<PAGE> 1
As filed with the Securities and Exchange Commission on March 25, 1997
<TABLE>
<S> <C>
1933 ACT FILE NO. 333-22595
1940 ACT FILE NO. 811-4058
</TABLE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
Form N-2
Registration Statement Under The Securities Act of 1933 [X]
Pre-Effective Amendment No. 1 [ ]
Post-Effective Amendment No. [ ]
and/or
Registration Statement Under The Investment Company Act of 1940 [X]
Amendment No. 19
------------------------
THE KOREA FUND, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Scudder, Stevens & Clark, Inc.
345 Park Avenue
New York, New York 10154
(Address of Principal Executive Offices (Number, Street, City, State, Zip Code))
Registrant's Telephone Number, including Area Code: (212) 326-6200
------------------------
JURIS PADEGS, CHAIRMAN OF THE BOARD
PAMELA A. MCGRATH, TREASURER
C/O SCUDDER, STEVENS & CLARK, INC.
345 PARK AVENUE
NEW YORK, NEW YORK 10154
(NAME AND ADDRESS (NUMBER, STREET, CITY, STATE, ZIP CODE) OF AGENTS FOR SERVICE)
------------------------
With copies to:
<TABLE>
<S> <C>
MEREDITH M. BROWN THOMAS A. DECAPO
DEBEVOISE & PLIMPTON SKADDEN, ARPS, SLATE,
875 THIRD AVENUE MEAGHER & FLOM LLP
NEW YORK, NEW YORK 10022 ONE BEACON STREET
BOSTON, MASSACHUSETTS 02108
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [X]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(2)
- --------------------------------------------------------------------------------------------------
Common Stock, par value $.01
per share..................... 12,429,083 Shares $12.30 $152,877,720.90 $46,326.58
==================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933. Based on a
discount from the average of the high and low sales prices for the Fund's
Common Stock reported on the New York Stock Exchange Composite Tape on
February 26, 1997.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
THE KOREA FUND, INC.
FORM N-2
CROSS-REFERENCE SHEET
PART A: THE PROSPECTUS
<TABLE>
<CAPTION>
FORM N-2 ITEM NUMBER PROSPECTUS/SAI CAPTION
- -------------------------------------------------------- -----------------------------------
<S> <C>
1. Outside Front Cover................................. Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Page............ Cover Page of Prospectus
3. Fee Table and Synopsis.............................. Prospectus Summary; Fee Table
4. Financial Highlights................................ Financial Highlights
5. Plan of Distribution................................ Cover Page; Prospectus Summary; The
Offer
6. Selling Shareholders................................ Not Applicable
7. Use of Proceeds..................................... Use of Proceeds
8. General Description of the Registrant............... Cover Page of Prospectus;
Prospectus Summary; The Fund; The
Offer; Risk Factors and Special
Considerations; Investment
Objective and Policies;
Investment Restrictions; Common
Stock
9. Management.......................................... Investment Advisers; Portfolio
Transactions and Brokerage;
Custodian; Dividend Paying Agent,
Transfer Agent and Registrar;
Common Stock
10. Capital Stock, Long-Term Debt, and Other
Securities............................................ Common Stock; Dividends and
Distributions; Dividend
Reinvestment and Cash Purchase
Plan; Taxation
11. Defaults and Arrears on Senior Securities........... Not Applicable
12. Legal Proceedings................................... Not Applicable
13. Table of Contents of the Statement of Additional
Information......................................... Table of Contents of Statement of
Additional Information
PART B: STATEMENT OF ADDITIONAL INFORMATION
14. Cover Page.......................................... Cover Page of SAI
15. Table of Contents................................... Cover Page of SAI
16. General Information and History..................... Not Applicable
17. Investment Objective and Policies................... Investment Objective and Policies;
Investment Restrictions
18. Management.......................................... Directors and Officers
19. Control Persons and Principal Holders of
Securities............................................ Common Stock
20. Investment Advisory and Other Services.............. Investment Advisers; Custodian;
Dividend Paying Agent, Transfer
Agent and Registrar; Experts
21. Brokerage Allocation and Other Practices............ Portfolio Transactions and
Brokerage
22. Tax Status.......................................... Taxation
23. Financial Statements................................ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C to this Registration Statement.
<PAGE> 3
PROSPECTUS
12,429,083 SHARES
LOGO THE KOREA FUND, INC.
COMMON STOCK
------------------
The Korea Fund, Inc. (the "Fund") is issuing to its shareholders of record
(the "Record Date Shareholders") as of the close of business on March 31, 1997
(the "Record Date") rights (the "Rights") entitling the holders thereof to
subscribe for an aggregate of 12,429,083 shares (the "Shares") of the Fund's
Common Stock at the rate of one share of Common Stock for each three Rights held
and entitling such Record Date Shareholders to subscribe, subject to certain
limitations and subject to allotment, for any Shares not acquired by exercise of
primary subscription Rights (the "Offer"). Each Record Date Shareholder is being
issued one Right for each 1.01 shares of Common Stock owned on the Record Date,
rounded to the nearest whole Right. No fractional Rights will be issued. The
Rights are transferable and are expected to be listed for trading on the New
York Stock Exchange ("NYSE"). The Shares are expected to be listed for trading
on the NYSE, Pacific Stock Exchange ("PSE") and Osaka Stock Exchange ("OSE").
See "The Offer." THE SUBSCRIPTION PRICE PER SHARE (the "Subscription Price")
will be $ .
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL 18, 1997
UNLESS EXTENDED AS DESCRIBED HEREIN.
The Fund is a non-diversified, closed-end management investment company,
commenced operations in 1984 and, as of March 21, 1997, had net assets of
$474,223,913. The Fund's investment objective is to seek long-term capital
appreciation through investment in securities, primarily equity securities, of
Korean companies. It is the policy of the Fund normally to invest at least 80%
of the Fund's net assets in securities listed on the Korea Stock Exchange (the
"Stock Exchange"). No assurance can be given that the Fund's investment
objective will be realized. Investment in Korea involves certain considerations,
such as restrictions on foreign investment and repatriation of capital,
fluctuations of currency exchange rates, and political and economic risks, that
are not normally involved in investments in the United States and that may be
deemed to involve speculative risks. SEE "INVESTMENT OBJECTIVE AND POLICIES,"
"RISK FACTORS AND SPECIAL CONSIDERATIONS" AND ANNEX A, "THE REPUBLIC OF KOREA."
Scudder, Stevens & Clark, Inc. (the "Manager") manages the Fund. Daewoo
Capital Management Co., Ltd. (the "Korean Adviser") acts as Korean adviser. The
address of the Fund is 345 Park Avenue, New York, New York 10154, and its
telephone number is (212) 326-6200. All questions relating to the Offer should
be directed to the Information Agent, Georgeson & Company Inc., toll free at
(800) 223-2064 or call collect at (212) 509-6240.
------------------
The Fund's currently outstanding shares of Common Stock are, and the Shares
offered hereby will be, listed on the NYSE and the PSE under the symbol "KF" and
on the OSE under the symbol "8676." The Rights will trade on the NYSE under the
symbol "KF-RT". The Fund announced the Offer after the close of trading on the
NYSE on February 28, 1997. The net asset value per share of Common Stock at the
close of business on February 28, 1997 and March 21, 1997 was $13.87 and $12.62,
respectively, and the last sale price of the Common Stock on the NYSE Composite
Tape on those dates was $15.25 and $14.125, respectively.
------------------
As a result of the terms of the Offer, Record Date Shareholders who do not
fully exercise their Rights should expect that they will, upon the completion of
the Offer, own a smaller proportional interest in the Fund than would otherwise
be the case. An immediate substantial dilution of the aggregate net asset value
of the shares of Common Stock owned by Record Date Shareholders who do not fully
exercise their Rights is likely to be experienced as a result of the Offer. SEE
"THE OFFER" AND "RISK FACTORS AND SPECIAL CONSIDERATIONS."
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUBSCRIPTION PROCEEDS TO
PRICE SALES LOAD(1) FUND(2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Per Share $ $ $
- ---------------------------------------------------------------------------------------------------------------------------
Total $ $ $
===========================================================================================================================
</TABLE>
(1) The Fund has agreed to pay Smith Barney Inc. (the "Dealer Manager") and
other broker-dealers included in the selling group to be formed and managed
by the Dealer Manager ("Selling Group Members") fees equal to 2.50% of the
Subscription Price for Shares either issued upon exercise of the Rights as a
result of their soliciting efforts or purchased from the Dealer Manager for
sale to the public. Certain other broker-dealers that have executed and
delivered a Soliciting Dealer Agreement and have solicited the exercise of
Rights will receive fees for their soliciting efforts of up to .50% of the
Subscription Price, subject generally to a maximum fee based upon the number
of shares of Common Stock held by each such broker-dealer through the
Depository Trust Company on the Record Date. The Fund will pay the Dealer
Manager a fee for financial advisory and marketing services in connection
with the Offer equal to 1.00% of the aggregate Subscription Price. The Fund
has agreed to indemnify the Dealer Manager against certain liabilities under
the U.S. Securities Act of 1933, as amended. See "The Offer -- Distribution
Arrangements." The total sales load shown in the table assumes that the
exercise of all Rights was solicited by Selling Group Members.
(2) Before deduction of expenses incurred by the Fund, estimated at $757,113,
including up to an aggregate of $25,000 to be paid to the Dealer Manager in
reimbursement of its expenses.
------------------
Prior to the Expiration Date, the Dealer Manager may offer Shares of Common
Stock, including Shares acquired through the purchase and exercise of Rights, at
prices it sets from time to time. Because the Dealer Manager will determine the
price, it may realize profits or losses independent of any fees referred to
under "The Offer -- Distribution Arrangements."
------------------
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus and to retain it for future reference. A Statement of
Additional Information, dated , 1997 (the "SAI"), containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission (the "Commission") and is incorporated by reference in its entirety
into this Prospectus. A copy of the SAI may be obtained without charge by
calling the Fund's Information Agent, Georgeson & Company Inc., toll free at
(800) 223-2064 or collect at (212) 509-6240. The table of contents of the SAI is
on page 49 of this Prospectus.
------------------
SMITH BARNEY INC.
The date of this Prospectus is , 1997.
<PAGE> 4
In this Prospectus, unless otherwise specified, all references to "billion"
are to one thousand million, to "trillion" are to one thousand billion, to
"Dollars," "US$" or "$" are to United States Dollars and to "Won" or "W" are to
Korean Won. On March 21, 1997, the daily weighted average exchange rate as
published by the Korea Finance Clearings Institute was Won 883.50 = $1.00. No
representation can be made as to whether the Won or Dollar amounts in this
Prospectus could have been or could be converted into Dollars or Won, as the
case may be, at such rates, at any other rates or at all. See Annex A, "The
Republic of Korea -- Foreign Exchange" for information regarding the rates of
exchange between the Won and the Dollar for the five years prior to the date of
this Prospectus. Reference should be made to "Risk Factors and Special
Considerations -- Currency Fluctuations" for a better understanding of the
effect of the fluctuation of the exchange rate between the Won and the Dollar on
the Fund and the significance, in Dollar terms, of amounts set forth in this
Prospectus in Won and of amounts in comparison based on, or computed by
reference to, such currency.
Unless otherwise indicated, Dollar equivalent information in Won for a
period is based on the average of the daily exchange rates for the days in the
period, and Dollar information for Won as of a specified date is based on the
exchange rate for that date, as contained in International Financial Statistics,
International Monetary Fund.
Certain numbers in this Prospectus have been rounded for ease of
presentation. Since most calculations have been made on unrounded figures, the
sum of the component figures in many of the tables presented may not precisely
equal the totals shown.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the United States Securities
and Exchange Commission (the "Commission"). Such reports and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the
Commission's regional offices at 7 World Trade Center, New York, New York 10048
and 14th Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a Web site (http://www.sec.gov) containing reports and
other information regarding the Fund that have been filed electronically with
the Commission. The Fund's shares of Common Stock are listed on the stock
exchanges referred to on the cover page of this Prospectus, and reports and
other information concerning the Fund can be inspected at such exchanges.
A Registration Statement on Form N-2 relating to the Shares has been filed
by the Fund with the Commission. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any exhibits and
schedules thereto. For further information with respect to the Fund and the
Shares offered hereby, reference is made to the Registration Statement of which
this Prospectus and the Statement of Additional Information (the "SAI")
incorporated herein by reference constitute a part. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
---------------------------
IN CONNECTION WITH THIS OFFERING, THE DEALER MANAGER MAY EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE RIGHTS AND THE
COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, ANY
OTHER EXCHANGES ON WHICH THE COMMON STOCK AND/OR THE RIGHTS HAVE BEEN ADMITTED
TO TRADING PRIVILEGES, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
EXPENSE INFORMATION
The following table sets forth certain fees and expenses of the Fund.
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<S> <C>
Sales Load (as a percentage of offering price)(1)(2)............................... 3.5%
Dividend Reinvestment and Cash Purchase Plan Fees.................................. (3)
</TABLE>
ANNUAL FUND OPERATING EXPENSES: Expenses paid by the Fund before it distributes
its net investment income, expressed as a percentage of the Fund's net assets
(based on estimated expenses for the fiscal year ending June 30, 1996).
<TABLE>
<S> <C>
Management Fees.................................................................... .99%
Other expenses..................................................................... .29%
-----
Total Annual Fund Operating Expenses....................................... 1.28%
=====
</TABLE>
EXAMPLE:(4)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Based on the level of total Fund operating expenses
listed above, the total expenses relating to a $1,000
investment in the Fund at the end of each period,
assuming a 5% annual return, are listed below........ $ 13 $41 $ 70 $155
</TABLE>
- ---------------
(1) The Fund has agreed to pay the Dealer Manager and each Selling Group Member
fees equal to 2.50% of the Subscription Price for each Share either issued
upon exercise of the Rights as a result of their soliciting efforts or
purchased from the Dealer Manager for sale to the Public. Certain other
broker-dealers that have executed and delivered a Soliciting Dealer
Agreement and have solicited the exercise of Rights will receive fees for
their soliciting efforts of up to .50% of the Subscription Price, subject
generally to a maximum fee based upon the number of shares of Common Stock
held by each such broker-dealer through the Depository Trust Company on the
Record Date. The Fund will pay the Dealer Manager a fee for financial
advisory and marketing services in connection with the Offer equal to 1.00%
of the aggregate Subscription Price. These fees will be borne by all of the
Fund's shareholders, including those shareholders who do not exercise their
Rights. The total sales load shown in the table assumes that the exercise of
all Rights was solicited by Selling Group Members. See "The
Offer--Distribution Arrangements."
(2) Does not include expenses of the Fund incurred in connection with the Offer,
estimated at $ .
(3) There is no charge to participants for reinvesting dividends and capital
gains distributions (the Plan Agent's fees are paid by the Fund).
Participants are charged a $0.75 service fee for each voluntary cash
investment and a pro rata share of brokerage commissions on all open market
purchases.
(4) The Example assumes reinvestment of all dividends and distributions at net
asset value, reflects all recurring and non-recurring fees including the
Sales Load and other expenses of the Fund incurred in connection with the
Offer, assumes that the percentage amounts listed under "Annual Fund
Operating Expenses" remain the same each year, and assumes that all of the
Rights are exercised.
The purpose of the foregoing table and example is to assist Rights holders
in understanding the various costs and expenses that an investor in the Fund
bears, directly or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURN. ACTUAL FUND EXPENSES AND
RETURN VARY FROM YEAR TO YEAR AND MAY BE HIGHER OR LOWER THAN THOSE SHOWN. In
addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in the Fund's Dividend
Reinvestment and Cash Purchase Plan may receive shares issued at a price or
value different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment and Cash Purchase Plan."
The figure provided under "Other Expenses" is based upon estimated amounts
for the current fiscal year. For more complete descriptions of certain of the
Fund's costs and expenses, see "Investment Advisers."
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information ("SAI") which is incorporated herein by reference.
Investors should carefully consider information set forth under the heading
"Risk Factors and Special Considerations."
THE OFFER
The Korea Fund, Inc. (the "Fund") is issuing to its shareholders of record
(the "Record Date Shareholders") as of the close of business on October 31, 1997
(the "Record Date") transferable rights (the "Rights") to subscribe for an
aggregate of shares of Common Stock (the "Shares") of the Fund. Each Record Date
Shareholder is being issued one Right for each 1.01 shares of Common Stock owned
on the Record Date, rounded to the nearest whole Right. No fractional Rights
will be issued. For purposes of determining the number of Shares a Record Date
Shareholder may acquire pursuant to the Offer (as defined below), broker-dealers
whose Shares are held of record by Cede & Co. ("Cede"), nominee for The
Depository Trust Company ("DTC"), or by any other depository or nominee will be
deemed to be the holders of the Rights that are issued to Cede or such other
depository or nominee on their behalf. The Rights entitle the Record Date
Shareholder to acquire at the Subscription Price (as hereinafter defined) one
Share for each three Rights held. Any Record Date Shareholder who is issued
fewer than three Rights may subscribe, at the Subscription Price, for one full
Share during the Subscription Period, which commences on the date of this
Prospectus and ends at 5:00 p.m. New York City time, on April 18, 1997 unless
extended by the Fund (the "Expiration Date").
The Rights are evidenced by subscription certificates ("Subscription
Certificates") which will be mailed to Record Date Shareholders (except as
discussed below under "Foreign Restrictions"). A Record Date Shareholder's right
to acquire during the Subscription Period at the Subscription Price one Share
for each three Rights held is hereinafter referred to as the "Primary
Subscription." Holders of Rights acquired during the Subscription Period
("Rights Holders") may also purchase Shares in the Primary Subscription. All
Rights may be exercised immediately upon receipt and until 5:00 p.m., New York
City time, on the Expiration Date. (Record Date Shareholders and Rights Holders
purchasing Shares in the Primary Subscription are hereinafter referred to as
"Exercising Rights Holders.")
As a result of the terms of the Offer, Record Date Shareholders who do not
fully exercise their Rights should expect that they will, upon the completion of
the Offer, own a smaller proportional interest in the Fund than would otherwise
be the case. An immediate substantial dilution of the aggregate net asset value
of the shares of Common Stock owned by Record Date Shareholders who do not fully
exercise their Rights is likely to be experienced as a result of the Offer. See
"Risk Factors and Special Considerations -- Special Considerations."
OVER-SUBSCRIPTION PRIVILEGE
Any Record Date Shareholder who fully exercises all Rights issued to him
(other than those Rights which cannot be exercised because they represent the
right to acquire less than one Share) is entitled to subscribe for Shares which
were not otherwise subscribed for by others on Primary Subscription (the "Over-
Subscription Privilege" and, together with the Primary Subscription, the
"Offer"). Shares acquired pursuant to the Over-Subscription Privilege are
subject to allotment, which is more fully discussed under "The Offer --
Over-Subscription Privilege."
SUBSCRIPTION PRICE
The Subscription Price per Share (the "Subscription Price") is $ .
4
<PAGE> 7
SOLICITING FEES
The Fund has agreed to pay Smith Barney Inc. (the "Dealer Manager") and
other broker-dealers included in the selling group to be formed and managed by
the Dealer Manager ("Selling Group Members") fees equal to 2.50% of the
Subscription Price for Shares either issued upon exercise of the Rights as a
result of their soliciting efforts or purchased from the Dealer Manager for sale
to the Public. Certain other broker-dealers that have executed and delivered a
Soliciting Dealer Agreement and have solicited the exercise of Rights will
receive fees for their soliciting efforts of up to .50% of the Subscription
Price, subject generally to a maximum fee based upon the number of shares of
Common Stock held by each such broker-dealer through DTC on the Record Date. See
"The Offer -- Distribution Arrangements."
INFORMATION AGENT
The Information Agent for the Offer is:
Georgeson & Company Inc.
Wall Street Plaza
New York, New York 10005
Toll Free: (800) 223-2064
or
Call Collect: (212) 509-6240
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
--------------------------------- -------------------------------------
<S> <C>
Record Date March 31, 1997
Subscription Period March 31, 1997 -- April 18, 1997
Expiration Date April 18, 1997 (unless extended)
Subscription Certificates and
Payment for Shares Due April 18, 1997
Notices of Guaranteed Delivery
Due April 18, 1997
Subscription Certificates and
Payment Due Pursuant to Notice
of Guaranteed Delivery April 23, 1997
Confirmation Date May 2, 1997
</TABLE>
EXERCISING RIGHTS
Rights will be evidenced by Subscription Certificates (see Appendix B) and
may be exercised by completing a Subscription Certificate and delivering it,
together with payment, either by means of a notice of guaranteed delivery or a
check, to State Street Bank and Trust Company, Boston, Massachusetts (the
"Subscription Agent"). Exercising Rights Holders will have no right to rescind a
purchase after the Subscription Agent has received payment, either by means of a
notice of guaranteed delivery or a check. See "The Offer -- Exercise of Rights"
and "The Offer -- Payment for Shares."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights are
expected to be listed for trading on the New York Stock Exchange (the "NYSE"),
and the Shares are expected to be listed for trading on the NYSE, the Pacific
Stock Exchange (the "PSE") and the Osaka Stock Exchange (the "OSE"). The Fund
has used its best efforts to ensure that an adequate trading market for the
Rights will exist, although no assurance can be given that a market for the
Rights will develop. Trading in the Rights on the NYSE may be conducted until
the close of trading on the NYSE on the last Business Day (as defined below)
prior to the Expiration Date. The Fund expects that a market for the Rights will
develop and that the value of the Rights,
5
<PAGE> 8
if any, will be reflected by the market price. Rights may be sold by individual
holders or may be submitted to the Subscription Agent for sale by or to the
Dealer Manager. Any Rights to be submitted by the Subscription Agent to the
Dealer Manager for purchase or sale must be received by the Subscription Agent
at or prior to 5:00 p.m., New York City time, on April 16, 1997, two Business
Days prior to the Expiration Date, due to normal settlement procedures. Trading
of the Rights on the NYSE will be conducted on a when-issued basis commencing on
April 1, 1997 and thereafter on a regular way basis from April 3, 1997 until and
including the last Business Day prior to the Expiration Date. If the
Subscription Agent receives Rights for sale in a timely manner, it will either
sell the Rights to the Dealer Manager or the Dealer Manager will use its best
efforts to sell the Rights on the NYSE. The Dealer Manager will also either
purchase or attempt to sell any Rights submitted to it by the Subscription Agent
that a Record Date Shareholder is unable to exercise because such Rights
represent the right to subscribe for less than one Share. Any commissions will
be paid by the selling Record Date Shareholder. Neither the Fund nor the
Subscription Agent nor the Dealer Manager will be responsible if Rights cannot
be sold and none of them has guaranteed any minimum sale price for the Rights.
For purposes of this Prospectus, a "Business Day" shall mean any day on which
trading is conducted on the NYSE. Record Date Shareholders are urged to obtain a
recent trading price for the Rights on the NYSE from their broker, bank,
financial adviser or the financial press. Exercising Rights Holders' inquiries
should be directed to the Information Agent.
RECORD DATE SHAREHOLDERS WITH NON-U.S. ADDRESSES
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (for these purposes the
United States includes its territories and possessions and the District of
Columbia) (such shareholders being referred to hereinafter as "Non-U.S. Record
Date Shareholders"). Non-U.S. Record Date Shareholders will, however, receive
written notice of the Offer. The Rights to which such Subscription Certificates
relate will be held by the Subscription Agent for such Non-U.S. Record Date
Shareholders' accounts until instructions are received to exercise, sell or
transfer the Rights. If no instructions have been received by 12:00 noon, New
York City time, on April 16, 1997, two Business Days prior to the Expiration
Date, the Rights of those Non-U.S. Record Date Shareholders will be transferred
by the Subscription Agent to the Dealer Manager, who will either purchase the
Rights or use its best efforts to sell the Rights on the NYSE. The net proceeds
from the sale of those Rights by or to the Dealer Manager will be remitted to
the Non-U.S. Record Date Shareholders.
USE OF PROCEEDS
The net proceeds of the Offer will be invested in accordance with the
policies set forth under "Investment Objective and Policies." The Board of
Directors of the Fund has determined that it would be in the best interests of
the Fund and its shareholders to increase the assets of the Fund available for
investment to permit it to take advantage of investment opportunities that the
Fund anticipates in Korea, including rights offerings by Korean issuers,
securities that the Fund believes are attractively valued and initial public
offerings by Korean issuers, without having to sell existing portfolio holdings
which would, in general, cause gains realized by the Fund in appreciated
positions to become taxable to shareholders. In addition, the Offer affords
existing shareholders the opportunity to purchase additional shares of the
Fund's Common Stock at a price that may be below market value and/or net asset
value without incurring the transaction costs associated with open-market
purchases. See "The Offer -- Purpose of the Offer" and "Foreign Investment and
Exchange Controls in Korea -- The Fund's License."
INFORMATION REGARDING THE FUND
The Fund is a non-diversified, closed-end management investment company
designed to facilitate international diversification for U.S. and other
investors who desire to participate in the Korean economy. The investment
objective of the Fund is to seek long-term capital appreciation through
investment in securities, primarily equity securities, of Korean companies. It
is the policy of the Fund normally to invest at least 80% of its net assets in
securities listed on the Korea Stock Exchange (the "Stock Exchange"). The Fund's
6
<PAGE> 9
investment objective is subject to certain investment policies and restrictions
described under "Investment Objective and Policies" in this Prospectus and
"Investment Restrictions" in the SAI.
INFORMATION REGARDING THE MANAGER AND THE KOREAN ADVISER
Scudder, Stevens & Clark, Inc. (the "Manager"), a leading global investment
manager, acts as investment adviser to and manager of the Fund. As of December
31, 1996, the Manager and its affiliates had over $115 billion under their
supervision, of which more than $22 billion was invested in non-U.S. securities.
Daewoo Capital Management Co., Ltd., an investment advisory subsidiary of Daewoo
Securities Co., Ltd. ("Daewoo Securities"), acts as Korean adviser to the
Manager (the "Korean Adviser"). Daewoo Securities is the largest Korean
securities firm, based on paid-in equity and total revenues in 1996. See
"Investment Advisers."
Under the Investment Advisory and Management Agreement between the Manager
and the Fund, the Manager receives 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, 1.00% of such net 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. A portion of these fees are paid by
the Manager to the Korean Adviser. See "Investment Advisers."
INFORMATION REGARDING THE CUSTODIAN
Brown Brothers Harriman & Co. acts as custodian for the Fund. The Seoul
branch of Citibank, N.A. acts as Subcustodian. See "Custodian."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Dilution. An immediate substantial dilution of the aggregate net asset
value of the shares of Common Stock owned by Record Date Shareholders who do not
fully exercise their Rights is likely to be experienced as a result of the Offer
because the Subscription Price is likely to be less than the Fund's then-net
asset value per share, and the number of shares outstanding after the Offer is
likely to increase in a greater percentage than the increase in the size of the
Fund's assets. In addition, as a result of the terms of the Offer, Record Date
Shareholders who do not fully exercise their Rights should expect that they
will, at the completion of the Offer, own a smaller proportional interest in the
Fund than would otherwise be the case. Although it is not possible to state
precisely the amount of such a decrease in value, because it is not known at
this time what the net asset value per share will be at the Expiration Date,
such dilution could be substantial. For example, assuming that all Rights are
exercised and that the Subscription Price of $ is % below the Fund's net
asset value of $ per share on , 1997, the Fund's net asset value per
share would be reduced by approximately $ per share.
Investments in Korea. Investing in securities of Korean companies and of
the government (the "Government") of the Republic of Korea ("Korea" or the
"Republic") involves certain considerations not typically associated with
investing in securities of United States companies or the United States
government, including (1) political and economic risks, including the potential
for military conflict with North Korea, (2) potential price volatility and
lesser liquidity of the Korean securities markets, due in part to their
relatively small size and to competition from alternative investment
opportunities in Korea, (3) governmental involvement in and influence on the
economy and the private sector, (4) restrictions imposed by the Government on
foreign investment, which may limit investment opportunities available to the
Fund, (5) fluctuations in the rate of exchange between the Won and the Dollar,
(6) restrictions on, and costs associated with, currency conversions and the
repatriation of the Fund's principal, income and gains and (7) Korean taxes.
Korean accounting, auditing and financial reporting standards are not
equivalent to United States standards. Therefore, certain material disclosures
(including disclosures as to off-balance sheet financing) may not be made and
less information may be available with respect to investments in Korea than in
the United States. Supervision by governmental agencies and self-regulatory
organizations with respect to the
7
<PAGE> 10
securities industry in Korea differs from, and in some respects is less than,
such supervision in the United States. The Fund's transaction costs are higher
than the transaction costs for the typical investment company investing in U.S.
securities. See "Risk Factors and Special Considerations."
The Government exercises substantial influence over many aspects of the
private sector. The Government from time to time has informally influenced the
payment of dividends and the prices of certain products, encouraged companies to
invest or to concentrate in particular industries, induced mergers between
stronger and weaker companies in industries suffering from excess capacity,
controlled access to credit on favorable terms, encouraged institutional
investment in Korean equity securities, induced private companies to publicly
offer their securities and induced banks to make loans to certain companies.
Such actions by the Government in the future could have a significant effect on
the market prices and dividend yields of Korean equity securities.
Relations between the Republic and North Korea have been tense over much of
the Republic's history. Large armies remain deployed on both sides of the
demilitarized zone. The United States still maintains a substantial military
force in Korea to reinforce its commitment to the Republic's security.
Negotiations to ease tensions and resolve the political division of the Korean
peninsula have been carried on from time to time; there also have been efforts
from time to time to increase economic, cultural and humanitarian contacts
between North Korea and Korea. Tensions rose with evidence that North Korea was
reprocessing plutonium, apparently as part of a weapons program, and remained
unwilling to meet with the Republic in seeking a reduction of military
confrontation, as mutually agreed in 1992. After a period of crisis, the U.S.,
with the Republic's concurrence, concluded "framework agreement" with North
Korea in October 1994 under which the Republic, Japan and the U.S. are to supply
North Korea with two light-water nuclear power plants and to normalize relations
with Pyongyang in return for North Korea's agreement to dismantle its plutonium
reprocessing program and to adhere to the Nuclear Non-Proliferation Treaty.
However, North-South negotiations to ease military confrontation, also called
for in the "framework agreement," have remained blocked by North Korea's
persistence in trying to deal directly with the U.S. rather than South Korea on
this critical question. Severe food shortages, a declining gross domestic
product and a difficult leadership transition after the death of Kim II Sung
have contributed to difficult relations with North Korea. In mid-1995, the
Republic proposed to North Korea to deliver free rice to improve the climate for
a dialogue. Tensions increased, however, following the discovery in September
1996 of a North Korean submarine off the coast of Korea and following the
defection in February 1997 of Hwang Jang Yop, a senior North Korean government
official who has sought asylum in the Republic.
Non-Diversified Status. The Fund is classified as a "non-diversified"
investment company under the U.S. Investment Company Act of 1940, as amended
(the "1940 Act"), which means that the Fund is not limited by the 1940 Act as to
the percentage of its assets that may be invested in the securities of a single
issuer. As a non-diversified investment company, the Fund may invest in a
smaller number of issuers, and, as a result, may be subject to greater risk with
respect to individual portfolio securities.
Discount from Net Asset Value. While the Fund's shares have generally
traded at a premium in relation to net asset value, continued development of
alternatives to the Fund as a vehicle for investment in Korean securities by
United States investors may reduce or eliminate (or change to a discount) this
premium. See "Market and Net Asset Value Information" and "Foreign Investment
and Exchange Controls in Korea -- Further Opening of the Korean Securities
Markets" in this Prospectus and "Net Asset Value" in the SAI.
Charter Provisions. Certain anti-takeover provisions will make a change in
the Fund's business or management more difficult without the approval of the
Fund's Board of Directors and may have the effect of depriving shareholders of
an opportunity to sell their shares at a premium above the prevailing market
price. See "Common Stock -- Special Voting Provisions."
8
<PAGE> 11
FINANCIAL HIGHLIGHTS
The following information includes selected data for a share of the Fund's
Common Stock outstanding throughout each period, based on the monthly average of
shares outstanding during the period, and other performance information derived
from the Fund's financial statements and market price data and has been audited
by Coopers & Lybrand L.L.P., independent accountants. This information should be
read in conjunction with the Financial Statements and Notes thereto which appear
in the SAI.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FOR THE FISCAL YEARS ENDED JUNE 30,
DECEMBER 31, ---------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992 1991 1990
------------ ------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, Beginning of
Period...................... $ 18.52 $19.89 $18.66 $11.40 $10.75 $ 10.27 $ 14.45 $ 16.84
------ ------ ------ ------ ------- ------- ------- ------
Income From Investment
Operations(a):
Net Investment Income
(Loss).................... (.04) .02 (.02) (.03) .02 .08 .09 .04
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions.............. (4.34) (.97) 2.42(b) 7.13 .86 .78 (2.13) (1.99)
------ ------ ------ ------ ------- ------- ------- ------
Total From Investment
Operations................ (4.38) (0.95) 2.40 7.10 .88 .86 (2.04) (1.95)
------ ------ ------ ------ ------- ------- ------- ------
Less Distributions:
From Net Investment
Income.................... -- (.02) -- (.01) (.04) (.06) -- (.08)
In Excess of Net Investment
Income...................... -- (.04) -- -- -- -- -- --
From Net Realized Gains on
Investment Transactions..... (.60) (.36) (.15) -- (.20) (.34) (2.20) (1.88)
------ ------ ------ ------ ------- ------- ------- ------
Total Distributions......... (.60) (.42) (.15) (.01) (.24) (.40) (2.20) (1.96)
------ ------ ------ ------ ------- ------- ------- ------
Antidilution (Dilution)
Resulting from the Rights
Offering (1995), Fourth
Tranche (1994) and Third
Tranche (1990); and
Reinvestment of
Distributions for Shares at
Market Value................ .01 -- (1.02) .22 .01 .02 .06 1.55
------ ------ ------ ------ ------- ------- ------- ------
Underwriting Expenditures
and Offering Costs........ -- -- -- (.05) -- -- -- (.03)
------ ------ ------ ------ ------- ------- ------- ------
Net Asset Value, End of
Period...................... $ 13.55 $18.52 $19.89 $18.66 $11.40 $ 10.75 $ 10.27 $ 14.45
====== ====== ====== ====== ======= ======= ======= ======
Market Value, End of Period... $ 14.88 $21.13 $19.63 $22.00 $15.00 $ 11.38 $ 14.13 $ 22.13
====== ====== ====== ====== ======= ======= ======= ======
TOTAL RETURN
Per Share Market Value (%).... (24.27)** 9.73 (5.43) 46.74 34.54 (17.01) (23.57) (26.23)
Per Share Net Asset Value
(%)(c)...................... (27.17)** (5.09) 13.00 63.77 8.20 7.87 (14.91) (9.52)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
($
millions)................... 509 689 735 550 258 241 228 303
Ratio of Operating Expenses to
Average Net Assets (%)...... 1.32* 1.28 1.32 1.37 1.52 1.52 1.47 1.44
Ratio of Net Investment Income
(Loss) to Average Net Assets
(%)(d)...................... (.23)** .10 (.10) (.18) .15 .70 .83 .21
Portfolio Turnover Rate (%)... 7.1* 32.6 10.5 14.3 14.3 18.2 19.2 17.9
Average Commission Rate
Paid(e)..................... $ .0853 $.1254 $ -- $ -- $ -- $ -- $ -- $ --
<CAPTION>
1989 1988(1) 1987(1)
------ ------ -------
<S> <C><C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, Beginning of
Period...................... $13.97 $11.13 $ 7.46
------ ------
Income From Investment
Operations(a):
Net Investment Income
(Loss).................... .04 .11 .29
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions.............. 4.65 3.64 3.42
------ ------
Total From Investment
Operations................ 4.69 3.75 3.71
------ ------
Less Distributions:
From Net Investment
Income.................... (.11) (.29) (.01)
In Excess of Net Investment
Income...................... -- -- --
From Net Realized Gains on
Investment Transactions..... (1.74) (.68) (.03)
------ ------
Total Distributions......... (1.85) (.97) (.04)
------ ------
Antidilution (Dilution)
Resulting from the Rights
Offering (1995), Fourth
Tranche (1994) and Third
Tranche (1990); and
Reinvestment of
Distributions for Shares at
Market Value................ .03 .06 --
------ ------
Underwriting Expenditures
and Offering Costs........ -- -- --
------ ------
Net Asset Value, End of
Period...................... $16.84 $13.97 $11.13
====== ======
Market Value, End of Period... $31.63 $23.58 $23.38
====== ======
TOTAL RETURN
Per Share Market Value (%).... 48.15 5.46 110.89
Per Share Net Asset Value
(%)(c)...................... 33.21 31.17 49.77
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
($
millions)................... 323 265 210
Ratio of Operating Expenses to
Average Net Assets (%)...... 1.54 1.53 1.47
Ratio of Net Investment Income
(Loss) to Average Net Assets
(%)(d)...................... .24 .92 3.25
Portfolio Turnover Rate (%)... 15.1 19.7 4.4
Average Commission Rate
Paid(e)..................... $ -- $ -- $ --
</TABLE>
- ---------------
* Annualized.
** Not annualized
(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) The ratio for the six months ended December 31, 1996 has not been annualized
since the Fund believes it would not be appropriate because the Fund's
dividend income is not earned ratably throughout the fiscal year.
(e) Average commission rate paid per share of common and preferred stocks in
calculated for fiscal years ending on or after June 30, 1996.
(f) All per share and share outstanding amounts for the fiscal years ended June
30, 1988 and June 30, 1987 have been restated to reflect the 200% stock
dividend paid on October 11, 1988.
9
<PAGE> 12
MARKET AND NET ASSET VALUE INFORMATION
The Fund's outstanding Common Stock is, and the Shares will be, listed on
the NYSE, the PSE and the OSE. The Fund's shares commenced trading on the NYSE
on August 22, 1984, the PSE on April 22, 1987 and the OSE on December 20, 1991.
The following table shows for the periods indicated (1) the high and low sales
prices for transactions in the Fund's shares on the NYSE Composite Tape, (2) the
net asset value as determined on the date closest to each quotation and (3) the
discount or premium to net asset value (expressed as a percentage) represented
by the quotation.
<TABLE>
<CAPTION>
HIGH SALES NET ASSET PREMIUM LOW SALES NET ASSET PREMIUM
PERIOD PRICE VALUE (DISCOUNT) PRICE VALUE (DISCOUNT)
- -------------------------- ---------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Oct. 1 -- Dec. 31, 1994... $ 26.750 $ 21.91 22.1% $19.875 $ 20.69 (3.9%)
Jan. 1 -- March 31,
1995.................... $ 22.625 $ 20.53 10.2% $19.125 $ 19.25 (0.6%)
April 1 -- June 30,
1995.................... $ 23.000 $ 20.25 13.6% $18.625 $ 19.94 (6.6%)
July 1 -- Sep. 30, 1995... $ 23.000 $ 22.63 1.6% $19.625 $ 19.77 (0.7%)
Oct. 1 -- Dec. 31, 1995... $ 23.500 $ 22.46 4.6% $20.000 $ 20.26 (1.3%)
Jan. 1 -- May 30, 1996.... $ 23.500 $ 20.56 14.3% $20.875 $ 19.84 5.2%
April 1 -- June 30,
1996.................... $ 24.000 $ 22.14 8.4% $21.000 $ 18.50 13.5%
July 1 -- Sep. 30, 1996... $ 21.625 $ 18.85 14.7% $17.875 $ 16.23 10.1%
Oct. 1 -- Dec. 31, 1996... $ 19.125 $ 17.16 11.5% $14.500 $ 13.32 8.9%
</TABLE>
Although historically shares of other closed-end investment companies have
frequently traded at a discount from net asset value, the Fund's shares have
generally traded at a premium to its net asset value. The continued development
of alternatives to the Fund as a vehicle for investment in Korean securities by
United States investors, as well as the continued opening of the Korean
securities markets to direct investment by foreigners, have reduced the premium
over time and may reduce future premiums or contribute to a discount. On August
22, 1984, the first day of trading in the Fund's shares, the shares closed at a
premium over net asset value per share of 16.5%. The Fund's premium reached a
high of 159.0% on August 10, 1987. The Fund's shares traded at a discount to net
asset value (of 0.87%) for the first time on March 26, 1992. On March 21, 1997,
the last price of the Fund's shares on the NYSE Composite Tape was $14.125,
which represented a premium of 11.9% above the net asset value per share of
$12.62.
THE FUND
The Fund, incorporated in Maryland in May 1984, is a non-diversified,
closed-end management investment company registered under the 1940 Act. The Fund
commenced operations in August 1984, and has had five previous public offerings
totaling approximately $375 million in aggregate price to the public.
As of March 21, 1997, the Fund's aggregate net assets were $474,223,913.
The Fund's investment objective is to seek long-term capital appreciation
through investment in securities, primarily equity securities, of Korean
companies. The Fund's policy is to invest at least 80% of its net assets in
securities listed on the Stock Exchange. As of March 21, 1997, 94.34% of the
Fund's net assets were invested in securities listed on the Stock Exchange.
The Fund is designed to facilitate international diversification by United
States and other investors who desire to participate in the Korean economy.
Because it invests primarily in the Korean securities markets, and due to the
risks inherent in international investments generally, the Fund should be
considered only as a vehicle for international diversification and not as a
complete investment program. The Fund's Manager is Scudder, Stevens & Clark,
Inc., a United States investment counsel firm. The Manager is a leading global
investment manager that has been active in international investment for over 40
years. Daewoo Capital Management Co., Ltd., a subsidiary of Daewoo Securities,
acts as Korean Adviser to the Manager.
11
<PAGE> 13
THE OFFER
TERMS OF THE OFFER
The Fund is issuing Rights to subscribe for the Shares to Record Date
Shareholders. Each Record Date Shareholder is being issued one transferable
Right for each 1.01 shares of Common Stock owned on the Record Date, rounded to
the nearest whole Right. No fractional Rights will be issued. For purposes of
determining the maximum number of Shares an Exercising Rights Holder may acquire
pursuant to the Offer, broker-dealers whose Shares are held of record by Cede or
by any other depository or nominee will be deemed to be the holders of the
Rights that are issued to Cede or such other depository or nominee on their
behalf. The Rights entitle the holders thereof to acquire at the Subscription
Price one Share for each three Rights held. Any Record Date Shareholder who is
issued fewer than three Rights may subscribe, at the Subscription Price, for one
full Share. The Rights are evidenced by Subscription Certificates which will be
mailed to Record Date Shareholders, except that Subscription Certificates will
not be mailed to Foreign Record Date Shareholders. Foreign Record Date
Shareholders will, however, receive written notice of the Offer. The Rights to
which such Subscription Certificates relate will be held by the Subscription
Agent for such Foreign Record Date Shareholders' accounts until instructions are
received to exercise, sell or transfer the Rights. If no instructions have been
received by 12:00 noon, New York City time, on April 18, 1997, two Business Days
prior to the Expiration Date, the Rights of those Foreign Record Date
Shareholders will be transferred by the Subscription Agent to the Dealer
Manager, who will either purchase the Rights or use its best efforts to sell the
Rights on the NYSE. The net proceeds from the sale of those Rights by or to the
Dealer Manager will be remitted to the Foreign Record Date Shareholders. See
"Sale of Rights -- Sales through Subscription Agent and Dealer Manager."
Completed Subscription Certificates may be delivered to State Street Bank
and Trust Company (the "Subscription Agent") at any time during the Subscription
Period, which commences on the date of this Prospectus and ends at 5:00 p.m.,
New York City time, on April 18, 1997, the Expiration Date (unless extended by
the Fund). Parties that purchase Rights prior to the Expiration Date ("Rights
Holders") may also purchase Shares in the Primary Subscription. All Rights may
be exercised immediately upon receipt and until 5:00 p.m. on the Expiration
Date.
Any Record Date Shareholder who fully exercises all Rights initially issued
to him (other than those Rights that cannot be exercised because they represent
the right to acquire less than one Share) is entitled to subscribe for Shares
that were not otherwise subscribed for by Exercising Rights Holders on the
Primary Subscription. Record Date Shareholders such as broker-dealers, banks,
and other professional intermediaries, who hold shares on behalf of clients, may
participate in the Over-Subscription Privilege for a client if the client fully
exercises all Rights attributable to him. Shares acquired pursuant to the
Over-Subscription Privilege may be subject to allotment, which is more fully
discussed below under "Over-Subscription Privilege."
Rights will be evidenced by Subscription Certificates (see Appendix B) and
may be exercised by completing a Subscription Certificate and delivering it,
together with payment, either by means of a notice of guaranteed delivery or a
check, to the Subscription Agent. The method by which Rights may be exercised
and Shares paid for is set forth below in "Exercise of Rights" and "Payment for
Shares." An Exercising Rights Holder will have no right to rescind a purchase
after the Subscription Agent has received payment, either by means of a notice
of guaranteed delivery or a check. See "Payment for Shares" below. Shares issued
pursuant to an exercise of Rights will be listed on the NYSE, PSE and OSE.
The Rights are transferable until the Expiration Date and will be admitted
for trading on the NYSE. Assuming a market exists for the Rights, the Rights may
be purchased and sold through usual brokerage channels, or delivered at or
before 5:00 p.m., New York City time, on April 16, 1997, to the Subscription
Agent for sale through or to the Dealer Manager. The Fund has used its best
efforts to ensure that an adequate trading market for the Rights will exist,
although no assurance can be given that a market for the Rights will develop.
Trading in the Rights on the NYSE may be conducted until and including the close
of trading on the last NYSE trading day prior to the Expiration Date. The method
by which Rights may be transferred is set forth below in "Sale of Rights." The
underlying Shares will be admitted for trading on the NYSE, PSE and
11
<PAGE> 14
OSE. Since fractional Shares will not be issued, Record Date Shareholders who
receive fewer than three Rights will be entitled to purchase one Share. Record
Date Shareholders who, after exercising their Rights, are left with fewer than
three Rights, will be unable to exercise such Rights and will not be entitled to
receive any cash, from the Fund, in lieu of such remaining Rights. However, the
Subscription Agent will automatically request the Dealer Manager either to
purchase or attempt to sell the number of Rights which a Record Date Shareholder
is unable to exercise for such reason after return of a completed and fully
exercised Subscription Certificate to the Subscription Agent at or before 5:00
p.m., New York City time, on April 16, 1997, and the Subscription Agent will
remit the proceeds, net of commissions, to the Record Date Shareholder.
The distribution to Record Date Shareholders of transferable Rights which
themselves may have intrinsic value will also afford non-participating Record
Date Shareholders the potential of receiving a cash payment upon sale of such
Rights, which may be viewed as compensation for the possible dilution of their
interest in the Fund.
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that the Offer is in the
best interests of the Fund and its shareholders because it represents an
opportunity to increase the assets of the Fund available for investment, thereby
enabling the Fund to take advantage more fully of existing and future investment
opportunities in Korea. The Fund anticipates that a number of Korean companies
in which the Fund currently owns shares will conduct rights offerings in which
the Fund may be able to participate. In addition, on October 1, 1996, the Korean
government increased the limit on share ownership by foreign investors in most
Korean corporations to 20%; this limit is scheduled to be increased by an
additional 3% in each of 1997, 1998 and 1999. The Fund believes that the
proceeds of the Offer will benefit shareholders by permitting it to take
advantage of these and other investment opportunities that the Fund anticipates
in Korea without having to sell existing portfolio holdings, which would, in
general, cause gains recognized by the Fund on appreciated positions to become
taxable to shareholders. In addition, the Offer affords existing shareholders
the opportunity to purchase additional shares of the Fund's Common Stock at a
price that may be below market value and/or net asset value without incurring
the transaction costs associated with open-market purchases. The proceeds of the
Offer will also enable the Fund to participate in initial public offerings by
Korean issuers. See "Foreign Investment and Exchange Controls in Korea -- The
Fund's License."
In deciding to approve the Offer, the Fund's Board of Directors considered
a number of factors in addition to the foregoing, including the Fund's belief
that current valuation levels of certain Korean equity securities have created
attractive investment opportunities; the possibility that the Offer could result
in a modest decrease in the Fund's expense ratio as a result of certain
economies of scale; and the fact that issuing transferable Rights could broaden
the Fund's shareholder base, thus improving liquidity. There can be no
assurance, however, that these benefits will be realized. The Board of Directors
also considered the expenses of the Offer, the likely dilutive effect on
non-exercising shareholders, the size of the Offer in relation to the number of
shares outstanding and the likelihood that a market for the Rights will develop.
The Manager and the Korean Adviser will benefit from the Offer because
their fees are based on the average daily net assets of the Fund. It is not
possible to state precisely the amount of additional compensation the Manager
and the Korean Adviser will receive as a result of the Offer because it is not
known how many Shares will be subscribed for and because the proceeds of the
Offer will be invested in additional portfolio securities which will fluctuate
in value. However, in the event that all the Rights are exercised in full and
net proceeds of the Offer are $ , the Manager and the Korean Adviser
would receive additional annual advisory fees (net, in the case of the Manager,
of the Korean Adviser's fee, which is paid by the Manager) of $ and
$ , respectively, based on the amount of such proceeds. Three of the
Fund's nine Directors who voted to authorize the Offer are "interested persons"
of the Fund as that term is defined in the 1940 Act. These three Directors could
benefit indirectly from the Offer because of their affiliations with the Manager
or the Korean Adviser. See "Investment Advisers" in this Prospectus and
"Directors and Officers" in the SAI.
12
<PAGE> 15
The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for by Exercising Rights Holders will be offered, by
means of the Over-Subscription Privilege, to the Record Date Shareholders who
have exercised all exercisable Rights issued to them and who wish to acquire
more than the number of Shares for which the Rights issued to them are
exercisable. Record Date Shareholders such as brokerdealers, banks, and other
professional intermediaries, who hold shares on behalf of clients, may
participate in the Over-Subscription Privilege for a client if the client fully
exercises all Rights attributable to him. Record Date Shareholders should
indicate on their Subscription Certificates how many Shares they are willing to
acquire pursuant to the Over-Subscription Privilege. If sufficient Shares
remain, all over-subscriptions will be honored in full.
If subscriptions for Shares pursuant to the Over-Subscription Privilege
exceed the Shares available, the available Shares will be allocated among those
who over-subscribe based on the number of Rights originally issued to them by
the Fund. The percentage of remaining Shares each over-subscribing Record Date
Shareholder may acquire may be rounded up or down to result in delivery of whole
Shares. The allocation process may involve a series of allocations in order to
assure that the total number of Shares available for over-subscription is
distributed on a pro rata basis (except to the extent that individual Record
Date Shareholders request fewer shares pursuant to the Over-Subscription
Privilege than would otherwise be their pro rata allocation.)
The Fund will not offer or sell any Shares that are not subscribed for
pursuant to the Primary Subscription or the Over-Subscription Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the Rights
will be $ . The Fund does not have the right to withdraw the Offer
after the Rights have been distributed.
The Fund announced the Offer after the close of trading on the NYSE on
February 28, 1997. The net asset value per share of Common Stock at the close of
business on February 28, 1997 and on , 1997 was $13.87 and $ ,
respectively, and the last reported sale price of a share of the Fund's Common
Stock on the NYSE Composite Tape on those dates was $15.25 and $ ,
respectively. The Subscription Price of $ is approximately a %
discount to the Fund's net asset value per share on , 1997. Information
about the Fund's net asset value may be obtained by calling the Information
Agent at (800) 223-2064 (toll free) or (212) 509-6240 (collect).
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on April 18, 1997,
the Expiration Date (unless extended by the Fund). Rights will expire on the
Expiration Date and thereafter may not be exercised.
SUBSCRIPTION AGENT
The Subscription Agent, State Street Bank and Trust Company, will receive
for its administrative, processing, invoicing and other services as Subscription
Agent a fee estimated to be $74,000, and reimbursement for all out-of-pocket
expenses related to the Offer. The Subscription Agent is also the Fund's
dividend paying agent, transfer agent and registrar with respect to the Shares,
and Plan Agent under the Fund's Dividend Reinvestment and Cash Purchase Plan.
Questions regarding the Subscription Certificates should be directed to State
Street Bank and Trust Company, Corporate Reorganization Department, P.O. Box
9061, Boston, Massachusetts 02205-8606 (telephone (800) 426-5523). Shareholders
may also consult their brokers
13
<PAGE> 16
or nominees. Signed Subscription Certificates (see Appendix B) should be sent to
State Street Bank and Trust Company by one of the methods described below:
<TABLE>
<S> <C> <C>
(1) BY MAIL: Corporate Reorganization Department
P.O. Box 9061
Boston, MA 02205-8686
(2) BY HAND: Bank of Boston
c/o Boston EquiServe
Corporate Reorganization
55 Broadway -- 3rd Floor
New York, NY 10006
(3) BY OVERNIGHT COURIER: State Street Bank and Trust
Corporate Reorganization
c/o Boston EquiServe
70 Campunelli Drive
Braintree, MA 02184
(4) BY FACSIMILE (TELECOPIER): (617) 794-6333, with the original
Subscription Certificate to be sent by mail,
hand or overnight courier. Confirm facsimile
by telephone to
(617) 794-6388.
</TABLE>
DELIVERY BY METHODS OTHER THAN THOSE STATED ABOVE WILL NOT CONSTITUTE GOOD
DELIVERY.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
Georgeson & Company Inc.
Wall Street Plaza
New York, New York 10005
Toll Free: (800) 223-2064
or
Call Collect: (212) 509-6240
The Information Agent will receive a fee estimated to be $58,000, and
reimbursement for all out-of-pocket expenses related to the Offer.
SALES OF RIGHTS
Sales through Subscription Agent and Dealer Manager. Record Date
Shareholders who do not wish to exercise any or all of their Rights may instruct
the Subscription Agent to sell any unexercised Rights through or to the Dealer
Manager. Subscription Certificates representing the Rights to be sold by or to
the Dealer Manager must be received by the Subscription Agent prior to 5:00
p.m., New York City time, on April 16, 1997. Upon the timely receipt by the
Subscription Agent of appropriate instruction to sell Rights, the Subscription
Agent will request the Dealer Manager either to purchase the Rights or use its
best efforts to sell the rights and the Subscription Agent will remit the
proceeds, net of commissions, to the Record Date Shareholders. Rights may be
sold through or to the Dealer Manager on the NYSE or otherwise. If the Rights
can be sold, sales of such Rights will be deemed to have been effected at the
weighted-average price received by the Dealer Manager on the day such Rights are
sold. The sale price of any Rights sold to the Dealer
14
<PAGE> 17
Manager will be based on the then current market price for the Rights, less
amounts comparable to the usual and customary brokerage fees. The selling Record
Date Shareholder will pay all brokerage commissions incurred by the Dealer
Manager. The Dealer Manager will also either purchase or attempt to sell all
Rights that remain unclaimed as a result of Subscription Certificates being
returned by the postal authorities to the Subscription Agent as undeliverable as
of the fourth Business Day prior to the Expiration Date. Such sales will be made
net of commissions on behalf of the non-claiming Record Date Shareholders. The
Subscription Agent will hold the proceeds from those purchases or sales for the
benefit of such non-claiming Record Date Shareholder until such proceeds are
either claimed or escheat. There can be no assurance that the Dealer Manager
will purchase or be able to complete the sale of any such Rights and neither the
Fund nor the Subscription Agent nor the Dealer Manager has guaranteed any
minimum sales price for the Rights.
Other Transfers. The Rights evidenced by a Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the instructions accompanying the Subscription Certificate. A
portion of the Rights evidenced by a single Subscription Certificate (but not
fractional Rights) may be transferred by delivering to the Subscription Agent a
Subscription Certificate properly endorsed for transfer, with instructions to
register such portion of the Rights evidenced thereby in the name of the
transferee and to issue a new Subscription Certificate to the transferee
evidencing such transferred Rights. In such event, a new Subscription
Certificate evidencing the balance of the Rights will be issued to the Record
Date Shareholder or, if the Record Date Shareholder so instructs, to an
additional transferee.
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five Business Days prior to the Expiration Date for
(i) the transfer instructions to be received and processed by the Subscription
Agent; (ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to retained Rights, if any; and (iii) the Rights
evidenced by such new Subscription Certificate to be exercised or sold by the
recipients thereof. Neither the Fund, the Subscription Agent nor the Dealer
Manager shall have any liability to a transferee or transferor of Rights if
Subscription Certificates are not received in time for exercise or sale prior to
the Expiration Date.
Except for the fees charged by the Subscription Agent and Dealer Manager
(which will be paid by the Fund), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection with
the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of such commissions, fees or expenses will be
paid by the Fund, the Subscription Agent or the Dealer Manager.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription (but not the Over-Subscription
Privilege) may be effected through, the facilities of DTC (Rights exercised
through DTC are referred to as "DTC Exercised Rights"). The holder of a DTC
Exercised Right who was a Record Date Shareholder may exercise the
Over-Subscription Privilege in respect of such DTC Exercised Right by properly
executing and delivering to the Subscription Agent, at or prior to 5:00 p.m.,
New York City time, on the Expiration Date, a DTC Participant Over-Subscription
Form (see Appendix D), together with payment of the Subscription Price for the
number of Shares for which the Over-Subscription Privilege is to be exercised.
Copies of the DTC Participant Over-Subscription Form may be obtained from the
Subscription Agent.
EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the reverse side of the
Subscription Certificate which accompanies this Prospectus and mailing it in the
envelope provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment for the Shares as
described below under "Payment of Shares." Completed Subscription Certificates
must be received by the Subscription Agent prior to 5:00 p.m., New York City
time, on the Expiration Date (unless payment is effected by means of a notice of
guaranteed delivery as described below under "Payment of Shares") at the
15
<PAGE> 18
offices of the Subscription Agent at the address set forth above. Rights may
also be exercised through an Exercising Rights Holder's broker, who may charge a
fee in connection with such exercise.
Nominees who hold shares of Common Stock for the account of others, such as
brokers, trustees or depositories for securities, should notify the respective
beneficial owners of such shares of Common Stock as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the nominee should
complete the Subscription Certificate and submit it to the Subscription Agent
with the proper payment. In addition, beneficial owners of Common Stock or
Rights held through such a nominee should contact the nominee and request the
nominee to effect transactions in accordance with the beneficial owner's
instructions.
A Record Date Shareholder who is issued fewer than three Rights may
subscribe, at the Subscription Price, for one Share. Fractional Shares will not
be issued, and Record Date Shareholders who, upon exercising their Rights, are
left with fewer than three Rights will not be able to exercise such remaining
Rights. However, the Dealer Manager will automatically either purchase or
attempt to sell the number of Rights which a Record Date Shareholder is unable
to exercise for this reason after the return of a completed and signed
Subscription Certificate received by the Subscription Agent at or before 5:00
p.m., New York City time, April 16, 1997 and the Subscription Agent will remit
the proceeds, net of commissions, to such Record Date Shareholder.
EXERCISE OF THE OVER-SUBSCRIPTION PRIVILEGE
Record Date Shareholders who fully exercise all Rights held by them on the
Expiration Date may participate in the Over-Subscription Privilege by indicating
on their Subscription Certificate the number of Shares they are willing to
acquire pursuant thereto. There is no limit on the number of Shares for which
Record Date Shareholders may seek to subscribe pursuant to the Over-Subscription
Privilege. If sufficient Shares remain after the Primary Subscription, all
over-subscriptions will be honored in full; otherwise, the number of Shares
issued to each Record Date Shareholder participating in the Over-Subscription
Privilege will be allocated as described above under "Over-Subscription
Privilege."
Banks, brokers and other nominee holders of Rights will be required to
certify to the Fund, before any OverSubscription Privilege may be exercised as
to any particular beneficial owner, as to (i) the aggregate number of Rights
exercised pursuant to the Primary Subscription, (ii) the number of Shares
subscribed for pursuant to the OverSubscription Privilege by such beneficial
owner, and (iii) that such beneficial owner's Primary Subscription was exercised
in full.
PAYMENT FOR SHARES
Exercising Rights Holders who acquire Shares in the Primary Subscription
and Record Date Shareholders who acquire Shares pursuant to the
Over-Subscription Privilege may choose between the following methods of payment:
(1) An Exercising Rights Holder may send the Subscription Certificate
together with payment for the Shares acquired in the Primary Subscription
and any additional Shares subscribed for pursuant to the Over-Subscription
Privilege (for Record Date Shareholders) to the Subscription Agent.
Subscriptions will be accepted when payment, together with the executed
Subscription Certificate, is received by the Subscription Agent; such
payment and Subscription Certificates are to be received by the
Subscription Agent no later than 5:00 p.m., New York City time, on the
Expiration Date. The Subscription Agent will deposit all checks received by
it for the purchase of Shares into a segregated interest-bearing account of
the Fund (the interest from which will belong to the Fund) pending
proration and distribution of Shares. A PAYMENT PURSUANT TO THIS METHOD
MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN
THE UNITED STATES, MUST BE PAYABLE TO THE KOREA FUND, INC. AND MUST
ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED.
16
<PAGE> 19
(2) Alternatively, a subscription will be accepted by the Subscription
Agent if, prior to 5:00 p.m., New York City time, on the Expiration Date,
the Subscription Agent has received a notice of guaranteed delivery (see
Appendix C) by facsimile (telecopy) or otherwise from a bank, a trust
company, or a NYSE member guaranteeing delivery of (i) payment of the full
Subscription Price for the Shares subscribed for on Primary Subscription
and any additional Shares subscribed for pursuant to the Over-Subscription
Privilege (for Record Date Shareholders), and (ii) a properly completed and
executed Subscription Certificate. The Subscription Agent will not honor a
notice of guaranteed delivery unless a properly completed and executed
Subscription Certificate and full payment for the Shares is received by the
Subscription Agent by the close of business on the third Business Day after
the Expiration Date (the "Protect Period").
Within five Business Days following the Protect Period (the "Confirmation
Date"), the Subscription Agent will send to each Exercising Rights Holder (or,
if the shares are held by Cede or any other depository or nominee, to Cede or
such other depository or nominee), the share certificates representing the
Shares purchased pursuant to the Primary Subscription (and, if applicable, the
Over-Subscription Privilege), along with a letter explaining the allocation of
Shares pursuant to the Over-Subscription Privilege. Any excess payment to be
refunded by the Fund to a Record Date Shareholder who is not allocated the full
amount of Shares subscribed for pursuant to the Over-Subscription Privilege will
be mailed by the Subscription Agent. An Exercising Rights Holder will have no
right to rescind a purchase after the Subscription Agent has received payment,
either by means of a notice of guaranteed delivery or a check.
DELIVERY OF SHARE CERTIFICATES
Certificates representing Shares purchased pursuant to the Primary
Subscription will be delivered to Exercising Rights Holders as soon as
practicable after the corresponding Rights have been validly exercised and full
payment for such Shares has been received and cleared. Certificates representing
Shares purchased pursuant to the Over-Subscription Privilege will be delivered
to Record Date Shareholders as soon as practicable after the Expiration Date and
all allocations have been effected. Shares purchased by participants in the
Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan") will be held by
the Plan Agent in uncertificated form. See "Dividends and Distributions;
Dividend Reinvestment and Cash Purchase Plan."
DISTRIBUTION ARRANGEMENTS
The Dealer Manager is Smith Barney Inc., 388 Greenwich Street, New York,
New York 10013. Under the terms and subject to the conditions contained in a
Dealer Manager Agreement dated the date of this Prospectus, the Dealer Manager
provides marketing assistance and financial advisory services in connection with
the Offer and will solicit the exercise of Rights by Record Date Shareholders.
In addition, the Dealer Manager has agreed with the Fund to assemble and manage
the Selling Group Members to (a) solicit the exercise of Rights and (b) sell to
the public Shares purchased by the Dealer Manager from the Fund as a result of
the purchase and exercise of Rights by the Dealer Manager. The Fund has agreed
to pay the Dealer Manager a fee equal to 1.00% of the aggregate subscription
price for the Shares (which, if all Shares are subscribed for, will result in a
fee of $ ) for its marketing and financial advisory services, including
advice with respect to the advisability, timing, size and Subscription Price of
the Offer and the coordination of soliciting efforts among soliciting dealers,
the Subscription Agent and the Information Agent. The Fund has also agreed to
reimburse the Dealer Manager for its marketing expenses in connection with the
Offer up to an aggregate of $25,000.
Pursuant to the Dealer Manager Agreement, the Fund has agreed to pay fees
equal to 2.50% of the Subscription Price to the Dealer Manager and each Selling
Group Member for each Share issued upon the exercise of Rights as a result of
the Dealer Manager's or Selling Group Member's soliciting efforts or purchased
by the Dealer Manager for sale to the public by the Dealer Manager or such
Selling Group Member, and to the Dealer Manager for each Share either issued
upon the exercise of Rights but for which no dealer designation was made on the
related Subscription Certificate or for which no other securities dealer is
receiving soliciting fees due to the maximum fee which is payable to a
securities dealer who is not a Selling Group Member.
17
<PAGE> 20
The Fund has also agreed that, with respect to Rights exercised not as a
result of the selling or soliciting activities of the Selling Group Members, the
Fund will pay a Soliciting Dealer Fee equal to .50% of the Subscription Price to
each securities dealer who is not a Selling Group Member but who is a member of
the National Association of Securities Dealers and who has executed and
delivered a Soliciting Dealer Agreement and solicited the exercise of Rights,
subject generally to a maximum fee based upon the number of shares of Common
Stock held by such dealer through DTC on the Record Date.
In addition, the Fund will indemnify the Dealer Manager with respect to
certain liabilities, including liabilities under the Securities Act of 1933, as
amended. The Dealer Manager Agreement also provides that in rendering the
services contemplated by the Dealer Manager Agreement, the Dealer Manager will
not be subject to any liability to the Fund except in instances involving the
Dealer Manager's gross negligence or willful misconduct, or for any act or
omission on the part of any broker-dealer (other than the Dealer Manager or any
of its affiliates) or any other person.
U.S. FEDERAL INCOME TAX CONSEQUENCES; KOREAN TAX CONSEQUENCES
The U.S. Federal income tax consequences to Record Date Shareholders and
Rights Holders with respect to the Offer will be as follows:
1. The distribution of Rights to Record Date Shareholders will not
result in taxable income nor will Record Date Shareholders or Rights
Holders realize taxable income as a result of the exercise of the Rights.
2. If the fair market value of the Right received by a Record Date
Shareholder immediately after issuance is less than 15% of the fair market
value of the Common Stock with regard to which the Right is issued, the
basis of the Right will be zero (unless the Record Date Shareholder elects
to allocate the basis of the Common Stock between the Right and the Common
Stock based upon their respective fair market values immediately after the
Right is issued). If the fair market value immediately after issuance of a
Right received by a Record Date Shareholder is 15% or more of the fair
market value of the Common Stock with regard to which it is issued, a
portion of the basis of the Common Stock will be allocated to the Right,
based upon the respective fair market values of the Right and the Common
Stock immediately after the Right is issued. However, in the case of a
Record Date Shareholder who receives a Right and who allows the Right to
expire, no portion of the basis of the Common Stock held by the Record Date
Shareholder will be allocated to the Right, and the basis of the Right will
be zero. In the case of a Rights Holder who purchases a Right in the
market, the basis of the Right will be the purchase price for the Right.
3. The holding period of a Right received by a Record Date Shareholder
includes the holding period of the Common Stock.
4. Any gain or loss on the sale of a Right will be treated as a
capital gain or loss if the Right is a capital asset in the hands of the
seller. Such a capital gain or loss will be long- or short-term, depending
on how long the Right has been held, in accordance with paragraph 3 above.
If a Right is allowed to expire, there will be no loss realized unless the
Right was acquired by purchase, in which case there will be a loss equal to
the basis of the Right.
5. If a Right is exercised by the Record Date Shareholder or Rights
Holder, the basis of the Common Stock received will include the basis of
the Right (see paragraph 2 above) and the amount paid upon exercise of the
Right.
6. If a Right is exercised, the holding period of the Common Stock
acquired begins on the date the Right is exercised.
7. Gain recognized by a non-U.S. shareholder on the sale of a Right
will be taxed in the same manner as gain recognized on the sale of Common
Stock. See "Taxation -- United States Federal Income Taxes -- Non-U.S.
Shareholders" in the SAI.
18
<PAGE> 21
Proceeds from the sale of a Right may be subject to withholding of U.S.
taxes at the rate of 31% unless the seller's certified U.S. taxpayer
identification number (or certificate regarding foreign status) is on file with
the Subscription Agent and the seller is not otherwise subject to U.S. backup
withholding or the seller is otherwise exempt from such withholding. The 31%
withholding tax is not an additional tax. Any amount withheld may be credited
against the seller's U.S. Federal income tax liability.
The foregoing is only a summary of the applicable U.S. Federal income tax
law and does not include any state, local or non-U.S. tax consequences with
respect to the Offer. Investors should consult their tax advisers regarding
specific questions as to U.S. Federal, state, local and non-U.S. taxes.
Under Korean law:
1. The issuance of the Rights by the Fund is not a taxable event and
will not result in the imposition of any Korean tax on either the Fund or
its shareholders.
2. The exercise of the Rights by the Record Date Shareholders or
Rights Holders and the purchase of additional shares of the Fund's Common
Stock as a result thereof are not taxable events and will not result in the
imposition of any Korean tax on either the Fund or its shareholders.
3. Any gain on the sale of a Right will not result in the imposition
of any Korean tax on a shareholder not domiciled in Korea.
See "Taxation" in this Prospectus and in the SAI for a discussion of the
tax treatment of the Fund and its shareholders.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the Commission's registration form, undertaken
to suspend the Offer until it amends this Prospectus if, subsequent to the
effective date of the Fund's Registration Statement, the Fund's net asset value
declines more than 10% from its net asset value as of that date.
USE OF PROCEEDS
The net proceeds of the Offer, assuming that all of the Rights are
exercised, are estimated at approximately $ after deducting expenses
payable by the Fund of approximately $757,113. There can be no assurance that
all of the Rights will be exercised. The net proceeds of the Offer will be used
by the Fund for investment in accordance with its investment objective and
policies. See "Investment Objective and Policies." The Fund expects that it will
invest the proceeds (as was done with the proceeds of the Fund's previous
offerings) in a manner designed to avoid disruption of trading on the Stock
Exchange by investing in Korean securities over such period of time and in such
amounts as are intended to minimize market impact. The Manager currently expects
that investment of the proceeds should be substantially completed within six
months of the closing of the Offer. Pending investment, the proceeds will be
temporarily invested in short-term debt securities of the type described under
"Investment Objective and Policies."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation through investment in securities, primarily equity securities, of
Korean companies. This objective is a fundamental policy and may not be changed
without the approval of the Minister of Finance and Economy and the approval of
a majority of the Fund's outstanding voting securities. As used in this
Prospectus, a "majority of the Fund's outstanding voting securities" means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares. While current income from dividends and interest may be a
consideration in selecting portfolio securities, it is not an objective of the
Fund. It is the policy of the Fund normally to invest at least 80% of its net
assets in securities listed on the Stock Exchange. As of March 21, 1997, 94.34%
of the Fund's net assets were invested in securities listed on the Stock
Exchange. It is expected that the balance of the Fund's net assets normally will
be invested (subject to any applicable investment restrictions under the Fund's
license and Korean law) in
19
<PAGE> 22
debt securities of the Government and Korean corporations and in recognized
Korean money market instruments. See "Foreign Investment and Exchange Controls
in Korea." For purposes of the Fund's investment policy, equity securities
include common and preferred stock (including convertible preferred stock),
bonds, notes and debentures convertible into common and preferred stock, stock
purchase warrants and rights, equity interests in trusts, partnerships, joint
ventures, or similar enterprises and depositary receipts. At present, not all of
these types of securities are available for investment in Korea. To the extent
permitted by applicable law, and if a market for such investments develops, the
Fund reserves the right to invest in any of the above listed equity securities,
and may use its assets to enter into foreign currency exchange contracts,
currency and stock index futures contracts, covered call options, repurchase
agreements, delayed delivery transactions and futures contracts. For further
information concerning the other types of investments the Fund may make, see
"Certain Investment Practices" in the SAI.
Pending investment in Korean securities, the Fund will invest the net
proceeds of the Offer in Dollar-denominated money market instruments of United
States issuers. These instruments will generally consist of: short-term (less
than 12 months to maturity) obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities; finance company and corporate
commercial paper; short-term corporate obligations; obligations (including
certificates of deposit and banker's acceptances) of U.S. banks (including
foreign branches of such banks) and savings and loan associations; and
repurchase agreements (agreements under which the seller agrees at the time of
sale to repurchase the security at an agreed time and price).
The Fund may invest its assets in a broad spectrum of Korean industries,
including, as conditions warrant from time to time, automobiles, cement,
chemicals, construction, electrical equipment, electronics, finance, food and
beverage, international trading, machinery, shipbuilding, steel and textiles. In
selecting industries and companies for investment, the Manager considers overall
growth prospects, competitive position in export markets, technology, research
and development, productivity, labor costs, raw material costs and sources,
profit margins, return on investment, capital resources, government regulation,
management and other factors. The Fund has invested principally in securities of
established companies, although investments may be made, to the extent permitted
by Korean law, in securities of new or little-known companies. To the extent
permitted by law, the Fund may also invest in stocks of securities-related
businesses listed on the Stock Exchange. Under the Fund's license, the Fund may
purchase shares in initial public offerings on the same basis as Korean domestic
institutional investors.
For defensive purposes, the Fund may vary from its investment policy.
During periods in which, in the opinion of the Manager, changes in Korean market
conditions, or other economic conditions or Korean political conditions warrant,
the Fund may reduce its position in equity securities and, subject to any
applicable restrictions under Korean law (which currently limit the amount of
Government and corporate bonds that the Fund may acquire up to 10% of the Fund's
net assets), increase its position in debt securities or in short-term
indebtedness or hold cash. The Fund may also at any time invest funds as
reserves for dividends and other distributions for shareholders in
Dollar-denominated money market instruments such as those described above.
However, once invested in Won-denominated securities, the Fund's investment
principal may not be converted into Dollar-denominated securities except for
payment of expenses in excess of Fund income or in connection with the
termination of the Fund. See "Foreign Investment and Exchange Controls in
Korea -- The Fund's License."
Although the Fund is a non-diversified company under the 1940 Act, it is
subject to portfolio diversification requirements that are contained (i) in its
investment restriction pertaining to concentration, which generally prevents it
from purchasing a security that would result in more than 25% of the Fund's net
assets being invested in a single industry; (ii) in the Fund's license and under
Korean law, under which the Fund may not buy generally more than 7% of a class
of an issuer's stock listed on the Stock Exchange and may not acquire Stock
Exchange-listed, underwritten or publicly offered Government and corporate bonds
(including those held through repurchase agreements, convertible bonds and bonds
with warrants) in excess of 20% of its net assets and unlisted shares registered
with the Korean Securities Dealers Association for trading on the
over-the-counter market in an amount of up to 25% of the Fund's net assets or up
to 5% of the Fund's net assets in any class of such shares; and (iii) in the
diversification requirements applicable to regulated
20
<PAGE> 23
investment companies under the U.S. Internal Revenue Code of 1986, as amended
(the "Code"). See "Foreign Investment and Exchange Controls in Korea" in this
Prospectus and "Investment Restrictions" and "Taxation -- United States Federal
Income Taxes" in the SAI. The Fund is also subject to the Securities and
Exchange Commission of Korea ("KSEC") rule that currently provides generally
that no more than 20% of the total number of shares of stock of any class of an
issuer listed on the Stock Exchange may be held by all foreign investors in the
aggregate. This percentage is scheduled to be increased, and then eliminated,
over the next four years. See "Foreign Investment and Exchange Controls in
Korea -- Further Opening of the Korean Securities Market." The Fund, as a
non-diversified company under the 1940 Act, is permitted to hold a relatively
greater concentration in securities of particular companies. This flexibility
reduces diversification of risk and could result in greater fluctuation in the
Fund's net asset value. However, it also reflects the composition of the Korean
securities markets, in that securities of relatively few companies account for a
greater share of the total capitalization of such markets than is the case in
the United States.
The Fund intends to purchase and hold securities for long-term capital
appreciation and does not expect to trade in securities for short-term gain. The
Fund has undertaken with the Minister of Finance and Economy that the Fund's
portfolio turnover rate during any year will not exceed 40%. The 40% limit will
be applied on a year by year basis by references to sales or purchases of
portfolio securities during the whole of the Fund's fiscal year, which ends June
30th. Subject to this 40% limit, the Fund will adjust its portfolio as it deems
advisable in view of prevailing or anticipated market conditions. A higher rate
of portfolio turnover generally involves correspondingly greater brokerage
commission expenses than a lower rate, which expenses must be borne by the Fund
and its shareholders. The Fund's portfolio turnover rate for the twelve months
ended December 31, 1996 was 34.2%. The portfolio turnover rate is calculated by
dividing the lesser of sales or purchases of portfolio securities by the average
monthly value of the Fund's portfolio securities. For purposes of this
calculation, portfolio securities exclude all securities having a maturity when
purchased of one year or less.
Consistent with provisions of the 1940 Act and any administrative
exemptions that may be granted by the Commission, the Fund may invest in the
securities of other investment companies that invest in Korean securities.
Absent special relief from the Commission, the Fund may invest up to 10% of its
assets in the aggregate in shares of other investment companies and up to 5% of
its assets in any one investment company, as long as that investment does not
represent more than 3% of the voting stock of the acquired investment company.
As a shareholder in any investment company, the Fund will bear its ratable share
of such company's expenses, and will remain subject to payment of the Fund's
advisory and administrative fees with respect to assets so invested.
For information regarding certain investment restrictions applicable to the
Fund, see "Investment Restrictions" in the SAI. For information about certain
transactions involving futures contracts, forward contracts, repurchase
agreements and similar instruments that the Fund may enter into, see "Certain
Investment Practices" in the SAI.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund is a closed-end investment company designed for long-term
investment, and investors should not consider it a trading vehicle. See
"Investment Objective and Policies." Historically, shares of closed-end
investment companies have frequently traded at a discount from net asset value,
but have also traded at premiums. See "Market and Net Asset Value Information."
Regulatory authorities in Korea adopted regulations in 1991 that since January
1992 have made it possible for non-Koreans to invest, subject to certain limits,
in Korean equity securities listed on the Stock Exchange. These regulations have
encouraged the formation of other investment vehicles similar to the Fund. This
and other similar developments have affected and may further affect the trading
price of the Fund's shares.
Investing in securities of Korean companies and of the Government involves
certain considerations not typically associated with investing in securities of
United States companies or the United States government, including (1) political
and economic risks, including the potential for military conflict with North
Korea, (2) potential price volatility and lesser liquidity of the Korean
securities markets, due in part to their relatively
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<PAGE> 24
small size and to competition from alternative investment opportunities in
Korea, (3) governmental involvement in and influence on the economy and the
private sector, (4) restrictions imposed by the Government on foreign
investment, which may limit investment opportunities available to the Fund, (5)
fluctuations in the rate of exchange between the Won and the Dollar, (6)
restrictions on, and costs associated with, currency conversions and on the
repatriation of principal, income or gains and (7) Korean taxes. Additional
considerations when investing in securities of Korean companies and of the
Government include the risk of nationalization or expropriation of assets or
confiscatory taxation, delays in settlement and the risk that it may be more
difficult to obtain or enforce a judgment in a court outside the United States.
Korean accounting, auditing and financial reporting standards are not
equivalent to United States standards and, therefore, less information may be
available with respect to investments in Korea than in the United States.
Supervision by governmental agencies and self-regulatory organizations with
respect to the securities industry in Korea differs from, and in some respects
is less than, such supervision in the United States. Accordingly, the Fund's
investment in Korean securities should be considered more speculative than
investments in securities of U.S. companies.
The Fund operates under a license granted by the Minister of Finance and
Economy under which it enjoys certain advantages over most other foreign
investors but is also subject to certain limitations which are more restrictive
than those applicable to other foreign investors. The Minister of Finance and
Economy may, when it deems it to be in the public interest, modify the Fund's
license or revoke such license in accordance with its terms in the event of
noncompliance by the Fund with one or more of the conditions of the license or
as a result of a material violation by the Fund of applicable Korean law. See
"Foreign Investment and Exchange Controls in Korea -- The Fund's License."
POLITICAL AND ECONOMIC RISKS
The value of the Fund's assets may be adversely affected by political,
economic or social instability in Korea. Following World War II, the Korean
peninsula was partitioned. The demilitarized zone at the boundary between Korea
and North Korea was established after the Korean War of 1950-1953 and is
supervised by United Nations forces. The United States maintains a military
force in Korea to help deter the ongoing military threat from North Korean
forces. The situation remains a source of tension, although negotiations to ease
tensions and resolve the political division of the Korean peninsula have been
carried on from time to time. There also have been efforts from time to time to
increase economic, cultural and humanitarian contacts between North Korea and
Korea. There can be no assurance that such negotiations or efforts will continue
to occur or will result in an easing of tensions between the two nations.
Tensions rose with evidence that North Korea was reprocessing plutonium,
apparently as part of a weapons program, and remained unwilling to meet with the
Republic in seeking a reduction of military confrontation, as mutually agreed in
1992. After a period of crisis, the U.S., with the Republic's concurrence,
concluded a "framework agreement" with North Korea in October 1994 under which
the Republic, Japan and the U.S. are to supply North Korea with two light-water
nuclear power plants and to progressively normalize relations with Pyongyang in
return for North Korea's agreement to dismantle its plutonium reprocessing
program and to adhere to the Nuclear Non-Proliferation Treaty. However,
North-South negotiations to ease military confrontation, also called for in the
"framework agreement," have remained blocked by North Korea's persistence in
trying to deal directly with the U.S. rather than South Korea on this critical
question. Severe food problems, a declining gross domestic product and a
difficult leadership transition after the death of Kim II Sung have contributed
to difficult relations with North Korea. Tension between Korea and North Korea
increased following the September 1996 discovery of a North Korean submarine off
the coast of Korea and the February 1997 defection of Hwang Jang Yop, a senior
North Korean government official who has sought asylum in South Korea. No
assurance can be given that the level of tension will not increase or change
abruptly as a result of future events, including political developments in the
dispute concerning North Korea's nuclear program (such as any moves to impose
trade sanctions against North Korea, further increasing political tensions and
the risk of military conflict) or developments related to proposed meetings
between Korea and North Korea. See Annex A, "The Republic of Korea."
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<PAGE> 25
The heightened tensions between the Republic and North Korea have from time
to time depressed new foreign investment in the Republic and the availability of
foreign financing for Korean companies. The uncertainty surrounding the
situation may adversely affect the economic climate in the Republic. The
tensions between the Republic and North Korea also may adversely affect the
prices of the Fund's portfolio securities and the Fund's share price.
In addition, agricultural and economic woes have not stopped North Korea
from strengthening its military forces along the demilitarized zone. Military
action or the risk of military action or the economic collapse of North Korea
could have a material adverse effect on Korea for a significant period of time,
and consequently, on the ability of the Fund to achieve its investment
objectives.
The domestic political situation in the Republic has been relatively stable
in recent years, in contrast to the turbulence associated with the assassination
of President Park Chung Hee in 1979 and the military-dominated regime that
succeeded him. Responding to widespread popular unrest in 1987, the authorities
permitted a genuinely democratic election in which Roh Tae Woo was elected
President. Despite his military background, Roh Tae Woo's administration was
marked with internal liberalization, a more serious search for reduced tensions
with North Korea, and successful efforts to improve relations with North Korea's
allies. Except for sporadic outbursts, radical activism waned and both
presidential and parliamentary elections have proceeded freely. Since taking
office in 1993 as the first civilian President in recent years, Kim Young Sam
has emphasized political reform and the deregulation and internationalization of
the Korean economy.
However, President Kim's administration has faced serious tests as the
Republic's economy deteriorated during 1996. The balance of trade was negatively
affected by decreases in prices of major export products and increases in
imported goods from Japan due to the weak Japanese Yen. Recent Government
initiatives to amend labor laws to make it easier to lay off workers and curb
wage growth have led to worker unrest, including a major walkout in December
1996 and January 1997.
In January 1997, Hanbo Steel Co., Ltd. ("Hanbo Steel"), the flagship
company of Hanbo Group, a chaebol, or large group of related companies,
defaulted in the payment of maturing bills, which forced it to commence
reorganization proceedings. The commencement of such reorganization proceedings
has led to investigations into and imprisonment of certain presidents of bank
lenders, who are alleged to have taken bribes from Hanbo Steel, and prominent
politicians in Korea who are alleged to have influenced banks' decisions to lend
large sums of money to Hanbo Steel. Hanbo Steel's default has also increased
financial difficulties of many of its suppliers and subcontractors, prompting
the Government to take emergency measures to protect them and the financial
institutions adversely affected by the reorganization proceedings and to stem
further deterioration of the economy. In March 1997, Sammi Group, another
chaebol, announced that its key affiliates Sammi Steel Co. ("Sammi Steel") and
Sammi Corp. had commenced reorganization proceedings after Sammi Steel failed to
make a 1.1 billion won debt payment. Sammi Steel's default has put increased
pressure on Korea's troubled banking sector.
With its lack of natural resources and with exports constituting a large
proportion of GNP, the Korean economy is significantly affected by changes in
commodity prices (particularly oil), changes in protectionist sentiment among
its trading partners and exchange rate movements. The rapid economic development
of Korea has in the past led to large foreign borrowings.
Korean companies tend to be substantially more leveraged than U.S. and
European companies. The high degree of leverage increases the risk of business
failures should adverse business conditions develop.
Korean accounting, auditing and financial reporting standards and practices
are not equivalent to those in the United States. Therefore, certain material
disclosures (including disclosures as to off-balance sheet financing loan
guarantees) may not be made, and less information may be available with respect
to investments in Korea than with respect to those in the United States.
THE KOREAN SECURITIES MARKETS
The Korean securities markets are still relatively small in comparison to
the United States, Japanese and major European securities markets. In addition,
market capitalization and trading volume in Korea are
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<PAGE> 26
concentrated in a limited number of companies within a small number of
industries. As a result, the Korean securities markets are subject to greater
price volatility and lesser liquidity than is usual in the United States,
Japanese and major European securities markets. Because of these liquidity
limitations, it may be more difficult for the Fund to purchase and sell
portfolio investments than would be the case in the United States. Accordingly,
in periods of rising market prices, the Fund may be unable to participate fully
in such price increases to the extent that it is unable to acquire desired
portfolio positions quickly; conversely, the Fund's inability to dispose fully
and promptly of positions in declining markets will cause its net asset value to
decline as the value of unsold positions is determined by reference to lower
prices.
Many companies traded on Korean securities markets are smaller, newer and
less seasoned than companies traded on United States securities markets.
Investments in smaller companies involve greater risk than are customarily
associated with investments in larger companies. Smaller companies may have
limited product lines, markets or financial or managerial resources and may be
more susceptible to losses and risks of bankruptcy.
The Korean securities markets have in the past been influenced by large
investors trading significant blocks of securities, and by the relative
attractiveness of alternative investment vehicles such as real estate and the
unofficial money market lending to business borrowers. Stock Exchange rules
confine daily movements in individual company share prices to fixed limits
around the previous day's closing price, so that the quoted closing price of a
security (if fixed by such a limit) may not necessarily represent the price at
which persons are willing to buy and to sell the security in the absence of such
a limit. These actions could have a significant effect on the market prices and
dividend yields of equity securities.
GOVERNMENT INVOLVEMENT IN THE PRIVATE SECTOR
The Government exercises substantial influence over many aspects of the
private sector by legislation, regulation and suasion. The Government from time
to time has informally influenced the payment of dividends and the prices of
certain products, encouraged companies to invest or to concentrate in particular
industries, induced mergers between stronger and weaker companies in industries
suffering from excess capacity, controlled access to credit on favorable terms,
encouraged institutional investment in Korean equity securities, induced private
companies to publicly offer their securities, and induced banks to make loans to
certain companies. Such actions by the Government in the future could have a
significant effect on the market prices and dividend yields of Korean equity
securities.
KOREAN INVESTMENT RESTRICTIONS
Investments by foreign investors in Korean stocks listed on the Stock
Exchange are generally subject to certain limitations, including a 5% limit on
the shares of any class of equity security of an issuer held by a particular
foreign investor (which is increased to 7% for the Fund pursuant to its license)
and a limit on the percentage of shares of any class of equity security of an
issuer that may be acquired by all foreign investors in the aggregate, generally
20% or a higher or lower percentage which may be prescribed for specific
companies from time to time. Additionally, certain companies in industries
designated by the Minister of Finance and Economy may further restrict, in their
articles of incorporation, foreign ownership of their shares. In general,
foreigners are not allowed to acquire equity securities of Korean companies that
are not listed on the Stock Exchange (unless otherwise approved pursuant to the
Foreign Capital Inducement Act (the "FCIA") or certain sections of the Foreign
Exchange Management Act (the "FEMA")), nor are they allowed to invest in bonds
issued by the Government in Korea or corporate bonds issued in Korea except for
certain convertible bonds and certain government bonds. Under its license to
invest in Korea, however, the Fund may acquire bonds listed on the Stock
Exchange, underwritten bonds or publicly offered bonds in an amount up to 20% of
the Fund's net assets and unlisted shares registered with the Korea Securities
Dealers Association for trading on the over-the-counter market in an amount of
up to 25% of the Fund's net assets or up to 5% of the Fund's net assets in any
class of such shares. See "Foreign Investment and Exchange Controls in Korea."
These limitations may preclude the Fund from making certain desired
investments, including making further purchases of securities of some of the
companies from time to time represented in its portfolio, and
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<PAGE> 27
may limit the size of investments that may be made. Furthermore, these
limitations, as well as purchasing programs by other foreign investors, could
substantially increase the prices of portfolio securities to the Fund above the
prices that would be paid by Korean investors, or that might be paid by foreign
investors if these limitations were relaxed or eliminated, for such securities.
The same factors could lengthen the time required to invest all of the proceeds
from the Offer in Korean securities.
As of March 21, 1997, 41.75% of the Fund's investment portfolio consisted
of securities that have reached the aggregate foreign investment limit. As of
March 21, 1997, 26.3% of the market capitalization of the Stock Exchange
consisted of securities that have reached the aggregate foreign investment
limit.
The diversification of the Fund's portfolio as a result of these
limitations may involve investments in securities of companies that may be
smaller or less well-known than certain of the issuers now represented in the
Fund's portfolio. Such companies often do not have extensive operating histories
that generate significant information for investors. As a result, market prices
for these companies tend to be more volatile than for the more established
companies.
The Fund has undertaken with the Minister of Finance and Economy that the
Fund's portfolio turnover rate during any year will not exceed 40%. Although the
Fund's portfolio turnover rate to date has been substantially below this limit,
the limit could constrain the Manager's ability to redeploy the Fund's assets
if, for example, there were to occur an event or events such as (i) a major
decline in the value of the Fund's portfolio securities or (ii) a major
disruption in the Korean securities markets caused by adverse changes in the
political or economic climate. See "Investment Objective and Policies."
CURRENCY FLUCTUATIONS
The market value of the Fund's Korean securities is generally determined in
Won, and substantially all of its income will be received or realized in Won.
The Fund will be required, however, to compute its net asset value and income,
and to distribute its income, in Dollars. The computations of the Fund's income
will be made as such income is received by the Fund using the currency exchange
rate in effect at such time. The distribution of such income in Dollars,
however, will occur on a date after such determination. Accordingly, any
reduction in the value of the Won relative to the Dollar during the time period
between the Fund's receipt of income in Won and its conversion of such income
into Dollars may require the Fund to liquidate additional securities in order to
make required distributions. Likewise, if the value of the Won falls relative to
the Dollar during the time period between the Fund's incurrence of expenses in
Dollars and the corresponding payment of such expenses, the amount of Won
required to be converted into Dollars to pay such expenses could be greater than
if such expenses originally had been incurred in Won. Reductions in the Won
relative to the Dollar will also adversely impact the Fund's net asset value.
Although the Fund may enter into forward currency exchange contracts and may
(subject to receipt of requisite regulatory approvals) purchase and sell options
on currencies in an effort to protect the Fund's portfolio holdings against
currency fluctuation risks, the Fund does not intend fully or partially to
hedge, on an ongoing basis, its portfolio holdings in such a manner.
CURRENCY CONVERSION AND REPATRIATION
Conversion of Won into Dollars or other foreign currencies, transfer of
funds from Korea to foreign countries and repatriation of foreign capital
invested in Korea are subject to certain regulatory approvals pursuant to
foreign exchange management laws and regulations. Such conversions and transfers
of funds often entail significant transaction costs.
The repatriation by foreign investors of principal, income or gains that
arise from holding and disposing of Korean equity securities that are traded on
the Stock Exchange is subject to regulations issued by the Minister of Finance
and Economy. Such repatriation is generally permitted to foreign investors that
have made a report to their designated foreign exchange bank for each
repatriation. Unlike other foreign investors, however, the Fund is, in general,
currently permitted, with the report to its designated foreign exchange bank, to
repatriate only income and gains. The repatriation of principal by the Fund is
restricted by the Fund's license from the Minister of Finance and Economy.
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If, because of restrictions on conversion or because of repatriation
problems, the Fund were unable to distribute substantially all of its net
investment income (including short-term capital gains) and long-term capital
gains within applicable time periods, the Fund could be subject to U.S. Federal
income and excise taxes which would not otherwise be incurred and might cease to
qualify for the favorable tax treatment afforded to regulated investment
companies under the Code, in which case it would become subject to U.S. Federal
income tax on all of its income and gains. See "Taxation -- United States
Federal Income Taxes" in the SAI.
NON-DIVERSIFIED STATUS
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act as to the
percentage of its assets that may be invested in the securities of a single
issuer. As a non-diversified investment company, the Fund may invest a greater
proportion of its assets in a smaller number of issuers, and, as a result, may
be subject to greater risk with respect to its portfolio securities. However,
the Fund has complied and intends to continue to comply with the diversification
requirements imposed by the Code for regulated investment companies, which
generally limit investments in any one issuer to 25% of the Fund's total assets.
See "Taxation -- United States Federal Income Taxes" in the SAI.
TRANSACTION COSTS
The Fund's transaction costs are higher than the transaction costs for the
typical investment company investing in U.S. securities. In addition to
incurring transaction costs associated with converting currency to and from Won
and Dollars, the Fund incurs brokerage costs on its portfolio transactions at
commission rates that are generally uniform and higher than in the United
States. Moreover, whenever it sells equity securities outside the Stock
Exchange, the Fund is subject to a securities transaction tax of 0.5% of the
sales price for such securities. See "Portfolio Transactions and Brokerage" in
the SAI.
DISCOUNT FROM NET ASSET VALUE
The shares of the Fund may trade at a discount from net asset value. This
is characteristic of shares of a closed-end fund and is a risk separate and
distinct from the risk of a decline in the net asset value as a result of a
fund's investment activities. In some cases, however, shares of closed-end funds
may trade at a premium. The Fund's shares have traded in the market above, at
and below net asset value since the commencement of the Fund's operations. The
Fund's shares have generally traded at a premium to net asset value. See "Market
and Net Asset Value Information."
KOREAN TAXES
The Fund will be subject to Korean taxes, including withholding taxes. The
withholding taxes imposed on the Fund could change in the event of changes in
Korean or United States tax laws or changes in the terms of, or the Minister of
Finance and Economy's interpretation of, the United States-Korea income tax
treaty or changes in relevant facts. See "Taxation -- Korean Taxation." The Fund
expects to be eligible to elect, and will notify shareholders if it so elects,
to "pass-through" to the Fund's shareholders the amount of such withholding
taxes paid by the Fund. If the Fund makes such an election, shareholders will be
required to include in income their proportionate shares of such amounts and may
be entitled to claim a credit or deduction for all or a portion of such amounts.
See "Taxation" -- United States Federal Income Taxes" in the SAI for a
discussion of the rules and limitations applicable to the treatment of foreign
income taxes under the U.S. Federal income tax laws.
SPECIAL CONSIDERATIONS RELATING TO THE OFFER
Dilution. An immediate substantial dilution of the aggregate net asset
value of the shares owned by Record Date Shareholders who do not fully exercise
their Rights is likely to be experienced as a result of the Offer because the
Subscription Price is likely to be less than the Fund's then-net asset value per
share, and the
26
<PAGE> 29
number of shares outstanding after the Offer is likely to increase in a greater
percentage than the increase in the size of the Fund's assets. In addition, as a
result of the terms of the Offer, Record Date Shareholders who do not fully
exercise their Rights should expect that they will, at the completion of the
Offer, own a smaller proportional interest in the Fund than would otherwise be
the case. Although it is not possible to state precisely the amount of such a
decrease in value, because it is not known at this time what the net asset value
per share will be at the Expiration Date, such dilution could be substantial.
For example, assuming that all Rights are exercised and that the Subscription
Price of $ is % below the Fund's net asset value of $ per
share on , 1997, the Fund's net asset value per share would be
reduced by approximately $ per share. The distribution to Record Date
Shareholders of transferable Rights which themselves may have intrinsic value
will afford non-participating Record Date Shareholders the potential of
receiving a cash payment upon the sale of such Rights, which may be viewed as
compensation for the possible dilution of their interest in the Fund. No
assurance can be given, however, that a market for the Rights will develop or as
to the value, if any, that such Rights will have.
Unrealized Appreciation. As of March 21, 1997, there was approximately
$66.8 million of net unrealized appreciation in the Fund's net assets of
approximately $474.2 million; if realized and distributed, or deemed
distributed, such gains would, in general, be taxable to shareholders, including
holders at that time of Shares acquired upon exercise of the Rights. See
"Taxation -- United States Federal Income Taxes -- General," "-- Distributions"
and "-- Non-U.S. Shareholders" in the SAI.
Prior Rights Offering. The Fund conducted a rights offering in 1995 which
was fully subscribed and resulted in net proceeds to the Fund of approximately
$110 million. As a result of the 1995 rights offering, the Fund enjoyed a .04%
decrease in its expense ratio.
INVESTMENT ADVISERS
GENERAL
The Fund's advisory structure reflects a bi-national United States-Korean
arrangement for providing investment advice and management to pursue the Fund's
investment objective of long-term capital appreciation through investing in
Korean securities. The Fund's Manager is Scudder, Stevens & Clark, Inc., a
United States investment counsel firm. The Korean Adviser is Daewoo Capital
Management Co., Ltd., a Korean firm which is a subsidiary of the largest Korean
securities firm, Daewoo Securities. The Fund may retain the services of advisers
or consultants with respect to Korean securities markets in addition to the
Korean Adviser when the Board of Directors determines it to be appropriate.
THE INVESTMENT MANAGER
Scudder, Stevens & Clark, Inc., an investment counsel firm whose address is
345 Park Avenue, New York, New York 10154, acts as investment adviser to and
manager and administrator for the Fund. The Manager is a leading global
investment manager with offices throughout the United States and subsidiaries in
London and Tokyo. The Manager was established in 1919 as a partnership and was
restructured as a Delaware corporation in 1985. The principal source of the
Manager's income is professional fees received from providing continuing
investment advice. The Manager provides investment counsel for many individuals
and institutions, including insurance companies, colleges, industrial
corporations, and financial and banking organizations.
The Manager has been active in international investment for over 40 years
and in emerging markets investment for over 20 years. As of December 31, 1996,
the Manager and its affiliates had in excess of $115 billion in assets under
their supervision, more than $22 billion of which was invested in non-U.S.
securities. As of that date, the Manager's clients included nine closed-end
United States investment companies with assets aggregating nearly $2 billion,
and more than 50 open-end United States investment
27
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company portfolios with assets aggregating over $38 billion. The Manager's
investment company clients, in addition to the Fund, include:
- The Argentina Fund, Inc., which commenced operations in 1991 and invests
primarily in equity securities of Argentine companies.
- The Brazil Fund, Inc., which commenced operations in 1988 and invests
primarily in equity securities of Brazilian companies.
- The First Iberian Fund, Inc., which commenced operations in 1988 and
invests primarily in equity securities of Spanish and Portuguese
companies.
- The Japan Fund, Inc., which commenced operations in 1962 and invests
primarily in securities of Japanese companies.
- The Korea Bond Fund, Inc., which commenced operations in 1996 and invests
primarily in debt securities of Korean issuers.
- The Latin America Dollar Income Fund, Inc., which commenced operations in
1992 and invests primarily in Dollar-denominated debt securities of Latin
American issuers.
- Scudder Latin America Fund, which commenced operations in 1992 and
invests in securities of Latin American issuers.
- Scudder New Asia Fund, Inc., which commenced operations in 1987 and
invests primarily in equity securities of Asian companies.
- Scudder New Europe Fund, Inc., which commenced operations in 1990 and
invests primarily in securities of European companies.
- Scudder World Income Opportunities Fund, Inc., which commenced operations
in 1994 and invests primarily in income securities issued by corporate
and sovereign entities throughout the world.
- Scudder International Fund, which was initially incorporated in Canada in
1953 and invests primarily in foreign equity securities.
- Scudder Pacific Opportunities Fund, which commenced operations in 1992
and invests in equity securities of Pacific Basin companies, excluding
Japan.
The Manager also advises Scudder Global Opportunities Funds -- Greater
Korea Fund, an open-end investment company organized in Luxembourg (the
"Luxembourg Fund"), which invests in Korean securities with an investment
objective similar to the Fund's, but without the benefit of the Fund's license
from the Minister of Finance and Economy.
The Manager also provides investment advisory services to the mutual funds
with assets aggregating over $13 billion that comprise the AARP Investment
Program from Scudder. With respect to this Program, the Manager manages a total
of 15 investment company portfolios pursuing a variety of investment objectives,
including money market returns, growth, income, and tax-free income. The Manager
also manages accounts for several large pension plans.
The Fund is managed by a team of investment professionals who each play an
important part in the Fund's management process. Team members work together to
develop investment strategies and select securities for the Fund's portfolio.
They are supported by the Manager's large staff of economists, research
analysts, traders and other investment specialists who work in the Manager's
offices across the United States and abroad. The Manager believes its team
approach will benefit Fund investors by bringing together many disciplines and
leveraging the Manager's extensive resources.
Lead portfolio manager John J. Lee has set Fund investment strategy and
overseen its daily operations since 1991, the year he joined the Manager'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.
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Mr. Bratt, who has been at the Manager since 1976, is the Director of the
Manager's Global Equity Department.
In managing the Fund, the Manager utilizes reports, statistics and other
investment information from a wider variety of sources, including the Korean
Adviser and other brokers and dealers who may execute portfolio transactions for
the Fund and clients of the Manager. Investment decisions, however, are based
primarily on investigations and critical analyses by its own research
specialists and portfolio managers.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Manager, including the Luxembourg Fund. Investment
decisions for the Fund and the Manager's other clients are made with a view to
achieving their respective investment objectives and after consideration of such
factors as their current holdings, availability of cash for investment and the
size of their investments generally. Frequently a particular security may be
bought or sold for only one client or in different amounts and at different
times for more than one but less than all clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling the security. In addition, purchases or sales of the same security
may be made for two or more clients on the same day. In such event, such
transactions will be allocated among the clients in a manner believed by the
Manager to be equitable to each. In some cases, this procedure could have an
adverse effect on the price or amount of the securities purchased or sold by the
Fund. Purchase and sale orders for the Fund may be combined with those of other
clients of the Manager in the interest of the most favorable net results to the
Fund. KSEC regulations generally limit the percentage of any class of shares
listed on the Stock Exchange that may be held by all foreign investors as a
group to 20%. Accordingly, purchases for other non-Korean clients of the
Manager, including the Luxembourg Fund, may limit the amount of such class
available for purchase by the Fund. See "Risk Factors and Special
Considerations -- Korean Investment Restrictions."
INVESTMENT ADVISORY, MANAGEMENT AND ADMINISTRATION AGREEMENT
On October 13, 1994, the Fund's shareholders approved the Fund's Investment
Advisory, Management and Administration Agreement (the "Agreement") with the
Manager. Under the Agreement, the Manager makes investment decisions, prepares
and makes available research and statistical data and supervises the acquisition
and disposition of securities by the Fund, all in accordance with the Fund's
investment objective and policies and in accordance with guidelines and
directions from the Fund's Board of Directors. The Manager assists the Fund as
it may reasonably request in the conduct of the Fund's business, subject to the
direction and control of the Fund's Board of Directors. The Manager is required
to maintain or cause to be maintained for the Fund all books and records
required to be maintained under the 1940 Act to the extent such books and
records are not maintained or furnished by the Fund's custodian or other agents,
and is required to furnish or cause to be furnished all required reports or
other information under Korean securities laws. The Manager also supplies the
Fund with office space in New York and furnishes clerical services in the United
States related to research, statistical and investment work. The Manager renders
to the Fund administrative services such as preparing reports to, and meeting
materials for, the Fund's Board of Directors and reports and notices to
shareholders, preparing and making filings with the Commission and other
regulatory and self-regulatory organizations including preliminary and
definitive proxy materials and post-effective amendments to the Fund's
registration statement, providing assistance in certain accounting and tax
matters and investor public relations, monitoring the valuation of portfolio
securities, calculation of net asset value and calculation and payment of
distributions to shareholders, and overseeing arrangements with the Fund's
Custodian, including the maintenance of books and records of the Fund. The
Manager also pays the reasonable salaries, fees and expenses of the Fund's
officers and employees and any fees and expenses of the Fund's directors who are
directors, officers or employees of the Manager, except that the Fund bears
travel expenses (or an appropriate portion of those expenses) of directors and
officers of the Fund who are directors, officers or employees of the Manager to
the extent that such expenses relate to attendance at meetings of the Board of
Directors or any committees of or advisers to the Board. Under the Agreement,
the Manager may render similar services to others.
Under the Agreement the Fund pays or causes to be paid all of its other
expenses, including, among other things, the following: organization and certain
offering expenses (including out-of-pocket expenses but not
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<PAGE> 32
overhead or employee costs of the Manager or of any one or more organizations
retained by the Fund or by the Manager as a Korean adviser of the Fund); legal
expenses; auditing and accounting expenses; telephone, facsimile, postage and
other communications expenses; taxes and governmental fees; stock exchange
listing fees; fees, dues and expenses incurred in connection with membership in
investment company trade organizations; fees and expenses of the Fund's
custodians, subcustodians, transfer agents and registrars; payment for portfolio
pricing or valuation services to pricing agents, accountants, bankers and other
specialists, if any; expenses of preparing share certificates and other expenses
in connection with the issuance, offering, distribution, sale or underwriting of
securities issued by the Fund; expenses relating to investor and public
relations; expenses of registering or qualifying securities of the Fund for
sale; freight, insurance and other charges in connection with the shipment of
the Fund's portfolio securities; brokerage commissions or other costs of
acquiring or disposing of any portfolio securities of the Fund; expenses of
preparing and distributing reports, notices and dividends to shareholders;
expenses of the Dividend Reinvestment and Cash Purchase Plan (except for
brokerage expenses paid by participants in such Plan); costs of stationery; any
litigation expenses; and costs of shareholders' and other meetings.
For its services, the Manager receives a monthly fee, payable in Dollars,
at an annual rate of 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, 1.00%
of such net 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. This
fee is higher than advisory fees paid by most other investment companies,
primarily because of the Fund's objective of investing in Korean securities, the
additional time and expense required of the Manager in pursuing such objective
and the need to enable the Manager to compensate the Korean Adviser for its
services. The Manager pays the Korean Adviser a monthly fee at an annual rate of
0.2875% of the Fund's month-end net assets up to and including $50,000,000,
0.275% on the next $50,000,000, 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. See "The Korean Adviser." The Manager
may retain the services of others, in addition to the Korean Adviser, but at no
additional cost to the Fund in connection with its services to the Fund. During
the fiscal years ended June 30, 1994, 1995 and 1996, the fees paid to the
Manager amounted to $4,507,935, $6,260,081 and $7,516,289, respectively.
Under the Agreement, the Manager is permitted to provide investment
advisory services to other clients, including clients which may invest in Korean
securities and, in providing such services, may use information furnished by the
Korean Adviser and others. Conversely, information furnished by others to the
Manager in providing services to other clients may be useful to the Manager in
providing services to the Fund.
The Agreement by its terms will remain in effect from year to year if such
continuance is specifically approved, at least annually, by a vote of a majority
of the members of the Board of Directors who are not interested persons of the
Manager, the Korean Adviser or the Fund, cast in person at a meeting called for
the purpose of voting on such approval, and by the affirmative vote of either a
majority of the Board of Directors or holders of a majority of the Fund's
outstanding voting securities. The Agreement may be terminated at any time
without payment of penalty by the Board of Directors, by vote of holders of a
majority of the outstanding voting securities of the Fund, or by the Manager on
60 days' written notice (or such longer period as may be required under the
Regulations). The Agreement automatically terminates in the event of its
assignment (as defined under the 1940 Act), but does not terminate upon
assignment to a corporate successor to all or substantially all of the Manager's
business, or a wholly owned subsidiary of such corporate successor, provided
that such assignment does not result in a change of actual control or management
of the Manager's business.
The Fund's license to invest in Korean securities provides that, should the
Manager's services be terminated for any reason, the Fund must appoint a
successor manager, subject to approval by the Minister of Finance and Economy,
within 120 days following such termination. The license provides that such
approval will not unreasonably be withheld, but that the Minister of Finance and
Economy will revoke the license if the Minister shall have determined that the
Fund has not sought in good faith to appoint a successor manager reasonably
acceptable to the Minister. In the event such license is terminated, the Board
of Directors will consider appropriate actions, including termination of the
Fund and liquidation of its assets.
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<PAGE> 33
The Agreement provides that the Manager is not liable for any act or
omission, error of judgment or mistake of law or for any loss suffered by the
Fund in connection with matters to which the Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Manager in the performance of its duties or from reckless disregard by the
Manager of its obligations and duties under the Agreement.
THE KOREAN ADVISER
Daewoo Capital Management Co., Ltd., whose address is 34-3 Youido-dong,
Yongdung po-gu, Seoul, Korea, an investment adviser registered under the
Investment Advisers Act of 1940, acts as Korean Adviser to the Manager pursuant
to a Research and Advisory Agreement (the "Research Agreement") with the
Manager. The Korean Adviser has been in the business of providing investment
advisory services since it was organized in February 1988 under the laws of the
Republic. The Korean Adviser is a subsidiary of Daewoo Securities, Daewoo
Securities Building, 34-3 Youido-dong, Yongdung po-gu, Seoul, Korea, the largest
Korean securities firm in terms of paid-in capital and revenues in 1996 and an
underwriter in four of the Fund's previous public offerings. The Korean Adviser
acts as Korean adviser to 14 investment companies organized outside the United
States to invest in Korean securities. Daewoo Securities is affiliated with
Daewoo Corporation, a conglomerate headquartered in Seoul, Korea. As of December
31, 1996, Daewoo Corporation and certain affiliates of Daewoo Corporation owned
approximately 12.97% of Daewoo Securities. Orders for the purchase and sale of
securities for the Fund's portfolio may be placed with Daewoo Securities as well
as with other Korean brokers. See "Portfolio Transactions and Brokerage" in the
SAI. See "Directors and Officers" in the SAI for information as to officers of
the Fund who are officers of the Korean Adviser.
Under the terms of the Research Agreement, the Korean Adviser provides such
information, investment recommendations, advice and assistance as the Manager
may, from time to time, reasonably request. The Korean Adviser may, under the
terms of the Research Agreement, render similar services to others, including
other investment companies. However, the Korean Adviser is required by the
Research Agreement to maintain a separate staff which prepares and makes
specific investment recommendations to the Manager. This information will be
evaluated by the Manager's research department and portfolio managers in light
of their own expertise and information from other sources, in determining
investment decisions for the Fund. See "Portfolio Transactions and Brokerage" in
the SAI.
For its services, the Korean Adviser receives from the Manager a monthly
fee at the annual rate of 0.2875% of the Fund's month-end net assets up to and
including $50,000,000, 0.275% of such assets on the next $50,000,000, 0.250% 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. The
Korean Adviser has agreed to pay fees and expenses of any officer or director of
the Fund affiliated with it, except that the Fund bears travel expenses of one
director, officer or employee of the Korean Adviser or any of its affiliates who
is not a resident in the United States to the extent that such expenses relate
to attendance as a Fund director at meetings of the Board of Directors in the
United States and also bears the travel expenses of any other director, officer
or employee of the Korean Adviser or of any of its affiliates who is a resident
in the United States to the extent such expenses relate to his attendance as a
Fund director at meetings of the Board of Directors held outside of the United
States. For the fiscal years ended June 30, 1994, 1995 and 1996, the aggregate
fees incurred by the Manager for the services of the Korean Adviser amounted to
$1,126,983, $1,565,020 and $1,879,072, respectively.
The Research Agreement provides that the Korean Adviser will not be liable
for any act or omission in the course of, connected with or arising out of any
services rendered under the Research Agreement except by reason of willful
misfeasance, bad faith or gross negligence on the part of the Korean Adviser in
the performance of its duties or from reckless disregard by the Korean Adviser
of its obligations and duties under the Research Agreement.
Because the Korean Adviser is a Korean corporation having substantially all
of its assets outside of the United States, it may be difficult for United
States investors to effect service of process upon the Korean Adviser within the
United States or to realize judgments of courts of the United States based upon
civil liabilities of the Korean Adviser under the federal securities laws and
other laws of the United States. There is
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<PAGE> 34
substantial doubt as to the enforceability in Korea of such civil remedies and
criminal penalties as are afforded by the federal securities laws in the United
States.
Under the Research Agreement, the Manager has agreed to further the
development of the Korean Adviser's ability to provide services under the
Research Agreement. The Manager has also agreed not to furnish, without the
consent of the Korean Adviser, to persons other than the Manager's personnel and
the Fund's directors and other representatives any tangible research material
prepared by the Korean Adviser that is not publicly available and that has been
marked confidential.
The Research Agreement by its terms will remain in effect from year to year
if such continuance is specifically approved at least annually by the
affirmative vote of a majority of the members of the Board of Directors who are
not interested persons of the Fund, the Manager or the Korean Adviser, cast in
person at a meeting called for the purpose of voting on such approval, and by
the affirmative vote of either a majority of the Board of Directors or the
holders of a majority of the outstanding voting securities. The Research
Agreement may be terminated at any time without payment of penalty by the Fund
or the Korean Adviser on 60 days' written notice. The Research Agreement
automatically terminates in the event of the termination of the Fund's Agreement
with the Manager or in the event the Research Agreement is assigned (as defined
under the 1940 Act), but shall not terminate upon assignment to a corporate
successor to all or substantially all of the Korean Adviser's business, or a
wholly-owned subsidiary of such corporate successor, provided that such
assignment does not result in a change of actual control or management of the
Korean Adviser's business.
The Fund's license to invest in Korean securities provides that, should the
Korean Adviser's services under the Research Agreement be terminated for any
reason, the Manager is required to appoint a subsequent Korean adviser, subject
to approval by the Minister of Finance and Economy, within 120 days following
such termination. The license provides that such approval will not unreasonably
be withheld, but that the Minister of Finance and Economy will revoke the
license if the Minister shall have determined that the Manager has not sought in
good faith to appoint a successor Korean adviser reasonably acceptable to the
Minister. In the event the Fund's license is terminated, the Board of Directors
will consider appropriate actions, including termination of the Fund and
liquidation of its assets.
FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN KOREA
Although the Government has allowed direct foreign investment in Korean
securities by foreigners who intended to or could participate in the management
of an invested enterprise under the FCIA and the FEMA and indirect foreign
investment in Korean securities such as through the Fund, the Korean securities
markets were until relatively recently closed to other direct investment by
foreign investors. In December 1991, the Minister of Finance and Economy issued
regulations, which became effective January 3, 1992, that permitted direct
investment by foreign investors in Korean stocks listed on the Stock Exchange.
Such investment, however, is still subject to significant limitations under
regulations issued by the Minister of Finance and Economy and the KSEC.
FOREIGN INVESTMENT RESTRICTIONS
Since January 3, 1992, foreigners have been permitted to invest in all
shares listed on the Stock Exchange, subject to certain ceilings on foreign
shareholdings and procedural limitations. With certain limited exceptions,
foreign investors are only permitted to trade such shares on the Stock Exchange
itself. Foreign investors currently are prohibited from engaging in margin
transactions. In addition, a foreign investor is subject to certain specific
registration and reporting requirements, custody requirements and requirements
prescribing the use of certain types of entities as authorized standing proxies
to exercise shareholder's rights, to place orders to sell or purchase shares or
to take other related actions that it does not undertake directly.
In general, foreigners are not allowed to acquire equity securities of
Korean companies that are not listed on the Stock Exchange (unless otherwise
approved pursuant to the FCIA or the FEMA), nor are they allowed to invest in
bonds issued in Korea by the Government or corporate bonds issued in Korea
(other than direct
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investment in non-guaranteed listed convertible bonds and non-guaranteed listed
corporate bonds issued by small and medium-sized companies, and acquisition in
the primary market of public bonds with low interest rates compared with
international interest rates). Under its license to invest in Korea, however,
the Fund may acquire Stock Exchange-listed, underwritten or publicly offered
bonds (including bonds held through repurchase agreements, convertible bonds and
bonds with warrants) in an amount up to 10% of the Fund's net assets (subject to
the limitation that during any one month the Fund may not trade bonds listed on
the Stock Exchange outside the Stock Exchange in excess of 30% of the total
amount of bonds traded by the Fund during that month (except for trading
repurchase agreements and bonds which are not listed on the Stock Exchange)).
Current regulations generally limit the percentage of any class of shares
of a listed issuer in which a single foreign investor and all foreign investors
in the aggregate may acquire beneficial ownership to 5% and 20%, respectively.
The KSEC, however, may increase or decrease these percentages if it deems
necessary for the public interest, protection of investors or industrial policy.
The Government has announced its intention to further increase the aggregate
foreign ownership limit by 3% in each of 1997, 1998 and 1999, and in 2000 to
consider whether it will abolish such limit. No assurance can be given, however,
as to whether or when any additional increase will be implemented and, if and
when implemented, to what levels such limits will be raised. Currently, the KSEC
has authorized several exceptional ceilings as follows: (1) subject to prior
report to the Governor of the Securities Supervisory Board by a company whose
shares are held by foreign investors under the FCIA or the FEMA, (x) in which
the percentage of such foreign shareholding is less than 50%, a ceiling equal to
the sum of (a) the current percentage of foreign shareholding under the FCIA or
the FEMA and (b) a percentage (up to 20%) requested by such company or (y) in
which the percentage of foreign shareholding is 50% or more, a ceiling equal to
the percentage requested by such company may be established; (2) a 15% ceiling
on the acquisition of shares by foreigners in the aggregate has been established
for certain corporations designated by the Minister of Finance and Economy
(currently, only Korea Electric Power Corporation ("KEPCO") and Pohang Iron &
Steel Co., Ltd. ("POSCO") are subject to this lower ceiling); (3) the 7% ceiling
on the acquisition of a class of shares by the Fund; and (4) subject to prior
report to the Governor of the Securities Supervisory Board of Korea (the
"Governor") upon election by a company that has issued shares to foreigners in
connection with its issuance of equity-related securities overseas, a ceiling
equal to the sum of (a) the current percentage of such shares held by foreigners
and (b) a percentage (up to 20%) requested by such company. These ceilings may
be exceeded, however, as a result of acquiring (i) shares obtained pursuant to
the FCIA or the FEMA, (ii) shares held by a depositary which issues depositary
receipts evidencing an interest in such shares, (iii) shares listed on the Stock
Exchange acquired as a result of conversion of, or exercise of warrants or
withdrawal rights under or attached to, equity-related securities issued
overseas by Korean companies (collectively, "Converted Shares"), or (iv) shares
arising from the exercise of shareholder's rights and other rights and shares
obtained by way of gift, inheritance or bequest; provided that the number of
shares exceeding the 5% limit or, in the case of the Fund, the 7% limit (except
in the cases of (i) and (ii) above) must be sold within three months from the
date of acquisition.
In calculating these ceilings, all foreign shareholdings (other than those
owned by certain foreigners treated as Korean nationals) must be counted
regardless of whether the shares were purchased through the Stock Exchange, or
whether they are newly issued shares or outstanding shares. Newly issued shares
(including Converted Shares) are calculated as of the date of their listing on
the Stock Exchange. When applying a ceiling with respect to acquisitions by a
single foreign investor, each entity (including individuals, corporations,
foreign government agencies, and foreign funds, unit trusts and partnerships) is
entitled to a separate 5% limitation. However, all branches in Korea of any
foreign investor as a group are entitled to their own 5% limitation separate
from that of their head office. When calculating these ceilings, shares
purchased are deemed to be acquired at the time of placing the relevant order
and shares sold are deemed to be disposed of at the time of execution.
A foreigner who has acquired shares in excess of any ceiling described
above may not exercise its voting rights with respect to the shares exceeding
such limit, and the KSEC may take necessary corrective action with regard to
such foreigner pursuant to the Securities and Exchange Act of Korea (the "Act").
The Governor may, in his discretion, disclose the numbers of shares of a class
available for investment by a single
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<PAGE> 36
foreign investor and foreign investors in the aggregate, and provide a list of
shares that have reached or exceeded the ceiling on acquisition by foreign
investors in the aggregate. Currently, the Governor discloses this list every
morning on which trading occurs.
As of March 21, 1997, 41.75% of the Fund's investment portfolio consisted
of securities that have reached the aggregate foreign investment limit. As of
March 21, 1997, 26.3% of the aggregate market capitalization of the Stock
Exchange consisted of securities that have reached the aggregate foreign
investment limit.
The Act generally imposes a 10% beneficial ownership limitation on the
total outstanding voting shares of a listed company that may be held by any one
individual or entity, including Korean nationals, without the approval of the
KSEC. Such 10% beneficial ownership limitation under the Act is scheduled to be
repealed effective April 1, 1997, except that certain designated public
corporations may, by their articles of incorporation, continue to impose such a
limit at a level not exceeding 3%. Under the Act, such designated public
corporations are also generally authorized to adopt provisions in their articles
of incorporation restricting or prohibiting foreign ownership of such companies'
shares. At present, KEPCO and POSCO have adopted a provision in each of their
articles of incorporation restricting ownership of their shares by a single
investor (including Korean nationals) to 1% of each class of their shares. Both
KEPCO and POSCO are significant within their respective industries in terms of
size and quality of their earnings and assets. The KSEC rules also provide that
a company may not issue convertible bonds, bonds with warrants or depositary
receipts outside of Korea if the sum of (i) shares to be acquired by foreigners
by the exercise of the conversion rights, warrants or withdrawal rights for
underlying shares under the proposed issue and under any previously issued
bonds, warrants or depositary receipts, (ii) shares to be acquired by foreigners
as a result of exercising applicable conversion rights attached to certain
eligible domestic convertible bonds issued by small and medium-sized companies,
(iii) shares held by foreigners in excess of the applicable ceiling (generally
20%) on aggregate foreign investment (except any such excess held under the
FCIA), and (iv) the Converted Shares which have not been included in the
calculation of the aggregate foreign ownership limit by reason of application by
the relevant company not to include such Converted Shares in the determination
of such ceiling and the report to the KSEC thereof in the aggregate, exceed or
would exceed 15% of the issued capital of the issuer at the date of issue of the
relevant securities plus the shares referred to in (i) above. However, in the
case of banks, the number of the Converted Shares may not exceed 30% of the
issued capital of such banks plus the aggregate foreign ownership of the shares,
except where (i) the depositary receipts represent the non-voting shares or (ii)
certain measures, including, but not limited to, the formation of a voting
council, are taken in order to direct the depositary as to the voting of the
shares held by the depositary. In addition, the Foreign Exchange Management
Regulations currently provide that the percentage of the outstanding shares of a
company (including shares which would be outstanding as a result of the
conversion of convertible bonds and the exercise of warrants attached to bonds
or withdrawal rights attached to depositary receipts) that may be held by
non-residents or foreigners, unless provided otherwise in any other relevant
laws and regulations (including those of the KSEC), is limited to 50%.
A foreign investor who intends to acquire shares must designate a single
bank in Korea and open Won and foreign currency accounts, exclusively for
investment in shares (respectively, "Won Account" and "Foreign Currency
Account"). No approval is required for remittance into Korea and deposit of
foreign currency funds in the Foreign Currency Account. With the report to the
designated foreign exchange bank, foreign currency funds may be transferred to a
Won account held with a broker (i.e., securities company) only at the time Won
funds are necessary for the purchase of shares (i.e., payment of the deposit
money at the time of placing an order, and the remainder of the purchase price
outstanding at the time of settlement). Funds in the Foreign Currency Account
may be remitted abroad without any governmental approval.
Dividends on shares of Korean companies are paid in Won. No governmental
approval is required for foreign investors to receive dividends on, or the Won
proceeds of the sale of, any such shares to be paid, received and retained in
Korea. Dividends paid on, and the Won proceeds of the sale of, any such shares
held by a non-resident of Korea must be deposited either in a Won account with
the investor's securities company or its Won Account. Funds in the investor's
Won Account may be transferred to its Foreign Currency Account or withdrawn for
local living expenses (subject to a certain limitations), in each case with a
report to the investor's designated foreign exchange bank. In addition, funds in
the Won Account may be used for future
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<PAGE> 37
investment in shares or for payment of the subscription price of new shares
obtained through the exercise of preemptive rights.
Certain designated securities companies are allowed to open foreign
currency accounts and Won accounts with banks exclusively for accommodating
foreign investors' stock investments in Korea. Through such accounts, these
designated securities companies may enter into foreign exchange transactions on
a limited basis, such as conversion of foreign currency funds and Won funds,
either as a counterparty to or on behalf of foreign investors without such
investors having to open their own accounts with banks.
Since July 1, 1994, foreign investors have been permitted to invest in (i)
Stock Exchange listed non-guaranteed convertible bonds issued by listed small-
and medium-sized companies and (ii) low interest rate public bonds designated
from time to time by the KSEC, subject to certain ceilings and procedural
limitations.
Beginning May 1, 1996, foreign investors were permitted to invest in
warrants representing the right to subscribe for shares of a listed company,
subject to certain aggregate foreign investment and trading limitations.
On May 3, 1996, a stock index futures market was opened on the Stock
Exchange. Foreign investors have been allowed to invest in this market subject
to certain individual ownership and aggregate foreign investment limitations.
Since January 3, 1997, foreign investors have been permitted to invest in
non-guaranteed corporate bonds issued by small and medium-sized companies that
are listed on the Stock Exchange or registered with the Korea Securities Dealers
Association for trading on the over-the-counter market.
THE FUND'S LICENSE
Under the Fund's license to invest in Korean securities, the Minister of
Finance and Economy has imposed certain restrictions on the Fund which provide,
among other things, that the Fund may not (1) purchase any equity security of a
Korean issuer if, as a result of such purchase, the Fund would then own more
than 7% of the outstanding shares of any class of stock of an issuer, unless
permitted by regulations applicable to investments by foreigners or otherwise
permitted by the KSEC; (2) make investments in Korean securities for the purpose
of exercising control or management of the issuer; or (3) acquire any unlisted
shares registered with the Korea Securities Dealers Association for trading on
the over-the-counter market, if as a result of such acquisition, more than 25%
of the Fund's net assets (determined at market value as of the purchase date)
would be invested in such shares in the aggregate or up to 5% of the Fund's net
assets (determined at market value as of the purchase date) would be invested in
any class of such shares. The Fund may purchase shares in initial public
offerings on the same basis as Korean domestic institutional investors. The Fund
may also acquire Stock Exchange-listed, underwritten or publicly offered
Government and corporate bonds (including bonds held through repurchase
agreements, convertible bonds and bonds with warrants) in amounts not in excess
of 20% of its net assets. In addition, although the Fund may repatriate income
received from dividends and interest earned on, and net realized capital gains
from, its investments in Korean securities, it may not repatriate principal
except to the extent that Fund expenses exceed Fund income or in the event of
termination of the Fund. Before any repatriation, the Fund is required to obtain
approval from its designated bank in order to confirm that the amount being
remitted is consistent with the Fund's license. The Fund currently obtains such
approvals from the Subcustodian, which is the Fund's designated bank. Were the
Minister of Finance and Economy to revoke or modify the license issued to the
Fund or suspend foreign exchange transactions generally, the Fund's shareholders
could be adversely affected because of an inability to repatriate funds. If for
any reason the Fund were unable to distribute substantially all of its net
investment income (including short-term capital gains) and long-term capital
gains within applicable time periods, the Fund could be subject to U.S. Federal
income and excise taxes which would not otherwise be incurred and may cease to
qualify for the favorable tax treatment afforded to regulated investment
companies under the Code, in which case it would become subject to U.S. Federal
income tax on all of its income and gains. See "Taxation -- United States
Federal Income Taxes" in the SAI.
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<PAGE> 38
The Fund's license to invest in Korean securities is also subject to the
condition that if the services of the Manager or the Korean Adviser are
terminated, the appointment of a successor is to be approved by the Minister of
Finance and Economy. See "Investment Advisers." Under a further condition, the
Fund, the Manager and the Korean Adviser are required to furnish to the Minister
of Finance and Economy and the KSEC information reasonably requested by the
Minister of Finance and Economy or the KSEC relating to the Fund's operations or
for the purpose of determining whether the Fund has complied with the conditions
of the license and with Korean securities laws.
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 noncompliance
by the Fund with one or more conditions attached to the license or a material
violation by the Fund of applicable Korean law. In addition, the Minister of
Finance and Economy or the 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. The Minister of
Finance and Economy has the authority, with prior public notice of scope and
duration, to suspend all foreign exchange transactions when emergency measures
are deemed necessary in case of a radical change in the international or
domestic economic situation. To date, the Minister of Finance and Economy has
not exercised this authority.
FURTHER OPENING OF THE KOREAN SECURITIES MARKET
In December 1996, Korea officially became the 19th member nation of the
Organization for Economic Cooperation and Development ("OECD"). Before
officially joining the OECD, the Government had announced a number of steps to
further liberalize the Korean securities market, consistent with its desire to
become an OECD member. Some of the steps are: permitting, during 1997,
foreigners to acquire non-guaranteed bonds issued by small and medium-sized
companies; permitting, during 1998, foreigners to acquire non-guaranteed
convertible bonds issued by companies other than small and medium-sized
companies; further expanding, during 1998 and 1999, the opening of the Korean
debt securities market to foreigners, particularly with respect to
non-guaranteed long-term bonds; full liberalization of the scope of foreign
investment in Korean debt securities about the time that the differences between
domestic and international interest rates become less than 2%, or,
alternatively, certain macroeconomic measures indicate stability in the Korean
economy (e.g., inflation rate falls to 3% or lower); increasing the aggregate
foreign ownership limit for equity securities generally by 3% in each of 1997,
1998 and 1999, and abolishing such limit in 2000; and increasing the ownership
limit by a single foreigner up to 10% in 2000.
THE KOREAN SECURITIES MARKETS
THE STOCK EXCHANGE
The Stock Exchange, established in 1956, is the only stock exchange in
Korea and has its only trading floor in Seoul. Both equity and debt securities
are traded on the Stock Exchange. Although the Stock Exchange market
capitalization and trading volume have increased substantially over the past ten
years except for 1990, 1991, 1995 and 1996, it is still small relative to
Japanese, United States and major European exchanges. The aggregate market value
of equity securities was approximately 117.4 trillion Won (approximately $139.1
billion) at December 31, 1996, and average daily trading value was approximately
486.8 billion Won (approximately $605.2 million) for 1996.
For smaller companies that are unable to meet the Stock Exchange's listing
requirements, an over-the-counter market was established in April 1987 for
nonlisted securities. At the end of 1995, the securities of 340 companies were
registered on the over-the-counter market. This market is small and
unsophisticated by U.S. standards. To further its plan to develop the
over-the-counter market, the KSEC has adopted various regulations designed to
promote the trading of shares of small and medium-sized companies on the
over-the-counter market.
36
<PAGE> 39
Equity Market
The number of companies listed on the Stock Exchange, the corresponding
aggregate market value at the end of the periods indicated and the average daily
trading volume for those periods are set out in the following table:
<TABLE>
<CAPTION>
MARKET VALUE AT PERIOD
END AVERAGE DAILY TRADING VOLUME
---------------------- --------------------------------------
NUMBER OF IN IN IN IN IN
LISTED BILLIONS MILLIONS THOUSANDS MILLIONS THOUSANDS
YEAR COMPANIES OF WON OF DOLLARS OF SHARES OF WON OF DOLLARS
- -------------------------------- --------- -------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1991............................ 686 73,118 96,106 14,022 214,263 292,170
1992............................ 688 84,712 107,448 24,028 308,246 394,858
1993............................ 693 112,665 139,420 35,130 574,048 715,113
1994............................ 699 151,217 191,729 36,862 776,257 966,167
1995............................ 721 141,151 182,201 26,104 487,234 631,730
1996............................ 760 117,370 139,031 26,571 486,834 605,176
</TABLE>
- ---------------
Source: Stock, Korea Stock Exchange.
Equity securities listed on the Stock Exchange are divided into two
sections. The following table shows the number of listed companies and the
average daily trading volume for each of the two sections of the Stock Exchange:
<TABLE>
<CAPTION>
AVERAGE DAILY TRADING VOLUME
---------------------------------------------------------
NUMBER OF
LISTED COMPANIES IN THOUSANDS IN MILLIONS IN THOUSANDS
OF SHARES OF WON OF DOLLARS
----------------- ----------------- ----------------- -----------------
FIRST SECOND FIRST SECOND FIRST SECOND FIRST SECOND
YEAR SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION
- ----------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1991......................... 483 203 12,127 1,895 194,944 19,319 265,827 26,343
1992......................... 483 205 20,769 3,259 281,788 26,458 360,966 33,892
1993......................... 482 211 28,568 6,562 497,280 76,768 619,533 95,640
1994......................... 460 239 30,047 6,815 673,555 102,702 839,143 127,950
1995......................... 467 254 20,554 5,576 412,123 75,639 534,343 98,071
1996......................... 469 291 19,564 7,008 372,520 114,314 463,094 142,102
</TABLE>
- ---------------
Source: Stock, Korea Stock Exchange.
For original listing on the Stock Exchange, a company must meet certain
requirements relating to size, history of operations, financial condition and
percentage of voting shares held or to be held by the public. Upon original
listing, a company's securities are traded on the second section of the Stock
Exchange. To be eligible for listing on the first section of the Stock Exchange,
a company must have been listed on the second section for at least one year and
must meet more stringent tests than those for original listing.
Purchases and sales of shares may be completed fully in cash or by means of
a margin transaction. Foreign investors, including the Fund, are currently
prohibited from engaging in margin transactions. At present, the margin
requirement is the amount equivalent to 40% of the total value of the stocks
purchased on margin or sold short. Only shares in the first section of the Stock
Exchange, except for the shares of a securities company which acts as a broker,
are eligible for margin transactions, and the margin requirements are varied
from time to time by the KSEC.
37
<PAGE> 40
The Korea Composite Stock Price Index (the "KOSPI"), a broadly based
indicator of share price, was created in 1972. After several years of
volatility, the KOSPI was reset by the Stock Exchange in 1979. Movements in
stock prices for the last 10 years, as shown by the KOSPI (January 4, 1980 =
100), are set out in the table below, together with the associated dividend
yield and price-to-earnings ratios for listed securities as of the end of the
periods indicated. The dividend yield figures include cash actually paid, are
based on dividend paying companies only and are not weighted by the aggregate
market value of such companies.
<TABLE>
<CAPTION>
AVERAGE
STOCK PRICES ------------------------------------
------------------- DIVIDEND YIELD(1) PRICE/EARNINGS
YEAR HIGH LOW ----------------- RATIO(2)
---------------------------------- -------- ------ (% OF MARKET --------------
VALUE AT 12/31)
<S> <C> <C> <C> <C>
1987.............................. 525.11 264.82 2.9 10.9
1988.............................. 922.56 527.89 2.6 11.2
1989.............................. 1,007.77 844.75 2.3 13.9
1990.............................. 928.82 566.27 2.6 12.8
1991.............................. 763.10 586.51 2.9 11.2
1992.............................. 691.48 459.07 2.5 10.8
1993.............................. 874.10 605.93 1.9 12.7
1994.............................. 1,138.75 855.37 1.4 16.2
1995.............................. 1,016.77 847.09 1.4 16.4
1996.............................. 986.84 651.22 1.5 17.8
</TABLE>
- ---------------
(1) The dividend yield calculated on the basis of a weighted average for all
listed companies was 2.1%, 1.4%, 1.2%, 1.5%, 1.8%, 1.9%, 1.4%, 1.2%, 1.1%
and 1.5 %, respectively, for the years ended December 31, 1987, 1988, 1989,
1990, 1991, 1992, 1993, 1994, 1995 and 1996. The figures include only
companies that paid dividends in the previous fiscal year.
(2) Korean companies normally report earnings only on an annual basis. As a
result, the earnings used to calculate price-to-earnings ratios may not be
comparable to those customarily used in the United States. The figures do
not include companies that recorded losses in the previous year.
Source: Stock, Korea Stock Exchange.
After recording steady gains during most of the mid-1980's, the KOSPI rose
sharply during the first half of 1986, from 163.27 to 274.20 in July, when the
Government, concerned by the increasingly speculative nature of stock market
trading, introduced measures that caused a decline through most of October,
although the KOSPI recovered to close the year at 272.61.
The KOSPI continued to increase during 1987 and 1988, closing 1988 at
907.20. The increase in the KOSPI reflected Korea's rapid economic growth,
growing current account surplus, growth in savings, and the orderly election of
Roh Tae Woo to succeed Chun Doo Hwan as President of the Republic.
The KOSPI rose to a high of 1007.77 on April 1, 1989, but then underwent a
period of prolonged weakness, reaching a subsequent low of 459.07 on August 21,
1992. Subsequently, the KOSPI exhibited a volatile but generally rising pattern,
reflecting, on the one hand, such negative factors as the trade deficit and
inflation and the August 1993 announcement (which caused a record one-day loss
of 7.5% in the KOSPI) of required disclosure of real names in financial
transactions and, on the other hand, such positive factors as the opening of the
Korean stock market to foreign investors, the depreciation of the Won (which
tended to help the price competitiveness of Korean goods in world markets), low
oil prices, improved labor-management relations, Government measures to support
the stock market and somewhat lower interest rates. The KOSPI reached an
all-time high of 1,138.7 on November 8, 1994, but has since experienced a
downward trend. It closed on March 24, 1997 at 617.26.
From 1987 to 1996, the dividend yield on the KOSPI declined from 2.9% to
1.5%. The substantial decline in the dividend yield is attributable to the
generally higher level in the market prices of securities listed on the Stock
Exchange and the common corporate practice of establishing dividend rates based
on the par value of shares and with reference to fixed deposit interest rates,
which have been declining since 1981.
38
<PAGE> 41
In addition to the KOSPI, stock price indexes for the first and second
sections and for small-, medium-and large-sized companies are published. In
general, stock prices on the second section are more volatile than those on the
first section and stock prices of small- and medium-sized companies are more
volatile than those of large companies.
Movements in individual company share prices of any category of shares on
one day are confined to 8% of the previous day's closing price of such shares,
rounded down as set forth below:
<TABLE>
<CAPTION>
ROUNDED DOWN TO
PREVIOUS DAY'S CLOSING PRICE (WON) (WON)
--------------------------------------------------------------------- ----------------
<S> <C>
Less than 10,000..................................................... 10
10,000 to less than 100,000.......................................... 100
100,000 to less than 500,000......................................... 500
500,000 or more...................................................... 1,000
</TABLE>
Such restrictions limit the maximum movement in the KOSPI on any day. As a
result, the quoted closing price of a listed security, if such closing price has
been fixed by the limit, may not necessarily represent the price at which
persons are willing to buy and to sell such security in the absence of such a
limit.
The following table shows the 30 largest companies listed on the Stock
Exchange, ranked by market capitalization as of December 31, 1996. As of that
date, these companies represented 46% of the total market capitalization of all
the companies listed on the Stock Exchange.
<TABLE>
<CAPTION>
IN BILLIONS IN MILLIONS
COMPANY OF WON OF DOLLARS
------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Korea Electric Power Corporation............................. 15,440,259 18,290
Samsung Electronics Co., Ltd. ............................... 4,592,777 5,440
Pohang Iron & Steel Co., Ltd. ............................... 3,427,416 4,060
Korea Mobile Telecommunications Corp. ....................... 2,660,972 3,152
Daewoo Heavy Industries Ltd. ................................ 1,904,261 2,256
Shinhan Bank................................................. 1,416,800 1,678
DACOM Corporation............................................ 1,402,080 1,661
LG Semicon................................................... 1,393,200 1,650
Samsung Display Devices Co., Ltd. ........................... 1,345,766 1,594
Korea Export Bank............................................ 1,262,250 1,495
Hyundai Electronics.......................................... 1,258,000 1,490
Kia Motors Corporation....................................... 1,247,868 1,478
Chohung Bank................................................. 1,228,167 1,455
Yukong Limited............................................... 1,181,971 1,400
Halla Climate................................................ 1,156,703 1,370
Kookmin Bank................................................. 1,142,009 1,353
Hyundai Engineering & Construction Co., Ltd. ................ 1,123,723 1,331
Hyundai Motor Co., Ltd. ..................................... 1,068,841 1,266
Ssangyon Oil Refining........................................ 1,050,232 1,244
LG Electronics Inc. ......................................... 1,043,229 1,236
Hanil Bank................................................... 962,800 1,140
The Commercial Bank of Korea, Ltd. .......................... 938,400 1,112
LG Information & Communications, Ltd. ....................... 855,880 1,014
Samsung Fire & Marine Insurance Co., Ltd. ................... 780,300 924
Dong Ah Construction......................................... 750,498 889
Daewoo Corporation........................................... 729,473 864
Korea First Bank............................................. 701,920 831
Seoul Bank................................................... 697,000 826
Samsung...................................................... 688,095 815
LG Chemical Ltd. ............................................ 686,461 813
</TABLE>
- ---------------
(1) 844.2 Exchange Rate 12/31/96
Source: Stock, Jan. 1997, Korea Stock Exchange.
39
<PAGE> 42
The following table shows the volume of trading during the year ended
December 31, 1996 for the 30 most actively traded companies on the Stock
Exchange. The trading in shares of these companies accounted for 20.6% of all
shares traded during 1996.
<TABLE>
<CAPTION>
NO. OF SHARES IN BILLIONS IN MILLIONS
COMPANY (000) OF WON OF DOLLARS(1)
----------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
Seoul Bank 112,054 872 835
Daewoo Heavy Industries Ltd.................... 95,835 845 802
The Commercial Bank of Korea, Ltd.............. 91,168 730 908
Korea First Bank............................... 79,181 525 683
LG Electronics, Inc............................ 72,200 1,437 1,788
Sammi Steel Co................................. 67,054 309 385
Daewoo Corporation............................. 66,488 561 597
Korea Exchange Bank............................ 65,618 645 802
Korea Electric Power Corporation............... 53,906 1,924 2,288
Kookmin Bank................................... 59,828 946 1,178
Kun Young Construction......................... 38,057 305 380
Cho Hun Bank................................... 54,947 498 510
Hanil Bank..................................... 53,665 455 588
Han Hwa Chemical............................... 47,695 474 538
Kukje.......................................... 47,155 288 350
Shinhan Bank................................... 46,856 742 972
Daewoo Telecom................................. 46,758 520 546
Samsung........................................ 41,954 781 946
Kunho Construction & Engineering............... 41,799 370 468
Samsung Electronics Co., Ltd................... 41,020 3,837 4,521
Chungbuk Bank.................................. 38,037 294 388
Daewoo Electronics Co., Ltd.................... 37,800 283 352
Daewoo Securities Co., Ltd..................... 37,127 707 878
Dong Sun....................................... 36,430 202 751
Midope......................................... 35,395 359 580
Ssangyung Motor................................ 38,138 298 370
Housing & Com'l Bank........................... 38,044 721 896
LG Chemical.................................... 32,004 425 528
Dongsuh Securities Co. Ltd..................... 32,940 390 485
Sapoong........................................ 32,230 425 529
</TABLE>
- ---------------
(1) Based on average exchange rate in 1996 of Won 804.45 = US$1.00.
Source: Fact Book, 1996 Facts and Figures, Korea Stock Exchange.
Since 1980, the Government and the public bodies have reduced their
interest in all listed companies, except for KEPCO and POSCO. The Government and
the public bodies owned, in aggregate, 8.03% of listed shares at December 31,
1995. With Government ownership down, institutional holders, including banks and
insurance companies, owned 26.8% of listed shares at December 31, 1995. On that
date, shareholders who individually owned 10,000 shares or more represented
2.06% of the total number of shareholders and owned 85.44% of the total number
of shares outstanding.
On May 3, 1996, the Stock Exchange opened a stock index futures market on
the Stock Exchange floor. The Stock Exchange has announced that it will open a
stock index futures option market in early 1997.
Bond Market
The market in Korea for listed bonds is less developed than the market for
listed equity securities. The official Korean bond market was established in
1968 pursuant to the Capital Market Promotion Act. In 1972, Korean corporations
began raising funds through underwritten public debt offerings. In line with the
sharp annual increases in the number of corporate bonds issued, the volume of
issues outstanding has also shown
40
<PAGE> 43
large increases. In addition, the Government and other public bodies have had
increasing recourse to the bond market with both listed and unlisted bond
volumes showing substantial growth. Volumes of outstanding bond issues since
1989 are given in the following table.
OUTSTANDING LISTED BOND ISSUES
AS OF DECEMBER 31
<TABLE>
<CAPTION>
LISTED PUBLIC BONDS LISTED CORPORATE BONDS TOTAL LISTED BONDS
--------------------------- --------------------------- ---------------------------
IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS
YEAR OF WON OF DOLLARS OF WON OF DOLLARS OF WON OF DOLLARS
- ------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1989.................... 28,095 41,341 15,395 22,654 43,491 63,994
1990.................... 29,049 40,549 22,068 30,804 51,117 71,353
1991.................... 32,250 42,389 29,241 38,435 61,491 80,824
1992.................... 32,447 41,155 32,697 41,472 65,143 82,627
1993.................... 41,359 51,181 37,574 46,496 78,933 97,677
1994.................... 56,621 71,790 45,876 58,167 102,497 129,957
1995.................... 69,542 89,766 56,456 72,874 125,998 162,641
1996.................... 102,419 121,321 73,120 86,615 175,540 207,937
</TABLE>
- ---------------
Source: Stock, Korea Stock Exchange.
Statistics are not regularly compiled with respect to unlisted public
bonds, although the volume outstanding is significant.
The secondary market in bonds listed on the Stock Exchange is relatively
inactive compared to the secondary market for equity securities listed on the
Stock Exchange. Details of trading value are given in the table below.
TRADING VALUE OF BONDS
<TABLE>
<CAPTION>
PUBLIC SECTOR BONDS CORPORATE SECTOR BONDS TOTAL BONDS
--------------------------- --------------------------- ---------------------------
IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS
YEAR OF WON OF DOLLARS OF WON OF DOLLARS OF WON OF DOLLARS
- ------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1989.................... 4,378 6,520 771 1,149 5,149 7,668
1990.................... 2,455 3,469 795 1,124 3,250 4,592
1991.................... 1,394 1,901 704 960 2,098 2,861
1992.................... 453 580 152 195 605 775
1993.................... 4 5 2 2 6 7
1994.................... 24 30 1,145 1,424 1,169 1,455
1995.................... 254 329 1,176 1,525 1,430 1,854
1996.................... 192 227 1,186 1,405 1,378 1,714
</TABLE>
- ---------------
Source: Stock, Korea Stock Exchange.
The table does not include over-the-counter trading. For bonds,
over-the-counter trading constitutes a substantially larger part of the overall
bond trading market than trading on the Stock Exchange.
THE KOREA SECURITIES MARKET STABILIZATION FUND
In May 1990, the Government established a Securities Market Stabilization
Fund (the "Stabilization Fund") which was designed to stabilize the market
prices of securities listed on the Stock Exchange. Financial contributors to the
capital of the Stabilization Fund were requested and obtained from companies
listed on the Stock Exchange and from domestic securities companies engaged in
trading securities listed on the Stock Exchange. As of December 31, 1995, the
aggregate value of listed shares held by the Stabilization Fund was
approximately Won 4.1 trillion (US$5.3 billion), representing approximately 2.9%
of the Stock Exchange's
41
<PAGE> 44
total market capitalization at that date. The Stabilization Fund was initially
established for a three year-period, which was extended for an additional three
years to May 1996.
On April 30, 1996, the contributors to the Stabilization Fund adopted a
resolution to liquidate the Stabilization Fund on May 3, 1996. Such resolution
provided that upon the liquidation of the Stabilization Fund, its cash and
liquid assets, amounting to approximately Won 1.3 trillion, would be distributed
to its members by August 1996, while the listed shares held by the Stabilization
Fund, with an aggregate market value of Won 4.1 trillion, would be deposited
with the Korea Securities Depository and thereafter distributed to its members
at the rate 20% per annum beginning in May 1998. This schedule for distribution
of listed shares is subject to amendment in accordance with market conditions.
In a slight departure from the foregoing schedule, the first distribution of
cash, in the amount of Won 922 billion, was made by the Stabilization Fund to
its members in September 1996. The remaining cash held by the Stabilization Fund
is scheduled to be distributed in February 1997.
MARKET REGULATION
The Minister of Finance and Economy establishes the basic policies
governing the overall operation of the Korean securities market. The official
Korean securities markets are principally regulated by the KSEC under the Act.
The Act is based on the United States securities laws and imposes restrictions
on insider trading, requires specified information to be made available to
investors and establishes rules regarding margin trading, proxy solicitation and
take-over bids, and also regulates the investment advisory business. Although
the KSEC is authorized to regulate and make decisions on all major issues
relating to the securities markets pursuant to the Act, all decisions of the
KSEC must be reported to the Minister of Finance and Economy. The Minister of
Finance and Economy may repeal any decision of the KSEC or suspend its
enforcement. The day-to-day management and implementation of the policies of the
KSEC are conducted by the Securities Supervisory Board.
The Act was most recently amended effective January 1994 in order to, among
other things, deregulate the securities markets by lifting (effective January 1,
1997) the 10% beneficial ownership limitation on the acquisition of shares of a
listed company by an individual Korean national. The January 1994 amendment also
permits listed companies to hold their own shares, improves the central
depository system and securities dispute conciliation committee, strengthens the
reporting requirements imposed on shareholders holding 5% or more of the issued
and outstanding shares of a listed company, and expands the scope of dissenting
shareholders entitled to request the issuer to purchase their shares under
certain circumstances, including at the time of merger or business transfer, to
include holders of non-voting shares. The Stock Exchange opened a stock index
futures market on May 3, 1996, and has announced that a stock index futures
option market will be introduced in early 1997.
Companies listed on the Stock Exchange are required to file audited annual
and reviewed semi-annual reports with the KSEC and the Stock Exchange. Certain
material events, including the revocation of a business license, the suspension
of a bank account, a corporate dissolution or a change in capitalization, must
be disclosed by listed companies on the date they occur to the public through
the facilities of the Stock Exchange. Certain less material events, including a
change of business objective, the filing of a major lawsuit against the company
and notification of a tax investigation, must be disclosed within two days to
the Stock Exchange, which will disclose them, on the company's behalf, to the
public.
In Korea, with requisite approvals from governmental authorities, banks,
merchant banks and short-term finance companies as well as securities companies
are allowed to engage in underwriting. Generally, securities companies are
allowed to perform all kinds of securities business while banks, merchant banks
and short-term finance companies are allowed to engage only in the underwriting
business with respect to debt securities.
42
<PAGE> 45
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT
AND CASH PURCHASE PLAN
The Fund intends to distribute to shareholders, at least annually,
substantially all of its net investment income and expects to distribute at
least annually any net long-term capital gains in excess of net short-term
capital losses (including any capital loss carryover). Net investment income
includes dividends, interest and any net short-term capital gains in excess of
net long-term capital losses (including any capital loss carryover), net of
expenses. See "Taxation -- United States Federal Income Taxes" in the SAI.
Pursuant to the Plan, each shareholder will be deemed to have elected,
unless State Street Bank and Trust Company, the Plan Agent, is otherwise
instructed in writing, to have all distributions, net of any applicable U.S.
withholding tax, automatically reinvested by the Plan Agent in Fund shares
pursuant to the Plan. Shareholders who elect not to participate in the Plan will
receive all distributions, net of any applicable U.S. withholding tax, in cash
paid by check in Dollars mailed directly to the shareholder by State Street Bank
and Trust Company, as dividend paying agent. Participants in the Plan may
terminate their accounts under the Plan by written notice to the Plan Agent. If
such notice is received by the Plan Agent not less than ten days prior to any
dividend or distribution record date, the termination will be effective
immediately; otherwise such termination will be effective on the first trading
day after the payment date of such dividend or distribution. In the case of
shareholders, such as banks, brokers or nominees, which 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 shareholder as
representing the total amount registered in the shareholder's name and held for
the account of beneficial owners who are to participate in the Plan. A
beneficial owner of shares registered in the name of a bank, broker or other
nominee should consult with such nominee as to participation in the Plan through
such nominee.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the directors of the Fund declare an income dividend or a capital gains
distribution payable either in the Fund's Common Stock or in cash, as
shareholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive Common Stock to be issued by the Fund.
If the market price per share on the valuation date equals or exceeds net asset
value per share on that date, the Fund will issue new shares to participants at
net asset value; provided, however, if the net asset value is less than 95% of
the market price on the valuation date, then the Fund will issue new shares to
participants at 95% of the market price. The valuation date will be the dividend
or distribution payment date or, if that date is not a NYSE trading day, the
next preceding trading day. If net asset value exceeds the market price of Fund
shares at such time, participants in the Plan will be deemed to have elected to
receive shares of stock from the Fund, valued at market price on the valuation
date. Participants reinvesting distributions in additional shares should be
treated for U.S. Federal income tax purposes as receiving a distribution in an
amount equal to the fair market value, determined as of the distribution date,
of the shares received (regardless of the net asset value of the shares on the
distribution date), and should have a cost basis in such shares equal to such
fair market value. If the Fund should declare an income dividend or capital
gains distribution payable only in cash, the Plan Agent will, as agent for the
participants, buy Fund shares in the open market, on the NYSE or elsewhere, for
the participants' account on, or shortly after, the payment date.
Participants in the Plan have the option of making additional cash payments
to the Plan Agent, semi-annually, in any amount from $100 to $3,000, for
investment in the Fund's common stock. The Plan Agent will use all such funds
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
thirty 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.
43
<PAGE> 46
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders 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 shareholder's proxy will include those
shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of the reinvestment
of dividends and capital gains distributions will be paid by the Fund. There
will be no brokerage charges with respect to shares issued directly by the Fund
as a result of dividends or capital gains distributions payable either in stock
or in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with voluntary cash payments made by the participant or reinvestment
of any dividends or capital gains distributions payable only in cash.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge $0.75 for each such purchase for a participant, plus a pro rata share of
the brokerage commissions. 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 prorating the lower
commission thus attainable.
The receipt of dividends and distributions under the Plan will not relieve
participants of any income tax (including withholding tax) which may be payable
on such dividends or distributions. See "Taxation -- United States Federal
Income Taxes" in the SAI.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to notice of the termination sent to the members of the Plan, in
the case of a dividend or distribution, at least 30 days before the record date
for such 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 laws, rules or policies of a regulatory authority) only by at least
30 days' written notice to participants in the Plan. Additional information
about the Plan may be obtained from the Plan Agent, State Street Bank and Trust
Company, P.O. Box 8200, Boston, MA 02266-8200, telephone number (617) 328-5000
ext. 6406.
TAXATION
For a discussion of the U.S. Federal income tax consequences and the Korean
tax consequences to Record Date Shareholders and Rights Holders with respect to
the Offer, see "The Offer -- U.S. Federal Income Tax Consequences; Korean Tax
Consequences" above. For a discussion of certain other U.S. tax matters
applicable to the Fund and its shareholders, see "Taxation" in the SAI.
Shareholders should consult their tax advisers concerning their own particular
situations, including the potential application of state, local and non-U.S.
taxes to their ownership of shares of the Fund.
U.S. TAXATION
The Fund has qualified and intends to continue to qualify to be treated as
a regulated investment company under the Code for each taxable year, although no
assurance can be given as to meeting the tests for such status. The Fund intends
to distribute to its shareholders each year all of its net investment income as
computed for U.S. Federal income tax purposes. Such distributions will, in
general, be taxable to shareholders. Shareholders not subject to tax on their
income will not be required to pay tax on amounts distributed to them. The Fund
will inform shareholders of the amount and nature of distributions made by the
Fund.
The Board of Directors will determine each year whether to distribute any
net long-term capital gains in excess of any net short-term capital losses
(including in such losses any capital loss carryovers from prior years) as
computed for U.S. Federal income tax purposes. The Fund presently expects to
distribute such excess to its shareholders each year.
44
<PAGE> 47
Dividend distributions paid out of the Fund's net investment income
(including short-term capital gains) will be taxable to a U.S. shareholder as
ordinary income, whether received in cash or reinvested in shares. Dividends
paid by the Fund will not qualify for the deduction (currently 70%, although
proposed legislation would make it 50% for many corporations) for dividends
received by corporations because the Fund's income is not expected to consist of
dividends paid by U.S. corporations. Distributions of net long-term capital
gains (i.e., capital gains from securities held for more than one year), if any,
are taxable as long-term capital gains, whether received in cash or reinvested
in shares, regardless of how long the shareholder has held the Fund's shares and
are not eligible for the dividends-received deduction. As of March 21, 1997,
there was approximately $66.8 million of net unrealized appreciation in the
Fund's net assets of approximately $474.2 million; if realized and distributed,
or deemed distributed, such gains would, in general, be taxable to shareholders,
including holders at that time of Shares acquired upon the exercise of the
Rights. See "Taxation -- United States Federal Income Taxes -- General,"
"-- Distributions" and "-- Non-U.S. Shareholders" in the SAI. Dividends of net
investment income and distributions of net long-term capital gains paid by the
Fund that (i) are declared in October, November or December, (ii) are payable to
holders of record as of a date in such a month, and (iii) are paid during the
following January, will be treated by shareholders as if received on December 31
of the calendar year in which declared. See "Dividends and Distributions;
Dividend Reinvestment and Cash Purchase Plan."
The Fund has adopted a Dividend Reinvestment and Cash Purchase Plan.
Shareholders are deemed to have elected to participate in the Plan unless the
Plan Agent is otherwise instructed in writing. Participants in the Plan will
receive dividend and capital gain distributions in shares of the Fund, rather
than in cash, if the Fund's Board of Directors declares that payment may be made
in shares of the Fund or in cash. The Fund contemplates that distributions will
ordinarily be payable in shares or cash. See "Dividends and Distributions;
Dividend Reinvestment and Cash Purchase Plan."
Shareholders reinvesting distributions in additional shares through
participation in the Plan should be treated for U.S. Federal income tax purposes
as receiving a distribution in an amount equal to the fair market value,
determined as of the distribution date, of the shares received (whether the fair
market value is less than or greater than the net asset value of the shares on
the distribution date), and should have a cost basis in such shares equal to
such fair market value.
The Fund expects to be eligible to elect, and will notify shareholders if
it so elects, to "pass-through" to the Fund's shareholders the amount of Korean
withholding taxes imposed on dividends and interest. If the Fund makes such an
election, shareholders will be required to include in income their proportionate
shares of such amount. U.S. shareholders may be entitled to claim a credit or
deduction for all or a portion of such amount. However, non-U.S. shareholders
will not ordinarily be able to claim a credit or deduction with respect to such
amount. See "Taxation -- Non-U.S. Income Taxes" and " -- Non-U.S. Shareholders"
in the SAI.
The Fund may be required to withhold for U.S. Federal income tax purposes
31% of all distributions payable to shareholders (not otherwise exempt from such
withholding) who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding.
KOREAN TAXATION
The following description of certain Korean tax matters relating to the
Fund and its shareholders represents the opinion of Shin & Kim, Korean counsel
to the Fund.
Under current Korean law, payments to non-residents of Korea (such as the
Fund) by Korean corporations in respect of income are subject to Korean
withholding tax, and capital gains derived by non-residents of Korea (such as
the Fund) with respect to stock and securities of Korean corporations are
subject to Korean withholding tax, unless exempted by relevant laws or tax
treaties. More specifically, dividends and interest are subject to withholding
tax at the rate of 27.5% and capital gains (without deduction for capital
losses) are subject to withholding tax at a rate equal to the lower of (i) 11%
of the gross sales proceeds, or (ii) if satisfactory evidence of acquisition
cost is produced, 27.5% of the difference between the gross sales
45
<PAGE> 48
proceeds and the acquisition cost of the stock or security sold (excluding any
transaction charges, commissions, fees or taxes paid at the time of
acquisition).
The applicable withholding tax rate under the United States-Korea income
tax treaty, as presently in effect (the "Treaty"), generally is 15% (plus a
resident tax of 10% of such amount, or a total of 16.5%) on dividends paid to
the Fund by Korean issuers, and generally 12% (plus a resident tax of 10% of
such amount, or a total of 13.2%) on interest paid to the Fund by Korean
issuers. Under the Treaty, as presently in effect, no withholding tax will be
applicable to capital gains realized by the Fund.
The reduced tax rate and exemption under the provisions of the Treaty will
not apply to the dividend, interest and capital gain income derived by the Fund
from Korean corporations if both (i) the Fund is, by reason of the existence of
special measures under United States Federal income tax law with respect to
those types of income, subject to United States Federal income tax in an amount
substantially less than the United States Federal income tax generally imposed
on corporate profits (Article 17(a) of the Treaty), and (ii) at least 25% of the
Fund's outstanding shares are held of record or otherwise determined to be
owned, directly or indirectly, by one or more persons who are not individual
residents of the United States (Article 17(b) of the Treaty).
Questions have been raised as to whether the United States regulated
investment company provisions contained in the Code constitute "special
measures" for purposes of Article 17(a) of the Treaty. Regardless of the
resolution of these questions, under Article 17(b) of the Treaty, the Fund will
qualify for the benefits of the Treaty so long as less than 25% of the Fund's
outstanding shares are determined to be held other than by individual residents
of the United States.
In 1993, the Fund received written confirmation from the Minister of
Finance and Economy that, so long as the number of shares allocated to the
underwriters of countries other than the United States is less than 25% of the
total number of publicly offered shares (aggregating the total number of shares
allocated to underwriters by the Fund in all of its public offerings), the Fund
will continue to be entitled to the benefits of the Treaty (as it has been until
now), because Article 17(b) of the Treaty does not apply.
At the time of the Fund's last rights offering in 1995, the Fund received
written confirmation from the Minister of Finance and Economy that if and so
long as the number of shares which have been underwritten by underwriters which
are outside of the country of residence of the Fund throughout the Fund's four
prior public offerings was less than 25% of the total number of shares which
have been publicly offered, the 1995 offering took place in the form of a
capital increase through an issue of rights to subscribe for new shares to be
offered to its existing shareholders, and the certificates which evidenced the
right to subscribe for newly issued shares were listed only on stock exchanges
within the United States, the applicability of the Treaty to the Fund would
continue to be acknowledged.
The Fund has satisfied the foregoing requirements with respect to all of
its outstanding shares publicly offered. In order to continue to qualify for the
benefits of the Treaty, the Fund will proceed with this offering in a manner so
as to satisfy the remaining requirements and intends to satisfy all of these
requirements in all future public offerings of its shares (if any).
Notwithstanding the foregoing, the Tax Exemption and Reduction Control Law
(the "TERCL") exempts interest on bonds denominated in a non-Korean currency
from Korean income and corporation taxes. The residents' tax referred to above
is therefore eliminated with respect to such investments. The TERCL tax
exemptions will expire on December 31, 1998.
Under present Korean law, no Korean tax will be payable on gain realized
upon a sale of shares of the Fund, or upon the receipt of distributions from the
Fund, if the seller, or recipient of the distributions, as the case may be, is
not domiciled in Korea and the Korean Inheritance and Gift Tax will not apply to
any testate, intestate or inter-vivos transfer of shares of the Fund to the
extent the deceased or the donee, as the case may be, is not domiciled in Korea;
Korean stamp duty will not apply to transfers of Fund shares, nor to the Fund's
portfolio securities transactions. The Korean Securities Transaction Tax will
not apply to the sale of securities made through the Stock Exchange by the Fund.
However, sales of Korean shares and certain other equity
46
<PAGE> 49
securities made outside of the Stock Exchange will be subject to the Korean
Securities Transaction Tax. See "Portfolio Transactions and Brokerage."
This tax treatment could change in the event of changes in Korean or United
States tax laws, changes in the terms of, or the Minister of Finance and
Economy's interpretation of, the Treaty, or changes in relevant facts.
COMMON STOCK
Shares of the Fund, when issued against payment therefor, will be fully
paid and non-assessable. All shares are equal as to earnings, assets and voting
privileges. There are no conversion, preemptive or other subscription rights. In
the event of liquidation, each share of Common Stock is entitled to its
proportion of the Fund's assets after debts and expenses. See "Risk Factors and
Special Considerations -- Currency Conversion and Repatriation," above, for a
description of possible restrictions on repatriation. There are no cumulative
voting rights for the election of directors.
Set forth below is information with respect to the Common Stock as of
February 7, 1997:
<TABLE>
<CAPTION>
AMOUNT HELD BY
FUND OR FOR AMOUNT OUTSTANDING
ITS (EXCLUSIVE OF FUND
AMOUNT AUTHORIZED ACCOUNT HOLDINGS)
- ---------------------- -------------- ------------------
<S> <C> <C>
50,000,000 shares..... 0 37,570,917
</TABLE>
The Fund has no present intention of offering additional shares, other than
pursuant to the Offer, except that additional shares may be issued under the
Plan. See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase
Plan." Other offerings of its shares, if made, will require approval of the
Fund's Board of Directors. Any additional offering will be subject to the
requirements of the 1940 Act that shares may not be sold at a price below the
then-current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders or
with the consent of a majority of the Fund's outstanding shares.
SPECIAL VOTING PROVISIONS
The Fund has provisions in its Articles of Incorporation and By-Laws that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund, to cause it to engage in certain transactions or to
modify its structure, such as by turning it into an open-end investment company.
The Board of Directors is divided into three classes. At the annual meeting of
shareholders each year, the term of one class will expire and directors will be
elected to serve in that class for terms of three years. This provision could
delay for up to two years the replacement of a majority of the Board of
Directors. No director may be removed without cause by shareholders of the Fund.
The vote of the holders of two-thirds of the shares of the Fund is required
to authorize any of the following transactions:
(i) merger or consolidation of the Fund with or into any other
corporation, or the sale of substantially all of the Fund's assets to any
other corporation;
(ii) the dissolution of the Fund;
(iii) any shareholder proposal as to specified investment decisions
made or to be made with respect to the Fund's assets; and
(iv) any amendment to the Fund's Articles of Incorporation to make the
Fund's Common Stock a "redeemable security" (i.e., to cause the Fund to
become an open-end investment company).
Reference is made to the Articles of Incorporation and By-Laws of the Fund,
on file with the Commission, for the full text of these provisions. See "Further
Information." These provisions could have the effect of depriving shareholders
of an opportunity to sell their shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain control of the Fund
in a tender offer or similar
47
<PAGE> 50
transaction. The provisions in the Articles of Incorporation were approved by
the Fund's shareholders at the Fund's annual meeting in 1988. The Board of
Directors has determined that the foregoing voting requirements, which are
generally greater than the minimum requirements under Maryland law and the 1940
Act, are in the best interests of shareholders generally, and that the
advantages obtained from better assuring stability and continuity in corporate
leadership outweigh any possible disadvantages of the provisions.
DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company, P.O. Box 8200, Boston, Massachusetts
02206-8200, is the Fund's dividend paying agent, transfer agent and registrar
for the Fund's Common Stock.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, is Custodian for the Fund. The Fund's portfolio securities, when invested
in securities of Korean issuers and other Won-denominated securities, and cash
and cash equivalents, when held in Korea, are held at the Seoul branch of
Citibank, N.A., acting as Subcustodian and one of the Fund's standing proxies in
Korea.
OFFICIAL DOCUMENTS
All of the documents, except Korean company annual reports, referred to
herein as the source of statistical information are public official documents of
the Republic of Korea, its Ministries, the Bank of Korea, the KSEC or the Stock
Exchange.
EXPERTS
The financial statements and financial highlights of the Fund as of
December 31, 1996 and for the six months then ended and as of June 30, 1996 and
for the year then ended, included in the SAI have been included therein in
reliance on the report of Coopers & Lybrand L.L.P., One Post Office Square,
Boston, Massachusetts 02109, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
VALIDITY OF THE SHARES
The validity of the Shares offered hereby will be passed on for the Fund by
Debevoise & Plimpton, New York, New York and for the Dealer Manager by Skadden,
Arps, Slate, Meagher & Flom LLP, Boston, Massachusetts. Matters of Korean law
will be passed on for the Fund and for the Dealer Manager by Shin & Kim, Seoul,
Korea.
FURTHER INFORMATION
Further information concerning the Fund and the Fund's Common Stock may be
found in the Registration Statement of which this Prospectus constitutes a part,
which is on file with the Commission.
48
<PAGE> 51
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Restrictions............................................................... 2
Certain Investment Practices.......................................................... 3
Directors and Officers................................................................ 7
Net Asset Value....................................................................... 10
Taxation.............................................................................. 11
Portfolio Transactions and Brokerage.................................................. 17
Financial Statements.................................................................. F-1
Report of Independent Accountants..................................................... F-35
</TABLE>
49
<PAGE> 52
ANNEX A
THE REPUBLIC OF KOREA
GENERAL INFORMATION
General
The Republic was founded in 1948 following elections held in southern
Korea. The Republic has since controlled and administered the portion of the
Korean peninsula that lies generally to the south of the 38th parallel.
The Korean War of 1950-1953 began with the invasion by communist forces
from the North and, following a military stalemate, resulted in an armistice
establishing a demilitarized zone in the vicinity of the 38th parallel, which
became the boundary between the Republic and North Korea. The armistice
agreement continues to be supervised by United Nations forces.
The Republic has a land area of about 38,000 square miles, approximately
one-fourth of which is arable. The Republic has a population of approximately 45
million and has a literacy rate of over 90%. The capital, Seoul, with a
population of about 11 million, is approximately 40 miles south of the
demilitarized zone separating the Republic from North Korea.
Politics and Foreign Relations
The early years of the Republic were dominated by the successive
presidencies of Dr. Rhee Syngman, who was first elected in 1948 and re-elected
in 1952, 1956 and 1960. President Rhee resigned shortly after his 1960
re-election, partly in response to pressure from student-led demonstrations. In
1961, a group of military leaders headed by Park Chung Hee assumed power. A
civilian government was subsequently established, and Mr. Park was formally
elected President in October 1963. President Park served until 1979 when he was
assassinated following a period of increasing strife between the Government and
its critics. Martial law was declared and an interim government was formed under
Prime Minister Choi Kyu Hah, who became the next President. After clashes
between the Government and its critics, President Choi resigned and was
succeeded in August 1980 by General Chun Doo Hwan, who had taken power within
the Korean army.
Under the leadership of President Chun, a new Constitution, providing for
indirect election of the President and for certain democratic reforms, was
approved in a national referendum and shortly thereafter, in early 1981,
President Chun was re-elected and inaugurated as President. In 1987, following
public demonstrations against the prospect of choosing President Chun's
successor through indirect elections in an electoral college, the Constitution
was revised to permit direct election of the President. In December 1987, Roh
Tae Woo was elected President by a narrow plurality, after the opposition
parties led by Kim Young Sam and Kim Dae Joong failed to unite behind a single
candidate. In February 1990, members of two opposition political parties,
including the party led by Kim Young Sam, merged into the ruling Democratic
Liberal Party led by President Roh.
In December 1992, Kim Young Sam was elected President as the candidate of
the Democratic Liberal Party. This election of a civilian and former opposition
party leader as President ended the controversy concerning the legitimacy of the
political regime. Since his inauguration, President Kim has emphasized political
reform and the deregulation and internationalization of the Korean economy.
In late 1995 and early 1996, respectively, former Presidents Roh and Chun
were charged with accepting bribes from businessmen associated with certain
Korean companies in exchange for favorable treatment. These former Presidents
were also charged with sedition relating to the events surrounding the clashes
between the Government and its critics described above, which included a
confrontation in 1980 between the Korean army and civilian protesters in
Kwangju, Republic of Korea. In August 1996, former Presidents Roh and Chun were
sentenced to severe criminal penalties and fines for the charges in trial court
proceedings, and have since appealed the decision. Although these events have
raised concerns over the stability of the Korean economy, there has been no
significant political or social unrest. In response to these events, the
Government
A-1
<PAGE> 53
has affirmed its commitment to uncover any unlawful practices relating to these
events, as well as to continue its anti-corruption reforms generally and the
deregulation of the Korean economy toward a more efficient market economy.
Relations between the Republic and North Korea have been tense over most of
the Republic's history. North Korea maintains a regular military force estimated
at more than 1,000,000 troops, the majority of which are concentrated near the
northern border of the demilitarized zone. The Republic maintains a state of
military preparedness along the southern border of the demilitarized zone. The
Republic has a national conscription system and a regular military force
consisting of approximately 655,000 troops. In addition to the regular forces,
there are reserves of almost 3.2 million troops. The United States currently
maintains military forces of approximately 37,000 troops in the Republic.
Sporadic contacts between the Republic and North Korea have taken place in
recent years. On December 13, 1991, the Prime Ministers of the Republic and
North Korea signed an "Agreement on Reconciliation, Nonaggression and Exchange
and Cooperation" in which the two sides agreed, among other things, to take
further steps toward conciliation and economic cooperation. Not long after it
was put into effect, however, major disputes developed, first over
interpretation, and then over mounting evidence that North Korea was
reprocessing plutonium, apparently as part of a weapons program, in violation of
the Nuclear Non-Proliferation Treaty to which it was a signatory. Tension built
to crisis proportions in 1994, but was relieved by a "framework agreement"
negotiated by the U.S. and North Korea with the Republic's concurrence. In
return for North Korea's dismantling its plutonium reprocessing program, the
Republic, Japan and the U.S. agreed to supply North Korea with two modern
light-water nuclear power plants. The agreement also called for eventual
normalization of U.S.-North Korea relations and North-South negotiations to ease
military confrontation. Direct trade between the Republic and North Korea,
although still relatively small, has expanded in recent years, along with minor
amounts of South Korean investment in the North. Annual direct trading volume
totaled US$229 million in 1994 and US$299 million in 1995. In mid-1995, the
Republic proposed to North Korea to deliver free rice to improve the climate for
a dialogue. This proposal led to an agreement to supply the North with 150,000
tons of rice free of charge without any preconditions. Most disturbing to the
Republic, however, North Korea has been unwilling to engage in tension-reducing
discussions with the Republic, pressing instead for bilateral talks with the
U.S. North Korea's recalcitrance has been intensified by domestic strains,
particularly severe food shortages, a declining gross domestic product and a
difficult leadership transition after the death of Kim II Sung. Tension between
the two Koreas again increased following the September 1996 discovery of a North
Korean submarine off the Republic's northeastern coast and the February 1997
defection of Hwang Jang Yop, a Secretary of the North Korean Workers Party who
has sought asylum in South Korea.
The Republic maintains diplomatic relations with most nations of the world.
The Republic's strongest ties are with the United States, and include a mutual
defense treaty and several agreements designed to promote the Republic's
economy. The Republic's relationship with Japan, now its largest trading partner
after the United States, is also increasingly important. China is also growing
in importance as a trading partner with the Republic.
Government Organization
Governmental authority in the Republic is highly centralized and is
concentrated in a strong presidency. The Constitution provides for the direct
election of the President by popular vote. The President is the chief of state
and head of the Republic's government. Under the present Constitution, the term
of office of the President is five years and he may not be re-elected. The
President has the right to veto new legislation and to take emergency measures
in case of natural disaster, serious fiscal or economic crisis, state of war or
similar condition. The President is required to notify the National Assembly
promptly of any such emergency measures taken and to seek its concurrence,
failing which the emergency measures are automatically invalidated.
Legislative power is vested in the National Assembly. Three-quarters of the
members of the National Assembly are elected by popular vote for a term of four
years. The remaining seats are distributed
A-2
<PAGE> 54
proportionately among parties winning five seats or more in the direct election.
The National Assembly enacts laws and approves treaties and the national budget.
Most legislation is drafted by the executive branch, which then submits bills to
the National Assembly for enactment.
THE ECONOMY
Economic Policy and the Five-Year Plans
Industry and commerce in the Republic are predominantly privately owned and
operated. The Government, however, has been heavily involved in establishing
economic policy objectives and implementing such policies with a view toward
maintaining national security, encouraging industrial development and improving
living standards. Economic, financial and business priorities can be influenced
by the Government through its control of business-related approvals and licenses
and through the allocation of credit. It is hoped that such Government influence
will gradually diminish through deregulation and market self-regulation, in
keeping with the Republic's economic liberalization policy.
The Minister of Finance and Economy is primarily responsible for
formulating economic policies, including the Five-Year Economic and Social
Development Plans which have guided economic policy since 1962. The Minister of
Finance and Economy exercises overall direction of the economy by means of
economic policies in cooperation with the various Ministries. The Minister of
Finance and Economy also implements fiscal, financial and monetary policies. To
encourage particular industries, the Government uses such measures as financial
assistance and tax incentives.
A five-year economic plan prepared by the Kim Young Sam administration
covers the years 1993 through early 1998. Included in the plan are proposals to
reduce regulations on business activity, reform the financial system, liberalize
interest rates, increase emphasis on research and development and add emphasis
on the training and upgrading of labor force skills.
The 30 largest business groups of related companies in terms of total
consolidated assets, commonly referred to as "chaebol" -- the four largest of
which are Hyundai, Samsung, Daewoo and LG -- are engaged in a wide range of
businesses and play a significant role in the Korean economy. Each chaebol
company is prohibited from holding shares of companies within its group and
outside the group in excess of 25% of its net asset value. Also, each chaebol
company was required to reduce the amount of guarantees provided for the benefit
of companies within the same group to 200% of its shareholders equity by the end
of March 1996. The Bank of Korea limits the total loans by Korean commercial
banks to Korean companies that are members of the 10 largest chaebol. Each of
the 10 largest chaebol is permitted to select up to three "core" companies (or,
in certain cases, up to five such companies) to which those limits would not
apply. The Government's policy is to encourage the growth of smaller and
medium-sized companies.
In December 1996, the Government became a member of the Organization for
Economic Cooperation and Development.
A-3
<PAGE> 55
Selected Economic Data
The following table sets forth selected economic data relating to the
Republic for the indicated periods.
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995(3)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Gross national product at current market prices
(billion Won).................................. 214,240 238,705 265,518 303,773 348,284
Government budget surplus (billion Won).......... (1,707) (689) 235 1,730 1,712
Growth in gross national product at current
prices (percentage change)..................... 20.2 11.4 11.2 14.4 14.7
Growth in real gross national product (percentage
change)........................................ 9.1 5.0 5.8 8.4 8.7
Producer price index (percentage change)......... 4.7 2.2 1.5 2.8 4.7
Consumer price index (percentage change)......... 9.3 6.2 4.8 6.2 4.5
Wages (percentage change)(1)..................... 16.9 15.7 10.9 15.5 9.9
Unemployment rate (percent)...................... 2.3 2.4 2.8 2.4 2.0
Industrial production (percentage change)........ 9.7 5.9 4.2 11.0 12.1
Exports (billion Dollars)(2)..................... 71.9 76.6 82.2 96.0 125.1
Imports (billion Dollars)(2)..................... 81.5 81.8 83.8 102.3 135.1
Trade balance (billion Dollars)(2)............... (9.6) (5.2) (1.6) (6.3) (10)
Current balance (billion Dollars)................ (8.7) (4.5) 0.4 (4.5) (8.9)
</TABLE>
- ---------------
(1) Monthly earnings of regular employees of all manufacturing industries.
(2) Calculated on the basis of customs clearing date.
(3) Preliminary.
Source: Monthly Statistics of Korea, National Statistical Office; Monthly
Bulletin, The Bank of Korea.
Gross National Product
During the past two decades, the average annual increase in real GNP has
been approximately 9.0%. Such increases are attributable in part to Government
policies favoring export-led growth and an industrious and well-trained labor
force. During this period, the Republic made significant progress toward the
transformation of its economy from one characterized by agricultural production
and the export of raw materials to that of a modern industrial state.
In 1990 and 1991, GNP grew at a rate of 9.6% and 9.1%, respectively. In
1992 and 1993, however, GNP grew at a lower growth rate of 5.0% and 5.8%,
respectively, as a result of various factors, including the previous
administration's policies intended to stabilize growth. In 1994, GNP grew at a
rate of 8.4%. In 1995, GNP increased 8.7%. On the demand side, final consumption
expenditure increased 7.0%, and gross fixed capital formation recorded a 12.4%
increase.
From 1990 through 1995, real GNP increased at an average annual rate of
7.4%. This high rate of growth was due to rapid growth in the exports of goods
and services and in domestic fixed capital formation. The former grew at an
average annual rate of 14.8% and the latter at 8.1%. The growth in the volume of
exports has been achieved by diversification of geographical markets and a shift
in emphasis in the composition of exports from agricultural products, raw
materials and textile products to manufactured goods, particularly
semiconductors, automobiles, electronic products, ships machinery and steel.
Prices, Wages and Employment
Higher wage increases during the period from the late 1980's to the early
1990's put increased inflationary pressure on the economy, resulting in an
increase of 8.6% in consumer prices in 1990 and 9.3% in 1991. However, the
annual rate of inflation has continued to fall since 1991 due to slower economic
growth and
A-4
<PAGE> 56
prudent economic policy of the Government. The inflation rate stood at 6.2%,
4.8%, 6.2%, 4.5% and 5.0% in 1992, 1993, 1994, 1995 and 1996, respectively.
The Republic's labor force is one of the economy's principal assets. In the
period from 1990 to November 1996, the economically active population of the
Republic increased by 16.6% to 21.6 million, while the number of employees
increased 17.1% to 21.2 million. The economically active population of those
over the age of 15 has remained a fairly stable proportion of the total
population over the age of 15 at between 58% and 63% over the past decade. The
labor force is well educated, with literacy being almost universal among workers
under 50.
Recent Government initiatives to make it easier for Korean companies to lay
off workers and curb wage growth have led to worker unrest, including a major
walkout in December 1996 and January 1997.
Energy
Korea has no domestic oil or gas production and is heavily dependent on
imported oil to meet its energy requirements. The performance of the Korean
economy is therefore broadly affected by the price of oil, resulting in high
inflation when world oil prices have risen sharply. Any significant long-term
increase in the price of oil may increase inflationary pressures in the Korean
economy and adversely affect the Republic's balance of trade.
THE FINANCIAL SECTOR
Korea's commercial banks have a high level of non-performing assets,
reflecting in part the high leverage typical of Korean companies and the decline
in several Korean industries, notably shipping and overseas construction during
the 1980's. The Bank of Korea selectively extends concessional loans (at 3%
annual interest) to commercial banks burdened by such non-performing loans. The
recent bankruptcy of Hanbo Steel Industry Co. has substantially increased
pressure on Korean commercial banks, causing the Government in January 1997 to
announce that it would distribute 100 billion Won through the banking sector
toward completion of a Hanbo steel mill. Further pressure was placed on Korea's
troubled banking sector by the March 1997 bankruptcy of Sammi Steel Co.
In addition to officially regulated financial institutions described above,
there has been an unofficial money market or "curb" market, which consists of
individual brokers and professional money lenders who make or arrange loans to
business borrowers. The curb market is significantly less important now than it
was several years ago. The increase in interest rates on officially regulated
markets, the increase in number of lending institutions, and increased price
stability, as well as steps taken by the Government, have contributed to the
substantial decline of the curb market.
In August 1993, President Kim Young Sam issued an emergency presidential
decree requiring the use of real names in financial transactions. Effective from
that date, financial institutions must confirm, whenever they enter into
financial transactions with their clients, that those clients are using their
real names. By October 12, 1993, all financial assets previously held in
accounts registered under names other than those of the actual owners with
financial institutions were to be reregistered under the owners' real names.
In addition, the law to introduce the real-name system for real estate
transactions became effective on July 1, 1995. This law is intended to
discourage real estate speculation and to prevent property taxes from rising out
of control by banning the practice of borrowing names for property registration,
thereby avoiding taxes.
MONETARY POLICY
The Monetary Board, the supreme policy-making arm of the Bank of Korea, has
the responsibility for formulating and implementing monetary policy. It also
regulates the activities of banking institutions and the Bank of Korea. The
Government does, however, exert considerable influence on monetary policy. The
Minister of Finance and Economy is empowered to request reconsideration of
resolutions adopted by the
A-5
<PAGE> 57
Monetary Board and if such a request is rejected by the Monetary Board, the
President has the authority to make the final decision.
Monetary policy is implemented by influencing the reserve positions of
banking institutions, principally through changes in the terms and conditions of
rediscounts, open market operations and changes in reserve requirement ratios.
The Bank of Korea may also set or alter maximum interest rates on deposits and
loans and, in periods of extreme monetary expansion, directly control the volume
and nature of bank credit. In practice, the Bank of Korea's power to set
interest rates and impose direct credit controls has proven to be the most
effective means of implementing monetary policy. The Bank of Korea recently has
reduced the extent of such direct intervention, in line with the Government's
deregulation of interest rates. In November 1994, the Government announced a
plan to further reduce the employment of direct intervention as a means of
implementing its monetary policy, in order to encourage the liberalization of
financial institutions' activities.
Interest rates of banks and non-bank financial institutions have been
largely determined by monetary authorities, bank rates by the Monetary Board and
others by the Minister of Finance and Economy. In November 1994, the Government
announced a plan for deregulation of interest rates, which accelerates the
Government's 1991 plan to reduce the use of direct intervention as a means of
implementing monetary policy. In accordance with the 1991 plan, at the end of
1993, all restrictions on interest rates for loans, (other than Bank of
Korea-supported policy loans), long-term (not less than two years) deposits,
certain short-term money market instruments, short-term (less than two years)
corporate and financial debt, monetary stabilization bonds and public bonds were
lifted. Pursuant to the 1994 plan, in 1995 interest rates were liberalized for
other short-term money market instruments and Bank of Korea-supported policy
loans, in 1996 interest rates were liberalized for all deposits other than
demand deposits, and beginning in 1997 limitations on interest rates for demand
deposits gradually will be lifted.
FOREIGN TRADE AND BALANCE OF PAYMENTS
Foreign Trade
Foreign trade is vital to the economy of the Republic, which lacks natural
resources and must rely on extensive trading activity as a basis for growth.
Virtually all domestic requirements for petroleum, wood and rubber are imported,
as are the Republic's requirements for coal and iron ore. In addition, much of
the capital equipment that built up Korea's manufacturing base has been
imported. The Republic has a very high ratio of exports as a percentage of GNP,
and the international economic environment is accordingly of crucial importance
to the Republic's economy.
In 1986, the Republic recorded the first substantial trade surplus on a
balance of payments basis in the nation's history at US$4.2 billion. The trade
surplus nearly doubled to US$7.7 billion in 1987 and increased to US$11.4
billion in 1988. In 1989, the trade surplus declined to US$4.6 billion, due
principally to the decline in export growth. In 1990, 1991 and 1992, the
Republic recorded trade deficits of US$2.0 billion, US$7.0 billion and US$2.1
billion, respectively. The balance of trade in 1990, 1991 and 1992 was adversely
affected by increases in oil prices that occurred in late 1990 as a result of
Persian Gulf crisis, by increased imports of machinery and other capital goods
and consumer goods, by the recession in countries constituting important markets
for Korean exports, principally the United States, and by increased competition
for the Republic's exports in certain markets. In 1993, the Republic recorded a
trade surplus of US$1.9 billion due to slow growth in imports of 2.5% compared
with 7.3% growth in exports. In 1994, the Republic sustained a US$3.1 billion
trade deficit due to rapid growth in imports of 22.4% compared with 15.7% growth
in exports.
In 1995, the Republic sustained a US$4.7 billion trade deficit as exports
grew 31.5% over the previous year's level to US$123.2 billion. The strong
Japanese yen, which made major Korean export items more price-competitive than
comparable Japanese products, and the worldwide economic recovery helped boost
export figures. Imports, however, increased 32.1% to US$128.0 billion due to
rapid infrastructure investment which required the increased importation of
capital goods.
In 1996, the Republic sustained a US$15.2 billion trade deficit. Exports
grew 4.1% over the previous year's level to US$128.3 billion while imports
increased 12.2% to US$143.5 billion. The balance of trade was
A-6
<PAGE> 58
adversely affected by decreases in prices of major export products and increases
in imported goods from Japan due to the weak Japanese Yen.
The following table summarizes the Republic's balance of trade (on a
balance of payments basis) from 1990 through 1996.
<TABLE>
<CAPTION>
EXPORTS PERCENTAGE PERCENTAGE
BALANCE AS % OF CHANGE CHANGE
EXPORTS IMPORTS OF TRADE IMPORTS EXPORTS IMPORTS
---------- ---------- ----------- ------------- ---------- ----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
1991............................ 69,582 76,561 (6,980) 90.9% 10.2% 17.6%
1992............................ 75,169 77,315 (2,146) 97.2% 8.0% 1.0%
1993............................ 80,950 79,090 1,860 102.4% 7.7% 2.3%
1994............................ 93,676 96,822 (3,145) 96.8% 15.7% 22.4%
1995............................ 123,203 127,949 (4,747) 96.3% 31.5% 32.1%
1996............................ 128,250 143,528 (15,278) 89.4% 4.1% 12.2%
Annual Average 91-96............ -- -- -- -- 12.7% 14.6%
</TABLE>
Source: Monthly Bulletin, The Bank of Korea
The Republic's largest trading partners are the United States and Japan. In
1996, the United States accounted for approximately 16.7% of Korea's total
exports and approximately 22.2% of Korea's total imports, while Japan accounted
for approximately 12.2% of Korea's total exports and approximately 20.9% of
Korea's total imports. Trade with China has increased in recent years, as
diplomatic relations between the two nations have improved, and China accounted
for approximately 8.8% of Korea's total exports and approximately 5.7% of
Korea's total imports total in 1996.
Balance of Payments
The following table sets forth certain information with respect to the
Republic's balance of payments for the periods indicated.
BALANCE OF PAYMENTS
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996(4)
------ ------ ------ ------- ------- -------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Current Balance............................. (8,728) (4,529) 385 (4,531) (8,948) (23,716)
Trade Balance............................. (6,980) (2,146) 1,860 (3,145) (4,746) (15,278)
Exports(1)................................ 69,582 75,169 80,950 93,676 123,203 128,250
Imports(1)................................ 76,561 77,315 79,090 96,822 127,949 143,528
Invisible Trade Balance................... (1,596) (2,614) (1,967) (1,989) (3,640) (7,683)
Unrequited Transfer (net)................. (152) 232 491 604 (561) (756)
Long-Term Capital(2)........................ 4,186 7,232 8,900 5,862 7,827 11,806
Basic Balance............................... (4,542) 2,704 9,284 1,331 (1,120) (11,911)
Short-Term Capital.......................... 41 1,110 (2,021) 3,163 5,592 5,423
Errors and Omissions........................ 760 1,084 (721) (1,672) (1,437) 750
Overall Balance............................. (3,741) 4,898 6,542 2,822 3,034 (5,737)
Financial Account(3)........................ 3,741 (4,898) (6,542) (2,822) (3,034) 5,737
Liabilities............................... 8,430 1,947 674 8,116 14,898 16,812
Assets.................................... (4,689) (6,845) (7,216) (10,938) (17,933) (11,075)
</TABLE>
- ---------------
(1) The entries are derived from trade statistics and valued on an FOB basis.
(2) The distinction between long-term and short-term capital is based on the
original maturity of one year.
(3) Includes borrowings from the International Monetary Fund, syndicated bank
loans and short-term finance from foreign commercial banks.
(4) Preliminary.
Source: Monthly Bulletin, The Bank of Korea.
A-7
<PAGE> 59
Public Finance
The Minister of Finance and Economy is responsible for the preparation of
the national budget. The Republic's fiscal year commences on January 1, and the
budget must be submitted to the National Assembly for its approval prior to the
commencement of the fiscal year.
The fiscal budget of the Government consists of a General Account and
Special Accounts. Revenues in the General Account include national taxes, stamp
duties and profits from government monopolies. Expenditures include those for
general administration, national defense, community service, education, health,
social security services, certain annuities and pensions, and local finance
which comprises the transfer of tax revenues to local governments.
Special Accounts are set up to aggregate the accounts of certain functions
of the Government to achieve more effective budgetary control and
administration. They include Government activities of a business nature, such as
communications, grain administration and government procurement.
The following table sets out Government revenues and expenditures,
excluding Special Accounts, for the periods indicated:
CONSOLIDATED CENTRAL GOVERNMENT
REVENUES AND EXPENDITURES
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995(P) 1996(1)
------ ------ ------ ------ ------- ----------
(IN BILLIONS OF WON)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Internal Taxes.......................... 24,030 30,099 34,178 38,462 44,387 33,815
Customs Duties.......................... 3,435 3,153 2,886 3,449 4,633 3,498
Defense Surtax.......................... 1,463 330 269 80 65 7
Traffic Tax............................. -- -- -- 2,449 3,372 3,207
Education Surtax........................ 816 943 999 1,205 1,449 1,215
Monopoly Profits........................ -- -- -- -- -- --
Special Agricultural and Fishery Tax.... -- -- -- 186 983 910
Government Enterprise Receipts.......... 810 1,042 902 1,079 1,407 1,133
Other................................... 8,775 10,699 13,894 7,601 20,622 14,449
------ ------ ------ ------ ------ ------
Total............................ 39,329 46,267 53,128 54,510 76,917 58,235
====== ====== ====== ====== ====== ======
Expenditures
General Expenses........................ 22,320 23,683 26,951 31,118 38,292 25,790
National Defense........................ 8,012 8,771 9,308 10,056 11,051 8,305
Fixed Capital Formation................. 2,049 2,821 2,889 2,547 4,045 2,911
Other................................... 8,617 11,686 13,721 9,053 21,860 13,506
------ ------ ------ ------ ------ ------
Total............................ 40,997 46,960 52,870 52,774 75,247 50,513
====== ====== ====== ====== ====== ======
Net Lending............................... 38 (5) 23 6 (42) 78
Budget Surplus............................ (1,707) (689) 235 1,730 1,712 7,645
</TABLE>
- ---------------
(P) Preliminary.
(1) January 1, 1996 through August 31, 1996
Source: Monthly Bulletin, The Bank of Korea.
External Debt
Rapid development in the Republic's economy has in the past necessitated
large foreign borrowings. In 1985, with total external debt of $46.8 billion,
the Republic was the world's fourth largest debtor. Since then, however, such
external debt was reduced to US$29.4 billion as of December 31, 1989 as a result
of substantial
A-8
<PAGE> 60
current account surpluses following 1986. Such external debt rose to US$39.1
billion, US$42.8 billion, US$43.9 billion and US$56.9 billion as of December
1991, 1992, 1993 and 1994, respectively, as a result of current account deficits
in each of these years except for 1993, in which case the increase of the
external debt over the previous year was due to a deficit in short-term capital
balance. The net external debt, which takes into account external debt and
assets at the same time, however, has decreased due to increased holdings of
external assets as foreign investment has increased.
FOREIGN EXCHANGE
Beginning in March 1990, exchange rates for the Won have been closely
linked to the rates calculated by averaging the daily exchange rates used for
interbank transactions settled through the Korea Telecommunications and
Clearings Institute (the "KTCI"), weighted by trading volume. This rate is known
as the market average exchange rate and is published daily by the KTCI. The
Government has enlarged the scope of the discretionary power of foreign exchange
banks to determine their own exchange rates with reference to the market average
exchange rate. The Government announced in 1995 that it would decide whether to
introduce a free-floating exchange rate system during 1996 and 1997 after
considering trends in the international monetary system.
The following table shows market average exchange rates at the dates
indicated below.
<TABLE>
<CAPTION>
EXCHANGE RATE
-------------------
(IN WON PER DOLLAR)
<S> <C>
June 30, 1991........................................................ 723.1
September 30, 1991................................................... 741.5
December 31, 1991.................................................... 760.8
March 31, 1992....................................................... 775.1
June 30, 1992........................................................ 790.2
September 30, 1992................................................... 786.6
December 31, 1992.................................................... 788.4
March 31, 1993....................................................... 794.0
June 30, 1993........................................................ 803.7
September 30, 1993................................................... 808.8
December 31, 1993.................................................... 808.1
March 31, 1994....................................................... 806.5
June 30, 1994........................................................ 805.5
September 30, 1994................................................... 798.9
December 31, 1994.................................................... 788.7
March 31, 1995....................................................... 771.5
June 30, 1995........................................................ 758.1
September 30, 1995................................................... 768.4
December 31, 1995.................................................... 774.7
March 31, 1996....................................................... 782.7
June 30, 1996........................................................ 810.6
September 30, 1996................................................... 821.2
December 31, 1996.................................................... 844.2
</TABLE>
- ---------------
Source: International Financial Statistics, International Monetary Fund; Monthly
Bulletin, The Bank of Korea.
A-9
<PAGE> 61
APPENDIX B
[Form of Subscription Certificate]
THE KOREA FUND, INC.
EXPIRATION DATE: APRIL 18, 1997
THIS SUBSCRIPTION CERTIFICATE MAY BE USED TO
SUBSCRIBE FOR SHARES OR MAY BE ASSIGNED OR
SOLD. FULL INSTRUCTIONS APPEAR ON THE BACK
OF THIS SUBSCRIPTION CERTIFICATE.
THE REGISTERED OWNER OF THIS
SUBSCRIPTION CERTIFICATE, NAMED BELOW,
OR ASSIGNEE, IS ENTITLED TO THE NUMBER
OF RIGHTS TO SUBSCRIBE FOR COMMON
STOCK, $0.01 PAR VALUE, OF THE KOREA
FUND, INC. (THE "FUND") SHOWN ABOVE,
IN THE RATIO OF ONE SHARE OF COMMON
STOCK FOR EACH THREE RIGHTS, PURSUANT
TO THE PRIMARY SUBSCRIPTION AND UPON
THE TERMS AND CONDITIONS AND AT THE
PRICE FOR EACH SHARE OF COMMON STOCK
SPECIFIED IN THE PROSPECTUS DATED
, 1997 RELATING THERETO.
DATE: , 1997
I,2
COUNTERSIGNED: STATE STREET BANK &
TRUST COMPANY
(BOSTON, MASSACHUSETTS)
SUBSCRIPTION AGENT
BY: AUTHORIZED SIGNATURE
REGISTERED OWNER:
SUBSCRIPTION CERTIFICATE FOR COMMON SHARES
VOID IF NOT EXERCISED AT OR BEFORE 5:00 P.M.,
(NEW YORK CITY TIME) ON APRIL 18, 1997, THE EXPIRATION DATE
THIS SUBSCRIPTION CERTIFICATE IS TRANSFERABLE RIGHTS
AND MAY BE DIVIDED AT THE OFFICE
OF THE SUBSCRIPTION AGENT
SUBSCRIPTION PRICE: U.S.$ PER COMMON SHARE
CUSIP 500634 11 8
IF YOU SUBSCRIBE FOR FEWER THAN ALL
THE SHARES REPRESENTED BY THIS
SUBSCRIPTION CERTIFICATE, THE
SUBSCRIPTION AGENT WILL ISSUE A NEW
SUBSCRIPTION CERTIFICATE REPRESENTING
THE BALANCE OF THE UNEXERCISED RIGHTS,
PROVIDED THAT THE SUBSCRIPTION AGENT
HAS RECEIVED YOUR SUBSCRIPTION
CERTIFICATE AND PAYMENT PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON ,
1997. NO NEW SUBSCRIPTION CERTIFICATE
WILL BE ISSUED AFTER SUCH DATE.
IMPORTANT: COMPLETE APPROPRIATE
FORM ON REVERSE.
THE KOREA FUND, INC.
CHAIRMAN OF THE BOARD
<PAGE> 62
PLEASE FILL IN ALL APPLICABLE INFORMATION
EXPIRATION DATE: APRIL 18, 1997
TO: STATE STREET BANK AND TRUST COMPANY
ATTENTION: CORPORATE REORGANIZATION DEPARTMENT
<TABLE>
<S> <C>
By Mail: By Facsimile:
P.O. Box 9061 (617) 794-6333,
Boston, MA 02205-8686 With the original Subscription Certificate to be sent by
mail, hand or overnight courier. Confirm facsimile by
telephone to (617) 794-6388
By Overnight Courier: By Hand:
State Street Bank & Trust Company Securities Transfer & Reporting Services Inc.
Corporate Reorganization c/o Boston EquiServe
c/o Boston EquiServe 55 Broadway 23rd Floor
70 Campanelli Dr. New York, New York 10006
Braintree MA 02184
A. PRIMARY SUBSCRIPTION /3 = X = $ (1)
----------------- ---------------- ----------------- ------------
(RIGHTS (NO. OF SHARES) (SUBSCRIPTION
EXERCISED) PRICE)
B. OVER-SUBSCRIPTION X = $ (2)
PRIVILEGE ---------------- ----------------- ------------
(NO. OF SHARES) (SUBSCRIPTION
PRICE)
C. AMOUNT OF CHECK ENCLOSED = $
(OR AMOUNT IN NOTICE OF ------------
GUARANTEED DELIVERY),
PAYABLE TO THE KOREA FUND,
INC.
D. SELL ANY REMAINING RIGHTS [ ]
E. SELL ALL OF MY RIGHTS [ ]
(1) IF YOU FULLY EXERCISE YOUR RIGHTS, THE SUBSCRIPTION AGENT WILL REQUEST THAT THE
DEALER MANAGER ATTEMPT TO SELL ANY RIGHTS YOU ARE UNABLE TO EXERCISE BECAUSE SUCH
RIGHTS REPRESENT THE RIGHT TO SUBSCRIBE FOR LESS THAN ONE SHARE.
(2) THE OVER-SUBSCRIPTION PRIVILEGE CAN BE EXERCISED ONLY BY A RECORD DATE
SHAREHOLDER, AS DESCRIBED IN THE PROSPECTUS, AND ONLY IF THE RIGHTS ISSUED TO HIM
ARE EXERCISED TO THE FULLEST EXTENT POSSIBLE.
F. NAME OF SOLICITING DEALER: [ ] SMITH BARNEY INC.
[ ] OTHER:
</TABLE>
- --------------------------------------------------------------------------------
SECTION 1. TO SUBSCRIBE: I HEREBY IRREVOCABLY SUBSCRIBE FOR THE FACE AMOUNT
OF COMMON STOCK INDICATED AS THE TOTAL OF A AND B HEREON UPON THE TERMS AND
CONDITIONS SPECIFIED IN THE PROSPECTUS RELATED HERETO, RECEIPT OF WHICH IS
ACKNOWLEDGED. I HEREBY AGREE THAT IF I FAIL TO PAY FOR THE SHARES OF COMMON
STOCK FOR WHICH I HAVE SUBSCRIBED, THE FUND MAY EXERCISE ANY OF THE REMEDIES SET
FORTH IN THE PROSPECTUS.
TO SELL: IF I HAVE CHECKED EITHER THE BOX ON LINE D OR THE BOX ON LINE E,
I AUTHORIZE THE SALE OF RIGHTS BY THE DEALER MANAGER ACCORDING TO THE PROCEDURES
DESCRIBED IN THE PROSPECTUS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE OF SUBSCRIBER(S)
- --------------------------------------------------------------------------------
ADDRESS FOR DELIVERY OF SHARES
IF PERMANENT CHANGE OF ADDRESS, CHECK HERE [ ]
PLEASE GIVE YOUR TELEPHONE NUMBER ( )
- ------------------------------
TAX I.D. NUMBER OR SOCIAL SECURITY NUMBER:
- --------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION 2. TO TRANSFER RIGHTS (EXCEPT PURSUANT TO D AND E ABOVE). FOR VALUE
RECEIVED, _____ OF THE RIGHTS REPRESENTED BY THE SUBSCRIPTION CERTIFICATE ARE
ASSIGNED TO:
- -------------------------------------------------------
(PRINT FULL NAME OF ASSIGNEE)
- -------------------------------------------------------
(PRINT FULL ADDRESS)
- -------------------------------------------------------
SIGNATURE(S) OF ASSIGNOR(S)
IMPORTANT: THE SIGNATURE(S) MUST CORRESPOND IN EVERY PARTICULAR, WITHOUT
ALTERATION, WITH THE NAME(S) AS PRINTED ON YOUR SUBSCRIPTION
CERTIFICATE.
YOUR SIGNATURE MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION WHICH IS
A PARTICIPANT IN A RECOGNIZED SECURITIES GUARANTEE PROGRAM.
<TABLE>
<S> <C>
SIGNATURE -----------------------------------------------------------------
GUARANTEED (NAME OF BANK OR FIRM)
BY -----------------------------------------------------------------
(SIGNATURE OF OFFICER AND TITLE)
</TABLE>
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES
UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION NUMBER (OR
CERTIFICATE REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT AND
THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING.
B-2
<PAGE> 63
APPENDIX C
[FORM OF NOTICE OF GUARANTEED DELIVERY]
NOTICE OF GUARANTEED DELIVERY FOR SHARES OF COMMON
STOCK OF THE KOREA FUND, INC.
SUBSCRIBED FOR UNDER THE PRIMARY SUBSCRIPTION
AND THE OVER-SUBSCRIPTION PRIVILEGE
As set forth in the Prospectus under "The Offer -- Payment for Shares,"
this form or one substantially equivalent hereto may be used as a means of
effecting subscription and payment for all Shares of the Fund's Common Stock.
Such form may be delivered by hand or sent by facsimile transmission, or
overnight courier or mail to the Subscription Agent.
The Subscription Agent is:
STATE STREET BANK AND TRUST COMPANY
Attention: Corporate Reorganization Department
<TABLE>
<S> <C>
By Mail: By Facsimile:
P.O. Box 9061 (617) 774-4519,
Boston, MA 02205-8686 with the original Subscription Certificate to
be sent by mail, hand or overnight courier.
Confirm facsimile by telephone to (617)
774-4511
By Overnight Courier: By Hand:
500 Victory Road 225 Franklin 61 Broadway
MB 2 Street or Concourse Level
Marina Bay Concourse Level New York, NY 10006
North Quincy, MA 02171 Boston, MA 02110
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS
VIA A TELECOPY FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT
CONSTITUTE A VALID DELIVERY.
The New York Stock Exchange member firm or bank or trust company which
completes this form must communicate the guarantee and the number of Shares
subscribed for (under both the Primary Subscription and the Over-Subscription
Privilege) to the Subscription Agent, and must deliver this Notice of Guaranteed
Delivery of Payment, guaranteeing delivery of (a) payment in full for all
subscribed Shares and (b) a properly completed and signed copy of the
Subscription Certificate to the Subscription Agent prior to 5:00 p.m., New York
City time, on the Expiration Date (April 18, 1997 unless extended). Failure to
do so will result in a forfeiture of the Rights.
C-1
<PAGE> 64
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank or
trust company having an office or correspondent in the United States, guarantees
delivery to the Subscription Agent by the close of business (5:00 p.m., New York
City time) on the third Business Day after the Expiration Date (April 18, 1997,
unless extended), of (a) a properly completed and executed Subscription
Certificate, and (b) payment of the full Subscription Price for Shares
subscribed for on Primary Subscription and any additional Shares subscribed for
pursuant to the Over-Subscription Privilege, as subscription for such Shares is
indicated herein or in the Subscription Certificate.
BROKER ASSIGNED CONTROL #
THE KOREA FUND, INC.
<TABLE>
<S> <C> <C> <C> <C>
1. Primary Number of Rights to be Number of Shares on Primary Payment to be made in
Subscription exercised Subscription requested for connection with Primary
which you are guaranteeing Subscription
delivery of Rights and payment
----------------------- Rights ----------------------- Shares $ ----------------------------
(Rights / 3)
2. Over-Subscription Number of Shares on Over- Payment to be made in
Privilege Subscription Privilege connection with
requested for which you are Over-Subscription Privilege
guaranteeing payment
----------------------- Shares $ ----------------------------
3. Totals Total number of Rights to be $ ----------------------------
delivered Total Payment
----------------------- Rights
</TABLE>
Method of delivery (circle one)
A. Through DTC
B. Direct to State Street Bank and Trust Company, as Subscription Agent.
Please assign a unique control number for each guarantee submitted. This
number needs to be referenced on any direct delivery of Rights or any delivery
through DTC. In addition, please note that if you are guaranteeing for
Over-Subscription Privilege Shares and are a DTC participant, you must also
execute and forward to State Street Bank and Trust Company a DTC Participant
Over-Subscription Form.
<TABLE>
<S> <C>
- ------------------------------------------- -------------------------------------------
Name of Firm Authorized Signature
- ------------------------------------------- -------------------------------------------
DTC Participant Number Title
- ------------------------------------------- -------------------------------------------
Address Name (Please Type or Print)
- ------------------------------------------- -------------------------------------------
Zip Code Phone Number
- ------------------------------------------- -------------------------------------------
Contact Name Date
</TABLE>
C-2
<PAGE> 65
APPENDIX D
[FORM OF DTC PARTICIPANT OVER-SUBSCRIPTION FORM]
THE KOREA FUND, INC.
RIGHTS OFFERING
DTC PARTICIPANT OVER-SUBSCRIPTION FORM
THIS FORM IS TO BE USED ONLY BY THE DEPOSITORY TRUST COMPANY PARTICIPANTS TO
EXERCISE THE OVER-SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO
WHICH THE PRIMARY SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE
FACILITIES OF THE DEPOSITORY TRUST COMPANY. ALL OTHER EXERCISES OF
OVER-SUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY THE DELIVERY OF THE
SUBSCRIPTION CERTIFICATES.
------------------------
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE FUND'S
PROSPECTUS DATED , 1997 (THE "PROSPECTUS") AND ARE INCORPORATED
HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM
THE FUND'S INFORMATION AGENT.
------------------------
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00
P.M., NEW YORK TIME, ON APRIL 18, 1997 UNLESS EXTENDED BY THE FUND (THE
"EXPIRATION DATE").
------------------------
1. The undersigned hereby certifies to the Fund and the Subscription Agent
that it is a participant in The Depository Trust Company ("DTC") and that it has
either (i) exercised the Primary Subscription in respect of Rights and delivered
such exercised Rights to the Subscription Agent by means of transfer to the DTC
account of the Subscription Agent or (ii) delivered to the Subscription Agent a
Notice of Guaranteed Delivery in respect of the exercise of the Primary
Subscription and will deliver the Rights called for in such Notice of Guaranteed
Delivery to the Subscription Agent by means of transfer to such DTC account of
the Subscription Agent. The undersigned hereby certifies to the Fund and the
Subscription Agent that it owned Shares of Common Stock on the Record
Date.
2. The undersigned hereby exercises the Over-Subscription Privilege to
purchase, to the extent available, shares of Common Stock and
certifies to the Fund and the Subscription Agent that such Over-Subscription
Privilege is being exercised for the account or accounts of persons (which may
include the undersigned) on whose behalf all Primary Subscription Rights have
been exercised.
3. The undersigned understands that payment of the Subscription Price of
$ per share for each share of Common Stock subscribed for pursuant to
the Over-Subscription Privilege must be received by the Subscription Agent at or
before 5:00 p.m. New York City time on the Expiration Date (unless such date is
extended by the Fund) and represents that such payment, in the aggregate amount
of $ either (check appropriate box):
[ ] has been or is being delivered to the Subscription Agent pursuant to
the Notice of Guaranteed Delivery referred to above (Broker-Assigned
Control # );
[ ] is being delivered to the Subscription Agent herewith; or
[ ] had been delivered separately to the Subscription Agent.
D-1
<PAGE> 66
4. The undersigned understands that in the event it is not allocated the
full amount of Shares oversubscribed for above, any excess payment to be
refunded by the Fund will be mailed to it by the Subscription Agent as provided
in the Prospectus.
- --------------------------------------
Primary Subscription Confirmation
Number
- --------------------------------------
DTC Participant Number
- --------------------------------------
Name of DTC Participant
By:
- --------------------------------------
Name:
Title:
Contact Name:
- --------------------------------------
Phone Number:
- --------------------------------------------------------------------------------
Dated:
- --------------------------------------,
1997
PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE
POSITION OF PRIMARY RIGHTS OWNED, THE NUMBER OF PRIMARY SHARES SUBSCRIBED AND
THE NUMBER OF OVERSUBSCRIPTION SHARES, IF APPLICABLE, REQUESTED BY EACH SUCH
OWNER.
D-2
<PAGE> 67
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DEALER MANAGER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Expense Information................... 3
Prospectus Summary.................... 4
Financial Highlights.................. 9
Market and Net Asset Value
Information......................... 10
The Fund.............................. 10
The Offer............................. 11
Use of Proceeds....................... 19
Investment Objective and Policies..... 19
Risk Factors and Special
Considerations...................... 21
Investment Advisers................... 27
Foreign Investment and Exchange
Controls in Korea................... 32
The Korean Securities Markets......... 36
Dividends and Distributions; Dividend
Reinvestment and Cash Purchase
Plan................................ 43
Taxation.............................. 44
Common Stock.......................... 47
Dividend Paying Agent, Transfer Agent
and Registrar....................... 48
Custodian............................. 48
Official Documents.................... 48
Experts............................... 48
Validity of the Shares................ 48
Further Information................... 48
Table of Contents of Statement of
Additional Information.............. 49
The Republic of Korea................. A-1
Form of Subscription Certificate...... B-1
Form of Notice of Guaranteed
Delivery............................ C-1
Form of DTC Participant
Over-Subscription Form.............. D-1
</TABLE>
------------------
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF.
======================================================
======================================================
THE KOREA FUND, INC.
12,429,083 SHARES
OF COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE
FOR SUCH SHARES
LOGO
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
======================================================
<PAGE> 68
THE KOREA FUND, INC.
---------------------------
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information ("SAI") is not a prospectus and
should be read in conjunction with the Prospectus, dated , 1997 (the
"Prospectus"). This SAI does not include all information that a prospective
investor should consider before purchasing shares of The Korea Fund, Inc. (the
"Fund") and investors should obtain and read the Prospectus before purchasing
shares. A copy of the Prospectus may be obtained without charge by calling the
Fund's Information Agent, Georgeson & Company Inc., at (800) 223-2064 or collect
at (212) 509-6240. Defined terms used herein shall have the same meanings as
provided in the Prospectus. The date of this SAI is , 1997.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Restrictions............................................................... 2
Certain Investment Practices.......................................................... 3
Directors and Officers................................................................ 7
Net Asset Value....................................................................... 10
Taxation.............................................................................. 11
Portfolio Transactions and Brokerage.................................................. 17
Financial Statements.................................................................. F-1
Report of Independent Accountants..................................................... F-35
</TABLE>
<PAGE> 69
INVESTMENT RESTRICTIONS
The following seven restrictions are fundamental policies, which cannot be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities. If a percentage restriction on investment or use
of assets set forth below is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
The Fund may not:
1. Purchase securities on margin, except such short-term credits as
may be necessary for clearance of transactions.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 5% (taken at the lower of cost or current value) of
its total assets (not including the amount borrowed), and may also pledge
its assets to secure such borrowings.
4. Purchase any security (other than obligations of the U.S.
government, its agencies or instrumentalities or of the Government, its
agencies or instrumentalities) if as a result more than 25% of the Fund's
total assets (taken at current value) would be invested in a single
industry; provided, however, that acquisition of securities of Korean
issuers shall not be deemed a purchase if effected upon exercise of rights
issued by such issuers and providing for an exercise price less than the
market price of such securities at the time of exercise.
5. Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell securities
which are secured by real estate or commodities and securities of companies
which invest or deal in real estate or commodities.
6. Make loans, except through repurchase agreements (repurchase
agreements with a maturity of longer than seven days together with
securities which are not readily marketable being limited to 10% of the
Fund's total assets) to the extent permitted under applicable law.
7. Act as underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under applicable securities laws.
The following three additional restrictions are not fundamental policies of
the Fund and may be changed by the Board of Directors. The Fund may not:
i. Purchase any security if as a result the Fund would then hold
more than 5% of any class of securities of an issuer (taking all common
stock issues of an issuer as a single class, all preferred stock issues
as a single class, and all debt issues as a single class) or more than
5% of the outstanding voting securities of an issuer, unless permitted
by regulations applicable to investments by foreigners or otherwise
permitted by the Minister of Finance and Economy or the KSEC.
ii. Make investments for the purpose of exercising control or
management.
iii. Participate on a joint and several basis in any trading
account in securities.
In addition to the restrictions described above, the Fund is subject to
additional restrictions imposed by the Fund's license, by Korean law and by the
Code's requirements for qualification as a regulated investment company.
Notwithstanding a change in the Fund's fundamental and other policies, the Fund
will continue to be subject to restrictions in the Fund's license and Korean
law. For discussions of Korean law restricting the Fund's investments and of the
Fund's license, see "Foreign Investment and Exchange Controls in Korea --
Foreign Investment Restrictions," and "-- The Fund's License" in the Prospectus.
For a discussion of the Code requirements, see "Taxation -- United States
Federal Income Taxes".
Should any investment restriction imposed by the Fund's license, by Korean
law or by the Code be removed or liberalized, the Fund reserves the right to
invest accordingly, without shareholder approval, except
2
<PAGE> 70
to the extent that such investment conflicts with the Fund's investment
objective or Investment Restrictions Nos. 1-7 above. The Fund will notify
shareholders of a change in any such restriction to the extent that the Manager
believes that such a change will result in a material change in the Fund's
investment strategy.
As a means of earning income for periods as short as overnight, the Fund
may enter into repurchase agreements in the United States with any member bank
of the Federal Reserve System and any broker-dealer that is recognized as a
reporting government securities dealer whose creditworthiness has been
determined by the Manager to be of sufficiently high quality. In addition, the
Fund is permitted under Korean law to enter into repurchase agreements with
Korean banks and broker-dealers. If market conditions warrant, the Fund may,
subject to the approval of its Board of Directors, enter into such arrangements
in Korea.
CERTAIN INVESTMENT PRACTICES
The Fund reserves the right to invest the portion of its assets not
invested in equity securities of Korean issuers in debt securities of such
issuers or in foreign currency exchange contracts, covered call options, futures
contracts and repurchase agreements, in each case to the extent that a market
for such investments exists in Korea and to the extent that such investments are
permissible for the Fund under Korean and other applicable law. See "Foreign
Investment and Exchange Controls in Korea" in the Prospectus. In addition, the
Fund reserves the right to lend portfolio securities, to borrow, and to purchase
and sell securities on a delayed delivery basis, if permitted by Korean law.
Certain provisions of the Code, however, may limit the extent to which the
Fund may enter into forward contracts, options and futures, and may also affect
the character and timing of income, gain or loss recognized by the Fund from
such transactions. See "Taxation -- United States Federal Income Taxes."
FORWARD CONTRACTS AND OPTIONS ON CURRENCIES
In order to hedge against currency exchange rate risks, the Fund may enter
into forward currency exchange contracts and may purchase and sell options on
currencies in U.S. or foreign markets. It is not the intention of the Fund,
however, to fully or partially hedge the Fund's portfolio holdings against
currency risks on an on-going basis. A forward currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded in the interbank market between currency traders (usually large
commercial banks). The Fund may either accept or make delivery of the currency
specified at the maturity of a forward contract or, prior to maturity, enter
into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader which is a party to the original forward
contract. A put option can give the Fund the right to sell a currency at the
exercise price on or before the expiration of the option. A call option can give
the purchaser of the option the right to purchase a currency at the exercise
price on or before the expiration of the option.
The Fund may enter into forward currency exchange contracts and options in
several circumstances. For example, when the Fund enters into a contract for the
purchase or sale of a security denominated in Won, or when the Fund anticipates
the receipt in Won of dividends or interest payments on a security that it
holds, the Fund may desire to "lock in" the Dollar price of the security or the
Dollar equivalent of such dividend or interest payment, as the case may be. In
addition, when the Manager believes that the Won may suffer a substantial
decline against the Dollar, it may enter into a forward contract to sell, for a
fixed amount of Dollars, the amount of Won approximating the value of some or
all of the Fund's portfolio securities denominated in Won. Under the FEMA, the
only forward contracts the Fund is permitted to enter into relate to the Won and
the Dollar; options contracts on Won currency or Won-denominated assets are not
permitted without approval from the Minister of Finance and Economy. The Fund is
permitted to enter into forward contracts with any foreign exchange bank in
Korea in respect of the aggregate amount of the Fund's Won-denominated assets in
Korea whether in the form of securities or cash.
3
<PAGE> 71
The Fund does not intend to enter into forward currency exchange contracts
and options on a regular basis, and will not do so if, as a result, the Fund
will have more than 20% of the value of its total assets committed to the
completion of such contracts and options. The Fund also will not enter into such
forward contracts and options or maintain a net exposure to such contracts and
options where the completion of the contracts and options would obligate the
Fund to deliver an amount of Won in excess of the value of the Fund's portfolio
securities or other assets denominated in Won. Further, the Fund generally will
not enter into a forward contract or option with a term of greater than one
year.
While the Fund may enter into forward currency exchange contracts and
options to reduce currency exchange rate risks, changes in currency prices may
result in a poorer overall performance for the Fund than if it had not engaged
in any such transactions. Moreover, there may be an imperfect correlation
between the Fund's portfolio holdings of securities denominated in Won and
forward contracts and options entered into by the Fund. Such imperfect
correlation may prevent the Fund from achieving the intended hedge or expose the
Fund to risk of exchange loss. Further, the Fund's successful use of forward
contracts and options to reduce currency exchange rate risks will be subject to
the Manager's ability to predict correctly movements of exchange rates. No
assurance can be given that the Manager's judgment in this respect will be
correct. The Manager's current expectation is to utilize forward currency
exchange contracts and options from time to time as, in its opinion, currency
exchange market conditions make it appropriate to do so. It is not the intention
of the Manager, however, to fully or partially hedge the Fund's portfolio
holdings against currency risks on an ongoing basis.
COVERED CALL OPTIONS
Although not currently permissible under Korean regulations, the Fund
reserves the right to write covered call options on securities to the extent
that such activity becomes permissible for the Fund. A "covered" call option
means that, so long as the Fund is obligated as the writer of the option, it
will own (a) the underlying securities subject to the option, or (b) securities
convertible or exchangeable without the payment of any consideration into the
securities subject to the option. As a matter of policy, the value of the
underlying securities on which options will be written at any one time will not
exceed 25% of the total assets of the Fund. In addition, as a matter of policy,
the Fund will neither purchase or write put options on securities nor purchase
call options on securities except in connection with closing purchase
transactions.
The Fund will receive a premium from writing call options, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund will limit
its opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. Thus, in some periods the Fund
will receive less total return and in other periods greater total return from
writing covered call options than it would have received from its underlying
securities had it not written call options.
REPURCHASE AGREEMENTS
Repurchase agreements are contracts under which the seller of a security
agrees at the time of sale to repurchase the security at an agreed upon price
and date. Such resale price reflects an agreed upon interest rate effective for
the period the security is held by the purchaser and is unrelated to the
interest rate on the instrument. Repurchase agreements can be viewed as loans
that are collateralized by the underlying security. Repurchase agreements may
involve risks in the event of insolvency or other default by the seller,
including possible delays and liquidation expenses or restrictions on the Fund's
ability to dispose of the underlying security, declines in its value and loss of
interest. The Manager intends to monitor the seller's compliance with its
obligation to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price, and also to review the
creditworthiness of the Fund's counterparties in such transactions.
BORROWING
The Fund may borrow for temporary purposes, such as to obtain amounts
necessary to make distributions for qualification as a regulated investment
company under the Code or to avoid imposition of an excise tax
4
<PAGE> 72
under U.S. Federal income tax laws or to pay the Fund's expenses outside Korea,
as well as for clearing transactions. Such temporary borrowings shall not
exceed, at any time, 5% of the value of the Fund's total assets. Borrowings by
the Fund increase exposure to capital risk and are subject to interest costs.
LENDING OF PORTFOLIO SECURITIES
To defray operating expenses, the Fund may generate income by lending
securities in its portfolio, to the extent permitted by Korean law, representing
up to 25% of its total assets, taken at market value, to securities firms and
financial institutions, provided that each loan is secured continuously by
collateral in the form of cash or U.S. government securities adjusted daily to
have a market value at least equal to the current market value of the securities
loaned. Such loans are terminable at any time, and the Fund will receive
payments representing the amount of any interest or dividends paid on the loaned
securities. In addition, it is anticipated that the Fund may share with the
borrower some of the income received on the collateral for the loan or the Fund
will be paid a premium for the loan. The risks in lending portfolio securities,
as with other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. In determining whether the Fund will lend securities, the Manager
will consider all relevant factors and circumstances, including the
creditworthiness of the borrower. Such transactions are currently prohibited
under Korean law.
DELAYED DELIVERY TRANSACTIONS
Although currently prohibited from doing so under Korean regulations, the
Fund may purchase and sell securities on a delayed delivery basis should such
activity become lawful in the future as a result of application by the Fund or
otherwise. Purchases or sales on a delayed delivery basis involve the purchase
(or sale) of securities at an agreed-upon price on a specified future date. In
such transactions, delivery of the securities occurs beyond the normal
settlement periods, but no payment or delivery is made by, and no interest
accrues to, the Fund prior to the actual delivery or payment by the other party
to the transaction. Due to fluctuations in the value of securities purchased or
sold on a delayed delivery basis, the returns obtained on such securities may be
higher or lower than the returns available in the market on the dates when the
investments are actually delivered to the buyers. The Fund will establish a
segregated account consisting of liquid securities in an amount equal to the
amount of its delayed delivery commitments.
FUTURES CONTRACTS
Futures contracts are standardized contracts for the future delivery of a
currency, security or index at a future date for an agreed-upon price. On May 3,
1996, the Stock Exchange opened a stock index futures market on the Stock
Exchange floor. The Stock Exchange has announced that in 1997 it will open a
stock index futures option market on the Stock Exchange floor. The Fund may
invest in such markets, provided that the Fund will not enter into futures
contracts if more than 20% of the value of the Fund's total assets would be
committed to the completion of such contracts or if doing so would violate
restrictions imposed by the Code.
Futures contract positions are typically liquidated by entering into an
offsetting transaction on an exchange. If an offsetting contract is not entered
into prior to the maturity of a contract, the parties must take or make delivery
of the underlying commodity against payment of the agreed-upon price, except in
the case of certain futures contracts, including foreign currency and stock
index contracts, which generally are settled by payments of cash.
Commodity futures exchanges generally impose daily limits on permitted
fluctuations in the price of the futures contracts traded thereon. Consequently,
in a period of widely fluctuating prices, it may be difficult for the Fund to
liquidate a position. The Fund will enter into a futures contract only if in the
Manager's view a liquid market exists for such contracts. There can, however, be
no assurance that the Fund will be able to close out a contract in a particular
case in a timely manner or at all, in which case the Fund may suffer a loss.
While the Fund may enter into futures contracts for hedging purposes,
changes in prices may result in a poorer overall performance for the Fund than
if it had not engaged in any such transaction. In the case of stock index
futures contracts, there may be an imperfect correlation between the Fund's
portfolio holdings of
5
<PAGE> 73
securities denominated in Won and futures contracts entered into by the Fund.
This imperfect correlation may prevent the Fund from achieving the intended
hedge or expose the Fund to risk of losses.
The Fund does not intend to enter into futures contracts to protect the
value of its portfolio securities on a regular basis. The Fund also will not
enter into such futures contracts or maintain a net exposure to such contracts
where the consummation of the contracts would obligate the Fund to deliver an
amount of currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. Further, the Fund generally will not
enter into a futures contract with a term of greater than one year.
At present the Fund is prohibited by the U.S. Commodity Exchange Act from
purchasing or selling Korean stock index futures contracts. The Fund reserves
the right to purchase and sell such contracts should such activities become
lawful in the future, as a result of an application by the Fund or otherwise.
The Fund may sell stock index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of
equity securities in its portfolio that might otherwise result. When the Fund is
not fully invested in stocks and anticipates a significant market advance, it
may purchase stock index futures to gain rapid market exposure that may in part
or entirely offset increases in the cost of the stocks that it intends to
purchase. In a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the futures position but, under
unusual market conditions, a futures position may be terminated without the
corresponding purchase of stocks. No assurance can be given that the Manager
will be able to make successful use of stock index futures.
6
<PAGE> 74
DIRECTORS AND OFFICERS
The names of the individuals who serve as directors and officers of the
Fund are set forth below, together with their positions and their principal
occupations during at least the past five years and, in the case of the
directors, their ages and their positions with certain other international
organizations and publicly-held companies.
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS REGISTRANT DURING PAST FIVE YEARS
- ---------------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Juris Padegs*(1)............ Chairman of the Board Advisory Managing Director (and formerly
Age 65 and Director Managing Director) of Scudder, Stevens &
Clark, Inc.; serves on the Boards of an
additional two funds managed by Scudder,
Stevens & Clark, Inc.
Chang-Hee Kim*.............. Vice Chairman of the President and Chief Executive Officer,
Daewoo Securities Co., Ltd. Board and Director Daewoo Securities Co., Ltd.
34-3 Youido-dong
Yongdung po-gu
Seoul, Korea 150-010
Age 60
Nicholas Bratt*(1).......... President and Director Managing Director of Scudder, Stevens &
Age 49 Clark Inc.; serves on the Boards of an
additional 15 funds managed by Scudder,
Stevens & Clark, Inc.
William H. Gleysteen, Director Consultant; Guest Scholar, Brookings
Jr. ......................
The Japan Society Institution; former President, The Japan
333 East 47th Street Society, Inc. (until 1995); Vice President
New York, NY 10017 of Studies, Council on Foreign Relations
Age 70 (1987-1989); United Sates Ambassador to
Korea (1978-1981); serves on the boards
of an additional 12 funds managed by
Scudder, Stevens & Clark, Inc.
Sang C. Lee................. Director President, Hyundai Plasma Display
352 Stanwich Rd. Division of Hyundai Electronics
Greenwich, CT 06830 America; President and Chief Executive
Officer,
Age 56 Spectron Corporation of America, LLC
(technology company) (1994-present);
Chairman, International Corporate
Ventures, Inc. (1992-present); President
and Chief Executive Officer, Spectron
Corp. of America, Ltd., Chairman of the
Board, Markwood, Inc., Hub City, Inc.
and Brocker Manufacturing, Inc. (portfolio
companies of PITCAIRN GROUP L.P.
(1989-1992)).
Tai Ho Lee.................. Director Chairman, Imjung Research Institute
301 World Villa T (1992-Present); President and Chief
Executive
999 Bangbae-Dong Officer, Hanjin Investment & Securities
Seocho-Gu Co., Ltd. (1990-1991).
Seoul, Korea
Age 74
</TABLE>
- ---------------
<TABLE>
<S> <C> <C>
* Directors considered by the Fund and its counsel to be persons who are "interested persons" as
defined in the 1940 Act, of the Fund, the Manager or the Korean Adviser.
</TABLE>
7
<PAGE> 75
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS REGISTRANT DURING PAST FIVE YEARS
- ---------------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Dr. Wilson Nolen............ Director Consultant; Trustee; Cultural Institutions
1120 Fifth Avenue Retirement Fund, Inc.; Director,
New York, NY 10128 Ecohealth, Inc., biotechnology company;
Age 70 serves on the boards of an additional 16
funds
managed by Scudder, Stevens & Clark, Inc.
Hugh T. Patrick............. Director R.D. Calkins Professor of International
Graduate School of Business Business, Graduate School of Business,
522 Uris Hall Columbia University; Director, Center on
Columbia University Japanese Economy and Business, Columbia
New York, NY 10027 University; Co-Director, APEC Study
Age 66 Center, Columbia University; and Director,
Japan Society; serves on the board of one
additional fund managed by Scudder,
Stevens & Clark, Inc.
Robert J. Callander......... Director Director, ARAMARK Corporation, Barnes
29 Still Hollow Road Group Inc., Beneficial Corporation, and
Lebanon, NJ 08833 Omnicom Group, Inc.; Member, Council on
Age 66 Foreign Relations; Managing Director,
Metropolitan Opera Association; Trustee
Drew University; and Visiting Professor/
Executive-in-Residence, Columbia Business
Business School, Columbia University
(until
1995); serves on the board of an
additional
three funds managed by Scudder, Stevens &
Clark, Inc.
Jerard K. Hartman(1)........ Vice President Managing Director of Scudder, Stevens &
Clark, Inc.
David S. Lee(2)............. Vice President Managing Director of Scudder, Stevens &
Clark, Inc.; serves on the boards of an
additional 29 funds managed by Scudder,
Stevens & Clark, Inc.
Kun-Ho Hwang................ Vice President Managing Director, Planning Department of
Daewoo Securities Co., Ltd. Daewoo Securities Co., Ltd.
34-3 Youido-dong
Yongdung po-gu
Seoul, Korea
John J. Lee(1).............. Vice President Principal of Scudder, Stevens & Clark Inc.
Dong Wook Park.............. Vice President Director of Daewoo Capital Management
Daewoo Securities Co., Ltd. Co., Ltd.
34-3 Youido-dong
Yongdung po-gu
Seoul, Korea
Young H. Kim................ Vice President President, Daewoo Securities (America)
Inc.
Daewoo Securities
(America) Inc.
101 East 52nd Street
New York, NY 10022
Pamela A. McGrath(2)........ Vice President and Managing Director of Scudder, Stevens &
Treasurer Clark, Inc.
Kathryn L. Quirk(1)......... Vice President and Managing Director of Scudder, Stevens &
Assistant Secretary Clark, Inc.
</TABLE>
8
<PAGE> 76
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS REGISTRANT DURING PAST FIVE YEARS
- ---------------------------- ---------------------- ------------------------------------------
<S> <C> <C>
Edward J. O'Connell(1)...... Vice President and Principal of Scudder, Stevens & Clark,
Inc.
Assistant Treasurer
Thomas F. McDonough(2)...... Vice President, Principal of Scudder, Stevens & Clark,
Inc.
Secretary and
Assistant Treasurer
</TABLE>
- ---------------
(1) Address: 345 Park Avenue, New York, NY 10154
(2) Address: Two International Place, Boston, MA 02110
The amount of shares in the Fund owned by the Fund's directors and officers
as a group is less than one percent of the Fund's outstanding stock.
The Fund's Board of Directors has an Executive Committee which may exercise
the powers of the Board to conduct the current and ordinary business of the Fund
while the Board is not in session. Currently, Messrs. Bratt and Padegs are
members of the Executive Committee.
Scudder is a Delaware corporation. Daniel Pierce* is the Chairman of the
Board of Scudder. Edmond D. Villani(#) is the President and Chief Executive
Officer of Scudder. Stephen R. Beckwith(#) Lynn S. Birdsong(#), Nicholas
Bratt(#), E. Michael Brown*, Mark S. Casady*, Linda C. Coughlin*, Margaret D.
Hadzima*, Jerard K. Hartman(#), Richard A. Holt(@), Dudley H. Ladd*, John T.
Packard+, Kathryn L. Quirk(#), Cornelia M. Small(#) and Stephen A. Wohler* are
the other members of the Board of Directors of Scudder. The principal occupation
of each of the above named individuals is serving as a Managing Director of
<TABLE>
<C> <S>
Scudder.
- ---------------
* Two International Place, Boston, Massachusetts
(#) 345 Park Avenue, New York, New York
+ 101 California Street, San Francisco, California
(@) Two Prudential Plaza, 180 North Stetson, Suite 5400, Chicago, Illinois
</TABLE>
All the outstanding voting and nonvoting securities of the Manager are held
of record by Stephen R. Beckwith, Juris Padegs, Daniel Pierce and Edmond D.
Villani as representatives of the beneficial owners of such securities pursuant
to a Security Holders Agreement, under which such representatives have the right
to reallocate shares among the beneficial owners from time to time, at net book
value in cash transactions. All Managing Directors of the Manager own voting and
nonvoting stock; all Principals own nonvoting stock.
The officers of the Fund will conduct and supervise the daily business
operations of the Fund, while the directors, in addition to their functions set
forth under "Investment Advisers," will review such actions and decide on
general policy.
The Fund pays each of its directors who is not an affiliated person of the
Manager or the Korean Adviser, in addition to certain out-of-pocket expenses, an
annual fee of $6,000 plus $750 for each Board of Directors or audit committee
meeting, and for each meeting held for the purpose of considering arrangements
between the Fund and the Manager and between the Manager and the Korean Adviser,
and $250 for each other committee meeting attended. For the fiscal year ended
June 30, 1996, the aggregate amount for fees and expenses paid to such directors
amounted to $123,343. For the six months ended December 31, 1996, directors'
fees and expenses amounted to $88,802.
The following Compensation Table provides, in tabular form, the following
data:
Column (1): All directors who receive compensation from the Fund.
Column (2): Aggregate compensation received by a director from the
Fund.
Columns (3) and (4): Pension or retirement benefits accrued or
proposed to be paid by the Fund. The Fund does not pay its directors such
benefits.
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<PAGE> 77
Column (5): Total compensation received by a director from the Fund,
plus compensation received from all funds for which a director serves in
the Scudder fund complex. The total number of funds from which a director
receives such compensation is also provided.
COMPENSATION TABLE
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL FROM FUND
COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON AND FUND COMPLEX
NAME OF PERSON, POSITION FROM FUND PART OF FUND EXPENSES RETIREMENT PAID TO DIRECTOR
- -------------------------------- ------------ --------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
William H. Gleysteen, Jr........ $ 11,500 -- -- $130,336
Director (13 funds)
Hugh T. Patrick................. $ 12,250 -- -- $ 25,250
Director (2 funds)
Sang C. Lee..................... $ 11,500 -- -- $ 11,500
Director (1 fund)
Tai Ho Lee...................... $ 10,600 -- -- $ 10,600
Director (1 fund)
Dr. Wilson Nolen................ $ 12,250 -- -- $165,608
Director (17 funds)
Robert J. Callander............. $ 2,902 -- -- $ 41,602
Director (4 funds)
</TABLE>
Although the Fund is a Maryland corporation, certain of its directors and
officers are residents of Korea, and substantially all of the assets of such
persons may be located outside of the United States. As a result, it may be
difficult for United States investors to effect service of process upon such
directors or officers within the United States or to realize judgments of courts
of the United States based upon civil liabilities of such directors or officers
under the federal securities laws and other laws of the United States. There is
substantial doubt as to the enforceability in Korea of such civil remedies and
criminal penalties as are afforded by the federal securities laws in the United
States. No extradition treaty currently is in effect between the United States
and Korea which would subject the Fund's directors and officers to enforcement
of the criminal penalties of the federal securities laws.
The By-Laws of the Fund provide that the Fund will indemnify directors,
officers, employees or agents of the Fund against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Fund to the full extent permitted by law. However,
nothing in the Articles of Incorporation or the By-Laws of the Fund protects or
indemnifies a director, officer, employee or agent against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
To the best of the Fund's knowledge, as of February 14, 1997 no person
owned beneficially more than 5% of the Fund's outstanding shares.
NET ASSET VALUE
The net asset value of shares of the Fund is determined no less frequently
than weekly, on the last business day of each month, and at such other times as
the Board of Directors may determine, by dividing the value of the total assets
of the Fund, less all liabilities, by the total number of shares of Common Stock
outstanding.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on the Nasdaq Stock Market is
valued at its most recent sale price. Lacking any sales, the security is valued
at the high or "inside" bid quotation. The value of an equity security not
quoted on the Nasdaq Stock Market, but traded in another over-the-counter
market, is its most recent sale
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<PAGE> 78
price. Lacking any sales, the security is valued at the Calculated Mean. Lacking
a Calculated Mean, the security is valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board of Directors believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Manager may calculate the price of
that debt security taking into account such factors as the Manager deems
appropriate. This valuation method may not be used with respect to a particular
security for longer than ten consecutive trading days, or for securities with an
aggregate value that exceeds 5% of the Fund's net assets on a particular
valuation date.
An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's valuation committee (the "Valuation
Committee"), the value of a portfolio asset as determined in accordance with
these procedures does not represent the fair market value of the portfolio
asset, the value of the portfolio asset is taken to be an amount which, in the
opinion of the Valuation Committee, represents fair market value on the basis of
all available information. The value of other portfolio holdings owned by the
Fund is determined in a manner which, in the discretion of the Valuation
Committee, most fairly reflects fair market value of the property on the
valuation date.
Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets is calculated in terms of
Dollars by converting the Local Currency into Dollars at the prevailing currency
exchange rate on the valuation date.
The Fund currently values the securities in its portfolio that are already
at or over the limit for aggregate foreign ownership on the basis of prices on
the Stock Exchange, unless quotations are regularly available as to the prices
offered by prospective foreign purchasers in the over-the-counter market to
existing foreign holders of such shares.
See "Market and Net Asset Value Information" in the Prospectus for
information as to the relationship between the market price and net asset value
per share of Common Stock. Under the Fund's Articles of Incorporation, the Fund
cannot become an open-end investment company without the approval of (i) the
Minister of Finance and Economy and (ii) holders of two-thirds of the Fund's
outstanding shares.
TAXATION
UNITED STATES FEDERAL INCOME TAXES
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS A SUMMARY
INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IT DOES NOT INCLUDE CERTAIN
INFORMATION SET FORTH IN THE PROSPECTUS WITH REGARD TO TAX
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<PAGE> 79
CONSEQUENCES OF THE OFFER UNDER "THE OFFER -- U.S. FEDERAL INCOME TAX
CONSEQUENCES; KOREAN TAX CONSEQUENCES" AND WITH REGARD TO CERTAIN OTHER U.S. TAX
MATTERS APPLICABLE TO THE FUND UNDER "TAXATION -- U.S. TAXATION." IN VIEW OF THE
INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT
HIS OWN TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF BEING A
SHAREHOLDER OF THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF U.S. FEDERAL,
STATE, LOCAL AND NON-U.S. TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES THEREIN.
General
The Fund has qualified and intends to continue to qualify to be treated as
a regulated investment company under the Code for each taxable year, although no
assurance can be given as to meeting the tests for such status.
To qualify as a regulated investment company, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to stock or securities loans, gains
from the sale or other disposition of stock or securities, and certain other
related income, including, generally, gains from options, futures and forward
contracts and foreign currency gains (under regulations which may be
promulgated, foreign currency gains which are not directly related to the Fund's
principal business of investing in stocks or securities may not be treated as
qualifying income for this purpose); (b) derive in each taxable year less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures, forward contracts and foreign currencies, held less than three
months (excluding, for this purpose, gains from foreign currencies (and options,
futures and forward contracts on foreign currencies) that are directly related
to the Fund's principal business of investing in stocks or securities or options
or futures thereon); and (c) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash, U.S. government securities, securities of other
regulated investment companies, and other securities, with such other securities
of any one issuer qualifying, for purposes of this calculation, only if the
Fund's investment is limited to an amount not greater than 5% of the value of
the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated investment companies)
or of any two or more issuers that the Fund controls and that are determined to
be engaged in the same, similar or related businesses. Corporations owned or
controlled by the Government will be treated as separate issuers for this
purpose, except that a debt obligation of such a corporation may be treated as
issued by the Government if the obligation is backed by the full faith and
credit of the Government. In the past, legislation has been proposed that would
eliminate the 30% requirement; it is unclear whether, and in what form, such
legislation might be enacted.
As a regulated investment company, the Fund will not be subject to U.S.
Federal income tax on its income and capital gains, if any, that it distributes
to its shareholders, provided it distributes each taxable year at least 90% of
its "investment company taxable income," calculated without the deduction for
dividends paid, as determined for U.S. Federal income tax purposes ("net
investment income"). Net investment income includes dividends, interest, net
short-term capital gains in excess of any net long-term capital losses and any
capital loss carryovers from prior years, net of expenses, and, net gain or loss
on debt securities and futures contracts on debt securities, to the extent
attributable to fluctuations in currency exchange rates, and net gain or loss on
foreign currencies and foreign currency forward contracts. Dividend income
derived by a regulated investment company from its investments is required to be
taken into account for U.S. Federal income tax purposes as of the ex-dividend
date (rather than the payment date, which generally is later). Accordingly, the
Fund, in order to satisfy its distribution requirements, may be required to make
distributions based on earnings that have been accrued but not yet received.
Interest income from discount on indebtedness held by the Fund will also give
rise to such accrued earnings. The Fund intends to distribute to its
shareholders each year all of its net investment income as computed for U.S.
Federal income tax purposes. Korean exchange control or other regulations, which
may restrict repatriation of investment income, capital or the proceeds of
securities
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<PAGE> 80
sales by foreign investors such as the Fund, may limit the Fund's ability to
make sufficient distributions to satisfy the 90% distribution requirement and
the calendar year distribution requirement described below. See "Risk Factors
and Special Considerations -- Currency Conversion and Repatriation" in the
Prospectus and "Other Taxation" below.
The Board of Directors will determine each year whether to distribute any
net long-term capital gains in excess of any net short-term capital losses
(including in such losses any capital loss carryovers from prior years) as
computed for U.S. Federal income tax purposes. The Fund presently expects to
distribute such excess to its shareholders each year. To the extent that the
Fund retains any part of such excess for investment, it will be subject to U.S.
Federal income tax on the amount retained at the then current rate, which
currently is 35%. If any such amount is retained, the Fund expects to designate
such amount as undistributed capital gains in a notice to its shareholders who
(i) if subject to U.S. Federal income tax on long-term capital gains, will be
required to include in income for such tax purposes, as long-term capital gains,
their proportionate shares of such undistributed amount, and (ii) will be
entitled to credit their proportionate shares of taxes paid by the Fund on such
undistributed amount against their U.S. Federal income tax liabilities and to
claim refunds to the extent such proportionate shares of the tax exceed such
liabilities. For U.S. Federal income tax purposes, the tax basis of shares owned
by a shareholder of the Fund will be increased by 65% of the amount of
undistributed capital gains included in the shareholder's gross income.
The Fund will be subject to a non-deductible U.S. Federal 4% excise tax on
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with a calendar year distribution requirement. To avoid
application of the excise tax, the Fund intends to make its distributions in
accordance with such requirement. Exchange control or other regulations referred
to above, however, could limit the Fund's ability to satisfy such requirement.
Distributions
Shareholders subject to U.S. Federal alternative minimum tax will be
required to include distributions from the Fund in alternative minimum taxable
income.
If the fair market value of a shareholder's shares is reduced below the
shareholder's cost for such shares as a result of a distribution by the Fund,
such distribution will be taxable for U.S. Federal income tax purposes even
though from an economic viewpoint it may represent a return of invested capital.
Investors should, therefore, consider the tax implications of buying shares in
the Fund prior to a distribution since the price of shares purchased at that
time may reflect the amount of the forthcoming distribution and the distribution
will nevertheless be taxable to the purchasing shareholder. As of March 21,
1997, there was approximately $66.8 million of net unrealized appreciation in
the Fund's net assets of approximately $474.2 million; if realized and
distributed, or deemed distributed, such gains would, in general, be taxable to
shareholders, including holders at that time of Shares acquired upon exercise of
the Rights. See "General" and "Non-U.S. Shareholders."
Shareholders will be notified as to the U.S. Federal income tax status of
any dividends, distributions and deemed distributions made by the Fund to its
shareholders.
Sale of Shares
Upon the sale or exchange of shares of the Fund, a U.S. shareholder will
realize a taxable gain or loss. Such gain or loss will be a capital gain or loss
if the shares are capital assets in the shareholder's hands, and will be
long-term or short-term depending upon whether the shareholder has held the
shares for more than one year. Under current U.S. Federal income tax law, the
maximum rate for long-term capital gains for individuals is 28% and short-term
capital gains are taxed at the same rate as ordinary income. Any loss realized
on a sale or exchange of Fund shares will be disallowed to the extent that the
shares disposed of are replaced, including, for example, pursuant to the Plan,
within a 61-day period beginning 30 days before and ending 30 days after the
date the shares are disposed of. In such a case, a U.S. shareholder will adjust
the basis of the shares acquired to reflect the disallowed loss. Any loss
realized by a U.S. shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any
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<PAGE> 81
distributions of net long-term capital gains received by the shareholder (and
any amounts retained by the Fund which were designated as undistributed capital
gains) with respect to such shares.
Non-U.S. Income Taxes
The Fund will be subject to Korean income taxes, including withholding
taxes, described in the Prospectus under "Taxation -- Korean Taxation." So long
as more than 50% in value of the Fund's total assets at the close of any taxable
year in which it is a regulated investment company consists of stocks or
securities of non-U.S. corporations, the Fund may elect to treat any such
non-U.S. income taxes paid by it during such year (to the extent that such taxes
are treated as income taxes under U.S. Federal tax principles) as paid by its
shareholders. The Fund has qualified and expects to continue to qualify for this
election annually. The Fund will notify shareholders in writing each year if it
makes the election and of the amount of non-U.S. income taxes, if any, to be
treated as paid by the shareholders and the amount to be treated by them as
income from non-U.S. sources. If the Fund makes the election, shareholders will
be required to include in income their proportionate shares of the amount of
non-U.S. income taxes paid by the Fund for purposes of computing their U.S.
income tax. U.S. shareholders will be entitled to claim either a credit (subject
to the limitations discussed below) or, if they itemize their deductions, a
deduction for their shares of the non-U.S. income taxes in computing their U.S.
Federal income tax liability. (For the treatment of non-U.S. shareholders, see
"Non-U.S. Shareholders" below.) No deduction will be permitted for such income
taxes in computing the alternative minimum tax imposed on individuals.
Shareholders that are exempt from tax under Section 501(a) of the Code, such as
pension plans, generally will derive no benefit from the Fund's election to pass
through the Fund's non-U.S. income taxes to its shareholders. However, such
shareholders should not ordinarily be disadvantaged because the amount of
additional income they are deemed to receive generally will not be subject to
U.S. Federal income tax. Korean taxes imposed on dividends and interest qualify
as income taxes that the Fund may elect to treat as having been paid by its
shareholders, and the Fund believes that the Korean capital gains tax, if
imposed on the Fund by Korea at some future date, should qualify for such
treatment, but the Korean Securities Transaction Tax is not such an income tax.
See "Taxation -- Korean Taxation" in the Prospectus.
Generally, a credit for non-U.S. income taxes is subject to the limitation
that it may not exceed the shareholder's U.S. Federal income tax (determined
without regard to the availability of the credit) attributable to his or her
total non-U.S. source taxable income. For this purpose, the portion of
distributions paid by the Fund from its non-U.S. source income will be treated
as non-U.S. source income. The Fund's gains from the sale of securities will
generally be treated as derived from U.S. sources, unless the Korean capital
gains tax were to be imposed on such gains, in which case the Fund would expect
to elect to treat such gains as derived from a non-U.S. source. Additionally,
certain currency fluctuation gains and losses, including fluctuation gains from
foreign currency denominated debt securities, receivables and payables, will be
treated as derived from U.S. sources. The limitation on the foreign tax credit
is applied separately to non-U.S. source "passive income," such as the portion
of dividends received from the Fund which qualifies as non-U.S. source income.
In addition, the foreign tax credit is allowed to offset only 90% of the
alternative minimum tax imposed on corporations and individuals. Because of
these limitations, shareholders may be unable to claim a credit for the full
amount of their proportionate shares of the non-U.S. income taxes paid by the
Fund.
The foregoing is only a general description of the treatment of non-U.S.
income taxes under the U.S. Federal income tax laws. Because the availability of
a credit or deduction depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
Backup Withholding
Corporate shareholders and other shareholders specified in the Code are
exempt from backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. Federal income
tax liability.
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<PAGE> 82
Non-U.S. Shareholders
U.S. Federal income taxation of a shareholder who, under the Code, is a
non-resident alien individual, a foreign trust or estate, foreign corporation,
or foreign partnership ("non-U.S. shareholder") depends on whether the income
from the Fund is "effectively connected" with a U.S. trade or business carried
on by such shareholder. Ordinarily, income from the Fund will not be treated as
so "effectively connected."
If the income from the Fund is not treated as "effectively connected" with
a U.S. trade or business carried on by the non-U.S. shareholder, dividends of
net investment income (which includes short-term capital gains), whether
received in cash or reinvested in shares, will be subject to a U.S. Federal
income tax of 30% (or lower treaty rate), which tax is generally withheld from
such dividends. See the definition of "net investment income" at "General"
above. Furthermore, such non-U.S. shareholders may be subject to U.S. Federal
income tax at the rate of 30% (or lower treaty rate) on their income resulting
from the Fund's election (described above) to "pass through" the amount of
non-U.S. taxes paid by the Fund, but will not be able to claim a credit or
deduction with respect to the non-U.S. income taxes treated as having been paid
by them.
A non-U.S. shareholder whose income is not treated as "effectively
connected" with a U.S. trade or business generally will not be subject to U.S.
Federal income taxation on distributions of net long-term capital gains, amounts
retained by the Fund which are designated as undistributed capital gains and any
gain realized upon the sale of Fund shares. The Fund will incur a U.S. Federal
income tax liability with respect to amounts retained by it that are designated
as undistributed capital gains. The non-U.S. shareholder may claim a credit with
respect to such taxes paid by the Fund and may claim a refund where such taxes
exceed such shareholder's U.S. Federal income tax liabilities, but must file a
tax return to do so. In addition, if the non-U.S. shareholder is treated as a
non-resident alien individual but is physically present in the United States for
more than 182 days during the taxable year, then in certain circumstances such
distributions of net long-term capital gains, amounts retained by the Fund which
are designated as undistributed capital gains, and gain from the sale of Fund
shares will be subject to a U.S. Federal income tax of 30% (or lower treaty
rate). In the case of a non-U.S. shareholder who is a non-resident alien
individual, the Fund may be required to withhold U.S. Federal income tax at a
rate of 31% of distributions (including distributions of net long-term capital
gains) unless IRS Form W-8 is provided. See "Backup Withholding" and
"Taxation -- U.S. Taxation."
If the income from the Fund is "effectively connected" with a U.S. trade or
business carried on by a non-U.S. shareholder, then distributions of net
investment income (which includes short-term capital gains), whether received in
cash or reinvested in shares, net long-term capital gains and amounts otherwise
includible in income, such as amounts retained by the Fund which are designated
as undistributed capital gains, and any gains realized upon the sale of shares
of the Fund, will be subject to U.S. Federal income tax at the graduated rates
applicable to U.S. taxpayers. Non-U.S. shareholders that are corporations may
also be subject to the branch profits tax.
Transfers of shares of the Fund by gift by a non-U.S. shareholder will
generally not be subject to U.S. Federal gift tax, but the value of shares of
the Fund held by such a shareholder at death will be includible in the
shareholder's gross estate for U.S. Federal estate tax purposes.
The income tax and estate tax consequences to a non-U.S. shareholder
entitled to claim the benefits of an applicable tax treaty may be different from
those described herein. Non-U.S. shareholders may be required to provide
appropriate documentation to establish their entitlement to the benefits of such
a treaty.
Non-U.S. shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in shares of
the Fund.
Foreign Exchange-Related Transactions; Hedging Transactions
Debt securities denominated in foreign currencies (and, in some
circumstances, futures, options, forwards and other similar financial
instruments based on foreign currencies) held by the Fund, and gains or losses
attributable to fluctuations in exchange rates that occur between the time the
Fund accrues income or expense denominated in a foreign currency and the time
the Fund actually collects such income or pays such expense, will be subject to
special rules for determining, among other things, the character and timing of
income,
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<PAGE> 83
deductions, gain, and loss attributable to foreign exchange gain or loss. In
general, these rules operate to treat as ordinary income or loss (to be taken
into account in computing net investment income) the portion of a gain or loss
so attributable. In addition, the hedging transactions which may be undertaken
by the Fund may result in "straddles" for U.S. Federal income tax purposes. The
straddle rules may affect the character and timing of income, deduction, gain or
loss recognized by the Fund. Certain hedging transactions may increase the
amount of short-term capital gain realized by the Fund, which is taxed as
ordinary income when distributed to shareholders. These rules may also require
the acceleration of the recognition of income or gain by the Fund before the
Fund receives the cash required to make distributions to shareholders. All of
these rules may affect the timing and amount of distributions to shareholders.
The gross income and diversification requirements applicable to regulated
investment companies, described above, may limit the extent to which the Fund
will be able to engage in transactions in options, futures and forward currency
exchange contracts.
Other Taxation
If the Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies," the Fund may be subject to U.S. Federal
income tax on a portion of any "excess distribution" or gain from the
disposition of such shares even if such income or gain is distributed as a
taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains. Proposed regulations would generally
allow the Fund to elect to mark to market annually all of the stock of passive
foreign investment companies held by the Fund and thereby avoid the potential
imposition of tax. Gain recognized pursuant to such election is generally
treated as ordinary income subject to the distribution requirements discussed
above. It is unclear, however, whether and in what form such regulations might
be promulgated in final form. If the Fund were to invest in a passive foreign
investment company which the Fund elected to treat as a "qualified electing
fund" under the Code, in lieu of the foregoing requirements, the Fund would
ordinarily be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts would be subject to the 90% and
calendar year distribution requirements described above. Proposed legislation
would revise the passive foreign investment company rules in various respects;
it is unclear whether and in what form such legislation might be enacted.
Distributions from the Fund may be subject to additional U.S. Federal,
state, local and non-U.S. taxes depending on each shareholder's particular
situation. Shareholders should consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund and of the
possible impact of changes in applicable tax laws.
If the Fund did not qualify as a regulated investment company for any
taxable year, (i) it would be subject to U.S. Federal income tax at regular
corporate rates on its taxable income (which would be computed without deduction
for distributions paid to shareholders) and to certain state and local taxes,
(ii) its distributions to shareholders out of its current or accumulated
earnings and profits would be taxable to shareholders as ordinary dividend
income (even if derived from long-term capital gains) and subject to withholding
in the case of non-U.S. shareholders and (iii) non-U.S. income taxes, and U.S.
Federal income taxes paid by the Fund on any undistributed long-term capital
gains, would not "pass through" to shareholders. In addition, if the Fund failed
to qualify for taxation as a regulated investment company for a period greater
than one taxable year, the Fund would be required to recognize any net built-in
gains (the excess of aggregate gains over aggregate losses that would have been
realized if it had been liquidated) if it were to qualify as a regulated
investment company in a later taxable year.
KOREAN TAXES
For a discussion of Korean tax matters applicable to the Fund and its
shareholders, see "Taxation -- Korean Taxation" and "The Offer -- U.S. Federal
Income Tax Consequences; Korean Tax Consequences" in the Prospectus.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
To the maximum extent feasible, the Manager places orders for portfolio
transactions through its affiliate, Scudder Investor Services, Inc. (the
"Distributor"), a corporation registered as a broker/dealer and a wholly owned
subsidiary of the Manager, which in turn places orders on behalf of the Fund
with issuers, underwriters or other brokers and dealers. The Distributor does
not receive any commission, fees or other remuneration from the Fund for this
service. Allocation of brokerage will be supervised by the Manager.
The primary objective of the Manager in placing orders for the purchase and
sale of securities for the Fund's portfolio is to obtain the most favorable net
results taking into account such factors as price, commission, size of order,
difficulty of execution and skill required of the broker/dealer. Orders for
agency transactions may be placed with Daewoo Securities, among other Korean
brokers, when consistent with the above-stated policy and with Rule 17e-1 under
the 1940 Act. The Manager seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Manager reviews, on a routine basis, commission rates and execution
and settlement services performed by its brokers, and makes comparisons based on
these factors among the Fund's brokers and with other brokers.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Manager's practice to place such orders with
brokers and dealers who supply market quotations to the Fund or its agents for
portfolio evaluation purposes, or who supply research, market and statistical
information to the Fund or the Manager. The term "research, market and
statistical information" includes advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities, and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Manager is not authorized when placing portfolio transactions for the Fund
to pay a brokerage commission or transaction cost in excess of that which
another broker might have charged for executing the same transaction on account
of the receipt of research, market or statistical information, although it may
do so in seeking to obtain the most favorable net results with respect to a
particular transaction. The Manager will not place orders with brokers or
dealers on the basis that the broker or dealer has or has not sold shares of the
Fund. Except for implementing the policy stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof.
Although certain research, market and statistical information from brokers
and dealers can be useful to the Fund and to the Manager, it is the opinion of
the management of the Fund that such information is only supplementary to the
Manager's own research effort, since the information must still be analyzed,
weighed and reviewed by the Manager's staff. Such information may be useful to
the Manager in providing services to clients other than the Fund, and not all
such information will be used by the Manager in connection with the Fund.
Conversely, such information provided to the Manager by brokers and dealers
through whom other clients of the Manager effect securities transactions may be
useful to the Manager in providing services to the Fund.
During the fiscal year ended June 30, 1996, the Fund paid total brokerage
commissions of $2,211,569, of which $977,539 (44% of the total commission paid)
resulted from orders placed with brokers and dealers who provided supplementary
research, market and statistical information to the Fund or to the Manager.
Daewoo Securities, with respect to portfolio transactions for the Fund, was paid
$295,122, which amounted to 13% of total brokerage commissions paid. The
aggregate amount of brokerage transactions was $686,897,249 for the fiscal year.
The aggregate amount of brokerage transactions subject to brokerage commissions
was $683,216,557 (99% of all brokerage transactions). The aggregate dollar
amount of transactions subject to brokerage commissions that were effected
through Daewoo Securities was $68,525,287 (10% of the aggregate dollar amount of
transactions subject to brokerage commissions).
During the fiscal years ended June 30, 1994 and 1995, the Fund paid total
brokerage commissions of $603,867 and $461,281, respectively. During the same
periods, the Fund paid Daewoo Securities with respect
17
<PAGE> 85
to portfolio transactions brokerage commissions of $134,564 and $74,082,
respectively, which represented 22% and 16%, respectively, of the total
commissions paid for each respective period.
Brokerage commissions on equity securities may be negotiated up to a
permitted maximum percentage of the sales value of the transaction. The Stock
Exchange is permitted to alter the maximum commission rate from time to time.
The rates currently provide for a maximum commission of 0.6% for equity
securities and 0.3% for bonds. Each broker is required to report its commission
rate schedule and any deviation therefrom to the KSEC at least seven days before
its effectiveness. As a result of this practice, there generally is no deviation
in commission rates schedules among Korean brokers and, in practice, securities
companies currently collect brokerage commissions of up to 0.5% of the sales
value for equity securities. A Securities Transaction Tax equal to 0.5% (in the
case of transactions outside the Stock Exchange) or 0.35% (in the case of
transactions on the Stock Exchange) of the sales proceeds is imposed upon a
seller of Korean equity securities in most cases. In addition, a special
agricultural and fishery tax equal to 0.15% of the sales proceeds is imposed in
the case of transactions on the Stock Exchange. The Fund currently is not
required to pay such taxes with respect to its sales on the Stock Exchange. It
is, however, required to pay the Securities Transaction Tax with respect to any
sales it makes outside of the Stock Exchange.
18
<PAGE> 86
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Investment Portfolio as of December 31, 1996
<CAPTION>
===================================================================================================================
Principal Market
Amount(e) Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT 0.3%
U.S.$1,469,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 12/31/96 at 6.7% to be repurchased
at $1,469,547 on 1/2/97, collateralized by a
$1,200,000 U.S. Treasury Note, 10%, 5/15/10
(Cost $1,469,000) .................................... 1,469,000
----------
- -------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 2.7%
METALS & MINERALS
10,000,000,000 Korea Tungsten Exchange Bond, Zero Coupon with
36.03% bonus interest at maturity, 11/11/98 (c)
(Cost $14,540,668) ................................... 13,036,414
- -------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS 7.2%
CONSUMER STAPLES 1.4%
Food & Beverage 0.7% 800,000,000 Crown Confectionery Co., 3% with 16.28% bonus
interest at maturity, 12/31/97 (Major producer
of snacks)(c)(f) ..................................... 1,003,179
2,000,000,000 Haitai Confectionery Co., 1% with 12.69% bonus
interest at maturity, 6/30/98 (Major producer of
snacks)(c)(f) ........................................ 2,265,580
----------
3,268,759
----------
Textiles 0.7% U.S.$1,000,000 Kolon Industries, Inc., 0.250%, 12/31/04 (Leading
manufacturer of nylon, polyester yarn and
fabrics) ............................................. 555,000
2,400,000,000 Kukje Corp., 12% with 4.62% bonus interest at
maturity, 12/31/97 (Shoe manufacturer)(c)(f) ......... 2,941,717
----------
3,496,717
----------
HEALTH 0.8%
Pharmaceuticals 3,000,000,000 Korea Green Cross Corp., 1% with 11.88% bonus
interest at maturity, 12/31/97(Leading ethical
drug producer)(c)(f) ................................. 3,560,253
400,000,000 Yuhan Corp., 5.5% with 25.41% bonus interest at
maturity, 12/31/97 (Pharmaceutical company)(c)(f) .... 550,467
----------
4,110,720
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE> 87
<TABLE>
<CAPTION>
===================================================================================================================
Principal Market
Amount(e) Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING 0.9%
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) ............ 4,590,973
----------
ENERGY 1.1%
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) ........................................ 2,316,032
3,000,000,000 Yukong, Ltd., 1% with 13.92% bonus interest at
maturity, 12/31/98(c)(f) .............................. 3,250,532
----------
5,566,564
----------
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) ............ 1,395,967
500,000,000 Sammi Steel, 4% with 20.57% bonus interest
at maturity, 12/31/97 (Specialty steel
company)(c)(f) ........................................ 654,779
----------
2,050,746
----------
CONSTRUCTION 0.3%
Miscellaneous 1,000,000,000 Sungwon Construction, 5% with 21.11% bonus interest
at maturity, 12/31/97 (Construction company)(c)(f) .... 1,325,717
----------
TRANSPORTATION 0.5%
Marine Transportation 2,000,000,000 Hanjin Shipping, 0.125%, 11/30/99 (Container and
bulk shipping)(c) ..................................... 2,199,640
----------
UTILITIES 1.8%
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) ........................................ 5,834,342
2,300,000,000 Korea Electric Power Co., Zero Coupon with 30.5%
bonus interest at maturity, 12/31/98 (c)(f) ........... 2,761,902
----------
8,596,244
----------
TOTAL CONVERTIBLE BONDS (Cost $40,698,801) .............. 35,206,080
----------
- -------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS 4.2% Shares
------
CONSUMER DISCRETIONARY 0.2%
Apparel & Shoes 0.2% 10,700 Baik Yang Co. (Leading maker of under garments) ......... 443,195
50,000 Shin Won Corp. (Major apparel manufacturer) ............. 436,686
----------
879,881
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE> 88
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Investment Portfolio (continued)
<CAPTION>
===================================================================================================================
Market
Shares Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hotels & Casinos 0.0% 7,070 Hotel Shilla Co. (Hotel and resort operation) ............ 40,161
CONSUMER STAPLES 1.2%
Alcohol & Tobacco 0.0% 580 Chosun Brewery Co., Ltd. (Brewery) ....................... 5,491
5,800 Jinro, Ltd. (Leading producer of soju, a distilled
spirit) ................................................ 47,430
---------
52,921
---------
Food & Beverage 0.3% 70,690 Cheil Food and Chemical Co., Ltd. (Korea's leading
sugar refiner and major integrated food processor) ..... 1,254,852
---------
Package Goods/Cosmetics 0.2% 118,570 Pacific Corp. (Leading cosmetics producer) ............... 812,450
---------
Textiles 0.7% 184,000 Kohap (Leading maker of synthetic fabrics and yarns) ..... 622,769
225,910 Kolon Industries, Inc. ................................... 1,577,360
161,980 Sunkyong Industries, Ltd. (Leading producer of
acetate filament yarn, polyester yarns and fabrics) ..... 1,054,308
---------
3,254,437
---------
HEALTH 0.1%
Pharmaceuticals 6,700 Korea Green Cross Corp. .................................. 197,432
4,700 Shinpoong Pharmaceutical Co., Ltd. (Specialized
drug producer) ......................................... 49,670
---------
247,102
---------
FINANCIAL 0.8%
Insurance 0.4% 6,175 Samsung Fire & Marine Insurance Co. (Insurance
company)(d) ............................................ 2,130,923
---------
Other Financial
Companies 0.4% 87,310 Shin Young Securities (Medium-sized brokerage house) ..... 547,625
252,000 Ssangyong Investment & Securities (Leading
brokerage house) ....................................... 1,371,834
---------
1,919,459
---------
SERVICE INDUSTRIES 0.1%
Miscellaneous Commercial
Services 76,000 Sunkyong Ltd. (Leading trading company) .................. 496,473
---------
DURABLES 0.4%
Automobiles 0.3% 99,130 Mando Machinery Corp. (Major auto parts
manufacturer) .......................................... 1,466,420
---------
Tires 0.1% 74,650 Kumho Co. (Korea's largest tire manufacturer) ............ 335,704
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE> 89
<TABLE>
<CAPTION>
===================================================================================================================
Market
Shares Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING 0.4%
Chemicals 0.2% 3,700 Han Wha Co., Ltd. (Leading producer of explosives
and petrochemicals) .................................... 26,404
92,285 Oriental Chemical Industries Co., Ltd. (Manufacturer
of specialty chemicals) ................................ 944,693
14,095 Oriental Chemical Industries Co., Ltd. (New)(c) .......... 151,792
---------
1,122,889
---------
Miscellaneous 0.1% 60,000 Jindo Corp. (Manufactures steel, aluminum and
refrigerated container for the freight and other
industries) ............................................ 362,130
---------
Containers & Paper 0.1% 60,000 Hansol Paper Co. (Leading producer of papers and
newsprint) ............................................. 720,710
---------
Technology 0.4%
Electronic Components/Distributors 9,918 Samsung Display Devices (Leading manufacturer of
CRT and picture tubes) ................................. 278,173
50,000 Samsung Electromechanics Co., Ltd. (Major
manufacturer of electronics) ........................... 644,970
37,039 Samsung Electronics Co., Ltd. (Major electronics
manufacturer)(d) ....................................... 994,136
11,162 Samsung Electronics Co., Ltd. (New 1)(d) ................. 292,458
---------
2,209,737
---------
ENERGY 0.0%
Oil Companies 1,174 Ssangyong Oil Refining Co. (Major oil refiner)(c) ........ 11,178
---------
METALS & MINERALS 0.0%
Steel & Metals 37,170 Kangwon Industry (Steel company) ......................... 237,096
---------
CONSTRUCTION 0.5%
Building Materials 0.3% 80,000 Ssangyong Cement Industrial Co., Ltd. (Major
cement company)(c) ..................................... 728,994
29,300 Sung Shin Cement Co., Ltd. (Major cement company) ........ 285,718
50,000 Tong Yang Cement Co., Ltd. (Major cement company) ........ 396,450
---------
1,411,162
---------
Miscellaneous 0.2% 95,000 Hyundai Engineering & Construction Co. (Leading
general contractor) .................................... 1,096,154
---------
TRANSPORTATION 0.1%
Airlines 0.0% 20,520 Korean Air Co., Ltd. (Airline)(c) ........................ 167,560
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE> 90
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Investment Portfolio (continued)
<CAPTION>
===================================================================================================================
Market
Shares Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trucking 0.1% 25,500 Global Enterprises Co., Ltd. (Container
transport company) .................................... 482,840
----------
TOTAL PREFERRED STOCKS (Cost $30,272,448) ............... 20,712,239
----------
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 85.6%
CONSUMER DISCRETIONARY 3.5%
Apparel & Shoes 0.4% 52,083 Shin Won ................................................ 1,017,005
30,000 Ssang BangWool Co. (Leading underwear manufacturer) ..... 986,982
----------
2,003,987
----------
Department & Chain Stores 2.9% 182,591 Hwa Sung Industries (Department store) .................. 3,824,687
152,443 Shinsegae (Major department store chain) ................ 6,332,248
16,571 Shinsegae (New 1) ....................................... 607,930
214,599 Taegu Department Store (Department store) ............... 3,504,694
----------
14,269,559
----------
Hotels & Casinos 0.2% 100,000 Hotel Shilla Co. ........................................ 792,899
----------
CONSUMER STAPLES 4.7%
Alcohol & Tobacco 1.1% 3,020 Chosun Brewery Co., Ltd. ................................ 76,840
261,972 Jinro, Ltd. ............................................. 5,456,458
----------
5,533,298
----------
Food & Beverage 2.2% 133,855 Cheil Food and Chemical Co., Ltd. ....................... 5,385,882
120,000 Dongwon Industries Company (Leading deep-sea
fishing and processing company) ....................... 1,817,751
10,000 Haitai Confectionery Co. ................................ 112,426
32,271 Nhong Shim Co. (Manufacturer of instant noodles
and snacks) ........................................... 1,447,421
48,000 Pulmuone Co., Ltd. (Food producer) ...................... 1,755,266
----------
10,518,746
----------
Package Goods/Cosmetics 0.2% 50,000 Hankook Cosmetics Co. (Manufactures and sells
cosmetics) ............................................ 1,124,260
----------
Textiles 1.2% 1,200 Baik Yang Co. 127,811
20,356 Cheil Industries (Leading woolen yarn and fabric
manufacturer) ......................................... 238,490
30,000 Choongnam Spinning Co., Ltd. (Korea's leading
manufacturer of cotton yarn) .......................... 280,473
610 Daehan Synthetic Fiber (Manufacturer of polyester
yarns and synthetic fibers) ........................... 53,059
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE> 91
<TABLE>
<CAPTION>
===================================================================================================================
Market
Shares Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
48,240 Hankook Synthetics Inc. (Textiles) ..................... 2,454,817
40,969 Kolon Industries, Inc. (New 1) ......................... 688,473
5,000 Vivien Corp. (Manufactures lingerie and other
women's undergarments) ............................... 313,609
3,040 Taekwang Industrial Co., Ltd. (Major producer of
acrylic fiber) ....................................... 1,093,680
29,600 Hyosung T&C, Ltd., (Korea's largest producer of nylon
filament yarn) ....................................... 735,621
-----------
5,986,033
-----------
HEALTH 3.7%
Pharmaceuticals 72,632 Chong Kun Dang Co., Ltd. (Pharmaceutical company) ...... 4,770,481
11,011 Daewoong Pharmaceutical Co. (Pharmaceutical
company) ............................................. 531,655
241,010 Dong-A Pharmaceutical (Pharmaceutical company) ......... 4,649,069
16,068 Korea Green Cross Corp. ................................ 1,197,969
126,621 Yuhan Corporation ...................................... 4,870,038
27,565 Yuhan Corporation (New 1)(c) ........................... 1,206,988
15,418 Yuhan Corporation (New 2)(c) ........................... 664,160
-----------
17,890,360
-----------
COMMUNICATIONS 23.0%
Cellular Telephone 112,706 Korea Mobile Telecom Corp. (Mobile
telecommunication services)(d)(h) .................... 111,911,056
-----------
FINANCIAL 15.7%
Banks 7.7% 435,650 Cheju Bank (Regional bank) ............................. 3,449,111
571,400 Cho Hung Bank (GDS) (Commercial bank) .................. 4,285,500
134,692 Kookmin Bank (Major commercial bank) ................... 1,864,966
3,381 Daegu Bank (Leading regional bank) ..................... 39,972
100,000 Hanil Bank (Major commercial bank) ..................... 686,391
461,044 Korea Exchange Bank (Major commercial bank) ............ 4,173,949
200,000 Korea First Bank (Major commercial bank) ............... 1,013,018
391,300 Korea Housing Bank (New 1) ............................. 5,464,308
584,315 Korea Long Term Credit Bank (Major
commercial bank) ..................................... 10,026,707
485,950 Shin Han Bank (Major commercial bank) .................. 6,613,521
-----------
37,617,443
-----------
Insurance 6.8% 45,356 Daehan Fire & Marine Insurance Co., Ltd.
(Insurance company) .................................. 1,100,353
44,656 Hyundai Fire and Marine Insurance (Insurance company) .. 1,448,017
49,912 LG Insurance Co., Ltd. (Insurance company) ............. 2,652,131
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE> 92
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Investment Portfolio (continued)
<CAPTION>
===================================================================================================================
Market
Shares Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
68,967 Samsung Fire & Marine Insurance Co. (d)(h) .............. 27,831,653
----------
33,032,154
----------
Other Financial Companies 1.2% 14,638 Boo Kook Securities (Securities company) ................ 114,332
218,224 Hyundai Securities (Securities company) ................. 2,608,358
14,578 Hyundai Securities (New 1) .............................. 163,895
50,000 LG Securities Co., Ltd. (Securities company) ............ 508,876
145,000 Shinyoung Securities .................................... 2,402,367
27,081 Ssangyong Investment & Securities Co. ................... 258,952
----------
6,056,780
----------
SERVICE INDUSTRIES 0.9%
Miscellaneous
Commercial Services 243,132 Samsung Co., Ltd. (Trading company) ..................... 2,877,302
44,589 Samsung Co., Ltd. (New 1) ............................... 522,404
45,003 Sunkyong Ltd. ........................................... 655,073
6,515 Sunkyong Ltd. (New 1) ................................... 90,208
----------
4,144,987
----------
DURABLES 6.7%
Automobiles 4.6% 116,209 Hyundai Motor Co., Ltd. (Korea's largest auto
manufacturer) ......................................... 2,750,509
423,380 Hyundai Motor Services Co., Ltd. (Auto parts and
services) ............................................. 10,321,453
54,989 Hyundai Motor Services Co., Ltd. (New 1) ................ 1,301,515
113,341 Mando Machinery Corp. ................................... 3,822,745
35,000 Samlip Industries (Auto parts manufacturer) ............. 1,404,142
90,000 Yoosung Enterprise (Leading manufacturer of
engine parts) ......................................... 2,566,864
----------
22,167,228
----------
Leasing Companies 0.3% 93,000 Korea Development Leasing Co. (Largest leasing
company in Korea) ..................................... 1,309,704
----------
Telecommunications
Equipment 0.1% 5,490 LG Information & Communication (Leading
manufacturer of telecommunication equipment) .......... 350,840
5,050 LG Information & Communication (New 1) .................. 357,982
220 Sungmi Telecom Electronics (Leading manufacturer
of telecommunication equipment) ....................... 32,805
----------
741,627
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE> 93
<TABLE>
<CAPTION>
===================================================================================================================
Market
Shares Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tires 1.7% 163,416 Hankook Tire Manufacturing Co., Ltd. (Major tire
manufacturer) ......................................... 6,265,892
42,995 Hankook Tire Manufacturing Co., Ltd. (New)(c) ........... 1,679,095
11,570 Hankook Tire Manufacturing Co., Ltd. (New 2)(c) ......... 449,108
----------
8,394,095
----------
MANUFACTURING 5.4%
Chemicals 1.5% 85,550 Hanwha Co., Ltd. ........................................ 931,432
13,894 Hanwha Co., Ltd. (New 1) ................................ 154,560
37,540 Korea Chemical Co. (Paint company) ...................... 2,576,710
210,009 LG Chemical Co. Ltd. (Korea's largest integrated
chemical company) ..................................... 2,025,531
50,047 Oriental Chemical Industries Co., Ltd. .................. 1,160,854
4,755 Oriental Chemical Industries Co., Ltd. (New 1) .......... 106,354
10,960 Oriental Chemical Industries Co., Ltd. (New 2) .......... 241,250
----------
7,196,691
----------
Containers & Paper 3.3% 100,000 Asia Paper Manufacturing Co. (Specialized maker of
cardboard used for packaging) ......................... 3,491,124
37,333 Asia Paper Manufacturing Co. (New 1) .................... 1,219,397
50,000 Dae Young Packaging Co. (New 1) (Leading producer
of corrugated board base and boxes) ................... 1,698,225
169,500 Hansol Paper Manufacturing Co., Ltd. .................... 4,553,432
145,807 Hansol Paper Manufacturing Co., Ltd. (New 1) ............ 3,796,159
20,000 Korea Export Packaging Co. (New 1) (Producer of
corrugated boards) .................................... 437,870
35,000 Shin Poong Paper Manufacturing Co., Ltd. (Leading
manufacturer of white duplex paperboard) .............. 849,112
----------
16,045,319
----------
Diversified Manufacturing 0.0% 22,339 Samsung Heavy Industries Co., Ltd. (New 1)
(Shipbuilder, major producer of machinery) ............ 224,976
----------
Electrical Products 0.6% 114,086 Kyungwon Century Co., Ltd. (Major manufacturer of
heating and cooling equipment) ........................ 2,902,780
----------
TECHNOLOGY 9.1%
EDP Peripherals 0.3% 41,240 Chung Ho Computer Co. (Manufacturer of cash
dispensers, on-line and automated teller machines) .... 1,674,002
----------
Electronic Components/
Distributors 8.2% 216,605 Samsung Display Devices ................................. 12,381,091
15,445 Samsung Display Devices (New 1) ......................... 875,521
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE> 94
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Investment Portfolio (continued)
<CAPTION>
===================================================================================================================
Market
Shares Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
236,962 Samsung Electromechanics Co., Ltd. ...................... 5,384,225
59,318 Samsung Electromechanics Co., Ltd. (New 1) .............. 1,312,718
235,220 Samsung Electronics Co., Ltd. ........................... 12,665,692
143,724 Samsung Electronics Co., Ltd. (New 1) ................... 7,381,801
----------
40,001,048
----------
Electronic Data Processing 0.6% 87,817 Trigem Computer Inc. (Major personal computer
manufacturer) ......................................... 2,702,062
----------
ENERGY 1.2%
Oil & Gas Production 55,833 Ssangyong Oil Refining Co. .............................. 1,222,379
245,644 Yukong, Ltd. ............................................ 4,651,248
----------
5,873,627
----------
METALS & MINERALS 2.0%
Coal Mining 0.3% 30,000 Dongwon Company Ltd. (Thermal coal mining) .............. 1,437,870
----------
Steel & Metals 1.7% 160,000 Inchon Iron & Steel Co. (Steel producer) ................ 2,575,148
70,857 Inchon Iron & Steel Co. (New 1) ......................... 1,123,649
72,313 Kia Steel Co., Ltd. (New 1) ............................. 315,781
68,200 Pohang Iron & Steel Co., Ltd. (Leading steel
producer)(d) .......................................... 4,035,907
----------
8,050,485
----------
CONSTRUCTION 5.3%
Building Materials 2.7% 10,000 Asia Cement Manufacturing Co.(Major producer of
cement) ............................................... 250,888
24,000 Hanil Cement Manufacturing Co., Ltd. (Cement
manufacturing company) ................................ 1,050,888
234,337 Keum Kang Co., Ltd. (Construction company and
manufacturer of building materials) ................... 10,676,893
68,915 Ssangyong Cement Industrial Co., Ltd. ................... 970,519
----------
12,949,188
----------
Homebuilding 0.3% 50,000 Chong Gu Housing & Construction Co. (Apartment
building construction company) ........................ 1,242,604
46,300 Keang Nam Enterprises (Apartment and urban
renewal construction company) ......................... 372,044
----------
1,614,648
----------
Miscellaneous 2.3% 139,125 Dong Ah Construction Industries Co., Ltd. (Leading
construction company) ................................. 2,963,609
4,659 Dong Ah Construction Industries Co., Ltd. (New 2) ....... 94,834
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE> 95
<TABLE>
<CAPTION>
===================================================================================================================
Market
Shares Value($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
149,904 Hyundai Engineering & Construction Co. ................. 3,477,063
14,258 Hyundai Engineering & Construction Co. (New 1) ......... 313,845
30,870 Kumho Construction and Engineering (Engineering
and construction company) ............................ 233,808
135,350 LG Construction Co. (Major real estate developer and
construction company) ................................ 2,658,947
1,234 Sungwon Construction Co. ............................... 13,873
240 Sungwon Construction Co. (New) ......................... 2,542
20,000 Tae Young Corp. (Construction company) ................. 1,315,976
-----------
11,074,497
-----------
TRANSPORTATION 1.5%
Airlines 0.5% 158,146 Korean Air Co., Ltd. ................................... 2,433,015
-----------
Marine Transportation 0.1% 27,930 Hyundai Merchant & Marine Co. (Transportation
company) ............................................. 360,280
1,146 Korea Line Corp. (Maritime transportation company) ..... 13,155
-----------
373,435
-----------
Trucking 0.9% 179,156 Korea Express Co., Ltd. (General freight transport
company) ............................................. 4,303,984
-----------
UTILITIES 2.9%
Electric Utilities 1.6% 210,900 Korea Electric Power Co. ............................... 6,139,811
91,000 Korea Electric Power Co. (ADR) ......................... 1,865,500
-----------
8,005,311
-----------
Natural Gas Distribution 1.3% 12,900 Daehan City Gas Co. (Natural gas distributor) .......... 931,243
37,600 Daesung Industrial (Natural gas distributor) ........... 2,202,604
23,687 Daesung Industrial (New 1) ............................. 1,210,980
24,940 Samchully (Producer and distributor of anthracite
and gas) ............................................. 1,741,374
4,689 Samchully (New 1)(c) ................................... 338,496
1,875 Samchully (New 2) ...................................... 132,027
-----------
6,556,724
-----------
TOTAL COMMON STOCKS (Cost $296,131,802) ................ 416,913,878
-----------
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $383,112,719)(a) ............................... 487,337,611
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE> 96
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
Investment Portfolio (continued)
================================================================================
- --------------------------------------------------------------------------------
(a) The cost for federal income tax purposes was $383,716,010. At December 31,
1996, net unrealized appreciation for all securities based on tax cost was
$103,621,601. This consisted of aggregate gross unrealized appreciation
for all securities in which there was an excess of market value over tax
cost of $175,647,533 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over market value of
$72,025,932.
(b) New shares issued during 1996, eligible for a pro rata share of 1996
dividends (See Note A to the Notes to Financial Statements).
(c) Securities valued in good faith by the Valuation Committee of the Board of
Directors at fair value amounted to $53,084,865 (10.43% of net assets).
Their values have been estimated by the Board of Directors in the absence
of readily ascertainable market values. 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. The cost of
these securities at December 31, 1996 aggregated $59,806,632. These
securities may also have certain restrictions as to resale (See Note A to
the Notes to Financial Statements).
(d) 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 of $54,963,119 over the local share price of $92,233,014
for these securities valued by the Valuation Committee was approximately
10.80% of the Fund's net assets at December 31, 1996. The cost of these
securities at December 31, 1996 was $25,609,696 (See Note A to the Notes
to Financial Statements). Their values have been estimated by the Board of
Directors in the absence of readily ascertainable market values or other
market factors, respectively. However, because of the inherent uncertainty
of valuation, those estimated values may differ significantly from the
values that would have been used had a ready market for the securities
existed, and the difference could be material.
(e) Principal amount stated in Korean won unless otherwise noted. U.S.$ 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.
(h) At December 31, 1996, 28% of the Fund's net assets were invested in Korea
Mobile Telecom Corp. and Samsung Fire & Marine Insurance Co.
The accompanying notes are an integral part of the financial statements.
20
<PAGE> 97
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Financial Statements
<CAPTION>
======================================================================================================
- ------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $383,112,719)(Note A) .... $487,337,611
Cash:
U.S. dollars .................................................. 14,113
Won at market (identified cost $22,049,372)(Note A) ........... 21,718,387
Receivables:
Dividends and interest ........................................ 1,041,520
Other assets ..................................................... 3,747
------------
Total assets ................................................ 510,115,378
LIABILITIES
Payables:
Accrued management fee (Note C) ................................ $495,693
Other accrued expenses and payables (Note C) ................... 476,792
--------
Total liabilities ............................................ 972,485
------------
Net assets, at market value ...................................... $509,142,893
============
NET ASSETS
Net assets consist of:
Accumulated net investment loss ................................ $ (1,427,032)
Net unrealized appreciation (depreciation) on:
Investments .................................................. 104,224,892
Won .......................................................... (330,985)
Won related transactions ..................................... (10,076)
Accumulated net realized loss ................................ (7,050,450)
Paid-in capital .............................................. 413,736,544
------------
Net assets, at market value ...................................... $509,142,893
============
NET ASSET VALUE per share ($509,142,893 [divided by sign] 37,570,917
shares of common stock issued and outstanding, 50,000,000 shares
authorized, $.01 par value) .................................... $13.55
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
21
<PAGE> 98
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Financial Statements (continued)
<CAPTION>
============================================================================================================
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest (net of withholding taxes of $122,623) ..................... $ 2,543,583
Dividends (net of withholding taxes of $46,223) (Note A) ............ 117,777
-------------
2,661,360
Expenses:
Management fee (Note C) ............................................. $ 3,077,808
Custodian and accounting fees (Note C) .............................. 701,947
Directors' fees and expenses (Note C) ............................... 88,802
Legal ............................................................... 37,732
Auditing ............................................................ 60,459
Reports to shareholders ............................................. 38,922
Services to shareholders ............................................ 41,774
Other ............................................................... 40,948 4,088,392
------------- -------------
Net investment loss ................................................... (1,427,032)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized loss during the period on:
Investments ......................................................... (2,375,037)
Won related transactions ............................................ (3,850,414) (6,225,451)
-------------
Net unrealized appreciation (depreciation) during the period on:
Investments ......................................................... (158,292,765)
Won ................................................................. 2,042,692
Won related transactions ............................................ (4,580) (156,254,653)
------------- -------------
Net loss on investment transactions ................................... (162,480,104)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .................... $(163,907,136)
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
22
<PAGE> 99
<TABLE>
<CAPTION>
============================================================================================================
- ------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
INCREASE (DECREASE) IN NET ASSETS 1996 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income (loss) .......................................... $ (1,427,032) $ 738,094
Net realized gain (loss) from investment transactions ................. (6,225,451) 24,164,248
Net unrealized appreciation (depreciation) on investment transactions
during the period ................................................... (156,254,653) (60,906,538)
------------- ------------
Net decrease in net assets resulting from operations .................... (163,907,136) (36,004,196)
------------- ------------
Distributions to shareholders:
From net investment income ............................................ -- (738,094)
------------- ------------
In excess of net investment income .................................... -- (1,489,524)
------------- ------------
From net realized gains on investment transactions .................... (22,312,637) (13,231,733)
------------- ------------
Fund share transactions:
Reinvestment of distributions ......................................... 6,675,080 5,604,398
------------- ------------
DECREASE IN NET ASSETS .................................................. (179,544,693) (45,859,149)
Net assets at beginning of period ....................................... 688,687,586 734,546,735
------------- ------------
NET ASSETS AT END OF PERIOD (including accumulated net investment loss
of $1,427,032 at December 31, 1996) ................................... $ 509,142,893 $688,687,586
============= ============
OTHER INFORMATION
INCREASE IN FUND SHARES
Shares outstanding at beginning of period ............................... 37,188,528 36,930,508
------------- ------------
Shares issued to shareholders in reinvestment of distributions ........ 382,389 258,020
------------- ------------
Shares outstanding at end of period ..................................... 37,570,917 37,188,528
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- --------------------------------------------------------------------------------
23
<PAGE> 100
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Financial Highlights
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED JUNE 30,
DECEMBER 31, --------------------------------------------------------
1996 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period..................... $ 18.52 $19.89 $18.66 $11.40 $10.75 $ 10.27
------- ------ ------ ------ ------ -------
Income from investment operations (a):
Net investment income (loss)........................... (.04) .02 (.02) (.03) .02 .08
Net realized and unrealized gain (loss) on
investment transactions.............................. (4.34) (.97) 2.42 7.13 .86 .78
------- ------ ------ ------ ------ -------
Total from investment operations......................... (4.38) (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..... (.60) (.36) (.15) -- (.20) (.34)
------- ------ ------ ------ ------ -------
Total distributions...................................... (.60) (.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.................................................. .01 -- (1.02) .22 .01 .02
------- ------ ------ ------ ------ -------
Underwriting expenditures and offering costs............. -- -- -- (.05) -- --
------- ------ ------ ------ ------ -------
Net asset value, end of period........................... $ 13.55 $18.52 $19.89 $18.66 $11.40 $ 10.75
======= ====== ====== ====== ====== =======
Market value, end of period.............................. $ 14.88 $21.13 $19.63 $22.00 $15.00 $ 11.38
======= ====== ====== ====== ====== =======
TOTAL RETURN
Per share market value (%)............................... (24.27)** 9.73 (5.43) 46.74 34.54 (17.01)
Per share net asset value (%)(b)......................... (27.17)** (5.09) 13.00 63.77 8.20 7.87
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions)................... 509 689 735 550 258 241
Ratio of operating expenses to average net assets (%).... 1.32* 1.28 1.32 1.37 1.52 1.52
Ratio of net investment income (loss) to average
net assets (%)(c)...................................... (.23)** .10 (.10) (.18) .15 .70
Portfolio turnover rate (%).............................. 7.1* 32.6 10.5 14.3 14.3 18.2
Average commission rate paid (d)......................... $ .0853 $.1254 $ -- $ -- $ -- $ --
<FN>
(a) Based on monthly average of shares outstanding during each period.
(b) 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.
(c) The ratio for the six months ended December 31, 1996 has not been annualized since the Fund believes it would not be
appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year (Note A).
(d) Average commission rate paid per share of common and preferred stocks is calculated for fiscal years ending on or after
June 30, 1996.
* Annualized ** Not annualized
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE> 101
[Logo of The Korea Fund, Inc.] 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. See notes (c) and (d) of
the notes to the Investment Portfolio.
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 16.5% on dividends and 13.2% on interest paid to the
Fund by Korean issuers. 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.
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.
25
<PAGE> 102
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
Notes to Financial Statements (continued)
================================================================================
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
December 31, 1996 the exchange rate for Korean won was U.S. $0.001189 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.
B. PURCHASES AND SALES OF SECURITIES
---------------------------------
For the six months ended December 31, 1996, purchases and sales of investment
securities (excluding short-term investments) aggregated $81,446,217 and
$19,897,158, 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
six months ended December 31, 1996, the fee pursuant to such agreement amounted
to $3,077,808 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 six months ended December 31, 1996, brokerage commissions on investment
transactions amounting to $38,143 were paid by the Fund to Daewoo Securities
Co., Ltd., the parent company of the Korean Adviser.
26
<PAGE> 103
================================================================================
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the six months
ended December 31, 1996, the amount charged to the Fund by SFAC aggregated
$168,114, of which $25,702 is unpaid at December 31, 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 six months ended December 31, 1996, Directors' fees and
expenses amounted to $88,802.
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 Economy 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
October 1, 1996, total foreign investment was limited generally to 18% of each
class of a company's outstanding shares, while a single foreign investor could
only invest up to 4% of each class of outstanding shares. At October 1, 1996,
the limits were increased from 18% to 20% and 4% to 5%, respectively. Pursuant
to its license, however, the Fund may invest in shares representing 7% of each
class in general.
E. INVESTING IN THE KOREAN MARKET
------------------------------
Investing in the Korean market may involve special risks and considerations not
typically associated with investing in the United States. These risks include
revaluation of currency, high rates of inflation, repatriation restrictions on
income and capital, and future adverse political and economic developments.
Moreover, securities issued in this market may be less liquid, subject to
government ownership controls, delayed settlements, and their prices more
volatile than those of comparable securities in the United States.
27
<PAGE> 104
[LOGO]The Korea Fund, Inc.
Investment Portfolio as of June 30, 1996
<TABLE>
<CAPTION>
==========================================================================================================
Principal Market
Amount(e) Value($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT 0.3%
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.
<PAGE> 105
[LOGO]The Korea Fund, Inc.
Investment Portfolio (continued)
<TABLE>
<CAPTION>
===========================================================================================================
Principal Market
Amount(e) Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <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 $41,504,920) .......... 37,229,470
----------
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
PREFERRED STOCKS 3.4% Shares
------
<S> <C> <C> <C>
CONSUMER DISCRETIONARY 0.1%
Apparel & Shoes 10,700 BYC (Leading maker of under garments) (c) ........... 567,184
----------
CONSUMER STAPLES 0.7%
Alcohol & Tobacco 0.1% 5,800 Jinro, Ltd. ......................................... 53,982
46,165 Oriental Brewery Co., Ltd.
(Korea's largest brewery) (g) ..................... 682,914
----------
736,896
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 106
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <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.
<PAGE> 107
[LOGO] The Korea Fund, Inc.
Investment Portfolio (continued)
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <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 $21,382,560) ........... 19,974,370
----------
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
COMMON STOCKS 87.7%
<S> <C> <C> <C>
CONSUMER DISCRETIONARY 4.0%
Apparel & Shoes 0.5% 52,083 Shin Won (Major apparel manufacturer) ............... 1,592,281
30,000 Ssang Bang Wool Co.
(Leading underwear manufacturer) ................. 1,427,515
----------
3,019,796
----------
Department & Chain
Stores 3.3% 182,591 Hwa Sung Industries (Department store) .............. 4,794,364
152,443 Shinsegae (Major department store chain) ............ 10,335,756
16,571 Shinsegae (New) (b)(g) .............................. 1,031,602
174,599 Taegu Department Store (Department store) ........... 3,379,197
----------
19,540,919
----------
Hotels & Casinos 0.2% 100,000 Hotel Shilla Co. (Luxury hotel and resort
operator) ........................................ 1,183,432
----------
CONSUMER STAPLES 3.5%
Alcohol & Tobacco 0.1% 19,000 Jinro, Ltd. ......................................... 405,202
6,009 Jinro, Ltd. (New) (b)(g) ............................ 120,002
----------
525,204
----------
Food & Beverage 2.5% 123,854 Cheil Food and Chemical Co., Ltd. ................... 8,092,039
120,000 Dongwon Industries Company (Leading deep-sea
fishing and processing company) .................. 2,337,278
32,271 Nhong Shim Co. (Manufacturer of instant noodles
and snacks) ...................................... 1,209,367
48,000 Pulmuone Co., Ltd. (Food producer) .................. 2,633,136
----------
14,271,820
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 108
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <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.
<PAGE> 109
[LOGO] The Korea Fund, Inc.
Investment Portfolio (continued)
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <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.
<PAGE> 110
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <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.
<PAGE> 111
[LOGO] The Korea Fund, Inc.
Investment Portfolio (continued)
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <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.
<PAGE> 112
<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
===========
</TABLE>
(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.
The accompanying notes are an integral part of the financial statements.
<PAGE> 113
[LOGO] The Korea Fund, Inc.
Financial Statements
<TABLE>
<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>
<PAGE> 114
<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>
<PAGE> 115
[LOGO] The Korea Fund, Inc.
<TABLE>
<CAPTION>
Financial Statements (continued)
======================================================================================================
- ------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
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>
<PAGE> 116
[LOGO] The Korea Fund, Inc.
Financial Highlights
<TABLE>
<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,
----------------------------------------------
1996 1995(d) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<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 $ -- $ -- $ -- $ --
</TABLE>
- ----------
(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.
<PAGE> 117
[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.
<PAGE> 118
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
<PAGE> 119
[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.
<PAGE> 120
[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 statements of assets and liabilities of The
Korea Fund, Inc. including the investment portfolios, as of December 31, 1996
and June 30, 1996, and the related statements of operations for the six months
ended December 31, 1996 and for the year ended June 30, 1996, and the statements
of changes in net assets for the six months ended December 31, 1996
and for each of the two years in the period ended June 30, 1996, and the
financial highlights for the six months ended December 31, 1996 and for each of
the five years in the period ended June 30, 1996. 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
December 31, 1996 and 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 December 31, 1996 and June 30, 1996, the results of its
operations for the six months ended December 31, 1996 and for the year ended
June 30, 1996, the changes in its net assets for the six months ended December
31, 1996 and for each of the two years in the period ended June 30, 1996, and
the financial highlights for the six months ended December 31, 1996 and for each
of the five years in the period ended June 30, 1996 in conformity with generally
accepted accounting principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 24, 1997
<PAGE> 121
THE KOREA FUND, INC.
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
The following Financial Statements have been included as part of Item 23:
<TABLE>
<C> <C> <S>
(i) -- Investment Portfolio as of December 31, 1996 and as of June 30, 1996
(ii) -- Statement of Assets and Liabilities as of December 31, 1996 and as of June 30,
1996
(iii) -- Statement of Operations for the six months ended December 31, 1996 and for the
fiscal year ended June 30, 1996
(iv) -- Statements of Changes in Net Assets for the six months ended December 31, 1996
and for the fiscal years ended June 30, 1996 and June 30, 1995
(v) -- Financial Highlights for the six months ended December 31, 1996 and for each
of the years ended June 30, 1992 through 1996
(vi) -- Notes to Financial Statements for the six months ended December 31, 1996 and
for the fiscal year ended June 30, 1996
(vii) -- Report of Independent Accountants
</TABLE>
(2) Exhibits:
<TABLE>
<C> <C> <S> <C>
a. (i) -- Articles of Incorporation as of May 15, 1984. (Incorporated by reference to
Exhibit 1 to the Fund's original Registration Statement on Form N-2,
Registration No. 2-91879 (the "Registration Statement").)
a. (ii) -- Amendment dated November 14, 1986 to the Articles of Incorporation.
(Incorporated by reference to Exhibit 1(a)(2) to Amendment No. 6 to the
Registration Statement.)
a. (iii) -- Amendment dated December 1, 1988 to the Articles of Incorporation.
(Incorporated by reference to Exhibit 1(a)(3) to Amendment No. 8 to the
Registration Statement ("Amendment No. 8").)
a. (iv) -- Amendment dated October 29, 1990 to the Articles of Incorporation.
(Incorporated by reference to Exhibit 1(D) to Amendment No. 11 to the
Registration Statement ("Amendment No. 11").)
b. (i) -- Restated By-Laws dated April 15, 1993.
b. (ii) -- Amendment dated October 19, 1995 to the Restated By-Laws.
b. (iii) -- Amendment dated August 8, 1996 to the Restated By-Laws.
c. -- Not applicable.
d. (i) -- Specimen certificate representing shares of Common Stock, par value $.01 per
share. (Incorporated by reference to Exhibit 4 to Amendment No. 2 to the
Registration Statement ("Amendment No. 2").)
d. (ii) -- Form of Subscription Rights Distribution and Agency Agreement.
e. -- Dividend Reinvestment and Cash Purchase Plan. (Incorporated by reference to
Exhibit 10(C) to Amendment No. 11.)
f. -- Not applicable.
g. (i) -- Investment Advisory, Management and Administration Agreement, dated October
14, 1994, between the Fund and the Manager. (Incorporated by reference to
Exhibit g(iii) to Amendment No. 16 to the Registration Statement.)
</TABLE>
(i)
<PAGE> 122
<TABLE>
<C> <C> <S> <C>
g. (ii) -- Research and Advisory Agreement, dated October 14, 1994, between the Manager
and the Korean Adviser. (Incorporated by reference to Exhibit (g)(ii) to
Amendment No. 17 to the Registration Statement ("Amendment No. 17").)
h. (i) -- Form of Dealer Manager Agreement.
h. (ii) -- Form of Soliciting Dealer Agreement.
-- Not applicable.
j. (i) -- Custodian Agreement, dated April 19, 1995, between the Fund and Brown
Brothers Harriman & Co. (the "Custodian").
j. (ii) -- Subcustodian Agreement (the "Subcustodian Agreement"), dated August 20,
1984, between the Custodian and Citibank, N.A. (Incorporated by reference to
Exhibit 9(b)(1) to Amendment No. 2.)
j. (iii) -- Amendment dated October 23, 1992 to the Subcustodian Agreement dated August
20, 1984. (Incorporated by reference to Exhibit j(v) to Amendment No. 17.)
k. (i) -- Agency Agreement (the "Agency Agreement") dated August 6, 1984, between the
Fund and State Street Bank and Trust Company. (Incorporated by reference to
Exhibit 10(a)(1) to Amendment No. 2.)
k. (ii) -- Fee Schedule relating to the Agency Agreement. (Incorporated by reference to
Exhibit 10(a)(2) to Amendment No. 2.)
k. (iii) -- Form of Information Agent Agreement.
l. -- Opinion of Debevoise & Plimpton, and consent to use of the same.
m. -- Not applicable.
n. (i) -- Opinion of Shin & Kim, and consent to use of the same.
n. (ii) -- Consent of Coopers & Lybrand L.L.P.
n. (iii) -- License, Approval and Confirmation (the "License"), dated June 22, 1984,
issued by the Minister of Finance and Economy of the Republic of Korea (the
"MFE"). (Incorporated by reference to Exhibit 12(E) to the Registration
Statement.)
n. (iv) -- Amendment, dated April 11, 1986, to the License. (Incorporated by reference
to Exhibit 12(F) to Amendment No. 3 to the Registration Statement.)
n. (v) -- Amendment, dated August 2, 1989, to the License. (Incorporated by reference
to Exhibit 21(G) to Amendment No. 10 to the Registration Statement.)
n. (vi) -- Amendment, dated October 7, 1992, to the License. (Incorporated by reference
to Exhibit 12(H) to Amendment No. 13.)
n. (vii) -- Amendment, dated October 20, 1993, to the License. (Incorporated by
reference to Exhibit n(vii) to Amendment No. 15 to the Registration
Statement.)
n. (viii) -- Amendment, dated May 12, 1995, to the License. (Incorporated by reference to
Exhibit n(viii) to Amendment No. 17.)
n. (ix) -- Response to Inquiry Regarding Korean Tax Treatment of The Korea Fund, Inc.,
dated May 23, 1995, issued by the MFE. (Incorporated by reference to Exhibit
n(ix) to Amendment No. 17.)
n. (x) -- Amendment, dated March 30, 1996, to the License.
</TABLE>
(ii)
<PAGE> 123
<TABLE>
<C> <C> <S> <C>
n. (xi) -- Amendment, dated February 28, 1997, to the License.
o. -- Not applicable.
p. -- Not applicable.
q. -- Not applicable.
r. -- Financial Data Schedule. (Incorporated by reference to Exhibit r to
Amendment No. 18 to the Registration Statement ("Amendment No. 18").)
</TABLE>
Other Exhibit: Powers of Attorney. (Incorporated by reference to the Other
Exhibit to Amendment No. 18.)
ITEM 25. MARKETING ARRANGEMENTS
See Exhibits h(i) and h(ii) to this Amendment No. 19.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement:
<TABLE>
<S> <C>
SEC Registration fees..................................................... $ 46,327
Stock exchange listing fees............................................... $ 50,898
NASD Fees................................................................. $ 16,388
Printing (other than stock certificates) and related delivery expenses.... $165,000
Printing stock certificates............................................... $ 1,000
Dealer Manager expense reimbursement...................................... $ 25,000
Information Agent's fees and expenses..................................... $ 58,000
Subscription Agent's fees and expense..................................... $ 74,000
Fees and expenses of qualification under state securities laws (including
fees of counsel)........................................................ $ 5,000
Accounting fees and expenses.............................................. $ 27,500
Legal fees and expenses................................................... $253,000
Travel and related out-of-pocket expenses and miscellaneous............... $ 35,000
--------
Total........................................................... $757,113
========
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Common Stock, par value $.01 per share: 1,437 record holders as of March
21, 1997.
ITEM 29. INDEMNIFICATION
The information under Item 3 of Part II of Amendment No. 13 is herein
incorporated by reference. See also "The Offer -- Distribution Arrangements" in
the Prospectus.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Information as to the directors and officers of the Manager and Korean
Adviser is included in their respective Forms ADV, File Nos. 801-00252 and
801-32282 respectively, filed with the Commission and is incorporated herein by
reference thereto.
(iii)
<PAGE> 124
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules promulgated thereunder will be
maintained by Scudder, Stevens & Clark, Inc., 345 Park Avenue, New York, New
York 10154. Records relating to the duties of the Registrant's custodian will be
maintained by Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts, and those relating to the duties of the transfer agent will be
maintained by State Street Bank and Trust Company, Heritage Drive, North Quincy,
Massachusetts.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) Registrant undertakes to suspend offering of the shares covered hereby
until it amends its prospectus contained herein if (1) subsequent to the
effective date of this Registration Statement, its net asset per share declines
more than 10 percent from its net asset value per share as of the effective date
of this Registration Statement, or (2) its net asset value increases to an
amount greater than its net proceeds as stated in the prospectus contained
herein.
(b) Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of the Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains the form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
pursuant to Rule 415, a post effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) Registrant hereby undertakes to send by first-class mail other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, a Statement of Additional Information.
(iv)
<PAGE> 125
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York, on
the 25th day of March, 1997.
THE KOREA FUND, INC.
(Registrant)
By: /s/ JURIS PADEGS
------------------------------------------
Juris Padegs
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------ ------------------
<C> <S> <C>
/s/ JURIS PADEGS Chairman of the Board (Principal March 25, 1997
- ------------------------------------- Executive Officer) and Director
Juris Padegs
/s/ PAMELA A. MCGRATH Treasurer (Principal Financial and March 25, 1997
- ------------------------------------- Accounting Officer)
Pamela A. McGrath
* Director March 25, 1997
- -------------------------------------
Chang Hee Kim
* Director March 25, 1997
- -------------------------------------
Nicholas Bratt
* Director March 25, 1997
- -------------------------------------
Robert J. Callender
* Director March 25, 1997
- -------------------------------------
William H. Gleysteen, Jr.
Director
- -------------------------------------
Sand C. Lee
* Director March 25, 1997
- -------------------------------------
Tai Ho Lee
* Director March 25, 1997
- -------------------------------------
Wilson Nolen
* Director March 25, 1997
- -------------------------------------
Hugh T. Patrick
* /s/ JURIS PADEGS
- -------------------------------------
Juris Padegs
as Attorney-in-Fact
</TABLE>
(v)
<PAGE> 126
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGES
---- ----------------------------------------------------------------- ------------
<C> <C> <S> <C> <C>
a. (i) -- Articles of Incorporation as of May 15, 1984. (Incorporated by
reference to Exhibit 1 to the Fund's original Registration
Statement on Form N-2. Registration No. 2-91879 (the
"Registration Statement").)
a. (ii) -- Amendment dated November 14, 1986 to the Articles of
Incorporation. (Incorporated by reference to Exhibit 1(a)(2) to
Amendment No. 6 to the Registration Statement.)
a. (iii) -- Amendment dated December 1, 1988 to the Articles of
Incorporation. (Incorporated by reference to Exhibit 1(a)(3) to
Amendment No. 8 to the Registration Statement ("Amendment No.
8").)
a. (iv) -- Amendment dated October 29, 1990 to the Articles of
Incorporation. (Incorporated by reference to Exhibit 1(D) to
Amendment No. 11 to the Registration Statement ("Amendment No.
11").)
b. (i) -- Restated By-Laws dated April 15, 1993.
b. (ii) -- Amendment dated October 19, 1995 to the Restated By-Laws.
b. (iii) -- Amendment dated August 8, 1996 to the Restated By-Laws.
c. -- Not applicable.
d. (i) -- Specimen certificate representing shares of Common Stock, par
value $.01 per share. (Incorporated by reference to Exhibit 4 to
Amendment No. 2 to the Registration Statement ("Amendment No.
2").)
d. (ii) -- Form of Subscription Rights Distribution and Agency Agreement.
e. -- Dividend Reinvestment and Cash Purchase Plan. (Incorporated by
reference to Exhibit 10(C) to Amendment No. 11.)
f. -- Not applicable.
g. (i) -- Investment Advisory, Management and Administration Agreement,
dated October 14, 1994, between the Fund and the Manager.
(Incorporated by reference to Exhibit g(iii) to Amendment No. 16
to the Registration Statement.)
g. (ii) -- Research and Advisory Agreement, dated October 14, 1994, between
the Manager and the Korean Adviser. (Incorporated by reference to
Exhibit g(ii) to Amendment No. 17 to the Registration Statement
("Amendment No. 17").)
h. (i) -- Form of Dealer Manager Agreement.
h. (ii) -- Form of Soliciting Dealer Agreement.
i. -- Not applicable.
j. (i) -- Custodian Agreement, dated April 19, 1995, between the Fund and
Brown Brothers Harriman & Co. (the "Custodian").
j. (ii) -- Subcustodian Agreement (the "Subcustodian Agreement"), dated
August 20, 1984, between the Custodian and Citibank, N.A.
(Incorporated by reference to Exhibit 9(b)(1) to Amendment No.
2.)
j. (iii) -- Amendment, dated October 23, 1992, to the Subcustodian Agreement
dated August 20, 1984. (Incorporated by reference to Exhibit j(v)
to Amendment No. 17.)
</TABLE>
<PAGE> 127
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGES
---- ----------------------------------------------------------------- ------------
<C> <C> <S> <C> <C>
k. (i) -- Agency Agreement (the "Agency Agreement") dated August 6, 1984,
between the Fund and State Street Bank and Trust Company.
(Incorporated by reference to Exhibit 10(a)(1) to Amendment No.
2.)
k. (ii) -- Fee Schedule relating to the Agency Agreement. (Incorporated by
reference to Exhibit 10(a)(2) to Amendment No. 2.)
k. (iii) -- Form of Information Agent Agreement.
l. -- Opinion of Debevoise & Plimpton, and consent to use of the same.
m. -- Not applicable.
n. (i) -- Opinion of Shin & Kim, and consent to use of the same.
n. (ii) -- Consent of Coopers & Lybrand L.L.P.
n. (iii) -- License, Approval and Confirmation (the "License"), dated June
22, 1984, issued by the Minister of Finance and Economy of the
Republic of Korea (the "MFE"). (Incorporated by reference to
Exhibit 12(E) to the Registration Statement.)
n. (iv) -- Amendment, dated April 11, 1986, to the License. (Incorporated by
reference to Exhibit 12(F) to Amendment No. 3 to the Registration
Statement.)
n. (v) -- Amendment, dated August 2, 1989, to the License. (Incorporated by
reference to Exhibit 12(G) to Amendment No. 10 to the
Registration Statement.)
n. (vi) -- Amendment, dated October 7, 1992, to the License. (Incorporated
by reference to Exhibit 12(H) to Amendment No. 13.)
n. (vii) -- Amendment, dated October 20, 1993, to the License. (Incorporated
by reference to Exhibit n(vii) to Amendment No. 15 to the
Registration Statement.)
n. (viii) -- Amendment, dated May 12, 1995, to the License. (Incorporated by
reference to Exhibit n(viii) to Amendment No. 17.)
n. (ix) -- Response to Inquiry Regarding Korean Tax Treatment of The Korea
Fund, Inc., dated May 23, 1995, issued by the MFE. (Incorporated
by reference to Exhibit n(ix) to Amendment No. 17.)
n. (x) -- Amendment, dated March 30, 1996, to the License.
n. (xi) -- Amendment, dated February 28, 1997, to the License.
o. -- Not applicable.
p. -- Not applicable.
q. -- Not applicable.
r. -- Financial Data Schedule. (Incorporated by reference to Exhibit r
to Amendment No. 18 to the Registration Statement ("Amendment No.
18").)
</TABLE>
Other Exhibit: Powers of Attorney. (Incorporated by reference to the Other
Exhibit to Amendment No. 18.)
<PAGE> 1
EXHIBIT b(i)
THE KOREA FUND, INC.
A MARYLAND CORPORATION
RESTATED
BY-LAWS
AS OF APRIL 15, 1993
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL 1
Section 1.1 Principal Offices 1
Section 1.2 Seal 1
ARTICLE II - STOCKHOLDERS 2
Section 2.1 Annual Meetings 2
Section 2.2 Special Meetings 2
Section 2.3 Notice of Meetings 3
Section 2.4 Quorum 3
Section 2.5 Voting 3
Section 2.6 Stockholders Entitled to Vote 4
Section 2.7 Proxies 4
Section 2.8 Voting and Inspectors 5
Section 2.9 Action without Meeting 5
Section 2.10 New Business 5
Section 2.11 Director Nominations 7
ARTICLE III - BOARD OF DIRECTORS 9
Section 3.1 Powers 9
Section 3.2 Power to Issue and Sell Stock 9
Section 3.3 Power to Declare Dividends 9
Section 3.4 Number and Term 10
Section 3.5 Election 11
Section 3.6 Vacancies and Newly Created Directorships 11
Section 3.7 Removal 12
Section 3.8 Annual and Regular Meetings 12
Section 3.9 Special Meetings 13
Section 3.10 Waiver of Notice 13
Section 3.11 Quorum and Voting 13
Section 3.12 Action Without a Meeting 14
Section 3.13 Compensation of Directors 14
ARTICLE IV - COMMITTEES 14
Section 4.1 Organization 14
Section 4.2 Executive Committee 15
Section 4.3 Other Committees 15
Section 4.4 Proceedings and Quorum 15
</TABLE>
<PAGE> 3
ii
<PAGE> 4
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE V - OFFICERS 15
Section 5.1 General 15
Section 5.2 Election, Tenure and Qualifications 16
Section 5.3 Removal and Resignation 16
Section 5.4 Chairman of the Board 16
Section 5.5 Vice Chairman of the Board 17
Section 5.6 President 17
Section 5.7 Vice President 17
Section 5.8 Treasurer and Assistant Treasurers 18
Section 5.9 Secretary and Assistant Secretaries 18
Section 5.10 Subordinate Officers 19
Section 5.11 Remuneration 19
Section 5.12 Surety Bonds 19
ARTICLE VI - NET ASSET VALUE 20
Section 6.1 Valuation of Assets 20
ARTICLE VII - CAPITAL STOCK 20
Section 7.1 Certificates of Stock 20
Section 7.2 Transfer of Shares 20
Section 7.3 Stock Ledgers 21
Section 7.4 Transfer Agents and Registrars 21
Section 7.5 Fixing of Record Date 21
Section 7.6 Lost, Stolen or Destroyed Certificates 21
ARTICLE VIII - FISCAL YEAR AND ACCOUNTANT 22
Section 8.1 Fiscal Year 22
Section 8.2 Accountant 22
ARTICLE IX - CUSTODY OF SECURITIES 23
Section 9.1 Employment of a Custodian 23
Section 9.2 Termination of Custodian Agreement 23
ARTICLE X - INDEMNIFICATION AND INSURANCE 24
Section 10.1 Indemnification of Officers, Directors, Employees and
Agents 24
Section 10.2 Insurance of Officers, Directors, Employees and Agents 25
ARTICLE XI - AMENDMENTS 26
Section 11.1 General 26
</TABLE>
<PAGE> 5
iii
<PAGE> 6
BY-LAWS
OF
THE KOREA FUND, INC.
(A MARYLAND CORPORATION)
ARTICLE I
NAME OF CORPORATION, LOCATION OF
OFFICES AND SEAL
Section 1.1. Principal Offices. The principal office of the Corporation
in the State of Maryland shall be located in Baltimore, Maryland. The
Corporation may, in addition, establish and maintain such other offices and
places of business as the Board of Directors may, from time to time, determine.
[MGCL Section 2-108]
Section 1.2. Seal. The corporate seal of the Corporation shall be
circular in form and shall bear the name of the Corporation, the year of its
incorporation, and the word "Maryland." The form of the seal shall be subject to
alteration by the Board of Directors and the seal may be used by causing it or a
facsimile to be impressed or affixed or printed or otherwise reproduced. Any
officer or Director of the Corporation shall have authority to affix the
corporate seal of the Corporation to any document requiring the same. If the
Corporation is required to place its corporate seal to a document, it shall be
sufficient to place the word "(seal)" adjacent to the signature of the
authorized officer of the corporation signing the document. [MGCL Section 1-304]
ARTICLE II
STOCKHOLDERS
Section 2.1. Annual Meetings. An annual meeting of stockholders for the
election of Directors and the transaction of such other business as may properly
come before the meeting shall be held the first Tuesday in October, if not a
legal holiday, or if a legal holiday, then on
<PAGE> 7
the next succeeding day not a legal holiday unless the Board of Directors shall
have selected another date in the month of October for holding said annual
stockholders' meeting. The meeting will be held at such place within the United
States as the Board of Directors shall select. The first annual stockholders'
meeting shall be held in October 1985 unless otherwise determined by the Board
of Directors. [MGCL Section 2-501]
Section 2.2. Special Meetings. Special meetings of stockholders may be
called at any time by the President, by a majority of the Board of Directors or
by the Chairman of the Board, if any, and shall be held at such time and place
as may be stated in the notice of the meeting.
Special meetings of the stockholders shall also be called by the
Secretary upon the written request of the holders of shares entitled to not less
than 25% of all the votes entitled to be cast at such meeting, provided that (1)
such request shall state the purposes of such meeting and the matters proposed
to be acted on, and (2) the stockholders requesting such meeting shall have paid
to the Corporation the reasonably estimated cost of preparing and mailing the
notice thereof, which the Secretary shall determine and specify to such
stockholders. No special meeting shall be called upon the request of
stockholders to consider any matter which is substantially the same as a matter
voted upon at any special meeting of the stockholders held during the preceding
12 months, unless requested by the holders of a majority of all shares entitled
to be voted at such meeting. [MGCL Section 2-502]
Section 2.3. Notice of Meetings. The Secretary shall cause notice of
the place, date and hour, and, in the case of a special meeting or if otherwise
required by law, the purpose or purposes for which the meeting is called, to be
mailed, not less than 10 nor more than 90 days before the date of the meeting,
to each stockholder entitled to vote at such meeting at his address as it
appears on the records of the Corporation at the time of such mailing. Notice of
any stockholders' meeting need not be given to any stockholder who shall sign a
written waiver of such notice whether before or after the time of such meeting,
which waiver shall be filed with the record of such meeting, or to any
stockholder who is present at such meeting in
<PAGE> 8
person or by proxy. Notice of adjournment of a stockholders' meeting to another
time or place need not be given if such time and place are announced at the
meeting. [MGCL Section 2-504]
Section 2.4. Quorum. The presence at any stockholders' meeting, in
person or by proxy, of stockholders entitled to cast a majority of the votes
entitled to be cast thereat shall be necessary and sufficient to constitute a
quorum for the transaction of business. In the absence of a quorum, the holders
of a majority of shares entitled to vote at the meeting and present in person or
by proxy, or, if no stockholder entitled to vote is present in person or by
proxy, any officer present entitled to preside or act as Secretary of such
meeting, may adjourn the meeting sine die or from time to time without further
notice to a date not more than 120 days after the original record date. Any
business that might have been transacted at the meeting originally called may be
transacted at any such adjourned meeting at which a quorum is present. [MGCL
SectionSection 2-506, 2-511]
Section 2.5. Voting. At each stockholders' meeting, each stockholder
entitled to vote shall be entitled to one vote for each share of stock of the
Corporation validly issued and outstanding and standing in his name on the books
of the Corporation on the record date fixed in accordance with Section 5 of
Article VII hereof. Except as otherwise specifically provided in the Articles of
Incorporation or these By-Laws or as required by law, as amended from time to
time, all matters shall be decided by a vote of the majority of the votes
validly cast. The vote upon any question shall be by ballot whenever requested
by any person entitled to vote, but, unless such a request is made, voting may
be conducted in any way approved by the meeting. [MGCL Section 2-507]
Section 2.6. Stockholders Entitled to Vote. If the Board of Directors
sets a record date for the determination of stockholders entitled to notice of
or to vote at any stockholders' meeting in accordance with Section 7.5 of
Article VII hereof, each stockholder of the Corporation shall be entitled to
vote, in person or by proxy, each share of stock standing in his name on the
books of the Corporation on such record date. If no record date has been fixed,
<PAGE> 9
the record date for the determination of stockholders entitled to notice of or
to vote at a meeting of stockholders shall be determined in accordance with the
Maryland General Corporation Law. [MGCL Section 2-511]
Section 2.7. Proxies. The right to vote by proxy shall exist only if
the instrument authorizing such proxy to act shall have been signed by the
stockholder or by his duly authorized attorney. Unless a proxy provides
otherwise, it is not valid more than eleven months after its date. Proxies shall
be delivered prior to the meeting to the Secretary of the Corporation or to the
person acting as Secretary of the meeting before being voted. A proxy with
respect to stock held in the name of two or more persons shall be valid if
executed by one of them unless at or prior to exercise of such proxy the
Corporation receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a stockholder shall
be deemed valid unless challenged at or prior to its exercise.
[MGCL Section 2-507]
Section 2.8. Voting and Inspectors. At any election of Directors, the
Chairman of the meeting may appoint two inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after election make a certificate of the result of the vote
taken. No candidate for the office of Director shall be appointed such
Inspector.
Section 2.9. Action without Meeting. Any action to be taken by
stockholders may be taken without a meeting if (1) all stockholders entitled to
vote on the matter consent to the action in writing, (2) all stockholders
entitled to notice of the meeting but not entitled to vote at it sign a written
waiver of any right to dissent and (3) said consents and waivers are filed with
the records of the meetings of stockholders. Such consent shall be treated for
all purposes as a vote at the meeting. [MGCL Section 2-505]
Section 2.10. New Business. At an annual meeting of stockholders, only
such new business shall be conducted, and only such proposals shall be acted
upon, as shall have been brought before the annual meeting (a) by or at the
recommendation of a majority of the
<PAGE> 10
directors then in office or (b) by any stockholder of record at the time of
giving of notice provided for in this Section who complies with the notice
procedures set forth in this Section. For a proposal to be properly brought
before an annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to, or mailed and received at,
the principal executive offices of the Corporation not less than sixty (60) days
nor more than ninety (90) days prior to the date of the meeting, as established
pursuant to Section 2.1, regardless of any postponement, deferral, or
adjournment of that meeting to a later date (provided, however, that if less
than seventy (70) days' notice or prior public disclosure of the date of the
scheduled meeting is given or made, notice by the stockholder to be timely must
be so delivered or received not later than the close of business on the tenth
(10th) day following the earlier of the day on which such notice of the date of
the scheduled meeting was given or the day on which such public disclosure was
made). Such stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the proposal desired to be brought before the annual meeting; (b) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business; (c) the class and number of shares of the Corporation's
stock which are beneficially owned (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "1934 Act")) by the
stockholder; and (d) any material interest of the stockholder in such proposal.
The presiding officer of the annual meeting shall determine and declare
at the annual meeting whether the stockholder proposal was made in accordance
with the terms of this Section. If the presiding officer determines that a
stockholder proposal was made in accordance with the terms of this Section, he
shall so declare at the annual meeting and ballots shall be provided for use at
the meeting with respect to any such proposal. If the presiding officer
determines that a stockholder proposal was not made in accordance with the terms
of this Section, he shall so declare at the annual meeting and any such proposal
shall not be acted
<PAGE> 11
upon at the annual meeting.
Notwithstanding the foregoing provisions of this Section, a stockholder
shall also comply with all applicable requirements of the 1934 Act and the rules
and regulations thereunder with respect to the matters set forth in this
Section. This Section shall not prevent the consideration and approval or
disapproval at the annual meeting of reports of officers, directors and
committees of the Board of Directors, but, in connection with such reports, no
new business shall be acted upon at such annual meeting unless stated, filed and
received as herein provided.
Section 2.11. Director Nominations. Nominations of candidates for
elections as directors at any meeting of stockholders may be made (a) by or at
the recommendation of a majority of the directors then in office or (b) by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of notice provided for in this Section, who shall be entitled to vote for
the election of directors at the meeting, and who complies with the notice
procedures set forth in this Section. Only persons nominated in accordance with
the procedures set forth in this Section shall be eligible for election as
directors by the stockholders.
Nominations, other than those made by or at the recommendation of the
Board of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section. To be timely, a
stockholder's notice shall be delivered to, or mailed to and received at, the
principal executive offices of the Corporation, not less than sixty (60) days
nor more than ninety (90) days prior to the date of the meeting, as established
pursuant to Section 2.1 or Section 2.2 of Article II hereof (depending on
whether the meeting is an annual meeting or special meeting), regardless of any
postponement, deferral, or adjournment of that meeting to a later date
(provided, however, that if less than seventy (70) days' notice or prior public
disclosure of the date of the scheduled meeting is given or made, notice by the
stockholder to be timely must be so delivered or received not later than the
close of business on the tenth (10th) day following the earlier of the day on
<PAGE> 12
which such notice of the date of the scheduled meeting was given or the day on
which such public disclosure was made). Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or re-election as a director (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the Corporation's stock
which are beneficially owned (as defined in Rule 13d-3 under the 1934 Act) by
such person on the date of such stockholder's notice, (iv) such person's written
consent to being nominated and, if elected, to serving as a director, and (v)
any other information relating to such person that is required to be disclosed
in solicitations of proxies with respect to nominees for election as directors,
or is otherwise required, in such case pursuant to Regulation 14A under the 1934
Act and (b) as to the stockholder giving the notice (i) the name and address, as
they appear on the Corporation's books, of such stockholder and (ii) the class
and number of shares of the Corporation's stock which are beneficially owned (as
defined in Rule 13d-3 under the 1934 Act) by such stockholder. At the request of
the Board of Directors, any person nominated by or at the recommendation of the
Board of Directors for election as a director shall promptly furnish to the
Secretary of the Corporation the information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee.
The presiding officer of the meeting shall determine and declare at the
meeting whether the nomination was made in accordance with the terms of this
Section. If the presiding officer determines that the nomination was made in
accordance with the terms of this Section, he shall so declare at the meeting.
If the presiding officer determines that a nomination was not made in accordance
with the terms of this Section, he shall so declare at the meeting and the
defective nomination shall be disregarded.
Ballots bearing the names of all the persons who have been nominated
for election as directors at a meeting in accordance with the procedures set
forth in this Section shall be provided for use at the meeting.
Notwithstanding the foregoing provisions of this Section, a stockholder
shall also
<PAGE> 13
comply with all applicable requirements of the 1934 Act and the rules and
regulation thereunder with respect to the matters set forth in this Section.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1. Powers. The property, affairs, and business of the
Corporation shall be managed by the Board of Directors, which may exercise all
the powers of the Corporation except those powers vested solely in the
stockholders of the Corporation by statute, by the Articles of Incorporation, or
by these By-Laws. [MGCL Section 2-401]
Section 3.2. Power to Issue and Sell Stock. The Board of Directors may
from time to time authorize by resolution the issuance and sale of any of the
Corporation's authorized shares to such persons as the Board of Directors shall
deem advisable and such resolution shall fix the consideration or minimum
consideration for which such shares are to be issued, or a formula or method
pursuant to which such consideration is to be fixed and determined, and shall
include a fair description of any consideration other than money and a statement
of the actual value of such consideration as then determined by the Board of
Directors or a statement that such consideration is or will be not less than a
stated sum. [MGCL SectionSection 2-201, 2-203]
Section 3.3. Power to Declare Dividends.
(a) The Board of Directors, from time to time as they may deem
advisable to the extent permitted by applicable law, may declare and pay
dividends in cash or other property of the Corporation, out of any source
available for dividends, to the stockholders according to their respective
rights and interests. [MGCL Section 2-309]
(b) The Board of Directors shall cause to be accompanied by a written
statement any dividend payment wholly or partly from any source other than
(i) the Corporation's accumulated undistributed net income
(determined in accordance with good accounting practice and the rules
and regulations of the Securities and Exchange Commission then in
effect) and not including profits or losses realized
<PAGE> 14
upon the sale of securities or other properties; or
(ii) the Corporation's net income so determined for the
current or preceding fiscal year. [MGCL Section 2-309; ICA Section
19(a)]
Such statement shall adequately disclose the source or sources of such
payment and the basis of calculation, and shall be in such form as the
Securities and Exchange Commission may prescribe.
(c) Notwithstanding the above provisions of this Section 3.3, the Board
of Directors may at any time declare and distribute pro rata among the
stockholders a stock dividend out of the Corporation's authorized but unissued
shares of stock to the extent permitted by applicable law, including any shares
previously purchased by the Corporation, provided that such dividend shall not
be distributed in shares of any class with respect to any shares of a different
class. [MGCL Section 2-309(e)]
Section 3.4. Number and Term. The Board of Directors shall consist of
such number of Directors, not less than three nor more than ten, as may be
specified by resolution adopted by at least the majority of the entire Board of
Directors, provided that at least 40% of the entire Board of Directors shall be
persons who are not interested persons of the Corporation as defined in the
Investment Company Act of 1940. The Directors shall be divided into three
classes, and shall be designated as Class I, Class II, and Class III Directors,
respectively. The Class I Directors shall originally consist of three Directors
who shall be elected at the annual meeting of stockholders held in 1988 and
shall serve for a term of office that expires at the annual meeting of
stockholders to be held in 1989. The Class II Directors shall originally consist
of three Directors who shall be elected at the annual meeting of stockholders
held in 1988 and shall serve for a term of office that expires at the annual
meeting of stockholders to be held in 1990. The Class III Directors shall
originally consist of three Directors who shall be elected at the annual meeting
of stockholders to be held in 1988 and shall serve for a term of office that
expires at the annual meeting of stockholders to be held in 1991. After
expiration of the terms of office specified for the Directors elected at such
1988 annual
<PAGE> 15
meeting, the Directors of each class shall serve for terms of three years, or,
when filling a vacancy, for the unexpired portion of such term (or, if elected
by the Directors, until the next annual meeting of stockholders) and until their
successors are elected and have qualified. [MGCL Section 2-402, ICA Section
10(a)]
Section 3.5. Election. At the first annual meeting of stockholders and
at each annual meeting thereafter, Directors shall be elected by vote of the
holders of a majority of the shares present in person or by proxy and entitled
to vote thereon. [MGCL Section 2-404]
Section 3.6. Vacancies and Newly Created Directorships. If any
vacancies shall occur in the Board of Directors by reason of death, resignation,
removal or otherwise, or if the authorized number of Directors shall be
increased, the Directors then in office shall continue to act, and such
vacancies (if not previously filled by the stockholders) may be filled by a
majority of the Directors then in office, although less than a quorum, except
that a newly created Directorship may be filled only by a majority vote of the
entire Board of Directors; provided, however, that immediately after filling
such vacancy, at least two-thirds (2/3) of the Directors then holding office
shall have been elected to such office by the stockholders of the Corporation.
In the event that at any time, other than the time preceding the first annual
stockholders' meeting, less than a majority of the Directors of the Corporation
holding office at that time were elected by the stockholders, a meeting of the
stockholders shall be held promptly and in any event within 60 days for the
purpose of electing Directors to fill any existing vacancies in the Board of
Directors unless the Securities and Exchange Commission shall by order extend
such period. [MGCL Section 2-407; ICA Section 16]
Section 3.7. Removal. At any meeting of stockholders duly called and at
which a quorum is present, the stockholders may, by the affirmative vote of the
holders of a majority of the votes entitled to be cast for the election of
Directors, remove any Director or Directors from office, with cause, and may
elect a successor or successors to fill any resulting vacancies for the
unexpired terms of the removed Directors. [MGCL Section 2-406]
Section 3.8. Annual and Regular Meetings. The annual meeting of the
Board of
<PAGE> 16
Directors for choosing officers and transacting other proper business shall be
held at such time and place as the Board may determine. The Board of Directors
from time to time may provide by resolution for the holding of regular meetings
and fix their time and place within or outside the State of Maryland. Notice of
such annual and regular meetings need not be in writing, provided that written
notice of any change in the time or place of such meetings shall be sent
promptly, in the manner provided in Section 3.9 of this Article III for notice
of special meetings, to each Director not present at the meeting at which such
change was made. Members of the Board of Directors or any committee designated
thereby may participate in a meeting of such Board or committee by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other at the same time and
participation by such means shall constitute presence in person at a meeting.
[MGCL Section 2-409]
Section 3.9. Special Meetings. Special meetings of the Board of
Directors may be held at any time or place and for any purpose when called by
the Chairman of the Board or by a majority of the Directors. Notice of special
meetings, stating the time and place, shall be (1) mailed to each Director at
his residence or regular place of business at least three days before the day on
which a special meeting is to be held or (2) delivered to him personally or
transmitted to him by telegraph, cable or other communication leaving a visual
record at least one day before the meeting. [MGCL Section 2-409(b)]
Section 3.10. Waiver of Notice. No notice of any meeting need be given
to any Director who is present at the meeting or who waives notice of such
meeting in writing (which waiver shall be filed with the records of such
meeting), whether before or after the time of the meeting. [MGCL Section
2-409(c)]
Section 3.11. Quorum and Voting. At all meetings of the Board of
Directors, the presence of a majority of the number of Directors then in office
shall constitute a quorum for the transaction of business. In the absence of a
quorum, a majority of the Directors present may adjourn the meeting, from time
to time, until a quorum shall be present. The action of a
<PAGE> 17
majority of the Directors present at a meeting at which a quorum is present
shall be the action of the Board of Directors, unless the concurrence of a
greater proportion is required for such action by law, by the Articles of
Incorporation or by these By-Laws, provided that no action shall be taken
without the affirmative vote of 75% of the Directors, with respect to the
following matters:
(i) a merger or consolidation of the Corporation with or into,
or the sale of substantially all of the Corporation's assets to, any
other company;
(ii) the dissolution of the Corporation;
(iii) the election of officers and the compensation of
directors and officers; or
(iv) the declaration that an amendment to the Articles of
Incorporation is advisable, if such amendment would cause any stock of
the Corporation to be a "redeemable security" under the Investment
Company Act of 1940. [MGCL Section 2-408]
Section 3.12. Action Without a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if a written consent to such
action is signed by all members of the Board or of such committee, as the case
may be, and such written consent is filed with the minutes of proceedings of the
Board or committee. [MGCL Section 2-408(c)]
Section 3.13. Compensation of Directors. Directors shall be entitled to
receive such compensation from the Corporation for their services as may from
time to time be determined by resolution of the Board of Directors.
ARTICLE IV
COMMITTEES
Section 4.1. Organization. By resolution adopted by the Board of
Directors, the Board may designate one or more committees, including an
Executive Committee, which shall consist of not less than two Directors. The
Chairman of such committees shall be elected by the Board of Directors. Each
member of a committee shall be a Director and shall hold office
<PAGE> 18
in accordance with the By-Laws. The Board of Directors shall have the power at
any time to change the members of such committees and to fill vacancies in the
committees. The Board may delegate to these committees any of its powers, except
the powers to declare a dividend, authorize the issuance of stock, recommend to
stockholders any action requiring stockholders' approval, amend these By-Laws,
or approve any merger or share exchange which does not require stockholder
approval. [MGCL Section 2-411]
Section 4.2. Executive Committee. Unless otherwise provided by
resolution of the Board of Directors, when the Board of Directors is not in
session the Executive Committee shall have and may exercise all powers of the
Board of Directors in the management of the business and affairs of the
Corporation that may lawfully be exercised by an Executive Committee. The
Chairman of the Board, if any, and the President shall be members of the
Executive Committee.
Section 4.3. Other Committees. The Board of Directors may appoint other
committees which shall have such powers and perform such duties as may be
delegated from time to time by the Board.
Section 4.4. Proceedings and Quorum. In the absence of an appropriate
resolution of the Board of Directors, each committee may adopt such rules and
regulations governing its proceedings, quorum and manner of acting as it shall
deem proper and desirable. In the event any member of any committee is absent
from any meeting, the members thereof present at the meeting, whether or not
they constitute a quorum, may appoint a member of the Board of Directors to act
in the place of such absent member.
ARTICLE V
OFFICERS
Section 5.1. General. The officers of the Corporation shall be a
President, a Secretary and a Treasurer, and may include one or more Vice
Presidents, Assistant Secretaries or Assistant Treasurers, and such other
officers as may be appointed in accordance with the
<PAGE> 19
provisions of Section 5.10 of this Article V. The Board of Directors may elect,
but shall not be required to elect, a Chairman of the Board. [MGCL Section
2-412]
Section 5.2. Election, Tenure and Qualifications. The officers of the
Corporation, except those appointed as provided in Section 5.10 of this Article
V, shall be elected by the Board of Directors at its first meeting or such
meetings as shall be held prior to its first annual meeting, and thereafter
annually at its annual meeting. If any officers are not chosen at any annual
meeting, such officers may be chosen at any subsequent regular or special
meeting of the Board. Except as otherwise provided in this Article V, each
officer chosen by the Board of Directors shall hold office until the next annual
meeting of the Board of Directors and until his successor shall have been
elected and qualified. Any person may hold one or more offices of the
Corporation except the same person may not concurrently hold the offices of
President and Vice President. The Chairman of the Board, if any, shall be
elected from among the Directors of the Corporation and may hold such office
only so long as he continues to be a Director. No other officer need be a
Director. [MGCL Section 2-413]
Section 5.3. Removal and Resignation. Whenever in the Board's judgment
the best interest of the Corporation will be served thereby, any officer may be
removed from office by the vote of a majority of the members of the Board of
Directors given at a regular meeting or any special meeting called for such
purpose. Any officer may resign his office at any time by delivering a written
resignation to the Board of Directors, the President, the Secretary, or any
Assistant Secretary. Unless otherwise specified therein, such resignation shall
take effect upon delivery. [MGCL Section 2-413]
Section 5.4. Chairman of the Board. The Chairman of the Board, if there
be such an officer, shall be the senior officer of the Corporation, shall
preside at all stockholders' meetings and at all meetings of the Board of
Directors and shall be ex officio a member of all committees of the Board of
Directors. He shall have such powers and perform such other duties as may be
assigned to him from time to time by the Board of Directors.
Section 5.5. Vice Chairman of the Board. The Vice Chairman of the Board
shall
<PAGE> 20
consult with the Chairman as to the policies of the Corporation and as to the
agendas to be presented at the meetings of the Board of Directors. In the
absence of the Chairman of the Board and the President, he shall preside at
meetings of the Board of Directors. He shall have such powers and perform such
other duties as may be assigned to him from time to time by the Chairman.
Section 5.6. President. The President shall be the chief executive
officer of the Corporation and, in the absence of the Chairman of the Board or
if no Chairman of the Board has been chosen, he shall preside at all
stockholders' meetings and at all meetings of the Board of Directors and shall
in general exercise the powers and perform the duties of the Chairman of the
Board. Subject to the supervision of the Board of Directors, he shall have
general charge of the business, affairs, and property of the Corporation and
general supervision over its officers, employees and agents. Except as the Board
of Directors may otherwise order, he may sign in the name and on behalf of the
Corporation all deeds, bonds, contracts or agreements. He shall exercise such
other powers and perform such other duties as from time to time may be assigned
to him by the Board of Directors.
Section 5.7. Vice President. The Board of Directors may from time to
time elect one or more Vice Presidents who shall have such powers and perform
such duties as from time to time may be assigned to them by the Board of
Directors or the President. At the request or in the absence or disability of
the President, the Vice President (or, if there are two or more Vice Presidents,
then the senior of the Vice Presidents present and able to act) may perform all
the duties of the President and, when so acting, shall have all the powers of
and be subject to all the restrictions upon the President.
Section 5.8. Treasurer and Assistant Treasurers. The Treasurer shall be
the principal financial and accounting officer of the Corporation and shall have
general charge of the finances and books of account of the Corporation. Except
as otherwise provided by the Board of Directors, he shall have general
supervision of the funds and property of the Corporation and of the performance
by the Custodian of its duties with respect thereto. He shall render to
<PAGE> 21
the Board of Directors, whenever directed by the Board, an account of the
financial condition of the Corporation and of all his transactions as Treasurer;
and as soon as possible after the close of each financial year he shall make and
submit to the Board of Directors a like report for such financial year. He shall
perform all acts incidental to the Office of Treasurer, subject to the control
of the Board of Directors.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, he may perform all the duties of the Treasurer.
Section 5.9. Secretary and Assistant Secretaries. The Secretary shall
attend to the giving and serving of all notices of the Corporation and shall
record all proceedings of the meetings of the stockholders and Directors in
books to be kept for that purpose. He shall keep in safe custody the seal of the
Corporation, and shall have charge of the records of the Corporation, including
the stock books and such other books and papers as the Board of Directors may
direct and such books, reports, certificates and other documents required by law
to be kept, all of which shall at all reasonable times be open to inspection by
any Director. He shall perform such other duties as appertain to his office or
as may be required by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, he may perform all the duties of the Secretary.
Section 5.10. Subordinate Officers. The Board of Directors from time to
time may appoint such other officers or agents as it may deem advisable, each of
whom shall have such title, hold office for such period, have such authority and
perform such duties as the Board of Directors may determine. The Board of
Directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties.
Section 5.11. Remuneration. The salaries or other compensation of the
officers of the
<PAGE> 22
Corporation shall be fixed from time to time by resolution of the Board of
Directors, except that the Board of Directors may by resolution delegate to any
person or group of persons the power to fix the salaries or other compensation
of any subordinate officers or agents appointed in accordance with the
provisions of Section 5.10 of this Article V.
Section 5.12. Surety Bonds. The Board of Directors may require any
officer or agent of the Corporation to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940, as amended,
and the rules and regulations of the Securities and Exchange Commission) to the
Corporation in such sum and with such surety or sureties as the Board of
Directors may determine, conditioned upon the faithful performance of his duties
to the Corporation, including responsibility for negligence and for the
accounting of any of the Corporation's property, funds or securities that may
come into his hands. [ICA Section 17(g)]
ARTICLE VI
NET ASSET VALUE
Section 6.1. Valuation of Assets. The value of the Corporation's net
assets shall be determined at such times and by such method as shall be
established from time to time by the Board of Directors. Such method shall be
reduced to writing and maintained in the Corporation's permanent records.
ARTICLE VII
CAPITAL STOCK
Section 7.1. Certificates of Stock. The interest of each stockholder of
the Corporation shall be evidenced in such form as the Board of Directors may
from time to time prescribe. No certificate shall be valid unless it is signed
by the President or a Vice President and by the Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer of the Corporation and
sealed with its seal, or bears the facsimile signatures of such officers and a
facsimile of such seal. [MGCL Sections 2-210, 2-212]
<PAGE> 23
Section 7.2. Transfer of Shares. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by his duly authorized attorney or legal representative upon surrender and
cancellation of a certificate or certificates for the same number of shares of
the same class, duly endorsed or accompanied by proper instruments of assignment
and transfer, with such proof of the authenticity of the signature as the
Corporation or its agents may reasonably require. The shares of stock of the
Corporation may be freely transferred, and the Board of Directors may, from time
to time, adopt rules and regulations with reference to the method of transfer of
the shares of stock of the Corporation.
Section 7.3. Stock Ledgers. The stock ledgers of the Corporation,
containing the names and addresses of the stockholders and the number of shares
held by them respectively, shall be kept at the principal offices of the
Corporation or, if the Corporation employs a transfer agent, at the offices of
the transfer agent of the Corporation. [MGCL Section 2-209]
Section 7.4. Transfer Agents and Registrars. The Board of Directors may
from time to time appoint or remove transfer agents and/or registrars of
transfers of shares of stock of the Corporation, and it may appoint the same
person as both transfer agent and registrar. Upon any such appointment being
made, all certificates representing shares of capital stock thereafter issued
shall be countersigned by one of such transfer agents or by one of such
registrars of transfers or by both and shall not be valid unless so
countersigned.
Section 7.5. Fixing of Record Date. The Board of Directors may fix in
advance a date as a record date for the determination of the stockholders
entitled to notice of or to vote at any stockholders' meeting or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or to receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, provided that
(1) such record date shall be within 90 days prior to the date on which the
particular action requiring such determination will be taken; (2) the transfer
books shall not be closed for a period longer than 20 days, and (3) in the case
of a meeting of stockholders, the record date or
<PAGE> 24
any closing of the transfer books shall be at least 10 days before the date of
the meeting. [MGCL Section 2-511]
Section 7.6. Lost, Stolen or Destroyed Certificates. Before issuing a
new certificate for stock of the Corporation alleged to have been lost, stolen
or destroyed, the Board of Directors or any officer authorized by the Board may,
in its discretion, require the owner of the lost, stolen or destroyed
certificate (or his legal representative) to give the Corporation a bond or
other indemnity, in such form and in such amount as the Board or any such
officer may direct and with such surety or sureties as may be satisfactory to
the Board or any such officer, sufficient to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
[MGCL Section 2-213]
ARTICLE VIII
FISCAL YEAR AND ACCOUNTANT
Section 8.1. Fiscal Year. The fiscal year of the Corporation shall,
unless otherwise ordered by the Board of Directors, be twelve calendar months
ending on the 30th day of June.
Section 8.2. Accountant.
(a) The Corporation shall employ an independent public accountant or a
firm of independent public accountants of national reputation as its Accountant
to examine the accounts of the Corporation and to sign and certify financial
statements filed by the Corporation. The Accountant's certificates and reports
shall be addressed both to the Board of Directors and to the stockholders. The
employment of the Accountant shall be conditioned upon the right of the
Corporation to terminate the employment forthwith without any penalty by vote of
a majority of the outstanding voting securities at any stockholders' meeting
called for that purpose.
(b) A majority of the members of the Board of Directors who are not
"interested persons" (as such term is defined in the Investment Company Act of
1940, as amended) of the
<PAGE> 25
Corporation shall select the Accountant at any meeting held within 30 days
before or after the beginning of the fiscal year of the Corporation or before
the annual stockholders' meeting in that year. Such selection shall be submitted
for ratification or rejection at the next succeeding annual stockholders'
meeting. If such meeting shall reject such selection, the Accountant shall be
selected by majority vote of the Corporation's outstanding voting securities,
either at the meeting at which the rejection occurred or at a subsequent meeting
of stockholders called for that purpose.
(c) Any vacancy occurring between annual meetings, due to the
resignation of the Accountant, may be filled by the vote of a majority of the
members of the Board of Directors who are not "interested persons." [ICA Section
32(a)]
ARTICLE IX
CUSTODY OF SECURITIES
Section 9.1. Employment of a Custodian. The Corporation shall place and
at all times maintain in the custody of a Custodian (including any sub-custodian
for the Custodian) all funds, securities and similar investments owned by the
Corporation. The Custodian (and any sub-custodian) shall be an institution
conforming to the requirements of Section 17(f) of the Investment Company Act of
1940 and the rules of the U.S. Securities and Exchange Commission thereunder.
The Custodian shall be appointed from time to time by the Board of Directors,
which shall fix its remuneration. [ICA Section 17(f)]
Section 9.2. Termination of Custodian Agreement. Upon termination of
the Custodian Agreement or inability of the Custodian to continue to serve, the
Board of Directors shall promptly appoint a successor Custodian, but in the
event that no successor Custodian can be found who has the required
qualifications and is willing to serve, the Board of Directors shall call as
promptly as possible a special meeting of the stockholders to determine whether
the Corporation shall function without a Custodian or shall be liquidated. If so
directed by vote of the holders of a majority of the outstanding shares of stock
entitled to vote of the
<PAGE> 26
Corporation, the Custodian shall deliver and pay over all property of the
Corporation held by it as specified in such vote.
ARTICLE X
INDEMNIFICATION AND INSURANCE
Section 10.1. Indemnification of Officers, Directors, Employees and
Agents. To the maximum extent permitted by the Investment Company Act of 1940,
the Securities Act of 1933 (as such statutes are now or hereinafter in force)
and by Maryland law in effect from time to time, the Corporation shall
indemnify, and shall pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to, (i) any individual who is a present or former
Director or officer of the Corporation or (ii) any individual who serves or has
served another corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a director or officer of such corporation or
other enterprise or as a partner or trustee of such partnership, joint venture,
trust, employee benefit plan or other enterprise at the request of the
Corporation. The Corporation may, with the approval of its Board of Directors,
provide such indemnification and advancement of expenses to a person who served
a predecessor of the Corporation in any of the capacities described in (i) or
(ii) above and to any employee or agent of the Corporation or a predecessor of
the Corporation. Indemnification shall be made only as authorized for a specific
proceeding upon (i) a determination that indemnification of such person is
proper in the circumstances because he has met the applicable standard of
conduct for indemnification and (ii) such other authorizations and
determinations as may be required by law to be made by (A) the Board of
Directors of the Corporation by the vote of a majority of a quorum consisting of
Directors who are neither "interested persons" of the Corporation as defined in
the Investment Company Act of 1940 nor parties to such proceeding or, if such
quorum cannot be obtained, by a majority vote of a committee of the Board of
Directors consisting solely of two or more such Directors who are duly
designated to act in the matter by a majority vote of the full Board of
Directors; or (B) independent legal counsel in a written
<PAGE> 27
opinion, which counsel shall be selected in accordance with such procedures as
may be required by law, provided, however, that such counsel shall make only
such determinations and authorizations as are permitted by law to be made by
independent counsel; or (C) the stockholders of the Corporation acting in
accordance with the Charter and By-Laws of the Corporation and applicable law.
Neither the amendment nor repeal of this Section, nor the adoption or
amendment of any other provision of the By-Laws or Charter of the Corporation
inconsistent with this Section, shall apply to or affect in any respect any act
or failure to act which occurred prior to such amendment, repeal or adoption.
Section 10.2. Insurance of Officers, Directors, Employees and Agents.
The Corporation may purchase and maintain insurance on behalf of any person who
is or was a Director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a Director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in or
arising out of his position, whether or not the Corporation would have the power
to indemnify him against such liability. [MGCL Section 2-418(k)]
ARTICLE XI
AMENDMENTS
Section 11.1. General. All By-Laws of the Corporation, whether adopted
by the Board of Directors or the stockholders, shall be subject to amendment,
alteration or repeal, and new By-Laws may be made, by the affirmative vote of a
majority of either: (1) the holders of record of the outstanding shares of stock
of the Corporation entitled to vote, at any annual or special meeting, the
notice or waiver of notice of which shall have specified or summarized the
proposed amendment, alteration, repeal or new By-Law; or (2) the Directors, at
any regular or special meeting the notice or waiver of notice of which shall
have specified or summarized the proposed amendment, alteration, repeal or new
By-Law. [MGCL Section 2-109(b)]
<PAGE> 1
Exhibit b(ii)
THE KOREA FUND, INC.
Certificate as to Resolution
of
Board of Directors
The undersigned certifies that he is the Secretary of the above named fund (the
"Fund"), a Maryland corporation, and that, as such, he is authorized to execute
this Certificate on behalf of the Fund, and further certifies that the following
is a complete and correct copy of resolutions duly adopted by the duly elected
Members of the Board of the Fund at a meeting duly called, convened and held on
October 11, 1995, at which a quorum was present and acting throughout, and that
such resolutions are in full force and effect.
RESOLVED, that pursuant to Article XI, Section 11.1 of the
Fund's By-Laws, Article III A entitled "Emeritus Founding
Directors" be added to the Fund's By-Laws and shall read as
follows:
ARTICLE IIIA
EMERITUS FOUNDING DIRECTORS
Section 3A.1. Number; Qualification; Term: The Board
of Directors may from time to time designate and appoint one
or more directors who have served on the Board of Directors
since the Corporation's inception to the position of "emeritus
founding director". Each emeritus founding director shall
serve for such term as shall be specified in the resolution of
the Board of Directors appointing him or until his earlier
resignation or removal. An emeritus founding director may be
removed from such position with or without cause by the vote
of a majority of the Board of Directors given at any regular
meeting or special meeting.
Section 3A.2. Duties; Remuneration: An emeritus
founding director shall be invited to attend all meetings of
the Board of Directors but shall not be present at any portion
of a meeting from which the emeritus founding director shall
have been excluded by
<PAGE> 2
vote of the directors. An emeritus founding director shall not
be a "Director" or "officer" within the meaning of the
Corporation's Articles of Incorporation or of these By-Laws,
shall not be deemed to be a member of an "advisory board"
within the meaning of the Investment Company Act of 1940, as
amended from time to time, shall not hold himself out as any
of the foregoing, and shall not be liable to any person for
any act of the Corporation. Notice of special meetings may be
given to an emeritus founding director but the failure to give
such notice shall not affect the validity of any meeting or
the action taken thereat. An emeritus founding director shall
not have the powers of a Director, may not vote at meetings of
the Board of Directors and shall not take part in the
operation or governance of the Corporation. An emeritus
founding director shall receive such compensation as shall be
determined by the vote of a majority of the Board of
Directors.
IN WITNESS WHEREOF, I hereunto set my hand this day of October, 1995.
Secretary
<PAGE> 1
Exhibit b(iii)
THE KOREA FUND, INC.
Certificate as to Resolution
of
Board of Directors
The undersigned certifies that he is the Secretary of the above named fund
(the "Fund"), a Maryland corporation, and that, as such, he is authorized to
execute this Certificate on behalf of the Fund, and further certifies that the
following is a complete and correct copy of resolutions duly adopted by the
duly elected Members of the Board of the Fund at a meeting duly called,
convened and held on July 23, 1996, at which a quorum was present and acting
throughout, and that such resolutions are in full force and effect.
RESOLVED, that pursuant to Section 11.1 of the Fund's By-Laws, Section
2.2 of the Fund's By-Laws shall be amended by deleting the number "25%"
in the third line of the second paragraph thereof and inserting in its
place the number "50%";
FURTHER RESOLVED, that pursuant to Section 11.1 of the Fund's By-laws,
Section 4.1 of the Fund's By-Laws shall be amended by inserting the
following immediately after the fifth sentence thereof:
"If the Board of Directors has given general authorization for
the issuance of stock providing for or establishing a method
or procedure for determining the maximum number of shares to be
issued, a committee of the Board, in accordance with that
general authorization or any stock option or other plan or
program adopted by the Board, may authorize or fix the terms of
stock subject to classification or reclassification and the
terms on which any stock may be issued, including all terms and
conditions required or permitted to be established or authorized
by the Board of Directors under Section 3.2 of these By-Laws."
; and
FURTHER RESOLVED, that the foregoing amendments to the Fund's
By-Laws shall be deemed effective on October 1, 1996.
IN WITNESS WHEREOF, I hereunto set my hand this day of August, 1996.
Secretary
<PAGE> 1
Exhibit d(ii)
STATE STREET BANK AND TRUST COMPANY
SUBSCRIPTION RIGHTS DISTRIBUTION AND AGENCY AGREEMENT
This Subscription Rights Distribution and Agency Agreement (the
"Agreement") is made as of March __, 1997 between The Korea Fund, Inc. (the
"Company"), a Maryland corporation and State Street Bank and Trust Company, a
national banking association, as subscription and distribution agent ("Agent").
Certain capitalized terms used herein without definition have the respective
meanings specified therefor in the Prospectus (as defined below).
WHEREAS, the Company proposes to make a subscription offer by
issuing certificates or other evidences of subscription rights, in the form
designated by the Company ("Subscription Certificates"), to shareholders of
record ("Record Date Shareholders") of its Common Stock, par value $0.01 per
share ("Common Stock"), as of a record date specified by the Company (the
"Record Date"), pursuant to which each Record Date Shareholder will receive
transferable rights (the "Rights") to subscribe to purchase shares of Common
Stock, as described in the prospectus (the "Prospectus") included in the Form
N-2 Registration Statement filed by the Company with the Securities and Exchange
Commission on February 28, 1997, as amended by any amendments filed with respect
thereto (the "Registration Statement");
WHEREAS, the Company wishes the Agent to perform certain acts on
behalf of the Company and the Agent is willing so to act, in connection with the
distribution of the Subscription Certificates and the issuance and exercise of
the Rights all upon the terms and conditions set forth herein and in the manner
described in the Prospectus;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. The Company hereby appoints and authorizes the Agent to act on its behalf
in accordance with the provisions hereof, and the Agent hereby accepts
such appointment and agrees to so act.
2. (a) Each Subscription Certificate shall evidence the
Rights of the Record Date Shareholder therein
named to purchase Common Stock upon the terms and
<PAGE> 2
conditions therein and in the Prospectus set
forth.
(b) Upon the written advice of the Company signed by
its Chairman, President, Secretary or Assistant
Secretary, as to the Record Date, the Agent shall,
from a list of the Company's Shareholders as of
the Record Date to be prepared by the Agent in its
capacity as the Company's Transfer Agent, prepare
and record Subscription Certificates in the names
of the Record Date Shareholders, setting forth the
number of Rights to subscribe to the Company's
Common Stock calculated on the basis of one Right
for each 1.01 shares recorded on the Company's
books in the name of each such Record Date
Shareholder as of the Record Date, rounded to the
nearest whole Right. Fractional Rights will not
be issued. Each Subscription Certificate shall be
dated as of the Record Date. Upon the written
advice as to the effective date of the
Registration Statement, the Agent shall as
promptly as practicable deliver the Subscription
Certificates, together with a copy of the
Prospectus, to all Record Date Shareholders whose
addresses are in the United States.
3. (a) Each Subscription Certificate shall be irrevocable and
shall be fully transferable. The Agent shall maintain
a register of Subscription Certificates and the
holders of record thereof. Each Subscription Certificate
shall entitle the holder to the rights set forth on
the face thereof and set forth in the Prospectus.
(b) A Record Date Shareholder may exercise his Rights
under the Primary Subscription and Over-
Subscription Privilege by delivery to the Agent in
the manner specified in the Prospectus of (i) the
Subscription Certificate with respect thereto,
duly executed by such Record Date Shareholder in
accordance with and as provided by the terms and
conditions of the Subscription Certificate,
together with (ii) the Subscription Price for each
share of Common Stock subscribed for by exercise
of such Rights, in United States dollars in cash,
by check, or money order drawn on a bank in the
continental United States or by postal,
telegraphic, or express money order, in each case
payable to the order of the Company.
2
<PAGE> 3
(c) Rights may be exercised at any time after the date
of issuance of the Subscription Certificates with
respect thereto but no later than 5:00 P.M. New
York City Time on such date as the Company shall
designate to the Agent in writing (the "Expiration
Date"). For the purpose of determining the time
of the exercise of any Rights, delivery of any
material to the Agent shall be deemed to occur
when such materials are received at the corporate
office of the Agent specified in the Prospectus.
(d) Notwithstanding the provisions of Section 3(b) and
3(c) regarding delivery of an executed
Subscription Certificate to the Agent prior to
5:00 P.M. New York City Time on the Expiration
Date, if prior to such time the Agent receives
notice of guaranteed delivery by telegram or
otherwise from a bank, trust company or a New York
Stock Exchange member guaranteeing delivery of (i)
full payment for Shares purchased and subscribed
for under the Primary Subscription and the Over-
Subscription Privilege (if any) and (ii) a
properly completed and executed Subscription
Certificate, then such exercise of Primary
Subscription Rights and the Over-Subscription
Privilege shall be regarded as timely, subject,
however, to receipt of the duly executed
Subscription Certificate and full payment for the
Common Stock by the Agent within three business
days after the Expiration Date.
(e) Within eight Business Days following the
Expiration Date (the "Confirmation Date"), the
Agent shall sent to each shareholder (or, if
shares of Common Stock on the Record Date are held
by Cede & Co. or any other depository or nominee,
to Cede & Co. or such other depository or
nominee), (A) a confirmation showing (i) the
number of Shares acquired pursuant to the Primary
Subscription Rights, (ii) the number of Shares, if
any, acquired pursuant to the Over-Subscription
Privilege, (iii) the per Share and total purchase
price for the Shares, (iv) any amount payable to
the Shareholder pursuant to Section 9, and (v) any
excess to be refunded by the Company to such
Shareholder, in each case based on the
Subscription Price; and (B) a letter explaining
the allocation of shares pursuant to the Over-
Subscription Privilege. Any excess payment to be
3
<PAGE> 4
refunded by the Company to a Shareholder, shall be
mailed by the Agent to the Shareholder as promptly
as possible but in no event later than fifteen
Business Days after the Expiration Date, as provided
in Section 5 below.
4. If, after allocation of Shares to persons exercising
Rights in the Primary Subscription, there remain
unexercised Rights, then the Agent shall allot the
Shares issuable upon exercise of such unexercised
Rights (the "Remaining Shares") to persons exercising
the Over-Subscription Privilege, in the amounts of such
Over-Subscriptions. If the number of Shares for which
the Over-Subscription Privilege has been exercised is
greater than the Remaining Shares, the Agent shall
allot the Remaining Shares to the persons exercising
the Over-Subscription Privilege pro rata based solely
on the number of Rights originally issued to them, as
more fully described in the Prospectus. The Agent
shall advise the Company immediately upon the
completion of the allocation set forth above as to the
total number of Shares subscribed and distributable.
5. (a) The Agent will deliver (i) certificates
representing those Shares purchased pursuant to
the Primary Subscription as soon as practicable
after the corresponding Rights have been validly
exercised and full payment for such Shares has
been received and cleared, it being understood
that certificates representing those Shares
purchased by the Dealer Manager upon its exercise
of the corresponding Rights will be delivered to
the Dealer Manager no later than the close of
business on the Business Day following the day
that full payment for such Shares has been
received by the Agent; (ii) certificates
representing those Shares purchased pursuant to
the Over-Subscription Privilege as soon as
practicable after the Expiration Date and after
all allocations have been effected; (iii) in the
case of each holder of Rights whose Rights were
sold pursuant to Section 9, as promptly as
possible but in no event later than fifteen
Business Days after the Expiration Date, proceeds
of such sale (provided, however, that proceeds of
sales on behalf of Record Date Shareholders whose
Subscription Certificates are undeliverable shall
be held by the Agent until they are either claimed
or escheated); (iv) in the case of each Record
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<PAGE> 5
Date Shareholder who subscribed, pursuant to the Over-Subscription
Privilege, for a greater number of Shares than was allotted to such
Record Date Shareholder under Section 4, as promptly as possible but
in no event later than fifteen Business Days after the Expiration
Date, a refund in the amount of the difference between the purchase
price delivered for the Shares subscribed for pursuant to such
Over-Subscription Privilege and the purchase price of the Shares so
allotted under Section 4 (an "Excess Payment"), and the Agent will
deliver to the Company all interest accrued on such Excess Payment;
(v) in the case of Record Date shareholders who are participants in
the Dividend Reinvestment and Cash Purchase Plan, as promptly as
possible but in no event later than fifteen Business Days after the
Expiration Date, account statements reflecting a credit of
uncertificated Shares for their Primary Subscription and
Over-Subscription Shares unless such shareholders have elected to
receive certificates.
6. (a) All proceeds received by the Agent from holders of Rights in
respect of the exercise of Rights shall be held by the Agent, on
behalf of the Company, in a segregated, interest-bearing account
(the "Account") pending disbursement in the manner described in
Section 6(b) below.
(b) The Agent shall deliver all proceeds received in
respect of the exercise of the Rights (including
interest earned thereon) to the Company as
promptly as practicable after full payment in
respect of such exercise has been received and
cleared; provided that the Agent shall not deliver
to the Company proceeds in excess of the aggregate
maximum offering price shown on the Registration
Statement, and any such excess proceeds shall be
held in the Account to fund Excess Payments after
the Expiration Date.
7. The Agent (a) shall supply the Company with a certified list of Record
Date Shareholders and the number of shares owned of record by each and (b)
shall promptly advise the Company as to the date of delivery of and the
number of Common Stock issued pursuant to the exercise of Rights
hereunder.
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<PAGE> 6
8. The Agent shall account promptly to the Company with
respect to Rights exercised and concurrently account
for all monies received and returned by the Agent
with respect to the purchase of Shares of Common
Stock upon the exercise of Rights.
9. The Agent shall use its best efforts to sell, at
current market prices, either to the Dealer Manager or
through the Dealer Manager on the New York Stock
Exchange, on the terms set forth in the Prospectus, (i)
all Rights submitted to it for sale by Record Date
Shareholders in accordance with the Prospectus,
provided such Rights are received by the Agent prior to
the Expiration Date, (ii) all Rights of Record Date
Shareholders whose Subscription Certificates remain
unclaimed as a result of being returned by postal
authorities as undeliverable the fourth Business Day
prior to the Expiration Date, (iii) all Rights of
Foreign Record Date Shareholders in respect of which no
instructions have been received by the Agent by 12:00
noon, New York City time, two Business Days prior to
the Expiration Date, and (iv) all Rights a Record Date
Holder is unable to exercise because such Rights
represent the right to subscribe for less than one
Share. Such sales will be made exclusively either to
or through the Dealer Manager, and the Agent shall
deliver the proceeds of such sales to the respective
Record Date Holders net of commissions charged by the
Dealer Manager. The Agent agrees to inform the Dealer
Manager at reasonable intervals each Business Day
during the Subscription Period (orally, to be followed
by written confirmation) of the matter of Rights
available for sale pursuant to this Section 9.
10. In the event that the Agent does not receive, within
three Business Days after the Expiration Date, any
Certificate or amount due from a holder of Rights as
specified in Section 3(d), then it shall take such
action with respect to such Holder's Rights as may be
instructed by telephone or in writing by the Company
including without limitation (i) applying any payment
actually received by it toward the purchase of the
greatest whole number of Shares of common stock which
could be acquired with such payment, (ii) allocating
the Shares subject to such Rights to Record Date
Shareholders who have exercised their Over-Subscription
Privilege as set forth in Section 4 hereof, but have
not been allocated the full number of shares requested,
and (iii) selling all or a portion of the Shares of
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<PAGE> 7
Common Stock deliverable upon exercise of such Rights
on the open market, and applying the proceeds thereof
to the amount owed.
11. No Subscription Certificate shall entitle a holder of
Rights to vote or receive dividends or be deemed the
holder of Shares of Common Stock for any purpose, nor
shall anything contained in any Subscription
Certificate by construed to confer upon any holder of
Rights any of the rights of a shareholder of the
Company or any right to vote, give or withhold consent
to any action by the Company (whether upon any
recapitalization, issue of stock, reclassification of
stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings or other action affecting
shareholders or receive dividends or otherwise, until
the Rights evidenced thereby shall have been exercised
and the Shares of Common Stock purchasable upon the
exercise thereof shall have become deliverable as
provided in this Agreement and in the Prospectus.
12. If the Agent is requested to issue a new Subscription
Certificate to replace one that has been lost, stolen,
mutilated or destroyed, the Agent may issue a new
Subscription Certificate of like denomination in
substitution for the Subscription Certificate so lost,
stolen, mutilated or destroyed, subject to the
conditions that the party requesting the replacement
Subscription Certificate (i) provides appropriate
indemnification to the Company, (ii) in the case of a
mutilated Subscription Certificate, and (iii) complies
with any such other conditions as the Agent in its
discretion may impose.
13. (a) The Company covenants that all Shares of Common
Stock issued on exercise of Rights set forth in
the Subscription Certificates will be validly
issued, fully paid, nonassessable and free of
preemptive rights (other than the Rights).
(b) The Company shall furnish to the Agent, upon
request, an opinion of counsel satisfactory to the
Agent to the effect that a registration statement
under the Securities Act of 1933, as amended (the
"Act"), is then in effect with respect to its
Shares of Common Stock issuable upon the exercise
of the Rights evidenced by the Subscription
Certificates. Upon written advice to the Agent
that the Securities and Exchange Commission shall
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<PAGE> 8
have issued or threatened to have issued any order
preventing or suspending the use of the Prospectus,
or if for any reason it shall be necessary to amend
or supplement the Prospectus in order to comply with
the Act, the Agent shall cease acting hereunder until
receipt of written instructions from the Company and
such assurances as it may reasonably request that it
may comply with such instruction without violation of
the Act.
14. (a) Any corporation into which the Agent may be merged
or converted or with which it may be consolidated,
or any corporation resulting from any merger,
conversion or consolidation to which the Agent
shall be a party, or any corporation succeeding to
the corporate trust business of the Agent, shall
be the successor to the Agent hereunder without
the execution or filing of any of the parties
hereto, provided that such corporation would be
eligible for appointment as a successor agent. In
case at the time such successor to the Agent shall
succeed to the agency created by this Agreement,
any of the Subscription Certificates shall have
been countersigned but not delivered, any such
successor to the Agent may adopt this
countersignature of the original agent and deliver
such Subscription Certificates so countersigned,
and in case at that time any of the Subscription
Certificates shall not have been countersigned,
any successor to the Agent may countersign such
Subscription Certificates either in the name of
the predecessor Agent or in the name of the
successor Agent, and in all such cases such
Subscription Certificates shall have the full
force provided in the Subscription Certificates
and in this Agreement.
(b) In case at any time the name of the Agent shall be
changed and at such time any of the Subscription
Certificates shall have been signed but not
delivered, the Agent may adopt the signature under
its prior name and deliver Subscription
Certificates so signed, and in case at that time
any of the Subscription Certificates either in its
prior name or in its changed name, and in all such
cases such Subscription Certificates shall have
the full force provided in the Subscription
Certificates and this Agreement.
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<PAGE> 9
15. The Company agrees to pay to the Agent from time to
time, on demand of the Agent, reasonable compensation
for all services rendered by it hereunder and also its
reasonable expenses and other disbursements incurred in
the administration and execution of this Agreement and
the exercise and performance of its duties hereunder,
all as set forth in the Rights Subscription Fee
Schedule attached hereto.
16. The Agent undertakes the duties and obligations imposed
by this Agreement upon the following terms and
conditions:
(a) Whenever in the performance of its duties under
this Agreement the Agent shall deem it necessary
or desirable that any fact or matter be proved or
established, prior to taking or suffering any
action hereunder, such fact or matter (unless
other evidence in respect thereof is herein
specifically prescribed) may be deemed to be
conclusively proved and established by a
certificate signed by the Chairman of the Board or
President or a Vice President or the Secretary or
Assistant Secretary or the Treasurer of the
Company delivered to the Agent, and such
certificate shall be full authorization to the
Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement
in reliance upon such certificate.
(b) The Agent shall not be responsible for and the
Company shall indemnify and hold the Agent
harmless from and against any and all losses,
damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or
attributable to all actions of the Agent or its
agents or subcontractors required to be taken
pursuant to this Agreement, provided that such
actions are taken in good faith and without
negligence, willful misconduct, or material breach
of this Agreement.
(c) Nothing herein shall preclude the Agent from acting in any other
capacity for the Company or for any other legal entity.
(d) The Agent is hereby authorized and directed to
accept instructions with respect to the
performance of its duties hereunder from any
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<PAGE> 10
officer referred to in subsection (a) above of the
Company and to apply to any such officer of the
Company for advice or instructions in connection
with its duties, and shall be indemnified and not
liable for any action taken or suffered by it in
good faith in accordance with instructions of such
officer.
(e) The Agent shall be indemnified and shall incur no
liability for or in respect of any action taken,
suffered, or omitted by it in reliance upon any
Subscription Certificate or certificate for Common
Stock, instrument of assignment or transfer, power
of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement
or other paper or document that it reasonably
believes to be genuine and to be signed, executed
and, where necessary, verified or acknowledged, by
the proper person or persons.
(f) Neither party to this Agreement shall be liable to
the other party for consequential damages under any
provision of this Agreement or for any consequential
damages arising out of any act or failure to act
hereunder.
17. The Agent may, without the consent or concurrence of
the shareholders in whose names Subscription
Certificates are registered, by supplemental agreement
or otherwise, concur with the Company in making any
changes or corrections in a Subscription Certificate
that it shall have been advised by counsel (who may be
counsel for the Company) and are appropriate to cure
any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake
or manifest error therein or herein contained, and
which shall not be inconsistent with the provisions of
the Subscription Certificate except insofar as any such
change may confer additional rights upon the holders of
Rights.
18. (a) Except as provided in Section c below, neither
this Agreement nor any rights or obligations
hereunder may be assigned by either party without
the written consent of the other party.
(b) This Agreement shall inure to the benefit of and
be binding upon the parties and their respective
permitted successors and assigns.
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<PAGE> 11
(c) The Agent may, without further consent on the part
of the Company subcontract for the performance
hereof with (i) Boston Financial Data Services,
Inc. a Massachusetts Corporation ("BFDS") which is
duly registered as a transfer agent pursuant to
Section 17(c)(1) of the Securities Exchange Act of
1934 or (ii) the current third party vendor
utilized by BFDS; provided, however, that the
Agent shall be as fully responsible to the Company
for the acts and omissions of any agent or
subcontractor as it is for its own acts and
omissions.
19. All covenants and provisions of this Agreement by or for the benefit of
the Company or the Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
20. The validity, interpretation and performance of this
Agreement shall be governed by the law of the
Commonwealth of Massachusetts.
STATE STREET BANK THE KOREA FUND, INC.
AND TRUST COMPANY
By: By:
--------------------------- ---------------------------
Vice President Title:
Dated: Dated:
------------------------- ------------------------
11
<PAGE> 1
Exhibit h.(i)
DEALER MANAGER AGREEMENT
___________, 1997
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
The Korea Fund Inc., a corporation formed under the laws of the
State of Maryland (the "Company"), and Smith Barney Inc., a corporation formed
under the laws of the State of Delaware ("Smith Barney"), confirm their
agreement, subject to the terms and conditions set out below, with respect to
the proposed issuance by the Company to its shareholders of rights entitling
their holders to subscribe for shares of the Company's Common Stock, par value
$.01 per share.
1. DEFINITIONS
The following terms have the following meanings when used in this
Agreement:
(a) "Acts" means the Securities Act and the Investment Company Act
collectively.
(b) "Agreement" means this Dealer Manager Agreement as originally executed
and as amended, modified, supplemented or restated from time to time.
(c) "Availability Date" has the meaning set forth in Section 8(d) of this
Agreement.
(d) "Business Day" means any day on which the NYSE is open for trading.
(e) "Code" means the U.S. Internal Revenue Code of 1986, as amended.
(f) "Commission" means the U.S. Securities and Exchange Commission.
(g) "Common Stock" means the Company's Common Stock, par value $.01 per
share.
<PAGE> 2
(h) "Custodian" means Brown Brothers Harriman & Co.
(i) "Custodian Agreement" means the Custodian Agreement, dated
____________, between the Company and the Custodian.
(j) "Effective Date" means the date of the Effective Time.
(k) "Effective Time" has the meaning set forth in Section 4(a) of this
Agreement.
(l) "Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended.
(m) "Exercising Rights Holders" means Record Date Shareholders and Rights
Holders purchasing Shares in the Primary Subscription.
(n) "Expiration Date" means April __, 1997.
(o) "Investment Advisers Act" means the U.S. Investment Advisers Act of
1940, as amended.
(p) "Investment Company Act" means the U.S. Investment Company Act of
1940, as amended.
(q) "Korea" means the Republic of Korea.
(r) "Korean Adviser" means _______________Daewoo Capital Management Co.,
Ltd.
(s) "Manager" means Scudder, Stevens & Clark, Inc., the Company's
investment adviser and manager.
(t) "Management Agreement" means the Investment Advisory, Management and
Administration Agreement, dated [as of] October 13, 1994, between the Company
and the Manager.
(u) "NYSE" means the New York Stock Exchange, Inc.
(v) "Offer" means the offer of Shares contemplated by the Company's
proposed issuance of Rights.
(w) "OSE" means the Osaka Stock Exchange.
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<PAGE> 3
(x) "Primary Subscription" means a Record Date Shareholder's right to
acquire Shares during the Subscription Period at the Subscription Price.
(y) "Prospectus" means collectively the forms of prospectus and statement
of additional information as first filed with the Commission pursuant to and in
accordance with rule 497(h) under the Securities Act or (if no such filing is
required) as included in the Registration Statement.
(z) "PSE" means the Pacific Stock Exchange.
(aa) "Record Date" means April __, 1997.
(bb) "Record Date Shareholders" means the Company's shareholders of record
as of the close of business on the Record Date.
(cc) "Registration Statement" means the registration statement relating to
the Offer on Form N-2 (File Nos. 333-________ and 811-4058) under the Acts, as
amended at the Effective Time, including all information (if any) deemed to be a
part of such registration statement as of the Effective Time pursuant to Rule
430A(b) under the Securities Act, filed by the Company with the Commission.
(ee) "Research Agreement" means the Research and Advisory Agreement, dated
___________, between the Manager and the Korean Adviser.
(ff) "Rights" means the right proposed to be issued by the Company to
Record Date Shareholders, which rights entitle their holders to subscribe for
Shares.
(gg) "Rights Holders" means the holders of Rights.
(hh) "Rules and Regulations" means the rules and regulations adopted by
the Commission under the Securities Act and/or the Investment Company Act.
(ii) "Securities Act" means the U.S. Securities Act of 1933, as amended.
(jj) "Shares" means an aggregate of up to _________ shares of Common Stock
for which Rights Holders may subscribe.
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<PAGE> 4
(kk) "Subscription Agent" means State Street Bank and Trust Company.
(ll) "Subscription Agent Agreement" means the Subscription Rights
Distribution and Agency Agreement, dated as of _____________ , between the
Company and the Subscription Agent.
(mm) "Subscription Period" means the period of time beginning on
__________, 1997 and ending at 5:00 p.m., New York City time, on the Expiration
Date.
(nn) "Subscription Price" means the Subscription Price per Share of
$_____.
2. THE OFFER
The Company is proposing to issue Rights to Record Date
Shareholders, which Rights entitle their holders to subscribe for Shares. Under
the Company's proposal, each Record Date Shareholder will be issued one Right
for each full share of Common Stock owned on the Record Date. No fractional
Rights will be issued. The rights will entitle each Record Date Shareholder to
acquire in the Primary Subscription at the Subscription Price one Share for each
three Rights held, except that any Record Date Shareholder who is issued fewer
than three Rights will be able to subscribe for one full Share at the
Subscription Price. All Rights will be able to be exercised immediately upon
receipt and until 5:00 p.m., New York City time, on the Expiration Date. Any
Record Date Shareholder who fully exercises all Rights initially issued to him
(other than those Rights that cannot be exercised because they represent the
right to acquire less than one Share) will be entitled to subscribe for, subject
to allotment, Shares that are not otherwise subscribed for by Exercising Rights
Holder son the Primary Subscription. Additional terms and conditions of the
Offer are set out in the Registration Statement.
3. APPOINTMENT OF DEALER MANAGER
The Company appoints Smith Barney as the exclusive dealer manager in
connection with the Offer and Smith Barney accepts that appointment. The Company
also authorizes Smith Barney to form and manage a group of securities dealers
(each, a "Selling Group Member," and,
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<PAGE> 5
collectively, the "Selling Group") to solicit the exercise of Rights and sell
Shares purchased by Smith Barney from the Company through the exercise of
Rights. Smith Barney represents and warrants that it is a broker-dealer
registered under the Exchange Act.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with, Smith
Barney that:
(a) A registration statement (File Nos. 333-_______ and 811-4058)
including a form of prospectus relating to the Offer has been filed with the
Commission and either (i) has been declared effective under the Securities Act
and is not proposed to be amended or (ii) is proposed to be amended by amendment
or post-effective amendment. If the Company does not propose to amend such
registration statement and if any post-effective amendment to such registration
statement has been filed with the Commission prior to the execution and delivery
of this Agreement, the most recent such amendment has been declared effective by
the Commission. For purposes of this Agreement, "Effective Time" means (i) if
the Company has advised Smith Barney that is does not propose to amend such
registration statement, the date and time as of which such registration
statement, or the most recent post-effective amendment thereto (if any) filed
prior to the execution and delivery of this Agreement, was declared effective by
the Commission, or (ii) if the Company has advised Smith Barney that it proposes
to file an amendment or post-effective amendment to such registration statement,
the date and time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared effective
by the Commission.
(b) If the Effective Time is prior to the execution and delivery of this
Agreement: (i) on the Effective Date, the Registration Statement conformed in
all respects to the requirements of the Acts and the Rules and Regulations and
did not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) on the date of this Agreement, the Registration
Statement conforms, and at the time of filing of the Prospectus pursuant to Rule
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<PAGE> 6
497(h) under the Securities Act, the Registration Statement and the Prospectus
will conform, in all respects to the requirements of the Acts and the Rules and
Regulations, and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time is subsequent to the execution an delivery of
this Agreement: on the Effective Date, the Registration Statement and the
Prospectus will conform in all respects to the requirements of the Acts and the
Rules and Regulations, and neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements therein not misleading.
The two preceding sentences do not apply to statements in or omissions from the
Registration Statement or Prospectus based upon written information furnished to
the Company by Smith Barney specifically for use therein.
(c) Coopers & Lybrand L.L.P., whose report appears in the Prospectus, are
independent accountants as required by the Acts and the Rules and Regulations
with respect to the Company. The financial statements and financial highlights
(including the related notes) included in the Registration Statement or the
Prospectus present fairly the financial position, results of operations, changes
in net assets and financial highlights of the Company at the dates and for the
periods indicated therein and have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods indicated.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Maryland, with full
power and authority to own or lease its properties and conduct its business as
described in the Prospectus and is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which the character of
the business conducted by it or the location of the properties owned or leased
by it make such qualification necessary.
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<PAGE> 7
(e) All of the outstanding shares of Common Stock have been duly
authorized and are validly issued, fully paid and nonassessable, with no
personal liability attaching to the ownership thereof; the Offer, the Rights and
the Shares have been duly authorized, and the Rights and the Shares, upon
issuance and delivery and, in the case of the Shares, payment therefor, as
described in the Registration Statement and the Prospectus, will be validly
issued, fully paid and nonassessable, with no personal liability attaching to
the ownership thereof. Except for the Rights, there are no preemptive rights or
other rights to subscribe for or to purchase, or any restriction upon the voting
or transfer of, any shares of Common Stock (including the Shares) pursuant to
the Company's Articles of Incorporation, by-laws or other governing documents or
any agreement or other instrument to which the Company is a party or by which it
may be bound. Neither the filing of the Registration Statement nor the Offer as
contemplated by this Agreement and the Subscription Agent Agreement gives rise
to any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock or other securities
of the Company. The capitalization of the Company as of __________, 1997 is as
set forth in the Prospectus, and the Rights and the Shares conform to the
descriptions thereof contained in the Prospectus.
(f) Except as described in or contemplated by the Registration Statement
and the Prospectus, there has not been any material adverse change in, or
adverse development which materially affects, the condition (financial or
other), results of operation, business or prospects, of the Company from the
date as of which information is given in the Prospectus.
(g) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company is a party or to which any property
of the Company is subject or which is pending or, to the knowledge of the
Company, contemplated against the Company which might result in any material
adverse change in the condition (financial or other), results of operations,
business or prospects of the Company or which is required to be disclosed in the
Prospectus.
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<PAGE> 8
(h) The Company is not in violation of any law, ordinance, governmental
rule or regulation or court decree to which it may be subject which violation
might have a material adverse effect on the condition (financial or other),
results of operation, business or prospects of the Company.
(i) The Subscription Agent Agreement has been duly authorized, executed
and delivered by the Company and, assuming due authorization, execution and
delivery by the Subscription Agent, constitutes the valid and binding agreement
of the Company and is enforceable against the Company in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or
other laws relating to or affecting creditors' rights and to general equity
principles.
(j) This Agreement has been duly authorized, executed and delivered by the
Company and constitutes the valid and binding agreement of the Company, and is
enforceable against the Company in accordance with its terms subject, as to
enforcement, to bankruptcy, insolvency, reorganization or other laws relating to
or affecting creditors' rights and to general equitable principles.
(k) The Company is not, or with the giving of notice or lapse of time or
both would not be, in violation of or in default under, nor will the execution
or delivery hereof and of the Subscription Agent Agreement or consummation of
the transactions contemplated hereby or by the Subscription Agent Agreement,
including, without limitation, the distribution of the Rights and the allotment,
issue and sale of the Shares, result in a violation of, or constitute a default
under, the Articles of Incorporation or by-laws of the Company, or any
agreement, indenture or other instrument, to which the Company is a party or by
which it is bound, or to which any of its properties is subject, nor will the
performance by the Company of its obligations hereunder or under the
Subscription Agent Agreement violate any law, rule, administrative regulation or
decree of any court, or any governmental agency or body having jurisdiction over
the Company, or any of its properties, or result in the creation or imposition
of any lien, charge, claim or encumbrance upon any property or asset of the
Company. Except for permits and similar authorizations required under the
8
<PAGE> 9
Acts and the securities or "Blue Sky" laws of certain jurisdictions and for such
permits and authorization which have been obtained, no consent, approval,
authorization or order of any court, governmental agency or body or financial
institution is required in connection with the consummation of the transactions
contemplated by this Agreement or the Subscription Agent Agreement.
(l) The Rights are duly authorized for listing, subject to official notice
of issuance, on the NYSE and are, or as soon as practicable after the date of
this Agreement, will be, admitted to trading on the NYSE.
(m) The Shares are duly authorized for listing, subject to official notice
of issuance, on each of the NYSE, the OSE and the PSE and, as soon as
practicable after the date of this Agreement, will be admitted to trading on
each of the NYSE, the OSE and the PSE.
(n) The Company has not taken and shall not take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the Offer, provided that
the Company makes no representation with respect to any transactions by Smith
Barney or any other broker or dealer unaffiliated with Company, the Manager or
the Korean Adviser to stabilize the price of the shares of Common Stock in
connection with the Offer.
(o) The Company is duly registered with the Commission under the
Investment Company Act as a closed-end non-diversified management investment
company.
(p) Any required approval by the Korean Government, including any required
approval by the Minister of Finance and Economy of Korea under the Fund's
license to invest in Korean securities, of the offering, and confirmation of
applicability of the United States-Korea Income Tax Treaty (the "Treaty") have
been obtained and have not been rescinded or modified.
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<PAGE> 10
5. REPRESENTATIONS AND WARRANTIES OF THE MANAGER
The Manager represents and warrants to, and agrees with, Smith
Barney that:
(a) The Manager has been duly incorporated and is an existing corporation
in good standing under the laws of the State of Delaware, with corporate power
and authority to conduct its business as described in the Prospectus.
(b) The Manager is duly registered as an investment adviser under the
Investment Advisers Act and is not prohibited by the Investment Advisers Act or
the Investment Company Act, or the rules and regulations under such acts, from
acting as Manager for the Company as contemplated by the Prospectus.
(c) This Agreement has been duly authorized, exe-
cuted and delivered by the Manager.
(d) The Manager Agreement and the Research Agreement have each been duly
authorized, executed and delivered on behalf of the Manager and each constitutes
a valid and binding obligation of the Manager enforceable in accordance with its
terms, subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization or of the laws relating to or affecting creditors' rights
generally and to general equity principles; and neither the execution and
delivery of this Agreement, the Management Agreement or the Research Agreement
nor the performance by the Manager of its obligations thereunder will conflict
with or result in a breach or violation of any other terms and provisions of the
charter or By-laws of the Manager or any law, order, rule or regulation
applicable to the Manager of any United States jurisdiction, court, federal or
state regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Manager or its
properties or operations, or, to the best knowledge of the Manager after
reasonable investigation, constitute, with or without giving notice or lapse of
time or both, a default under, any agreement or instrument to which the Manager
is a party or by which the Manager or to which any of the properties of the
Manager is subject.
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(e) All written information furnished by the Manager specifically for use
in the Registration Statement and Prospectus, including, without limitation, the
description of the Manager, does not, and on the Expiration Date will not,
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the Registration Statement and Prospectus not misleading.
(f) There has not, since the date of the Prospectus, been any material
adverse change, or any development reasonably likely to cause a material adverse
change, in the Manager's ability to perform its obligations under this Agreement
or under the Manager Agreement.
6. SOLICITATION OF RIGHTS EXERCISE; FINANCIAL ADVISORY SERVICES
(a) On the basis of the representations and warranties, and subject to the
terms and conditions, set forth in this Agreement:
(i) Smith Barney agrees to (A) solicit, in accordance with the Acts,
the Exchange Act, the Rules and Regulations and its customary practice,
the exercise of the Rights, subject to the terms and conditions of this
Agreement, the Subscription Agent Agreement and the procedures described
in the Registration Statement; and (B) form and manage the Selling Group
to (i) solicit, in accordance with the Acts, the Exchange Act, the Rules
and Regulations and its customary practice, the exercise of the Rights,
subject to the terms and conditions of this Agreement, the Subscription
Agent Agreement and the procedures described in the Registration
Statement, and (ii) sell Shares purchased by Smith Barney from the Company
as provided herein. No securities dealer shall be considered a Selling
Group Member until it shall have entered into a Selling Group Agreement
with Smith Barney in substantially the form of Exhibit D hereto.
(ii) Smith Barney is authorized to buy and exercise Rights and to
sell Shares to the public or to Selling Group Members at the offering
price set by Smith Barney from time to time. Sales of Shares by Smith
Barney or Selling Group Members shall be at
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not more than the offering price set by Smith Barney from time to time.
(iii) the Company agrees to furnish, or cause to be furnished, to
Smith Barney, lists, or copies of those lists, showing the names and
addresses of, and number of Shares held by, Record Date Shareholders as of
the Record Date, and to use its best efforts to advise Smith Barney, or
cause it to be advised, on each Business Day during the Subscription
Period as to any transfers of Rights, and Smith Barney agrees to use such
information only in connection with the Offer;
(iv) the Company will arrange for the Subscription Agent (A) to
inform Smith Barney orally, on each Business Day during the Subscription
Period (to be followed by written confirmation), as to the number of
Rights that have been exercised since its previous daily report to Smith
Barney under the provision of this Section 6(a)(iv), (B) not later than
10:00 a.m. (New York City time) on __________ [Expiration Date plus 7
days], to provide Smith Barney with a written statement as to the total
number of Rights exercised (separately setting forth the number of Rights
exercised by Record Date Shareholders), (C) to sell any Rights received
for resale from Record Date Shareholders exclusively to or through Smith
Barney, which may, at its election, purchase such Rights as principal or
act as Agent for such resales and (D) to issue shares of Common Stock upon
Smith Barney's exercise of Rights no later than the close of business on
the business day following the day that full payment for such shares has
been received by the Agent.
(v) Smith Barney agrees to notify the Company on or prior to
___________ [Expiration Date plus 7 days] of the Shares purchased by Smith
Barney through the exercise of Rights and sold to the public or to each
Selling Group Member and the total amount of the commissions payable by
the Fund pursuant to Section 7 of this Agreement in connection with such
sales.
(b) Smith Barney agrees to provide to the Company, in addition to
the services described in paragraph (a) of
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this Section 6, financial advisory services in connection with the Offer.
(c) The Company and Smith Barney agree that Smith Barney and each Selling
Group Member is an independent contractor with respect to its solicitation of
the exercise of Rights contemplated by this Agreement and the performance of
financial advisory services to the Company contemplated by this Agreement, and
Smith Barney represents and warrants that it is not a partner or agent of any
other securities broker, dealer or other person soliciting the exercise of
Rights as contemplated by this Agreement, or of the Company or any of its
affiliates.
(d) In rendering the services contemplated by this Agreement, Smith Barney
and the Selling Group Members agree not to make any representations, oral or
written, to any shareholders or prospective shareholders of the Company that are
not contained in the Prospectus, unless previously authorized to do so in
writing by the Company.
(e) In rendering the services contemplated by this Agreement, neither
Smith Barney nor any Selling Group Member will be subject to any liability to
the Company, the Manager, the Korean Adviser or any of their affiliates, for any
act or omission on the part of any securities broker or dealer (other than
itself or any of its affiliates) or any other person, and neither Smith Barney
nor any Selling Group Member will be liable for its own acts or omissions in
performing its obligations under this Agreement, except for any losses, claims,
damages, liabilities and expenses that result from any acts or omissions
undertaken or omitted to be taken by Smith Barney or a Selling Group Member
through its gross negligence or willful misconduct.
7. DEALER MANAGER AND SOLICITATION FEES
The Company agrees to pay in New York Clearing House (next day)
funds on ___________ [Expiration Date plus 10 days]:
(a) to Smith Barney, as compensation for its services to the Company as
financial adviser in connection with the Offer, a fee equal to an amount
computed by multiplying (i) .01, by (ii) the aggregate number of
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Shares purchased in the Offer, by (iii) the Subscription Price;
(b) to Smith Barney for its own account a fee equal to an amount computed
by multiplying (i) .025, by (ii) the sum of the number of Shares purchased
pursuant to each subscription form relating to the Rights upon which Smith
Barney is designated (other than Shares purchased by Smith Barney through the
exercise of Rights and sold to the public or to Selling Group Members) plus the
number of Shares sold by Smith Barney to the public as indicated in the notice
provided by Smith Barney to the Fund pursuant to Section 6(a)(v) of this
Agreement, by (iii) the Subscription Price;
(c) to Smith Barney for the account of each Selling Group Member a fee
equal to an amount computed by multiplying (i) .025, by (ii) the sum of the
number of Shares purchased pursuant to each subscription form relating to the
Rights upon which the Selling Group Member is designated plus the number of
Shares sold by Smith Barney to such Selling Group Member as indicated in the
notice provided by Smith Barney to the Fund pursuant to Section 6(a)(v) of this
Agreement, by (iii) the Subscription Price;
(d) to each securities broker or dealer who has executed the Company's
Soliciting Dealer Agreement (other than Smith Barney or any Selling Group
Member) designated on any subscription form related to the Rights ("Listed
Broker") a fee equal to an amount computed by multiplying (i) .005, by (ii) the
number of Shares purchased pursuant to each subscription form upon which the
Listed Broker is designated, by (iii) the Subscription Price, provided that the
aggregate fees paid to any Listed Broker (other than a Listed Broker who is
registered as a specialist in the Rights with the NYSE and who has been approved
by the NYSE to act as such during the Subscription Period) may not exceed the
product of (A) .50% of the Subscription Price per Share, times (B) the aggregate
number of shares of Common Stock held in such Listed Broker's participant
accounts with The Depository Trust Company on the Record Date divided by three;
and
(e) to Smith Barney a fee equal to an amount computed by multiplying (i)
.025, by (ii) the number of Shares purchased pursuant to each subscription form
upon
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<PAGE> 15
which neither Smith Barney nor any Selling Group Member or Listed Broker is
designated plus the number of Shares purchased pursuant to subscription forms
upon which a Listed Broker is designated but which are in excess of the limit
set forth in clause (B) of the proviso in paragraph (d) of this Section 7, by
(iii) the Subscription Price.
8. COVENANTS OF THE COMPANY
The Company agrees:
(a) If the Effective Time is prior to the execution and delivery of this
Agreement, the Company will file the Prospectus with the Commission pursuant to
and in accordance with Rule 497(h) under the Securities Act not later than the
earlier of (a) the second business day following execution and delivery of this
Agreement or (b) the fifteenth business day after the Effective Date. The
Company will advise Smith Barney promptly of any such filing pursuant to Rule
497(h).
(b) The Company will advise Smith Barney promptly of any proposal to amend
or supplement the registration statement as filed, or the related prospectus or
statement of additional information, and will not effect such amendment or
supplementation without Smith Barney's consent; the Company will also advise
Smith Barney promptly of the effectiveness of the Registration Statement (if the
Effective Time is subsequent to the execution and delivery of this Agreement)
and of any amendments or supplementation of the Registration Statement or the
Prospectus, and of the institution by the Commission of any stop order
proceedings in respect of the Registration Statement, and will use its best
efforts to prevent the issuance of any such stop order and to obtain as soon as
possible its lifting, if issued.
(c) If at any time when a prospectus relating to the Offer is required to
be delivered under the Securities Act, any event occurs as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact, or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Acts, the
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<PAGE> 16
Company promptly will prepare and file with the Commission an amendment or
supplement which will correct such statement or omission or an amendment which
will effect such compliance.
(d) As soon as practicable, but not later than the Availability Date (as
defined below), the Company will make generally available to its security
holders an earnings statement covering a period of at least twelve months
beginning after the effective date of the Registration Statement which will
satisfy the provisions of Section 11(a) of the Securities Act. For the purpose
of the preceding sentence "Availability Date" means the 60th day after the end
of the fourth fiscal quarter following the fiscal quarter that includes the
Effective Date, except that, if such fiscal quarter is the last quarter of the
Company's fiscal year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to Smith Barney copies of the Registration
Statement (one of which will be signed and will include all exhibits), the
Prospectus and any other soliciting materials authorized by the Company relating
to the offer, and all amendments and supplements to such documents, in each case
as soon as available and in such quantities as Smith Barney requests.
(f) The Company will pay all expenses incident to the performance of its
obligations under this Agreement, and will reimburse the Dealer Manager (i) for
its out-of-pocket expenses (including fees and disbursements of counsel) up to
an aggregate of $25,000 and (ii) for any reasonable expenses (including
reasonable fees and disbursements of counsel) incurred by it in connection with
qualification of the Rights and the Shares under the securities laws of the
jurisdictions as provided in paragraph (g) of this Section 8 and the printing of
memoranda relating thereto, and for the filing fee of the National Association
of Securities Dealers, Inc. relating to the Rights and the Shares. If this
Agreement is terminated pursuant to Section 10 or if for any reason the issuance
of the Rights and the sale of the Shares is not consummated, the Company shall
not be required to reimburse Smith Barney for its expenses pursuant to Section
8(f)(i). Smith Barney will be entitled to the payment of any fees pursuant to
Section 7 earned with respect to Shares purchased upon the exercise of Rights
prior to the
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<PAGE> 17
date of any termination and to Shares purchased pursuant to the
Over-Subscription Privilege, as defined in the Registration Statement, by
holders who exercised such Rights prior to such date.
(g) To use every reasonable effort in cooperating with Smith Barney to
permit the distribution of the Rights and the offer and sale of the Shares under
the securities laws of the United States (including any state, territory or
possession and the District of Columbia) for so long as necessary for the
distribution of the Rights and the Shares, provided, however, that the Company
shall not be obligated to file any general consent to service of process, or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not now so qualified.
(h) During the period of five years hereafter, the Company will furnish to
Smith Barney, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to Smith Barney (i) as soon as available, a copy of each report or definitive
proxy statement of the Company filed with the Commission under the Investment
Company Act or the Exchange Act or mailed to stockholders, and (ii) from time to
time, such other information concerning the Company as Smith Barney may
reasonably request.
(i) To advise Smith Barney promptly of any action by any of the NYSE, the
OSE or the PSE rejecting, suspending or terminating the application for the
listing of, or the listing of, the Rights or the Shares, as the case may be.
(j) To comply with the undertaking contained in paragraph 6 of Item 33 in
Part C of the Registration Statement.
9. INDEMNIFICATION AND CONTRIBUTION
(a) The Company agrees to indemnify and hold harmless Smith Barney and
each person, if any, who controls Smith Barney within the meaning of the
Securities Act against any losses, claims, damages or liabilities, joint or
several, to which Smith Barney or such controlling person may become subject,
under the Securities Act or
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otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse Smith Barney and each such
controlling person for any legal or other expenses reasonably incurred by Smith
Barney or such controlling person in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any of such
documents in reliance upon and in conformity with written information furnished
to the Company by Smith Barney specifically for use therein, (ii) any failure of
the Company to consummate the Offer, including any failure of the Company to
issue the Rights or issue and sell the Shares, (iii) any action taken or omitted
to be taken by Smith Barney with the consent of the Company, (iv) any action
taken or omitted to be taken by the Company, and/or the Manager and/or the
Korean Adviser, (v) any breach by the Company of any representation or warranty,
or any failure by the Company and/or the Manager to comply with any agreement or
covenant contained in this Agreement or (vi) any of the other transactions
contemplated by the Offer or by Smith Barney's performance of its obligations
under this Agreement, and will reimburse Smith Barney and each person, if any,
who controls Smith Barney within the meaning of the Securities Act for any legal
or other expenses reasonably incurred by Smith Barney or such controlling person
in connection with investigating or defending any such loss, claim, damage,
liability or action. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Smith Barney agrees to indemnify and hold harmless the Company and its
directors, each of the Company's officers who have signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of the Securities Act, against any losses,
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<PAGE> 19
claims, damages or liabilities to which the Company or any such director,
officer or controlling person may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
the Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by Smith Barney specifically for use therein; and will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or defending any
such loss, claim, damage, liability or action. This indemnity agreement will be
in addition to any liability Smith Barney may otherwise have.
(c) The Manager agrees to indemnify and hold harmless Smith Barney and
each person, if any, who controls Smith Barney within the meaning of the
Securities Act, against any losses, claims, damages or liabilities to which
Smith Barney or such controlling person of Smith Barney may become subject,
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by the Manager specifically for use
therein; and will reimburse any legal or other expenses reasonably incurred by
Smith Barney or such controlling person of Smith Barney in connection with
investigating or defend-
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ing any such loss, claim, damage, liability or action. This indemnity agreement
will be in addition to any liability the Manager may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section , notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section . In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than the
reasonable costs of investigation. No indemnifying party shall be liable under
the foregoing indemnity agreement in respect of any compromise or settlement of
any such action without its consent, which consent shall not be unreasonably
delayed or withheld. If settlement is made with the consent of the indemnifying
party, such indemnifying party shall indemnify and hold harmless the indemnified
party against any loss or liability incurred by reason of such settlement.
(e) If the indemnification provided for in this Section is unavailable,
for any reason other than as specified therein, to hold harmless an indemnified
party under subsection (a), (b) or (c) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of the losses, claims, damages or liabilities referred to in subsection (a), (b)
or (c) above in such proportion as is appropriate to reflect the relative
benefits received by the
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Company on the one hand and Smith Barney on the other from the Offer. If the
allocation provided by the immediately preceding sentence is not permitted by
applicable law in the case of a claim for contribution by an indemnified party
under subsection (a) above, then the Company and the Manager shall each
contribute to the amount paid or payable by such indemnified party as a result
of the losses, claims, damages or liabilities referred to in subsection (a)
above in such proportion as is appropriate to reflect not only the relative
benefits referred to in the immediately preceding sentence but also the relative
fault of the Company, the Manager and Smith Barney in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. If the
allocation provided by the second preceding sentence is not permitted by
applicable law in the case of a claim for contribution by an indemnified party
under subsection (b) above, then Smith Barney shall contribute to the amount
paid or payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in subsection (b) above in such proportion as
is appropriate to reflect not only the relative benefits referred to in the
second preceding sentence but also the relative fault of the Company on the one
hand and Smith Barney on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and Smith Barney on the other shall be deemed to
be in the same proportion as the total net proceeds from the subscription for
the Shares (before deducting expenses) received by the Company bear to the total
fees received by Smith Barney pursuant to Section 7 of this Agreement with
respect to the Offer. The relative fault of the Company and Smith Barney shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relate to information supplied by the Company or Smith Barney
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
relative fault of the Manager shall be determined by reference to whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to any negligence, reck-
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lessness or willful misfeasance by the Manager in its performance of, or its
failure to perform, its obligations to the Company under the Management
Agreement, and the Manager shall not be liable for contribution under this
subsection (e) in the absence of such negligence, recklessness or willful
misfeasance. The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities referred to in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim which is the subject of this subsection (e). Notwithstanding the
provisions of this subsection (e), Smith Barney shall not be required to
contribute any amount in excess of the amount by which the total fees received
by Smith Barney pursuant to Section 7 of this Agreement exceeds the amount of
any damages that Smith Barney has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(f) The obligations of the Company and the Manager under this Section
shall be in addition to any liability which the Company or the Manager may
otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls Smith Barney within the meaning of the Securities
Act; and the obligations of Smith Barney under this Section shall be in addition
to any liability which Smith Barney may otherwise have and shall extend, upon
the same terms and conditions, to each director of the Company, to each officer
of the Company who has signed the Registration Statement and to each person, if
any, who controls the Company within the meaning of the Securities Act.
(g) Smith Barney confirms that the statements with respect to the public
offering of the Rights and Shares set forth [in the paragraph immediately
following the table appearing on the cover page of, and in the fifth and sixth
paragraphs under] the caption "The Offer Distribution Arrangements" in, the
Prospectus, and the stabilization legend on the inside cover of the Prospectus,
are correct and constitute the only information furnished in writing to the
Company by Smith Barney for
22
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inclusion in the Registration Statement and the Prospectus.
(h) The Manager confirms that the statements set forth in the [penultimate
sentence] under the caption "Use of Proceeds" and under the caption "Investment
Advisers and Administrator - The Investment Manager" in the Prospectus are
correct and constitute the only information furnished in writing to the Company
by the Manager for inclusion in the Registration Statement and the Prospectus.
10. TERMINATION
Smith Barney may terminate this Agreement, in its absolute
discretion, by notice given to and received by the Company prior to the issuance
of the Rights, or if (a) the Company or the Manager has failed, refused or been
unable to perform any material agreement on its part to be performed under this
Agreement, (b) there has been, since the dates as of which information is given
in the Registration Statement, any material adverse change in the net asset
value of the Company or the tax, exchange control or other laws or regulations
applicable to the Company in Korea, Japan or the United States, the effect of
which, in the reasonable judgment of Smith Barney, renders it impracticable to
proceed with the solicitation of the exercise of Rights, or (c) any other
condition of Smith Barney's obligations under this Agreement is not fulfilled.
Any termination of this Agreement pursuant to this Section 10 will be without
liability on the part of the Company, the Manager or Smith Barney except as
otherwise provided in Section 8(f), Section 9 and/or Section 12 of this
Agreement. Termination of this Agreement by Smith Barney will not preclude the
Company from consummating the Offer at its discretion.
11. CONDITIONS OF SMITH BARNEY'S OBLIGATIONS
The obligations of Smith Barney to perform and to continue to
perform as Dealer Manager under this Agreement will at all times be subject to
the accuracy, when made and at all times during the Offer and the Subscription
Period, including any extension thereof, of the representations and warranties
of the Company herein, to the accuracy of the statements of the officers of the
Company and Manager made pursuant to the provisions
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hereof, to the performance by the Company and the Manager of their respective
obligations hereunder and to each of the following additional conditions
precedent:
(a) Smith Barney shall have received a letter, dated the date of delivery
thereof (which, if the Effective Time is prior to the execution and delivery of
this Agreement, shall be on or prior to the date of this Agreement or, it the
Effective Time is subsequent to the execution and delivery of this Agreement,
shall be prior to the filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to the Effective Time), of
Coopers & Lybrand L.L.P. confirming that they are independent accountants within
the meaning of the Acts and the Rules and Regulations and stating in effect
that:
(i) in their opinion the financial statements including the
schedules audited by them and included in the Registration Statement
comply in form in all material respects with the applicable accounting
requirements of the Acts and related published Rules and Regulations as
applicable to Form N-2;
(ii) they have read the latest available minutes of meetings of the
Board of Directors of the Company as set forth in the minute books through
a specified date not more than five business days prior to the date of
delivery of such letter, and have made inquires of certain officials of
the Company who have responsibility for financial and accounting matters,
as to whether, at a specified date not more than five days prior to the
date of this Agreement, there was any change in the Common Stock, any
increase in long-term debt of the Company or any decrease in net assets,
as compared with amounts shown on the latest balance sheet included in the
Prospectus; except in all cases for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or they shall state
any specific changes or decreases; and
(iii) they have compared certain dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statement, which have been
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specified by the Dealer Manager, to the appropriate accounts in the
Company's accounting records subject to the internal controls of the
Company's accounting system and to schedules prepared by the Company
therefrom and have found such dollar amounts, percentages and other
financial information to be in agreement. The Dealer Manager will inform
Coopers & Lybrand L.L.P. as to which amounts and information shall be
subject to the comparison described in this subsection (iii).
For purposes of this subsection, if the Effective Time is subsequent
to the execution and delivery of this Agreement, "Registration Statement" shall
mean the registration statement as proposed to be amended by the amendment or
post-effective amendment to be filed shortly prior to the Effective Time, and
"Prospectus" shall mean the prospectus and statement of additional information
included in the Registration Statement.
(b) If the Effective Time is not prior to execution and delivery of this
Agreement, the Effective Time shall have occurred not later than 10:00 P.M., New
York City Time, on the date of this Agreement, or such later date as shall have
been consented to by Smith Barney. If the Effective Time is prior to the
execution and delivery of this Agreement, the Prospectus shall have been filed
with the Commission in accordance with the Rules and Regulations and Section
8(a) of this Agreement. At or before the date of this Agreement, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted, or to the
knowledge of the Company, the Manager or Smith Barney, shall be contemplated by
the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting particularly the business or properties of
the Company which, in the judgment of Smith Barney, materially impairs the
investment quality of the Shares, (ii) any suspension or limitation of trading
in securities generally on the NYSE, the Korea Stock Exchange, the OSE or the
PSE, or any setting of minimum prices for trading on any of such exchanges, or
any suspension of trading of the Common Stock of the Company
25
<PAGE> 26
on any exchange or in the over-the-counter market; (iii) any banking moratorium
declared by federal, New York or Korean authorities; (iv) any outbreak or
escalation of major hostilities in which the United States or Korea is involved,
any declaration of war by Congress or Korea or any other substantial U.S. or
Korean national or international calamity or emergency if, in the judgment of
Smith Barney the effect of any such outbreak, escalation, declaration, calamity
or emergency makes it impractical or inadvisable to proceed with the
solicitation of the exercise of the Rights; or (v) any material adverse change
in general economic, political or financial conditions that, or any
international conditions the effect of which on the financial markets in the
United States, Korea or Japan in the judgment of Smith Barney, makes it
impractical or inadvisable to proceed with the solicitation of the exercise of
the Rights.
(d) The Rights have been listed on the NYSE no later than the opening of
trading on the NYSE on the first full day of trading after the date of this
Agreement and admitted for trading on the NYSE no later than the opening of
trading on the NYSE on the first full day of trading after the date of this
Agreement.
(e) The Korean Government, including the Minister of Finance and Economy,
shall not have issued any order rescinding their authorization for the Company
to issue the Shares, or to invest in Korean securities pursuant to the license
granted by the Minister of Finance and Economy of Korea, or rescinding their
interpretation of the applicability of the Treaty.
(f) On the date of this Agreement, there shall have been furnished to
Smith Barney an opinion of Debevoise & Plimpton, counsel for the Company, dated
the date of this Agreement, and addressed to Smith Barney, to the effect set
forth in Exhibit A to this Agreement.
(g) On the date of this Agreement, there shall have been furnished to
Smith Barney an opinion of Counsel for the Manager, dated the date of this
Agreement, and addressed to Smith Barney, to the effect set forth in Exhibit B
to this Agreement.
(h) On the date of this Agreement, there shall have been furnished to
Smith Barney an opinion of Shin & Kim,
26
<PAGE> 27
Korean counsel for the Company, dated the date of this Agreement, and addressed
to Smith Barney, to the effect set forth in Exhibit C to this Agreement.
(i) Smith Barney shall have received from Skadden, Arps, Slate, Meagher &
Flom LLP, counsel for the Dealer Manager, such opinion or opinions, dated the
date of this Agreement, with respect to the Registration Statement, the
Prospectus, and other related matters as Smith Barney may require, and the
Company shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(j) Smith Barney shall have received certificates of the Chairman,
President or any Vice-President and a principal financial or accounting officer
of the Company, and of the President and any Vice-President or any two
Vice-Presidents of the Manager, each dated the date of this Agreement, in which
such officers, to the best of their knowledge after reasonable investigation,
shall state that each such party has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to the date
of this Agreement, and, in the case of the certificate of officers of the
Company, that the representations and warranties of the Company in this
Agreement are true and correct as of such date, that no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated by the
Commission, and that, subsequent to the date of the balance sheet in the
Prospectus, there has been no material adverse change in the financial position
or results of operation of the Company except as set forth or contemplated in
the Prospectus or as described in such certificate.
The Company and the Manager will furnish Smith Barney with such conformed copies
of such opinions, certificates, letters and documents as Smith Barney reasonably
requests.
12. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS
The respective indemnities, agreements, representations, warranties,
and other statements of the Company and the Manager of their respective officers
and
27
<PAGE> 28
of Smith Barney set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of termination of this Agreement, and
regardless of any investigation, or statement as to the results thereof, made by
or on behalf of Smith Barney or the Company and the Manager or any of their
respective officers or directors or any controlling person, and will survive
delivery of the Rights and the Shares. If this Agreement is terminated pursuant
to Section 10 or if for any reason the issuance of the Rights and the sale of
Shares is not consummated, the Company shall remain responsible for the expenses
to be paid or reimbursed by it pursuant to Section 8(f) and the respective
obligations of the Company and the Manager and Smith Barney pursuant to Section
9 shall remain in effect.
13. NOTICES
All communications hereunder will be in writing and, if sent to
Smith Barney will be mailed, delivered or telegraphed and confirmed to it at 390
Greenwich Street, New York, New York 10013, Attention: [Will Corkhill,] Equity
Capital Markets, 212-723-7300, if sent to the Company, will be mailed, delivered
or telegraphed and confirmed to it at 345 Park Avenue, New York, New York 10154,
Attention: President, or if sent to the Manager, will be mailed, delivered or
telegraphed and confirmed to it at 345 Park Avenue, New York, New York 10154,
Attention: President.
14. SUCCESSORS
This Agreement will inure to the benefit of and be binding upon the
parties hereto and their respective successors and the officers and directors
and controlling persons referred to in Section 9, and no other person will have
any right or obligation hereunder.
15. APPLICABLE LAW
This Agreement will be governed by, and construed in accordance
with, the laws of the State of New York applicable to contacts made and to be
performed within the State of New York.
16. COUNTERPARTS.
28
<PAGE> 29
This Agreement may be executed in one or more counterparts and, if
executed in more than one counterpart, the executed counterparts will each be
deemed to be an original but all such counterparts will together constitute one
and the same instrument.
* * * * *
29
<PAGE> 30
If the foregoing correctly sets forth the agreement among the
Company, the Manager and Smith Barney, please indicate Smith Barney's acceptance
in the space provided for that purpose below, whereupon it will become a binding
agreement among the Company, the Manager and Smith Barney in accordance with its
terms.
Very truly yours,
THE KOREA FUND, INC.
By: ____________________________________
Name:
Title:
SCUDDER, STEVENS & CLARK, INC.,
as Manager
By: ____________________________________
Name:
Title:
Accepted as of the date
first above written:
SMITH BARNEY INC.
By: _________________________
Name:
Title:
30
<PAGE> 31
EXHIBIT A
Form of Opinion of Debevoise & Plimpton
Debevoise & Plimpton is of the opinion that:
(1) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Maryland, with corporate power and authority to own its properties and
conduct its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good standing in
New York, and in all other United States jurisdictions in which it owns or
leases substantial properties or in which the conduct of its business
requires such qualification except where failure to so qualify would not
have a material adverse effect on the business of the Company.
(2) All of the outstanding shares of the Common Stock of
the Company have been duly authorized, validly issued, fully paid and
nonassessable; the Offer, the Rights and the Shares have been duly
authorized, and the Rights and the Shares, upon issuance and delivery and,
in the case of the Shares, payment therefor, as described in the
Registration Statement and the Prospectus, will be, validly issued, fully
paid and nonassessable; the Rights conform to the statements concerning
them included in the Prospectus; the Shares conform to the description
thereof contained under the caption "Common Stock" in the Prospectus; the
Rights are duly authorized for listing, subject to official notice of
issuance, on the NYSE and are, or as soon as practicable after the date of
this Agreement, will be, admitted to trading on the NYSE; the Shares are
duly authorized for listing, subject to official notice of issuance, on
the NYSE and, as soon as practicable after the date of this Agreement,
will be admitted to trading on the NYSE and are registered under the
Exchange Act; and the stockholders of the Company have no preemptive
rights (except for the Rights) with respect to the Shares.
<PAGE> 32
(3) Each of this Agreement and the Subscription Agent
Agreement has been duly authorized, executed and delivered by the Company,
and the Subscription Agent Agreement constitutes the valid and binding
agreement of the Company and is enforceable against the Company, in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting
creditors' rights and to general equity principles.
(4) The Management Agreement, the Research Agreement and
the Custodian Agreement have each been duly authorized and approved by the
Company and comply with all applicable provisions of the Investment
Company Act, and the Management Agreement and Custodian Agreement have
been duly executed and delivered by the Company and constitute the valid
and binding obligations of the Company enforceable in accordance with
their respective terms subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting
creditors' rights and to general equity principles.
(5) The Company is duly registered with the Commission
under the Investment Company Act as a closed-end non-diversified
management investment company, and all required action has been taken by
the Company under the Acts and the Exchange Act to make the public
offering and consummate the issuance of the Rights and sale of the Shares
pursuant to this Agreement; the provisions of the Articles of
Incorporation and By-laws of the Company comply as to form in all material
respects with the requirements of the Investment Company Act; and no
consent, approval, authorization or order of, or filing with, any court or
governmental agency, authority or body is required under Maryland
corporate law, the laws of New York or federal law, or, to the best of
such counsel's knowledge, the laws of any other jurisdiction in the United
States for the consummation of the transactions contemplated herein or in
the Subscription Agent Agreement in connection with the issuance of the
Rights or the sale of the Shares by the Company except such as have been
obtained under the Acts and the Exchange Act and
A-2
<PAGE> 33
such as may be required under state securities laws in connection with the
distribution of the Rights and the Shares.
(6) The execution, delivery and performance of this
Agreement and the Subscription Agent Agreement and the consummation of the
transactions contemplated herein and in the Subscription Agent Agreement
will not result in a breach or violation of any of the terms and
provisions of the Articles of Incorporation or By-laws of the Company or
any law, order, rule or regulation applicable to the Company of any United
States jurisdiction, court, federal or state regulatory body,
administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Company, or its
properties or operations, or, to the best knowledge of such counsel after
reasonable investigation, constitute, with or without giving notice or
lapse of time or both, a default under, any agreement or instrument to
which the Company is a party or by which the Company is bound or to which
any of the properties of the Company is subject (except that in this
paragraph (6) they express no opinion as to the accuracy or completeness
of the Registration Statement or of the Prospectus).
(7) The Registration Statement was declared effective
under the Securities Act as of the date and as of the time specified in
such opinion, the Prospectus was either filed with the Commission pursuant
to the subparagraph of Rule 497(h) specified in such opinion on the date
specified therein or was included in the Registration Statement (as the
case may be), and, to the best of the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act, and the Registration
Statement and the Prospectus (except as to the financial statements and
other financial data contained therein, as to which they express no
belief), as of their respective effective or issue dates, complied as to
form in all material respects with the requirements of the Acts and the
Rules and Regulations.
A-3
<PAGE> 34
(8) The descriptions in the Registration Statement and
Prospectus of United States statutes, legal and governmental proceedings
and contracts and other documents are accurate and fairly present the
information required to be shown; and such counsel do not know of any
legal or governmental proceedings required to be described in the
Prospectus which are not described as required, nor of any contracts or
documents of a character required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the Registration
Statement which are not described and filed as required.
Such counsel shall also state that, while they have not themselves
checked the accuracy and completeness of or otherwise verified, and are not
passing upon and assume no responsibility for the accuracy or completeness of,
the statements contained in the Registration Statement or the Prospectus, except
to the limited extent stated in paragraph (8) above, in the course of their
review and discussion of the contents of the Registration Statement and
Prospectus with certain officers and employees of the Company and its
independent accountants and with Korean counsel to the Company, no facts have
come to their attention which cause them to believe that either the Registration
Statement of the Prospectus, or any amendment or supplement thereto (except as
to any financial statements or other financial date included in the Registration
Statement, the Prospectus or any such amendment or supplement, as to which they
express no belief), as of such respective effective or issue dates, contained an
untrue statement or a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements contained therein not
misleading.
A-4
<PAGE> 35
EXHIBIT B
Form of Opinion of Counsel for Manager
Counsel for the Manager is of the opinion that:
(1) The Manager has been duly incorporated and is an existing
corporate in good standing under the laws of the State of Delaware, with
corporation power and authority to conduct its business as described in
the Prospectus.
(2) The Manager is duly registered as an investment adviser under
the Investment Advisers Act and is not prohibited by the Investment
Advisers Act or the Investment Company Act, or the rules and regulations
under such acts, from acting as Manager for the Company as contemplated by
the Prospectus.
(3) This Agreement has been duly authorized, executed and
delivered by the Manager.
(4) The Management Agreement and the Research Agreement have each
been duly authorized, executed and delivered on behalf of the Manager and
each constitutes a valid and binding obligation of the Manager enforceable
in accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other laws relating to or affecting
creditors' rights and to general equity principles; and neither the
execution and delivery of this Agreement, the Management Agreement or the
Research Agreement nor the performance by the Manager of its obligations
thereunder will conflict with or result in a breach or violation of any of
the terms and provisions of the charter or By-laws of the Manager or any
law, order, rule or regulation applicable to the Manager of any United
States jurisdiction, court, federal or state regulatory body,
administrative agency or other governmental body, stock exchange or
securities association having jurisdiction over the Manager or its
properties or operations, or, to the best knowledge of such counsel after
reasonable investigation, constitute, with or without giving notice or
lapse of time
<PAGE> 36
or both, a default under, any agreement or instrument to which the Manager
is a party or by which the Manager or to which any of the properties of
the Manager is subject.
B-2
<PAGE> 37
EXHIBIT C
Form of Opinion of Shin & Kim
Shin & Kim is of the opinion that:
(1) The information in the Prospectus, to the extent that it relates
to matters of Korean law or legal conclusions, has been reviewed by them
and is an accurate and complete description of all Korean law or legal
conclusions applicable to the Company and the operation of its business as
described in the Prospectus and, at the Effective Time, such information
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; and such counsel has no reason to
believe that the Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective effective or issue
dates, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
(2) The Company, the Manager and the Korean Adviser have received
all governmental and other licenses, authorizations, approvals and
consents in Korea which are necessary for the consummation by the Company,
the Manager and the Korean Adviser of the transactions contemplated by
this Agreement, the Subscription Agent Agreement, the Management
Agreement, the Research Agreement and the Custodian Agreement, as the case
may be, and for the operation of the business of the Company as described
in the Prospectus, and there is no other license, authorization, approval
or consent of, or filing with, any governmental or other regulatory
authority, stock exchange or securities business association in Korea
necessary in order for the Company, the Manager and the Korean Adviser
lawfully to perform their respective obligations under such Agreements or
to conduct the business of the Company as described in the Prospectus.
<PAGE> 38
(3) To the best of the knowledge of such counsel, there are no
actions, investigations or other proceedings in Korea of any nature
pending, commenced or threatened, which in any case or in the aggregate,
might result in any material adverse change in the business of the
Company, the Manager or the Korean Adviser or which question the validity
of the Agreements referred to under (2) above or the performance by the
Company, the Manager or the Korean Adviser, of such Agreements.
(4) The Korean Adviser has been duly organized and is validly
existing under the laws of Korea, with corporate power to conduct its
business as described in the Prospectus.
(5) The Research Agreement has been duly authorized, executed and
delivered on behalf of the Korean Adviser and constitutes a valid and
binding obligation of the Korean Adviser enforceable in accordance with
its terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization or other laws relating to or generally affecting creditors'
rights, and neither the execution and delivery of the Research Agreement
nor the performance by the Korean Adviser of its obligations thereunder
will, to the best of such counsel's knowledge after reasonable
investigation, conflict with, or result in a breach or violation of any of
the terms and provisions of, or constitute, with or without giving notice
or lapse of time or both, a default under, any agreement or instrument to
which the Korean Adviser is party or by which the Korean Adviser is bound
or to which any of the properties of the Korean Adviser is subject, or the
charter or by-laws of the Korean Adviser or will violate any law, order,
rule or regulation in Korea applicable to the Korean Adviser of any
jurisdiction, court, regulatory body, administrative agency or other
governmental body, stock exchange or securities business association in
Korea having jurisdiction over the Korean Adviser or its properties or
operations.
In addition, such counsel will also confirm their opinions set forth
under caption "Taxation-Korean Taxes" in the Prospectus.
C-2
<PAGE> 1
Exhibit h.(ii)
THE KOREA FUND, INC.
Rights Offering for Shares of Common Stock
SOLICITING DEALER AGREEMENT
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL
___, 1997, UNLESS EXTENDED.
To Securities Dealers and Brokers:
The Korea Fund, Inc. (the "Company") is issuing to its shareholders
of record ("Record Date Shareholders") as of the close of business on April ___,
1997 (the "Record Date") rights ("Rights") to subscribe for an aggregate of
__________ shares of Common Stock (the "Shares") of the Company upon the terms
and subject to the conditions set forth in the Company's Prospectus dated
__________, 1997 (the "Offer"). Each such Record Date Shareholder is being
issued one Right for each full share of Common Stock owned on the Record Date.
No fractional Rights will be issued. The Rights may be traded on the New York
Stock Exchange. The Rights entitle the Record Date Shareholders and holders of
Rights acquired during the Subscription Period (as hereinafter defined) to
acquire at the Subscription Price (as hereafter defined), one Share for each
three (3) Rights held in the primary subscription. The Subscription Price is
$_____ per Share. Any Record Date Shareholder who is issued fewer than three (3)
Rights may subscribe, at the Subscription Price, for one full Share of Common
Stock during the Subscription Period, which commences on __________, 1997 and
ends at 5:00 p.m., New York City time, on the Expiration Date. (With respect to
the Offer, the term "Expiration Date" means 5:00 p.m., New York City time, on
Friday, April ___, 1997, unless and until the Company shall, in its sole
discretion, have extended the period for which the Offer is open, in which event
the term "Expiration Date" with respect to the Offer will mean the latest time
any date on which the Offer, as so extended by the Company, will expire.) Any
Record Date Shareholder who fully exercises all Rights issued to him (other than
those Rights which cannot be exercised because they represent the right to
acquire
<PAGE> 2
less than one Share) is entitled to subscribe for Shares which were not
otherwise subscribed for by others on primary subscription (the
"Over-Subscription Privilege"). Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment, as more fully discussed in
the Prospectus.
For the duration of the Offer, the Company will pay Soliciting Fees
(as defined below) to any qualified broker or dealer who solicits the exercise
of Rights in connection with the Offer and who complies with the procedures
described below (a "Soliciting Dealer"). Upon timely delivery to State Street
Bank and Trust Company, the Company's Subscription Agent for the Offer (the
"Subscription Agent"), of payment for Shares purchased pursuant to the exercise
of Rights and of properly completed and executed documentation as set forth in
this Soliciting Dealer Agreement, a Soliciting Dealer will be entitled to
receive a fees equal to .50% of the Subscription Price per Share purchased
pursuant to exercise of the Rights (the "Soliciting Fees"); provided that the
aggregate fees paid to any Soliciting Dealer hereunder (other than a Soliciting
Dealer who is registered as a specialist in the Rights with The New York Stock
Exchange and who has been approved by The New York Stock Exchange to act as such
during the Subscription Period) may not exceed the product of (i) .50% of the
Subscription Price Per Share, times (ii) the aggregate number of shares of
Common Stock held in such Soliciting Dealer's participant accounts with The
Depository Trust Company on the Record Date divided by three. A qualified broker
or dealer is a broker or dealer which is a member of a registered national
securities exchange in the United States or the National Association of
Securities Dealers, Inc.
("NASD").
The Company hereby agrees to pay the Soliciting Fees payable to the
Soliciting Dealers. Solicitation and other activities by Soliciting Dealers may
be undertaken only in accordance with the applicable rules and regulations of
the Securities and Exchange Commission and only in those states and other
jurisdictions where such solicitations and other activities may lawfully be
undertaken and in accordance with the laws thereof. Compensation will not be
paid for solicitations in any state or other jurisdiction in which, in the
opinion of counsel to the Company or counsel to Smith Barney Inc., the Dealer
2
<PAGE> 3
Manager in connection with the Offer (the "Dealer Manager"), such compensation
may not lawfully be paid. No Soliciting Dealer shall be paid Soliciting Fees
with respect to Shares purchased pursuant to an exercise of Rights for its own
account or for the account of any affiliate of the Soliciting Dealer, except
that the Dealer Manager shall receive the Soliciting Fees with respect to Shares
purchased pursuant to an exercise of Rights for its own account provided that
such Shares are offered and sold by the Dealer Manager to its clients. No
Soliciting Dealer or any other person is authorized by the Company or the Dealer
Manager to give any information or make any representations in connection with
the Offer other than those contained in the Prospectus and other authorized
solicitation material furnished by the Company through the Dealer Manager. No
Soliciting Dealer is authorized to act as agent of the Company or the Dealer
Manager in any connection or transaction. In addition, nothing herein contained
shall constitute the Soliciting Dealers partners with the Dealer Manager or with
one another, or agents of the Dealer Manager or of the Company, or create any
association between such parties, or shall render the Dealer Manager or the
Company liable for the obligations of any Soliciting Dealer. The Dealer Manager
shall be under no liability to make any payment to any Soliciting Dealer, and
shall be subject to no other liabilities to any Soliciting Dealer, and no
obligations of any sort shall be implied.
In order for a Soliciting Dealer to receive Soliciting Fees, the
Subscription Agent must have received from such Soliciting Dealer no later than
5:00 p.m., New York City time, on the Expiration Date, a properly completed and
duly executed Soliciting Dealer Agreement (or a facsimile thereof), accompanied
by either (i) a properly completed and duly executed Subscription Certificate
with respect to Shares purchased pursuant to the exercise of Rights and full
payment for such Shares; or (ii) a Notice of Guaranteed Delivery guaranteeing
delivery to the Subscription Agent, by close of business on the third New York
Stock Exchange trading day after the Expiration Date, of a properly completed
and duly executed Subscription Certificate with respect to Shares purchased
pursuant to the exercise of Rights and full payment for such Shares. In the case
of a Notice of Guaranteed Delivery, Soliciting Fees will only be paid
3
<PAGE> 4
after payment and delivery in accordance with such Notice of Guaranteed Delivery
has been effected.
All questions as to the form, validity and eligibility (including
time of receipt) of the Soliciting Dealer Agreement will be determined by the
Company, in its sole discretion, which determination shall be final and binding.
Unless waived, any irregularities in connection with a Soliciting Dealer
Agreement or delivery thereof must be cured within such time as the Company
shall determine. None of the Company, the Dealer Manger, the Information Agent
for the Offer (Georgeson & Company Inc.) or any other person will be under any
duty to give notification of any defects or irregularities in any Soliciting
Dealer Agreement or incur any liability for failure to give such notification.
The acceptance of Soliciting Fees from the Company by a Soliciting
Dealer shall constitute a representation by such Soliciting Dealer to the
Company that; (i) it has received and reviewed the Prospectus; (ii) in
soliciting purchases of Shares pursuant to the exercise of the Rights, it has
complied with the applicable requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the applicable rules and regulations
thereunder, any applicable securities laws of any state or jurisdiction where
such solicitations may lawfully be made, and the applicable rules and
regulations of any self-regulatory organization or registered national
securities exchange; (iii) in soliciting purchases of Shares pursuant to the
exercise of Rights, it has not published, circulated or use any soliciting
materials other than the Prospectus and any other authorized solicitation
material furnished by the Company through the Dealer Manager; (iv) it has not
purported to act as agent of the Company or the Dealer Manager in any connection
or transaction relating to the Offer; (v) the information contained in this
Soliciting Dealer Agreement is, to its best knowledge, true and complete; (vi)
it is not affiliated with the Company; (vii) it will not accept Soliciting Fees
paid by the Company pursuant to the terms hereof with respect to Shares
purchased by the Soliciting Dealer pursuant to an exercise of Rights for its own
account; (viii) it will not remit, directly or indirectly, any part of
Soliciting Fees paid by the Company pursuant to the terms hereof to any
beneficial owner of Shares purchased pursuant to the Offer; and (ix) it has
4
<PAGE> 5
agreed to the amount of the Soliciting Fees and the terms and conditions set
forth herein with respect to receiving such Soliciting Fees. By returning a
Soliciting Dealer Agreement and accepting Soliciting Fees, a Soliciting Dealer
will be deemed to have agreed to indemnify the Company against losses, claims,
damages and liabilities to which the Company may become subject as a result of
the breach of such Soliciting Dealer's representations made herein and described
above. [In making the foregoing representations, Soliciting Dealers are reminded
of the possible applicability of Regulation M if they have bought, sold, dealt
in or traded in any Shares for their own account since the commencement of the
Offer.]
Soliciting Fees due to eligible Soliciting Dealers will be paid
promptly after consummation of the Offer. Upon expiration of the Offer, no
Soliciting Fees will be payable to Soliciting Dealers with respect to Shares
purchased thereafter.
This Soliciting Dealer Agreement will be governed by the laws of the
State of New York.
This Soliciting Dealer Agreement may be signed in two or more
counterparts, each of which will be an original, with the same effect as if the
signatures were upon the same instrument.
Please list on the Appendix attached hereto and forming part of this
Soliciting Dealer Agreement the number of Shares purchased pursuant to exercise
of the Rights by each beneficial owner whose purchases pursuant to exercise of
Rights you, as a Soliciting Dealer, have solicited. All amounts beneficially
owned by a beneficial owner, whether in one account or several, and in however
many capacities, must be aggregated for purposes of completing the table in the
Appendix hereto. Any questions as to what constitutes beneficial ownership
should be directed to the Company. The number of shares not listed in the
Appendix for reasons of inadequate space should be listed on a separate schedule
attached to, and forming part of, this Soliciting Dealer Agreement.
Please execute this Soliciting Dealer Agreement below accepting the
terms and conditions hereof and confirming that you are a member firm of a
registered na-
5
<PAGE> 6
tional securities exchange or of the NASD, and certifying that you have
solicited the purchase of the Shares pursuant to exercise of the Rights, all as
described above, in accordance with the terms and conditions set forth in this
Soliciting Dealer Agreement.
Very truly yours,
THE KOREA FUND, INC.
___________________________________
Name:
Title:
ACCEPTED AND CONFIRMED
______________________________ ___________________________________
Printed Firm Name Address
______________________________ ___________________________________
Authorized Signature Area Code and Telephone Number
______________________________
Name and Title
Dated: _______________________
6
<PAGE> 7
ALL SOLICITING DEALER AGREEMENTS SHOULD BE RETURNED TO
STATE STREET BANK AND TRUST COMPANY BY FACSIMILE
(TELECOPIER) AT (617) 774-4519. FACSIMILE TRANSMISSIONS MAY
BE CONFIRMED BY CALLING (617) 575-4511.
ALL QUESTIONS CONCERNING SOLICITING DEALER AGREEMENTS
SHOULD BE DIRECTED TO GEORGESON & COMPANY INC. AS FOLLOWS:
FOR BANK INQUIRIES, PLEASE CALL (212) 440-9901 AND FOR
BROKER INQUIRIES, PLEASE CALL (212) 440-9907.
7
<PAGE> 8
APPENDIX TO SOLICITING DEALER AGREEMENT
- ---------------------------------------------------------------------------
TO BE COMPLETED BY THE SOLICITING DEALER
- ---------------------------------------------------------------------------
Beneficial Owners Number of Shares Purchased
- ---------------------------------------------------------------------------
Beneficial Owner No. 1
- ---------------------------------------------------------------------------
Beneficial Owner No. 2
- ---------------------------------------------------------------------------
Beneficial Owner No. 3
- ---------------------------------------------------------------------------
Beneficial Owner No. 4
- ---------------------------------------------------------------------------
Beneficial Owner No. 5
- ---------------------------------------------------------------------------
Beneficial Owner No. 6
- ---------------------------------------------------------------------------
Beneficial Owner No. 7
- ---------------------------------------------------------------------------
Beneficial Owner No. 8
- ---------------------------------------------------------------------------
Beneficial Owner No. 9
- ---------------------------------------------------------------------------
Beneficial Owner No. 10
- ---------------------------------------------------------------------------
Beneficial Owner No. 11
- ---------------------------------------------------------------------------
Beneficial Owner No. 12
- ---------------------------------------------------------------------------
Beneficial Owner No. 13
- ---------------------------------------------------------------------------
Beneficial Owner No. 14
- ---------------------------------------------------------------------------
Beneficial Owner No. 15
- ---------------------------------------------------------------------------
Beneficial Owner No. 16
- ---------------------------------------------------------------------------
Beneficial Owner No. 17
- ---------------------------------------------------------------------------
Beneficial Owner No. 18
- ---------------------------------------------------------------------------
Beneficial Owner No. 19
- ---------------------------------------------------------------------------
Beneficial Owner No. 20
- ---------------------------------------------------------------------------
Beneficial Owner No. 21
- ---------------------------------------------------------------------------
TOTAL:
- ---------------------------------------------------------------------------
8
<PAGE> 1
EXHIBIT j(i)
CUSTODIAN AGREEMENT
Dated as of
April 19, 1995
Between
THE KOREA FUND, INC.
and
BROWN BROTHERS HARRIMAN & CO.
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
APPOINTMENT OF CUSTODIAN
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
<TABLE>
<CAPTION>
<S> <C>
2.1. Safekeeping 1
2.2. Manner of Holding Securities 2
2.3. Registered Name; Nominee 2
2.4. Purchases by the Fund 2
2.5. Exchanges of Securities 3
2.6. Sales of Securities 4
2.7. Depositary Receipts 4
2.8. Exercise of Rights; Tender Offers 5
2.9. Stock Dividends, Rights, Etc. 5
2.10. Options 5
2.11. Futures and Forward Contracts 6
2.12. Borrowings 6
2.13. Bank Accounts 7
2.14. Interest-Bearing Deposits 7
2.15. Foreign Exchange Transactions 8
2.16. Securities Loans 9
2.17. Collections 9
2.18. Dividends, Distributions and
Redemptions 10
2.19. Proxies; Communications Relating to
Portfolio Securities 10
2.20. Bills 11
2.21. Nondiscretionary Details 11
2.22. Deposit of Fund Assets in Securities
Systems 11
2.23. Other Transfers 12
2.24. Establishment of Segregated Accounts 12
2.25. Custodian Advances 13
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
<TABLE>
<CAPTION>
<S> <C>
3.1. Proper Instructions and Special
Instructions 13
3.2. Authorized Persons 14
3.3 Persons Having Access to Assets of the Fund 15
3.4. Actions of Custodian Based on Proper
Instructions and Special Instructions 15
ARTICLE IV
SUBCUSTODIANS
4.1. Domestic Subcustodians 15
4.2. Foreign Subcustodians and Interim
Subcustodians 16
4.3. Termination of a Subcustodian 17
4.4. Agents 18
ARTICLE V
STANDARD OF CARE; INDEMNIFICATION
5.1. Standard of Care 18
5.2. Liability of Custodian for Actions of
Other Persons 20
5.3. Indemnification 20
5.4. Investment Limitations 21
5.5. Fund's Right to Proceed 22
ARTICLE VI
RECORDS
6.1. Preparation of Reports 23
6.2. Custodian's Books and Records 23
6.3. Opinion of Fund's Independent Certified
Public Accountants 23
6.4. Reports of Custodian's Independent
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
Certified Public Accountants 24
6.5. Calculation of Net Asset Value 24
6.6. Information Regarding Foreign
Subcustodians and Foreign Depositories 26
</TABLE>
<PAGE> 5
TABLE OF CONTENTS
ARTICLE VII
CUSTODIAN FEES
ARTICLE VIII
TERMINATION
ARTICLE IX
MISCELLANEOUS
<TABLE>
<CAPTION>
<S> <C>
9.1. Execution of Documents 28
9.2. Entire Agreement 29
9.3. Waivers and Amendments 29
9.4. Captions 29
9.5. Governing Law 29
9.6. Notices 29
9.7. Successors and Assigns 29
9.8. Counterparts 29
9.9. Representative Capacity; Nonrecourse
Obligations 30
</TABLE>
Appendix A Procedures Relating to Custodian's Security Interest
Appendix B Subcustodians, Foreign Countries, and Foreign Depositories
Appendix C Sources of Price Quotations
<PAGE> 6
FORM OF CUSTODIAN AGREEMENT
CUSTODIAN AGREEMENT dated as of April 19, 1995, between The Korea Fund,
Inc. (the "Fund"), a Maryland corporation, and Brown Brothers Harriman & Co.
(the "Custodian"), a New York limited partnership.
In consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
The Fund hereby employs and appoints the Custodian as a
custodian for the term of and subject to the provisions of this Agreement. The
Fund agrees to deliver to the Custodian all securities, cash and other assets
owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of capital stock of the Fund as may be issued or sold from time
to time.
The Custodian shall not be under any duty or obligation to
require the Fund to deliver to it any securities, cash or other assets owned by
the Fund and shall have no responsibility or liability for or on account of
securities, cash or other assets not so delivered. The Fund will deposit with
the Custodian copies of the Articles of Incorporation and By-Laws (or comparable
documents) of the Fund and all amendments thereto, and copies of such votes and
other proceedings of the Fund as may be necessary for or convenient to the
Custodian in the performance of its duties.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
<PAGE> 7
The Custodian shall have and perform, or cause to be performed
in accordance with this Agreement, the powers and duties set forth in this
Article II. Pursuant to and in accordance with Article IV, the Custodian may
appoint one or more Subcustodians (as that term is defined in Article IV) to
exercise the powers and perform the duties of the Custodian set forth in this
Article II and, except as the context shall otherwise require, references to the
Custodian in this Article II shall include any Subcustodian so appointed.
2.1. SAFEKEEPING. The Custodian shall keep safely the cash,
securities and other assets of the Fund that have been delivered to the
Custodian and from time to time shall accept delivery of cash, securities and
other assets for safekeeping.
2.2. MANNER OF HOLDING SECURITIES. (a) The Custodian shall
hold securities of the Fund (i) by physical possession of the share certificates
or other instruments representing such securities in registered or bearer form,
or the broker's receipts or confirmations for forward contracts, futures
contracts, options and similar contracts and securities, or (ii) in book-entry
form by a Securities System (as that term is defined in section 2.22) or (iii)
by a Foreign Depository (as that term is defined in section 4.2(a)).
(b) The Custodian shall identify securities and other assets
held by it hereunder as being held for the account of the Fund and shall require
each Subcustodian to identify securities and other assets held by such
Subcustodian as being held for the account of the Custodian for the Fund (or, if
authorized by Special Instructions, for customers of the Custodian) or for the
account of another Subcustodian for the Fund (or, if authorized by Special
Instructions, for customers of such Subcustodian); provided that if assets are
held for the account of the Custodian or a Subcustodian for customers of the
Custodian or such Subcustodian, the records of the Custodian shall at all times
indicate the Fund and other customers of the Custodian for which such assets are
held in such account and their respective interests therein.
2.3. REGISTERED NAME; NOMINEE. (a) The Custodian shall hold
registered securities and other assets of the Fund (i) in the name of the
Custodian (including any Subcustodian), the Fund, a Securities System, a Foreign
Depository or any nominee of any such person or (ii) in street certificate form,
<PAGE> 8
so-called, and in any case with or without any indication of fiduciary capacity,
provided that such securities and other assets of the Fund are held in an
account of the Custodian containing only assets of the Fund or only assets held
as fiduciary or custodian for customers.
(b) Except with respect to securities or other assets which
under local custom and practice generally accepted by Institutional Clients are
held in the investor's name, the Custodian shall not hold registered securities
or other assets in the name of the Fund, and shall require each Subcustodian not
to hold registered securities or other assets in the name of the Fund, unless
the Custodian or such Subcustodian promptly notifies the Fund that such
registered securities are being held in the Fund's name and causes the
Securities System, Foreign Depository, issuer or other relevant person to direct
all correspondence and payments to the address of the Custodian or such
Subcustodian, as the case may be.
2.4. PURCHASES BY THE FUND. Upon receipt of Proper
Instructions (as that term is defined in section 3.1(a)) and insofar as funds
are available for the purpose (or as funds are otherwise provided by the
Custodian at its discretion pursuant to section 2.25), the Custodian shall pay
for and receive securities or other assets purchased for the account of the
Fund, payment being made only upon receipt of the securities or other assets (a)
by the Custodian, or (b) by credit to an account which the Custodian may have
with a Securities System, clearing corporation of a national securities
exchange, Foreign Depository or other financial institution approved by the
Fund. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i) in
the case of repurchase agreements entered into by the Fund in a transaction
involving a Securities System or a Foreign Depository, the Custodian may release
funds to the Securities System or Foreign Depository prior to the receipt of
advice from the Securities System or Foreign Depository that the securities
underlying such repurchase agreement have been transferred by book entry into
the Account (as defined in section 2.22) of the Custodian maintained with such
Securities System or similar account with a Foreign Depository, provided that
the instructions of the Custodian to the Securities System or Foreign Depository
require that the Securities System or Foreign Depository, as the case may be,
may make payment of such funds to the other party to the repurchase agreement
only upon transfer by book-entry of the securities underlying the repurchase
agreement into the Account,
<PAGE> 9
(ii) in the case of futures and forward contracts, options and similar
securities, foreign currency purchased from third parties, time deposits,
foreign currency call account deposits, and other bank deposits, and
transactions pursuant to sections 2.10, 2.11, 2.13, 2.14 and 2.15, the Custodian
may make payment therefor prior to delivery of the contract, currency, option or
security without receiving an instrument evidencing said contract, currency,
option, security or deposit, and (iii) in the case of the purchase of securities
or other assets the settlement of which occurs outside the United States of
America, the Custodian may make payment therefor and receive delivery thereof in
accordance with local custom and practice generally accepted by Institutional
Clients (as defined below) in the country in which settlement occurs, provided
that in every case the Custodian shall be subject to the standard of care set
forth in Article V and to any Special Instructions given in accordance with
section 3.1(b). Except in the cases provided for in the immediately preceding
sentence, in any case where payment for purchase of securities or other assets
for the account of the Fund is made by the Custodian in advance of receipt of
the securities or other assets so purchased in the absence of Proper
Instructions to so pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities or other assets to the same extent as if the
securities or other assets had been received by the Custodian. For purposes of
this Agreement, "Institutional Clients" means U.S. registered investment
companies, or major, U.S.-based commercial banks, insurance companies, pension
funds or substantially similar financial institutions which, as a substantial
part of their business operations, purchase or sell securities and make use of
custodial services.
2.5. EXCHANGES OF SECURITIES. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event, and to deposit any such securities in accordance with the terms of any
reorganization or protective plan. Without Proper Instructions, the Custodian
may surrender securities in temporary form for definitive securities, may
surrender securities for transfer into a name or nominee name as permitted in
section 2.3, and may surrender securities for a different number of certificates
or instruments representing the same number of shares or same principal amount
of indebtedness, provided that the securities to
<PAGE> 10
be issued are to be delivered to the Custodian.
2.6. SALES OF SECURITIES. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities or other assets which have been
sold for the account of the Fund, but only against payment therefor (a) in cash,
by a certified check, bank cashier's check, bank credit, or bank wire transfer,
or (b) by credit to the account of the Custodian with a Securities System,
clearing corporation of a national securities exchange, Foreign Depository or
other financial institution approved by the Fund by Proper Instructions.
However, (i) in the case of delivery of physical certificates or instruments
representing securities, the Custodian may make delivery to the broker acting as
agent for the buyer of the securities, against receipt therefor, for examination
in accordance with "street delivery" custom, provided that the Custodian shall
have taken reasonable steps to ensure prompt collection of the payment for, or
the return of, such securities by the broker or its clearing agent and (ii) in
the case of the sale of securities or other assets the settlement of which
occurs outside the United States of America, such securities shall be delivered
and paid for in accordance with local custom and practice generally accepted by
Institutional Clients in the country in which settlement occurs, provided that
in every case the Custodian shall be subject to the standard of care set forth
in Article V and to any Special Instructions given in accordance with section
3.1(b). Except in the cases provided for in the immediately preceding sentence,
in any case where delivery of securities or other assets for the account of the
Fund is made by the Custodian in advance of receipt of payment for the
securities or other assets so sold in the absence of Proper Instructions to so
deliver in advance, the Custodian shall be absolutely liable to the Fund for
such payment to the same extent as if such payment had been received by the
Custodian.
2.7. DEPOSITARY RECEIPTS. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used by an issuer of
American Depositary Receipts, European Depositary Receipts, Global Depositary
Receipts, International Depositary Receipts and other types of Depositary
Receipts (hereinafter collectively referred to as "ADRs") for such securities
against a written receipt therefor adequately describing such securities and
written evidence satisfactory to the Custodian that the depositary has
acknowledged receipt of instructions to issue ADRs with respect to such
securities in the
<PAGE> 11
name of the Custodian, or a nominee of the Custodian, for delivery to the
Custodian in Boston, Massachusetts, or at such other place as the Custodian may
from time to time designate.
Upon receipt of Proper Instructions, the Custodian shall
surrender ADRs to the issuer thereof against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depositary to deliver the securities underlying such
ADRs to the Custodian.
2.8. EXERCISE OF RIGHTS; TENDER OFFERS. Upon receipt of Proper
Instructions, the Custodian shall (a) deliver to the issuer or trustee thereof,
or to the agent of either, warrants, puts, calls, futures contracts, options,
rights or similar securities for the purpose of being exercised or sold,
provided that the new securities and cash, if any, acquired by such action are
to be delivered to the Custodian, and (b) deposit securities upon invitations
for tenders of securities, provided that the consideration is to be paid or
delivered or the tendered securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the contrary, the Custodian
shall take all necessary action, unless otherwise directed to the contrary by
Proper Instructions, to comply with the terms of all mandatory or compulsory
exchanges, calls, tenders, redemptions or similar rights of security ownership
of which the Custodian receives notice or otherwise becomes aware, and shall
promptly notify the Fund of any such action in writing by facsimile transmission
or in such other manner as the Fund and the Custodian may agree in writing.
2.9. STOCK DIVIDENDS, RIGHTS, ETC. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and shall
deal with the same as it would other deposited assets or as directed in Proper
Instructions.
2.10. OPTIONS AND SWAPS. Upon receipt of Proper Instructions
or instructions from a third party properly given under any Procedural
Agreement, the Custodian shall (a) receive and retain confirmations or other
documents (to the extent confirmations or other documents are provided to the
Custodian) evidencing the purchase, sale or writing of an option or swap of any
type on or in respect of a security, securities index, currency or similar form
of property by the Fund; (b) deposit and
<PAGE> 12
maintain in a segregated account, either physically or by book-entry in a
Securities System or Foreign Depository or with a broker, dealer or other
party designated by the Fund, securities, cash or other assets in connection
with options transactions or swap agreements entered into by the Fund; (c)
transfer securities, cash or other assets to a Securities System, Foreign
Depository, broker, dealer or other party or organization, as margin (including
variation margin) or other security for the Fund's obligations in respect of
an option or swap; and (d) pay, release and/or transfer such securities, cash
or other assets only in accordance with a notice or other communication
evidencing the expiration, termination, exercise of any such option or default
under any such option or swap furnished by The Options Clearing Corporation,
the securities or options exchange on which such option is traded, or such
other organization, party, broker or dealer as may be responsible for handling
such options or swap transactions or have authority to give such notice or
communication under a Procedural Agreement. Subject to the standard of care
set forth in Article V (and to its safekeeping duties set forth in section 2.1)
, the Custodian shall not be responsible for the sufficiency of assets held in
any segregated account established and maintained in accordance with Proper
Instructions or instructions from a third party properly given under any
Procedural Agreement or for the performance by the Fund or any third party of
its obligations under any Procedural Agreement. For purposes of this Agreement,
a "Procedural Agreement" is a procedural agreement relating to options, swaps
(including caps, floors and similar arrangements), futures contracts, forward
contracts or borrowings by the Fund to which the Fund, the Custodian and a
third party are parties.
2.11. FUTURES AND FORWARD CONTRACTS. Upon receipt of Proper
Instructions or instructions from a third party properly given under any
Procedural Agreement, the Custodian shall (a) receive and retain confirmations
or other documents (to the extent confirmations or other documents are provided
to the Custodian) evidencing the purchase or sale of a futures contract or an
option on a futures contract by the Fund or the entry into a forward contract by
the Fund; (b) deposit and maintain in a segregated account, either physically or
by book entry in a Securities System or Foreign Depository, for the benefit of
any futures commission merchant, or pay to such futures commission merchant,
securities, cash or other assets designated by the Fund as initial, maintenance
or variation "margin" deposits in tended to secure the Fund's performance of its
obligations under any
<PAGE> 13
futures contracts purchased or sold or any options on futures contracts written,
purchased or sold by the Fund or any forward contracts entered into, in
accordance with the provisions of any Procedural Agreement designed to comply
with the rules of the Commodity Futures Trading Commission and/or any contract
market, or any similar organization or organizations on which such contracts or
options are traded; and (c) pay, release and/or transfer securities, cash or
other assets into or out of such margin accounts only in accordance with any
such agreements or rules. Subject to the standard of care set forth in Article
V, the Custodian shall not be responsible for the sufficiency of assets held in
any such margin account established and maintained in accordance with Proper
Instructions or instructions from a third party properly given under any
Procedural Agreement or for the performance by the Fund or any third party of
its obligations under any Procedural Agreement.
2.12. BORROWINGS. Upon receipt of Proper Instructions or
instructions from a third party properly given under any Procedural Agreement,
the Custodian shall deliver securities of the Fund to lenders or their agents,
or otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, but only against
receipt of the amounts borrowed (or to adjust the amount of such collateral in
accordance with the Procedural Agreement), provided that if such collateral is
held in book-entry form by a Securities System or Foreign Depository, such
collateral may be transferred by book-entry to such lender or its agent against
receipt by the Custodian of an undertaking by such lender to pay such borrowed
money to or upon the order of the Fund on the next business day following such
transfer of collateral.
2.13. BANK ACCOUNTS. The Custodian shall open and operate one
or more accounts in the name of the Fund on the Custodian's books subject only
to draft or order by the Custodian. All funds received by the Custodian from or
for the account of the Fund shall be deposited in said account(s). The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
Upon receipt of Proper Instructions, the Custodian may open
and operate additional accounts in such other banks or trust companies,
including any Subcustodian, as may be designated by the Fund in such
instructions (any such bank or trust company
<PAGE> 14
other than the Custodian so designated by the Fund being referred to hereafter
as a "Banking Institution"), provided that any such account shall be in the name
of the Custodian for the account of the Fund (or, if authorized by Special
Instructions, for the account of the Custodian's customers generally) and
subject only to the Custodian's draft or order; provided that if assets are
held in such an account for the account of the Custodian's customers generally,
the records of the Custodian shall at all times indicate the Fund and other
customers for which such assets are held in such account and their respective
interests therein. Such accounts may be opened with Banking Institutions in the
United States and in other countries and may be denominated in U.S. Dollars or
such other currencies as the Fund may determine. So long as the Custodian
exercises reasonable care and diligence in executing Proper Instructions, the
Custodian shall have no responsibility for the failure of any Banking
Institution to make payment from such an account upon demand.
2.14. INTEREST-BEARING DEPOSITS. The Custodian shall place
interest-bearing fixed term and call deposits with such banks and in such
amounts as the Fund may authorize pursuant to Proper Instructions. Such deposits
may be placed with the Custodian or with Subcustodians or other Banking
Institutions as the Fund may determine. Deposits may be denominated in U.S.
Dollars or other currencies, as the Fund may determine, and need not be
evidenced by the issuance or delivery of a certificate to the Custodian,
provided that the Custodian shall include in its records with respect to the
assets of the Fund, appropriate notation as to the amount and currency of each
such deposit, the accepting Banking Institution and all other appropriate
details, and shall retain such forms of advice or receipt evidencing such
deposits as may be forwarded to the Custodian by the Banking Institution in
question. The responsibility of the Custodian for such deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit. With
respect to interest-bearing deposits other than those accepted on the
Custodian's books, (a) the Custodian shall be responsible for the collection of
income as set forth in section 2.17, and (b) so long as the Custodian exercises
reasonable care and diligence in executing Proper Instructions, the Custodian
shall have no responsibility for the failure of any Banking Institution to make
payment in accordance with the terms of such an account. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable steps as the Fund deems
necessary or appropriate to cause such deposits to be insured to the maximum
extent possible
<PAGE> 15
by the Federal Deposit Insurance Corporation and any other applicable deposit
insurers.
2.15. FOREIGN EXCHANGE TRANSACTIONS. (a) Upon receipt of
Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may direct pursuant to Proper Instructions. The
Custodian shall be responsible for the transmission of cash and instructions to
and from the currency broker or Banking Institution with which the contract or
option is made, the safekeeping of all certificates and other documents and
agreements received by the Custodian evidencing or relating to such foreign
exchange transactions and the maintenance of proper records as set forth in
section 6.2. In connection with such transactions, upon receipt of Proper
Instructions, the Custodian shall be authorized to make free outgoing payments
of cash in the form of U.S. Dollars or foreign currency without receiving
confirmation of a foreign exchange contract or option or confirmation that the
countervalue currency completing the foreign exchange contract has been
delivered or that the option has been delivered or received. The Custodian shall
have no authority to select third party foreign exchange dealers and, so long as
the Custodian exercises reasonable care and diligence in executing Proper
Instructions, shall have no responsibility for the failure of any such dealer to
settle any such contract or option in accordance with its terms. The Fund shall
reimburse the Custodian for any interest charges or reasonable out-of-pocket
expenses incurred by the Custodian resulting from the failure or delay of third
party foreign exchange dealers to deliver foreign exchange, other than interest
charges and expenses occasioned by or resulting from the negligence, misfeasance
or misconduct of the Custodian.
(b)The Custodian shall not be obligated to enter into foreign
exchange transactions as principal. However, if the Custodian has made available
to the Fund its services as principal in foreign exchange transactions, upon
receipt of Proper Instructions, the Custodian shall enter into foreign exchange
contracts or options to purchase and sell foreign currencies for spot and future
delivery on behalf of and for the account of the Fund with the Custodian as
principal. The responsibility of the Custodian with respect to foreign exchange
contracts and options executed with the Custodian as principal
<PAGE> 16
shall be that of a U.S. bank with respect to a similar contract or option.
2.16. SECURITIES LOANS. Upon receipt of Proper Instructions,
the Custodian shall deliver securities of the Fund, in connection with loans of
securities by the Fund, to the borrower thereof in accordance with the terms of
a written securities lending agreement to which the Fund is a party or which is
otherwise approved by the Fund.
2.17. COLLECTIONS. The Custodian shall promptly collect,
receive and deposit in the account or accounts referred to in section 2.13 all
income, payments of principal and other payments with respect to the securities
and other assets held hereunder, promptly endorse and deliver any instruments
required to effect such collections and in connection therewith deliver the
certificates or other instruments representing securities to the issuer thereof
or its agent when securities are called, redeemed, retired or otherwise become
payable; provided that the payment is to be made in such form and manner and at
such time, which may be after delivery by the Custodian of the instrument
representing the security, as is in accordance with the terms of the instrument
representing the security, such Proper Instructions as the Custodian may
receive, governmental regulations, the rules of the Securities System or Foreign
Depository in which such security is held or, with respect to securities
referred to in clause (iii) of the second sentence of section 2.4, in accordance
with local custom and practice generally accepted by Institutional Clients in
the market where payment or delivery occurs, but in all events subject to the
standard of care set forth in Article V. The Custodian shall promptly execute
ownership and other certificates and affidavits for all federal, state and
foreign tax purposes in connection with receipt of income or other payments with
respect to securities or other assets of the Fund or in connection with transfer
of securities or other assets. Pursuant to Proper Instructions, the Custodian
shall take such other actions, which may involve an investment decision, as the
Fund may request with respect to the collection or receipt of funds or the
transfer of securities. Except in the cases provided for in the first sentence
of this section, in any case where delivery of securities for the account of the
Fund is made by the Custodian in advance of receipt of payment with respect to
such securities in the absence of Proper Instructions to so deliver in advance,
the Custodian shall be absolutely liable to the Fund for such
<PAGE> 17
payment to the
same extent as if such payment had been received by the Custodian. The Custodian
shall promptly notify the Fund in writing by facsimile transmission or in such
other manner as the Fund and the Custodian may agree in writing if any amount
payable with respect to securities or other assets of the Fund is not received
by the Custodian when due.
2.18. DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. Upon receipt
of Proper Instructions, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized by Proper
Instructions), the Custodian shall release funds or securities, insofar as
available, to the Shareholder Servicing Agent or as such Shareholder Servicing
Agent shall otherwise instruct (a) for the payment of dividends or other
distributions to Fund shareholders or (b) for payment to the Fund shareholders
who have delivered to such Shareholder Servicing Agent a request for repurchase
or redemption of their shares of capital stock of the Fund.
2.19. PROXIES; COMMUNICATIONS RELATING TO PORTFOLIO
SECURITIES. The Custodian shall, as promptly as is appropriate under the
circumstances, deliver or mail to the Fund all forms of proxies and all notices
of meetings and any other notices, announcements or information (including,
without limitation, information relating to pendency of calls and maturities of
securities and expirations of rights in connection therewith, notices of
exercise of call and put options written by the Fund, and notices of the
maturity of futures contracts (and options thereon) purchased or sold by the
Fund) affecting or relating to securities owned by the Fund that are received by
the Custodian. Upon receipt of Proper Instructions, the Custodian shall execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominees shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect to securities or other assets
of the Fund (except as otherwise herein provided) unless ordered to do so by
Proper Instructions.
The Custodian shall notify the Fund on or before ex-date (or
if later within 24 hours after receipt by the Custodian of the notice of such
corporate action) of all
<PAGE> 18
corporate actions affecting portfolio securities of the Fund received by the
Custodian from the issuers of the securities involved, from third parties
proposing a corporate action, from subcustodians, or from commonly utilized
sources (including proprietary sources) providing corporate action information,
a list of which will be provided by the Custodian to the Fund from time to time
upon request. Information as to corporate actions shall include information as
to dividends, distributions, stock splits, stock dividends, rights offerings,
conversions, exchanges, tender offers, recapitalizations, mergers, redemptions,
calls, maturity dates and similar transactions, including ex-, record and pay
dates and the amounts or other terms thereof. If the Fund desires to take action
with respect to any corporate action, the Fund shall notify the Custodian within
such period as will give the Custodian (including any Subcustodian) a
sufficient amount of time to take such action.
2.20. BILLS. Upon receipt of Proper Instructions, the
Custodian shall pay or cause to be paid, insofar as funds are available for the
purpose, bills, statements, or other obligations of the Fund (including but not
limited to interest charges, taxes, advisory fees, compensation to Fund officers
and employees, and other operating expenses of the Fund).
2.21. NONDISCRETIONARY DETAILS. Without the necessity of
express authorization from the Fund, the Custodian shall (a) attend to all
nondiscretionary details in connection with the sale, exchange, substitution,
purchase, transfer or other dealings with securities, cash or other assets of
the Fund held by the Custodian except as otherwise directed from time to time by
the Board of Directors of the Fund, and (b) make payments to itself or others
for minor expenses of handling securities or other assets and for other similar
items relating to the Custodian's duties under this Agreement, provided that all
such payments shall be accounted for to the Fund.
2.22. DEPOSIT OF FUND ASSETS IN SECURITIES SYSTEMS. The
Custodian may deposit and/or maintain securities owned by the Fund in (a) The
Depository Trust Company, (b) the Participants Trust Company, (c) any book-entry
system as provided in Subpart O of Treasury Circular No. 300, 31 CFR 306,
Subpart B of 31 CFR Part 350, or the book-entry regulations of federal agencies
substantially in the form of Subpart O, or (d) any other domestic clearing
agency registered with the Securities and Exchange Commission (the "SEC") under
Section 17A of the Securities
<PAGE> 19
Exchange Act of 1934, as amended, which acts as a securities depository and
whose use the Fund has previously approved by Special Instructions (as that term
is defined in section 3.1(b)) (each of the foregoing being referred to in this
Agreement as a "Securities System"). Utilization of a Securities System shall be
in accordance with applicable Federal Reserve Board and SEC rules and
regulations, if any, and subject to the following provisions:
(i) The Custodian may deposit and/or maintain securities held
hereunder in a Securities System, provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian, or otherwise for
customers;
(ii) The records of the Custodian with respect to securities
of the Fund which are maintained in a securities System shall identify
by book entry those securities belonging to the Fund;
(iii) The Custodian shall pay for securities purchased for the
account of the Fund only upon (A) receipt of advice from the Securities
System that such securities have been transferred to the Account, and
(B) the making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Fund. The Custodian
shall transfer securities sold for the account of the Fund only upon
(1) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (2) the making of
an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices from the
Securities System of transfers of securities for the account of the
Fund shall identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request. The Custodian
shall furnish the Fund confirmation of each transfer to or from the
account of the Fund in the form of a written advice or notice and shall
furnish to the Fund copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of the Fund
on the next business day;
(iv) The Custodian shall provide the Fund with any
<PAGE> 20
report obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System; and the Custodian shall
send to the Fund such reports on its own systems of internal
accounting control as the Fund may reasonably request from time to
time; and
(v) Upon receipt of Special Instructions, the Custodian shall
terminate the use of any such Securities System on behalf of the Fund
as promptly as practicable and shall take all actions reasonably
practicable to safeguard the securities of the Fund that had been
maintained with such Securities System.
2.23. OTHER TRANSFERS. The Custodian shall deliver securities,
cash, and other assets of the Fund to a Subcustodian as necessary to effect
transactions authorized by Proper Instructions. Upon receipt of Proper
Instructions in writing in advance, the Custodian shall make such other
disposition of securities, cash or other assets of the Fund in a manner other
than or for purposes other than as enumerated in this Agreement, provided that
such written Proper Instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
funds and/or securities to be delivered and the name of the person or persons to
whom delivery is to be made.
2.24. ESTABLISHMENT OF SEGREGATED ACCOUNTS. Upon receipt of
Proper Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other assets of the
Fund, including securities maintained by the Custodian in a Securities System,
said account to be maintained (a) for the purposes set forth in sections 2.10,
2.11, 2.12 and 2.15; (b) for the purposes of compliance by the Fund with the
procedures required by Release No. 10666 under the Investment Company Act of
1940, as amended (the "1940 Act"), or any subsequent release or releases of the
SEC relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as set forth, from time to time, in
Special Instructions.
2.25. CUSTODIAN ADVANCES. (a) In the event that the Custodian
is directed by Proper Instructions to make any payment
<PAGE> 21
or transfer of funds on behalf of the Fund for which there would be, at the
close of business on the date of such payment or transfer, insufficient funds
held by the Custodian on behalf of the Fund, the Custodian may, in its
discretion without further Proper Instructions, provide an advance ("Advance")
to the Fund in an amount sufficient to allow the completion of the transaction
by reason of which such payment or transfer of funds is to be made. In addition,
in the event the Custodian is directed by Proper Instructions to make any
payment or transfer of funds on behalf of the Fund as to which it is
subsequently determined that the Fund has overdrawn its cash account with the
Custodian as of the close of business on the date of such payment or transfer,
said overdraft shall constitute an Advance. Any Advance shall be payable on
demand by the Custodian, unless otherwise agreed by the Fund and the Custodian,
and shall accrue interest from the date of the Advance to the date of payment by
the Fund at a rate agreed upon in writing from time to time by the Custodian and
the Fund. It is understood that any transaction in respect of which the
Custodian shall have made an Advance, including but not limited to a foreign
exchange contract or other transaction in respect of which the Custodian is not
acting as a principal, is for the account of and at the risk of the Fund, and
not, by reason of such Advance, deemed to be a transaction undertaken by the
Custodian for its own account and risk. The Custodian and the Fund acknowledge
that the purpose of Advances is to finance temporarily the purchase or sale of
securities for prompt delivery or to meet redemptions or emergency expenses or
cash needs that are not reasonably foreseeable by the Fund. The Custodian shall
promptly notify the Fund in writing (an "Notice of Advance") of any Advance by
facsimile transmission or in such other manner as the Fund and the Custodian may
agree in writing. At the request of the Custodian, the Fund shall pledge, assign
and grant to the Custodian a security interest in certain specified securities
of the Fund, as security for Advances provided to the Fund, under the terms and
conditions set forth in Appendix A attached hereto.
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
3.1. PROPER INSTRUCTIONS AND SPECIAL INSTRUCTIONS.
<PAGE> 22
(a) Proper Instructions. As used in this Agreement, the
term "Proper Instructions" shall mean: (i) a tested telex from the Fund or the
Fund's investment manager or adviser, or a written request, direction,
instruction or certification (which may be given by facsimile transmission)
signed or initialed on behalf of the Fund by, one or more Authorized Persons (as
that term is defined in section 3.2); (ii) a telephonic or other oral
communication by one or more Authorized Persons; or (iii) a communication (other
than facsimile transmission) effected directly between electro-mechanical or
electronic devices or systems (including, without limitation, computers) by the
Fund or the Fund's investment manager or adviser or by one or more Authorized
Persons on behalf of the Fund; provided that communications of the types
described in clauses (ii) and (iii) above purporting to be given by an
Authorized Person shall be considered Proper Instructions only if the Custodian
reasonably believes such communications to have been given by an Authorized
Person with respect to the transaction involved. Instructions given in the form
of Proper Instructions under clause (i) shall be deemed to be Proper
Instructions if they are reasonably believed by the Custodian to be genuine.
Proper Instructions in the form of oral communications shall be confirmed by the
Fund in the manner set forth in clauses (i) or (iii) above, but the lack of such
confirmation shall in no way affect any action taken by the Custodian in
reliance upon such oral instructions prior to the Custodian's receipt of such
confirmation. The Fund, the Custodian and any investment manager or adviser of
the Fund each is hereby authorized to record any telephonic or other oral
communications between the Custodian and any such person. Proper Instructions
may relate to specific transactions or to types or classes of transactions,
provided that Proper Instructions may take the form of standing instructions
only if they are in writing.
(b) Special Instructions. As used in this Agreement, the term
"Special Instructions" shall mean Proper Instructions countersigned or confirmed
in writing by the Treasurer or any Assistant Treasurer of the Fund or any other
person designated by the Treasurer of the Fund in writing, which
countersignature or confirmation shall be (i) included on the instrument
containing the Proper Instructions or on a separate instrument relating thereto,
and (ii) delivered by hand, facsimile transmission, mail or courier service or
in such other manner as the Fund and the Custodian agree in writing.
<PAGE> 23
(c) Address for Proper Instructions and Special Instructions.
Proper Instructions and Special Instructions shall be delivered to the Custodian
at the address and/or telephone, telecopy or telex number agreed upon from time
to time by the Custodian and the Fund.
3.2. AUTHORIZED PERSONS. Concurrently with the execution of
this Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian a certificate, duly certified by the Secretary or
Assistant Secretary of the Fund, setting forth: (a) the names, titles,
signatures and scope of authority of all persons authorized to give Proper
Instructions or any other notice, request, direction, instruction, certificate
or instrument on behalf of the Fund (each an "Authorized Person"); and (b) the
names, titles and signatures of those persons authorized to issue Special
Instructions. Such certificate may be accepted and relied upon by the Custodian
as conclusive evidence of the facts set forth therein and shall be considered
to be in full force and effect until delivery to the Custodian of a similar
certificate to the contrary. Upon delivery of a certificate which deletes the
name(s) of a person previously authorized to give Proper Instructions or to
issue Special Instructions, such persons shall no longer be considered an
Authorized Person or authorized to issue Special Instructions.
3.3. PERSONS HAVING ACCESS TO ASSETS OF THE FUND.
Notwithstanding anything to the contrary in this Agreement, the Custodian shall
not deliver any assets of the Fund held by the Custodian to or for the account
of any Authorized Person, director, officer, employee or agent of the Fund,
provided that nothing in this section 3.3 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, provided such action
does not result in delivery of or access to assets of the Fund prohibited by
this section 3.3; or (b) the Fund's independent certified public accountants
from examining or reviewing the assets of the Fund held by the Custodian. The
Fund shall provide a list of such persons to the Custodian, and the Custodian
shall be entitled to rely upon such list and any modifications thereto that are
provided to the Custodian from time to time by the Fund.
3.4. ACTIONS OF CUSTODIAN BASED ON PROPER INSTRUCTIONS AND
SPECIAL INSTRUCTIONS. So long as and to the extent that the
<PAGE> 24
Custodian acts in accordance with Proper Instructions or Special Instructions,
as the case may be, and the terms of this Agreement, the Custodian shall not be
responsible for the title, validity or genuineness of any property, or evidence
of title thereof, received or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
The Custodian may, from time to time, in accordance with the
relevant provisions of this Article IV, appoint one or more Domestic
Subcustodians, Foreign Subcustodians and Interim Subcustodians (as such terms
are defined below) to act on behalf of the Fund. For purposes of this Agreement,
all duly appointed Domestic Subcustodians, Foreign Subcustodians and Interim
Subcustodians are referred to collectively as "Subcustodians."
4.1. DOMESTIC SUBCUSTODIANS. The Custodian may, at any time
and from time to time, at its own expense, appoint any bank as defined in
section 2(a)(5) of the 1940 Act meeting the requirements of a custodian under
section 17(f) of the 1940 Act and the rules and regulations thereunder, to act
on behalf of the Fund as a subcustodian for purposes of holding cash, securities
and other assets of the Fund and performing other functions of the Custodian
within the United States (a "Domestic Subcustodian"), provided that the
Custodian shall notify the Fund in writing of the identity and qualifications of
any proposed Domestic Subcustodian at least 30 days prior to appointment of such
Domestic Subcustodian, and the Fund may, in its sole discretion, by written
notice to the Custodian executed by an Authorized Person disapprove of the
appointment of such Domestic Subcustodian. If following notice by the Custodian
to the Fund regarding appointment of a Domestic Subcustodian and the expiration
of 30 days after the date of such notice, the Fund shall have failed to notify
the Custodian of its disapproval thereof, the Custodian may, in its discretion,
appoint such proposed Domestic Subcustodian as its subcustodian.
4.2. FOREIGN SUBCUSTODIANS AND INTERIM SUBCUSTODIANS. (a)
Foreign Subcustodians. The Custodian may, at any time and from time to time, at
its own expense, appoint: (i) any bank, trust company or other entity meeting
the requirements of an
<PAGE> 25
"eligible foreign custodian" under section 17(f) of the 1940 Act and the rules
and regulations thereunder or exempted therefrom by order of the SEC, or (ii)
any bank as defined in section 2(a)(5) of the 1940 Act meeting the requirements
of a custodian under section 17(f) of the 1940 Act and the rules and regulations
thereunder to act on behalf of the Fund as a subcustodian for purposes of
holding cash, securities and other assets of the Fund and performing other
functions of the Custodian in countries other than the United States of America
(a "Foreign Subcustodian"); provided that prior to the appointment of any
Foreign Subcustodian, the Custodian shall have obtained written confirmation of
the approval of the Board of Directors of the Fund (which approval may be
withheld in the sole discretion of such Board of Directors) with respect to (A)
the identity and qualifications of any proposed Foreign Subcustodian, (B) the
country or countries in which, and the securities depositories or clearing
agencies (meeting the requirements of an "eligible foreign custodian" under
section 17(f) of the 1940 Act and the rules and regulations thereunder or
exempted therefrom by order of the SEC) through which, any proposed Foreign
Subcustodian is authorized to hold Securities, cash and other assets of the Fund
(each a "Foreign Depository") and (C) the form and terms of the subcustodian
agreement to be entered into between such proposed Foreign Subcustodian and the
Custodian. In addition, the Custodian may utilize directly any Foreign
Depository, provided the Board of Directors shall have approved in writing the
use of such Foreign Depository by the Custodian. Each such duly approved Foreign
Subcustodian and the countries where and the Foreign Depositories through which
it may hold securities and other assets of the Fund and the Foreign Depositories
that the Custodian may utilize shall be listed in Appendix B, as it may be
amended from time to time in accordance with the provisions of section 9.3. The
Fund shall be responsible for informing the Custodian sufficiently in advance of
a proposed investment which is to be held in a country in which no Foreign
Subcustodian is authorized to act, in order that there shall be sufficient time
for the Custodian to effect the appropriate arrangements with a proposed Foreign
Subcustodian, including obtaining approval as provided in this section 4.2(a).
The Custodian shall not agree to any material amendment to any subcustodian
agreement entered into with a Foreign Subcustodian, or agree to permit any
material changes thereunder, or waive any material rights under such agreement,
except upon prior approval pursuant to Special Instructions. The Custodian shall
promptly provide the Fund with notice of any such amendment, change, or waiver,
whether or not
<PAGE> 26
material, including a copy of any such amendment. For purposes of this
subsection, a material amendment, change or waiver means an amendment, change or
waiver that may reasonably be expected to have an adverse effect on the Fund in
any material way, including but not limited to the Fund's or the Board's
obligations under the 1940 Act, including Rule 17f-5 thereunder.
(b) Interim Subcustodians. In the event that the Fund shall
invest in a security or other asset to be held in a country in which no Foreign
Subcustodian is authorized to act (whether because the Custodian has not
appointed a Foreign Subcustodian in such country and entered into a subcustodian
agreement with it or because the Board of Directors of the Fund has not approved
the Foreign Subcustodian appointed by the Custodian in such country and the
related subcustodian agreement), the Custodian shall promptly notify the Fund in
writing by facsimile transmission or in such other manner as the Fund and
Custodian shall agree in writing that no Foreign Subcustodian is approved in
such country and the Custodian shall, upon receipt of Special Instructions,
appoint any person designated by the Fund in such Special Instructions to hold
such security or other asset. Any person appointed as a Subcustodian pursuant to
this section 4.2(b) is hereinafter referred to herein as an "Interim
Subcustodian." Each Interim Custodian and the securities or assets of the Fund
that it is authorized to hold shall be set forth in Appendix B.
In the absence of such Special Instructions, such security or
other asset shall be held by such agent as the Custodian may appoint unless and
until the Fund shall instruct the Custodian to move the security or other asset
into the possession of the Custodian or a Subcustodian.
4.3. TERMINATION OF A SUBCUSTODIAN. The Custodian shall (a)
cause each Domestic Subcustodian and Foreign Subcustodian to, and (b) use its
best efforts to cause each Interim Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Subcustodian. In the event that the
Custodian is unable to cause such Subcustodian to fully perform its obligations
thereunder, the Custodian shall forthwith, upon the receipt of Special
Instructions, exercise its best efforts to recover any Losses (as hereinafter
defined) incurred by the Fund because of such failure to perform from such
Subcustodian under the applicable subcustodian agreement and, if necessary or
desirable, terminate such subcustodian and appoint a
<PAGE> 27
replacement Subcustodian in accordance with the provisions of this Agreement. In
addition to the foregoing, the Custodian (i) may, at any time in its discretion,
upon written notification to the Fund, terminate any Domestic Subcustodian,
Foreign Subcustodian or Interim Subcustodian, and (ii) shall, upon receipt of
Special Instructions, terminate any Subcustodian with respect to the Fund, in
each case in accordance with the termination provisions of the applicable
subcustodian agreement.
4.4. AGENTS. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank, trust company,
securities depository or clearing agency that is itself qualified to act as a
custodian under the 1940 Act and the rules and regulations thereunder, as its
agent (an "Agent") to carry out such of the provisions of this Agreement as the
Custodian may from time to time direct, provided that the appointment of one or
more Agents (other than an agent appointed to the second paragraph of section
4.2(b)) shall not relieve the Custodian of its responsibilities under this
Agreement. Without limiting the foregoing, the Custodian shall be responsible
for any notices, documents or other information, or any securities, cash or
other assets of the Fund, received by any Agent on behalf of the Custodian or
the Fund as if the Custodian had received such items itself.
ARTICLE V
STANDARD OF CARE; INDEMNIFICATION
5.1. STANDARD OF CARE.
(a) General Standard of Care. The Custodian shall exercise
reasonable care and diligence in carrying out all of its duties and obligations
under this Agreement, and shall be liable to the Fund for all Losses suffered or
incurred by the Fund resulting from the failure of the Custodian to exercise
such reasonable care and diligence. For purposes of this Agreement, "Losses"
means any losses, damages, and expenses.
(b) Actions Prohibited by Applicable Law, Etc. In no event
shall the Custodian incur liability hereunder if the Custodian or any
Subcustodian or Securities System, or any subcustodian, securities depository or
securities system utilized by any such Subcustodian or the Custodian, or any
nominee of the
<PAGE> 28
Custodian or any Subcustodian, is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction; or (ii) any act
of God or war or action of any de facto or de jure government or other similar
circumstance beyond the control of the Custodian, unless, in each case, such
delay or nonperformance is caused by the negligence, misfeasance or misconduct
of such person.
(c) Mitigation by Custodian. Upon the occurrence of any event
which causes or may cause any Losses to the Fund (i) the Custodian shall, and
shall cause any applicable Domestic Subcustodian or Foreign Subcustodian to, and
(ii) the Custodian shall use its best efforts to cause any applicable Interim
Subcustodian to, use all commercially reasonable efforts and take all reasonable
steps under the circumstances to mitigate the effects of such event and to avoid
continuing harm to the Fund.
(d) Advice of Counsel. The Custodian shall be entitled to
receive and act upon advice of counsel on all matters. The Custodian shall be
without liability for any action reasonably taken or omitted in good faith
pursuant to the advice of (i) counsel for the Fund, or (ii) at the expense of
the Custodian, such other counsel as the Fund may agree to, such agreement not
to be unreasonably withheld or delayed; provided that with respect to the
performance of any action or omission of any action upon such advice, the
Custodian shall be required to conform to the standard of care set forth in
section 5.1(a).
(e) Expenses. In addition to the liability of the
Custodian under this Article V, the Custodian shall be liable to the
Fund for all reasonable costs and expenses incurred by the Fund in
connection with any claim by the Fund against the Custodian arising from the
obligations of the Custodian hereunder including, without limitation, all
reasonable attorneys' fees and expenses incurred by the Fund in asserting any
such claim, and all reasonable expenses incurred by the Fund in connection with
any investigations, lawsuits or proceedings relating to such claim, provided
that the Fund has recovered from the Custodian for such claim.
<PAGE> 29
(f) Liability for Past Records. The Custodian shall have no
liability in respect of any Losses suffered by the Fund, insofar as such Losses
arise from the performance of the Custodian's duties hereunder by reason of the
Custodian's reliance upon records that were maintained for the Fund by entities
other than the Custodian prior to the Custodian's employment hereunder.
(g) Reliance on Certifications. The Secretary or an Assistant
Secretary of the Fund shall certify to the Custodian the names and signatures of
the officers of the Fund, the name and address of the Shareholder Servicing
Agent, and any instructions or directions to the Custodian by the Fund's Board
of Directors or shareholders. Any such certificate may be accepted and relied
upon by the Custodian as conclusive evidence of the facts set forth therein and
may be considered in full force and effect until receipt of a similar
certificate to the contrary.
5.2. LIABILITY OF CUSTODIAN FOR ACTIONS OF OTHER PERSONS.
(a) Domestic Subcustodians, Foreign Subcustodians and Agents.
The Custodian shall be liable for the actions or omissions of any Domestic
Subcustodian, Foreign Subcustodian or Agent (other than an agent appointed
pursuant to section 4.2(b)) to the same extent as if such action or omission
were performed by the Custodian itself pursuant to this Agreement. In the event
of any Losses suffered or incurred by the Fund caused by or resulting from the
actions or omissions of any Domestic Subcustodian, Foreign Subcustodian or Agent
(other than an agent appointed pursuant to section 4.2(b)) for which the
Custodian would be directly liable if such actions or omissions were those of
the Custodian, the Custodian shall promptly reimburse the Fund in the amount of
any such Losses.
(b) Interim Subcustodians. Notwithstanding the provisions of
section 5.1 to the contrary, the Custodian shall not be liable to the Fund for
any Losses suffered or incurred by the Fund resulting from the actions or
omissions of an Interim Subcustodian or an agent appointed pursuant to section
4.2(b) unless such Losses are caused by, or result from, the negligence,
misfeasance or misconduct of the Custodian; provided that in the event of any
Losses (whether or not caused by or resulting from the negligence, misfeasance
or misconduct of the Custodian), the Custodian shall take all reasonable steps
to enforce such rights
<PAGE> 30
as it may have against such Interim Subcustodian or agent to protect the
interests of the Fund.
(c) Securities Systems and Foreign Depositories.
Notwithstanding the provisions of section 5.1 to the contrary, the Custodian
shall not be liable to the Fund for any Losses suffered or incurred by the Fund
resulting from the use by the Custodian or any Subcustodian of a Securities
System or Foreign Depository, unless such Losses are caused by, or result from,
the negligence, misfeasance or misconduct of the Custodian; provided that in the
event of any such Losses, the Custodian shall take all reasonable steps to
enforce such rights as it may have against the Securities System or Foreign
Depository, as the case may be, to protect the interests of the Fund.
(d) Reimbursement of Expenses. The Fund agrees to reimburse
the Custodian for all reasonable out-of-pocket expenses incurred by the
Custodian in connection with the fulfillment of its obligations under this
section 5.2, provided that such reimbursement shall not apply to expenses
occasioned by or resulting from the negligence, misfeasance or misconduct of the
Custodian.
5.3. INDEMNIFICATION.
(a) Indemnification Obligations. Subject to the limitations
set forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees for all Losses suffered or incurred by the Custodian
or its nominee (including Losses suffered under the Custodian's indemnity
obligations to Subcustodians) caused by or arising from actions taken by the
Custodian in the performance of its duties and obligations under this Agreement,
provided that such indemnity shall not apply to Losses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Custodian or any
Subcustodian, Securities System, Foreign Depository or their respective
nominees. In addition, the Fund agrees to indemnify the Custodian against any
liability incurred by reason of taxes assessed to the Custodian, any
Subcustodian, any Securities System, any Foreign Depository, and their
respective nominees, or other Losses incurred by such persons, resulting from
the fact that securities and other property of the Fund are registered in the
name of such persons, provided that in no event shall such indemnification be
applicable to income, franchise or similar taxes which may be imposed or
assessed against such persons.
<PAGE> 31
(b) Notice of Litigation, Right to Prosecute, etc. The Fund
shall not be liable for indemnification under this section 5.3 unless the person
seeking indemnification shall have notified the Fund in writing (i) within such
time after the assertion of any claim as is sufficient for such person to
determine that it will seek indemnification from the Fund in respect of such
claim or (ii) promptly after the commencement of any litigation or proceeding
brought against such person, in respect of which indemnity may be sought;
provided that in the case of clause (i) of this section 5.3(b) the Fund shall
not be liable for such indemnification to the extent the Fund is disadvantaged
by any such delay in notification. With respect to claims in such litigation or
proceedings for which indemnity by the Fund may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the Fund
shall be entitled to participate in any such litigation or proceeding and, after
written notice from the Fund to the person seeking indemnification, the Fund may
assume the defense of such litigation or proceeding with counsel of its choice
at its own expense in respect of that portion of the litigation for which the
Fund may be subject to an indemnification obligation, provided that such person
shall be entitled to participate in (but not control) at its own cost and
expense, the defense of any such litigation or proceeding if the Fund has not
acknowledged in writing its obligation to indemnify such person with respect to
such litigation or proceeding. If the Fund is not permitted to participate in or
control such litigation or proceeding under applicable law or by a ruling of a
court of competent jurisdiction, such person shall reasonably prosecute such
litigation or proceeding. A person seeking indemnification hereunder shall not
consent to the entry of any judgment or enter into any settlement of any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment and without the Fund's prior written consent, which
consent shall not be unreasonably withheld or delayed. All persons seeking
indemnification hereunder shall submit written evidence to the Fund with respect
to any cost or expense for which they are seeking indemnification in such form
and detail as the Fund may reasonably request.
5.4. INVESTMENT LIMITATIONS. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its
duties generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
<PAGE> 32
liable to the Fund, and the Fund agrees to indemnify the Custodian and its
nominees, for any Losses suffered or incurred by the Custodian and its nominees
arising out of any violation of any investment or other limitation to which the
Fund is subject.
5.5. FUND'S RIGHT TO PROCEED. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System, Foreign Depository or other person for Losses
caused the Fund by such Subcustodian, Securities System, Foreign Depository or
other person, and shall be entitled to enforce the rights of the Custodian with
respect to any claim against such Subcustodian, Securities System, Foreign
Depository or other person which the Custodian may have as a consequence of any
such Losses, if and to the extent that the Fund has not been made whole for such
Losses. If the Custodian makes the Fund whole for such Losses, the Custodian
shall retain the ability to enforce its rights directly against such
Subcustodian, Securities System, Foreign Depository or other person. Upon the
Fund's election to enforce any rights of the Custodian under this section 5.5,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the Losses incurred by the
Fund; provided that, so long as the Fund has acknowledged in writing its
obligation to indemnify the Custodian under section 5.3 hereof with respect to
such claim, the Fund shall retain the right to settle, compromise and/or
terminate any action or proceeding in respect of the Losses incurred by the Fund
without the Custodian's consent; and provided further that if the Fund has not
made an acknowledgement of its obligation to indemnify the Custodian, the Fund
shall not settle, compromise or terminate any such action or proceeding without
the written consent of the Custodian, which consent shall not be unreasonably
withheld or delayed. The Custodian agrees to cooperate with the Fund and take
all actions reasonably requested by the Fund in connection with the Fund's
enforcement of any rights of the Custodian. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under this section 5.5,
provided that such reimbursement shall not apply to expenses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Custodian.
<PAGE> 33
ARTICLE VI
RECORDS
6.1. PREPARATION OF REPORTS. The Custodian shall, as
reasonably requested by the Fund, assist generally in the preparation of reports
to Fund shareholders, regulatory authorities and others, audits of accounts, and
other ministerial matters of like nature. The Custodian shall render statements,
including interim monthly and complete quarterly financial statements, or copies
thereof, from time to time as reasonably requested by Proper Instructions.
6.2. CUSTODIAN'S BOOKS AND RECORDS. The Custodian shall
maintain complete and accurate records with respect to securities and other
assets held for the account of the Fund as required by the rules and regulations
of the SEC applicable to investment companies registered under the 1940 Act,
including: (a) journals or other records of original entry containing a detailed
and itemized daily record of all receipts and deliveries of securities
(including certificate and transaction identification numbers, if any), and all
receipts and disbursements of cash; (b) ledgers or other records reflecting (i)
securities in physical possession, (ii) securities in transfer, (iii) securities
borrowed, loaned or collateralizing obligations of the Fund, (iv) monies
borrowed and monies loaned (together with a record of the collateral therefor
and substitutions of collateral), and (v) dividends and interest received; and
(c) cancelled checks and bank records related thereto. The Custodian shall keep
such other books and records of the Fund as the Fund shall reasonably request.
All such books and records maintained by the Custodian shall be maintained in a
form acceptable to the Fund and in compliance with the rules and regulations of
the SEC (including, but not limited to, books and records required to be
maintained under Section 31(a) of the 1940 Act and the rules and regulations
from time to time adopted thereunder), and any other applicable Federal, State
and foreign tax laws and administrative regulations. All such records will be
the property of the Fund and in the event of termination of this Agreement shall
be delivered to the successor custodian.
All books and records maintained by the Custodian pursuant to
this Agreement and any insurance policies and
<PAGE> 34
fidelity or similar bonds maintained by the Custodian shall be made available
for inspection and audit at reasonable times by officers of, attorneys for, and
auditors employed by, the Fund and the Custodian shall promptly provide the Fund
with copies of all reports of its independent auditors regarding the Custodian's
controls and procedures.
6.3. OPINION OF FUND'S INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS. The Custodian shall take all reasonable action as the Fund may
request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of any periodic reports
to or filings with the SEC and with respect to any other requirements of the
SEC.
6.4. REPORTS OF CUSTODIAN'S INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS. At the request of the Fund, the Custodian shall deliver to the Fund
a written report prepared by the Custodian's independent certified public
accountants with respect to the services provided by the Custodian under this
Agreement, including, without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding cash, securities and
other assets, including cash, securities and other assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report shall be
of sufficient scope and in sufficient detail as may reasonably be required by
the Fund and as may reasonably be obtained by the Custodian.
6.5. CALCULATION OF NET ASSET VALUE. The Custodian shall
compute and determine the net asset value per share of capital stock of the Fund
as of the close of regular business on the New York Stock Exchange on each day
on which such Exchange is open, unless otherwise directed by Proper
Instructions. Such computation and determination shall be made in accordance
with (a) the provisions of the By-Laws of the Fund and Articles of
Incorporation, as they may from time to time be amended and delivered to the
Custodian, (b) the votes of the Board of Directors of the Fund at the time in
force and applicable, as they may from time to time be delivered to the
Custodian, and (c) Proper Instructions. On each day that the Custodian shall
compute the net asset value per share of the Fund, the Custodian shall provide
the Fund with written reports which permit the Fund to verify that portfolio
transactions have been recorded in accordance with the Fund's instructions.
<PAGE> 35
In computing the net asset value, the Custodian may rely upon
any information furnished by Proper Instructions, including without limitation
any information (i) as to accrual of liabilities of the Fund and as to
liabilities of the Fund not appearing on the books of account kept by the
Custodian, (ii) as to the existence, status and proper treatment of reserves, if
any, authorized by the Fund, (iii) as to the sources of quotations to be used in
computing the net asset value, including those listed in Appendix C hereto, (iv)
as to the fair value to be assigned to any securities or other assets for which
price quotations are not readily available, and (v) as to the sources of
information with respect to "corporate actions" affecting portfolio securities
of the Fund, including those listed in Appendix C. (Information as to "corporate
actions" shall include information as to dividends, distributions, stock splits,
stock dividends, rights offerings, conversions, exchanges, recapitalizations,
mergers, redemptions, calls, maturity dates and similar transactions, including
the ex- and record dates and the amounts or other terms thereof.)
In like manner, the Custodian shall compute and determine the
net asset value as of such other times as the Board of Directors of the Fund, or
any valuation committee thereof, from time to time may reasonably request.
The Custodian shall be held to the standard of care set forth
in Article V with respect to the performance of its responsibilities under this
Article VI. The parties hereto acknowledge, however, that the Custodian's
causing an error or delay in the determination of net asset value may, but does
not in and of itself, constitute negligence, gross negligence or reckless or
willful misconduct. The Custodian's liability for any such negligence, gross
negligence or reckless or willful misconduct which results in an error in
determination of such net asset value shall be limited to the direct,
out-of-pocket loss the Fund, shareholder or former shareholder shall actually
incur, measured by the difference between the actual and the erroneously
computed net asset value, and any expenses incurred by the Fund in connection
with correcting the records of the Fund affected by such error (including
charges made by the Fund's registrar and transfer agent for making such
corrections), communicating with shareholders or former shareholders of the Fund
affected by such error or responding to or defending against any inquiry or
proceeding with respect to such error made or initiated by the
<PAGE> 36
SEC or other regulatory or self-regulatory body.
Without limiting the foregoing, the Custodian shall not be
held accountable or liable to the Fund, any shareholder or former shareholder
thereof or any other person for any delays or Losses any of them may suffer or
incur resulting from (A) the Custodian's failure to receive timely and suitable
notification concerning quotations or corporate actions relating to or affecting
securities of the Fund or (B) any errors in the computation of the net asset
value based upon or arising out of quotations or information as to corporate
actions if received by the Custodian either (1) from a source which the
Custodian was authorized pursuant to the second paragraph of this section 6.5 to
rely upon, or (2) from a source which in the Custodian's reasonable judgment was
as reliable a source for such quotations or information as the sources
authorized pursuant to that paragraph. Nevertheless, the Custodian will use its
best judgment in determining whether to verify through other sources any
information it has received as to quotations or corporate actions if the
Custodian has reason to believe that any such information might be incorrect.
In the event of any error or delay in the determination of
such net asset value for which the Custodian may be liable, the Fund and the
Custodian will consult and make good faith efforts to reach agreement on what
actions should be taken in order to mitigate any Losses suffered by the Fund or
its present or former shareholders, in order that the Custodian's exposure to
liability shall be reduced to the extent possible after taking into account all
relevant factors and alternatives. Such actions might include the Fund or the
Custodian taking reasonable steps to collect from any shareholder or former
shareholder who has received any overpayment upon redemption of shares such
overpaid amount or to collect from any shareholder who has underpaid upon a
purchase of shares the amount of such underpayment or to reduce the number of
shares issued to such shareholder. It is understood that in attempting to reach
agreement on the actions to be taken or the amount of the loss which should
appropriately be borne by the Custodian, the Fund and the Custodian will
consider such relevant factors as the amount of the loss involved, the Fund's
desire to avoid loss of shareholder good will, the fact that other persons or
entities could have reasonably expected to have detected the error sooner than
the time it was actually discovered, the appropriateness of limiting or
eliminating the benefit which shareholders or former
<PAGE> 37
shareholders might have obtained by reason of the error, and the possibility
that other parties providing services to the Fund might be induced to absorb a
portion of the loss incurred.
Upon written notice from the Fund to the Custodian, the
Custodian's responsibilities under this Section 6.5 shall terminate, but this
Agreement shall otherwise continue in full force and effect. Upon such
termination, the fee schedule provided for under Article VII hereof shall be
adjusted by the parties in such manner as they may agree, and the Custodian will
transfer such of the Fund's books and records, and provide such other reasonable
cooperation, as the Fund may request in connection with the transfer of such
responsibilities.
6.6. INFORMATION REGARDING FOREIGN SUBCUSTODIANS AND FOREIGN
DEPOSITORIES. (a) The Custodian shall use reasonable efforts to assist the Fund
in obtaining the following with respect to any country in which any assets of
the Fund are held or proposed to be held:
(1) information concerning whether, and to what extent,
applicable foreign law would restrict the access afforded the Fund's
independent public accountants to books and records kept by a foreign
custodian or foreign securities depository used, or proposed to be
used, in that country;
(2) information concerning whether, and to what extent,
applicable foreign law would restrict the Fund's ability to recover its
assets in the event of the bankruptcy of a foreign custodian or foreign
securities depository used, or proposed to be used, in that country;
(3) information concerning whether, and to what extent,
applicable foreign law would restrict the Fund's ability to recover
assets that are lost while under the control of a foreign custodian or
foreign securities depository used, or proposed to be used, in that
country;
(4) information concerning the likelihood of expropriation,
nationalization, freezes or confiscation of the Fund's assets in that
country;
(5) information concerning whether difficulties in converting
the Fund's cash and cash equivalents held in that
<PAGE> 38
country into U.S. Dollars are reasonably foreseeable, including without
limitation as a result of applicable foreign currency exchange
regulations;
(6) information concerning the financial strength, general
reputation and standing and ability to perform custodial services of
each foreign custodian or foreign securities depository used, or
proposed to be used, in that country;
(7) information concerning whether each foreign custodian or
foreign securities depository used, or proposed to be used, in that
country would provide a level of safeguards for maintaining the Fund's
assets not materially different from that provided by the Custodian in
maintaining the Fund's securities in the United States;
(8) information concerning whether each foreign custodian or
foreign securities depository used, or proposed to be used, in that
country has offices in the United States in order to facilitate the
assertion of jurisdiction over and enforcement of judgments against
such custodian or depository;
(9) as to each foreign securities depository used, or proposed
to be used, in that country information concerning the number of
participants in, and operating history of, such depository; and
(10) such other information as may be requested by the Fund to
ensure compliance with Rule 17f-5 under the 1940 Act.
(b) During the term of this Agreement, the Custodian shall use
reasonable efforts to provide the Fund with prompt notice of any material
changes in the facts or circumstances upon which any of the foregoing
information or statements were based.
(c) Upon request of the Fund, the Custodian shall deliver to
the Fund a certificate stating: (i) the identity of each Foreign Subcustodian
then acting on behalf of the Custodian; and (ii) the countries in which and the
Foreign Depositories through which each such Foreign Subcustodian or the
Custodian is then holding cash, securities and other assets of the Fund.
<PAGE> 39
ARTICLE VII
CUSTODIAN FEES
The Fund shall pay the Custodian a custody fee based on such
fee schedule as may from time to time be agreed upon in writing by the Custodian
and the Fund. Such fee, together with all amounts for which the Custodian is to
be reimbursed in accordance with the following sentence, shall be billed to the
Fund in such a manner as to permit payment either by a direct cash payment to
the Custodian or by placing Fund portfolio transactions with the Custodian
resulting in an agreed-upon amount of commissions being paid to the Custodian
within an agreed-upon period of time. The Custodian shall be entitled to receive
reimbursement from the Fund on demand for its cash disbursements and expenses
(including cash disbursements and expenses of any Subcustodian or Agent for
which the Custodian has reimbursed such Subcustodian or Agent) permitted by this
Agreement, but excluding salaries and usual overhead expenses, upon receipt by
the Fund of reasonable evidence thereof.
ARTICLE VIII
TERMINATION
This Agreement shall continue in full force and effect until
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid, to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing. In the event of
termination, the Custodian shall be entitled to receive prior to delivery of the
securities, cash and other assets held by it all accrued fees and unreimbursed
expenses the payment of which is contemplated by Article VII, upon receipt by
the Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it
is agreed that the cash, securities and other assets owned by the Fund and held
by the Custodian or any Subcustodian or Agent shall be delivered to the
successor custodian, and the Custodian agrees to cooperate with the Fund in
<PAGE> 40
execution of documents and performance of other actions necessary or desirable
in order to substitute the successor custodian for the Custodian under this
Agreement.
ARTICLE IX
MISCELLANEOUS
9.1. EXECUTION OF DOCUMENTS. Upon request, the Fund shall
deliver to the Custodian such proxies, powers of attorney or other instruments
as may be reasonable and necessary or desirable in connection with the
performance by the Custodian or any Subcustodian of their respective obligations
under this Agreement or any applicable subcustodian agreement.
9.2. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof.
9.3. WAIVERS AND AMENDMENTS. No provision of this Agreement
may be amended or terminated except by a statement in writing signed by the
party against which enforcement of the amendment or termination is sought,
provided that Appendix B listing the Foreign Subcustodians and Foreign
Depositories approved by the Fund and Appendix C listing quotation and
information sources may be amended from time to time to add or delete one or
more of such entities or sources by delivery to the Custodian of a revised
Appendix B or C executed by an Authorized Person, such amendment to take effect
immediately upon execution of the revised Appendix B or C by the Custodian.
In connection with the operation of this Agreement, the
Custodian and the Fund may agree in writing from time to time on such provisions
interpretative of or in addition to the provisions of this Agreement as may in
their joint opinion be consistent with the general tenor of this Agreement. No
interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Agreement.
9.4. CAPTIONS. The section headings in this Agreement are for
the convenience of the parties and in no way alter, amend, limit or restrict the
contractual obligations of the
<PAGE> 41
parties set forth in this Agreement.
9.5. GOVERNING LAW. This instrument shall be governed by and
construed in accordance with the laws of the State of New York.
9.6. NOTICES. Notices and other writings delivered or mailed
postage prepaid to the Fund addressed to the Fund at 345 Park Avenue, New York,
NY 10154 or to such other address as the Fund may have designated to the
Custodian in writing, or to the Custodian at 40 Water Street, Boston,
Massachusetts 02109, Attention: Manager, Securities Department, or to such other
address as the Custodian may have designated to the Fund in writing, shall be
deemed to have been properly delivered or given hereunder to the respective
addressee.
9.7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
on and shall inure to the benefit of the Fund and the Custodian and their
respective successors and assigns, provided that neither party hereto may assign
this Agreement or any of its rights hereunder without the prior written consent
of the other party.
9.8. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original. This
Agreement shall become effective when one or more counterparts have been signed
and delivered by each of the parties.
9.9. REPRESENTATIVE CAPACITY; NONRECOURSE OBLIGATIONS. The
Custodian agrees that any claims by it against the Fund under this Agreement may
be satisfied only from the assets of the Fund; that the person executing this
Agreement has executed it on behalf of the Fund and not individually, and that
the obligations of the Fund arising out of this Agreement are not binding upon
such person or the Fund's shareholders individually but are binding only upon
the assets and property of the Fund; and that no shareholders, directors or
officers of the Fund may be held personally liable or responsible for any
obligations of the Fund arising out of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed in its name and behalf on the day and year first above
written.
<PAGE> 42
BROWN BROTHERS HARRIMAN & CO.
per pro____________________________
Name:
Title:
THE KOREA FUND, INC.
By:________________________________
Name: Nicholas Bratt
Title: President
APPENDIX A TO THE
CUSTODIAN AGREEMENT BETWEEN
THE KOREA FUND, INC. AND
BROWN BROTHERS HARRIMAN & CO.
DATED AS OF April 19, 1995
PROCEDURES RELATING TO CUSTODIAN'S SECURITY INTEREST
As security for any Advances (as defined in the Custodian
Agreement) of the Fund, the Fund shall pledge, assign and grant to the Custodian
a security interest in Collateral (as hereinafter defined), under the terms,
circumstances and conditions set forth in this Appendix A.
SECTION 1. DEFINED TERMS. As used in this Appendix A the following
terms shall have the following respective meanings:
(a) "Business Day" shall mean any day that is not a Saturday, a Sunday
or a day on which the Custodian is closed for business.
(b) "Collateral" shall mean those securities having a fair market value
(as determined in accordance with the procedures set forth in the prospectus for
the Fund) equal to the aggregate of all Advance Obligations of the Fund that are
(i) identified in any Pledge Certificate executed on behalf of the Fund or (ii)
designated by the Custodian for the Fund pursuant to Section 3 of this Appendix
A. Such securities shall consist of marketable securities held by the Custodian
on behalf of the Fund or, if no such marketable securities are held by the
Custodian on behalf of the Fund, such other securities designated by the Fund in
the applicable Pledge Certificate or by the Custodian pursuant to Section 3 of
this Appendix A.
<PAGE> 43
(c) "Advance Obligations" shall mean the amount of any outstanding
Advance(s) provided by the Custodian to the Fund together with all accrued
interest thereon.
(d) "Pledge Certificate" shall mean a Pledge Certificate in the form
attached as Exhibit 1 to this Appendix A, executed by a duly authorized officer
of the Fund and delivered by the Fund to the Custodian by facsimile transmission
or in such other manner as the Fund and the Custodian may agree in writing.
(e) "Release Certificate" shall mean a Release Certificate in the form
attached as Exhibit 2 to this Appendix A, executed by a duly authorized officer
of the Custodian and delivered by the Custodian to the Fund by facsimile
transmission or in such other manner as the Fund and the Custodian may agree in
writing.
(f) "Written Notice" shall mean a written notice executed by a duly
authorized officer of the party delivering the notice and delivered by facsimile
transmission or in such other manner as the Fund and the Custodian shall agree
in writing.
SECTION 2. PLEDGE OF COLLATERAL. To the extent that any Advance
Obligations of the Fund are not satisfied by the close of business on the first
Business Day following the Business Day on which the Fund receives a Written
Notice requesting security for such Advance Obligation and stating the amount of
such Advance Obligation, the Fund shall pledge, assign and grant to the
Custodian a first priority security interest in Collateral specified by the Fund
by delivering to the Custodian a Pledge Certificate executed by the Fund
describing such Collateral. Such Written Notice may, in the discretion of the
Custodian, be included within or accompany the Notice of Advance (as defined in
the Custodian Agreement) relating to the applicable Advance Obligation.
SECTION 3. FAILURE TO PLEDGE COLLATERAL. In the event that the Fund
shall fail (a) to pay the Advance Obligation described in such Written Notice,
(b) to deliver to the Custodian a Pledge Certificate pursuant to Section 2, or
(c) to identify substitute securities pursuant to Section 6 upon the sale or
maturity of any securities identified as Collateral, the Custodian may, by
Written Notice to the Fund, specify Collateral which shall secure the applicable
Advance Obligation. The Fund hereby pledges, assigns and grants to the Custodian
a first priority security
<PAGE> 44
interest in any and all Collateral specified in such Written Notice; provided
that such pledge, assignment and grant of security shall be deemed to be
effective only upon receipt by the Fund of such Written Notice, and provided
further that if the Custodian specifies Collateral in which a first priority
security interest has already been granted, the security interest pledged,
assigned and granted hereunder shall be a security interest that is not a first
priority security interest.
SECTION 4. DELIVERY OF ADDITIONAL COLLATERAL. If at any time the
Custodian shall notify the Fund by Written Notice that the fair market value of
the Collateral securing any Advance Obligation is less than the amount of such
Advance Obligation, the Fund shall deliver to the Custodian, within one Business
Day following the Fund's receipt of such Written Notice, an additional Pledge
Certificate describing additional Collateral. If the Fund shall fail to deliver
such additional Pledge Certificate, the Custodian may specify Collateral which
shall secure the unsecured amount of the applicable Advance Obligation in
accordance with Section 3 of this Appendix A.
SECTION 5. RELEASE OF COLLATERAL. Upon payment by the Fund of any
Advance Obligation secured by the pledge of Collateral, the Custodian shall
promptly deliver to the Fund a Release Certificate pursuant to which the
Custodian shall release Collateral from the lien under the applicable Pledge
Certificate or Written Notice pursuant to Section 3 having a fair market value
equal to the amount paid by the Fund on account of such Advance Obligation. In
addition, if at any time the Fund shall notify the Custodian by Written Notice
that the Fund desires that specified Collateral be released and (a) that the
fair market value of the Collateral securing any Advance Obligation exceeds the
amount of such Advance Obligation, or (b) that the Fund has delivered a Pledge
Certificate pursuant to Section 6 substituting Collateral in respect of such
Advance Obligation, the Custodian shall deliver to the Fund, within one Business
Day following the Custodian's receipt of such Written Notice, a Release
Certificate relating to the Collateral specified in such Written Notice.
SECTION 6. SUBSTITUTION OF COLLATERAL. The Fund may substitute
securities for any securities identified as Collateral by delivery to the
Custodian of a Pledge Certificate executed by the Fund, indicating the
securities pledged as Collateral.
SECTION 7. SECURITY FOR FUND ADVANCE OBLIGATIONS. The
<PAGE> 45
pledge of Collateral by the Fund shall secure only Advance Obligations of the
Fund. In no event shall the pledge of Collateral by the Fund be deemed or
considered to be security for any other types of obligations of the Fund to the
Custodian or for the Advance Obligations or other types of obligations of any
other fund.
SECTION 8. CUSTODIAN'S REMEDIES. Upon (a) the Fund's failure to pay any
Advance Obligation of the Fund within thirty days after receipt by the Fund of a
Written Notice demanding security therefor, and (b) one Business Day's prior
Written Notice to the Fund, the Custodian may elect to enforce its security
interest in the Collateral securing such Advance Obligation, by taking title to
(at the then prevailing fair market value), or selling in a commercially
reasonable manner, so much of the Collateral as shall be required to pay such
Advance Obligation in full. Notwithstanding the provisions of any applicable
law, including, without limitation, the Uniform Commercial Code, the remedy set
forth in the preceding sentence shall be the only right or remedy to which the
Custodian is entitled with respect to the pledge and security interest granted
pursuant to any Pledge Certificate or Section 3. Without limiting the foregoing,
the Custodian hereby waives and relinquishes all contractual and common law
rights of set-off to which it may now or hereafter be or become entitled with
respect to any obligations of the Fund to the Custodian arising under this
Appendix A to the Custodian Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Appendix A to
be executed in its name and behalf on the day and year first above written.
BROWN BROTHERS HARRIMAN & CO.
per pro____________________________
Name:
Title:
THE KOREA FUND, INC.
By:________________________________
Name: Nicholas Bratt
Title: President
<PAGE> 46
EXHIBIT 1
TO
Appendix A
PLEDGE CERTIFICATE
This Pledge Certificate is delivered pursuant to the Custodian
Agreement dated as of _____________________ (the "Agreement"), between
_____________________ (the "Fund") and Brown Brothers Harriman & Co. (the
"Custodian"). Capitalized terms used herein without definition shall have the
respective meanings ascribed to them in the Agreement. Pursuant to [Section 2 or
Section 4] of Appendix A attached to the Agreement, the Fund hereby pledges,
assigns and grants to the Custodian a first priority security interest in the
securities listed on Schedule A attached to this Pledge Certificate
(collectively, the "Pledged Securities"). Upon delivery of this Pledge
Certificate, the Pledged Securities shall constitute Collateral, and shall
secure all Advance Obligations of the Fund described in that certain Written
Notice dated , 19 , delivered by the Custodian to the Fund. The pledge,
assignment and grant of security in the Pledged Securities hereunder shall be
subject in all respects to the terms and conditions of the Agreement, including,
without limitation, Sections 7 and 8 of Appendix A attached hereto.
IN WITNESS WHEREOF, the Fund has caused this Pledge
Certificate to be executed in its name, on behalf of the Fund this day of , 19 .
By: _____________________
Name: _____________________
Title: _____________________
<PAGE> 47
SCHEDULE A
TO
PLEDGE CERTIFICATE
<TABLE>
<CAPTION>
Type of Certificate/CUSIP Number of
Issuer Security Numbers Shares
- ------ -------- ------- ------
<S> <C> <C> <C>
</TABLE>
<PAGE> 48
EXHIBIT 2
TO
Appendix A
RELEASE CERTIFICATE
This Release Certificate is delivered pursuant to the Custodian
Agreement dated as of _________, 199_ (the "Agreement"), between
_______________________ (the "Fund") and Brown Brothers Harriman & Co. (the
"Custodian"). Capitalized terms used herein without definition shall have the
respective meanings ascribed to them in the Agreement. Pursuant to Section 5 of
Appendix A attached to the Agreement, the Custodian hereby releases the
securities listed on Schedule A attached to this Release Certificate from the
lien under the [Pledge Certificate dated __________, 19 or the Written Notice
delivered pursuant to Section 3 of Appendix A dated ___________, 19 ].
IN WITNESS WHEREOF, the Custodian has caused this Release Certificate
to be executed in its name and on its behalf this ____ day of 19__.
Brown Brothers Harriman & Co.
By: _____________________
Name: _____________________
Title: _____________________
<PAGE> 49
SCHEDULE A
TO
RELEASE CERTIFICATE
<TABLE>
<CAPTION>
Type of Certificate/CUSIP Number of
Issuer Security Numbers Shares
- ------ -------- ------- ------
<S> <C> <C> <C>
</TABLE>
<PAGE> 50
[Translation]
MINISTRY OF FINANCE AND ECONOMY
Document No.: JEUNGJAE 41610-57
Enforcement Date: March 30, 1996
To: Dr. Young Moo Shin and
Law Offices of Shin & Kim
Re: Amendment to the License for Investment in Korean
Securities Regarding The Korea Fund, Inc. and The Korea-
Europe Fund Limited
- ------------------------------------------------------------------------------
1. Reference is made to your letters, SEJONG NO. 96-0351
(dated March 27, 1996) and SEJONG NO. 96-0354 (dated March
28, 1996).
2. Pursuant to Article 203 of the Securities and Exchange
Act and Article 10-66 of the Foreign Exchange Management
Regulations, we hereby approve the investment in Korean
securities by The Korea Fund, Inc. and The Korea-Europe
Fund Limited as set forth in the attached.
Attachment: A copy of the "Amendment to the License,
Approval and confirmation Regarding The Korea
Fund, Inc." and a copy of the "Amendment to the
Approval for Investment by The Korea-Europe
Fund Limited".
MINISTER OF FINANCE AND ECONOMY
(Official Seal Affixed)
- ------------------------------------------------------------------------------
<PAGE> 51
To: The Korea Fund, Inc.
Re: Amendment to the License, Approval and
Confirmation of The Korea Fund, Inc.
The Minister of Finance and Economy, on behalf of the Government of the
Republic of Korea, pursuant to Korean Law presently in force, hereby amends the
License, Approval and Confirmation dated June 22, 1984, as amended on April 11,
1986, August 2, 1989, October 7, 1992, October 20, 1993 and May 12, 1995 (as
amended, the "License") as set forth below. In all other respects, the License
remains unchanged and in full force and effect, and the confirmations made
therein are repeated as of the date of this Amendment.
1. Paragraph 4. D of the License, setting forth the limit on investments in
securities of an individual issuer, is deleted in its entirety and replaced
with the following new Paragraph 4. D:
"D. Limits on Investments
(1) The Fund shall not acquire shares of a Korean issuer if, as a result of
such acquisition, the Fund would hold in excess of 5% of the shares then
outstanding of any class of stock of the issuer
(2) The Fund shall not acquire listed bonds (as defined in the regulations
of KSEC) if, as a result of such acquisition, the Fund's holdings of
such, listed bonds would have a value (calculated at the time of
acquisition) in excess of 10% of the net asset value of the Fund (as
such value is calculated as at the date of such acquisition).
(3) The Fund is permitted to acquire unlisted shares which are registered
with the Korea Securities Dealers Association for the trading on the
over-the-counter market in Korea (the "Registered OTC Shares");
provided that the Fund shall not
<PAGE> 52
acquire the Registered OTC Shares if, as a result, more than 25% of the net
asset value of the Fund (as such value is calculated as at the date of such
acquisition) would be invested in the Registered OTC Shares in aggregate or
more than 5% of the net asset value of the Fund (as such value is calculated
as at the date of such acquisition) would be invested in any class of the
Registered OTC Shares. The Fund shall trade the Registered OTC only with
Korean nationals or foreigners treated as Korean nationals (as defined in
the regulations of KSEC) through Korean securities companies as intermediary
and may rely on information provided by such securities companies with
respect to the status of the counter-parties to such trades.
(4) If any of the matters set forth above in paragraphs (1) through (3) comes to
be permitted under a provision of law or regulation applicable to investment
by foreigners, or to be permitted otherwise by KSEC, then, to the extent
permitted to other foreigners, such matters shall be permitted to the Fund.
(5) The Fund may invest in securities index futures market which will be
established in Korea, and such investment shall be made in accordance with
the regulations which apply to foreigners' investment or as otherwise
permitted by KSEC."
<PAGE> 1
[GEORGESON & COMPANY, INC. LETTERHEAD]
Exhibit k(iii)
March 25, 1997
The Korea Fund, Inc.
345 Park Avenue
New York, NY 10154
LETTER OF AGREEMENT
This Letter of Agreement (the "Agreement") sets forth the terms and conditions
under which Georgeson & Company Inc. ("Georgeson") has been retained by The
Korea Fund, Inc. ("The Korea Fund") as Information Agent for its rights offer
(the "Offer"). The term of the Agreement shall be the term of the Offer,
including any extensions thereof.
1. During the term of the Agreement, Georgeson will: provide advice and
consultation with respect to the planning and execution of the Offer;
assist in the preparation and placement of newspaper ads; assist in the
distribution of Offer documents to brokers, banks, nominees,
institutional investors, and other shareholders and investment community
accounts; answer collect telephone inquiries from shareholders and their
representatives; and, if requested, call individuals who are registered
holders.
2. The Korea Fund will pay Georgeson a fee of $7,500.00, of which half is
payable in advance per the enclosed invoice and the balance at the
expiration of the Offer, plus an additional fee to be mutually agreed
upon if the Offer is extended more than fifteen days beyond the initial
expiration date. If Georgeson is requested to call individuals who are
registered holders of Common Stock of The Korea Fund, The Korea Fund,
Inc. will pay Georgeson an additional sum computed on the basis of $6.00
per call.
3. In connection with our services under this agreement, you agree to
reimburse us, or pay directly, or, where requested by us, advance
sufficient funds to us for payment for the following reasonable costs and
expenses:
--expenses incidental to the Offer, including typesetting, printing,
distribution, mailing, postage and freight charges incurred by us on your
behalf;
--expenses we incur in working with your agents or other parties,
including bank threshold lists, data processing, charges for facsimile
transmissions or other forms of electronic communications, charges of
courier, and other such services authorized by you;
--expenses we incur at your request or for your convenience,including
printing additional and/or supplemental material, copying, and travel
expenses of our executives;
--fees and expenses authorized by you resulting from extraordinary
contingencies during the solicitation, including advertising, media
relations, stock watch and analytical services.
<PAGE> 2
The Korea Fund, Inc.
March 25, 1997
Page 2
4. If requested, we will check, itemize and pay, on your behalf, from funds
provided by you, the charges of brokers and banks, with the exception of
ADP Proxy Services which will bill you directly, for forwarding Offer
material to beneficial owners. To ensure that we have sufficient funds in
your account to pay these bills promptly, you agree to provide us, at the
time we complete the initial delivery of this material, with a
preliminary payment equal to 75% of the anticipated broker and bank
charges for distributing this material. For this service, you will pay us
five dollars and fifty cents ($5.50) for each broker and bank invoice
paid by us. If you prefer to pay these bills directly, please strike out
and initial this clause before returning the Agreement to us.
5. Georgeson hereby agrees not to make any representations not included in
the Korea Fund's Registration Statement when it becomes effective.
6. The Korea Fund agrees to indemnify and hold Georgeson harmless against
any loss, damage, expense (including, without limitation, reasonable
legal fees and expenses), liability or claim arising out of Georgeson's
fulfillment of the Agreement (except for any loss, damage, expense,
liability or claim arising out of Georgeson's own negligence or
misconduct or failure to substantially perform any of its duties or
obligations under this Agreement). At its election, The Korea Fund may
assume the defense of any such action. Georgeson hereby agrees to advise
The Korea Fund of any such liability or claim promptly after receipt of
any notice thereof. The Korea Fund shall not be liable for any settlement
of any action without its written consent. The indemnification contained
in this paragraph will survive the term of the Agreement for a period of
three years from the date hereof.
7. Georgeson agrees to preserve the confidentiality of all non-public
information provided by The Korea Fund or its agents for our use in
providing services under this Agreement, or information developed by
Georgeson based upon such non-public information.
IF THE ABOVE IS AGREED TO BY YOU, PLEASE SIGN AND RETURN THE ENCLOSED DUPLICATE
OF THIS AGREEMENT TO GEORGESON & COMPANY INC., WALL STREET PLAZA, NEW YORK, NEW
YORK 10005, ATTENTION: MARCY ROTH, CONTRACT ADMINISTRATOR.
ACCEPTED: Sincerely,
THE KOREA FUND, INC. GEORGESON & COMPANY INC.
By: By:
------------------------------- ---------------------------------
Kay DeAngelis
Senior Managing Director
Title:
----------------------------
Date:
----------------------------
<PAGE> 1
Exhibit l
[Debevoise & Plimpton Letterhead]
March 25, 1997
The Korea Fund, Inc.
345 Park Avenue
New York, New York 10154
The Korea Fund, Inc.
Registration Statement on Form N-2
Ladies and Gentlemen:
We have acted as counsel for The Korea Fund, Inc., a Maryland
corporation (the "Fund"), in connection with the preparation and filing with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Act") of a Registration Statement on Form N-2 (File
Nos. 333-22595 and 811-4058) (the "Registration Statement"), relating to the
issuance of transferable rights (the "Rights") for the purchase of shares of
common stock of the Fund, par value $.01 per share (the "Shares").
In so acting, we have examined and relied upon the originals, or
copies certified or otherwise identified to our satisfaction, of such documents,
records, certificates and other instruments and have made such other
investigations as in our judgment are necessary or appropriate to enable us to
render the opinion expressed below.
<PAGE> 2
The Korea Fund, Inc. 2 March 25, 1997
We are of the opinion that the Shares have been duly authorized for
issuance and, when issued and paid for pursuant to the terms set forth in the
Registration Statement, will be validly issued, fully paid and non-assessable.
We consent to the filing of this opinion as an Exhibit to Amendment
No. 19 to the Registration Statement and to the reference to us under the
heading "Validity of the Shares" in the Prospectus forming a part of the
Registration Statement. In giving such consent, we do not hereby concede that we
are within the category of persons whose consent is required under Section 7 of
the Act or Rules and Regulations of the Commission thereunder.
Very truly yours,
Debevoise & Plimpton
<PAGE> 1
Exhibit n(i)
[SHIN & KIM LETTERHEAD]
March 25, 1997
The Korea Fund, Inc.
345 Park Avenue
New York, NY 10154
U.S.A.
Korean Taxes Applicable to
The Korea Fund, Inc. and the Operation of its Business
------------------------------------------------------
Dear Sirs:
We have acted as legal advisers in the Republic of Korea ("Korea") to
The Korea Fund, Inc. (the "Company") and to Daewoo Capital Management Co.,
Ltd. (the "Korean Adviser") in connection with the offering of shares of common
stock of the Company. We hereby consent to the reference to our firm under the
headings, "Taxation - Korean Taxes" and "Validity of the Shares", in the
Prospectus constituting a part of the Company's Registration Statement on Form
N-2 and to the filing of this opinion with the United States Securities and
Exchange Commission as an exhibit to the Company's Registration Statement on
Form N-2.
This opinion is confined to, and given on the basis of, Korean law as
currently enforced by the relevant authorities and applied by the courts in
Korea. We have made no independent investigation of the laws of the United
States that govern the taxation of the Company, and we do not express or imply
any opinion on the laws of any other jurisdiction. We have assumed that there
is nothing in the law of any other place which will affect this opinion. All
terms used herein have the meanings set forth in the Prospectus or the Dealer
Manager Agreement between the Company and the Dealer Manager.
For the purposes of this opinion, we have examined the following
documents:
1. The Company's Registration Statement on Form N-2 (Registration No.
333-22595) under the Securities Act of 1933, as amended, and
Amendment No. 18 to the Company's Registration Statement under the
Investment Company Act of 1940, as amended, including the
Prospectus for the offering of shares of common stock of the
Company and the Exhibits attached thereto;
2. The License, Approval and Confirmation, dated June 22, 1984, issued
by the Minister of Finance and Economy of Korea to the Company,
Scudder, Stevens & Clark, Inc. (the "Manager"), and the Korean
Adviser;
3. The Amendment, dated April 11, 1986, to the License, Approval and
Confirmation, dated June 22, 1984, issued by the Minister of
Finance and Economy of Korea;
4. The Amendment, dated August 3, 1989, to the License, Approval and
Confirmation, dated June 22, 1984, issued by the Minister of
Finance and Economy of Korea;
5. The Amendment, dated October 7, 1992, to the License, Approval and
Confirmation, dated June 22, 1984, issued by the Minister of
Finance and Economy of Korea;
6. The Amendment, dated October 20, 1993, to the License, Approval and
Confirmation, dated June 22, 1984, issued by the Minister of
Finance and Economy of Korea;
7. The Amendment, dated May 12, 1995, to the License, Approval and
Confirmation, dated June 22, 1984, issued by the Minister of
Finance and Economy of Korea;
8. The Amendment, dated March 30, 1996, to the License, Approval and
Confirmation, dated June 22, 1984, issued by the Minister of
Finance and Economy of Korea;
<PAGE> 2
9. The Amendment, dated September 30 1996, to the License, Approval
and Confirmation, dated June 22, 1984, issued by the Minister of
Finance and Economy of Korea;
10. The Amendment, dated February 28, 1997, to the License, Approval
and Confirmation, dated June 22, 1984, issued by the Minister of
Finance and Economy of Korea;
11. The Response to Inquiry Regarding Korean Tax Treatment of The Korea
Fund, Inc., dated November 17, 1993, issued by the Minister of
Finance and Economy of Korea;
12. The Response to Inquiry Regarding Korean Tax Treatment of The Korea
Fund, Inc., dated May 23, 1995, issued by the Minister of Finance
and Economy of Korea; and
13. The opinion of Debevoise & Plimpton pertaining to the United States
taxation of investment companies such as the Company, dated March
24, 1997.
In giving this opinion, we have assumed in relation to the documents
listed above the genuineness of all signatures and the authenticity of all
documents submitted to us as originals and the conformity with the originals of
all documents submitted to us as copies thereof, and we have found nothing to
indicate that such assumptions are not fully justified. We have also assumed
that the representations and warranties (other than as to matters of Korean
law) made by the Company in the Dealer Manager Agreement are true and correct
and that the shares of common stock will be duly registered, issued, offered
and sold. As to any other matters of fact material to the opinions expressed
herein, we have relied upon the statements of officers and other
representatives of the Company, the Manager, the Korean Adviser and the
appropriate governmental ministries and agencies.
Based upon and subject to the foregoing and the qualifications set
forth below, we are of the opinion that:
1. The information in the Prospectus, to the extent that it relates to
Korean taxes, has been reviewed by us and is an accurate
description of Korean taxes applicable to the Company and the
operation of its business as described in the Prospectus and such
information does not contain any untrue statement of material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. In
rendering this opinion, we have relied upon the opinion of
Debevoise & Plimpton that since the date on which the United States
of America - Republic of Korea Income Tax Treaty was signed, the
United States has enacted no special measures by reason of which
the United States tax imposed on dividend, interest, royalty and
capital gains income of investment companies such as the Company
is substantially less than the tax imposed by the United States on
corporate profits.
<PAGE> 3
2. As for the shareholders of the Company, no Korean withholding tax
will in any event be applicable to any payments by the Company to
its shareholders and no capital gains tax will be payable with
respect to gains on sales of shares of the Company held by (1)
individuals who are not Korean nationals nor domiciled in Korea;
(2) foreign corporations that have no place of business in Korea or
(3) foreign partnerships, foreign trusts or foreign estates, all of
whose partners or beneficiaries, as the case may be, are persons
described in Clauses (1), (2) or (3) (all persons described in
Clauses (1), (2) or (3) being hereinafter referred to as
"Non-Korean Shareholders"). Non-Korean Shareholders will not be
subject to income tax or corporate tax with respect to any
distributions from the Company or gains on sales of shares of the
Company. Except as described in the Prospectus and by us above,
under Korean law presently in force, neither the Company nor any
Non-Korean Shareholders will be subject to any Korean taxes upon
or with respect to the operations or conduct of business by the
Company, the income, profits, receipts or gains derived by the
Company, the ownership by the Company of stocks and securities of
Korean corporations, the ownership of shares of the Company or the
receipt of distributions with respect thereto, or otherwise upon or
with respect to the contemplated transactions.
This opinion is subject to the qualification that we have not been
responsible for investigating or verifying the accuracy of the facts, or the
reasonableness of any statement of opinion, contained in the Prospectus, or
that no material facts have been omitted therefrom, other than to the extent
that such relates to matters of Korean law, legal conclusions or taxation.
This opinion is given on the basis that it will be governed by, and be
construed and have effect in accordance with, Korean law. This opinion is
limited to the matters addressed herein and is not to be read as an opinion
with respect to any other matter.
Very truly yours,
[Signature]
Shin & Kim
<PAGE> 1
Exhibit n(ii)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of The Korea Fund, Inc.:
We consent to the inclusion in Pre-Effective Amendment No. 1 to
the Registration Statement of The Korea Fund, Inc. on Form N-2 (File No.
811-4058) of our report dated February 24, 1997 on our audits of the financial
statements and financial highlights of the Fund for the six months ended
December 31, 1996, and for the year ended June 30, 1996, which are included in
the Registration Statement. We also consent to the reference to our Firm under
the captions "Financial Highlights" and "Experts" in the Prospectus.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 24, 1997
<PAGE> 1
Exhibit n (x)
MINISTRY OF FINANCE AND ECONOMY
Document No.: JEUNGJAE 41610-57
Enforcement Date: March 30, 1996
To: Dr. Young Moo Shin and
Law Offices of Shin & Kim
Re: Amendment to the License for Investment in Korean
Securities Regarding The Korea Fund, and The Korea-
Europe Fund Limited
- --------------------------------------------------------------------------------
1. Reference is made to your letters, SEJONG NO. 96-0351
(dated March 27, 1996) and SEJONG NO. 96-0354 (dated
March 28, 1996.
2. Pursuant to Article 203 of the Securities and Exchange
Act and Article 10-66 of the Foreign Exchange Management
Regulations, we hereby approve the investment in Korean
securities by The Korea Fund, Inc. and The Korea-Europe
Fund Limited as set forth in the attached.
Attachment: A copy of the "Amendment to the License,
Approval and confirmation Regarding The Korea
Fund, Inc." and a copy of the "Amendment to the
Approval for Investment by The Korea-Europe
Fund Limited."
Minister of Finance and Economy
(Official Seal Affixed)
<PAGE> 2
To: The Korea Fund, Inc.
Re: Amendment to the License, Approval and
Confirmation of The Korea Fund, Inc.
------------------------------------
The Minister of Finance and Economy, on behalf of the Government
of the Republic of Korea, pursuant to Korean law presently in force, hereby
amends the License, Approval and Confirmation dated June 22, 1984, as amended
on April 11, 1986, August 2, 1989, October 7, 1992, October 20, 1993 and May
12, 1995 (as amended, the "License") as set forth below. In all other respects,
the License remains unchanged and in full force and effect, and the
confirmations made therein are repeated as of the date of this Amendment.
1. Paragraph 4. D of the License, setting forth the limit on investments in
securities of an individual issuer, is deleted in its entirety and replaced
with the following new Paragraph 4. D:
"D. Limits on Investments
---------------------
1) The Fund shall not acquire shares of a Korean issuer if, as a result
of such acquisition, the Fund would hold in excess of 5% of the
shares then outstanding of any class of stock of the issuer.
2) The Fund shall not acquire listed bonds (as defined in the regulations of
KSEC) if, as a result of such acquisition, the Fund's holdings of such,
listed bonds would have a value (calculated at the time of acquisition) in
excess of 10% of the net asset value of the Fund (as such value is
calculated as at the date of such acquisition).
3) The Fund is permitted to acquire unlisted shares which are registered
with the Korea Securities Dealers Association for the trading on the
over-the-counter market in Korea (the "Registered OTC Shares"):
provided that the Fund shall not acquire the Registered OTC Shares if,
as a result, more than 25% of the net asset value of the Fund (as such value
is calculated as at the date of such acquisition) would be invested in the
Registered OTC Shares in aggregate or more than 5% of the net asset value of
the Fund (as such value is calculated as at the date of such acquisition)
would be invested in any class of the Registered OTC Shares. The Fund
shall trade the Registered OTC Shares only with Korean nationals or
foreigners treated as Korean nationals (as defined in the regulations
of KSEC) through Korean securities companies as intermediary and may rely
on information provided by such securities companies with respect
to the status of the counter-parties to such trades.
4) If any of the matters set forth above in paragraphs (1) through (3) comes to
be permitted under a provision of law or regulation applicable to
investment by foreigners, or to be permitted otherwise by KSEC, then,
to the extent permitted to other foreigners, such matters shall be
permitted to the Fund.
5) The Fund may invest in securities index futures market which will be
established in Korea, and such investment shall be made in accordance
with the regulations which apply to foreigners' investment or as
otherwise permitted by KSEC."
<PAGE> 1
Exhibit n(xi)
[Translation]
MINISTRY OF FINANCE AND ECONOMY
Document No.: JEUNGJAE 41296-20
Enforcement Date: February 28, 1997
To: Young Moo Shin, Esq. and
Law Offices of Shin & Kim
Re: Amendment to the Approval of the Investment in Korean
Securities Regarding The Korea Fund, Inc.
- -------------------------------------------------------------------------
1. Reference is made to your letter, SEJONG NO. 97-0212
(dated February 26, 1997).
2. Pursuant to Article 303 of the Securities and Exchange Act and Article
10-66 of the Foreign Exchange Management Regulations, we hereby approve
the investment in Korean securities by the Korea Fund, Inc. of the
proceeds of its sixth offering as set forth in the attached.
Attachment: A copy of the "Amendment to the License, Approval and
Confirmation Regarding The Korea Fund, Inc."
MINISTER OF FINANCE AND ECONOMY
(Official Seal Affixed)
<PAGE> 2
To: The Korea Fund, Inc.
Scudder, Stevens & Clark, Inc.
Daewoo Capital Management Co., Ltd.
Re: Amendment to the Licence, Approval and Confirmation of
The Korea Fund, Inc.
We understand that The Korea Fund, Inc. (the "Fund") has proposed to
increase its capital through a stock offering of its Common Stock to its
shareholders (the "Six Offering"). Shares of such Common Stock will be offered
in the Six Offering with the aggregate increase in capital (i.e. gross
subscription price) of not more than US$200 million.
The Minister of Finance and Economy, on behalf of the Government of the
Republic of Korea, pursuant to Korean law presently in force, hereby amends the
Licence, Approval and Confirmation dated June 22, 1984, as amended on April 11,
1986, August 2, 1989, October 7, 1992, October 20, 1993, May 12, 1995, March
30, 1996 and September 30, 1996 (as amended, the "License") as set forth below.
In all other respects, the Licence remains unchanged and in full force and
effect, and the confirmations made therein are repeated as of the date of this
Amendment.
1. The permission granted by Paragraph 1.A of the License shall extend as
well to the investment of proceeds from the Sixth Offering.
2. The following new sentence shall be added to the end of Paragraph 1.A
of the Licence:
"The Fund may purchase shares in initial public offering on the
same basis as Korean domestic institutional investors."
3. The limit on investments in listed bonds set forth in Paragraph 4.D.2)
of the License shall be changed from 10% to 20%.
