<PAGE> 1
PROSPECTUS
12,429,083 SHARES
LOGO THE KOREA FUND, INC.
COMMON STOCK
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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 $12.00.
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.
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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 27, 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 $14.50, respectively.
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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 may be experienced as a result of the Offer. SEE "THE
OFFER" AND "RISK FACTORS AND SPECIAL CONSIDERATIONS -- SPECIAL CONSIDERATIONS
RELATING TO THE OFFER -- DILUTION."
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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 $12.00 $0.42 $11.58
- ---------------------------------------------------------------------------------------------------------------------------
Total $149,148,996 $5,220,214.86 $143,928,781.14
===========================================================================================================================
</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 $25,000 to be paid to the Dealer Manager in
reimbursement of its expenses.
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Prior to the Expiration Date, the Dealer Manager may offer Shares of Common
Stock, including Shares acquired through the purchase and exercise of Rights, at
prices it sets from time to time. Because the Dealer Manager will determine the
price, it may realize profits or losses independent of any fees referred to
under "The Offer -- Distribution Arrangements."
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This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus and to retain it for future reference. A Statement of
Additional Information, dated March 31, 1997 (the "SAI"), containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission (the "Commission") and is incorporated by reference in its entirety
into this Prospectus. A copy of the SAI may be obtained without charge by
calling the Fund's Information Agent, Georgeson & Company Inc., toll free at
(800) 223-2064 or collect at (212) 509-6240. The table of contents of the SAI is
on page 49 of this Prospectus.
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SMITH BARNEY INC.
The date of this Prospectus is March 31, 1997.
<PAGE> 2
In this Prospectus, unless otherwise specified, all references to "billion"
are to one thousand million, to "trillion" are to one thousand billion, to
"Dollars," "US$" 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> 3
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%
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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>
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(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 $757,113.
(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> 4
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 March 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 may 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 $12.00.
4
<PAGE> 5
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> 6
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> 7
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 may 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 Shares are
subscribed for and that the Subscription Price of $12.00 is 4.91% below the
Fund's net asset value of $12.62 per share on March 27, 1997, the Fund's net
asset value per share would be reduced by approximately $0.27 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> 8
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> 9
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(F) 1987(F)
------ ------ -------
<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 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> 10
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 -- March 31,
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 27, 1997,
the last price of the Fund's shares on the NYSE Composite Tape was $14.50, which
represented a premium of 14.9% 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.
10
<PAGE> 11
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 16, 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> 12
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 Shares are subscribed for and net
proceeds of the Offer are $143,171,668, 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 $1,020,098 and $340,033,
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> 13
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 $12.00. 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 March 27, 1997 was $13.87 and $12.62,
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 $14.50,
respectively. The Subscription Price of $12.00 is a 4.91% discount to the Fund's
net asset value per share on March 27, 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> 14
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 Campanelli 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> 15
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
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<PAGE> 16
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.
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<PAGE> 17
(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 $1,491,489.96) 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.
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<PAGE> 18
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.
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<PAGE> 19
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 Shares are subscribed for,
are estimated at approximately
$143,171,668 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
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<PAGE> 20
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
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<PAGE> 21
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> 22
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> 23
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> 24
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> 25
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, 23.6% 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.
25
<PAGE> 26
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 may 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> 27
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 Shares are subscribed for and that the
Subscription Price of $12.00 is 4.91% below the Fund's net asset value of $12.62
per share on March 27, 1997, the Fund's net asset value per share would be
reduced by approximately $0.27 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
<PAGE> 28
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
29
<PAGE> 30
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.
30
<PAGE> 31
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
31
<PAGE> 32
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
32
<PAGE> 33
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 20% 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
33
<PAGE> 34
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, 23.6% 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
34
<PAGE> 35
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.
35
<PAGE> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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 March
21, 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> 48
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. Certain legal matters will be passed
on 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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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
MARCH 31, 1997 RELATING THERETO.
DATE: MARCH 31, 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.$12.00 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 APRIL 11,
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> 60
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> 61
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> 62
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> 63
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 MARCH 31, 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
$12.00 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> 64
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> 65
======================================================
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
MARCH 31, 1997
------------
SMITH BARNEY INC.
======================================================
<PAGE> 66
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 March 31, 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 March 31, 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> 67
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
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<PAGE> 68
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.
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<PAGE> 69
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> 70
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> 71
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.
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<PAGE> 72
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> 73
<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> 74
<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> 75
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 March 21, 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
10
<PAGE> 76
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.
Since August 21, 1995, Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of the Manager, has been responsible for determining the daily net
asset value per share and maintaining the portfolio and general accounting
records of the Fund. For the fiscal year ended June 30, 1996, SFAC charged the
Fund an aggregate of $343,236 for such services.
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
11
<PAGE> 77
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
12
<PAGE> 78
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
13
<PAGE> 79
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> 80
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,
15
<PAGE> 81
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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<PAGE> 82
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
$295,613, 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> 83
to portfolio transactions brokerage commissions of $134,564 and $74,082,
respectively, which represented 22% and 16%, respectively, of the total
commissions paid for each respective period.
Brokerage commissions on equity securities may be negotiated up to a
permitted maximum percentage of the sales value of the transaction. The Stock
Exchange is permitted to alter the maximum commission rate from time to time.
The rates currently provide for a maximum commission of 0.6% for equity
securities and 0.3% for bonds. Each broker is required to report its commission
rate schedule and any deviation therefrom to the KSEC at least seven days before
its effectiveness. As a result of this practice, there generally is no deviation
in commission rates schedules among Korean brokers and, in practice, securities
companies currently collect brokerage commissions of up to 0.5% of the sales
value for equity securities. A Securities Transaction Tax equal to 0.5% (in the
case of transactions outside the Stock Exchange) or 0.35% (in the case of
transactions on the Stock Exchange) of the sales proceeds is imposed upon a
seller of Korean equity securities in most cases. In addition, a special
agricultural and fishery tax equal to 0.15% of the sales proceeds is imposed in
the case of transactions on the Stock Exchange. The Fund currently is not
required to pay such taxes with respect to its sales on the Stock Exchange. It
is, however, required to pay the Securities Transaction Tax with respect to any
sales it makes outside of the Stock Exchange.
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[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Investment Portfolio as of December 31, 1996
<CAPTION>
===================================================================================================================
Principal Market
Amount(e) Value($)
- -------------------------------------------------------------------------------------------------------------------
<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.$1,000,000 Kolon Industries, Inc., 0.250%, 12/31/04 (Leading
manufacturer of nylon, polyester yarn and
fabrics) ............................................. 555,000
2,400,000,000 Kukje Corp., 12% with 4.62% bonus interest at
maturity, 12/31/97 (Shoe manufacturer)(c)(f) ......... 2,941,717
----------
3,496,717
----------
HEALTH 0.8%
Pharmaceuticals 3,000,000,000 Korea Green Cross Corp., 1% with 11.88% bonus
interest at maturity, 12/31/97(Leading ethical
drug producer)(c)(f) ................................. 3,560,253
400,000,000 Yuhan Corp., 5.5% with 25.41% bonus interest at
maturity, 12/31/97 (Pharmaceutical company)(c)(f) .... 550,467
----------
4,110,720
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE> 85
<TABLE>
<CAPTION>
===================================================================================================================
Principal Market
Amount(e) Value($)
- -------------------------------------------------------------------------------------------------------------------
<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 $40,698,801) .............. 35,206,080
----------
- -------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS 4.2% Shares
------
CONSUMER DISCRETIONARY 0.2%
Apparel & Shoes 0.2% 10,700 Baik Yang Co. (Leading maker of under garments) ......... 443,195
50,000 Shin Won Corp. (Major apparel manufacturer) ............. 436,686
----------
879,881
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE> 86
[Logo of The Korea Fund, Inc.] The Korea Fund, Inc.
<TABLE>
Investment Portfolio (continued)
<CAPTION>
===================================================================================================================
Market
Shares Value($)
- -------------------------------------------------------------------------------------------------------------------
<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> 87
<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> 88
[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> 89
<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> 90
[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> 91
<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> 92
[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> 93
<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> 94
[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> 95
[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> 96
[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> 97
<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> 98
[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> 99
[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> 100
[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> 101
================================================================================
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> 102
[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> 103
[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 $41,504,920) .......... 37,229,470
----------
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
PREFERRED STOCKS 3.4% Shares
------
<S> <C> <C> <C>
CONSUMER DISCRETIONARY 0.1%
Apparel & Shoes 10,700 BYC (Leading maker of under garments) (c) ........... 567,184
----------
CONSUMER STAPLES 0.7%
Alcohol & Tobacco 0.1% 5,800 Jinro, Ltd. ......................................... 53,982
46,165 Oriental Brewery Co., Ltd.
(Korea's largest brewery) (g) ..................... 682,914
----------
736,896
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 104
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<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> 105
[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 $21,382,560) ........... 19,974,370
----------
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
COMMON STOCKS 87.7%
<S> <C> <C> <C>
CONSUMER DISCRETIONARY 4.0%
Apparel & Shoes 0.5% 52,083 Shin Won (Major apparel manufacturer) ............... 1,592,281
30,000 Ssang Bang Wool Co.
(Leading underwear manufacturer) ................. 1,427,515
----------
3,019,796
----------
Department & Chain
Stores 3.3% 182,591 Hwa Sung Industries (Department store) .............. 4,794,364
152,443 Shinsegae (Major department store chain) ............ 10,335,756
16,571 Shinsegae (New) (b)(g) .............................. 1,031,602
174,599 Taegu Department Store (Department store) ........... 3,379,197
----------
19,540,919
----------
Hotels & Casinos 0.2% 100,000 Hotel Shilla Co. (Luxury hotel and resort
operator) ........................................ 1,183,432
----------
CONSUMER STAPLES 3.5%
Alcohol & Tobacco 0.1% 19,000 Jinro, Ltd. ......................................... 405,202
6,009 Jinro, Ltd. (New) (b)(g) ............................ 120,002
----------
525,204
----------
Food & Beverage 2.5% 123,854 Cheil Food and Chemical Co., Ltd. ................... 8,092,039
120,000 Dongwon Industries Company (Leading deep-sea
fishing and processing company) .................. 2,337,278
32,271 Nhong Shim Co. (Manufacturer of instant noodles
and snacks) ...................................... 1,209,367
48,000 Pulmuone Co., Ltd. (Food producer) .................. 2,633,136
----------
14,271,820
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 106
<TABLE>
<CAPTION>
===========================================================================================================
Market
Shares Value($)
- -----------------------------------------------------------------------------------------------------------
<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> 107
[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> 108
<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> 109
[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> 110
<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> 111
[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> 112
<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> 113
[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> 114
[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> 115
[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> 116
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> 117
[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> 118
[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
