,755 Oriental Chemical Industries Co., Ltd. (New) (b)(g) . 161,196
----------
13,160,284
----------
Containers & Paper 2.5% 100,000 Asia Paper Manufacturing Co. (Specialized maker of
cardboard used for packaging) .................... 3,821,499
50,000 Dae Young Packaging Co. (New) (Leading producer of
corrugated board base and boxes) (g) ............. 1,183,432
115,762 Hansol Paper Manufacturing Co., Ltd. ................ 4,338,221
145,807 Hansol Paper Manufacturing Co., Ltd.
(New) (Common 1) (b) (g) ......................... 4,529,507
20,000 Korea Export Packaging Co. (Producer of
corrugated boards) (g) ........................... 468,442
15,000 Shin Poong Paper Manufacturing Co., Ltd. (Leading
manufacturer of white duplex paperboard) ......... 526,997
----------
14,868,098
----------
Diversified Manufacturing 0.1% 22,339 Samsung Heavy Industries Co., Ltd.
(New) (Machinery manufacturer) (b)(g) ............ 316,689
----------
Electrical Products 0.7% 114,086 Kyungwon Century Co., Ltd. (Major manufacturer
of heating and cooling equipment) ................ 3,881,624
----------
TECHNOLOGY 10.3%
Electronic Components/
Distributors 9.9% 213,685 Samsung Display Devices ............................. 15,304,609
15,445 Samsung Display Devices (New) (b) (g) ............... 1,047,183
236,962 Samsung Electromechanics Co., Ltd.
(Major electronics parts company) ................ 8,500,486
59,318 Samsung Electromechanics Co., Ltd. (New) (b) ........ 1,945,092
235,218 Samsung Electronics Co., Ltd. ....................... 19,746,490
143,723 Samsung Electronics Co., Ltd. (New) (b) ............. 11,427,679
----------
57,971,539
----------
Electronic Data Processing 0.4% 70,000 Trigem Computer Inc.
(Major personal computer manufacturer) ........... 2,373,028
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
[LOGO] The Korea Fund, Inc.
<TABLE>
Investment Portfolio (continued)
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 0.7%
Oil & Gas Production 25,243 Ssangyong Oil Refining Co. .......................... 585,020
119,731 Yukong, Ltd. ........................................ 3,512,819
----------
4,097,839
----------
METALS & MINERALS 2.2%
Coal Mining 0.3% 30,000 Dongwon Company Ltd. (Thermal coal mining) (g) ...... 1,834,320
----------
Steel & Metals 1.9% 120,000 Inchon Iron & Steel Co. (Steel producer) ............ 3,402,367
70,857 Inchon Iron & Steel Co. (New) (b)(g) ................ 1,843,051
72,313 Kia Steel Co., Ltd.
(Specialty steel company) (New) (b)(g) ............ 384,207
68,200 Pohang Iron & Steel Co., Ltd.
(Leading steel producer)(d) ....................... 5,605,902
----------
11,235,527
----------
CONSTRUCTION 5.4%
Building Materials 3.0% 10,000 Asia Cement Manufacturing Co.
(Major producer of cement) ........................ 368,590
24,000 Hanil Cement Manufacturing Co., Ltd.
(Cement manufacturing company) .................... 1,242,604
224,337 Keum Kang Co., Ltd. (Construction company and
manufacturer of building materials) ............... 14,269,957
58,915 Ssangyong Cement Industrial Co., Ltd. ............... 1,408,963
----------
17,290,114
----------
Homebuilding 0.3% 50,000 Chong Gu Housing & Construction Co. (Apartment
building construction company) .................... 1,140,286
46,300 Keang Nam Enterprises (Apartment and urban
renewal construction company) ..................... 499,414
----------
1,639,700
----------
Miscellaneous 2.1% 52,875 Dong Ah Construction Industries Co., Ltd.
(Leading construction company) .................... 1,812,038
149,904 Hyundai Engineering & Construction Co. .............. 6,227,521
30,870 Kumho Construction and Engineering (Engineering
and construction company) ......................... 308,243
120,150 LG Construction Co. (Major real estate developer
and construction company) ......................... 2,636,428
1,234 Sungwon Construction Co. ............................ 23,731
240 Sungwon Construction Co. (New) (b)(g) ............... 3,935
20,000 Tae Young Corp. (Construction company) .............. 1,407,791
----------
12,419,687
----------
TRANSPORTATION 1.7%
Airlines 0.6% 148,416 Korean Airlines Co., Ltd. ........................... 3,457,917
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marine Transportation 0.1% 27,930 Hyundai Merchant & Marine Co. (Marine
transportation company) .......................... 502,685
1,146 Korea Line Corp.
(Marine transportation company) .................. 19,072
-----------
521,757
-----------
Trucking 1.0% 162,216 Korea Express Co., Ltd.
(General freight transport company) .............. 5,899,127
-----------
UTILITIES 2.3%
Electric Utilities 1.0% 110,900 Korea Electric Power Co. ........................... 3,827,909
91,000 Korea Electric Power Co. (ADR) ..................... 2,206,750
-----------
6,034,659
-----------
Natural Gas Distribution 1.3% 12,900 Daehan City Gas Co. (Gas utility) .................. 1,176,775
37,600 Daesung Industrial (Natural gas distributor) ....... 2,363,905
23,686 Daesung Industrial (New) (b)(g) .................... 1,343,141
24,940 Samchully (Producer and distributor of
anthracite and natural gas) ..................... 1,936,908
4,689 Samchully (New) (Common 1) (b)(g) .................. 335,259
1,875 Samchully (New) (Common 2) (b)(g) .................. 125,509
-----------
7,281,497
-----------
TOTAL COMMON STOCKS (Cost $243,977,644) ............ 512,911,855
-----------
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $322,530,065) (a) ......................... 585,047,722
===========
<FN>
(a) The cost for federal income tax purposes was $323,133,356. At June 30,
1996, net unrealized appreciation for all securities based on tax cost was
$261,914,366. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $282,963,094 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$21,048,728.
(b) New shares issued during 1996, eligible for a pro rata share of 1996
dividends (Note A).
(c) Securities valued in good faith by the Valuation Committee of the Board of
Directors. The cost of these securities at June 30, 1996 was $56,623,037
(Note A).
(d) Equity securities that have met the foreign-ownership limitation valued at
a premium in good faith by the Valuation Committee of the Board of
Directors. The cost of these securities at June 30, 1996 was $12,709,134
(Note A).
(e) Principal amount stated in Korean won unless otherwise noted. CHF Swiss
Francs. U.S.$ United States Dollar.
(f) Bonus interest represents the amount available to be paid to the holder at
maturity in lieu of conversion.
(g) Non-income producing.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
[LOGO] The Korea Fund, Inc.
<TABLE>
Financial Statements
=========================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
- -----------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Investments, at market (identified cost $322,530,065) (Note A) .............. $585,047,722
Cash:
U.S. dollars ............................................................. 927
Won at market (identified cost $105,662,409) (Note A) .................... 103,288,732
Receivables:
Investments sold ......................................................... 1,344,901
Dividends and interest ................................................... 761,486
Other assets ................................................................ 3,747
------------
Total assets .......................................................... 690,447,515
LIABILITIES
Payables:
Investments purchased .................................................... $671,454
Accrued management fee (Note C) .......................................... 570,194
Other accrued expenses and payables (Note C) ............................. 518,281
--------
Total liabilities ..................................................... 1,759,929
------------
Net assets, at market value ................................................. $688,687,586
============
NET ASSETS
Net assets consist of:
Net unrealized appreciation (depreciation) on:
Investments ........................................................... $262,517,657
Won ................................................................... (2,373,677)
Won related transactions .............................................. (5,496)
Accumulated net realized gain ............................................ 21,487,638
Common stock ............................................................. 371,885
Additional paid-in capital ............................................... 406,689,579
------------
Net assets, at market value ................................................. $688,687,586
============
NET ASSET VALUE per share ($688,687,586 [divided by sign] 37,188,528 shares
of common stock issued and outstanding, 50,000,000 shares
authorized, $.01 par value) ............................................... $ 18.52
============
The accompanying notes are an integral part of the financial statements.
- -----------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
================================================================================================
- ------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest (net of withholding taxes of $370,894) (Note A) ..... $ 4,663,894
Dividends (net of withholding taxes of $1,224,537) (Note A) .. 5,842,031
------------
10,505,925
------------
Expenses:
Management fee (Note C) ...................................... $ 7,516,289
Custodian and accounting fees (Note C) ....................... 1,523,660
Directors' fees and expenses (Note C) ........................ 123,343
Legal ........................................................ 157,144
Auditing ..................................................... 107,002
Reports to shareholders ...................................... 92,762
Services to shareholders ..................................... 78,223
Other ........................................................ 169,408 9,767,831
----------- ------------
Net investment income .......................................... 738,094
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) during the period on:
Investments .................................................. 24,364,471
Won related transactions ..................................... (200,223) 24,164,248
-----------
Net unrealized depreciation during the period on:
Investments .................................................. (58,463,815)
Won .......................................................... (2,415,407)
Won related transactions ..................................... (27,316) (60,906,538)
----------- ------------
Net loss on investment transactions ............................ (36,742,290)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $(36,004,196)
------------
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
[LOGO] The Korea Fund, Inc.
<TABLE>
Financial Statements (continued)
======================================================================================================
- ------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
- -------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30,
--------------------
1996 1995
INCREASE (DECREASE) IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income (loss) (Note A) ...................................$ 738,094 $ (615,149)
Net realized gain from investment transactions (Note A) ................. 24,164,248 13,445,142
Net unrealized appreciation (depreciation) on investment transactions
during the period (Note A) ......................................... (60,906,538) 64,721,917
------------ ------------
Net increase (decrease) in net assets resulting from operations ........... (36,004,196) 77,551,910
------------ ------------
Distributions to shareholders:
From net investment income ($.02 per share) ............................. (738,094) --
------------ ------------
In excess of net investment income ($.04 per share) ..................... (1,489,524) --
------------ ------------
From net realized gains on investment transactions
($.36 and $.15 per share, respectively) ............................. (13,231,733) (4,359,655)
------------ ------------
Fund share transactions:
Net proceeds of shares issued in connection with the Fund's rights
offering, net of broker and dealer manager fees of $4,006,960
and expenditures and offering costs of $860,000 ................ -- 109,617,621
------------ ------------
Reinvestment of distributions ..................................... 5,604,398 1,798,229
------------ ------------
INCREASE (DECREASE) IN NET ASSETS ......................................... (45,859,149) 184,608,105
Net assets at beginning of period ......................................... 734,546,735 549,938,630
------------ ------------
NET ASSETS AT END OF PERIOD ...............................................$688,687,586 $734,546,735
============ ============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period ................................. 36,930,508 29,474,985
Shares issued in connection with the Fund's rights offering ............. -- 7,386,102
Shares issued to shareholders in reinvestment of distributions .......... 258,020 69,421
------------ ------------
Shares outstanding at end of period ....................................... 37,188,528 36,930,508
============ ============
The accompanying notes are an integral part of the financial statements.
- -------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
[LOGO] The Korea Fund, Inc.
<TABLE>
Financial Highlights
=============================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS AND MARKET PRICE DATA.
- --------------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30,
----------------------------------------------
1992 1993 1995(d) 1996 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................... $19.89 $18.66 $11.40 $10.75 $ 10.27
------ ------ ------ ------ -------
Income from investment operations (a):
Net investment income (loss)........................ .02 (.02) (.03) .02 .08
Net realized and unrealized gain (loss) on
investment transactions......................... (.97) 2.42(b) 7.13 .86 .78
------ ------ ------ ------ -------
Total from investment operations (0.95) 2.40 7.10 .88 .86
------ ------ ------ ------ -------
Less distributions:
From net investment income.......................... (.02) -- (.01) (.04) (.06)
In excess of net investment income.................. (.04) -- -- -- --
From net realized gains on investment transactions.. (.36) (.15) -- (.20) (.34)
------ ------ ------ ------ -------
Total distributions.................................... (.42) (.15) (.01) (.24) (.40)
------ ------ ------ ------ -------
Antidilution (dilution) resulting from the rights offering
(1995), fourth tranche (1994), and reinvestment
of distributions for shares at market value......... -- (1.02) .22 .01 .02
------ ------ ------ ------ -------
Underwriting expenditures and offering costs........... -- -- (.05) -- --
------ ------ ------ ------ -------
Net asset value, end of period......................... $18.52 $19.89 $18.66 $11.40 $ 10.75
====== ====== ====== ====== =======
Market value, end of period............................ $21.13 $19.63 $22.00 $15.00 $ 11.38
====== ====== ====== ====== =======
TOTAL RETURN
Per share market value (%)............................. 9.73 (5.43) 46.74 34.54 (17.01)
Per share net asset value (%) (c)...................... (5.09) 13.00 63.77 8.20 7.87
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions)................. 689 735 550 258 241
Ratio of operating expenses to average
net assets (%)..................................... 1.28 1.32 1.37 1.52 1.52
Ratio of net investment income (loss) to
average net assets (%) (d)......................... .10 (.10) (.18) .15 .70
Portfolio turnover rate (%)............................ 32.6 10.5 14.3 14.3 18.2
Average commission rate paid (e)....................... $.1254 $ -- $ -- $ -- $ --
- ----------
<FN>
(a) Based on monthly average of shares outstanding during each period.
(b) Due to the timing and magnitude of the rights offering, the amount reported
herein is not proportional to the aggregate value reported in the
Statements of Changes in Net Assets.
(c) Total investment returns reflect changes in net asset value per share
during each period and assume that dividends and capital gains
distributions, if any, were reinvested. These percentages are not an
indication of the performance of a shareholder's investment in the Fund
based on market price.
(d) Certain amounts have been reclassified to conform with fiscal 1996
presentations.
(e) Average commission rate paid per share of common and preferred stocks is
calculated for fiscal years ending on or after June 30, 1996.
- -------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
23
<PAGE>
[LOGO] The Korea Fund, Inc.
Notes To Financial Statements
===============================================================================
A. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
The Korea Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, closed-end management investment
company.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
SECURITY VALUATION. Portfolio securities which are traded on the Korean, U.S.,
or foreign stock exchanges are valued at the most recent sale price reported on
the exchange on which the security is traded most extensively. If no sale
occurred, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked quotations,
the most recent bid quotation is used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at fair value as determined in good faith by the
Valuation Committee of the Board of Directors including certain securities
valued in good faith by the Valuation Committee amounting to $52,188,713 or 7.6%
of the Fund's net assets at June 30, 1996, and certain investments in Korean
equity securities that have met the limit for aggregate foreign ownership and
for which premiums to the local stock exchange prices are offered by prospective
foreign investors. The aggregate premium ($51,600,746) over the local share
price ($133,083,301) for these securities valued by the Valuation Committee was
approximately 7.5% of the Fund's net assets at June 30, 1996. Their values have
been estimated by the Board of Directors in the absence of readily ascertainable
market values or other market factors, respectively. However, because of the
inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the difference could be material. At June 30, 1996,
25.7% of the Fund's net assets were invested in Korea Mobile Telecom and Samsung
Fire & Marine Insurance Co.
DIVIDEND INCOME. Korean-based corporations have generally adopted calendar
year-ends, and their corporate actions are normally approved by their boards of
directors and shareholders in the first quarter of each calendar year.
Accordingly, dividend income from Korean equity investments is earned and
received by the Fund primarily in the first calendar quarter of each year. As a
result, the Fund, which has a June 30 year end, receives substantially less
dividend income in the first half of its year than in the second half of such
year.
INCOME TAXES. The Fund's policy is to comply with the requirements of the
Internal Revenue Code which are applicable to regulated investment companies and
to distribute all of its taxable income to its shareholders. The Fund,
accordingly, paid no federal income taxes and no federal income tax provision
was required. Under the United States-Korea Income Tax Treaty, as presently in
effect, the government of Korea imposes a nonrecoverable withholding tax and
resident tax aggregating 16.125% on dividends and 12.9% on interest paid to the
Fund by Korean issuers. Effective January 1, 1996, withholding taxes on
dividends and interest were increased to 16.5% and 13.2%, respectively. Under
the United States-Korea Income Tax Treaty, there is no Korean withholding tax on
realized capital gains.
DISTRIBUTION OF INCOME AND GAINS. Distribution of net investment income is made
annually. It is expected that net realized gains from investment transactions
during any particular year in excess of available capital loss carryforwards
which, if not distributed, would be taxable to the Fund, will be distributed to
shareholders. An additional distribution may be made to the extent necessary to
avoid the payment of a four percent federal excise tax.
24
<PAGE>
================================================================================
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences relate primarily to foreign denominated investments and certain
securities sold at a loss. As a result, net investment income (loss) and net
realized gain (loss) on investment transactions for a reporting period may
differ significantly from distributions during such period. Accordingly, the
Fund may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of the Fund.
The Fund uses the identified cost method for determining realized gain or loss
on investments for both financial and federal income tax reporting purposes.
FOREIGN CURRENCY TRANSLATIONS. The books and records of the Fund are maintained
in U.S. dollars. Foreign currency transactions are translated into U.S. dollars
on the following basis:
(i) market value of investment securities, other assets and liabilities at
the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions.
The Fund does not isolate that portion of gains and losses on investments which
is due to changes in foreign exchange rates from that which is due to changes in
market prices of the investments. Such fluctuations are included with the net
realized and unrealized gains and losses from investments.
Net realized gain (loss) from won related transactions includes net currency
gains and losses between trade and settlement dates on securities transactions,
gains and losses arising from the sales of won and gains and losses between the
ex and payment dates on dividends, interest, and foreign withholding taxes. At
June 30, 1996 the exchange rate for Korean won was U.S. $0.001233 to W 1.
SUBSCRIPTIONS FOR NEW SHARES. As part of their annual corporate action matters,
certain Korean companies offer rights to their shareholders to subscribe to new
shares which are eligible for a portion of the dividends paid on existing shares
in the year of subscription. The Fund follows a policy of subscribing to new
share offerings by Korean companies.
OTHER. Investment security transactions are accounted for on a trade-date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. All original
issue and acquisition discounts are accreted for both tax and financial
reporting purposes. Certain amounts have been reclassified in the fiscal 1995
statement of changes in net assets and financial highlights to conform with
fiscal 1996 presentation. Certain amounts with respect to bonus interest
reported in the Fund's statements of operations and changes in net assets for
the six months ended December 31, 1995 have been reclassified in the
aforementioned statements for the year ended June 30, 1996.
B. PURCHASES AND SALES OF SECURITIES
---------------------------------
For the year ended June 30, 1996, purchases and sales of investment securities
(excluding short-term investments) aggregated $244,667,165 and $224,953,333,
respectively.
C. RELATED PARTIES
---------------
Under the Management Agreement the Fund agrees to pay the Manager a monthly fee
at an annual rate equal to 1.15% of the Fund's month-end net assets up to and
including $50,000,000, 1.10% of such net assets on the next $50,000,000, 1% of
such assets on the next $250,000,000, 0.95% of such net assets on the next
$400,000,000, and 0.90% of such net assets in excess of $750,000,000. For the
year ended June 30, 1996, the fee pursuant to such agreements
25
<PAGE>
[LOGO] The Korea Fund, Inc.
Notes To Financial Statements (continued)
===============================================================================
amounted to $7,516,289 which was equivalent to an annual effective rate of 0.99%
of the Fund's average month-end net assets.
Under the Advisory Agreement, the Manager pays the Korean Adviser a monthly fee,
equal to an annual rate of 0.2875% of the first $50,000,000 of the Fund's
month-end net assets, 0.275% of such net assets on the next $50,000,000, and
0.25% of such net assets on the next $250,000,000, 0.2375% of such net assets on
the next $400,000,000, and 0.225% of such net assets in excess of $750,000,000.
For the year ended June 30, 1996, brokerage commissions on investment
transactions amounting to $295,613 were paid by the Fund to Daewoo Securities
Co., Ltd., the parent company of the Korean Adviser.
Effective August 21, 1995, Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of the Adviser, assumed responsibility for determining the daily net
asset value per share and maintaining the portfolio and general accounting
records of the Fund. For the year ended June 30, 1996, the amount charged to the
Fund by SFAC aggregated $343,236, of which $66,854 is unpaid at June 30, 1996.
The Fund pays each Director not affiliated with the Manager or the Korean
Adviser $6,000 annually plus specified amounts for attended board and committee
meetings. For the year ended June 30, 1996, Directors' fees and expenses
amounted to $123,343.
D. FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN KOREA
-------------------------------------------------
The Foreign Exchange Management Act, the Presidential Decree relating to such
Act and the regulations of the Minister of Finance and Economy issued thereunder
impose certain limitations and controls which generally affect foreign investors
in Korea. The Fund has obtained from the Minister of Finance and Economy a
license to invest in Korean securities and to repatriate income received from
dividends and interest earned on, and net realized capital gain from, its
investments in Korean securities and, upon termination of the Fund or for
payment of expenses in excess of income, to repatriate investment principal. The
Minister of Finance and Economy may, when it deems it to be in the public
interest, modify the Fund's license to invest in Korean securities or, according
to the terms of the license, revoke it in the event of the Fund's noncompliance
with conditions of the license or a material violation of Korean law. The
Minister of Finance and Economy or the Securities and Exchange Commission of
Korea ("KSEC") may issue orders imposing additional restrictions, when deemed in
the public interest, for the protection of investors or in the interest of
maintaining an orderly securities market. Under the Foreign Exchange Management
Act, the Minister of Finance and Economy has the power, with prior public notice
of scope and duration, to suspend all or a part of foreign exchange transactions
when emergency measures are deemed necessary in case of radical change in the
international or domestic economic situation. The Fund could be adversely
affected by delays in, or the refusal to grant, any required governmental
approval for such transactions.
Under current regulations of the Minister of Finance and the KSEC, foreigners
are subject to certain restrictions with respect to investing in equity
securities of Korean companies listed on the Korea Stock Exchange. Until
April 1, 1996, total foreign investment was limited generally to 15% of each
class of a company's outstanding shares, while a single foreign investor could
only invest up to 3% of each class of outstanding shares. At April 1, 1996,
the limits were increased from 15% to 18% and 3% to 4%, respectively. Pursuant
to its license, however, the Fund may invest in shares representing 5% of each
class in general.
26
<PAGE>
[LOGO]The Korea Fund, Inc.
Report Of Independent Accountants
===============================================================================
TO THE BOARD OF DIRECTORS AND THE SHAREHOLDERS OF The Korea Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
Korea Fund, Inc. including the investment portfolio, as of June 30, 1996, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Korea Fund, Inc. as of June 30, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended in conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
August 16, 1996
27
<PAGE>
[LOGO] The Korea Fund, Inc.
Tax Information
===============================================================================
Pursuant to section 852 of the Internal Revenue Code, the Fund designates
$24,836,787 as capital gain dividend for its fiscal year ended June 30, 1996.
Due to the nature of its investments, the Fund pays foreign taxes to the
Republic of Korea throughout the year. As in prior years, the Fund intends to
make an election under Section 853 of the Internal Revenue Code. This election
will allow shareholders to treat their proportionate share of foreign taxes paid
by the Fund as having been paid directly by them. Additionally, shareholders
will be required to report their proportionate share of such taxes paid as gross
income (in addition to other amounts of reportable distributions paid by the
Fund).
The Fund paid taxes to the Republic of Korea of $.04 per share during the
taxable year ended June 30, 1996. Pursuant to an election made by the Fund under
Section 853 of the Internal Revenue Code, shareholders may treat their
proportionate share of such taxes as having been paid by them. During the same
year, the Fund recognized $.06 per share of foreign source income, all of which
was derived from the Republic of Korea.
Please consult a tax advisor if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Korea Fund account, please call 800-426-5523.
28
<PAGE>
Dividend Reinvestment and Cash Purchase Plan
The Plan
The Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan") offers
you an automatic way to reinvest your dividends and capital gains distributions
in shares of the Fund. The Plan also provides for cash investments in Fund
shares of $100 to $3,000 semiannually through State Street Bank and Trust
Company, the Plan Agent.
Automatic Participation
Each shareholder of record is automatically a participant in the Plan
unless the shareholder has instructed the Plan Agent in writing otherwise. Such
a notice must be received by the Plan Agent not less than 10 days prior to the
record date for a dividend or distribution in order to be effective with respect
to that dividend or distribution. A notice which is not received by that time
will be effective only with respect to subsequent dividends and distributions.
Shareholders who do not participate in the Plan will receive all
distributions in cash paid by check in dollars mailed directly to the
shareholder by State Street Bank and Trust Company, as dividend paying agent.
Shares Held by a Nominee
If your shares are held in the name of a brokerage firm, bank, or other
nominee as the shareholder of record, please consult your nominee (or any
successor nominee) to determine whether it is participating in the Plan on your
behalf. Many nominees are generally authorized to receive cash dividends unless
they are specifically instructed by a client to reinvest. If you would like your
nominee to participate in the Plan on your behalf, you should give your nominee
instructions to that effect as soon as possible.
Pricing of Dividends and Distributions
If the market price per share on the payment date for the dividend or
distribution (the "Valuation Date") equals or exceeds net asset value per share
on that date, the Fund will issue new shares to participants at the greater of
the following on the Valuation Date: (a) net asset value, or (b) 95% of the mean
market price. The Valuation Date will be the dividend or distribution payment
date or, if that date is not a New York Stock Exchange trading date, the next
preceding trading date. If the net asset value exceeds the market price of Fund
shares at such time, participants in the Plan are considered to have elected to
receive shares of stock from the Fund, valued at market price, on the Valuation
Date. In either case, for Federal income tax purposes, the shareholder receives
a distribution equal to the market value on Valuation Date of new shares issued.
State and local taxes may also apply. If the Fund should declare an income
dividend or net capital gains distribution payable only in cash, the Plan Agent
will, as agent for the participants, buy Fund shares in the open market, on the
New York Stock Exchange or elsewhere, for the participants' account on, or
shortly after, the payment date.
Voluntary Cash Purchases
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, semiannually, in any amount from $100 to $3,000, for
investment in the Fund's shares. The Plan Agent will use all such monies
received from participants to purchase Fund shares in the open market on or
about February 15 and August 15. Any voluntary cash payments received more than
30 days prior to these dates will be returned by the Plan Agent, and interest
will not be paid on any uninvested cash payments. To avoid unnecessary cash
accumulations, and also to allow ample time for receipt and processing by the
Plan Agent, it is suggested that participants send in voluntary cash payments to
be received by the Plan Agent approximately ten days before February 15, or
August 15, as the case may be. A participant may withdraw a voluntary cash
payment by written notice, if the notice is received by the Plan Agent not less
than 48 hours before such payment is to be invested.
29
<PAGE>
Participant Plan Accounts
The Plan Agent maintains all participant accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by participants for personal and tax records. Shares in the account of
each plan participant will be held by the Plan Agent in non-certificated form in
the name of the participant, and each participant will be able to vote those
shares purchased pursuant to the Plan at a shareholder meeting or by proxy.
No Service Fee to Reinvest
There is no service fee charged to participants for reinvesting dividends
or distributions from net realized capital gains. The Plan Agent's fees for the
handling of the reinvestment of dividends and capital gains distributions will
be paid by the Fund. There will be no brokerage commissions with respect to
shares issued directly by the Fund as a result of dividends or capital gains
distributions payable either in stock or in cash. However, participants will pay
a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of any
dividends or capital gains distributions payable only in cash.
Costs for Cash Purchases
With respect to purchases of Fund shares from voluntary cash payments, the
Plan Agent will charge $0.75 for each such purchase for a participant. Each
participant will pay a pro rata share of brokerage commissions incurred with
respect to the Plan Agent's open market purchases of Fund shares in connection
with voluntary cash payments made by the participant.
Brokerage charges for purchasing small amounts of stock for individual
accounts through the Plan are expected to be less than the usual brokerage
charges for such transactions, because the Plan Agent will be purchasing stock
for all participants in blocks and pro-rating the lower commission thus
attainable.
Amendment or Termination
The Fund and the Plan Agent each reserve the right to terminate the Plan.
Notice of the termination will be sent to the participants of the Plan at least
30 days before the record date for a dividend or distribution. The Plan also may
be amended by the Fund or the Plan Agent, but (except when necessary or
appropriate to comply with applicable law, rules or policies of a regulatory
authority) only by giving at least 30 days' written notice to participants in
the Plan.
A participant may terminate his account under the Plan by written notice to
the Plan Agent. If the written notice is received 10 days before the record day
of any distribution, it will be effective immediately. If received after that
date, it will be effective as soon as possible after the reinvestment of the
dividend or distribution.
If a participant elects to sell his shares before the Plan is terminated,
the Plan Agent will deduct a $2.50 fee plus brokerage commissions from the sale
transaction.
Plan Agent Address and Telephone Number
You may obtain more detailed information by requesting a copy of the Plan
from the Plan Agent. All correspondence (including notifications) should be
directed to: The Korea Fund Dividend Reinvestment and Cash Purchase Plan, c/o
State Street Bank and Trust Company, P.O. Box 8209, Boston, MA 02266-8209,
1-800-426-5523.
30
<PAGE>
Officers and Directors
JURIS PADEGS*
Chairman of the Board and Director
CHANG-HEE KIM
Vice Chairman of the Board and Director
NICHOLAS BRATT*
President and Director
WILLIAM H. GLEYSTEEN, JR.
Director
ROBERT W. LEAR
Director
DR. SANG C. LEE
Director
TAI HO LEE
Director
DR. WILSON NOLEN
Director
HUGH T. PATRICK
Director
SIDNEY M. ROBBINS
Emeritus Founding Director
JERARD K. HARTMAN*
Vice President
KUN-HO HWANG
Vice President
YOUNG H. KIM
Vice President
JOHN J. LEE*
Vice President
DAVID S. LEE*
Vice President
DONG WOOK PARK
Vice President
THOMAS F. McDONOUGH*
Secretary and Assistant Treasurer
PAMELA A. McGRATH*
Treasurer
EDWARD J. O'CONNELL*
Vice President and Assistant Treasurer
KATHRYN L. QUIRK*
Vice President and Assistant Secretary
COLEEN DOWNS DINNEEN*
Assistant Secretary
* Scudder, Stevens & Clark, Inc.
31
