<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1995
1933 ACT FILE NO. 33-61849
1940 ACT FILE NO. 811-6467
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[_]REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X]PRE-EFFECTIVE AMENDMENT NO. 1
[_]POST-EFFECTIVE AMENDMENT NO.
AND/OR
[_]REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X]AMENDMENT NO. 7
EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER:
THE KOREAN INVESTMENT FUND, INC.
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (NUMBER, STREET, CITY, STATE, ZIP CODE):
1345 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10105
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(212) 969-1000
NAME AND ADDRESS (NUMBER, STREET, CITY, STATE, ZIP CODE) OF AGENT FOR SERVICE:
EDMUND P. BERGAN, JR.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
ALLIANCE FUND DISTRIBUTORS, INC.
1345 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10105
with copies to:
PATRICIA A. POGLINCO JOHN A. MACKINNON
SEWARD & KISSEL BROWN & WOOD
ONE BATTERY PARK PLAZA ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10048
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box......................................................[X]
----------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(2)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 2,484,546 $11.375 $28,261,710 $9,745.42
-----------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
--------
(1) Estimated pursuant to Rule 457(c) under the Securities Act of 1933 on the
basis of market price per share on August 11, 1995.
(2) Previously paid.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
THE KOREAN INVESTMENT FUND, INC.
FORM N-2
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
LOCATION IN
N-2 ITEM NUMBER PROSPECTUS (CAPTION)
--------------- --------------------
<C> <S> <C>
PART A
Item 1 Outside Front Cover....... Outside Front Cover Page
Item 2 Inside Front and Outside
Back Cover Page.......... Inside Front Cover Page; Outside Back
Cover Page
Item 3 Fee Table and Synopsis.... Expense Information
Item 4 Financial Highlights...... Financial Highlights
Item 5 Plan of Distribution...... Outside Front Cover Page; The Offer;
Distribution Arrangements
Item 6 Selling Shareholders...... Not Applicable
Item 7 Use of Proceeds........... Use of Proceeds; Investment Objective
and Policies
Item 8 General Description of the
Registrant............... The Fund; Net Asset Value and Market
Price Information; Investment
Objective and Policies; Special Risk
Considerations; Description of Common
Stock
Item 9 Management................ Management of the Fund; Custodian,
Dividend Paying Agent, Transfer Agent
and Registrar
Item 10 Capital Stock, Long-Term
Debt, and Other
Securities............... Dividend Reinvestment Plan; Taxation;
The Offer; Description of Common
Stock
Item 11 Defaults and Arrears on
Senior Securities........ Not Applicable
Item 12 Legal Proceedings......... Not Applicable
Item 13 Table of Contents of the
Statement of Additional
Information.............. Table of Contents of the Statement of
Additional Information
<CAPTION>
LOCATION IN
STATEMENT OF ADDITIONAL
INFORMATION (CAPTION)
-----------------------
<C> <S> <C>
PART B
Item 14 Cover Page................ Outside Front Cover Page
Item 15 Table of Contents......... Outside Front Cover Page
Item 16 General Information and
History.................. Not Applicable
Item 17 Investment Objective and
Policies................. Investment Objective and Policies;
Investment Restrictions
Item 18 Management ............... Management of the Fund
Item 19 Control Persons and
Principal Holders of
Securities............... Management of the Fund; Certain Owners
of Record
Item 20 Investment Advisory and
Other Services........... Management of the Fund
Item 21 Brokerage Allocation and
Other Practices.......... Brokerage and Portfolio Transactions
Item 22 Tax Status................ Taxation
Item 23 Financial Statements...... Financial Statements
PART C
Items 24-33 have been answered in order in Part C.
</TABLE>
<PAGE>
THE KOREAN INVESTMENT FUND, INC.
1,987,637 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF
RIGHTS TO SUBSCRIBE FOR SUCH SHARES
----------
The Korean Investment Fund, Inc. (the "Fund") is issuing to its shareholders
of record as of the close of business on September 25, 1995 (the "Record Date")
non-transferable rights ("Rights") entitling the holders thereof to subscribe
for an aggregate of 1,987,637 shares ("Shares") of the Fund's Common Stock at
the rate of one share of Common Stock for every three Rights held (the
"Offer"). Shareholders of record will receive one Right for each whole share of
Common Stock held on the Record Date. Shareholders who fully exercise their
Rights will be entitled to subscribe for additional shares of Common Stock
pursuant to the Over-Subscription Privilege as described herein. The Fund may
increase the number of Shares of Common Stock subject to subscription by up to
25% of the Shares, or 496,909 Shares, for an aggregate total of 2,484,546
Shares. Fractional shares will not be issued upon the exercise of Rights. The
Rights are non-transferable and will not be admitted for trading on the New
York Stock Exchange or any other exchange and, accordingly, may not be
purchased or sold. See "The Offer." THE SUBSCRIPTION PRICE PER SHARE (THE
"SUBSCRIPTION PRICE") WILL BE 95% OF THE LOWER OF (i) THE AVERAGE OF THE LAST
REPORTED SALES PRICE OF A SHARE OF THE FUND'S COMMON STOCK ON THE NEW YORK
STOCK EXCHANGE ON THE DATE OF THE EXPIRATION OF THE OFFER (THE "PRICING DATE")
AND ON THE FOUR PRECEDING BUSINESS DAYS AND (ii) THE NET ASSET VALUE PER SHARE
AS OF THE CLOSE OF BUSINESS ON THE PRICING DATE.
The Fund announced the Offer after the close of trading on the New York Stock
Exchange on August 16, 1995. Shares of the Common Stock trade on that exchange
under the symbol "KIF." The net asset value per share of Common Stock at the
close of business on August 11, 1995 and September 15, 1995 was $12.66 and
$12.82, respectively, and the last reported sales price of a share of the
Fund's Common Stock on the New York Stock Exchange on those dates was $11.25
and $12.50, respectively.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 20, 1995
(THE "EXPIRATION DATE"), UNLESS EXTENDED AS DESCRIBED HEREIN.
The Fund is a diversified, closed-end management investment company. The
Fund's investment objective is to seek long-term capital appreciation through
investment primarily in equity securities of Korean companies. Under normal
circumstances, the Fund invests at least 65% of its total assets in such
securities. Equity securities include common stocks, preferred stocks, rights
or warrants to purchase common or preferred stock and debt securities
convertible into common or preferred stock. INVESTMENT IN THE FUND INVOLVES
SPECIAL CONSIDERATIONS THAT ARE NOT NORMALLY ASSOCIATED WITH INVESTMENT IN
UNITED STATES ISSUERS. SEE "SPECIAL RISK CONSIDERATIONS." There can be no
assurance that the Fund's investment objective will be achieved. See
"Investment Objective and Policies."
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated September 19,
1995 (the "SAI") containing additional information about the Fund has been
filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this Prospectus. A copy of the SAI, the table of
contents of which appears on page 41 of this Prospectus, may be obtained
without charge by calling the Fund at (800) 227-4618.
(Continued on the following page)
----------
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>
<CAPTION>
Estimated Estimated
Subscription Estimated Proceeds to
Price(1) Sales Load(2) Fund(3)(4)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............. $11.88 $0.45 $11.43
-------------------------------------------------------------------------------
Total Maximum(5)...... $23,613,128 $885,492 $22,727,636
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
(Footnotes on the following page)
----------
PAINEWEBBER INCORPORATED
----------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 19, 1995.
<PAGE>
(Continued from the previous page)
Upon the completion of the Offer, shareholders who do not fully exercise
their Rights will own a smaller proportional interest in the Fund than would
otherwise be the case if the Offer had not been made. In addition, because the
Subscription Price per Share will be less than the net asset value per share
and because the Fund will incur expenses in connection with the Offer, the
Offer will result in a dilution of net asset value per share for all
shareholders. Such dilution will disproportionately affect non-exercising
shareholders. If the Subscription Price per Share were to be substantially less
than the current net asset value per share, such dilution would be substantial.
Shareholders will have no right to rescind their subscriptions after receipt of
their payment for Shares by the Subscription Agent. See "Special Risk
Considerations--Dilution and the Effect of Non-Participation in the Offer." For
the recent trading history of the Fund see "Net Asset Value and Market Price
Information."
The Fund's investment manager and administrator is Alliance Capital
Management L.P. ("Alliance"), a leading international investment manager. Orion
Asset Management Co., Ltd. ("Orion"), a subsidiary of Tong Yang Securities Co.,
Ltd. ("Tong Yang Securities"), a component member of a leading Korean
securities company, serves as investment manager to the Fund with respect to
its investments in Korean securities. See "Management of the Fund." The address
of the Fund is 1345 Avenue of the Americas, New York, New York 10105 and its
telephone number is (800) 247-4154.
Unless otherwise specified, references in this Prospectus to "U.S. Dollars,"
"US $" or "$" are to United States Dollars and references to "Won" or "W" are
to Korean Won. On September 15, 1995, the market average exchange rate, as
published by The Korea Financial Telecommunications and Clearings Institute,
was 777.10 Won per U.S. Dollar. See "Special Risk Considerations--Currency
Fluctuation." Certain numbers in this Prospectus and in the SAI have been
rounded. Unless otherwise indicated, U.S. 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 U.S. Dollar information for Won as of a specified date is
based on the exchange rate for that date.
----------------
(Footnotes from the previous page)
(1) Estimated on the basis of the closing market price per share on the New
York Stock Exchange on September 15, 1995.
(2) In connection with the Offer, PaineWebber Incorporated (the "Dealer
Manager") and other broker-dealers soliciting the exercise of Rights will
receive soliciting fees equal to 2.50% of the Subscription Price per Share
for each Share issued pursuant to the exercise of the Rights and the Over-
Subscription Privilege. The Fund has also agreed to pay the Dealer Manager
a fee for financial advisory services in connection with the Offer equal to
1.25% of the Subscription Price per Share for each Share issued upon
exercise of the Rights and pursuant to the Over-Subscription Privilege and
has agreed to indemnify the Dealer Manager against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
(3) Before deduction of offering expenses incurred by the Fund, estimated at
$546,000, including an aggregate of up to $100,000 to be paid to the Dealer
Manager as partial reimbursement for its expenses.
(4) Funds received by check prior to the final due date of this Offer will be
deposited into a segregated interest bearing account (which interest will
be paid to the Fund) at State Street Bank and Trust Company pending
proration and distribution of Shares.
(5) Assumes all Rights are exercised at the Estimated Subscription Price.
Pursuant to the Over-Subscription Privilege, the Fund may at its discretion
increase the number of Shares subject to subscription by up to 25% of the
Shares offered hereby. If the Fund increases the number of Shares subject
to subscription by 25%, the aggregate maximum Estimated Subscription Price,
Estimated Sales Load and Estimated Proceeds to Fund will be $29,516,406,
$1,106,865 and $28,409,541, respectively.
2
<PAGE>
EXPENSE INFORMATION
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price)(1)....................... 3.75%
ANNUAL EXPENSES (as a percentage of net assets)(2)
Management and Administration fees(3)................................... 1.25%
Other expenses.......................................................... .62%
----
Total annual expenses..................................................... 1.87%
====
</TABLE>
--------
(1) Consists of Dealer Manager and soliciting fees. See "Distribution
Agreements." The fees will be borne by all of the Fund's shareholders,
including those shareholders who do not exercise their rights.
(2) Amounts based on the Fund's most recently completed fiscal year, except
that "Other expenses" are based on estimated amounts for the Fund's current
fiscal year and assume that the Fund's shareholders exercise their Rights
to purchase all of the Shares, including all of the Shares offered pursuant
to the Over-Subscription Privilege. Annual expenses for the fiscal year
ended April 30, 1995 were 2.00% as a percentage of average net assets.
(3) See "Management of the Fund--Management and Administration Arrangements"
herein and in the SAI.
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming a 5% annual
return.................................... $56 $94 $135 $249
</TABLE>
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that a shareholder bears directly or indirectly.
The above example is based on an operating expense ratio of 1.87% and assumes
reinvestment of all dividends and distributions at net asset value. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES; ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following information as to per share data, ratios and certain
supplemental data for each of the periods shown below has been audited by Price
Waterhouse LLP, independent accountants, as stated in their report included in
the SAI. This information should be read in conjunction with the financial
statements and notes thereto included in the SAI, copies of which can be
obtained by shareholders.
PER SHARE DATA, RATIOS AND CERTAIN SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED FEBRUARY 24,
APRIL 30, APRIL 30, APRIL 30, 1992(A) TO
1995 1994 1993 APRIL 30, 1992
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of
period...................... $ 13.09 $ 10.37 $ 11.00 $ 10.90(b)
------- ------- ------- -------
INCOME FROM INVESTMENT OPERA-
TIONS
Net investment loss.......... $ (.13)* (.09) (.03) (.01)
Net realized and unrealized
gain (loss) on securities
and foreign currency trans-
actions..................... $ .28 2.81 (.59) .11
------- ------- ------- -------
Net increase (decrease) in
net asset value............. $ .15 2.72 (.62) .10
------- ------- ------- -------
LESS: DISTRIBUTIONS
Distributions from net real-
ized gains on investment and
foreign currency transac-
tions....................... -0- -0- (.01) -0-
CAPITAL SHARE TRANSACTIONS
Dilutive effect of rights of-
fering...................... (.48) -0- -0- -0-
Offering costs charged to ad-
ditional paid-in capital.... (.10) -0- -0- -0-
------- ------- ------- -------
Total capital share transac-
tions....................... (.58) -0- -0- -0-
------- ------- ------- -------
Net asset value, end of peri-
od.......................... $ 12.66 $ 13.09 $ 10.37 $ 11.00
------- ------- ------- -------
Market value, end of period.. $12.375 $13.375** $12.125 $10.000
======= ======= ======= =======
Total investment return based
on: (c)
Market value............... (5.88)% 10.31%** 21.39% (10.39)%
Net asset value............ (3.28)% 26.23% (5.62)% (1.43)%
Net assets, end of period
(000's omitted)............. $75,461 $55,078 $43,663 $46,278
RATIOS AND SUPPLEMENTAL DATA:
Ratio of expenses to average
net assets.................. 2.00% 2.26% 2.55% 2.37%(d)
Ratio of net investment loss
to average net assets....... (.83)% (.82)% (.27)% (.49)%(d)
Portfolio turnover rate...... 34% 14% 43% 8%
</TABLE>
--------
* Based on average shares outstanding during the period.
** Restated.
(a) Commencement of operations.
(b) Net of offering costs of $.26.
(c) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of each period reported. Dividends and distributions, if any, are assumed
for purposes of this calculation to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Rights offerings, if any, are
assumed for purposes of this calculation to be fully subscribed under the
terms of the rights offering. Generally, total investment return based on
net asset value will be higher than total investment return based on market
value in periods where there is an increase in the discount or a decrease
in the premium of the market value to the net asset value from the
beginning to the end of such periods. Conversely, total investment return
based on the net asset value will be lower than total investment return
based on market value in periods where there is a decrease in the discount
or an increase in the premium of the market value to the net asset value
from the beginning to the end of such periods. Total investment return for
a period of less than one year is not annualized.
(d) Annualized.
The per share amounts reported herein are not necessarily consistent with the
corresponding amounts reported on the Statement of Operations due to the change
in capital stock caused by the rights offering.
4
<PAGE>
THE OFFER
PURPOSE OF THE OFFER
The Board of Directors of the Fund has determined that it would be in the
best interest of the Fund and its shareholders to increase the assets of the
Fund available for investment, thereby enabling the Fund to more fully take
advantage of available investment opportunities consistent with the Fund's
investment objective of long-term capital appreciation. In reaching its
decision, the Board of Directors was advised by Alliance and Orion that the
availability of new funds would enable the Fund to more fully take advantage of
attractive investment opportunities available in the Korean market as a result
of current valuations of equity securities and economic conditions, as well as
the recent liberalization of the Korean securities market. In this regard,
Alliance and Orion informed the Board that the Korean government recently
relaxed foreign investment regulations to increase (in general) from 12% to 15%
the percentage of each class of a Korean company's outstanding equity shares
listed on the Korea Stock Exchange that may be held by all foreign investors as
a group. Alliance and Orion have advised the Board of Directors that an
increase in the assets of the Fund at this time would permit the Fund to invest
in additional investment opportunities in the Korean securities markets without
having to sell portfolio securities that Alliance and Orion believe should be
held. The Board of Directors also took into account that a well-subscribed
rights offering may reduce the Fund's expense ratio, which may be of long-term
benefit to shareholders. In addition, the Board of Directors considered that
such a rights offering could result in an improvement in the liquidity of the
trading market for shares of the Fund's common stock on the New York Stock
Exchange, where the shares are listed and traded. The Board of Directors also
considered the proposed terms of the Offer, the expense of the Offer, and its
dilutive effect, including its effect on non-exercising shareholders of the
Fund. After careful consideration, the Fund's Board of Directors unanimously
voted to approve the Offer.
Alliance and Orion, as well as the Dealer Manager in its capacity as a
provider of certain ongoing services with respect to the Fund, will benefit
from the Offer because their fees are based on the average weekly net assets of
the Fund. See "Management of the Fund--Management and Administration
Arrangements" and "Distribution Arrangements."
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 Investment Company Act of 1940, as amended (the
"1940 Act").
TERMS OF THE OFFER
The Fund is issuing to holders of its common stock, par value $.01 per share
(the "Common Stock"), of record on September 25, 1995 non-transferable Rights
to subscribe for an aggregate of 1,987,637 Shares (2,484,546 Shares if the Fund
increases the number of Shares available by up to 25% pursuant to the Over-
Subscription Privilege). Each shareholder is being issued one Right for each
whole share of Common Stock held on the Record Date. The Rights entitle the
holders thereof to subscribe for one Share for every three Rights held (1 for
3). Fractional Shares will not be issued upon the exercise of Rights. Rights
may be exercised at any time during the Subscription Period, which commences on
September 25, 1995 and ends at 5:00 p.m., New York City time, on October 20,
1995, unless extended by the Fund until 5:00 p.m., New York City time, on a
date not later than October 27, 1995. A shareholder's right to acquire during
the Subscription Period at the Subscription Price one Share for every three
Rights held is hereinafter referred to as the "Primary Subscription."
Any shareholder who fully exercises all Rights issued to such shareholder
pursuant to the Primary Subscription will be entitled to request additional
Shares at the Subscription Price pursuant to the terms of the "Over-
Subscription Privilege" (as described below). Shares available, if any,
pursuant to the Over-Subscription Privilege are subject to allotment and may be
subject to increase, as is more fully discussed below under "Over-Subscription
Privilege." For purposes of determining the maximum number of Shares a
5
<PAGE>
shareholder may acquire pursuant to the Offer, broker-dealers whose Shares are
held of record by Cede & Co. ("Cede"), the nominee for The Depository Trust
Company, 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.
As fractional Shares will not be issued, shareholders who receive fewer than
three Rights or have fewer than three Rights remaining will be unable to
purchase Shares upon the exercise of such Rights and will not be entitled to
receive any cash in lieu thereof, although such shareholders may request Shares
pursuant to the Over-Subscription Privilege.
Shareholders will have no right to rescind their subscriptions after receipt
of their payment for Shares by the Subscription Agent.
OVER-SUBSCRIPTION PRIVILEGE
To the extent shareholders do not exercise all Rights issued to them pursuant
to the Primary Subscription, any underlying Shares represented by such Rights
will be offered by means of the Over-Subscription Privilege to shareholders who
have exercised all the Rights issued to them and who desire to acquire
additional Shares at the Subscription Price. Only shareholders who exercise all
such Rights issued to them may indicate on the Subscription Certificate (as
defined below) the number of additional Shares desired pursuant to the Over-
Subscription Privilege. If sufficient Shares remain as a result of unexercised
Rights, all over-subscription requests will be honored in full. If sufficient
Shares are not available to honor all over-subscription requests, the Fund may,
at its discretion, issue up to an additional 25% of the Shares available
pursuant to the Offer (up to 496,909 Shares) in order to cover such over-
subscription requests. Regardless of whether the Fund issues the additional
Shares, to the extent Shares are not available to honor all over-subscription
requests, the available Shares will be allocated among those who over-subscribe
based on the number of Rights originally issued to them by the Fund, so that
the number of Shares issued to shareholders who subscribe pursuant to the Over-
Subscription Privilege will generally be in proportion to the number of Shares
owned by them on the Record Date. The allocation process may involve a series
of allocations in order to assure that the total number of Shares available for
over-subscription requests is distributed on a pro rata basis. The issuance of
Shares in the Primary Subscription and pursuant to the Over-Subscription
Privilege is subject to certain conditions described in "Description of Common
Stock--Certain Anti-Takeover Provisions of the Articles of Incorporation and
Bylaws."
The Fund will not offer or sell any Shares that are not subscribed for
pursuant to the Primary Subscription or the Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price per Share for the Shares to be issued pursuant to the
Offer will be 95% of the lower of (i) the average of the last reported sales
price of a share of the Fund's Common Stock on the New York Stock Exchange on
the date of the expiration of the Offer (the "Pricing Date") and on the four
preceding business days and (ii) the net asset value per share as of the close
of business on the Pricing Date. For example, if the average of the last
reported sales price on the New York Stock Exchange on the Pricing Date and on
the four preceding business days of a share of the Fund's Common Stock is
$12.00, and the net asset value is $10.00, the Subscription Price will be $9.50
(95% of $10.00). If, however, the average of the last reported sales price of a
share on that exchange on the Pricing Date and on the four preceding business
days is $12.00, and the net asset value as of the close of business on the
Pricing Date is $14.00, the Subscription Price will be $11.40 (95% of $12.00).
See "Description of Common Stock."
The Fund announced the Offer after the close of trading on the New York Stock
Exchange on August 16, 1995. The net asset value per share of Common Stock at
the close of business on August 11, 1995 and September 15, 1995 was $12.66 and
$12.82, respectively, and the last reported sales price of a share of the
6
<PAGE>
Fund's Common Stock on the New York Stock Exchange on those dates was $11.25
and $12.50, respectively. On September 15, 1995, the Fund's Common Stock was
trading at a discount to its net asset value.
NON-TRANSFERABILITY OF RIGHTS
The Rights are non-transferable and, therefore, may not be purchased or sold.
The Rights will not be admitted for trading on the New York Stock Exchange or
any other exchange. However, the Shares issued pursuant to the exercise of
Rights and the Over-Subscription Privilege will be authorized for listing on
the New York Stock Exchange, subject to official notice of issuance.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on October 20, 1995,
unless extended by the Fund until 5:00 p.m., New York City time, to a date not
later than October 27, 1995. The Rights will expire on the Expiration Date and
thereafter may not be exercised. Any extension of the Offer will be followed as
promptly as practical by announcement thereof. Without limiting the manner in
which the Fund may choose to make such announcement, the Fund will not, unless
otherwise required by law, have any obligation to publish, advertise or
otherwise communicate any such announcement other than by making a release to
the Dow Jones News Service or such other means of announcement as the Fund
deems appropriate.
SUBSCRIPTION AGENT
The Subscription Agent is State Street Bank and Trust Company, which will
receive, for its administrative, processing, invoicing and other services as
subscription agent, a fee estimated to be $5,000 plus reimbursement for its
out-of-pocket expenses related to the Offer. The Subscription Agent is also the
Fund's Transfer Agent, Dividend-Paying Agent and Registrar with respect to the
Common Stock. Shareholder communications should be directed to State Street
Bank and Trust Company, Two Heritage Drive, North Quincy, Massachusetts 02171
(telephone (800) 219-4218). Shareholders may also consult their brokers or
nominees for information. SIGNED SUBSCRIPTION CERTIFICATES MUST BE SENT TO
STATE STREET BANK AND TRUST COMPANY by one of the methods described below. The
Fund will accept only Subscription Certificates or Notices of Guaranteed
Delivery received prior to 5:00 p.m., New York City time, on the Expiration
Date. Alternatively, a Notice of Guaranteed Delivery may also be sent to any of
the addresses listed. See "Method of Exercise of Rights" below.
(1)BY FIRST CLASS MAIL:
State Street Bank and Trust Company
Corporate Reorganization Dept.
P.O. Box 9061
Boston, MA 02205-8686
U.S.A.
(2)BY EXPRESS MAIL OR OVERNIGHT COURIER:
State Street Bank and Trust Company
Corporate Reorganization Dept.
Two Heritage Drive-MB2
North Quincy, MA 02171
U.S.A.
7
<PAGE>
(3)BY HAND:
State Street Bank and Trust Company
Corporate Reorganization Dept.
225 Franklin Street-Concourse Level
Boston, MA 02110
U.S.A.
or
State Street Bank and Trust Company
Corporate Reorganization Dept.
61 Broadway-Concourse Level
New York, NY 10006
U.S.A.
(4)BY FACSIMILE:
FOR NOTICE OF GUARANTEED DELIVERY ONLY
(617) 774-4519
Confirm facsimile by telephone to:
(617) 774-4511
DELIVERY TO AN ADDRESS OTHER THAN THOSE ABOVE DOES NOT CONSTITUTE VALID
DELIVERY.
METHOD OF EXERCISE OF RIGHTS
The Rights are evidenced by subscription certificates ("Subscription
Certificates"), which will be mailed to shareholders as of the Record Date,
except as discussed below under "Foreign Restrictions." If a shareholder's
shares are held by Cede or any other depository or nominee on their behalf, the
Subscription Certificates will be mailed to Cede or such depository or nominee.
Rights may be exercised by completing and signing the Subscription Certificate
and mailing or otherwise delivering it to the Subscription Agent at one of the
addresses set forth above together with payment for the Shares as described
below under "Payment for Shares." Rights may also be exercised by contacting
your broker, banker or trust company, which can arrange, on your behalf, to
guarantee delivery of payment and of a properly completed and executed
Subscription Certificate ("Notice of Guaranteed Delivery"). Fractional Shares
will not be issued, and shareholders who receive, or who have remaining, fewer
than three Rights will not be able to purchase any Shares upon the exercise of
such Rights (although such shareholders may subscribe for Shares pursuant to
the Over-Subscription Privilege). Completed Subscription Certificates or
Notices of Guaranteed Delivery must be received by the Subscription Agent prior
to 5:00 p.m., New York City time, on the Expiration Date at one of the offices
of the Subscription Agent at one of the addresses set forth above.
Shareholders Who Are Registered Record Owners. Shareholders who are
registered record owners can choose between either option set forth under
"Payment for Shares" below. If a shareholder who is a registered record owner
chooses option (2) below, an additional fee may be charged by the firm
guaranteeing delivery for this service. If time is of the essence, option (2)
will permit delivery of the Subscription Certificate and payment after the
Expiration Date.
Shareholders Whose Shares Are Held By A Nominee. Shareholders whose shares
are held by a nominee, such as a broker or trustee, must contact that nominee
to exercise their Rights. In that case, the nominee will complete the
Subscription Certificate on behalf of the investor and arrange for proper
payment by one of the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold shares for the account of others should notify
the beneficial owners of such shares 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 described under "Payment for Shares" below.
8
<PAGE>
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to shareholders whose addresses
are outside the United States (for these purposes the United States includes
its territories and possessions and the District of Columbia). The Rights to
which those Subscription Certificates relate will be held by the Subscription
Agent for such shareholders' accounts until instructions are received to
exercise the Rights subject to applicable law. If no instructions are received
prior to the Expiration Date, such Rights will expire.
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
The Information Agent for the Offer is:
SHAREHOLDER
COMMUNICATIONS CORPORATION
17 State Street
New York, New York 10004
Toll Free: (800) 733-8481, Extension 325
or Call Collect: (212) 805-7000
Shareholders may also contact their brokers or nominees for information with
respect to the Offer.
The Information Agent will receive a fee estimated to be $5,000 plus
reimbursement for its out-of-pocket expenses related to the Offer.
PAYMENT FOR SHARES
Shareholders who acquire Shares during the Primary Subscription or pursuant
to the Over-Subscription Privilege may choose between the following methods of
payment:
(1) A shareholder can send the Subscription Certificate, together with
payment for the Shares acquired during the Primary Subscription and for
additional Shares requested pursuant to the Over-Subscription Privilege to
the Subscription Agent, calculating the total payment on the basis of an
estimated Subscription Price of $11.88 per share. To be accepted, such
payment, together with the executed Subscription Certificate, must be
received by the Subscription Agent at one of the Subscription Agent's
offices at the addresses set forth above prior to 5:00 p.m., New York City
time, on the Expiration Date. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN
UNITED STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN
THE UNITED STATES, MUST BE PAYABLE TO THE KOREAN INVESTMENT FUND, INC. AND
MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED.
(2) Alternatively, subscription instructions 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 by facsimile or otherwise from a bank, trust company, or New York
Stock Exchange member guaranteeing delivery to State Street Bank and Trust
Company of (i) payment of the full Subscription Price for the Shares
subscribed for during the Primary Subscription and any additional Shares
subscribed for pursuant to the Over-Subscription Privilege, and (ii) a
properly completed and executed Subscription Certificate. The Subscription
Agent will not honor a Notice of Guaranteed Delivery if a properly
completed and executed Subscription Certificate is not received by the
Subscription
9
<PAGE>
Agent by the close of business on October 25, 1995, the third business day
after the Expiration Date, unless the Offer is extended.
Within eight business days following the Expiration Date (the "Confirmation
Date"), November 1, 1995, unless the offer is extended, a confirmation notice
will be sent by the Subscription Agent to each participating shareholder (or,
if the shareholder's Shares are held by Cede or any other depository or
nominee, to Cede or such depository or nominee), showing (i) the number of
Shares acquired pursuant to the Primary Subscription, (ii) the number of
Shares, if any, allocated pursuant to the Over-Subscription Privilege, (iii)
the per Share and total purchase price for the Shares, and (iv) any additional
amount payable by such shareholder to the Fund or any excess to be refunded by
the Fund to such shareholder, in each case based on the Subscription Price as
determined on the Pricing Date. If any shareholder exercises the right to
acquire Shares pursuant to the Over-Subscription Privilege, any such excess
payment which would otherwise be refunded to him will be applied by the Fund
toward payment for Shares acquired pursuant to exercise of the Over-
Subscription Privilege. Any additional payment required from a shareholder must
be received by the Subscription Agent within ten business days after the
Confirmation Date, November 15, 1995, unless the offer is extended. Any excess
payment to be refunded by the Fund to shareholders will be mailed by the
Subscription Agent to them as promptly as possible. All payments by a
shareholder must be in U.S. Dollars by money order or check drawn on a bank
located in the United States of America and payable to THE KOREAN INVESTMENT
FUND, INC.
The Subscription Agent will deposit all checks received by it prior to the
final due date into a segregated interest bearing account (which interest will
accrue to the benefit of the Fund) at State Street Bank and Trust Company
pending distribution of the Shares.
Whichever of the two methods described above is used, issuance and delivery
of certificates for the Shares purchased are subject to collection of checks
and actual payment pursuant to any Notice of Guaranteed Delivery.
SHAREHOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTIONS AFTER RECEIPT
OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT.
If a shareholder who acquires Shares pursuant to the Primary Subscription or
Over-Subscription Privilege does not make payment of any additional amounts
due, the Fund reserves the right to take any or all of the following actions:
(i) sell such subscribed and unpaid-for Shares to other shareholders, (ii)
apply any payment actually received by it toward the purchase of the greatest
whole number of Shares which could be acquired by such holder upon exercise of
the Primary Subscription and/or Over-Subscription Privilege, and/or (iii)
exercise any and all other rights or remedies to which it may be entitled.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE RIGHTS
HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND
PAYMENT BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY
TO THE FUND AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON
THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT,
BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations
will be final and binding. The Fund in its sole discretion may waive any defect
or irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been
10
<PAGE>
received or accepted until all irregularities have been waived or cured within
such time as the Fund determines in its sole discretion. The Fund will not be
under any duty to give notification of any defect or irregularity in connection
with the submission of Subscription Certificates or incur any liability for
failure to give such notification.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, pursuant to the Securities and Exchange Commission's regulatory
requirements, undertaken that, if subsequent to September 19, 1995, 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, the Fund will
suspend the Offer until it amends this Prospectus. In such event, the Fund will
notify shareholders of any such decline and thereby permit them the opportunity
to cancel their subscription prior to the extended expiration date as defined
herein.
DELIVERY OF SHARE CERTIFICATES
Except as noted below in this paragraph, share certificates for all Shares
acquired during the Primary Subscription and pursuant to the Over-Subscription
Privilege will be mailed promptly after the expiration of the Offer and full
payment for the Shares subscribed for has been received and cleared.
Participants in the Fund's Dividend Reinvestment Plan (the "Plan") will have
any Shares acquired during the Primary Subscription or pursuant to the Over-
Subscription Privilege credited to their shareholder dividend reinvestment
accounts in the Plan. Share certificates will not be issued for Shares credited
to Plan accounts. Shareholders whose shares of Common Stock are held of record
by Cede or by any other depository or nominee on their behalf or their broker-
dealers' behalf will have any Shares acquired during the Primary Subscription
or pursuant to the Over-Subscription Privilege credited to the account of Cede
or such other depository or nominee.
FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
For U.S. federal income tax purposes, neither the receipt nor the exercise of
the Rights by shareholders will result in taxable income to holders of Common
Stock, and no loss will be realized if the Rights expire without exercise. A
shareholder's holding period for a Share acquired upon exercise of a Right
begins with the date of exercise. Assuming that the fair market value of the
Rights on the date of distribution is less than 15% of the fair market of the
shares of Common Stock on that date, and that a shareholder does not make the
election described below, a shareholder's basis for determining gain or loss
upon the sale of a Share acquired upon the exercise of a Right will be equal to
the sum of the Subscription Price per Share and any servicing fee charged to
the shareholder by the shareholder's broker, bank or trust company. A
shareholder's gain or loss recognized upon a sale of a Share acquired upon the
exercise of a Right will be capital gain or loss (assuming the Share is held as
a capital asset at the time of sale) and will be long-term capital gain or loss
if the Share has been held at the time of sale for more than one year.
The following portion of this discussion assumes that the fair market value
of the Rights upon the date of distribution will be less than 15% of the fair
market value of the shares of Common Stock outstanding on that date. In these
circumstances, a shareholder's basis in the Rights received in the Offer will
be zero unless the shareholder elects to allocate his basis in those Shares of
the Fund which he originally owned between such shares and the Rights issued in
the Offer. This allocation is based upon the relative fair market values of
such shares and of the Rights as of the date of issuance of the Rights. Thus,
if such an election is made, the shareholder's basis in the shares originally
owned will be reduced by an amount equal to the basis allocated to the Rights.
This election must be made in a statement attached to the shareholder's federal
income tax return for the year in which the Rights are received. However, if an
electing shareholder does not exercise the Rights, no loss will be recognized
and no portion of the shareholder's basis in the Shares will be allocated to
the unexercised Rights. If an electing Shareholder does exercise the Rights,
the basis of any Shares acquired through exercise of the Rights will be
increased by the basis allocated to such Rights. Accordingly, shareholders
should consider the advisability of making the election described above if the
shareholder intends to exercise the Rights.
11
<PAGE>
The foregoing is a general summary of the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and U.S. Treasury
regulations currently in effect, and does not cover state or local taxes. The
Code and regulations are subject to change by legislative or administrative
action. Shareholders should consult their tax advisors regarding specific
questions as to federal, state or local taxes. See "Taxation" in the SAI.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders subject to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") (including corporate savings and 401(k) plans), Keogh
Plans of self-employed individuals and Individual Retirement Accounts
(collectively, "Benefit Plans") should be aware of the complexity of the rules
and regulations governing Benefit Plans and the penalties for noncompliance,
and should consult their counsel and tax advisors regarding the consequences
under ERISA and the Code of their exercise of the Rights.
DILUTION AND EFFECT OF NON-PARTICIPATION IN THE OFFER
Upon the completion of the Offer, shareholders who do not fully exercise
their Rights will own a smaller proportional interest in the Fund than would be
the case if the Offer had not been made. In addition, because the Subscription
Price of each Share will be less than the net asset value per share of the
Fund's Common Stock and because the Fund will incur expenses in connection with
the Offer, the Offer will result in a dilution of net asset value per share for
all shareholders, which will disproportionately affect shareholders who do not
exercise their Rights. Although it is not possible to state precisely the
amount of such decrease in net asset value because it is not known at the date
of this Prospectus how many Shares will be subscribed for, or what the
Subscription Price will be, such dilution might be substantial. For example,
assuming all Rights are exercised at the estimated Subscription Price per
Share, including up to an additional 25% of the Shares which may be issued to
satisfy over-subscription requests, and after deducting all expenses related to
the Offer, the Fund's net asset value as of September 15, 1995 of $12.82 per
share would be reduced by approximately $0.47, or 3.7%. Expenses related to the
Offer will be borne by the Fund and will reduce the net asset value of the
Fund's Common Stock.
It is expected that no dividends or other distributions will be payable with
respect to the Shares offered hereby until December 1995.
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
----- ----
<S> <C>
Record Date............................ September 25, 1995
Subscription Period.................... September 25, 1995-October 20, 1995*
Expiration Date and Pricing Date....... October 20, 1995*
Subscription Certificates and Payment
for Shares Due+....................... October 20, 1995*
Notices of Guaranteed Delivery Due+.... October 20, 1995*
Payment for Guarantees of Delivery Due. October 25, 1995*
Confirmation to Participants........... November 1, 1995*
Final Payment for Shares............... November 15, 1995*
</TABLE>
--------
*Unless the Offer is extended to a date not later than October 27, 1995.
+ A shareholder exercising Rights must deliver either (i) a Subscription
Certificate and Payment for Shares or (ii) a Notice of Guaranteed Delivery
by the Expiration Date.
12
<PAGE>
THE FUND
The Korean Investment Fund, Inc. is a diversified, closed-end management
investment company. The Fund's investment objective is to seek long-term
capital appreciation through investment primarily in equity securities of
Korean companies. At April 30, 1995, approximately 99% of the Fund's net assets
were invested in equity securities of Korean companies. As a matter of
fundamental policy, the Fund, under normal circumstances, invests at least 65%
of its total assets in equity securities of Korean companies. Equity securities
include common stocks, preferred stocks, rights or warrants to purchase common
or preferred stock and debt securities convertible into common or preferred
stock. The Fund defines Korean companies to be entities (i) that are organized
under the laws of Korea and conduct business in Korea, (ii) that derive 50% or
more of their total revenues from business in Korea or (iii) the equity or debt
securities of which are traded principally in Korea. The Fund may invest up to
25% of its total assets, to the extent permitted by future Korean laws or
regulations with respect to foreign investment, in equity or debt securities
for which there is no ready market. The Fund may also invest up to 35% of its
total assets in nonconvertible debt securities provided that such securities
are rated BBB or higher by Standard & Poor's Corporation ("S&P") or Baa or
higher by Moody's Investors Service, Inc. ("Moody's") or rated of equivalent
credit quality by an internationally recognized statistical rating organization
or, if not so rated, of equivalent credit quality as determined by Alliance.
Nonconvertible debt securities in which the Fund may invest include U.S. Dollar
or Won denominated debt securities issued by the Korean government or Korean
companies and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). In general,
Korean law does not currently permit foreign investors to acquire debt
securities denominated in Won or stocks of companies organized under the laws
of Korea that are not listed on the Korea Stock Exchange. See "Investment
Objective and Policies."
Alliance Capital Management L.P., a Delaware limited partnership listed on
the New York Stock Exchange, serves as investment manager and administrator to
the Fund. Alliance is a leading international investment manager supervising
client accounts with assets as of June 30, 1995 totaling more than $135
billion. See "Management of the Fund--Management and Administration
Arrangements."
Orion Asset Management Co., Ltd., a Cayman Islands corporation that is a
wholly-owned subsidiary of Tong Yang Securities Co., Ltd., a component member
of a leading Korean securities company, serves as investment manager to the
Fund with respect to its investments in Korean securities. See "Management of
the Fund--Management and Administration Arrangements."
The Fund was incorporated under the laws of the State of Maryland on November
1, 1991 and is registered under the 1940 Act. It commenced investment
operations on February 24, 1992 after an initial public offering of 4,200,000
shares of Common Stock. The net proceeds of the offering were approximately
$46,900,000. On August 2, 1994, the Fund completed a rights offering during
which shareholders purchased 1,753,797 shares of Common Stock, the net proceeds
to the Fund of which were approximately $21,809,340. The Fund's outstanding
Common Stock is listed and traded on the New York Stock Exchange under the
symbol "KIF." For the fiscal year ended April 30, 1995 the average weekly
trading volume of the Fund's shares was 129,400 shares and the aggregate net
assets of the Fund at April 30, 1995 were $75,460,898. There are currently
5,962,912 shares of Common Stock outstanding. The Fund's principal office is
located at 1345 Avenue of the Americas, New York, New York 10105 and its
telephone number is (800) 247-4154.
USE OF PROCEEDS
Assuming all Shares offered hereby are sold at the Estimated Subscription
Price of $11.88 per Share, the net proceeds of the Offer are estimated to be
$22,181,636 after payment of the Dealer Manager and soliciting fees and
estimated offering expenses. Expenses related to the issuance of the Shares
will be borne by the Fund and will reduce the net asset value of the Common
Stock. If the Fund increases the number of Shares subject
13
<PAGE>
to the Offer by 25%, or 496,909 Shares, in order to satisfy over-
subscriptions, the additional net proceeds will be approximately $5,681,905.
The net proceeds will be invested within six months following receipt by the
Fund of payment for the Shares in accordance with the Fund's investment
objective and policies. Pending such investment, the proceeds may be invested
in U.S. Dollar-denominated bank deposits, short-term debt or money market
instruments rated high quality by any nationally recognized statistical rating
service, or if not so rated, of equivalent investment quality as determined by
Alliance. All proceeds of the Offer will be paid to the Fund in U.S. Dollars
and, prior to investment in Won denominated securities, will be converted into
Won at prevailing rates.
NET ASSET VALUE AND MARKET PRICE INFORMATION
The outstanding shares of Common Stock of the Fund are listed on the New
York Stock Exchange. The following table shows, for each fiscal quarter for
the two most recently completed fiscal years, (i) the high and low sales price
per share of Common Stock of the Fund, as reported in the consolidated
transaction reporting system, (ii) the net asset value per share of the Fund
as determined on the date closest to each quotation, and (iii) the percentage
by which the shares of Common Stock of the Fund traded at a premium over, or
discount from, the Fund's net asset value per share represented by the
quotation.
<TABLE>
<CAPTION>
PREMIUM (OR
DISCOUNT)
MARKET PRICE NET ASSET VALUE PERCENTAGE
--------------- --------------- -------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ------- ------- --------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
April 30, 1993............... $12.500 $10.125 $ 10.40 $ 9.50 17.79% 6.97%
July 31, 1993................ 13.250 11.125 10.84 10.09 21.44 11.75
October 31, 1993............. 13.500 10.750 10.58 9.41 24.05 12.92
January 31, 1994............. 18.500 12.375 12.43 11.57 44.81 9.21
April 30, 1994............... 17.250 11.875 13.28 12.51 30.23 (0.08)
July 31, 1994................ 16.375 13.125 13.75 13.47 19.09 (2.56)
October 31, 1994............. 15.125 13.500 14.36 13.82 5.33 (2.32)
January 31, 1995............. 14.375 11.625 15.12 14.52 (4.93) (19.94)
April 30, 1995............... 13.500 11.750 13.92 13.45 (3.02) (12.84)
July 31, 1995................ 12.875 11.250 13.04 12.58 (1.27) (10.57)
</TABLE>
During the first two years of the Fund's operations, the Fund's shares
generally traded at a price greater than the Fund's net asset value per share.
Since October 7, 1994, however, the Fund's shares have generally traded at a
discount from the Fund's net asset value per share. At the close of business
on September 15, 1995, the Fund's net asset value was $12.82 per share while
the closing market price of the Common Stock on the New York Stock Exchange
was $12.50 per share.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The investment objective of the Fund is to seek long-term capital
appreciation through investment primarily in equity securities of Korean
companies. Under normal circumstances, the Fund invests at least 65% of its
total assets in equity securities of Korean companies. Equity securities
include common stocks, preferred stocks, rights or warrants to purchase common
or preferred stock and debt securities convertible into common or preferred
stock. The Fund defines Korean companies to be entities (i) that are organized
under the laws of Korea and conduct business in Korea, (ii) that derive 50% or
more of their total revenues from business in Korea or (iii) the equity or
debt securities of which are traded principally in Korea. The Fund invests in
companies that, in the opinion of Alliance and Orion, possess the potential
for growth, including established companies in rapidly growing industry
sectors such as telecommunications, electronics and
14
<PAGE>
consumer products. While investment in large companies is emphasized, on
occasion the Fund may invest in smaller companies believed by Alliance and
Orion to have growth potential. See "Special Risk Considerations--Investment
in Securities of Smaller Companies." In particular, securities of Korean
companies that are believed to be the likely beneficiaries of the emergence of
new markets for their products are identified for investment by the Fund. In
addition, the Fund may not invest more than 20% of its total assets in rights
or warrants to purchase equity securities. The Fund may invest up to 25% of
its total assets in securities which are not readily marketable. Although the
Fund is authorized to engage in various strategies to hedge its portfolio
against adverse changes in the relationship between the U.S. Dollar and the
Won, it is not currently permitted to do so in Korea under Korean laws or
regulations (with certain limited exceptions) and there can be no assurance
that such strategies will become permissible and available in Korea in the
future. The Fund does not presently intend to engage in these strategies
outside of Korea.
The Fund's investment objective and its policy of investing at least 65% of
its total assets in equity securities of Korean companies are fundamental and
cannot be changed without the approval of a majority of the Fund's outstanding
voting securities, which, as used in this Prospectus and the SAI, means the
lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are present in person or represented by proxy or
(ii) more than 50% of the outstanding shares. The Fund's investment policies
that are not designated fundamental policies may be changed by the Fund
without shareholder approval, but the Fund will not change its investment
policies without contemporaneous notice to its shareholders. The Fund is
designed primarily for long-term investment, and investors should not consider
it a trading vehicle. As with all investment companies, there can be no
assurance that the Fund's objective will be achieved.
The Fund may also invest up to 35% of its total assets in nonconvertible
debt securities, including U.S. Dollar or Won denominated debt securities
issued by the Korean government or Korean companies and U.S. Government
Securities. Korean law does not currently permit foreign investors to acquire
debt securities denominated in Won, except for (i) non-guaranteed convertible
bonds which are issued in Korea by listed small- and medium-sized companies
and are listed on the Korea Stock Exchange (the "Exchange") and (ii) certain
government or public bonds which are designated by the Securities and Exchange
Commission of Korea (the "KSEC") from time to time. At the present time,
however, foreign investors are permitted to invest in bonds with warrants,
depositary receipts and other debt securities (including floating rate notes,
bonds and commercial paper) issued by Korean companies outside of Korea and
denominated in currencies other than the Won. The Ministry of Finance and
Economy (the "MFE") has announced a plan to permit foreign investors to make
further investments in Won denominated debt securities. See "The Korean
Securities Markets--Regulation of Foreign Investment." There can be no
assurance that such plan will be implemented. If, in the future, other types
of Won denominated debt securities become permissible investments for foreign
investors, the Fund may invest in such securities. The Fund may invest in debt
securities rated BBB or higher by S&P or Baa or higher by Moody's or rated of
equivalent credit quality by another internationally recognized statistical
rating organization or, if not so rated, of equivalent credit quality as
determined by Alliance. Securities rated Baa by Moody's are considered to have
speculative characteristics. Sustained periods of deteriorating economic
conditions or rising interest rates are more likely to lead to a weakening in
the issuer's capacity to pay interest and repay principal than in the case of
higher-rated securities. The Fund expects that it will not retain a debt
security which is downgraded below BBB or Baa or, if unrated, determined by
Alliance to have undergone similar credit quality deterioration, subsequent to
purchase by the Fund.
For temporary defensive purposes, the Fund may vary from its investment
policies during periods in which conditions in the Korean securities markets
or other economic or political conditions in Korea warrant. Under such
circumstances, the Fund may reduce its position in equity securities and
increase its position in debt securities, which may include U.S. Government
Securities, securities rated AA or better by S&P or Aa or better by Moody's
or, if not so rated, of equivalent credit quality as determined by Alliance,
short-term indebtedness or cash equivalents denominated in U.S. Dollars or, if
it becomes permissible for the Fund to so
15
<PAGE>
invest, denominated in Won. The Fund may also at any time, with respect to up
to 35% of its total assets, temporarily invest funds in U.S. Dollar-denominated
money market instruments as reserves for dividends and other distributions to
shareholders.
SECURITIES NOT READILY MARKETABLE
The Fund may invest up to 25% of its total assets, to the extent permitted by
future Korean laws or regulations with respect to foreign investment, in equity
or debt securities for which there is no ready market. The Fund may therefore
not be able to readily sell such securities. Such securities are unlike
securities that are traded in the open market and which can be expected to be
sold immediately if the market is adequate. The sale price of securities that
are not readily marketable may be lower or higher than the Fund's most recent
estimate of their fair value. Generally, less public information is available
with respect to the issuers of these securities than with respect to companies
whose securities are traded on an exchange. Securities not readily marketable
are more likely to be issued by start-up, small or family businesses and
therefore subject to greater economic, business and market risks than the
listed securities of more well-established companies. Adverse conditions in the
public securities markets may at certain times preclude a public offering of an
issuer's securities. While Korean law requires registration with a government
agency of a public offering or secondary public distribution of securities,
that law does not contain restrictions like those contained in regulations
promulgated under the United States Securities Act of 1933 regarding the length
of time the securities must be held or manner of resale. There may be
contractual restrictions on the resale of securities.
BORROWING
The Fund may borrow from a bank or other entity in a privately arranged
transaction to the maximum extent permitted under the 1940 Act but only in
order to finance the repurchase of its shares or to pay dividends for purposes
of complying with the Code. See "Special Risk Considerations--Borrowing" below,
"Description of Common Stock--Repurchase of Shares" below and "Taxation--United
States Federal Income Taxes--General" in the SAI. The 1940 Act requires the
Fund to maintain "asset coverage" of not less than 300% of its "senior
securities representing indebtedness" as those terms are defined and used in
the 1940 Act. In addition, the Fund may not pay any cash dividends or make any
cash distributions to shareholders if, after the distribution, there would be
less than 300% asset coverage of a senior security representing indebtedness
for borrowings (excluding for this purpose certain evidences of indebtedness
made by a bank or other entity and privately arranged, and not intended to be
publicly distributed). If, as a result of the foregoing restriction or
otherwise, the Fund were unable to distribute at least 90% of its investment
company taxable income in any year, it would lose its status as a regulated
investment company for such year and become liable at the corporate level for
federal income taxes on its income for such year. See "Taxation--United States
Federal Income Taxes--General" in the SAI. In the event of any borrowing from a
Korean source, such borrowing may be subject to any applicable Korean laws and
regulations.
The Fund may also borrow for temporary purposes in an amount not exceeding 5%
of the value of the total assets of the Fund. Such borrowings are not subject
to the asset coverage restrictions set forth in the preceding paragraph. See
"Investment Restrictions" in the SAI.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies that
invest a substantial portion of their assets in Korean securities to the extent
permitted by the 1940 Act. Under the 1940 Act, the Fund may invest up to 10% of
its total assets in shares of other investment companies and up to 5% of its
total assets in any one investment company, provided that the investment does
not represent more than 3% of the voting stock of the related acquired
investment company. By investing in an investment company, the Fund's
shareholders will bear a ratable share of the investment company's expenses, as
well as continue to bear the Fund's investment management and administrative
fees with respect to the amount of the investment.
16
<PAGE>
REPURCHASE AGREEMENTS
The Fund may enter into "repurchase agreements" involving U.S. Government
Securities with member banks of the Federal Reserve System or "primary dealers"
(as designated by the Federal Reserve Bank of New York) in such securities.
There is no percentage restriction on the Fund's ability to enter into
repurchase agreements. A repurchase agreement arises when a buyer such as the
Fund purchases a security and simultaneously agrees to resell it to the vendor
at an agreed-upon future date, normally one day or a few days later. The resale
price is greater than the purchase price, reflecting an agreed-upon interest
rate which is effective for the period of time the buyer's money is invested in
the security and which is related to current market interest rates rather than
the coupon rate on the purchased security. Such agreements permit the Fund to
keep all of its assets at work while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature. The Fund requires continual
maintenance by its custodian of its account in the Federal Reserve/Treasury
Book Entry System of collateral in an amount equal to, or in excess of, the
resale price. In the event a vendor defaults on its repurchase obligation, the
Fund might suffer a loss to the extent that the proceeds from the sale of the
collateral are less than the repurchase price. In the event of a vendor's
bankruptcy, the Fund might be delayed in, or prevented from, selling the
collateral for the Fund's benefit. The Fund's Board of Directors has
established procedures, which are periodically reviewed by the Board, pursuant
to which Alliance monitors the creditworthiness of the institutions with which
the Fund enters into repurchase agreement transactions.
OTHER INVESTMENT PRACTICES
GENERAL. Certain investment practices in which the Fund is authorized to
engage are not currently permitted in Korea under Korean laws and regulations
(with certain limited exceptions). These investment practices include the
purchase or sale of put and call options, currency hedging techniques,
including currency options and futures, options on such futures and forward
foreign currency transactions, the selling of securities short, the lending of
portfolio securities, forward commitments and standby commitment agreements.
The Fund does not presently intend to engage in these investment practices
outside of Korea. The Fund may engage in these investment practices in Korea to
the extent the practices become available in the future. These investment
practices and the risks involved in engaging in such investment practices are
described in the SAI.
FUTURE DEVELOPMENTS. The Fund may, following written notice thereof to its
shareholders, take advantage of investment practices that are not presently
contemplated for use by the Fund or which are not currently available but which
may be developed, to the extent such practices are both consistent with the
Fund's investment objective and legally permissible for the Fund. Such
practices, if they arise, may involve risks which exceed those involved in the
various investment practices described in the SAI.
SPECIAL RISK CONSIDERATIONS
The Fund is a closed-end investment company designed for long-term investment
and investors should not consider it a trading vehicle. Shares of closed-end
investment companies frequently trade at a discount from net asset value.
During the first two years of the Fund's operations, the Fund's shares
generally traded at a price greater than the Fund's net asset value per share.
Since October 7, 1994, however, the Fund's shares have generally traded at a
discount from the Fund's net asset value per share. As of September 15, 1995
the Fund's shares were trading at a 2.5% discount from net asset value. The
Fund cannot predict whether its shares of Common Stock will, in the future,
trade at, below or above net asset value. See "Investment Objective and
Policies." Investing in the Fund, which invests in Korean securities, involves
certain considerations set forth below not usually associated with investing in
U.S. securities.
RELATIONS WITH NORTH KOREA
Relations between Korea and North Korea have been tense since the end of
World War II. North Korea maintains a regular army estimated at close to one
million, compared with the Korean army of 520,000. The majority of both forces
are concentrated on either side of the demilitarized zone in a state of
military readiness. The United States maintains a military force of
approximately 36,000 in Korea.
Tensions between Korea and North Korea were temporarily eased in 1972 when
the first moves toward conciliation and eventual reunification were initiated.
The talks broke down at an early stage and efforts to
17
<PAGE>
revive them during 1979 and 1980 were unsuccessful. Since 1984 there has been
intermittent contact between the two countries, consisting mainly of a series
of talks on economic relations, humanitarian issues, unified sports teams and
the possibility of the two heads of state and their legislatures meeting with
one another. Until recently these talks yielded only minimal results. On
December 13, 1991, the leaders of North Korea and Korea signed an Agreement on
Reconciliation, Nonaggression and Exchange and Cooperation. This agreement was
put into force on February 19, 1992. Tensions between North Korea and Korea
increased following the announcement in March 1993 by North Korea of its
intention to withdraw from participation in the Nuclear Non-Proliferation
Treaty and its cancellation of an invitation to inspectors of the International
Atomic Energy Agency ("IAEA").
In October 1994, North Korea signed an accord in Geneva in which it agreed to
stop the development of nuclear weapons in exchange for the development of
nuclear power plants. On June 13, 1995, a multi-national consortium led by the
United States agreed to provide North Korea with two nuclear reactors and moved
toward selecting Korea's state-controlled electric utility as the prime
contractor in the project. Korea has agreed to provide most of the $4 billion
cost for the reactors. In September 1995, inspectors from IAEA started to
monitor North Korea's nuclear freeze. It is uncertain whether this cooperation
between North Korea and Korea and further implementation of the Geneva accord
will reduce the tension between the two countries.
There is still the continuing threat to the armistice that has maintained the
peace since the end of the Korean War. During the past year, North Korea has
tried to prevent neutral observer nations from taking part in a separate
commission to monitor the armistice, and in May it banned the observers from
the neutral countries from entering the northern side of the demilitarized
zone. The tensions between North Korea and Korea may adversely affect both the
prices of the Fund's portfolio securities and the Fund's share price.
In addition, there are reports of increasing militarization in North Korea,
accompanied by a general economic decline in that country. Military action or
the risk of military action or the economic collapse of North Korea could have
a material adverse effect on Korea, and consequently, on the ability of the
Fund to achieve its investment objective.
CURRENCY FLUCTUATIONS
Because the Fund's assets are invested in equity securities of Korean
companies and, to the extent permissible under future Korean laws or
regulations, in Won denominated fixed income securities, and because the great
majority of the Fund's revenues are received in Won, the U.S. Dollar equivalent
of the Fund's net assets and distributions will be adversely affected by
reductions in the value of the Won relative to the U.S. Dollar to the extent
the Fund does not hedge against such reductions. Such changes will also affect
the Fund's income. If the value of the Won falls relative to the U.S. Dollar
between receipt of income and the making of Fund distributions, the Fund may be
required to liquidate securities in order to make distributions if the Fund has
insufficient cash in U.S. Dollars to meet distribution requirements. Similarly,
if the exchange rate for the Won declines between the time the Fund incurs
expenses in U.S. Dollars and the time cash expenses are paid, the amount of Won
required to be converted into U.S. Dollars in order to pay expenses in U.S.
Dollars could be greater than the equivalent amount of such expenses in Won at
the time they were incurred. Under current Korean laws and regulations, the
Fund is permitted to enter into forward contracts between the Won and other
currencies with Korean banks (including branches in Korea of foreign banks) up
to the amount of the Fund's assets denominated in Won. The Fund does not
presently intend to enter into such forward contracts. In addition, the Fund is
not currently permitted under Korean laws or regulations to employ certain
other investment techniques in Korea which may be designed principally to hedge
against currency exchange rate risks. The Fund does not presently intend to
employ these techniques outside of Korea. Accordingly, investors should
consider that the Fund presently will not hedge against possible devaluations
or fluctuations in the value of the Won in determining whether to invest in the
Fund. See "Investment Objective and Policies--Other Investment Practices" in
the SAI for a discussion of the use, risks and costs of the currency hedging
techniques the Fund may utilize, including currency options and futures,
options on such futures and forward foreign currency transactions.
18
<PAGE>
The exchange rate for the Won at the end of each of the past six years is set
forth in the table under "The Republic of Korea--Domestic Economy." For a more
recent exchange rate, see the inside front cover of this Prospectus.
INVESTMENT AND REPATRIATION RESTRICTIONS
There are significant restrictions and controls on foreign investment in the
Korean securities markets. These restrictions or controls may at times limit or
preclude investment in certain securities, which may adversely affect the
performance of the Fund. Beginning on January 3, 1992, the Korean securities
markets were opened to general direct foreign investment following the adoption
and implementation by the KSEC and the MFE of regulations (collectively, the
"Foreign Investment Regulations") that allow foreign investors to directly
purchase and sell equity shares on the Exchange, subject to certain
restrictions that are described below. Under the current Foreign Investment
Regulations, the percentage of each class of a company's outstanding equity
shares that may be held by a particular foreign investor and by all foreign
investors as a group generally is limited to 3% and 15%, respectively. The 15%
limitation is, however, subject to reduction to 10% for certain government
designated public corporations ("public corporations") with shares listed on
the Exchange and no foreign investment is permitted in shares of Korean
companies designated as "general telecommunications service providers" under
the Telecommunications Business Law. In addition, Korean law provides that
public corporations may impose stricter limits on foreign ownership of their
shares and a limit on ownership of their shares by a single investor (Korean or
foreign) in their articles of incorporation. The articles of incorporation of
Korea Electric Power Corporation ("KEPCO") and Pohang Iron & Steel Co., Ltd.
("POSCO"), the two largest Korean companies listed on the Exchange, set a 1%
ceiling on acquisition by a single foreign or Korean investor of the shares of
their respective common stock (together with certain holdings by specially
related persons). Further, the KSEC is authorized to increase or decrease the
15% limitation, and it has acknowledged several exceptions for companies whose
shares are held by foreigners under the Foreign Capital Inducement Act or
certain sections of the Foreign Exchange Management Regulations and for
companies which have issued equity related securities outside of Korea. The
Korean government has announced its intention to gradually further raise the
15% foreign investment limitation. If and when the 15% limitation is raised,
the Fund may have more flexibility in selecting investments for its portfolio.
There can be no assurance that the 15% limitation will be raised. The Korean
government has implemented a system to monitor foreign investment limits and
transactions.
Under the Foreign Exchange Management Act, if the MFE deems that certain
emergency circumstances are likely to occur, including but not limited to,
sudden fluctuation in interest rates or exchange rates, extreme difficulty in
stabilizing the balance of payments or substantial disturbance in the Korean
financial and capital markets, the MFE may impose any restrictions it deems
necessary such as requiring foreign investors, including the Fund, to obtain
approval prior to the acquisition of Korean equity securities or for the
remittance of sales proceeds overseas. The MFE has the authority, with prior
public notice of scope and duration, to suspend all or part of 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 MFE
has not exercised this authority.
There can be no assurance that the Foreign Investment Regulations adopted to
permit direct foreign investment in shares traded on the Exchange and the
repatriation of funds so invested will enable the Fund to continue to make
investments in a manner consistent with its investment objective and policies.
The limitations on individual and aggregate holdings by foreign investors may
preclude the Fund from making particular investments or 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 over the prices that would be
paid by Korean investors. The same factors could lengthen the time period
required to fully invest the proceeds of the Offer in Korean securities.
It is impossible to predict the extent to which foreign investment will
continue to increase in Korea or the Fund's ability to participate in such
increased foreign investment in light of the foreign holding limitations
19
<PAGE>
or governmental restrictions that may be imposed in the future. As of December
31, 1994, approximately US $18.95 billion had been invested in Korea by foreign
investors since January 1992.
Foreign investors are prohibited from engaging in purchase transactions on
the Exchange in a security that has reached or exceeded the maximum aggregate
foreign ownership limit. As of June 30, 1995, 97 of the 877 companies listed on
the Exchange had reached the applicable maximum aggregate foreign ownership
limit (11.06% of all companies listed on the Exchange). Currently, the
information regarding the number of shares of a class of each listed company
available for investment by an individual foreign investor and foreign
investors in the aggregate and the classes of shares of each listed company for
which the aggregate foreign ownership limit has been reached is available from
Korean securities companies.
Foreign investors are, however, allowed to effect transactions with other
foreign investors in the class of shares of companies that have reached or
exceeded the maximum aggregate foreign ownership limit off the Exchange through
a securities company in Korea (including branches in Korea of foreign
securities companies) as an intermediary. However, foreign investors are not
permitted to enter into such transactions with branches and subsidiaries of
foreign banks, securities companies and insurance companies (collectively,
"foreign financial institutions") and certain residents of Korea. Such
transactions ("OTC transactions") generally occur at a premium over prices on
the Exchange. The Fund invests in equity securities of Exchange-listed
companies through such OTC transactions, and thus pays premiums over the share
prices quoted on the Exchange, which premiums can be substantial. There can be
no assurance that the Fund will be able to realize such premiums if it sells
the shares to another foreign investor. Such premiums may be affected by
changes in regulation, changes in the supply of or demand for shares and
otherwise, including changes in the percentage of foreign ownership permitted
in Exchange-listed companies.
MARKET CHARACTERISTICS
The Korean securities markets, while relatively small as compared to the
securities markets of the United States, Japan and certain European countries,
have, with the exception of 1990 and 1991, been generally characterized by
gradual and consistent growth. The development of the Korean securities markets
may be attributed to, among other things, the Korean government's extensive
involvement in the private sector, including the securities markets. The
aggregate market capitalization of domestic equity securities listed on the
Exchange was approximately W 151,217 billion (approximately US $191.7 billion)
at December 31, 1994, as compared to US $4.4 trillion on the New York Stock
Exchange and US $3.6 trillion on the Tokyo Stock Exchange. As discussed above
in "Investment and Repatriation Restrictions," however, only a small portion of
the equity securities that compose this market capitalization may be purchased
by foreign investors.
Market capitalization along with trading volume is concentrated in a limited
number of companies within a small number of industries. The Korean government
has from time to time taken measures to minimize excessive price volatility on
the Exchange, including the imposition of limitations on daily price movements
of securities and varying margin requirements. Such actions by the Korean
government have had and in the future could have a significant effect on the
market prices and dividend yields of Korean equity securities. In particular,
during 1990 the Korea Securities Market Stabilization Fund (the "Stabilization
Fund"), a partnership operated by its contributors which include substantially
all Exchange-listed companies, Korean securities companies and certain
institutional investors, was formed to stabilize the market through the
purchase and sale of securities. In January and February 1994, the
Stabilization Fund sold approximately W 500 billion (approximately US $618
million) and approximately W 300 billion (approximately US $371 million) worth
of equity securities, respectively. Future liquidations of the Stabilization
Fund's portfolio could exert significant downward pressure on the market price
of Exchange-listed securities in which the Fund may invest. In addition, any
purchases by the Stabilization Fund could reduce the shares available for
investment by foreign investors such as the Fund or retard a decline in the
market price of Exchange-listed securities. By virtue of its Charter, the
Stabilization Fund is due to be liquidated in May 1996.
20
<PAGE>
Under the Foreign Investment Regulations, a foreign investor must appoint one
or more standing proxies from among the Korea Securities Depository, securities
firms (including Korean branches of foreign securities firms) which have
obtained a license to act as a standing proxy and banks (including Korean
branches of foreign banks) to exercise shareholders' rights, apply to change a
name on the shareholders' registry, place an order to sell or purchase shares
or engage in any matters related to these activities, if any such activities
are not conducted by the foreign investor itself. The Fund has appointed a
subsidiary of the Fund's subcustodian as a standing proxy. Because the Fund
will be engaged in transactions with several Korean brokers, it may need to
appoint a number of standing proxies to efficiently conduct its trading
activities. Each such standing proxy appointed will receive a commission for
its services. If a standing proxy other than the Fund's custodian or
subcustodian were deemed to have custody over certain assets of the Fund, the
Fund may be required to obtain relief from the United States Securities and
Exchange Commission or a waiver or modification of the standing proxy
requirement from the KSEC. There can be no assurance that such relief, waiver
or modification will be obtained.
There are currently a limited number of securities firms engaged in
securities underwriting and trading in Korea. Tong Yang Securities, the parent
company of Orion, frequently manages underwritten offerings of debt and equity
securities of Korean issuers. The Fund is prohibited by the 1940 Act from
purchasing any securities in an offering for which Tong Yang Securities is the
principal underwriter and, under current Korean laws and regulations, is
prohibited from participating in initial public offerings of securities with a
few exceptions. Tong Yang Securities may also be a dealer in various securities
in which the Fund may invest. In the absence of exemptive relief, the Fund will
not purchase or sell securities from or to Tong Yang Securities in principal
transactions or purchase securities in secondary offerings in which Tong Yang
Securities is an underwriter. The Fund does not currently intend to apply for
such exemptive relief. The underwriting and trading activities of Tong Yang
Securities, however, as well as its investment positions, could adversely
affect the availability of securities the Fund is seeking to purchase or the
demand for securities the Fund is seeking to sell.
GOVERNMENT INVOLVEMENT IN THE PRIVATE SECTOR
The Korean government has historically exercised and continues to exercise
substantial influence over many aspects of the private sector including the
securities markets. The Korean 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 companies in industries suffering from excess capacity
and induced private companies to publicly offer their securities. Certain
government actions could have a greater adverse impact on foreigners, such as
the Fund, than on Korean nationals. The effect of future government actions on
the Fund cannot be predicted.
CORPORATE DISCLOSURE STANDARDS
Issuers of securities in Korea are not subject to the same degree of
regulation as are U.S. issuers with respect to such matters as insider trading
rules, restrictions on market manipulation, shareholder proxy requirements and
timely disclosure of information. Korean accounting, auditing and financial
standards are not equivalent to United States standards in important respects
and, therefore, less information is generally available to investors in
publicly-traded Korean securities than to investors in publicly-traded U.S.
securities.
TRANSACTION COSTS
Maximum brokerage commission rates have been established by regulations of
the Exchange. There is generally no deviation in commission rate schedules
among Korean brokers. Brokerage commissions and transaction costs for
transactions both on and off the Exchange are generally higher than in the
United States.
21
<PAGE>
UNITED STATES AND FOREIGN TAXES
Korean taxes paid by the Fund may be creditable or deductible by U.S.
shareholders for U.S. income tax purposes. No assurance can be given that
applicable tax laws and interpretations will not change in the future.
Moreover, non-U.S. investors may not be able to credit or deduct such foreign
taxes. Investors should review carefully the information discussed under the
heading "Taxation" herein and in the SAI and should discuss with their tax
advisers the specific tax consequences of investing in the Fund.
OTHER RISKS OF FOREIGN INVESTMENT
The economy of an individual foreign country may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product or gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. For example, the
Korean economy is heavily dependent upon international trade and, accordingly,
has been and may continue to be adversely affected by economic conditions in
the U.S. and other countries with which it trades, trade barriers, managed
adjustments in the value of the Won and other protectionist measures imposed or
negotiated by the U.S. and other countries with which it trades.
The Fund's portfolio investments in Korea may be adversely affected by
nationalization, expropriation or confiscatory taxation, currency blockage,
political changes, government regulation, social instability or diplomatic
developments.
INVESTMENT IN SECURITIES OF SMALLER COMPANIES
While investment in large companies is emphasized, on occasion the Fund may
invest in smaller companies believed by Alliance or Orion to have growth
potential. Investment in smaller companies involves greater risk than is
customarily associated with the securities of more established companies. The
securities of smaller companies may have relatively limited marketability and
may be subject to more abrupt or erratic market movements than securities of
larger companies or broad market indices.
SECURITIES NOT READILY MARKETABLE
Although the Fund invests primarily in listed securities of established
companies, it may, to the extent permitted by future Korean laws and
regulations, invest up to 25% of its total assets in securities which are not
readily marketable and which may involve a high degree of business and
financial risk that can result in substantial losses. Because of the absence of
a trading market for these investments, the Fund may not be able to realize
their value upon sale. See "Investment Objective and Policies--Securities Not
Readily Marketable."
DILUTION AND THE EFFECT OF NON-PARTICIPATION IN THE OFFER
Upon the completion of the Offer, shareholders who do not fully exercise
their Rights will own a smaller proportional interest in the Fund than would be
the case if the Offer had not been made. In addition, an immediate dilution of
the net asset value per share will be experienced by all shareholders as a
result of the Offer because the Subscription Price will be less than the then
current net asset value per share, the Fund will bear the expenses of the Offer
and the number of shares outstanding after the Offer will have increased
proportionately more than the increase in the size of the Fund's net assets.
Although it is not possible to state precisely the amount of such a decrease in
value, because it is not known at this time how many Shares will be subscribed
for or what the Subscription Price will be, such dilution might be substantial.
For example, assuming (i) all Rights are exercised, (ii) the Fund issues an
additional 25% of the Shares, (iii) the Fund's net asset value on the
Expiration Date is $12.82 per share (the net asset value per share on September
15, 1995), and (iv) the Subscription Price is $11.88 per share (95% of the
closing market price per share on September 15, 1995), then the Fund's net
asset value per share on such date would be reduced by approximately $0.47 per
share or 3.7%. Record Date shareholders will experience a decrease in the net
asset value per share held
22
<PAGE>
by them, irrespective of whether they exercise all or any portion of their
Rights. Moreover, Record Date shareholders who do not fully exercise their
Rights will, at the completion of the Offer, own a smaller proportional
interest in the Fund than they owned prior to the Offer. The actual
Subscription Price may be greater or less than the Estimated Subscription
Price of $11.88 per Share. This dilution of net asset value per share will
disproportionately affect shareholders who do not exercise their Rights.
BORROWING
The Fund may borrow from a bank or other entity in a privately arranged
transaction to the maximum extent permitted under the 1940 Act, but only to
finance the repurchase of its shares or to pay distributions for purposes of
complying with the Code. Borrowing creates an opportunity for the Fund to
finance the limited activities described above without the requirement that
portfolio securities be liquidated at a time when it would be disadvantageous
to do so. Any investment income or gains on, or savings in transaction costs
made through the retention of, portfolio securities in excess of the interest
paid on and the other costs of the borrowings will cause the net income or net
asset value per share of the Fund's Common Stock to be greater than would
otherwise be the case. On the other hand, if the income or gain, if any, on
the securities retained fails to cover the interest paid on and the other
costs of the borrowing, the net income or net asset value per share of the
Fund's Common Stock will be less than would otherwise be the case. In the
event of any borrowing from a Korean source, such borrowing may be subject to
any applicable Korean laws and regulations.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The management of the Fund, including general supervision of the duties
performed by Alliance and Orion, is the responsibility of its Board of
Directors. 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 predicated upon civil liabilities of
such Directors or officers under the federal securities laws of the United
States. The Fund has been advised that 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 of the United States. There is no
extradition treaty currently in effect between the United States and Korea. It
is unclear if any future extradition treaty in effect between the United
States and Korea would subject such Directors and officers to effective
enforcement of the criminal penalties of the federal securities laws. For
certain information regarding the Directors and officers of the Fund, see
"Management of the Fund--Directors and Officers" in the SAI.
MANAGEMENT AND ADMINISTRATION ARRANGEMENTS
Alliance Capital Management L.P., a New York Stock Exchange listed company
with principal offices at 1345 Avenue of the Americas, New York, New York
10105, has been retained under an investment management and administration
agreement (the "Management and Administration Agreement") to serve as
investment manager and administrator to the Fund. Orion Asset Management Co.,
Ltd., a Cayman Islands corporation with principal offices at 780 Third Avenue,
New York, New York 10017, has been retained under an investment management
agreement (the "Management Agreement") to serve as investment manager to the
Fund with respect to the Fund's investments in Korean securities. The
employees of Alliance and Orion who have been principally responsible for the
Fund's portfolio investment decisions are Mr. A. Rama Krishna since March 1993
and Mr. In Kee Oh since May 1995. Mr. Krishna is Vice President of Asian
Equity Research of Alliance and of Alliance Capital Management (Japan) Inc.
Mr. Krishna has been associated with
23
<PAGE>
Alliance since March 1993. Previously, Mr. Krishna was Chief Investment
Strategist and Director of Equity Research for CS First Boston Corporation
since prior to 1990. Mr. Oh is a Director and Chief Operating Officer of Orion
with which he has been associated since October 1991. Previously, Mr. Oh was an
Analyst in the New York and Seoul, Korea offices of Tong Yang Securities since
prior to 1990.
Alliance is a leading international investment manager supervising client
accounts with assets as of June 30, 1995 totaling more than $135 billion (of
which approximately $44 billion represented the assets of investment
companies). Alliance's clients are primarily major corporate employee benefit
funds, public employee retirement systems, investment companies, foundations
and endowment funds and included, as of June 30, 1995, 29 of the FORTUNE 100
Companies. As of that date, Alliance and its subsidiaries employed
approximately 1,350 employees operating out of domestic offices and the
overseas offices of subsidiaries in Bombay, Istanbul, London, Sydney, Tokyo,
Toronto, Bahrain, Luxembourg and Singapore. The 51 registered investment
companies comprising 103 separate investment portfolios managed by Alliance
currently have more than one million shareholders.
Alliance Capital Management Corporation, the sole general partner of, and the
owner of a 1% general partnership interest in, Alliance, is an indirect,
wholly-owned subsidiary of The Equitable Life Assurance Society of the United
States ("Equitable"), one of the largest life insurance companies in the United
States and a wholly-owned subsidiary of The Equitable Companies Incorporated
("ECI"), a holding company controlled by AXA, a French insurance holding
company. As of June 30, 1995, ACMC, Inc. and Equitable Capital Management
Corporation, each a wholly-owned direct or indirect subsidiary of Equitable,
owned approximately 59% of the issued and outstanding units representing
assignments of beneficial ownership of limited partnership interest in Alliance
("Units"). As of June 30, 1995, approximately 33% and 8% of the Units were
owned by the public and employees of Alliance and its subsidiaries,
respectively, including employees of Alliance who serve as Directors of the
Fund.
Orion is a wholly-owned subsidiary of Tong Yang Securities, a listed company
which was established in 1962 and is a component member of a leading Korean
securities company. Tong Yang Securities is part of the Tong Yang Group, which
is a group of affiliated companies based in Korea which have operations in the
basic industrial, foods, merchandising and service and finance industries. Tong
Yang Group has one of the most broadly diversified groups of financial services
companies in Korea. At June 30, 1995, the aggregate assets of the Tong Yang
Group were approximately $10.5 billion and it employed approximately 4,422
persons. Tong Yang Securities and its affiliates manage funds and accounts with
approximately $1.4 billion invested in Korean equity securities as of June 30,
1995. Orion, as an affiliate of Tong Yang Securities, has access to its
resources and research capabilities. To the extent that certain of the
directors and officers of Orion are residents of Korea, and substantially all
of their assets may be located outside of the United States, 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 predicated upon civil liabilities of such directors
or officers under the federal securities laws of the United States. The Fund
has been advised that 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 of the United States. There is no extradition treaty
currently in effect between the United States and Korea. It is unclear if any
future extradition treaty in effect between the United States and Korea would
subject such directors and officers to effective enforcement of the criminal
penalties of the federal securities laws.
The Management and Administration Agreement between the Fund and Alliance
provides that Alliance will furnish investment advice and recommendations to
the Fund as described above and will also furnish administrative, legal,
accounting and bookkeeping, internal auditing and other such services to the
Fund under the Management and Administration Agreement. Alliance also provides
office space in New York, order placement facilities and persons satisfactory
to the Fund's Board of Directors to act as officers and employees of the Fund.
Such officers and employees, as well as certain Directors of the Fund, may be
employees of Alliance or directors, officers or employees of its affiliates.
Under the Management and Administration Agreement and the Management Agreement
(collectively, the "Agreements"), Alliance and
24
<PAGE>
Orion have established a joint working relationship with respect to the Fund's
investments in Korean securities. Under the Management and Administration
Agreement, the Fund pays monthly to Alliance a fee at an annualized rate of
.85% of the Fund's average weekly net assets. Under the Management Agreement,
the Fund pays monthly to Orion a fee at an annualized rate of .40% of the
Fund's average weekly net assets.
For purposes of the calculation of the fees payable to Alliance and Orion,
average weekly net assets are determined on the basis of the average net assets
of the Fund for each weekly period (ending on Friday) ending during the month.
The net assets for each weekly period are determined by averaging the net
assets on Friday of such weekly period with the net assets on Friday of the
immediately preceding weekly period. When a Friday is not a Fund business day,
then the calculation will be based on the net assets of the Fund on the Fund
business day immediately preceding such Friday. The aggregate fees payable by
the Fund to Alliance and Orion are higher than those paid by most U.S.
investment companies investing exclusively in securities of U.S. issuers,
although Alliance believes they are generally comparable to those paid by other
closed-end investment companies of comparable size that invest primarily in the
securities of issuers in a single foreign country. In addition to payments to
Alliance under the Management and Administration Agreement and to Orion under
the Management Agreement, the Fund pays certain other costs.
Each of the Agreements by its terms continues in effect from year to year if
such continuance is specifically approved, at least annually, by a majority
vote of the Directors who neither are interested persons of the Fund nor have
any direct or indirect financial interest in the Agreement, cast in person at a
meeting called for the purpose of voting on such approval.
THE KOREAN SECURITIES MARKETS
BACKGROUND AND DEVELOPMENT
The Korean securities markets have developed largely as a result of measures
of the Korean government designed to stimulate the Korean economy and
investment in Korea. The Exchange was established in 1956, at which time it
functioned primarily as a market for the trading of Korean government bonds,
with only 12 equity securities listed for trading. It was not until the Korean
government enacted the first economic development plan in 1962 that the
securities markets began to develop. During the 1960's, the Korean government
enacted legislation which provided tax and other incentives to both issuers and
buyers of equity securities. The securities markets developed more fully during
the 1970's pursuant to further governmental measures which, among other things,
empowered the Korean government to induce corporations to publicly offer their
securities and list their shares on the Exchange. In 1976, the Korean
Securities and Exchange Law (the "Korean Securities Law") was amended to
provide for, among other things, the establishment of the KSEC and its
executive body, the Securities Supervisory Board (the "Securities Board").
GOVERNMENT INVOLVEMENT IN THE PRIVATE SECTOR
The Korean government has historically exercised and continues to exercise
substantial influence over many aspects of the private sector including the
securities markets. The Korean government from time to time has influenced the
payment of dividends and the prices of certain products, encouraged companies
to invest in or to concentrate in particular industries, induced mergers
between companies in industries suffering from excess capacity and induced
private companies to publicly offer their securities. The Exchange has also
sought to minimize excessive price volatility through various steps, including
the imposition of limitations on daily price movements of securities.
In August 1993, the Korean government introduced a real-name financial
transactions system. Financial institutions are required to confirm, whenever
they enter into financial transactions with their clients, that those clients
are using their real names. The system was introduced to increase disclosure in
financial transactions and is expected by the government to enhance the
integrity and efficiency of the Korean financial markets.
25
<PAGE>
REGULATION OF FOREIGN INVESTMENT
The Korean securities markets have historically been closed to foreign
investors. In 1981, however, the MFE announced the intention to gradually
internationalize the Korean securities markets. Since then, the Korean
government has progressively implemented steps to liberalize foreign investment
in the Korean securities markets. At the present time, however, foreign
investors, including the Fund, are not permitted to make direct or indirect
investments in Won denominated debt securities, except for certain convertible
bonds and public bonds. The MFE has recently announced a plan to permit foreign
investors to make certain limited investments in Won denominated debt
securities. Foreign investors currently may not participate in the purchase of
shares through initial public offerings and there are no current proposed
regulations that would permit this type of investment.
Since January 3, 1992, the Korean stock markets have been open to general
direct foreign investment following the adoption and implementation by the KSEC
and MFE of the Foreign Investment Regulations. These regulations allow foreign
investors to directly purchase and sell equity shares on the Exchange, subject
to certain restrictions that are described below and in the SAI. Under the
Foreign Investment Regulations as amended, the percentage of each class of a
company's outstanding equity shares that may be held by a particular foreign
investor and by all foreign investors as a group is generally limited to 3% and
15%, respectively. In December 1994, the Korean government announced that it
will continue to raise the 15% foreign investment limitation. If, and when, the
15% limitation is raised, the Fund may have more flexibility in selecting
investments for its portfolio. There can be no assurance that the 15%
limitation will be raised.
In December 1994, the MFE announced a three-phase plan to be implemented
during the period from 1995 to 1999 to liberalize foreign exchange
transactions, including further opening of the securities markets to foreign
investors. In the plan, the government announced its intention to gradually
raise the ceilings on investments by foreign investors in companies listed on
the Exchange. The plan provides for the further opening of the debt securities
market step-by-step, by way of indirect investment in debt securities through
Korean investment in long-term non-guaranteed bonds, together with the issuance
in Korea of Won-denominated or foreign-currency-denominated debt securities by
foreign entities. The plan also provides for the easing of requirements for the
establishment of Korean branches of foreign securities companies and for
further opening of the securities industry to foreign participants. The plan
also provides for Korean investors to be permitted more opportunities to invest
directly and indirectly in foreign securities.
THE KOREA STOCK EXCHANGE
The Exchange is Korea's sole securities exchange and has its trading floor in
Seoul. The Exchange, which has been a non-profit member organization since
1988, is currently owned by 33 member securities companies. Both equity and
debt securities are traded on the Exchange, although equity securities account
for most of the Exchange's trading activity. Equity securities listed on the
Exchange are divided into two separate trading sections based on, among other
things, the total number of shares held by minority shareholders and the
monthly average trading volume. See "The Korean Securities Markets--The Korea
Stock Exchange--Listing, Reporting and Disclosure Requirements" in the SAI.
Transactions on the Exchange may only be effected through securities
companies that are members of the Exchange. Securities companies that wish to
engage in securities dealing, brokering or underwriting in Korea must be
licensed by the MFE. Currently all 33 members of the Exchange are licensed in
all three categories. Financial intermediaries including banks, investment
trust companies, short-term finance companies and merchant banking corporations
are not eligible for membership on the Exchange. However, they may engage in
underwriting upon obtaining a license from the MFE.
REGULATION. The MFE establishes the basic policies governing the overall
operation of the Korean securities markets. Although the KSEC is authorized to
regulate and make decisions on all major issues relating to the securities
markets pursuant to the Korean Securities Law, all decisions of the KSEC must
be reported to the MFE. The MFE may repeal any decision of the KSEC or suspend
its enforcement. The KSEC
26
<PAGE>
is composed of nine commissioners, one of whom is appointed as chairman by the
President. The day-to-day management and implementation of the policies of the
KSEC are conducted by the Securities Board.
The Korean Securities Law was originally enacted in 1962 and amended
fundamentally in 1976, 1982, 1987 and 1991 to broaden the scope and improve
the effectiveness of official supervision of the securities markets. As
amended, the Korean Securities Law introduced restrictions on insider trading,
required that specified information be made available by listed companies to
investors and established rules regarding margin trading, proxy solicitation
and takeover bids. The 1987 amendment generally improved the regulatory and
disclosure requirements under the Korean Securities Law, established a more
effective system for the transfer of securities through the use of a book-
entry system without the need for physical delivery of securities
certificates, and provided a statutory basis for futures trading on the
Exchange. In addition, the 1987 amendments strengthened control over insider
trading and contained extensive new provisions which, for the first time,
regulate the investment advisory business. The 1991 amendments introduced
stricter restrictions on insider trading and supplemented the existing
disclosure system. The Korean Securities Law was further amended in January
1994, to permit listed companies to hold their own shares subject to certain
limitations, improve the central depository system and securities dispute
conciliation committee, strengthen the reporting requirements imposed on
shareholders holding 5% or more of the issued and outstanding voting shares of
a listed company, and expand the scope of dissenting shareholders entitled to
request that the issuer purchase their shares under certain circumstances,
including at the time of merger or business transfer, to include holders of
non-voting shares. The January 1994 amendments also lifted the 10% beneficial
ownership limitation on the acquisition of voting shares of a listed company
(with effect from January 1, 1997). The Korean Securities Law and regulations
promulgated thereunder currently require the initial registration of companies
and the filing of separate registration statements for both initial and
subsequent public issues of securities and provide for the administration and
supervision of securities companies, investment advisory companies, listed
companies, and other securities-related institutions, including foreign
securities firms conducting business in Korea and domestic securities
companies conducting business abroad.
SECURITIES FINANCING. The Korea Securities Finance Corporation (the "KSFC"),
which was established in 1955 to facilitate financing in the securities
markets, is the only institution specializing in securities financing in
Korea. The KSFC provides loans to underwriting groups and securities
collateral loans to the public. In March 1986 the KSFC suspended credit
extension for margin transactions as one measure to stabilize the securities
markets. Korean securities companies may extend credit for margin transactions
and provide for their clients subscription loans, purchase loans and
securities collateral financing by using their own resources or by borrowing
from the KSFC.
The margin requirement as set by the KSEC is 40% of the total of the sale
value of the securities purchased. The margin requirements are varied by the
KSEC depending upon market conditions. Foreign investors, including the Fund,
are not permitted to engage in margin transactions or enjoy the benefit of
other loans or financing.
THE KOREA SECURITIES MARKET STABILIZATION FUND
The Stabilization Fund, a partnership operated by its contributors, which
include substantially all of the Exchange-listed companies, Korean securities
companies and certain institutional investors including banks and insurance
companies, was formed during 1990 to stabilize the market through the purchase
and sale of securities. In August 1992, the MFE asked the Stabilization Fund,
together with banks, insurance companies and pension funds, to purchase an
additional W 3.9 trillion worth of stock in the succeeding twelve months. In
January and February 1994, the Stabilization Fund sold approximately W 500
billion (approximately US $618 million) and approximately W 300 billion
(approximately US $371 million) worth of equity securities,
27
<PAGE>
respectively. The Stabilization Fund's securities holdings, cash balances and
trading activities are not publicly disclosed. By virtue of its charter, the
Stabilization Fund is due to be liquidated by May 1996.
MARKET CAPITALIZATION AND TRADING VOLUME
The Korean securities markets, while relatively small as compared to the
securities markets of the United States, Japan and certain European countries,
have, with the exception of 1990 and 1991, been generally characterized by
gradual and consistent growth. The development of the Korean securities markets
may be attributed to, among other things, the Korean government's extensive
involvement in the private sector.
The following table sets forth the number of listed issues, listed companies,
market capitalization and trading volume of listed Korean equity securities for
1982 through 1994.
<TABLE>
<CAPTION>
NUMBER OF
LISTED NUMBER OF
EQUITY LISTED EQUITY TRADING VOLUME
ISSUES COMPANIES MARKET CAPITALIZATION ON THE EXCHANGE
--------- --------- ------------------------------ ------------------------------
(WON BILLIONS) (US $ MILLIONS) (WON BILLIONS) (US $ MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1982.................... 416 334 3,000 4,008 1,973 2,700
1983.................... 422 328 3,490 4,387 1,753 2,260
1984.................... 455 336 5,148 6,223 3,118 3,869
1985.................... 414 342 6,570 7,380 3,621 4,162
1986.................... 485 355 11,994 13,924 9,598 10,890
1987.................... 603 389 26,172 33,033 20,494 24,915
1988.................... 970 502 64,544 94,349 58,121 79,460
1989.................... 1,284 626 95,477 140,490 81,200 120,931
1990.................... 1,115 669 79,020 110,302 53,455 75,527
1991.................... 1,013 686 73,118 96,107 62,565 85,314
1992.................... 1,014 688 84,712 107,448 90,624 116,088
1993.................... 1,045 693 112,665 139,419 169,918 211,691
1994.................... 1,089 699 151,217 191,729 229,772 291,330
</TABLE>
--------
Sources: Korea Stock Exchange, Stock, June 1995; Securities Supervisory Board,
Monthly Review, June 1995.
THE KOREA COMPOSITE STOCK PRICE INDEX
Market performance of the Exchange is measured by a composite index and
several additional indices based on the first and second trading sections of
the Exchange, industry sectors and the capitalization of individual stocks. The
Korea Composite Stock Price Index (the "KOSPI") is the major measure of changes
in the aggregate market value of all common stocks listed on the Exchange.
Under the current aggregate market value method of computing the KOSPI, the
market price of each listed common stock is multiplied by the number of shares
listed and then aggregated.
The KOSPI rose to an all-time high of 1138.75 on November 8, 1994. During
1994, the KOSPI traded within a range of 855.37 to 1138.75. The KOSPI closed on
September 15, 1995 at 985.64.
OPTIONS AND FUTURES
Currently, the Korean securities markets do not provide mechanisms for the
purchase and sale of options and futures contracts. However, the Exchange
announced that it plans to open a stock index futures market during 1996 and a
stock index futures option market during 1997.
28
<PAGE>
EQUITY SECURITIES
THE PRIMARY MARKET. The primary market for equity securities in Korea has
generally been characterized by consistent and significant growth. A downward
trend in the number of primary equity offerings began in 1990, however, and
continued through 1994.
PRIVATIZATIONS. As part of its program for the development of the securities
markets, the Korean government has sold portions of certain government-owned
corporations to the public. These sales were intended to increase the
participation of low and middle-income investors in the Korean securities
markets. Participation was encouraged through government-provided discounts and
loans. The sale by the Korean government of a portion of its interest in POSCO
and KEPCO in 1988 and 1989, respectively, constituted the first public
offerings under this program. In 1991, Korea Exchange Bank, formerly wholly-
owned by the Korean government, sold its newly issued shares to the public. The
Korean government recently sold to the public a portion of its interest in
Korea Telecom, which is the largest telecommunications service provider in
Korea, through a competitive bidding process. The Korean government recently
announced that it is considering the sale of additional government-owned
corporations although any such sale would be subject to a number of factors and
there can be no assurance that such sales will occur.
THE SECONDARY MARKET. The total trading volume of equity securities in 1994
was approximately W 229.8 trillion representing an increase of 35.2% from the
1993 level of W 169.9 trillion.
The aggregate market capitalization of all equity securities of the 699
companies listed on the Exchange as of December 31, 1994 was approximately W
151.2 trillion (approximately US $191.7 billion). As of May 31, 1995, the
market capitalization had decreased to W 133.4 trillion (approximately U.S.
$175.3 billion). Market capitalization, along with trading volume, is
concentrated in a limited number of companies within a small number of
industries. As of December 31, 1994, the 30 largest companies by market
capitalization represented 48.1% of the total market capitalization of Korean
equity securities and the 30 most actively traded domestic equity securities
accounted for 29.2% of total trading volume of domestic equity securities for
the year ended December 31, 1994.
BOND MARKET
The Korean listed bond market 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 to promote the development of the
bond and equity markets. The Korean bond market is comprised of corporate bonds
issued by Korean corporations and public bonds including government bonds,
municipal bonds issued by city governments and special bonds issued by
government-run corporations. The majority of corporate bonds are guaranteed by
banking institutions.
The secondary market in bonds listed on the Exchange has been relatively
inactive compared to equity securities listed on the Exchange. There is also an
active over-the-counter market in certain non-listed bonds. Currently, foreign
investors are not permitted to invest in listed or unlisted Won denominated
bonds, except for certain convertible bonds and public bonds; however, Korean
branches and subsidiaries of certain foreign financial institutions are
generally permitted to invest in listed Won denominated bonds.
THE REPUBLIC OF KOREA
BACKGROUND
GOVERNMENT. Governmental authority in Korea is highly centralized and is
concentrated in a strong presidency. The current President is Kim Young Sam,
who was elected in December 1992. President Kim has emphasized reform and
liberalization of politics and deregulation and revitalization of the economy
of Korea.
29
<PAGE>
Legislative power is vested in the National Assembly. Approximately four-
fifths of the members of the National Assembly are elected by popular vote for
a term of four years. The remaining seats are generally distributed
proportionately among parties winning 5% or more of votes or 5 or more seats
in the direct election. The National Assembly enacts laws and approves
treaties and the national budget. Judicial power in Korea is vested in the
Supreme Court, the Constitutional Court and other lower courts at various
levels.
INTERNATIONAL RELATIONS. Korea maintains diplomatic relations with most
nations, but its strongest ties are with the United States. Korea and the
United States have entered into several agreements designed to promote Korea's
economy and a mutual defense treaty. Korea also maintains strong ties with
Japan, which constitutes Korea's leading source of imported capital goods,
technology and foreign direct investment and which provided 58.6% of foreign
visitors to Korea in 1994. Since the beginning of 1989, Korea has established
diplomatic relations with Albania, Bulgaria, the Czech Republic, Slovakia,
Hungary, Kazakstan, Mongolia, Palau, Poland, Romania, Russia, the Federal
Republic of Yugoslavia, Croatia and Zimbabwe. A Chinese trade office was
established in Seoul in April 1991, and diplomatic relations with the People's
Republic of China were officially established in August 1992. Korea maintains
diplomatic relations with more than 175 countries.
Relations between Korea and North Korea have been tense since the end of
World War II. North Korea maintains a regular army estimated at close to one
million, compared with the Korean army of 520,000. The majority of both forces
are concentrated on either side of the demilitarized zone in a state of
military readiness. The United States maintains a military force of
approximately 36,000 in Korea.
Tension between Korea and North Korea was temporarily eased in 1972 when the
first moves towards conciliation and eventual reunification were initiated. On
December 13, 1991, the leaders of North Korea and Korea signed an Agreement on
Reconciliation, Nonaggression and Exchange and Cooperation. This agreement was
put into force on February 19, 1992. As discussed above under "Special Risk
Considerations--Relations with North Korea," tensions between North Korea and
Korea still exist as a result of North Korea's attempts to change the
armistice that has maintained the peace since the end of the Korean War.
DOMESTIC ECONOMY
Korean industry and commerce are predominately privately owned and operated.
However, the Korean government is 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 Korean government through its controls of approvals and
licenses and through the allocation of credit. However, such government
influence has gradually diminished through deregulation and market self-
regulation, in keeping with Korea's liberalization policy.
Primary responsibility for formulating Korea's economic policies, including
the development and implementation of a series of successive economic and
social development plans (the "Economic Plans") which have guided economic
policy since 1962, is with the government's Economic Planning Board, headed by
the Deputy Prime Minister. The emphasis of the Economic Plans has changed from
the development of import substitution industries and the infrastructure to a
focus on economic stabilization, liberalization of the economy, reduction of
restrictions on direct foreign investment and improvements in social
conditions. Since the establishment of the Economic Plans, Korea has made
significant progress toward the transformation of its economy from one
characterized by agricultural production and the export of raw materials,
textiles and clothing to that of a modern industrial state. Korea's exports
now include ships, motor vehicles, integrated circuits and consumer
electronics. In early 1993, the Korean government announced economic reform
and development programs to be implemented in a new Five Year Economic Plan
for the period through 1997. Pursuant to this plan, the government will
promote fiscal, financial and administrative reforms and changes in prevailing
patterns of economic behavior. The new plan is also intended to promote stable
growth and globalization of the Korean economy and to improve the quality of
life in Korea.
30
<PAGE>
The following table sets forth certain indicators of economic activity in
Korea from 1989 to 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1989 1990 1991 1992 1993 1994(1)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross National Product
at Constant 1990 Market
Prices (Won billions).. 162,683.7 178,262.1 194,458.8 204,231.0 216,162.4 233,940.2
Percentage Increase of
GNP over Previous Year
at Constant 1990 Market
Prices................. 6.9% 9.6% 9.1% 5.0% 5.6% 8.2%
Exports FOB (U.S. $ mil-
lions)................. 62,377.2 65,015.7 71,870.1 76,631.5 82,235.9 96,013.2
Imports CIF (U.S. $ mil-
lions)................. 61,464.8 69,843.7 81,524.9 81,775.3 83,800.1 102,348.2
Total Official Reserves
(U.S. $ millions)...... 15,245.2 14,822.4 13,733.0 17,153.9 20,262.4 25,672.7
Exchange rate (in Won
per Dollar)............ 679.6 716.4 760.8 788.4 808.1 788.7
</TABLE>
--------
(1) Preliminary
Source: The Bank of Korea, Monthly Bulletin, April 1995; National Statistical
Office, Monthly Statistics of Korea, April 1995.
ENERGY
Korea 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 on the Korean economy and adversely affect Korea's
balance of trade. See "Foreign Trade and Balance of Payments--Foreign Trade" in
the SAI.
To reduce its dependence on oil imports, the Korean government encouraged
efforts to implement an energy source diversification program, with primary
emphasis on nuclear energy. Korea's first nuclear power plant went into full
operation on March 3, 1978 with a rated generating capacity of 587 megawatts.
The total Korean nuclear power generating capacity at the end of 1994 was
58,650 megawatts, accounting for 35.5% of total annual power generation.
THE FINANCIAL SECTOR
Korea's financial sector has developed along with the economy and today
comprises a banking system, a range of non-banking financial institutions and
the securities markets.
In addition to the 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.
The Bank of Korea, which was established in 1950, is Korea's central bank and
sole currency issuing bank. Monetary and credit policies of The Bank of Korea
are formulated and controlled by a nine-member Monetary Board comprised of the
MFE, the Governor of The Bank of Korea and seven other members. The Monetary
Board regulates the activities of banking institutions and sets and implements
monetary policy.
Although The Bank of Korea has primary responsibility for monetary policy,
the Korean government, through the MFE, exerts considerable influence on
monetary policy. For example, the MFE has the power to request the
reconsideration of resolutions adopted by the Monetary Board and, if such a
request is rejected by the Monetary Board, the President has the authority to
override the Monetary Board's decision.
Monetary policy is implemented by influencing the reserve positions of
banking institutions, principally through changes in the terms and conditions
of discounts, open market operations and changes in reserve requirements. 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.
31
<PAGE>
Effective December 5, 1988, the Korean government deregulated interest rates
on loans (other than loans entailing government subsidies) and deposits
(including money market instruments such as certain categories of commercial
paper, certificates of deposit, bank debentures, corporate bonds, cash
management accounts and development trust funds, but excluding traditional time
deposits and savings deposits).
In August 1991, the Monetary Board adopted a four-stage interest rate
deregulation plan in furtherance of the deregulation process. Pursuant to such
plan, in 1991 the Korean government deregulated interest rates on other
financial products, including certain time deposits.
On June 30, 1993, the MFE announced a three-phase liberalization plan. The
principal proposals under such phase relate to further interest rate
deregulation, improvement of monetary control measures and the development of
money markets, improvement of credit control management, and foreign exchange
and capital market liberalization. Each area of deregulation is to be phased in
under three stages from 1993 to 1997.
In November 1994, the government announced a plan for the 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. The 1994 plan
provides that in 1995 interest rates will be liberalized for other short-term
money market instruments and Bank of Korea-supported policy loans, in 1996
interest rates will be 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 Korean economy, which lacks
natural resources and must rely on extensive trading activity as a base for
growth. Virtually all domestic requirements for petroleum, wood and rubber are
imported, as are much of Korea's requirements for coal and iron ore. Exports
constitute a high percentage of Korea's GNP, and the international economic
environment is, accordingly, of crucial importance to Korea's economy. Korea's
largest trading partners are the United States and Japan.
Korea's trade balance has been highly sensitive to world crude oil prices.
The balance of trade in 1990, 1991 and 1992 was adversely affected by increases
in oil prices, increased imports of machinery and other capital goods and
consumer goods, the economic recession in countries constituting important
markets for Korean exports, principally the United States, and increased
competition for Korea's exports in certain markets, principally exports to
Japan from other Asian countries. The balance of trade could continue to be
adversely affected if, among other things, Korea's trading partners increased
barriers against imports, prices for essential natural resources imported by
Korea increased or the economic slowdown continued in countries constituting
important markets for Korean exports.
EXCHANGE CONTROLS. Only authorized banks are permitted to effect foreign
exchange transactions. Approval by the MFE is required to become an authorized
bank.
Authorization or approval, either by the MFE, The Bank of Korea or authorized
banks, as appropriate, is necessary for overseas remittances, issuance of
international bonds and certain other instruments, overseas investments and
other transactions involving foreign exchange payments in conformity with the
foreign exchange control regulations unless such authorization or approval is
expressly exempted under the regulations.
FOREIGN EXCHANGE
Prior to 1989, The Bank of Korea set daily exchange rates for the Won based
on a trade-weighted multi-currency basket system. This rate was known as The
Bank of Korea concentration base rate. In 1989, the
32
<PAGE>
Korean government announced a three-phase plan to produce a free-floating
exchange rate system. The first phase allowed the domestic banks to decide
buying and selling rates of foreign exchange within narrow limits of The Bank
of Korea concentration base rate. In the second phase, which took effect in
March 1990, the trade-weighted multi-currency basket system was replaced by a
system whereby the foreign exchange rates are determined by averaging the
previous day's inter-bank rates settled through the Korea Financial
Telecommunications and Clearings Institute, weighted by trading volume. This
system is known as the market average exchange rate system. Under this system,
foreign exchange rates are permitted to move each day within narrow ranges on
either side of the market average exchange rates published daily by the Korea
Financial Telecommunications and Clearings Institute. The government recently
announced 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 market average exchange rate for the Won as of a recent date is set forth
on the inside cover page of this Prospectus.
NET ASSET VALUE
The Fund calculates and makes available for weekly publication the net asset
value of its shares of Common Stock. Net asset value per share of Common Stock
is determined by adding the market value of all securities in the Fund's
portfolio and other assets, subtracting liabilities accrued, and dividing by
the total number of the Fund's shares of Common Stock then outstanding.
All securities listed on the Exchange for which market quotations are readily
available, including those traded by foreign investors in OTC transactions at a
premium over prices on the Exchange, are valued at the closing price on the
Exchange on the day of valuation or, if no such closing price is available, at
the last bid price quoted on such day. Other securities for which market
quotations are readily available will be valued in a like manner. Options will
be valued at such market value or fair value if no market exists. Futures
contracts will be valued in a like manner, except that open futures contracts
sales are valued using the closing settlement price or, in the absence of such
a price, the most recent quoted asked price. If there are no quotations
available for the day of valuation, the last available closing price will be
used. However, readily marketable fixed income securities may be valued on the
basis of prices provided by a pricing service when such prices are believed by
Alliance to reflect the fair market value of such securities. The prices
provided by a pricing service take into account institutional size, trading in
similar groups of securities and any developments related to specific
securities. Securities and assets for which market quotations are not readily
available (including investments that are subject to limitations as to their
resale) are valued at fair value as determined in good faith by the Fund's
Board of Directors. In making this determination, the Board of Directors
considers, among other things, publicly available information regarding an
issue, recent transactions in the issuer's securities, market conditions and
values ascribed to comparable companies in Korea.
Short-term debt securities that mature in less than 60 days are valued at
amortized cost if their term to maturity from date of purchase was less than 60
days, or by amortizing their value on the 61st day prior to maturity if their
term to maturity from date of purchase when acquired by the Fund was more than
60 days, unless such amortized cost is determined by the Board of Directors not
to represent fair value.
For purposes of determining the Fund's net asset value per share, all assets
and liabilities initially expressed in Won or other foreign currencies are
converted into U.S. Dollars at the mean of the current bid and asked prices of
such currency against the U.S. Dollar last quoted by a major bank that is a
regular participant in the foreign exchange market or on the basis of a pricing
service that takes into account the quotes provided by a number of such major
banks.
33
<PAGE>
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan") all
shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by
State Street Bank and Trust Company (the "Agent"), as agent under the Plan,
unless a shareholder elects to receive cash. Shareholders whose shares are held
in the name of a broker or nominee will automatically have distributions
reinvested by the broker or the nominee in additional shares under the Plan,
unless the shareholder elects to receive distributions in cash. If the service
is not available, such distributions will be paid in cash. See "Dividend
Reinvestment Plan" in the SAI.
The Agent has furnished each shareholder with written information relating to
the Plan. Included in such information are procedures for electing to receive
dividends and distributions in cash (or, in the case of shares held in the name
of a broker or a nominee who does not participate in the Plan, for electing to
participate in the Plan). Shareholders whose shares are held in the name of a
broker or nominee should contact the broker or nominee for details. All
distributions to investors who elect not to participate in the Plan will be
paid by check mailed directly to the record holder by or under the direction of
State Street Bank and Trust Company, as the dividend-paying agent.
If the Board declares an income distribution or determines to make a capital
gain distribution payable either in shares or in cash, as holders of the shares
may have elected, non-participants in the Plan will receive cash and
participants in the Plan will receive the equivalent in shares of the Fund
valued as follows:
(i) If the shares are trading at net asset value or at a premium above
net asset value at the time of valuation, the Fund will issue new shares at
the greater of net asset value or 95% of the then current market price.
(ii) If the shares are trading at a discount from net asset value at the
time of valuation, the Agent will receive the dividend or distribution in
cash and apply it to the purchase of the Fund's shares in the open market,
on the New York Stock Exchange or elsewhere, for the participants'
accounts. Such purchase will be made on or shortly after the payment date
for such dividend or distribution and in no event more than 30 days after
such date except where temporary curtailment or suspension of purchase is
necessary to comply with Federal securities laws. If, before the Agent has
completed its purchases, the market price exceeds the net asset value of a
share of Common Stock, the average purchase price per share paid by the
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend or distribution had been
in shares issued by the Fund.
There is no charge to participants for reinvesting dividends and capital
gains distributions. The fees of the Agent for handling the reinvestment of
dividends and capital gains distributions are paid by the Fund. There are no
brokerage charges with respect to shares issued directly by the Fund as a
result of dividends or capital gains distributions payable either in shares or
in cash. However, each participant will bear a pro-rata share of brokerage
commissions incurred with respect to the Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions
paid in cash.
The automatic reinvestment of income and capital gains distributions will not
relieve participants of any income tax that may be payable on such income and
capital gains distributions. The federal income tax treatment of reinvestment
is described in the SAI under "Taxation."
All correspondence concerning the Plan should be directed to the Agent at
State Street Bank and Trust Company, at P.O. Box 1713, Boston, Massachusetts
02105. For a more complete description of the Plan, see "Dividend Reinvestment
Plan" in the SAI.
34
<PAGE>
TAXATION
The Fund intends to continue to qualify and elect to be treated as a
"regulated investment company" under the Code. The Fund intends to make timely
distributions of the Fund's taxable income (including any net capital gain) so
that the Fund will not be subject to federal income or excise taxes. However,
Korean exchange control or other regulations on the repatriation of investment
income, capital or the proceeds of securities sales by non-Korean individuals
or entities may limit the Fund's ability to make distributions sufficient in
amount to avoid being subject to one or both of such federal taxes. It is
anticipated that a portion of the distributions of the Fund's taxable income
will be taxable as ordinary income to holders of the Fund's shares ("Holders")
who are citizens or residents of the United States or United States
corporations ("United States Holders") and a portion will be taxable as long-
term capital gain. After the end of each taxable year, the Fund will notify
United States Holders of the United States federal income tax status of any
distributions made by the Fund to such Holders during such year.
Dividends and interest received by the Fund in respect of Korean securities
will also be subject to Korean income taxes, including withholding taxes.
Interest on foreign-currency denominated bonds issued by Korean entities will
be exempt from Korean income taxes, including withholding taxes, until December
31, 1998 by virtue of the Korean Tax Exemption and Reduction Control Law of
1993, as amended, and it is not certain whether such exemption will be
extended. Pursuant to a ruling issued by the MFE interpreting the income tax
treaty between the United States and Korea (the "Korean Tax Treaty"), capital
gains derived by the Fund upon the sale of stock or other securities of Korean
corporations will be exempt from any Korean withholding tax as long as all of
the Fund's shares are listed solely on recognized United States stock exchanges
and traded by general investors on such exchanges. At present, all of the
Fund's shares are listed solely on the New York Stock Exchange and the shares
of the Fund are traded on such stock exchange by general investors within the
meaning of the MFE's ruling. The Board of Directors has no intention of
authorizing the listing of the shares on any other stock exchange. The Korean
tax treatment described above could change in the event of changes in Korean or
United States tax laws or changes in the terms of, or the interpretation by the
Korean tax authorities of, the Korean Tax Treaty.
DESCRIPTION OF COMMON STOCK
The Fund is authorized to issue 100,000,000 shares of Common Stock, par value
$.01, per share, of which 5,962,912 shares were outstanding as of August 31,
1995. The Fund's shares of Common Stock have no preemptive, conversion,
exchange or redemption rights. Each share of Common Stock has equal voting,
dividend, distribution and liquidation rights. The shares of Common Stock
outstanding are, and the Shares when issued will be, fully paid and
nonassessable. Shareholders are entitled to one vote per share. All voting
rights for the election of Directors are noncumulative, which means that the
holders of more than 50% of the shares can elect 100% of the Directors then
nominated for election if they choose to do so and, in such event, the holders
of the remaining shares of Common Stock will not be able to elect any
Directors. The foregoing description and the description under "Certain Anti-
Takeover Provisions of the Articles of Incorporation and Bylaws" are subject to
the provisions contained in the Fund's Articles of Incorporation and Bylaws.
The Fund has no present intention of offering additional shares of Common
Stock, except under the Plan and in connection with the Offer. See "Dividend
Reinvestment Plan." Other offerings of the Fund's shares of Common Stock, if
made, will require approval of its Board of Directors. Any additional offering
of Common Stock will be subject to the requirement of the 1940 Act that shares
may not be sold at a price below the then current net asset value, exclusive of
sales load, except in connection with an offering to existing shareholders or
with the consent of the holders of a majority of the Fund's outstanding voting
securities.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Fund presently has provisions in its Articles of Incorporation and Bylaws
(together, the "Charter Documents") that are intended to limit (i) the ability
of other entities or persons to acquire control of the
35
<PAGE>
Fund, (ii) the Fund's freedom to engage in certain transactions or (iii) the
ability of the Fund's Directors or shareholders to amend the Charter Documents
or effect changes in the Fund's management. These provisions of the Charter
Documents may be regarded as "anti-takeover" provisions. The Board of Directors
is divided into three classes, each having a term of three years. At each
annual meeting of shareholders, the term of one class of Directors expires.
Accordingly, only those Directors in one class may be changed in any one year,
and it would require two years to change a majority of the Board of Directors
(although under Maryland law procedures are available for the removal of
Directors even if they are not then standing for re-election, and under
Securities and Exchange Commission regulations, procedures are available for
including shareholder proposals in management's annual proxy statement). Such
system of electing Directors is intended to have the effect of maintaining the
continuity of management and, thus, make it more difficult for the Fund's
shareholders to change the majority of Directors. A director may be removed
from office only by a vote of at least 75% of the outstanding shares of Common
Stock of the Fund entitled to vote for the election of Directors. Under
Maryland law and the Fund's Articles of Incorporation, the affirmative vote of
the holders of a majority of the votes entitled to be cast is required for the
consolidation of the Fund with another corporation, a merger of the Fund with
or into another corporation (except for certain mergers in which the Fund is
the successor), a statutory share exchange in which the Fund is not the
successor, a sale or transfer of all or substantially all of the Fund's assets,
the dissolution of the Fund and any amendment to the Fund's Articles of
Incorporation. The affirmative vote of 75% (which is higher than that required
under Maryland law or the 1940 Act) of the outstanding shares of Common Stock
of the Fund is required to authorize the liquidation or dissolution of the Fund
in the absence of approval of the liquidation or dissolution by a majority of
the Continuing Directors of the Fund (defined for this purpose as those
Directors who were either members of the Board of Directors on the date of
closing of the initial offering of the shares of the Fund's Common Stock or
subsequently became Directors and whose election was approved by a majority of
the Continuing Directors then on the Board). In addition, the affirmative vote
of 75% (which is higher than that required under Maryland law or the 1940 Act)
of the outstanding shares of Common Stock of the Fund is required generally to
authorize any of the following transactions involving a corporation, person or
entity that is directly, or indirectly through affiliates, the beneficial owner
of more than 5% of the outstanding shares of the Fund (a "Principal
Shareholder"), or to amend the provisions of the Articles of Incorporation
relating to such transactions:
(i) merger, consolidation or statutory share exchange of the Fund with or
into any Principal Shareholder;
(ii) issuance of any securities of the Fund to any Principal Shareholder
for cash except upon reinvestment of dividends pursuant to a dividend
reinvestment plan of the Fund;
(iii) sale, lease or exchange of all or any substantial part of the
assets of the Fund to any Principal Shareholder (except assets having an
aggregate fair market value of less than $1,000,000); or
(iv) sale, lease or exchange to the Fund, in exchange for securities of
the Fund, of any assets of any Principal Shareholder (except assets having
an aggregate fair market value of less than $1,000,000).
However, such vote would not be required when, under certain conditions, the
Continuing Directors approve the transactions described in (i)-(iv) above,
although in certain cases involving merger, consolidation or statutory share
exchange or sale of all or substantially all of the Fund's assets, the
affirmative vote of a majority of the outstanding shares of Common Stock of the
Fund would nevertheless be required. The affirmative vote of 75% (which is
higher than that required under Maryland law or the 1940 Act) of the
outstanding shares of Common Stock of the Fund is required to convert the Fund
to an open-end investment company and to amend the Fund's Articles of
Incorporation to effect any such conversion. For the full text of these
provisions, reference is made to the Articles of Incorporation and Bylaws of
the Fund, on file with the Securities and Exchange Commission. See "Available
Information."
The provisions of the Charter Documents described above could have the effect
of depriving the owners of shares of Common Stock of opportunities 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
36
<PAGE>
transaction. See "Repurchase of Shares." The overall effect of these provisions
is to render more difficult the accomplishment of a merger or the assumption of
control by a Principal Shareholder. The Board of Directors of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are
in the best interests of the Fund and its shareholders.
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a discount from
net asset value. In recognition of the possibility that the Fund's shares might
from time to time trade at a discount to net asset value, the Fund's Board of
Directors has determined that it would be in the interest of shareholders for
the Fund to take action to attempt to reduce or eliminate any market value
discount from net asset value. To that end, the Board contemplates that the
Fund would from time to time take action either to repurchase in the open
market or to make a tender offer for its own shares at net asset value. The
Board intends each quarter to consider the making of a tender offer. The Board
may at any time, however, decide that the Fund should not make a tender offer.
Subject to the Fund's fundamental policy with respect to borrowings, the Fund
may incur debt to finance repurchases and tenders. The Fund will comply with
the 1940 Act asset coverage requirements. See "Investment Objective and
Policies--Borrowing" above and "Investment Restrictions" in the SAI. Interest
on such borrowing will reduce the Fund's net income. See "Special Risk
Considerations--Borrowing."
The Fund anticipates that the market price of its shares will generally vary
from net asset value. The market price of the Fund's shares will, among other
things, be determined by the relative demand for and supply of such shares in
the market, the Fund's investment performance, the Fund's distributions, and
investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. Nevertheless, the fact that the
Fund's shares may be the subject of tender offers at net asset value from time
to time may reduce the spread between market price and net asset value that
might otherwise exist. In the opinion of Alliance, sellers may be less inclined
to accept a significant discount if they have a reasonable expectation of being
able to recover net asset value in conjunction with a possible open market
share repurchase or tender offer. There can be no assurance that open market
share repurchases or tender offers will result in shares of the Fund's Common
Stock trading at a price which is equal to their net asset value.
Although the Board of Directors believes that share repurchases and tenders
generally would have a favorable effect on the market price of the Fund's
shares, it should be recognized that the acquisition of shares by the Fund will
decrease the total assets of the Fund and therefore have the effect of
increasing the Fund's expense ratio. Because of the nature of the Fund's
investment objective, policies and portfolio, Alliance does not anticipate that
repurchases and tenders should have an adverse effect on the Fund's investment
performance and does not anticipate any material difficulty in disposing of
portfolio securities in order to consummate stock repurchases or tenders.
Even if a tender offer has been made, it is the Board's announced policy,
which may be changed by the Board, not to accept tenders or effect repurchases
if (i) such transaction, if consummated, would (a) result in the delisting of
the Fund's shares from the New York Stock Exchange (the New York Stock Exchange
having advised the Fund that it would consider delisting if the aggregate
market value of the Fund's outstanding publicly held Common Stock is less than
$5,000,000, the number of publicly held shares of Common Stock falls below
600,000 or the number of round-lot holders falls below 1,200) or (b) impair the
Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund); (ii) the Fund would not be able to liquidate
portfolio securities in an orderly manner and consistent with the Fund's
investment objective and policies in order to repurchase shares; or (iii) there
is any (a) material legal action or proceeding instituted or threatened which
challenges, in the
37
<PAGE>
Board's judgment, such transactions or otherwise materially adversely affects
the Fund, (b) suspension of or limitation on prices for trading securities
generally on the New York Stock Exchange or any foreign exchange on which
portfolio securities of the Fund are traded, (c) declaration of a banking
moratorium by foreign authorities or any suspension of payment by banks in
Korea, (d) limitation which affects the Fund or the issuers of its portfolio
securities imposed by federal, state or Korean authorities on the extension of
credit by lending institutions or on the exchange of foreign currency, (e)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving Korea, or (f) other event or
condition which, in the Board's judgment, would have a material adverse effect
on the Fund or its shareholders if shares were repurchased. The Board may
modify these conditions in light of experience.
Any tender offer made by the Fund will be at a price equal to the net asset
value of the shares as of the close of business on the date the offer ends.
Each offer will be made and shareholders notified in accordance with the
requirements of the Securities Exchange Act of 1934 and the 1940 Act, either by
publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. When a tender offer is authorized to be made by the
Board, a shareholder wishing to accept the offer will be required to tender all
(but not less than all) of the shares owned by such shareholder (or attributed
to the shareholder for federal income tax purposes under section 318 of the
Code). The Fund will purchase all shares tendered by a holder of shares at any
time during the period of the tender offer in accordance with the terms of the
offer unless it determines to accept none of the shares tendered in the tender
offer (based upon one of the conditions set forth above). Each person tendering
shares will be required to submit a check in the amount of $25.00 payable to
the Fund, which will be used to help defray the costs associated with effecting
the tender offer. This $25.00 fee will be imposed upon each tendering
shareholder any of whose tendered shares are purchased in the tender offer and
will be imposed regardless of the number of shares purchased. The Fund expects
the cost to the Fund of effecting a tender offer will exceed the aggregate of
all service charges received from those who tender their shares. Costs
associated with the tender offer will be charged against capital. During the
period of a tender offer, the Fund's shareholders will be able to determine the
Fund's current net asset value by use of a toll-free telephone number.
Shares that have been purchased by the Fund will be retired and will be
authorized but unissued shares. The purchase of shares by the Fund will reduce
the Fund's net asset value.
If the Fund must liquidate portfolio securities in order to purchase Fund
shares tendered, and if such securities have been held for less than three
months, such sales may impair the Fund's tax status as a regulated investment
company under the Code because of the limitation that not more than 30% of the
Fund's gross income may be derived from the sale of securities held for less
than three months. The liquidation of securities held for less than three
months to purchase Fund shares tendered would reduce the ability of the Fund to
sell other securities held for less than three months. The inability of the
Fund to sell such securities in the ordinary course of its portfolio management
may adversely affect the Fund's return. See "Taxation--United States Federal
Income Taxes--General" in the SAI. The portfolio turnover rate of the Fund may
or may not be affected by the Fund's repurchase of shares pursuant to a tender
offer or in open market transactions.
DISTRIBUTION ARRANGEMENTS
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York,
will act as dealer manager for the Offer. Under the terms and subject to the
conditions contained in a Dealer Manager Agreement dated the date hereof, the
Dealer Manager will provide financial advisory services and marketing
assistance in connection with the Offer and will solicit the exercise of Rights
by Record Date shareholders. The Offer is not contingent upon any number of
Rights being exercised. The Fund has agreed to pay the Dealer Manager a fee for
financial advisory services equal to 1.25% of the Subscription Price per Share
for Shares issued upon exercise of the Rights and the Over-Subscription
Privilege and to pay broker-dealers, including the Dealer Manager, fees for
their soliciting efforts (the "Soliciting Fees") of 2.50% of the
38
<PAGE>
Subscription Price per Share for each Share issued upon exercise of the Rights
and the Over-Subscription Privilege. Soliciting Fees will be paid to the
broker-dealer designated on the applicable portion of the Subscription
Certificates or, if no broker-dealer is so designated, to the Dealer Manager.
In addition, the Fund has agreed to reimburse the Dealer Manager up to
$100,000 for its reasonable expenses incurred in connection with the Offer,
and will indemnify the Dealer Manager with respect to certain liabilities,
including liabilities under the Securities Act.
The Fund, Alliance and Orion have each agreed to indemnify the Dealer
Manager or contribute to losses arising out of certain liabilities including
liabilities under the Securities Act. The Dealer Manager Agreement also
provides that the Dealer Manager will not be subject to any liability to the
Fund in rendering the services contemplated by the Agreement for any act or
omission on the part of any broker-dealer (other than the Dealer Manager)
except in instances involving the bad faith, willful misfeasance, or gross
negligence of the Dealer Manager or reckless disregard by the Dealer Manager
of its obligations and duties under the Agreement. The staff of the Securities
and Exchange Commission has advised the Fund and the Dealer Manager that the
staff is considering whether a dealer manager is an underwriter for purposes
of the Securities Act and the 1940 Act.
The Fund has agreed not to offer or sell, or enter into any agreement to
sell, any equity or equity related securities of the Fund or securities
convertible into such securities for a period of 180 days after the date of
the Dealer Manager Agreement without the prior consent of the Dealer Manager
except for the Shares and Common Stock issued in reinvestment of dividends or
distributions.
Alliance has entered into a written agreement with PaineWebber Incorporated,
the Dealer Manager, pursuant to which it pays PaineWebber Incorporated out of
Alliance's own resources, a quarterly fee at an annualized rate of 0.10% of
the Fund's average weekly net assets in consideration of the provision by
PaineWebber Incorporated of certain economic research and statistical services
not including advice or recommendations regarding the purchase or sale of
portfolio securities. In addition, PaineWebber Incorporated provides a variety
of services designed to publicize the Fund on an ongoing basis and to remind
investors and prospective investors of the Fund's features and benefits. Such
services include communications with clients and their representatives,
periodic seminars or conference calls, internal and external publications,
presentations at retail system meetings, responses to questions from potential
or current shareholders and specific shareholder contact where appropriate.
PaineWebber Incorporated also makes available to its brokers and customers
market price and net asset value and dividend information regarding the Fund.
These ongoing efforts (which to Alliance's knowledge are not provided with
respect to most closed-end investment companies) help to maintain the
visibility of the Fund to brokers and clients, both those who are shareholders
of the Fund and those for whom ownership might be suitable in the future. In
addition, PaineWebber Incorporated provides advice and consultation at the
request of Alliance with respect to tender offers and share repurchases. This
array of special services helps to maintain shareholder knowledge of the Fund,
facilitate the liquidity of the Fund and minimize potential trading discounts
from net asset value. PaineWebber Incorporated does not give advice as to the
value of securities. Following the initial one-year term which ended on
February 21, 1993, the agreement between PaineWebber Incorporated and Alliance
continues for successive one-year periods unless it is terminated by either
party. The agreement has not resulted in any increase in the total expense
ratio of the Fund or in the aggregate amount of fees paid to Alliance by the
Fund.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
serves as custodian for the Fund. The majority of the Fund's assets are held
by its foreign subcustodian, Korea Exchange Bank, 181, 2-Ga, Ulchiro, Chung-
gu, Seoul 100-793, Korea.
39
<PAGE>
TRANSFER AGENT, DIVIDEND-PAYING AGENT AND REGISTRAR
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, acts as the Fund's transfer agent, dividend-paying agent
and registrar.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the Fund by
Seward & Kissel, New York, New York. Certain legal matters will be passed upon
for the Dealer Manager by Brown & Wood, New York, New York. Seward & Kissel and
Brown & Wood will rely upon the opinion of Venable, Baetjer and Howard, LLP,
Baltimore, Maryland, for matters relating to Maryland law. Matters of Korean
law will be passed on for the Fund by Shin & Kim, Seoul, Korea.
EXPERTS
The audited financial statements included in this Prospectus have been so
included in reliance on the report by Price Waterhouse LLP, independent
accountants, given on the authority of such firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
is required to file reports, proxy statements and other information with the
Securities and Exchange Commission. Any such reports, proxy statements and
other information can be inspected and copied at the public reference
facilities of the Securities and Exchange Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Securities
and Exchange Commission's New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048 and Chicago Regional Office, Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such materials can be obtained from the public reference
section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Reports, proxy statements and
other information concerning the Fund can also be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
Additional information regarding the Fund and the Shares is contained in the
Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the
Securities and Exchange Commission, Washington, D.C. This Prospectus and the
SAI do not contain all of the information set forth in the Registration
Statement, including any amendments, exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in this
Prospectus and the SAI 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 Securities and Exchange Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from
the Securities and Exchange Commission upon the payment of certain fees
prescribed by the Securities and Exchange Commission.
A copy of the Fund's annual report for the fiscal year ended April 30, 1995
was mailed to shareholders in June 1995.
40
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Investment Restrictions.................................................... 10
Management of the Fund..................................................... 12
The Korean Securities Markets.............................................. 16
The Republic of Korea...................................................... 31
Brokerage and Portfolio Transactions....................................... 46
Dividends and Distributions................................................ 47
Dividend Reinvestment Plan................................................. 48
Taxation................................................................... 49
Certain Owners of Record................................................... 56
Financial Statements....................................................... 57
</TABLE>
41
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND THE SAI AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REP-
RESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND,
ALLIANCE, ORION OR THE DEALER MANAGER. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLI-
CATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PRO-
SPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR
SUPPLEMENTED ACCORDINGLY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF-
FERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR AN OFFER
TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICI-
TATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITA-
TION 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>
Expense Information........................................................ 3
Financial Highlights....................................................... 4
The Offer.................................................................. 5
The Fund................................................................... 13
Use of Proceeds............................................................ 13
Net Asset Value and Market Price Information............................... 14
Investment Objective and Policies.......................................... 14
Special Risk Considerations................................................ 17
Management of the Fund..................................................... 23
The Korean Securities Markets.............................................. 25
The Republic of Korea...................................................... 29
Net Asset Value............................................................ 33
Dividend Reinvestment Plan................................................. 34
Taxation................................................................... 35
Description of Common Stock................................................ 35
Distribution Arrangements.................................................. 38
Custodian.................................................................. 39
Transfer Agent, Dividend-Paying Agent and Registrar........................ 40
Legal Matters.............................................................. 40
Experts.................................................................... 40
Available Information...................................................... 40
Table of Contents of Statement of Additional Information................... 41
</TABLE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
THE KOREAN
INVESTMENT FUND, INC.
1,987,637 SHARES OF
COMMON STOCK ISSUABLE
UPON EXERCISE OF RIGHTS TO
SUBSCRIBE FOR SUCH SHARES
OF COMMON STOCK
----------------
PROSPECTUS
----------------
PAINEWEBBER INCORPORATED
----------------
SEPTEMBER 19, 1995
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
THE KOREAN INVESTMENT FUND, INC.
----------------
STATEMENT OF ADDITIONAL INFORMATION
The Korean Investment Fund, Inc. (the "Fund") is a diversified, closed-end
management investment company. The Fund's investment objective is to seek long-
term capital appreciation through investment primarily in equity securities of
Korean companies. Under normal circumstances, the Fund invests at least 65% of
its total assets in such securities. Equity securities include common stocks,
preferred stocks, rights or warrants to purchase common or preferred stock and
debt securities convertible into common or preferred stock. The Fund may invest
up to 25% of its total assets, to the extent permitted by future laws or
regulations of The Republic of Korea ("Korea") with respect to foreign
investment, in equity or debt securities for which there is no ready market.
The Fund may also invest up to 35% of its total assets in nonconvertible debt
securities provided that such securities are rated BBB or higher by Standard &
Poor's Corporation ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") or rated of equivalent credit quality by another internationally
recognized statistical rating organization or, if not so rated, of equivalent
credit quality as determined by Alliance Capital Management L.P., the Fund's
investment manager and administrator ("Alliance").
This Statement of Additional Information ("SAI") is not a prospectus, but
should be read in conjunction with the Prospectus for the Fund dated September
19, 1995 (the "Prospectus"). This SAI does not include all information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling (800) 227-
4618. This SAI incorporates by reference the entire Prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
Investment Restrictions.................................................... 10
Management of the Fund..................................................... 12
The Korean Securities Markets.............................................. 16
The Republic of Korea...................................................... 31
Brokerage and Portfolio Transactions....................................... 46
Dividends and Distributions................................................ 47
Dividend Reinvestment Plan................................................. 48
Taxation................................................................... 49
Certain Owners of Record................................................... 56
Financial Statements....................................................... 57
</TABLE>
----------------
The Prospectus and this SAI omit certain of the information contained in the
registration statement filed with the Securities and Exchange Commission,
Washington, D.C. The registration statement may be obtained from the Securities
and Exchange Commission upon payment of the fee prescribed, or inspected at the
Securities and Exchange Commission's office at no charge.
----------------
This Statement of Additional Information is dated September 19, 1995.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The investment objective of the Fund is to seek long-term capital
appreciation through investment primarily in equity securities of Korean
companies. Under normal circumstances, the Fund invests at least 65% of its
total assets in equity securities of Korean companies. At April 30, 1995,
approximately 99% of the Fund's net assets were invested in equity securities
of Korean companies. Equity securities include common stocks, preferred stocks,
rights or warrants to purchase common or preferred stock and debt securities
convertible into common or preferred stock. The Fund defines Korean companies
to be entities (i) that are organized under the laws of Korea and conduct
business in Korea, (ii) that derive 50% or more of their total revenues from
business in Korea or (iii) the equity or debt securities of which are traded
principally in Korea. The Fund invests in companies that, in the opinion of
Alliance and Orion Asset Management Co., Ltd., the Fund's investment manager
with respect to its investments in Korean securities ("Orion"), possess the
potential for growth, including established companies in rapidly growing
industry sectors such as telecommunications, electronics and consumer products.
While investment in large companies is emphasized, on occasion the Fund may
invest in smaller companies believed by Alliance and Orion to have growth
potential. See "Special Risk Considerations--Investment in Securities of
Smaller Companies" in the Prospectus. In particular, securities of Korean
companies that are believed to be the likely beneficiaries of the emergence of
new markets for their products are identified for investment by the Fund,
including investment opportunities in Korean companies that may benefit from
future improved relations with The Democratic People's Republic of Korea
("North Korea"). If possible, the Fund would consider investing up to 10% of
its total assets in North Korean issuers; however, the Fund will not do so
without contemporaneous written notice to shareholders. Such investments are
not now permitted under U.S. or Korean law or available, and there can be no
assurance that such investments will become permissible and available in the
future. See "Special Risk Considerations--Relations with North Korea" in the
Prospectus. In addition, the Fund may not invest more than 20% of its total
assets in rights or warrants to purchase equity securities. The Fund may invest
up to 25% of its total assets in securities which are not readily marketable.
Although the Fund is authorized to engage in various strategies to hedge its
portfolio against adverse changes in the relationship between the U.S. Dollar
and the Won, it is not currently permitted to do so in Korea under Korean laws
or regulations, with certain exceptions, and there can be no assurance that
such strategies will become permissible and available in Korea in the future.
The Fund does not presently intend to engage in these strategies outside of
Korea.
The Fund's investment objective and its policy of investing at least 65% of
its total assets in equity securities of Korean companies are fundamental and
cannot be changed without the approval of a majority of the Fund's outstanding
voting securities, which, as used in the Prospectus and this SAI, means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are present in person or represented by proxy or (ii)
more than 50% of the outstanding shares. The Fund's investment policies that
are not designated fundamental policies may be changed by the Fund without
shareholder approval, but the Fund will not change its investment policies
without contemporaneous notice to its shareholders. The Fund is designed
primarily for long-term investment, and investors should not consider it a
trading vehicle. As with all investment companies, there can be no assurance
that the Fund's objective will be achieved.
The Fund may also invest up to 35% of its total assets in nonconvertible debt
securities, including U.S. Dollar or Won denominated debt securities issued by
the Korean government or Korean companies and U.S. Government Securities (as
defined in the Prospectus). Korean law does not currently permit foreign
investors to acquire debt securities denominated in Won except for certain
convertible bonds and public bonds. At the present time, however, foreign
investors are permitted to invest in bonds with warrants, depositary receipts
and other debt securities (including floating rate notes, bonds and commercial
paper) issued by Korean companies outside of Korea and denominated in
currencies other than the Won. In addition, the Ministry of Finance and Economy
(the "MFE") has recently announced a plan to permit foreign investors to make
2
<PAGE>
certain limited investments in Won denominated debt securities, as described
more fully below. See "The Korean Securities Markets--Regulation of Foreign
Investment." If, in the future, Won denominated debt securities become
permissible investments for foreign investors, the Fund may invest in such
securities. The Fund may invest in debt securities rated BBB or higher by S&P
or Baa or higher by Moody's or rated of equivalent credit quality by another
internationally recognized statistical rating organization or, if not so rated,
of equivalent credit quality as determined by Alliance. Securities rated Baa by
Moody's are considered to have speculative characteristics. Sustained periods
of deteriorating economic conditions or rising interest rates are more likely
to lead to a weakening in the issuer's capacity to pay interest and repay
principal than in the case of higher-rated securities. The Fund expects that it
will not retain a debt security which is downgraded below BBB or Baa or, if
unrated, determined by Alliance to have undergone similar credit quality
deterioration, subsequent to purchase by the Fund.
For temporary defensive purposes, the Fund may vary from its investment
policies during periods in which conditions in the Korean securities markets or
other economic or political conditions in Korea warrant. Under such
circumstances, the Fund may reduce its position in equity securities and
increase its position in debt securities, which may include U.S. Government
Securities, securities rated AA or better by S&P or Aa or better by Moody's or,
if not so rated, of equivalent credit quality as determined by Alliance, short-
term indebtedness or cash equivalents denominated in U.S. Dollars or, if it
becomes permissible for the Fund to so invest, denominated in Won. The Fund may
also at any time, with respect to up to 35% of its total assets, temporarily
invest funds in U.S. Dollar denominated money market instruments as reserves
for dividends and other distributions to shareholders.
SECURITIES NOT READILY MARKETABLE
The Fund may invest up to 25% of its total assets, to the extent permitted by
future Korean laws or regulations with respect to foreign investment, in equity
or debt securities for which there is no ready market. The Fund may therefore
not be able to readily sell such securities. Such securities are unlike
securities that are traded in the open market and which can be expected to be
sold immediately if the market is adequate. The sale price of securities that
are not readily marketable may be lower or higher than the Fund's most recent
estimate of their fair value. Generally, less public information is available
with respect to the issuers of these securities than with respect to companies
whose securities are traded on an exchange. Securities not readily marketable
are more likely to be issued by start-up, small or family businesses and
therefore subject to greater economic, business and market risks than the
listed securities of more well-established companies. Adverse conditions in the
public securities markets may at certain times preclude a public offering of an
issuer's securities. If, in the future, the Fund makes any investments in North
Korea, all or substantially all of such investments are likely to be in
securities which are not readily marketable. While Korean law requires
registration with a government agency of a public offering or secondary public
distribution of securities, that law does not contain restrictions like those
contained in regulations promulgated under the United States Securities Act of
1933, as amended (the "Securities Act") regarding the length of time the
securities must be held or manner of resale. There may, however, be contractual
restrictions on the resale of securities.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies that
invest a substantial portion of their assets in Korean securities to the extent
permitted by the Investment Company Act of 1940, as amended (the "1940 Act").
Under the 1940 Act, the Fund may invest up to 10% of its total assets in shares
of other investment companies and up to 5% of its total assets in any one
investment company, provided that the investment does not represent more than
3% of the voting stock of the related acquired investment company. By investing
in an investment company, the Fund's shareholders will bear a ratable share of
the investment company's expenses, as well as continue to bear the Fund's
investment management and administrative fees with respect to the amount of the
investment.
3
<PAGE>
REPURCHASE AGREEMENTS
The Fund may enter into "repurchase agreements" involving U.S. Government
Securities with member banks of the Federal Reserve System or "primary dealers"
(as designated by the Federal Reserve Bank of New York) in such securities.
There is no percentage restriction on the Fund's ability to enter into
repurchase agreements. A repurchase agreement arises when a buyer such as the
Fund purchases a security and simultaneously agrees to resell it to the vendor
at an agreed-upon future date, normally one day or a few days later. The resale
price is greater than the purchase price, reflecting an agreed-upon interest
rate which is effective for the period of time the buyer's money is invested in
the security and which is related to current market interest rates rather than
the coupon rate on the purchased security. Such agreements permit the Fund to
keep all of its assets at work while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature. The Fund requires continual
maintenance by its custodian for its account in the Federal Reserve/Treasury
Book Entry System of collateral in an amount equal to, or in excess of, the
resale price. In the event a vendor defaults on its repurchase obligation, the
Fund might suffer a loss to the extent that the proceeds from the sale of the
collateral are less than the repurchase price. In the event of a vendor's
bankruptcy, the Fund might be delayed in, or prevented from, selling the
collateral for the Fund's benefit. The Fund's Board of Directors has
established procedures, which are periodically reviewed by the Board, pursuant
to which Alliance monitors the creditworthiness of the institutions with which
the Fund enters into repurchase agreement transactions.
OTHER INVESTMENT PRACTICES
GENERAL. Certain investment practices in which the Fund is authorized to
engage, such as the purchase or sale of put and call options, currency hedging
techniques, the selling of securities short, the lending of portfolio
securities, forward commitments and standby commitment agreements are not
currently permitted in Korea under Korean laws or regulations (with certain
limited exceptions). The Fund does not presently intend to engage in these
investment practices outside of Korea. The Fund may engage in these investment
practices in Korea to the extent such investment practices become available in
the future.
OPTIONS ON KOREAN SECURITIES. In an effort to enhance income and to reduce
fluctuations in net asset value, the Fund may, to the extent permitted by
future Korean regulations, write covered put and call options and purchase put
and call options on securities of the types in which it is permitted to invest
that are traded on the Korea Stock Exchange (the "Exchange"). The Fund may also
write call options for cross-hedging purposes. There are no specific percentage
limitations on the Fund's writing and purchasing of options.
A put option gives the purchaser of such option, upon payment of a premium,
the right to deliver a specified amount of a security to the writer of the
option on or before a fixed date at a predetermined price. A call option gives
the purchaser of the option, upon payment of a premium, the right to call upon
the writer to deliver a specified amount of a security on or before a fixed
date, at a predetermined price. A call option written by the Fund is "covered"
if the Fund owns the underlying security covered by the call or has an absolute
and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other securities held
in its portfolio. A call option is also covered if the Fund holds a call on the
same security and in the same principal amount as the call written where the
exercise price of the call held (i) is equal to or less than the exercise price
of the call written or (ii) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash and/or other liquid
assets in a segregated account with its custodian. A put option written by the
Fund is "covered" if the Fund maintains cash and/or other liquid assets with a
value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same security and in the same principal amount as
the put written where the exercise price of the put held is equal to or greater
than the exercise price of the put written. The premium paid by the purchaser
of an option will reflect, among other things, the relationship of the exercise
price to the market price and volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
4
<PAGE>
The Fund may write call options for cross-hedging purposes. A call option is
for cross-hedging purposes if the Fund does not own the underlying security,
and is designed to provide a hedge against a decline in value in another
security which the Fund owns or has the right to acquire. In such
circumstances, the Fund collateralizes its obligation under the option by
maintaining in a segregated account with its custodian, cash and/or other
liquid assets in an amount not less than the market value of the underlying
security, marked to market daily. The Fund would write a call option for cross-
hedging purposes, instead of writing a covered call option, when the premium to
be received from the cross-hedge transaction would exceed that which would be
received from writing a covered call option, while at the same time achieving
the desired hedge.
In purchasing a call option, the Fund would be in a position to realize a
gain if, during the option period, the price of the underlying security
increased by an amount in excess of the premium paid. It would realize a loss
if the price of the underlying security declined or remained the same or did
not increase during the period by more than the amount of the premium. In
purchasing a put option, the Fund would be in a position to realize a gain if,
during the option period, the price of the underlying security declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the underlying security increased or remained the same or did not decrease
during that period by more than the amount of the premium. If a put or call
option purchased by the Fund were permitted to expire without being sold or
exercised, its premium would be lost by the Fund.
If a put option written by the Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by the Fund were exercised, the Fund would be obligated to sell
the underlying security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value of the
underlying security. If this occurred, the option could be exercised and the
underlying security would then be sold by the option holder to the Fund at a
higher price than its current market value. The risk involved in writing a call
option is that there could be an increase in the market value of the underlying
security. If this occurred, the option could be exercised and the underlying
security would then be sold by the Fund at a lower price than its current
market value. These risks could be reduced by entering into a "closing
transaction" in which the Fund would write or purchase another option having
the same features as the one it purchased or wrote, thereby having the two
offsetting options cancel each other out. The Fund retains the premium received
from writing a put or call option whether or not the option is exercised.
The Fund may purchase or write options on securities of the types in which it
is permitted to invest in privately negotiated transactions. The Fund will
effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy by Alliance, and the Fund will adopt procedures for monitoring the
creditworthiness of such entities. Options purchased or written by the Fund in
negotiated transactions are illiquid and it may not be possible for the Fund to
effect a closing transaction at a time when Alliance believes it would be
advantageous to do so.
CURRENCY HEDGING TECHNIQUES. Although the Fund has no present intention to
engage in currency hedging techniques, it is authorized to engage, to the
extent permitted by future Korean regulations, in various portfolio strategies
to hedge its portfolio against adverse changes in the relationship between the
U.S. Dollar and the Won. These strategies include use of currency options and
futures, options on such futures and forward foreign currency transactions. The
Fund may enter into such transactions only in connection with its currency
hedging strategies. While the Fund's use of hedging strategies is intended to
reduce the volatility of the net asset value of Fund shares caused by currency
fluctuation, the Fund's net asset value will fluctuate. There can be no
assurance that the Fund's hedging transactions will be effective. Furthermore,
the Fund will only engage in hedging activities from time to time and may not
necessarily be engaging in hedging activities when movements in the U.S.
Dollar-Won exchange rate occur.
Although certain risks are involved in forward, futures and options
transactions, Alliance and Orion believe that, because the Fund will only
engage in these transactions for hedging purposes, the forward, futures and
options portfolio strategies of the Fund will not subject the Fund to the risks
frequently associated
5
<PAGE>
with the speculative use of such transactions. United States tax requirements
applicable to regulated investment companies may limit the Fund's ability to
engage in hedging transactions. See "Taxation--United States Federal Income
Taxes--General; Currency Fluctuations "Section 988" Gains or Losses; and
Options, Futures Contracts and Forward Foreign Currency Contracts."
HEDGING FOREIGN CURRENCY RISKS. Generally, the foreign exchange transactions
of the Fund will be conducted on a spot, i.e., cash, basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. Under
normal market conditions this rate differs from the prevailing exchange rate in
an amount generally less than one-tenth of one percent due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign currency transactions between currencies of the
different countries in whose securities it will invest as a hedge against
possible variations in the foreign exchange rates between these currencies.
This hedging is accomplished through contractual agreements to purchase or sell
a specified currency at a specified future date (up to one year) and price set
at the time of the contract. The Fund's dealings in forward foreign currency
transactions will be limited to hedging involving either specific transactions
or portfolio positions. Transaction hedging is the purchase or sale of forward
foreign currency with respect to specific receivables or payables of the Fund
accruing in connection with the purchase and sale of its portfolio securities
or the payment of dividends and distributions by the Fund. Position hedging is
the sale of forward foreign currency with respect to portfolio security
positions denominated or quoted in such foreign currency. The Fund will not
speculate in forward foreign exchange. Consequently, the Fund may not position
hedge with respect to the currency of a particular country to an extent greater
than the aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or quoted in that particular
foreign currency. If the Fund enters into a position hedging transaction, its
custodian bank will place cash or other liquid assets in a segregated account
of the Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of such forward contract. If the value of the
securities placed in the segregated account declines, additional cash or other
liquid assets will be placed in the account so that the value of the account
will equal the amount of the Fund's commitment with respect to such contracts.
The Fund will not enter into a position hedging commitment if, as a result
theeof, the Fund would have more than 15% of the value of its assets committed
to such contracts. The Fund will not enter into a forward contract with a term
of more than one year.
Under the foreign exchange control regulations of Korea, non-residents are
allowed to enter into forward transactions between Won and foreign currencies
with a bank in Korea in order to hedge currency risks involving their holding
of Won-denominated assets in connection with their permissible investments in
Korean equities and bonds.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities denominated in that currency
or prevent losses if the prices of such securities decline. Such transactions
also preclude the opportunity for gain if the value of the hedged currency
should rise. Moreover, it may not be possible for the Fund to hedge against a
devaluation that is so generally anticipated that the Fund is not able to
contract to sell the currency at a price above the devaluation level it
anticipates. The cost to the Fund of engaging in foreign currency transactions
varies with such factors as the currency involved, the length of the contract
period and the market conditions then prevailing. Since foreign currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved.
The Fund is also authorized to purchase or sell listed or unlisted foreign
currency options, foreign currency futures and related options on foreign
currency futures as a short or long hedge against possible variations in
foreign exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. Dollar-denominated securities owned by the Fund, sold by the
Fund but not yet delivered, or committed or anticipated to be purchased by the
Fund. As an illustration, the Fund may use such techniques to hedge the stated
value in U.S. Dollars of an investment in a Won-denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of Won for Dollars at a specified price
by a future date. To the extent the hedge is successful, a loss in the value of
the Won relative to the Dollar will tend to be offset by an increase in the
value of the put option. To offset, in
6
<PAGE>
whole or in part, the cost of acquiring such a put option, the Fund may also
sell a call option which, if exercised, requires it to sell a specified amount
of Won for Dollars at a specified price by a future date (a technique called a
"straddle"). By selling such call option in this illustration, the Fund gives
up the unlimited opportunity to profit from increases in the relative value of
the Won to the Dollar. All options written by the Fund must be "covered," and
must remain "covered" as long as the Fund is obligated as a writer. For
example, where the Fund sells a call option on a futures or forward contract,
it may cover either by entering into a long position in the same contract at a
price no higher than the strike price of the call option or by owning the
instruments or currency underlying the futures or forward contract. The Fund
could also cover this position by holding a separate call option permitting it
to purchase the same futures or forward contract at a price no higher than the
strike price of the call option sold by the Fund. A put option written by the
Fund may be "covered" if the Fund maintains cash or liquid assets with a value
equal to the exercise price in a segregated account with its custodian, or else
owns a put on the same contract as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
Certain differences exist between these foreign currency hedging instruments.
Foreign currency options provide the holder thereof the right to buy or sell a
currency at a fixed price on a future date. Listed options are third-party
contracts (i.e., performance of the parties' obligations is guaranteed by an
exchange or clearing corporation) which are issued by a clearing corporation,
traded on an exchange and have standardized strike prices and expiration dates.
Unlisted options are two-party contracts and have negotiated strike prices and
expiration dates. The Fund will engage in unlisted transactions involving
options only with member banks of the Federal Reserve System and primary
dealers in U.S. Government Securities or with affiliates of such banks or
dealers which have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million. The Fund will
acquire only those unlisted options for which management believes the Fund can
receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option). A futures
contract on a foreign currency is an agreement between two parties to buy and
sell a specified amount of a currency for a set price on a future date. Certain
futures contracts and options on futures contracts are traded on boards of
trade or futures exchanges.
The Fund will not speculate in foreign currency options, futures or related
options. Accordingly, the Fund will not hedge a currency substantially in
excess of (i) the market value of the securities denominated in such currency
which it owns, (ii) the expected acquisition price of securities which it has
committed or anticipates to purchase which are denominated in such currency,
and (iii) in the case of securities which have been sold by the Fund but not
yet delivered, the proceeds thereof in its denominated currency. Further, the
Fund will maintain a segregated account with its custodian bank with cash or
liquid assets having a market value substantially representing any subsequent
decrease in the market value of such hedged security, less any initial or
variation margin held in the account of its broker. The Fund may not incur
potential net liabilities of more than 33 1/3% of its total assets from foreign
currency forward, futures and option transactions.
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. Utilization of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts and movements in the price of the currencies
which are the subject of the hedge. If the price of the futures contract moves
more or less than the price of the currency, the Fund will experience a gain or
loss which will not be completely offset by movements in the price of the
currencies which are the subject of the hedge. Unanticipated changes in
currency prices may result in poorer overall performance for the Fund than if
it had not entered into such contract. Transactions in options and options on
futures contracts involve similar risks. The successful use of such instruments
draws upon Alliance's special skills with respect to such instruments and
usually depends on Alliance's ability to forecast currency exchange rate
movements correctly.
Prior to exercise or expiration, an exchange-traded option position written
by the Fund can only be terminated by entering into a closing purchase or sale
transaction. This requires a secondary market on an exchange for call or put
options of the same series. The Fund will enter into an option or futures
transaction on an exchange only if there appears to be a liquid secondary
market for such options or futures. However,
7
<PAGE>
there can be no assurance that a liquid secondary market will exist for any
particular call or put option or futures contract at any specific time. Thus,
it may not be possible for the Fund to close a particular option or futures
position. The Fund will acquire only unlisted options for which management
believes the Fund can receive on each business day at least two independent
bids or offers (one of which will be from an entity other than a party to the
option). In the case of a futures position, in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of variation margin. In such situations, if the Fund has insufficient cash, it
may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Fund may be required to take or make delivery of the currency underlying
futures contracts it holds. The inability to close options and futures
positions also could have an adverse impact on the Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by the Fund of
margin deposits in the event of the bankruptcy of a broker with whom the Fund
has an open position in the futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions have
generally established "position limits" which are limitations governing the
maximum number of call or put options on the same underlying currency (whether
or not covered) which may be written by a single investor, whether acting alone
or in concert with others (regardless of whether such options are written on
the same or different exchanges or are held or written on one or more accounts
or through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day. An
exchange may order the liquidation of positions found to be in violation of
these limits and it may impose other sanctions or restrictions. Alliance does
not believe that these position and trading limits will have any adverse impact
on the portfolio strategies for hedging the Fund's portfolio. On the other
hand, the protections afforded to exchange participants by position and trading
limits are not available with respect to transactions in unlisted options.
SHORT SALES. The Fund may make short sales of securities or maintain a short
position only for the purpose of deferring realization of gain or loss for
United States Federal income tax purposes, provided that at all times when a
short position is open the Fund owns an equal amount of such securities of the
same issue as, and equal in amount to, the securities sold short. In addition,
the Fund may not make a short sale if more than 10% of the Fund's net assets
(taken at market value) is held as collateral for short sales at any one time.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur
a loss; conversely, if the price declines, the Fund will realize a capital
gain. See "Investment Restrictions." The Fund is not currently permitted under
Korean laws and regulations to engage in short sales of Korean securities in
Korea.
LENDING OF PORTFOLIO SECURITIES. In order to increase income, the Fund may
from time to time lend portfolio securities to brokers, dealers and financial
institutions and receive collateral in the form of cash or U.S. Government
Securities. Under the Fund's procedures, collateral for such loans must be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities (including interest accrued on the loaned
securities). The interest accruing on the loaned securities will be paid to the
Fund and the Fund will have the right, on demand, to call back the loaned
securities. The Fund may pay fees to arrange the loans. The Fund will neither
lend portfolio securities in excess of 30% of the value of its total assets nor
lend its portfolio securities to any officer, director, employee or affiliate
of the Fund, Alliance or Orion. The lending of portfolio securities by foreign
investors in Korea is not currently permitted under Korean laws and
regulations.
FORWARD COMMITMENTS. The Fund may, to the extent permitted by future Korean
regulations, enter into forward commitments for the purchase or sale of
securities in Korea. Such transactions may include purchases on a "when-issued"
basis or purchases or sales on a "delayed delivery" basis. In some cases, a
forward commitment may be conditioned upon the occurrence of a subsequent
event, such as approval and consummation of a merger, corporate reorganization
or debt restructuring (i.e., a "when, as and if issued" trade).
8
<PAGE>
When forward commitment transactions are negotiated, the price, which is
generally expressed in yield terms, is fixed at the time the commitment is
made, but delivery and payment for the securities take place at a later date.
Normally, the settlement date occurs within two months after the transaction,
but delayed settlements beyond two months may be negotiated. Securities
purchased or sold under a forward commitment are subject to market fluctuation,
and no interest or dividends accrue to the purchaser prior to the settlement
date. At the time the Fund enters into a forward commitment, it will record the
transaction and thereafter reflect the value of the security purchased or, if a
sale, the proceeds to be received, in determining its net asset value. Any
unrealized appreciation or depreciation reflected in such valuation of a "when,
as and if issued" security would be cancelled in the event that the required
conditions did not occur and the trade was cancelled. No forward commitments
will be made by the Fund if, as a result, the Fund's aggregate commitments
under such transactions would be more than 30% of the then current value of the
Fund's total assets.
The use of forward commitments for the purchase or sale of fixed income
securities enables the Fund to protect against anticipated changes in interest
rates and prices. For instance, in periods of rising interest rates and falling
bond prices, the Fund might sell securities in its portfolio on a forward
commitment basis to limit its exposure to falling prices. In periods of falling
interest rates and rising bond prices, the Fund might sell a security in its
portfolio and purchase the same or a similar security on a when-issued or
forward commitment basis, thereby obtaining the benefit of currently higher
cash yields. However, if Alliance were to forecast incorrectly the direction of
interest rate movements, the Fund might be required to complete such when-
issued or forward transactions at prices inferior to then current market
values.
The Fund's right to receive or deliver a security under a forward commitment
may be sold prior to the settlement date, but the Fund will enter into forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. To facilitate such transactions, the Fund's
custodian will maintain, in the segregated account of the Fund, cash and/or
other liquid assets having value equal to, or greater than, any commitments to
purchase securities on a forward commitment basis and, with respect to forward
commitments to sell portfolio securities of the Fund, the portfolio securities
themselves. If the Fund, however, chooses to dispose of the right to receive or
deliver a security subject to a forward commitment prior to the settlement date
of the transaction, it might incur a gain or loss. In the event the other party
to a forward commitment transaction were to default, the Fund might lose the
opportunity to invest money at favorable rates or to dispose of securities at
favorable prices.
STANDBY COMMITMENT AGREEMENTS. The Fund may, to the extent permitted by
future Korean regulations, from time to time enter into standby commitment
agreements in Korea. Such agreements commit the Fund, for a stated period of
time, to purchase a stated amount of a fixed income security which may be
issued and sold to the Fund at the option of the issuer. The price and coupon
of the security are fixed at the time of the commitment. At the time of
entering into the agreement the Fund is paid a commitment fee which is
typically approximately 0.5% of the aggregate purchase price the Fund has
committed to purchase. The fee is payable regardless of whether or not the
security is ultimately issued. The Fund will enter into such agreements only
for the purpose of investing in the security underlying the commitment at a
yield and price which are considered advantageous to the Fund and which are
unavailable on a firm commitment basis. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and will limit its
investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities that are not readily marketable, will not exceed 25% of its assets
taken at the time of acquisition of such commitment of security. The Fund will
at all times maintain a segregated account with its custodian of cash and/or
other liquid assets in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the Fund will bear
the risk of capital loss in the event the value of the security declines and
will not benefit from any appreciation in the
9
<PAGE>
value of the security during the commitment period if the issuer decides not to
issue and sell the security to the Fund.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
FUTURE DEVELOPMENTS. The Fund may, following written notice thereof to its
shareholders, take advantage of investment practices that are not presently
contemplated for use by the Fund or which are not currently available but which
may be developed, to the extent such practices are both consistent with the
Fund's investment objective and legally permissible for the Fund. Such
practices, if they arise, may involve risks which exceed those involved in the
activities described above.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions, which are
fundamental investment policies and may not be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities as
defined above under "Investment Objective and Policies--General." The
percentage limitations set forth below as well as those described in the
Prospectus (except insofar as they relate to restrictions on borrowing under
the 1940 Act and the diversification requirements under the Internal Revenue
Code of 1986, as amended (the "Code")) apply only at the time an investment is
made or other relevant action is taken by the Fund. With respect to investment
restriction 7 below, it is the Fund's present intention to make short sales
only for the purpose of deferring realization of gain or loss for federal
income tax purposes.
The Fund will not:
1. Purchase more than 10% of the outstanding voting securities of any one
issuer;
2. Invest more than 15% of the value of its total assets in the
securities of any one issuer (except that the Fund may invest up to 25% of
the value of its total assets in the securities of the Korean government,
its agencies and instrumentalities to the extent such investments may be
permitted under Korean laws or regulations) or 25% or more of the value of
its total assets in the securities of issuers in the same industry,
provided, however, that the foregoing restriction shall not be deemed to
prohibit the Fund from purchasing the securities of any issuer pursuant to
the exercise of rights distributed to the Fund by the issuer, except that
no such purchase may be made if as a result the Fund will fail to meet the
diversification requirements of the Code, and any such acquisition in
excess of the foregoing 15% or 25% limits will be sold by the Fund as soon
as reasonably practicable. The foregoing restrictions do not apply to
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
3. Make loans except through (i) the purchase of debt obligations in
accordance with its investment objective and policies, (ii) the lending of
portfolio securities or (iii) the use of repurchase agreements;
4. Borrow money or issue senior securities, except that the Fund may
borrow from a bank or other entity in a privately arranged transaction for
(i) the repurchase and/or tenders for its shares or to pay dividends for
purposes of complying with the Code, if after such borrowing there is asset
coverage of at least 300% as defined in the 1940 Act and (ii) temporary
purposes in an amount not exceeding 5% of the value of the total assets of
the Fund;
5. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
(i) to secure permitted borrowings and (ii) in connection with initial and
variation margin deposits relating to futures contracts;
6. Invest in companies for the purpose of exercising control;
10
<PAGE>
7. Make short sales of securities or maintain a short position unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of the same issuer as, and
equal in amount to, the securities sold short ("short sales against the
box"), and unless not more than 10% of the Fund's net assets (taken at
market value) is held as collateral for such sales at any one time; or
8. (i) Purchase or sell real estate, except that it may purchase and sell
securities of companies which deal in real estate or interests therein,
(ii) purchase or sell commodities or commodity contracts (except foreign
currencies, foreign currency options and futures and forward contracts or
contracts for the future acquisition or delivery of foreign currencies and
related options on futures contracts and other similar contracts), (iii)
invest in interests in oil, gas, or other mineral exploration or
development programs, except that it may purchase and sell securities of
companies that deal in oil, gas or other mineral exploration or development
programs, (iv) purchase securities on margin, except for such short-term
credits as may be necessary for the clearance of transactions or (v) act as
an underwriter of securities, except that the Fund may acquire securities
in private placements under circumstances in which, if such securities were
sold, the Fund might be deemed to be an underwriter within the meaning of
the Securities Act of 1933.
It should not be assumed that activities that the Fund can perform as
exceptions to the restrictions above will necessarily be permissible under
Korean laws and regulations. In addition to the restrictions described above,
the Fund is subject to additional restrictions imposed by Korean laws and
regulations and restrictions imposed by the Code. See "Special Risk
Considerations--Investment and Repatriation Restrictions" in the Prospectus and
"Taxation--United States Federal Income Taxes--General" and "Korean Securities
Markets--Regulation of Foreign Investment" herein. Should any restriction
imposed by Korean laws or regulations be removed or liberalized, the Fund
reserves the right to invest accordingly, except to the extent that such
investment conflicts with the Fund's investment objective or investment
restrictions.
11
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Directors and officers of the Fund and their principal occupations during
the past five years are set forth below. A Director or officer may also serve
as a director, trustee or officer of other registered investment companies
sponsored by Alliance.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING THE PAST FIVE YEARS
NAME AND ADDRESS OFFICE AND OTHER AFFILIATIONS
---------------- ------ --------------------------------------
<C> <C> <S>
John D. Carifa* Chairman and Chief President, Chief Operating Officer and
1345 Avenue of the Executive Officer a Director of ACMC.**
Americas
New York, NY 10105
David H. Dievler Director Former Senior Vice President of ACMC.
204 Washington Avenue
Spring Lake, NJ 07762
William H. Foulk, Jr. Director Investment Adviser and Independent
2 Hekma Road Consultant. Formerly senior Manager of
Greenwich, CT 06831 Barrett Associates, Inc., a registered
investment adviser.
Dr. James M. Hester Director President of the Harry Frank
45 East 89th Street Guggenheim Foundation and a Director
New York, NY 10128 of Union Carbide Corporation.
Hon. James D. Hodgson Director Formerly U.S. Ambassador to Japan and
10132 Hillgrove Drive U.S. Secretary of Labor. Director of
Beverly Hills, CA 90210 United Television Inc. (broadcasting).
Wang-Ha Cho* Director and President Executive Vice President of Tong Yang
TIFC Building #185 Securities Co., Ltd. Formerly
2 Kaulchi-ro Chung-ku President of Corporate Planning and
Seoul, Korea Control Group of Tong Yang Group and
Executive Vice President of Tong Yang
Benefit Life Insurance Co., Ltd.
Sung Jin Kim* Director and Senior President of Tong Yang Securities
780 Third Avenue Vice President (America), Inc. Former General Manager
42nd Floor of International Business Department
New York, NY 10017 of Tong Yang Securities Co., Ltd.
Choong (John) H. Koh Director Founder and Chief Executive Officer of
P.O. Box 361 CHK Management, Inc. Formerly a
Alpine, NJ 07620 Partner of Ernst & Young LLP
</TABLE>
--------
* An "interested person" of the Fund, as defined in the 1940 Act.
** For the purpose of this SAI, ACMC refers to Alliance Capital Management
Corporation, the sole general partner of Alliance, and to the predecessor
general partner of Alliance of the same name.
12
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING THE PAST FIVE YEARS
NAME AND ADDRESS OFFICE AND OTHER AFFILIATIONS
---------------- ------ --------------------------------------
<C> <C> <S>
Robert Heisterberg Executive Vice President Senior Vice President of ACMC and
1345 Avenue of the --Investments Global Economic and Policy Analyst
Americas
New York, NY 10105
Yung Chul Park Executive Vice President Professor of Economics, Korea
1 Anam-dong --Investments University since 1976. Director of
Seoul, Korea Institute of Economic Research, Korea
University
A. Rama Krishna Vice President Senior Vice President of ACMC
Shiroyama JT Mori Bldg. --Investments
9th Floor
4-309, Toranomon
Minato-Ku,
Tokyo 105 Japan
In Kee Oh Vice President Director and Chief Operating Officer
23-8 Yoido-Dong Young --Investments of Orion
Dungpo-gu
Seoul, Korea
Thomas J. Bardong Vice President Senior Vice President of ACMC
1345 Avenue of the
Americas
New York, NY 10105
Mark D. Gersten Treasurer and Chief Senior Vice President of Alliance Fund
500 Plaza Drive Financial Officer Services, Inc. ("AFS")
Secaucus, NJ 07094
Edmund P. Bergan, Jr. Secretary Senior Vice President and General
1345 Avenue of the Counsel of Alliance Fund Distributors,
Americas Inc. ("AFD")
New York, NY 10105
Joseph J. Mantineo Controller Vice President of AFS
500 Plaza Drive
Secaucus, NJ 07094
</TABLE>
The Board of Directors was divided into three classes, each class having a
term of three years. Each year the term of one class expires. See "Description
of Common Stock--Certain Anti-Takeover Provisions of the Articles of
Incorporation and Bylaws" in the Prospectus.
The Fund does not pay any fees to, or reimburse expenses of, its Directors
who are considered "interested persons" of the Fund. The aggregate compensation
paid by the Fund to each of the Directors during its fiscal
year ended April 30, 1995, the aggregate compensation paid to each of the
Directors during calendar year 1994 by all of the funds to which Alliance
provides investment advisory services (collectively, the "Alliance
Fund Complex") and the total number of funds in the Alliance Fund Complex with
respect to which each of
13
<PAGE>
the Directors serves as a director or trustee, are set forth below. Neither the
Fund nor any other fund in the Alliance Fund Complex provides compensation in
the form of pension or retirement benefits to any of its directors or trustees.
<TABLE>
<CAPTION>
TOTAL NUMBER
OF FUNDS
TOTAL IN THE
COMPENSATION ALLIANCE FUND
FROM THE COMPLEX,
ALLIANCE INCLUDING THE
AGGREGATE FUND COMPLEX, FUND, AS TO WHICH
NAME OF DIRECTOR COMPENSATION INCLUDING THE DIRECTOR IS A
OF THE FUND FROM THE FUND THE FUND DIRECTOR OR TRUSTEE
---------------- ------------- ------------- -------------------
<S> <C> <C> <C>
John D. Carifa.................. $ 0 $ 0 49
Wang-Ha Cho..................... $ 0 $ 0 1
David H. Dievler................ $2,500 $ 0 42
William H. Foulk, Jr............ $9,500 $141,500 30
Dr. James M. Hester............. $8,500 $154,500 37
The Hon. James D. Hodgson....... $8,500 $ 73,000 8
Sung Jin Kim.................... $ 0 $ 0 1
Choong H. Koh................... $2,500 $ 2,500 1
</TABLE>
As of September 1, 1995, the Directors and officers of the Fund as a group
owned less than 1% of the outstanding shares of Common Stock of the Fund.
MANAGEMENT AND ADMINISTRATION ARRANGEMENTS
Alliance Capital Management L.P., a New York Stock Exchange listed company
with principal offices at 1345 Avenue of the Americas, New York, New York
10105, has been retained under an investment management and administration
agreement (the "Management and Administration Agreement") to serve as
investment manager and administrator to the Fund. Orion Asset Management Co.,
Ltd., a Cayman Islands corporation with principal offices at 780 Third Avenue,
New York, New York 10017, has been retained under the Investment Management
Agreement (the "Management Agreement") to serve as investment manager to the
Fund with respect to the Fund's investments in Korean securities. Under the
Management and Administration Agreement and the Management Agreement
(collectively, the "Agreements"), Alliance and Orion have established a joint
working relationship with respect to the Fund's investments in Korean
securities.
ACMC, the sole general partner of and owner of a 1% general partnership
interest in Alliance, is an indirect, wholly-owned subsidiary of The Equitable
Life Assurance Society of the United States ("Equitable"), one of the largest
life insurance companies in the United States and a wholly-owned subsidiary of
The Equitable Companies Incorporated ("ECI"), a holding company controlled by
AXA, a French insurance holding company. As of June 30, 1995, ACMC, Inc. and
Equitable Capital Management Corporation, each a wholly-owned direct or
indirect subsidiary of Equitable, owned in the aggregate approximately 59% of
the issued and outstanding units representing assignments of beneficial
ownership of limited partnership interests in Alliance ("Units"). As of June
30, 1995 approximately 33% and 8% of the Units were owned by the public and
employees of Alliance and its subsidiaries, respectively, including employees
of Alliance who serve as Directors of the Fund.
AXA owns approximately 60% of the outstanding voting shares of common stock
of ECI. AXA is the holding company for an international group of insurance and
related financial services companies. AXA's insurance operations are comprised
of activities in life insurance, property and casualty insurance and
reinsurance. The insurance operations are diverse geographically with
activities in France, the United States,
the United Kingdom, Canada and other countries, principally in Europe. AXA is
also engaged in asset management, investment banking and brokerage, real estate
and other financial services activities in the United States and Europe. Based
on information provided by AXA, as of January 1, 1995, 42.3% of the
14
<PAGE>
issued shares (representing 54.7% of the voting power) of AXA were owned by
Midi Participations, a French corporation that is a holding company. The voting
shares of Midi Participations are in turn owned 60% by Finaxa, a French
corporation that is a holding company, and 40% by subsidiaries of Assicurazioni
Generali S.p.A., an Italian corporation ("Generali") (one of which, Belgica
Insurance Holding S.A., a Belgian corporation, owned 34.1%). As of January 1,
1995, 62.1% of the issued shares (representing 75.7% of the voting power) of
Finaxa were owned by five French mutual insurance companies (the "Mutuelles
AXA") (one of which, AXA Assurances I.A.R.D. Mutuelle, owned 31.8% of the
issued shares) (representing 39.0% of the voting power), and 26.5% of the
issued shares (representing 16.6% of the voting power) of Finaxa were owned by
Banque Paribas, a French bank ("Paribas"). Including the shares owned by Midi
Participations, as of January 1, 1995, the Mutuelles AXA directly or indirectly
owned 51.3% of the issued shares (representing 65.8% of the voting power) of
AXA. In addition, certain subsidiaries of AXA own 0.4% of the shares of AXA
which are not entitled to be voted. Acting as a group, the Mutuelles AXA
control AXA, Midi Participations and Finaxa.
Orion is a wholly-owned subsidiary of Tong Yang Securities Co. Ltd. ("Tong
Yang Securities"), a listed company which was established in 1962 and is a
component member of a leading Korean securities company. Tong Yang Securities
is part of the Tong Yang Group, which is a group of affiliated companies based
in Korea which have operations in the basic industrial, foods, merchandising
and service and finance industries. Tong Yang Group has one of the most broadly
diversified groups of financial services companies in Korea. At December 31,
1994, the aggregate assets of the Tong Yang Group were approximately $10.5
billion and it employed approximately 4,422 persons. Tong Yang Securities and
its affiliates manage funds and accounts with approximately $1.4 billion
invested in Korean equity securities as of June 30, 1995. Orion, as an
affiliate of Tong Yang Securities, has access to its resources and research
capabilities.
Since the commencement of the Fund's operations, the Fund's management
arrangements have undergone two revisions, effective August 27, 1992 and
November 30, 1993, respectively, each of which was approved by the Fund's
shareholders. As a result of the revisions, the responsibility for investment
management services provided to the Fund with respect to Korean securities was
changed, although Alliance's sole responsibility for the Fund's limited
investments in securities other than Korean securities and its role as the
Fund's administrator was unaffected. In addition, the Fund's Investment
Strategy Committee was eliminated during the first revision. Although the
revisions did not involve any change in the aggregate fees payable by the Fund
to Alliance and Orion, the first revision increased the fee paid by the Fund to
Alliance from .75% to 1.05%, and decreased the fee paid to Orion from .50% to
.20%, of the Fund's average weekly net assets and the second revision decreased
the fee paid by the Fund to Alliance to .85%, and increased the fee paid by the
Fund to Orion to .40%, of the Fund's average weekly net assets. For the fiscal
years ended April 30, 1993, April 30, 1994 and April 30, 1995, the Fund paid
fees to Alliance that, in the aggregate, amounted to $388,934, $455,066 and
$655,205, respectively, and to Orion that, in the aggregate, amounted to
$122,319, $139,967 and $308,335, respectively.
Certain other clients of Alliance or Orion or any of their respective
affiliates may have investment objectives and policies similar to those of the
Fund. Alliance or Orion and any of their respective affiliates may, from time
to time, make recommendations that result in the purchase or sale of a
particular security by their other clients simultaneously with the Fund. If
transactions on behalf of more than one client during the same period increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price or quantity. It is the policy of
Alliance and Orion and any of their respective affiliates to allocate advisory
recommendations and the placing of orders in a manner that is deemed equitable
by Alliance or Orion and any of their respective affiliates to the accounts
involved, including the Fund. When two or more clients of Alliance or Orion and
any of their respective affiliates (including the Fund) are purchasing or
selling the same security on a given day from the same broker-dealer, such
transactions may be averaged as to price.
15
<PAGE>
CUSTODIAN
Brown Brothers Harriman & Co. ("Brown Brothers"), 40 Water Street, Boston,
Massachusetts, 02109, serves as custodian for the Fund. Rule 17f-5 adopted
under the 1940 Act permits the Fund to maintain its Korean securities and cash
in the custody of certain eligible non-U.S. custodians. Pursuant to that Rule,
under the terms of a subcustodial agreement between Brown Brothers and Korea
Exchange Bank, the Fund's portfolio of assets invested in Korean securities are
held by Korea Exchange Bank, 181, 2-Ga, Ulchiro, Chung-gu, Seoul 100-793,
Korea. The majority of the Fund's assets are held in Korea.
Selection of Korea Exchange Bank as the Fund's subcustodian was made by the
Board following consideration of a number of factors, including, but not
limited to, the reliability and financial stability of the institution, the
ability of the institution to perform custodial services for the Fund, the
reputation of the institution in its national market, the political and
economic stability of Korea and the risks of potential nationalization or
expropriation of Fund assets.
TRANSFER AGENT, DIVIDEND-PAYING AGENT AND REGISTRAR
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts, 02110, acts as the Fund's transfer agent, dividend-paying agent
and registrar.
THE KOREAN SECURITIES MARKETS
BACKGROUND AND DEVELOPMENT
The Korean securities markets have developed largely as a result of measures
of the Korean government designed to stimulate the Korean economy and
investment in Korea. The Korea Stock Exchange (the "Exchange") was established
in 1956, at which time it functioned primarily as a market for the trading of
Korean government bonds, with only 12 equity securities listed for trading. It
was not until the Korean government enacted the first economic development plan
in 1962 that the securities markets began to develop. During the 1960's, the
Korean government enacted legislation which provided tax and other incentives
to both issuers and buyers of equity securities. The securities markets
developed more fully during the 1970's pursuant to further governmental
measures which, among other things, empowered the Korean government to induce
corporations to publicly offer their securities and list their shares on the
Exchange. In 1976, the Korean Securities and Exchange Law (the "Korean
Securities Law") was amended to provide for, among other things, the
establishment of the Securities and Exchange Commission of Korea (the "KSEC")
and its executive body, the Securities Supervisory Board (the "Securities
Board").
GOVERNMENT INVOLVEMENT IN THE PRIVATE SECTOR
The Korean government has historically exercised and continues to exercise
substantial influence over many aspects of the private sector including the
securities markets. The Korean government from time to time has influenced the
payment of dividends and the prices of certain products, encouraged companies
to invest in or to concentrate in particular industries, induced mergers
between companies in industries suffering from excess capacity and induced
private companies to publicly offer their securities. The Exchange has also
sought to minimize excessive price volatility through various steps, including
the imposition of limitations on daily price movements of securities.
REGULATION OF FOREIGN INVESTMENT
The Korean securities markets have historically been closed to foreign
investors. In 1981, however, the MFE announced its intention to gradually
internationalize the Korean securities markets. Since then, the
16
<PAGE>
Korean government has progressively implemented steps to liberalize foreign
investment in the Korean securities markets. At the present time, however,
foreign investors, including the Fund, are not permitted to make direct or
indirect investments in equity securities of Korean companies that are not
listed on the Exchange (unless otherwise approved specifically by the Korean
government) and Won denominated debt securities except for certain convertible
bonds and public bonds. The MFE has recently announced a plan to permit foreign
investors to make certain limited investments in Won denominated debt
securities, as described more fully below. Foreign investors currently may not
participate in the purchase of shares through initial public offerings. There
are no current proposed regulations that would permit this type of investment.
The liberalization of the Korean securities markets began with the
authorization of indirect investment by foreign investors primarily in Korean
equity securities through Korean investment trusts and other pooled vehicles.
The first type of permitted indirect foreign investments in Korea were a number
of investment trusts in Korea commencing in late 1981 and managed by Korean
investment management companies. Foreign investors were also permitted to
invest indirectly in the Korean securities markets through three foreign
investment funds licensed by the Korean government and established outside
Korea commencing in 1984. Beginning in 1985, a number of Korean companies
listed on the Exchange have been permitted to issue equity-related securities
including convertible bonds, and, in later years, bonds with subscription
warrants and depositary receipts to foreign investors outside of Korea as a
means of raising capital.
Since January 3, 1992, the Korean stock markets have been open to general
direct foreign investment following the adoption and implementation by the KSEC
and MFE of regulations (the "Foreign Investment Regulations"). These
regulations allow foreign investors to directly purchase and sell equity shares
on the Exchange, subject to certain restrictions that are described below.
Either a "general limit" or "exceptional limit" is imposed on aggregate foreign
ownership of the shares of each class of a Korean company. Under the general
limit, the total foreign investment in each class of a company's outstanding
equity shares may not exceed 15%. In December 1994, the Korean government
announced its intention to continue to raise the 15% foreign investment
limitation. There can be no assurance, however, that the 15% limitation will be
raised.
The KSEC may increase or decrease this 15% limitation if it deems necessary
for the public interest, protection of investors or industrial policy.
Currently, the KSEC has authorized several exceptional limits including the
following: (1) subject to prior report to the Governor of the Securities Board
by a company whose shares are held by foreign investors under the Foreign
Capital Inducement Act ("FCIA") or certain sections of the Foreign Exchange
Management Act ("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 15%) requested by such company (provided that in this case
the ceiling may not equal or exceed 50%) or (y) in which the percentage of
foreign ownership is 50% or more, a ceiling equal to the percentage requested
by such company may be established; (2) a 10% ceiling on the acquisition of
shares by foreigners in the aggregate has been established for certain public
corporations designated by the MFE (the "public corporations") (currently, only
Korea Electric Power Corporation ("KEPCO") and Pohang Iron & Steel Co., Ltd.
("POSCO") are subject to this lower ceiling); and (3) subject to application by
a company which has issued equity-related securities outside Korea and approval
by the KSEC, a ceiling equal to the sum of (a) the percentage of current
foreign shareholding in connection with such issuance of equity-related
securities and (b) a percentage (up to 15%) requested by such company (provided
that in this case the ceiling may not equal or exceed 50%). Further, no foreign
investment is permitted in shares of Korean companies designated as "general
telecommunications service providers" under the Telecommunications Business
Law. Currently, only two companies, Korea Telecom and DACOM Corporation, are
designated in this category and only DACOM Corporation is listed on the
Exchange.
Each foreign investor, including the Fund, is limited to an investment of 3%
of the total outstanding equity shares of each class of a listed company. In
addition, Korean law provides that public corporations may impose limits on
ownership (by Korean nationals or foreigners) of their shares in their articles
of incorporation. The articles of incorporation of each of KEPCO and POSCO
currently provide for a 1%
17
<PAGE>
ceiling on the acquisition by a single investor (by a Korean national or
foreigner) of their common shares. As of June 30, 1995, KEPCO and POSCO
represented approximately 12.9% and 4.5%, respectively, of the total market
capitalization of the Exchange.
The foregoing aggregate and individual foreign ownership limits 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
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 3% limit (except in the cases of (i) and (ii) above) must
be sold within three months from the date of acquisition.
In calculating these limits, 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 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 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 3% limitation. However, all branches in Korea of any
foreign investors that constitute a group are entitled to their own 3%
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 Korean Securities Law. The Governor of the Securities
Board of Korea may, in his discretion, disclose the numbers of shares of a
class available for investment by a single 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.
The Korean government has implemented a system to monitor foreign investment
limits and transactions, including the issuance of identification cards to all
foreign investors. Shares acquired by foreign investors must be traded on the
Exchange, with certain limited exceptions including OTC transactions as
described below. For transactions on the Exchange, a foreign investor must open
a Won account for securities transactions with a securities company in Korea
and at that time must present its investment registration card to the
securities company.
Once the applicable maximum aggregate foreign ownership limit in a class of
particular security has been reached or exceeded, foreign investors are
prohibited from engaging in purchase transactions in that security on the
Exchange. As of June 30, 1995, of the 877 companies listed on the Exchange, 97
companies had reached the applicable maximum aggregate foreign ownership limit
(11.06% of all the companies listed on the Exchange at such time). Foreign
investors are, however, allowed to effect transactions in the class of shares
of these companies with other foreign investors (other than branches and
subsidiaries in Korea of certain foreign financial institutions) and certain
residents of Korea off the Exchange through a securities company in Korea as an
intermediary. Such transactions ("OTC transactions") generally occur at a
premium over prices on the Exchange. The Fund invests in equity securities of
Exchange-listed companies through such OTC transactions, and thus pays premiums
over the share prices quoted on the Exchange, which premiums can be
substantial. There can be no assurance that the Fund will be able to realize
such premiums if it sells the shares to another foreign investor. Such premiums
may be affected by changes in regulations,
18
<PAGE>
changes in the supply of or demand for shares and otherwise, including changes
in the percentage of foreign ownership permitted in Exchange-listed companies.
Under the Foreign Investment Regulations, a foreign investor must appoint one
or more standing proxies from among the Korea Securities Depository, securities
firms (including Korean branches of foreign securities firms) which have
obtained a license to act as a standing proxy and foreign exchange banks
(including Korean branches of foreign banks) to exercise shareholders' rights,
apply to change a name on the shareholders' registry, place an order to sell or
purchase shares or engage in any matters related to these activities, if any
such activities are not conducted by the foreign investor itself. The Fund has
appointed a subsidiary of the Fund's subcustodian as a standing proxy. Because
the Fund will be engaged in transactions with several Korean brokers, it may
need to appoint a number of standing proxies to efficiently conduct its trading
activities. Each such standing proxy appointed will receive a commission for
its services. If a standing proxy other than the Fund's custodian or
subcustodian were deemed to have custody over certain assets of the Fund, the
Fund may be required to obtain relief from the United States Securities and
Exchange Commission or a waiver or modification of the standing proxy
requirement from the KSEC. There can be no assurance that such relief, waiver
or modification will be obtained.
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"). The
Fund has opened such accounts with its subcustodian in Korea. No approval is
required for remittance into Korea and deposit of foreign currency funds in the
Foreign Currency Account. With the confirmation of the designated 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,
if required, 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 subject
to approval of the investor's designated bank. In addition, funds in the Won
Account may be used for future investment in shares or for payment of the
subscription price of new shares obtained through the exercise of pre-emptive
rights. As of March 20, 1995, 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.
In December 1994, the MFE announced a three-phase plan to be implemented
during the period from 1995 to 1999 to liberalize foreign exchange
transactions, including further opening of the securities markets to foreign
investors. In the plan, the government announced its intention to gradually
raise the ceilings on investments by foreign investors in companies listed on
the Exchange. The plan provides for the further opening of the debt securities
market step-by-step, by way of indirect investment in debt securities through
Korean investment in long-term non-guaranteed bonds, together with issuance in
Korea of Won-denominated or foreign-currency-denominated debt securities by
foreign entities. The plan also provides for the easing of requirements for the
establishment of Korean branches of foreign securities companies and for
further
19
<PAGE>
opening of the securities industry to foreign participants. The plan also
provides for Korean investors to be permitted more opportunities to invest
directly and indirectly in foreign securities. There can be no assurance that
the provisions of the plan, including the provisions relating to foreign
investment, will be put into effect or have the intended impact. Effective July
1, 1994, foreign investors are allowed to invest in (i) 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.
THE KOREA STOCK EXCHANGE
The Exchange is Korea's sole securities exchange and has its trading floor in
Seoul. The Exchange, which has been a non-profit member organization since
1988, is currently owned by 33 member securities companies. Both equity and
debt securities are traded on the Exchange, although equity securities account
for most of the Exchange's trading activity. The aggregate market value of
equity securities listed on the Exchange was approximately W 151.2 trillion
(approximately US $191.7 billion) at December 31, 1994, and the average daily
trading value of such securities for 1994 was W 776 million (US $983.9
thousand). Equity securities listed on the Exchange are divided into two
separate trading sections based on, among other things, the total number of
shares held by minority shareholders and the monthly average trading volume.
See "Listing, Reporting and Disclosure Requirements."
Transactions on the Exchange may only be effected through securities
companies that are members of the Exchange. Securities companies that wish to
engage in securities dealing, brokering or underwriting in Korea must be
licensed by the MFE. Currently all 33 members of the Exchange are licensed in
all three categories. Financial intermediaries including banks, investment
trust companies, short-term finance companies and merchant banking corporations
are not eligible for membership on the Exchange. However, they may engage in
underwriting upon obtaining a license from the MFE.
REGULATION. The MFE establishes the basic policies governing the overall
operation of the Korean securities markets. Although the KSEC is authorized to
regulate and make decisions on all major issues relating to the securities
markets pursuant to the Korean Securities Law, all decisions of the KSEC must
be reported to the MFE. The MFE may repeal any decision of the KSEC or suspend
its enforcement. The KSEC is composed of nine commissioners, one of whom is
appointed as chairman by the President. The day-to-day management and
implementation of the policies of the KSEC are conducted by the Securities
Board.
The Korean Securities Law was originally enacted in 1962 and amended
fundamentally in 1976, 1982, 1987 and 1991 to broaden the scope and improve the
effectiveness of official supervision of the securities markets. As amended,
the Korean Securities Law introduced restrictions on insider trading, required
that specified information be made available by listed companies to investors
and established rules regarding margin trading, proxy solicitation and takeover
bids. The 1987 amendment generally improved the regulatory and disclosure
requirements under the Korean Securities Law, established a more effective
system for the transfer of securities through the use of a book-entry system
without the need for physical delivery of securities certificates, and provided
a statutory basis for futures trading on the Exchange. In addition, the 1987
amendments strengthened control over insider trading and contained extensive
new provisions which, for the first time, regulate the investment advisory
business. The 1991 amendments introduced stricter restrictions on insider
trading and supplemented the existing disclosure system. The Korean Securities
Law was further amended in January 1994, effective generally from April 1,
1994, to permit listed companies to hold their own shares subject to certain
limitations, improve the central depository system and securities dispute
conciliation committee, strengthen the reporting requirements imposed on
shareholders holding 5% or more of the issued and outstanding voting shares of
a listed company, and expand the scope of dissenting shareholders entitled to
request that the issuer purchase their shares under certain circumstances,
including at the time of merger or business transfer, to include holders of
non-voting shares. The January 1994
20
<PAGE>
amendments also lifted the 10% beneficial ownership limitation on the
acquisition of voting shares of a listed company (with effect from January 1,
1997). The Korean Securities Law and regulations promulgated thereunder
currently require the initial registration of companies and the filing of
separate registration statements for both initial and subsequent public issues
of securities and provide for the administration and supervision of securities
companies, investment advisory companies, listed companies, and other
securities-related institutions, including foreign securities firms conducting
business in Korea and domestic securities companies conducting business abroad.
TRADING PROCEDURES. The Exchange is open Monday through Friday for trading
between 9:30 a.m.--11:30 a.m. (except for trading of debt securities, which
ends at 12:30 p.m.) and 1:00 p.m.--3:00 p.m. It is also open on Saturday
mornings. The Exchange has established a daily price change limitation schedule
for equities and certain other securities traded on the Exchange based on the
previous day's closing price. The Exchange may suspend trading in the
securities of an individual company. Share transactions are effected through
accounts with one of the 33 securities companies which act as brokers, but
which may also buy and sell as principals. A computerized order-routing system
transmits a customer's order to the trading floor, where it is submitted to an
appropriate trading post by a floor representative of the member securities
firm.
An Exchange employee determines the price of a particular security by
matching the best bids and offers. Opening prices are determined by all bids
and offers received during the 100 minutes prior to the opening of each trading
session. The Exchange has established procedures for block sales of shares.
SETTLEMENT PROCEDURES. All securities transactions are settled and cleared
through the settlement unit of the Exchange. With respect to delivery and
receipt of securities, the Exchange moved its settlement function to the Korea
Securities Depository, a special statutory corporation of which the Exchange is
the majority shareholder and a number of major financial institutions are
minority shareholders. Transactions are classified either as regular way
transactions, for which settlement is due on the second business day following
the day of contract, or as cash transactions which are due on the day of
contract. Shares, equity-related bonds and beneficial certificates are traded
as regular way transactions, while bonds (excluding equity-related bonds) may
be traded either as regular way or cash transactions. The delivery and receipt
of securities may be cleared by a book entry clearing system of the Korea
Securities Depository.
Regulations of the Exchange require that investors place an "entrustment
guarantee" deposit in an amount equal to 40% of the purchase or sales order
price with the relevant broker on or prior to placing a purchase or sales
order. The remaining purchase price must be paid on or prior to the settlement
date, which typically occurs two days after the date of execution. The
"entrustment guarantee" deposit requirement applies to both Korean and foreign
investors. However, certain institutional investors designated by the Exchange,
including the Fund, are exempt from such deposit requirement. If the Fund were
not exempt from the deposit requirement and an entity other than the Fund's
custodian or subcustodian were deemed to have custody over certain assets of
the Fund due to such deposit requirement, the Fund may be required to obtain
relief from the United States Securities and Exchange Commission or a waiver or
modification of the entrustment guarantee deposit requirement from the
Exchange. There can be no assurance that the Fund could obtain such relief,
waiver or modification.
TRANSACTION COSTS. Regulations of the Exchange have established certain
maximum brokerage commission rates for all transactions effected on the
Exchange. The rates currently provide for a commission of up to 0.6% for equity
securities and up to 0.3% for bonds and beneficial certificates. Each
individual broker may determine brokerage commissions within the established
ranges. Each broker is required to report its commission rate schedule and any
deviation therefrom to the Exchange. Accordingly, there is generally no
deviation in commission rate schedules among Korean brokers. The same
commission rates are, in practice, applied to all trades in the same volume
range. In addition, a securities transaction tax is levied on the seller for
most transactions at a rate of 0.3% of the value of shares sold on the Exchange
and 0.5% of the value of shares sold off the Exchange. However, under certain
circumstances, the tax may be reduced to zero. Effective as of July 1 , 1994,
an additional agricultural and fishery special tax of 0.15% of the sales price
is imposed on
21
<PAGE>
securities transactions on the Exchange. Under the terms of the relevant law,
this agricultural and fishery special tax expires on June 30, 2004.
SECURITIES FINANCING. The Korea Securities Finance Corporation (the "KSFC"),
which was established in 1955 to facilitate financing in the securities
markets, is the only institution specializing in securities financing in Korea.
The KSFC provides loans to underwriting groups and securities collateral loans
to the public. In March 1986 the KSFC suspended credit extension for margin
transactions as one measure to stabilize the securities markets. Korean
securities companies may extend credit for margin transactions and provide for
their clients subscription loans, purchase loans and securities collateral
financing by using their own resources or by borrowing from the KSFC.
The margin requirement as set by the KSEC is 40% of the total of the sale
value of the securities purchased. The margin requirements are varied by the
KSEC depending upon market conditions. Foreign investors, including the Fund,
are not permitted to engage in margin transactions or enjoy the benefit of
other loans or financing.
LISTING, REPORTING AND DISCLOSURE REQUIREMENTS. The listing of securities is
regulated by the Securities Listing Regulation of the Exchange, which
classifies the four types of securities which may be listed as equity
securities, warrants to subscribe for new shares, beneficial certificates and
debt securities. A listing application and initial listing fee (except for
certain limited cases where the Exchange exempted such fee) must be submitted
to the Exchange, which determines whether an applicant is eligible for listing.
The Exchange is empowered to de-list securities.
The Exchange has two separate market sections within which equity securities
are traded. The main difference between the two sections is that margin
transactions are permitted only in the first trading section (with the
exception of securities issued by the securities company providing the margin
loans). A newly listed equity security must be traded in the second trading
section for at least one year after its initial listing. Additional listing
criteria must be met in order for an equity security to be traded in the first
trading section. As of May 31, 1995, the securities of 471 companies out of 701
companies listed on the Exchange were traded in the first trading section. An
equity security trading in the first trading section that fails to maintain
certain criteria will be reassigned to the second trading section.
Under the current regulations of the Exchange, the primary listing criteria
for equity securities include the following: (i) corporate existence for at
least five years; (ii) paid-in capital of at least W 3 billion, at least
300,000 outstanding shares and stockholders' equity of at least W 5 billion;
(iii) average annual sales revenue for the last three accounting periods of at
least W 15 billion and sales revenue for the most recent accounting period of
at least W 20 billion; (iv) the provision of a favorable auditor's opinion
(whether qualified or not) on the company's financial statements for the last
three accounting periods; (v) at least 30% of the outstanding shares, including
at least 30% of all voting shares, must be publicly offered for subscription or
sale within six months prior to the listing application date; (vi) a debt to
equity ratio of less than 150% of the average for the same industry sector;
(vii) shares issued by way of rights or bonus issues (including stock
dividends) during the past year (or two years in the case of bonus issues from
asset revaluation reserves) must not exceed a specified percentage, and, with
certain exceptions, the stockholding ratio must not have been changed during
the past year; and (viii) the asset value per share and the earnings value per
share (as defined in the KSEC regulations) must exceed 150% and 100% of its par
value, respectively.
The listing criteria a company must meet for its equity securities to be
traded on the first trading section of the Exchange include the following: (i)
paid-in capital of at least W 5 billion as of the end of the most recent
accounting period; (ii) after-tax net profit for each of the last three
accounting periods must have been at least 10% of paid-in capital, or,
alternatively, the ratio of stated capital plus reserves to stated capital as
of the end of each such accounting periods must have been at least 250%; (iii)
debt to equity ratio must be no greater than the average for the sector; (iv)
current ratio for each of the last three accounting periods must have equalled
or exceeded the average for the sector; (v) a dividend of at least 5% of the
par value per share
22
<PAGE>
must have been declared and paid to each stockholder holding voting shares of
less than 1% of the issued and outstanding shares in respect of at least two
out of the last three accounting periods; (vi) the provision of a favorable
auditor's opinion (whether qualified or not) on the company's financial
statements for the last three accounting periods; (vii) at least 40% of the
outstanding shares, excluding those held by the Korean government or certain
foreign investors ("Government and Foreign Owned Shares"), must be held by
certain institutional investors and a minimum number (400 to 500 depending on
the amount of the paid-in capital) of stockholders, each holding less than 1%
of the company's issued and outstanding shares; (viii) the company's shares
must have been listed for at least one year in the second trading section; (ix)
monthly average trading volume on the Exchange for the accounting period in
which listing in the first section initially takes place must be at least 1% of
the company's shares, excluding Government and Foreign Owned Shares, if any;
and (x) with the exception of the Korean government holding shares of certain
designated corporations no stockholder may own more than 51% of the company's
outstanding voting shares.
The listing requirements for corporate bonds include, but are not limited to:
(i) the paid-in capital of the issuer must equal or exceed W 500 million; (ii)
the total amount issued must equal or exceed W 300 million; (iii) less than one
year has passed since issuance; (iv) a total unredeemed amount of at least W
300 million at par value; (v) the issuer must be listed on the Exchange or
registered with the KSEC; and (vi) the bonds must be publicly offered or sold.
For warrants, the total amount of par value of shares to be issued upon
exercise of the warrant must be at least W 50 million; and for beneficial
certificates the principal amount of the trust must be at least W 300 million
and the principal amount per unit must be at least W 500.
Listed companies are required to submit both semi-annual and annual reports
to the KSEC and the Exchange. Upon the occurrence of certain events such as the
revocation of a license for the main line of business, the suspension of a bank
account or conditions for corporate dissolution, direct disclosure of such
event must be made by listed companies to the public investors through the
broadcasting facilities located in the Exchange. Within two days after certain
less material events such as a change of business objectives, the filing of a
significant lawsuit against the company and notification of a tax
investigation, disclosure must be made to the Exchange, which will be
disseminated to the public.
An over-the-counter market for non-listed securities was established in April
1987 as a mechanism for smaller companies that are unable to meet the Exchange
listing requirements to gain access to the securities markets. As of April 30,
1995, 313 Korean companies were registered on the over-the-counter market. This
market, which is distinct from the OTC system for trading in Exchange-listed
shares among foreign investors, is not open to foreign investors.
GOVERNMENT STABILIZATION ACTIVITIES
The Stabilization Fund, a partnership operated by its contributors, which
include substantially all of the Exchange-listed companies, Korean securities
companies and certain institutional investors including banks and insurance
companies, was formed during 1990 to stabilize the market through the purchase
and sale of securities. The Stabilization Fund's securities holdings, cash
balances and trading activities are not publicly disclosed. By virtue of its
charter, the Stabilization Fund is due to be liquidated by May 1996.
In January and February of 1994, the Korean government announced a number of
measures intended to stabilize the securities market. The more significant of
these measures include, among others, increasing the number of new listings on
the Exchange; strengthening the guarantee deposit requirement for purchase of
stocks on the Exchange; lowering the interest rate on deposits with securities
companies; encouraging institutional investors, including the Stabilization
Fund, to sell listed stocks in their possession; permitting short sales;
lowering the ceiling on the percentage of outstanding shares of a single
company which may be held by a securities investment trust; and raising the
securities transaction tax rate for sales effected on the Exchange.
23
<PAGE>
MARKET CAPITALIZATION AND TRADING VOLUME
The Korean securities markets, while relatively small as compared to the
securities markets of the United States, Japan and certain European countries,
have, with the exception of 1990 and 1991, been generally characterized by
gradual and consistent growth. The development of the Korean securities markets
may be attributed to, among other things, the Korean government's extensive
involvement in the private sector, including the securities markets. From 1982
to 1989, market capitalization of equity securities listed on the Exchange
increased substantially from approximately W 3.0 trillion to approximately W
95.5 trillion at December 31, 1989. During 1990 and 1991, however, market
capitalization did not continue such growth, and the total market
capitalization of equity securities listed on the Exchange decreased 17.2% to
approximately W 79.0 trillion at December 31, 1990 and decreased 7.5% to
approximately W 73.1 trillion at December 31, 1991. Since the beginning of 1992
and the opening of the Korean stock markets to foreign investment, market
capitalization has increased and at December 31, 1992, December 31, 1993 and
December 31, 1994, the total market capitalization of equity securities listed
on the Exchange was approximately W 84.7 trillion, W 112.7 trillion and W 151.2
trillion, respectively.
Large groups of related companies referred to as "chaebol" are engaged in a
wide range of businesses and play a significant role in the Korean economy. As
of December 31, 1994, the 30 largest chaebol groups accounted for 48.1% of the
total market capitalization on the Exchange. The Korean government has
requested that the chaebol companies reduce their shareholdings both within and
outside of the chaebol group. The Korean government's policy is to encourage
the growth of smaller and medium-sized companies.
Total trading volume of equity securities listed on the Exchange has
fluctuated widely, but also has, with the exception of 1990 and 1991, generally
increased from 1982 through 1994. In 1994, total trading volume was
approximately W 229.8 trillion, which represented an increase of 35.3% from
total trading volume of W 169.9 trillion in 1993. Trading activity in equity
securities is concentrated in relatively few securities. In 1994, the 30 most
actively traded equity securities listed on the Exchange accounted for 29.2% of
total trading volume.
The following table sets forth the number of listed companies, market
capitalization and trading volume of domestic equity securities in Korea and
other selected countries for year-end 1994.
SELECTED MARKET CAPITALIZATION AND TRADING VOLUME OF DOMESTIC EQUITY
SECURITIES(1)
(US $ MILLIONS)
<TABLE>
<CAPTION>
NUMBER OF MARKET TRADING VOLUME
LISTED COMPANIES CAPITALIZATION FOR THE
AS OF AS OF YEAR ENDED
COUNTRY DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994
------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
United States............. 7,770 $5,081,810 $3,592,668
Japan..................... 2,205 3,719,914 1,121,438
United Kingdom............ 2,070 1,210,245 928,171
Germany................... 417 470,519 460,617
France.................... 459 451,263 615,371
Hong Kong................. 529 269,508 147,158
Taiwan.................... 313 247,325 711,346
Malaysia.................. 478 199,276 126,458
Korea..................... 699 191,729 291,330
Thailand.................. 389 131,479 80,188
Mexico.................... 206 130,246 82,964
India..................... 7,000 127,515 27,290
Indonesia................. 216 47,241 11,801
</TABLE>
--------
(1) This table sets forth information for selected countries only.
Source: International Finance Corporation, Emerging Stock Markets Factbook,
1995; Securities Supervisory Board Monthly Review, June 1995.
24
<PAGE>
THE KOREA COMPOSITE STOCK PRICE INDEX
Market performance of the Exchange is measured by a composite index and
several additional indices based on the first and second trading sections of
the Exchange, industry sectors and the capitalization of individual stocks. The
KOSPI is the major measure of changes in the aggregate market value of all
common stocks listed on the Exchange. Under the current aggregate market value
method of computing the KOSPI, the market price of each listed common stock is
multiplied by the number of shares listed and then aggregated.
The KOSPI rose to an all-time high of 1,138.75 on November 8, 1994. During
1994, the KOSPI traded within a range of 855.37 to 1,138.75. The KOSPI closed
on September 15, 1995 at 985.64.
The following table illustrates the market performance of the Exchange as
measured by the KOSPI from 1983 through 1994 and for 1995 through May 31.
KOREA COMPOSITE STOCK PRICE INDEX(1)
<TABLE>
<CAPTION>
PERIOD
HIGH LOW END
-------- ------ --------
<S> <C> <C> <C>
1983................................................... 134.46 115.59 121.21
1984................................................... 142.46 114.37 142.46
1985................................................... 163.37 131.40 163.37
1986................................................... 279.67 153.85 272.61
1987................................................... 525.11 264.82 525.11
1988................................................... 922.56 527.89 907.20
1989................................................... 1,007.77 844.75 909.72
1990................................................... 928.82 566.27 696.11
1991................................................... 763.10 586.51 610.92
1992................................................... 691.48 459.07 678.44
1993................................................... 874.10 605.93 866.18
1994................................................... 1,138.75 855.37 1,027.37
1995(2)................................................ 922.05 847.09 882.50
</TABLE>
--------
(1) The KOSPI covers all common stocks listed on the Exchange with a base date
of January 4, 1980 and a base index of 100.
(2) Through May 31, 1995.
Source: Korea Stock Exchange, Fact Book, 1995; Stock, June 1995.
Movements in individual company share prices are confined to fixed limits
around the previous day's closing price. 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.
OPTIONS AND FUTURES
Currently, the Korean securities markets do not provide mechanisms for the
purchase and sale of options and futures contracts. However, the Exchange
announced that it intends to open a stock index futures market in early 1996
and a stock index futures option market in 1997. It has not been announced
whether foreign investors (including the Fund) will be permitted to participate
in such markets.
25
<PAGE>
EQUITY SECURITIES
THE PRIMARY MARKET. The primary market for equity securities in Korea has
generally been characterized by consistent and significant growth. A downward
trend in the number of primary equity offerings began in 1990, however, and
continued through 1993.
<TABLE>
<CAPTION>
TOTAL
EQUITY
OFFERINGS TO CAPITAL
TOTAL PUBLIC OFFERINGS(1) SHAREHOLDERS RAISED
------------------------------- ----------------- ----------
AMOUNT AMOUNT AMOUNT
(WON (WON (WON
NUMBER MILLIONS) NUMBER MILLIONS) MILLIONS)
----------- --------------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
1986............... 16(4) 43,060 110 797,705 840,765
1987............... 44(4) 243,763 178 1,654,950 1,898,713
1988............... 112(14) 1,049,431 298 6,720,644 7,770,075
1989............... 126(16) 3,050,970 274 11,124,538 14,669,186
1990............... 36(3) 336,023 169 2,581,808 2,917,831
1991............... 21(0) 226,894 136 2,180,178 2,687,072
1992............... 8(0) 81,680 133 1,711,188 2,349,889
1993............... 7(0) 181,245 171 2,788,862 3,258,770
1994............... 25(0) 579,524 161 5,378,678 6,247,792
1995(2)............ 4(0) 98,130 55 2,407,317 2,567,649
</TABLE>
--------
(1) The number in parenthesis specifies the number of secondary offerings
included in the total.
(2) Through April 30, 1995.
Source: Securities Supervisory Board, Monthly Review, May 1995.
PRIVATIZATIONS. As part of its program for the development of the securities
markets, the Korean government has sold portions of certain government-owned
corporations to the public. These sales were intended to increase the
participation of low and middle-income investors in the Korean securities
markets. Participation was encouraged through government-provided discounts and
loans. The sale by the Korean government of a portion of its interest in POSCO
and KEPCO in 1988 and 1989, respectively, constituted the first public
offerings under this program. In 1991, Korea Exchange Bank, formerly wholly-
owned by the Korean government, sold its newly issued shares to the public. The
Korean government recently sold to the public a portion of its interest in
Korea Telecom, which is the largest telecommunications service provider in
Korea, through a competitive bidding process. The Korean government announced
that it is considering the sale of additional government-owned corporation
although any such sale would be subject to a number of factors and there can be
no assurance that such sales will occur.
26
<PAGE>
THE SECONDARY MARKET. The total trading volume of equity securities in 1994
was approximately W 229.8 trillion, representing an increase of 35.2% from the
1993 level of W 169.9 trillion. Trading activity, however, is concentrated in a
limited number of companies within a small number of industries. The 30 most
actively traded domestic equity securities accounted for 29.2% of total trading
volume of domestic equity securities for the year ended December 31, 1994. The
following table illustrates the trading volume of the 30 most actively traded
equity securities on the Exchange for the year ended December 31, 1994.
<TABLE>
<CAPTION>
COMPANIES VOLUME
--------- ----------
(MIL. WON)
<S> <C>
Pohang Iron & Steel Co., Ltd. ...................................... 8,035,259
Samsung Electronics Co., Ltd. ...................................... 6,102,021
Korea Electric Power Corporation.................................... 5,683,453
LG Electronics Inc. ................................................ 5,016,530
Hyundai Engineering & Construction Co., Ltd. ....................... 4,444,052
Yukong Limited...................................................... 3,961,913
Daewoo Corporation.................................................. 2,794,263
Daewoo Heavy Ind. Co., Ltd. ........................................ 2,427,359
Korea Mobile Telecom................................................ 2,381,629
Hyundai Motor Company............................................... 2,361,321
LG Chemical Ltd. ................................................... 2,072,479
Korea Long Term Credit Bank......................................... 1,839,358
Cho Hung Bank....................................................... 1,811,154
Shinhan Bank........................................................ 1,792,254
Ssang Yong Cement Industrial Co., Ltd. ............................. 1,783,601
Hanwha Chemical Corporation......................................... 1,765,280
Korea First Bank.................................................... 1,677,303
DACOM Corporation................................................... 1,642,237
The Commercial Bank of Korea, Ltd. ................................. 1,629,021
Ssang Yong Oil Refining Company Limited............................. 1,607,652
Dong Ah Construction Ind. Co., Ltd. ................................ 1,490,790
Daewoo Electronics Co., Ltd. ....................................... 1,427,245
Korea Airline Co., Ltd. ............................................ 1,423,805
Daewoo Securities Co., Ltd. ........................................ 1,390,971
Samsung Heavy Industry Co., Ltd. ................................... 1,333,557
Samsung Electron Devices............................................ 1,322,519
Tae Young Corporation............................................... 1,303,802
Sunkyong Limited.................................................... 1,209,193
Seoul Bank.......................................................... 1,182,215
Tongil Heavy Industries Co., Ltd. .................................. 1,173,174
----------
Total............................................................. 74,135,410
==========
</TABLE>
--------
Source: Korea Stock Exchange, Fact Book, 1995; Stock, June 1995.
The aggregate market capitalization of all equity securities of the 699
companies listed on the Exchange as of December 31, 1994 was approximately W
151.2 trillion (approximately US $191.7 billion). Market capitalization, along
with trading volume, is concentrated in a limited number of companies within a
small number of industries. As of December 31, 1994, the 30 largest companies
by market capitalization represented approximately 48.1% of the total market
capitalization of Korean equity securities. The following tables illustrate the
30 largest companies on the Exchange by market capitalization on December 31,
1994 and the sectoral distribution of listed companies at May 31, 1995.
27
<PAGE>
<TABLE>
<CAPTION>
MARKET CAPITALIZATION
AT DECEMBER 31, 1994
-----------------------
(WON
COMPANY BILLIONS) (US$ MIL.)
------- ---------- -----------
<S> <C> <C>
Korea Electric Power Corporation(1).................... W 16,777 $ 21,272
Samsung Electronics Co., Ltd .......................... 6,716 8,515
Pohang Iron & Steel Co., Ltd .......................... 6,007 7,617
Daewoo Heavy Ind. Co., Ltd. ........................... 4,389 5,565
LG Electronics Inc. ................................... 2,742 3,476
Korea Mobile Telecom................................... 2,327 2,950
Hyundai Motor Company.................................. 2,047 2,596
Shinhan Bank........................................... 2,012 2,551
Yukong Limited......................................... 1,952 2,475
Cho Hung Bank.......................................... 1,909 2,420
Samsung Heavy Industry Co., Ltd. ...................... 1,854 2,351
LG Chemical Ltd. ...................................... 1,839 2,332
Hyundai Engineering & Construction Co., Ltd. .......... 1,778 2,254
Hanil Bank............................................. 1,696 2,151
Daewoo Securities Co., Ltd. ........................... 1,643 2,083
Daewoo Corporation..................................... 1,562 1,980
SsangYong Oil Refining Company Limited................. 1,537 1,949
DACOM Corporation...................................... 1,531 1,941
Korea First Bank....................................... 1,430 1,813
The Commercial Bank of Korea, Ltd. .................... 1,339 1,698
Korea Exchange Bank.................................... 1,295 1,642
Korea Airline Co., Ltd. ............................... 1,239 1,571
Kookmin Bank........................................... 1,235 1,566
Seoul Bank............................................. 1,219 1,546
Kia Motors Corporation................................. 1,186 1,504
SsangYong Cement Industrial Co., Ltd. ................. 1,035 1,312
LG Securities Co., Ltd. ............................... 1,022 1,296
Korea Long Term Credit Bank............................ 1,022 1,296
Daewoo Electronics Co., Ltd. .......................... 956 1,212
Dong Ah Construction Ind. Co., Ltd. ................... 866 1,098
Total(2)............................................... 72,732 94,032
</TABLE>
--------
(1) Under its articles of incorporation, each of KEPCO and POSCO provide for a
1% ceiling on the acquisition by a single investor (including Korean
national and foreign investors) of its common shares.
(2) Amounts may not add up due to rounding.
Source: Korea Stock Exchange, Fact Book, 1995; Stock, June 1995.
28
<PAGE>
SECTORAL DISTRIBUTION OF LISTED COMPANIES AT MAY 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF MARKET VALUE MARKET
COMPANIES (WON BILLIONS) SHARE(1)
--------- -------------- ----------
<S> <C> <C> <C>
Fishing.................................... 3 68.5 0.0
Mining..................................... 3 186.4 0.1
Foods & Beverages.......................... 47 3,157.3 2.3
Textile, Wearing Apparel & Leather......... 63 4,889.1 3.6
Luggage, Handbags, Saddlery, Harness and
Footwear.................................. 12 393.0 0.2
Wood & Wood Products....................... 4 226.9 0.1
Paper & Paper Products..................... 24 1,822.7 1.3
Publishing, Printing, Reproduction of Re-
corded Media.............................. 3 144.3 0.1
Chemicals, Petroleum, Coal & Rubber........ 104 12,105.7 9.0
Non-metallic Mineral....................... 26 2,803.7 2.1
Basic metals............................... 38 10,183.4 7.6
Fabricated metals & Machinery.............. 151 31,477.4 23.6
Other Products............................. 10 318.6 0.2
Electricity & Gas.......................... 3 17,675.0 13.2
Construction............................... 51 8,103.4 6.0
Wholesale Trade............................ 38 4,357.8 3.2
Retail Trade............................... 8 1,125.7 0.8
Hotels & Restaurants....................... 1 205.5 0.1
Transport & Storage........................ 14 2,656.0 1.9
Communication.............................. 2 3,872.5 2.9
Financial Institutions..................... 83 25,687.4 19.2
Insurance.................................. 12 1,893.3 1.4
Recreational and Cultural Services......... 1 4.8 0.0
Total...................................... 701 133,358.4 100.0
</TABLE>
--------
(1) Amounts may not add up due to rounding.
Source: Korea Stock Exchange, Stock, June 1995.
BOND MARKET
The Korean listed bond market 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 to promote the development of the
bond and equity markets. The Korean bond market is comprised of corporate
bonds issued by Korean corporations and public bonds including government
bonds, municipal bonds issued by city governments and special bonds issued by
government-run corporations. The majority of corporate bonds are guaranteed by
banking institutions. As of May 31, 1995, the total amount of listed public
bonds and listed corporate bonds was W 66.3 trillion and W 49.2 trillion,
respectively. The following table illustrates the total amount in Won of all
bond issues listed on the Exchange for 1986 through 1994 and for 1995 through
May 31.
29
<PAGE>
TOTAL BOND ISSUES
(WON BILLIONS)
<TABLE>
<CAPTION>
LISTED LISTED
PUBLIC BONDS CORPORATE BONDS TOTAL(1)
------------ --------------- ---------
<S> <C> <C> <C>
1986.................................. 8,638.2 8,474.3 17,112.6
1987.................................. 15,033.8 9,972.9 25,006.7
1988.................................. 22,159.0 11,521.0 33,680.1
1989.................................. 28,094.7 15,395.5 43,490.1
1990.................................. 29,049.1 22,068.2 51,117.3
1991.................................. 32,249.7 29,241.0 61,490.7
1992.................................. 32,446.5 32,696.6 65,143.2
1993.................................. 41,359.1 37,573.6 78,932.7
1994.................................. 56,620.7 45,876.4 102,497.1
1995(2)............................... 66,307.0 49,199.2 115,506.2
</TABLE>
--------
(1) Amounts may not add up due to rounding.
(2) January 1 through May 31, 1995.
Source: Korea Stock Exchange, Stock, June 1995.
The secondary market in bonds listed on the Exchange has been relatively
inactive compared to equity securities listed on the Exchange. In 1994, the
value of bonds traded on the Exchange was W 1.2 trillion compared to the value
of equity securities traded which was W 229.8 trillion. There is also an active
over-the-counter market in certain non-listed bonds. Currently, foreign
investors are not permitted to invest in listed or unlisted Won denominated
bonds, except for Exchange-listed non-guaranteed convertible bonds of small-
and medium-sized companies and certain low-interest rate government or public
bonds to be designated from time to time by the KSEC; however, Korean branches
and subsidiaries of certain foreign financial institutions are permitted to
invest in listed Won-denominated bonds. The following table illustrates the
trading volume of bonds listed on the Exchange for 1986 through 1994 and for
1995 through May 31.
BOND TRADING VOLUME
(WON BILLIONS)
<TABLE>
<CAPTION>
PUBLIC BONDS CORPORATE BONDS TOTAL(1)
------------ --------------- --------
<S> <C> <C> <C>
1986................................... 1,001.2 2,165.7 3,166.9
1987................................... 5,326.8 1,911.6 7,238.3
1988................................... 7,000.7 1,544.6 8,545.3
1989................................... 4,377.7 771.4 5,149.1
1990................................... 2,455.0 795.3 3,250.3
1991................................... 1,393.7 704.1 2,097.8
1992................................... 452.5 152.5 605.0
1993................................... 3.8 1.8 5.5
1994................................... 24.5 1,144.5 1,168.9
1995(2)................................ 13.1 214.4 227.5
</TABLE>
--------
(1) Amounts may not add up due to rounding.
(2) January 1, through May 31, 1995.
Source: Korean Stock Exchange, Stock, June 1995.
30
<PAGE>
THE REPUBLIC OF KOREA
BACKGROUND
AREA AND POPULATION. Korea, which was founded on August 15, 1948, occupies
approximately 38,270 square miles (99,300 square kilometers) of the southern
portion of the Korean peninsula. It is bordered to the north by North Korea and
to the east, west and south by the East Sea, the Yellow Sea and the Korean
Strait, respectively. Korea's present border with North Korea was determined as
a result of the armistice that ended the Korean War (1950-1953), which
established a demilitarized zone near the 38th parallel that separates Korea
and North Korea. The population of Korea is approximately 44.8 million. Seoul,
the capital, has a population of approximately 10.6 million.
GOVERNMENT. Governmental authority in Korea is highly centralized and is
concentrated in a strong presidency. The President, who is the Chief of State
and head of the government, is also Chairman of the State Council (cabinet)
which consists of the Prime Minister, who is appointed by the President with
the consent of the National Assembly, and other members appointed by the
President on the recommendation of the Prime Minister. The Prime Minister, by
order of the President, is responsible for the overall coordination of the
various ministries and agencies. The President has the right to veto new
legislation and to take emergency measures in case of natural disaster, serious
fiscal or economic crisis, a state of war or a similar condition. The present
Constitution provides that the President is elected by popular vote for a term
of five years, after which he may not be reelected. The current President is
Kim Young Sam, who was elected in December 1992. President Kim has emphasized
reform and liberalization of politics and deregulation and revitalization of
the economy of Korea.
Legislative power is vested in the National Assembly. Approximately four-
fifths of the members of the National Assembly are elected by popular vote for
a term of four years. The remaining seats are generally distributed
proportionately among parties winning 5% or more of votes or 5 or more seats in
the direct election. The National Assembly enacts laws and approves treaties
and the national budget. Judicial power in Korea is vested in the Supreme
Court, the Constitutional Court, and other lower courts at various levels.
The two primary political parties in Korea are the Democratic Liberal Party
("DLP") led by President Kim, and the opposition party, the Democratic Party
("DP"). The last National Assembly elections were held in March 1992 and the
next election is scheduled to be held in 1996. As of August 31, 1994, the DLP
and DP held 176 and 97 seats in the National Assembly, respectively. The
remaining 26 seats were held by others.
INTERNATIONAL RELATIONS. Korea maintains diplomatic relations with most
nations, but its strongest ties are with the United States. Korea and the
United States have entered into several agreements designed to promote Korea's
economy and a mutual defense treaty. Korea also maintains strong ties with
Japan, and Japan constitutes Korea's leading source of imported capital goods,
technology and foreign direct investment and provided 58.6% of foreign visitors
to Korea in 1994. Since the beginning of 1989, Korea has established diplomatic
relations with Bulgaria, the Czech Republic, Slovakia, Hungary, Mongolia,
Poland, Romania, Russia, the Federal Republic of Yugoslavia and Croatia. A
Chinese trade office was established in Seoul in April 1991, and diplomatic
relations with the Peoples's Republic of China were officially established in
August 1992.
Relations between Korea and North Korea have been tense since the end of
World War II. North Korea maintains a regular army estimated at close to one
million, compared with the Korean army of 520,000. The majority of both forces
are concentrated on either side of the demilitarized zone in a state of
military readiness. The United States maintains a military force of
approximately 36,000 in Korea.
Tension between Korea and North Korea was temporarily eased in 1972 when the
first moves towards conciliation and eventual reunification were initiated. The
talks broke down at an early stage and efforts to revive them during 1979-80
were unsuccessful. Since 1984 there has been intermittent contact between the
31
<PAGE>
two countries, consisting mainly of a series of talks on economic relations,
humanitarian issues, unified sports teams and the possibility of the two heads
of state and their legislatures meeting with one another. However, until
recently these talks yielded only minimal results. On December 13, 1991, the
leaders of North Korea and Korea signed an Agreement on Reconciliation,
Nonaggression and Exchange and Cooperation. This agreement was put into force
on February 19, 1992. Tensions between North Korea and Korea increased
following the announcement in March 1993 by North Korea of its intention to
withdraw from participation in the Nuclear Non-Proliferation Treaty and its
cancellation of an invitation to inspectors of the International Atomic Energy
Agency ("IAEA").
In October 1994, North Korea signed an accord in Geneva in which it agreed to
stop the development of nuclear weapons in exchange for the development of
nuclear power plants. On June 13, 1995, a multi-national consortium led by the
United States agreed to provide North Korea with two nuclear reactors and moved
toward selecting Korea's state-controlled electric utility as the prime
contractor in the project. Korea has agreed to provide most of the $4 billion
cost for the reactors. In September 1995, inspectors for the IAEA started to
monitor North Korea's nuclear freeze. It is still not clear whether this
cooperation between North Korea and Korea and further implementation of the
Geneva accord will reduce the tension between the two countries.
Both Korea and North Korea were admitted as members of the United Nations on
September 17, 1991. In addition, Korea is a member of a number of international
organizations, including the Asian Development Bank, the International Bank for
Reconstruction and Development (The World Bank), the International Development
Association, the International Monetary Fund and the International Finance
Corporation. It is also a party to the General Agreement on Tariffs and Trade.
DOMESTIC ECONOMY
GENERAL. Korean industry and commerce are predominately privately owned and
operated. However, the Korean government is 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 Korean government through its controls of approvals and licenses and
through the allocation of credit. However, such government influence has
gradually diminished through deregulation and market self-regulation, in
keeping with Korea's liberalization policy.
Primary responsibility for formulating Korea's economic policies, including
the development and implementation of a series of successive economic and
social development plans (the "Economic Plans") which have guided economic
policy since 1962, is with the government's Economic Planning Board, headed by
the Deputy Prime Minister. The emphasis of the Economic Plans has changed from
the development of import substitution industries and the infrastructure to a
focus on economic stabilization, liberalization of the economy, reduction of
restrictions on direct foreign investment and improvements in social
conditions. Since the establishment of the Economic Plans, Korea has made
significant progress toward the transformation of its economy from one
characterized by agricultural production and the export of raw materials,
textiles and clothing to that of a modern industrial state. Korea's exports now
include ships, motor vehicles, integrated circuits and consumer electronics.
The Korean government announced in early 1993 economic reform and development
programs to be implemented in a new Five Year Economic Plan for the period
through 1997. Pursuant to this plan, the government will promote fiscal,
financial and administrative reforms and changes in prevailing patterns of
economic behavior. The new plan is also intended to promote stable growth and
globalization of the Korean economy and to improve the quality of life in
Korea.
GROSS NATIONAL PRODUCT. The Korean economy has been characterized in recent
years by growth. In 1990 and 1991, the GNP growth rate was 9.6% and 9.1%,
respectively, due in part to increased domestic demand. In 1992, 1993 and 1994,
GNP grew at a rate of 5.0%, 5.8% and 8.2%, respectively, based on preliminary
figures released by The Bank of Korea and the Exchange.
32
<PAGE>
The following table shows the composition of Korea's GNP at current market
prices and the GNP at constant 1990 market prices from 1990 to 1994.
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994(1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross National Product
at Current Market
Prices:
Private Consumption... 96,387.7 115,042.8 129,735.2 143,721.7 164,212.1
General Government
Consumption.......... 18,187.0 22,169.5 26,110.3 28,745.9 32,482.9
Gross Domestic Fixed
Capital Formation.... 66,568.7 82,946.5 87,907.0 96,218.5 109,374.1
Increase in Stocks.... (270.0) 973.0 35.2 (2,511.7) 198.5
Exports of Goods and
Services............. 53,467.0 60,735.0 69,432.7 78,162.6 91,780.1
Less Imports of Goods
and Services......... (54,417.2) (66,049.7) (71,840.0) (76,970.7) (94,313.2)
Statistical
Discrepancy.......... (384.3) (82.6) (988.2) (220.4) 1,273.2
--------- --------- --------- --------- ---------
Expenditures on Gross
Domestic Product..... 179,539.0 215,734.4 240,392.2 267,146.0 305,007.7
Net Factor Income from
the Rest of the
World................ (1,276.9) (1,494.5) (1,687.6) (1,628.1) (2,140.7)
--------- --------- --------- --------- ---------
Total............... 178,262.1 214,239.9 238,704.6 265,517.9 302,867.0
Gross National Product
at Constant 1990 Market
Prices................. 178,262.1 194,458.8 204,231.0 216,162.4 233,940.2
Percentage increase of
GNP over Previous Years
At Current Prices..... 20.5% 20.2% 11.4% 11.2% 14.1%
At Constant 1990 Mar-
ket Prices........... 9.6% 9.1% 5.0% 5.8% 8.2%
</TABLE>
--------
(1) Preliminary
Source: The Bank of Korea, Monthly Bulletin, April 1995; Securities Supervisory
Board, Monthly Review, May 1995.
The high rate of growth of the Korean economy was due to rapid growth in the
exports of goods and services and in domestic fixed capital formation. The
former grew 17.4% and the latter at 13.7% from 1993 to 1994. The growth in the
volume of exports has been achieved by geographical diversification of markets
and a shift in emphasis in the composition of exports from agricultural
products, raw materials and textile products to manufactured goods,
particularly electronics products, ships, machinery and steel. In 1989 and
1990, as growth in exports slowed, construction expenditures and private
consumption expenditures increased, primarily as a result of the steady
increase in income levels and the demand for housing and consumption goods,
particularly consumer durables such as passenger cars and household electric
appliances. In 1991, export growth was slower than the increase in imports, and
Korea's trade deficit grew to U.S. $7 billion while its balance on current
account registered a shortfall of U.S. $8.7 billion. A recession during the
second half of 1992 restricted import growth to 1%, cut the current account
deficit to U.S. $4.6 billion and
33
<PAGE>
cut the trade deficit to U.S. to $2.1 billion. By the first half of 1993, a
rise in exports and a decline in imports virtually eliminated Korea's
merchandise trade deficit. Although Korea's leading export groups, clothing and
footwear comprising 10% of Korea's exports in 1992, experienced a decline in
1993, the introduction of new export lines and growth in existing export groups
mitigated the effects of the decrease by outpacing the growth rate of imports.
See "Foreign Trade and Balance of Payments--Foreign Trade." The following table
sets forth the composition of Korea's GNP in current prices for the years 1989
to 1994.
<TABLE>
<CAPTION>
AT CURRENT PRICES
----------------------------------------------------------------
1989 1990 1991 1992 1993 1994(1)
--------- --------- --------- --------- --------- ---------
(IN BILLION WON)
<S> <C> <C> <C> <C> <C> <C>
Industries.............. 135,329.7 161,785.3 195,304.1 218,101.8 241,549.4 275,238.2
Agriculture, Forestry
and fishing........... 14,380.6 15,592.4 16,549.8 17,805.8 18,832.5 21,499.9
Mining and quarrying... 992.0 1,025.0 1,142.4 928.5 902.1 1,010.4
Manufacturing.......... 46,252.9 52,351.0 61,527.3 66,710.1 72,158.5 81,991.1
Electricity, gas and
water................. 3,731.5 3,888.7 4,506.7 5,285.2 6,194.5 7,070.3
Construction........... 13,358.2 20,736.6 30,035.3 32,870.6 37,005.9 41,026.2
Wholesale & retail
trade, restaurant &
hotels................ 19,822.0 23,110.6 26,419.5 28,802.6 31,187.6 35,603.1
Transport, storage &
communication......... 10,328.1 12,017.3 14,356.7 16,390.1 19,112.2 22,629.3
Finance, insurance,
real estate &
business services..... 21,302.1 26,801.0 33,052.3 39,923.0 45,481.4 52,119.5
Community, social &
personal services..... 5,162.2 1,262.7 7,714.1 9,385.7 10,674.9 12,288.4
Producers of government
services............... 10,788.4 13,097.8 15,898.0 18,824.3 21,231.8 24,211.9
Public administration
& defence............. 5,984.4 7,386.0 8,995.1 10,616.1 11,876.6 13,315.7
Social, recreational &
related community
services.............. 4,727.9 5,619.6 6,788.7 8,053.5 9,178.2 10,696.2
Others................. 76.0 92.2 114.2 154.6 176.9 200.1
Producers of private
non-profit services to
households............. 3,538.8 4,257.6 4,984.0 6,142.4 6,908.9 7,870.2
Import duties........... 5,109.7 6,859.0 7,148.7 7,212.0 7,397.4 8,812.3
(less) Imputed bank
service charges........ 5,601.9 6,460.7 7,600.4 9,888.3 9,941.5 11,124.8
Gross domestic product.. 149,164.7 79,539.0 215,734.4 240,392.2 267,146.0 305,007.7
Net factor income from
the rest of the world.. (1,223.1) (1,276.9) (1,494.5) (1,687.6) (1,628.1) (2,140.7)
--------- --------- --------- --------- --------- ---------
Gross national
product............. 147,941.6 178,262.1 214,239.9 238,704.6 265,517.9 302,867.0
========= ========= ========= ========= ========= =========
</TABLE>
--------
(1) Preliminary
Source: The Bank of Korea, Monthly Bulletin, April 1995.
PRICES, WAGES AND EMPLOYMENT. During the 1960's and early 1970's, Korea
experienced a period of increasingly high inflation rates. Government measures
successfully reduced inflation rates and from 1982 to 1987, and inflation, as
measured by the Consumer Price Index, increased by an average of 2.8%.
Thereafter, however, inflation, as measured by the Consumer Price Index, began
to accelerate from 3.0% in 1987 to 7.1% in 1988. In 1989, the inflation rate,
as measured by the Consumer Price Index, decreased to 5.7% but increased in
1990 to 8.6% and 9.3% in 1991. In recent years, the inflation rate, as measured
by the Consumer Price Index, decreased to 6.2% in 1992, 4.8% in 1993 and 6.2%
in 1994.
34
<PAGE>
The recent increased acceleration in inflation rates has been caused in part
by wage increases. Until recently, the Korean labor movement was constrained by
labor laws and policies which limited the ability of workers and their unions
to take collective action. In December 1986 and November 1987, these laws were
amended, relaxing constraints on the formation of democratic unions and the
staging of strikes. During 1988 and 1989, backed by stronger unions, the Korean
work force won significant wage concessions as workers demanded higher pay to
compensate for increases in productivity achieved during the 1980's. Labor
disputes in Korea have decreased since 1990. Since 1988, wages have increased
sharply. Monthly wages in all industries rose 15.5% in 1988, 21.1% in 1989,
18.8% in 1990, 17.5% in 1991, 15.2% in 1992, 12.2% in 1993 and 12.7% in 1994.
These wage increases can be compared with increases in productivity of 10.3% in
1988, 7.5% in 1989, 12.7% in 1990, 13.8% in 1991, 10.7% in 1992, 7.0% in 1993
and 7.6% in 1994.
Korea's labor force is one of the economy's principal assets. In the period
from 1989 to 1994, the economically active population of Korea increased by
12.8% to 20.3 million, while the number of employees increased 13.0% to 19.8
million. The economically active population over 15 years old as a percentage
of the total population over 15 years old has remained fairly stable at between
58% and 62% over the past decade. The labor force is well-educated, with
literacy being almost universal among workers under 50.
The following table shows selected price and unemployment rate indices for
the periods indicated.
<TABLE>
<CAPTION>
INCREASE INCREASE
PRODUCER OVER CONSUMER OVER
PRICE PREVIOUS PRICE PREVIOUS UNEMPLOYMENT
INDEX(1) YEAR INDEX(1) YEAR RATE(1)(2)
----------- -------- ----------- -------- ------------
(1990 = 100) (%) (1990 = 100) (%) (%)
<S> <C> <C> <C> <C> <C>
1989.................. 96.0 1.5 92.1 5.7 2.6
1990.................. 100.0 4.2 100.0 8.6 2.4
1991.................. 104.7 4.7 109.3 9.3 2.3
1992.................. 107.0 2.2 116.1 6.2 2.4
1993.................. 108.6 1.5 121.7 4.8 2.8
1994.................. 111.6 7.0 129.3 6.2 2.4
</TABLE>
--------
(1) Average for year.
(2) Expressed as a percentage of the economically active population.
Source: National Statistical Office, Major Statistics of Korean Economy,
February 1995; National Statistical Office, Monthly Statistics of Korea, April
1995; The Bank of Korea, Monthly Bulletin, April 1995.
INDUSTRY. Industrial production increased by 3.3% in 1989, 8.8% in 1990, 9.6%
in 1991, 5.8% in 1992, 4.4% in 1993 and 11.1% in 1994. See "Foreign Trade and
Balance of Payments--Foreign Trade."
35
<PAGE>
The following table sets forth indices of industrial production for various
products from 1989 through 1994 and their relative contribution to total
industrial production.
INDUSTRIAL PRODUCTION
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Mining............................... 109.7 100.0 99.8 85.9 79.9 78.7
Coal................................ 116.2 100.0 84.4 66.6 51.6 39.4
Metal Ores.......................... 117.2 100.0 94.8 95.8 69.3 43.4
Other Mining & Quarrying............ 97.4 100.0 117.6 107.3 112.9 125.8
Manufacturing........................ 91.8 100.0 109.7 116.2 121.1 134.4
Food Products & Beverages........... 94.3 100.0 108.6 110.9 112.7 122.1
Tobacco Products.................... 94.2 100.0 101.1 104.7 107.2 101.9
Textiles............................ 100.8 100.0 98.1 94.6 86.5 86.2
Wearing Apparel & Fur Articles...... 103.5 100.0 95.1 86.5 73.3 76.8
Leather, Luggage, Handbags &
Footwear........................... 93.2 100.0 93.4 86.5 66.0 55.8
Wood & Products of Wood and Cork... 96.2 100.0 108.2 103.0 85.6 88.3
Pulp, Paper & Paper Products....... 94.9 100.0 103.9 110.5 119.5 133.7
Publishing, Printing & Reproduction
of Record Media................... 92.2 100.0 103.1 114.6 110.6 120.9
Coke, Refined Petroleum Products &
Nuclear Fuel...................... 93.6 100.0 128.8 164.0 179.4 184.1
Chemicals & Chemical Products...... 86.6 100.0 116.3 138.1 152.3 164.9
Rubber & Plastic Products.......... 96.4 100.0 108.3 114.8 119.9 129.7
Non-Metallic Mineral Products...... 93.2 100.0 116.0 123.6 124.7 134.1
Basic Metals....................... 89.4 100.0 110.8 115.9 129.0 139.9
Fabricated Metal Products.......... 92.7 100.0 108.1 103.2 102.4 118.1
Machinery & Equipment, n.e.c....... 89.7 100.0 110.7 107.6 114.4 133.6
Office, Accounting & Computing
Machinery......................... 89.6 100.0 104.9 112.3 139.9 190.0
Electrical Machinery & Apparatus,
n.e.c............................. 83.4 100.0 108.1 115.6 121.4 136.7
Radio, Television & Communication
Equipment......................... 92.2 100.0 115.4 125.4 136.3 167.5
Medical Precision & Optical
Instrument, Watches............... 104.0 100.0 105.8 106.1 118.0 135.9
Motor Vehicles & Trailers.......... 80.8 100.0 115.4 131.4 153.2 183.3
Other Transport Equipment.......... 89.7 100.0 118.0 147.3 136.3 148.2
Furniture and Manufacturing n.e.c.. 102.2 100.0 101.6 94.5 87.7 85.8
Electricity and Gas.................. 87.8 100.0 111.3 124.4 139.2 160.5
Electricity........................ 87.8 100.0 110.2 121.6 134.2 153.3
Gas................................ -- 100.0 152.4 219.6 315.3 410.6
All Items............................ 91.9 100.0 109.6 116.0 121.1 134.5
Percentage Increase of All Items
Over Previous Year................ 3.3% 8.8% 9.6% 5.8% 4.4% 11.1%
</TABLE>
--------
Source: National Statistical Office, Major Statistics of Korea, June 1995.
36
<PAGE>
MANUFACTURING. The manufacturing sector has been the most rapidly growing
sector of Korea's economy in recent years. In 1992, 1993 and 1994 the
production of manufactured goods increased 5.9%, 4.2% and 11.0%, respectively,
as a result of overall slow economic growth. Performance within the
manufacturing sector has been particularly strong in electronics and heavy
industries (iron and steel, machinery and automobiles), reflecting the relative
importance attached to import substitution and export competition in these
products. Performance has also been strong in the petrochemical, semiconductor
and automobile industries, which have experienced strong growth in domestic and
overseas markets.
The electronics industry grew at an average annual rate of approximately
13.6% during the period 1988 to 1993. This growth may be traced to both
domestic and overseas demand, as well as to encouragement by the Korean
government of technology through tax incentives, loans at favorable interest
rates and tariff protection. Korea is among the world's largest producers of
electronic products and semiconductors. The electronics goods produced in Korea
include personal computers, videocassette recorders and compact disc players.
Supported by large increases in domestic demand for steel due to the growth
of other heavy industry and large scale public investment in road, harbor and
housing construction, steel production increased from 13.5 million tons in 1988
to 33.0 million tons in 1993. This growth has been achieved in large part by
the expansion of POSCO's integrated facilities, which in 1994 produced 21.6
million tons of crude steel. These increases in production have permitted a
substantial increase in iron and steel exports.
The Korean automobile industry has grown significantly from 1984 to 1993. In
1984, the Hyundai Motor Co., Korea's leading car manufacturer, began exporting
cars to Canada and in 1986 shipped its first cars to the United States. Daewoo
Motors began exporting cars to the United States in 1987, and Kia Motors began
exporting cars to the United States in 1988. Recently, exports to Europe and
Asia have become increasingly important as United States demand for Korean cars
has declined. The domestic market for cars has increased as incomes have risen.
Total passenger car production amounted to 1,592,669 units in 1993, compared
with 1,259,500 units in 1992 and 166,759 in 1984.
CONSTRUCTION. The construction industry has become one of the major
industries in Korea, growing 12.6% in 1993 and 10.8% in 1994. The recent
decline in overseas construction has been offset by the growth of domestic
construction markets. Domestically, orders rose to W 25,569.4 billion in 1991,
W 27,861.0 billion in 1992, W 33,246.5 billion in 1993 and W 37,197.1 billion
in 1994.
AGRICULTURE, FORESTRY AND FISHERIES. The contribution of agriculture,
forestry and fisheries to Korea's GNP has declined from 10.7% in 1988 to 7.1%
in 1994. The Korean government's agricultural policy emphasizes increasing
grain production, the development of irrigation systems, land consolidation and
reclamation, seed improvement, mechanization measures to combat drought and
flood damage, and increasing agricultural incomes. The government has
encouraged the development of the fishing industry by encouraging the building
of large fishing vessels, and the modernization of fishing equipment, marketing
techniques and distribution outlets.
ENERGY
Korea 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 on the Korean economy and adversely affect Korea's
balance of trade. See "Foreign Trade and Balance of Payments--Foreign Trade."
The following table shows Korea's reliance on imported energy for the years
1985 to 1994.
37
<PAGE>
RELIANCE ON IMPORTED ENERGY
<TABLE>
<CAPTION>
TOTAL RELIANCE
DEMAND IMPORTS RATIO
------------ ------------ -------------
(IN MILLION TONS OF OIL EQUIVALENTS)
<S> <C> <C> <C>
1985.................................. 56.3 42.9 76.2%
1986.................................. 61.5 48.1 78.2%
1987.................................. 67.9 54.3 80.0%
1988.................................. 75.4 62.7 83.2%
1989.................................. 81.7 69.8 85.5%
1990.................................. 93.2 81.9 87.9%
1991.................................. 103.6 94.6 91.3%
1992.................................. 116.0 108.5 93.6%
1993.................................. 126.9 120.2 94.8%
</TABLE>
--------
Source: National Statistical Office, Major Statistics of Korean Economy,
February 1995.
To reduce its dependence on oil imports, the Korean government encouraged
efforts to implement an energy source diversification program, with primary
emphasis on nuclear energy. The total Korean nuclear power generating capacity
at the end of 1994 was 58,650 megawatts, accounting for 35.5% of total annual
power generation. The following table sets out the principal primary sources of
energy consumed in Korea, expressed in million tons of oil equivalents and as a
percentage of total energy consumption, for the period 1985 to 1994.
CONSUMPTION OF PRIMARY ENERGY SOURCES
<TABLE>
<CAPTION>
COAL PETROLEUM NUCLEAR OTHER TOTAL(1)
------------- ------------- ------------- ------------ --------------
QUANTITY % QUANTITY % QUANTITY % QUANTITY % QUANTITY %
-------- ---- -------- ---- -------- ---- -------- --- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985..... 22.0 39.1 27.1 48.2 4.2 7.4 2.9 5.3 56.3 100.0
1986..... 23.3 38.0 28.5 46.4 7.1 11.5 2.6 4.2 61.5 100.0
1987..... 23.6 34.8 29.7 43.7 9.8 14.5 4.8 7.0 67.9 100.0
1988..... 25.2 33.4 35.4 47.0 10.0 13.3 4.8 6.3 75.4 100.0
1989..... 24.5 30.0 40.5 49.6 11.8 14.5 4.8 5.9 81.7 100.0
1990..... 24.4 26.2 50.2 53.8 13.2 14.2 5.4 5.8 93.2 100.0
1991..... 24.5 23.7 59.6 57.5 14.1 13.6 5.4 5.2 103.6 100.0
1992..... 23.6 20.4 71.7 61.8 14.1 12.2 6.5 5.5 116.0 100.0
1993..... 25.8 20.4 78.5 61.9 14.5 11.5 7.9 6.3 126.9 100.0
</TABLE>
--------
(1) Amounts may not add up due to rounding.
Source: National Statistical Office, Major Statistics of Korean Economy,
February 1995.
THE FINANCIAL SECTOR
Korea's financial sector has developed along with the economy and today
comprises a banking system, a range of non-banking financial institutions, and
the securities markets.
Korean financial institutions may be divided into two main categories:
monetary institutions and other financial institutions. Monetary institutions
are comprised of The Bank of Korea and deposit taking banks. Deposit taking
banks are in turn divided into commercial banks and specialized banks according
to their legal status and the banking businesses in which they may engage.
38
<PAGE>
Commercial banks are classified into city banks, regional banks and foreign
bank branches. City banks engage in both domestic and foreign business and are
owned by the private sector. Regional banks perform similar functions to the
city banks.
Specialized banks are established by statutes and currently include: The
Industrial Bank of Korea, The Korea Housing Bank, National Agricultural
Cooperative Federation, The National Federation of Fisheries Cooperatives and
National Livestock Cooperative Federation.
Other financial institutions are divided into development institutions,
investment institutions, savings institutions and insurance institutions.
Development institutions include The Korea Development Bank, The Export-Import
Bank of Korea and the Korea Long Term Credit Bank. There are 15 investment and
finance companies and 15 joint-venture merchant banks. The financial sector
also includes a number of domestic and foreign insurance companies and mutual
savings companies.
In addition to the 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 addition, the law to introduce the real-name system for real estate
transactions was enacted and became effective July 1, 1995. The main purpose
of the law is to discourage real estate speculation and to prevent property
taxes from rising out of control. The law bans the current practice of
borrowing names for property registration, thereby avoiding taxes.
MONETARY POLICY. The Bank of Korea, which was established in 1950, is
Korea's central bank and sole currency issuing bank. Monetary and credit
policies of The Bank of Korea are formulated and controlled by a nine-member
Monetary Board comprised of the Minister of Finance and Economy, the Governor
of The Bank of Korea and seven other members. The Monetary Board regulates the
activities of banking institutions and sets and implements monetary policy.
Although The Bank of Korea has primary responsibility for monetary policy,
the Korean government, through the MFE, exerts considerable influence on
monetary policy. For example, the MFE has the power to request the
reconsideration of resolutions adopted by the Monetary Board and, if such a
request is rejected by the Monetary Board, the President has the authority to
override the Monetary Board's decision.
Monetary policy is implemented by influencing the reserve positions of
banking institutions, principally through changes in the terms and conditions
of discounts, open market operations and changes in reserve requirements. 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 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.
Effective December 5, 1988, the Korean government deregulated interest rates
on loans (other than loans entailing government subsidies) and deposits
(including money market instruments such as certain categories of commercial
paper, certificates of deposit, bank debentures, corporate bonds, cash
management accounts and development trust funds, but excluding traditional
time deposits and savings deposits).
In August 1991, the Monetary Board adopted a four-stage interest rate
deregulation plan in furtherance of the deregulation process. Pursuant to such
plan, in 1991 the Korean government deregulated interest rates on other
financial products, including certain time deposits.
On June 30, 1993, the MFE announced a three-phase liberalization plan. The
principal proposals under such phase relate to interest rate deregulation
(which is to accelerate the 1991 plan above), improvement of monetary control
measures and the development of money markets, improvement of credit control
39
<PAGE>
management, and foreign exchange and capital market liberalization. Each area
of deregulation is to be phased in under three stages from 1993 to 1997.
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. The 1994 plan
provides that in 1995 interest rates will be liberalized for other short-term
money market instruments and Bank of Korea-supported policy loans, in 1996
interest rates will be liberalized for all deposits other than demand deposits,
and beginning in 1997 limitations on interest rates for demand deposits
gradually will be lifted.
MONEY SUPPLY. From 1983 to 1984, the Korean government, in an effort to
consolidate a foundation for price stability, maintained a tight control of
monetary aggregates. However, as economic growth slowed in 1985, the government
reversed its tight monetary policy and money supply increased 15.6% in 1985. In
response to greatly expanded economic activity, the money supply increased at a
rate of 18.4% in 1986, 19.1% in 1987, 21.5% in 1988, 19.8% in 1989, 17.2% in
1990, 21.9% in 1991, 14.9% in 1992, 16.6% in 1993 and 18.7% in 1994.
The following table shows the volume of the money supply for each year during
the period 1989 to 1994.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
-------- -------- -------- -------- --------- ---------
(WON BILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Money Supply............ 14,329.0 15,905.3 21,752.4 24,586.3 29,041.4 32,510.6
Quasi-money (1)......... 44,309.0 52,803.2 61,993.6 71,672.2 83,177.8 100,668.1
-------- -------- -------- -------- --------- ---------
Money Supply (2)(3)..... 58,638.0 68,707.5 83,745.9 96,258.6 112,219.2 133,178.7
======== ======== ======== ======== ========= =========
Percentage increase over
previous year.......... 19.8% 17.2% 21.9% 14.9% 16.6% 18.7%
</TABLE>
--------
(1) Comprised of time and savings deposits and residents' deposits in foreign
currencies.
(2) Money Supply is the sum of currency in circulation, demand deposits and
quasi-money.
(3) Amounts may not add up due to rounding.
Source: National Statistical Office, Major Statistics of Korean Economy,
February 1995; National Statistical Office, Monthly Statistics of Korea, May
1995; The Bank of Korea, Monthly Bulletin, April 1995.
FOREIGN TRADE AND BALANCE OF PAYMENTS
FOREIGN TRADE. Foreign trade is vital to the Korean economy, which lacks
natural resources and must rely on extensive trading activity as a base for
growth. Virtually all domestic requirements for petroleum, wood and rubber are
imported, as are much of Korea's requirements for coal and iron ore. Exports
constitute a high percentage of Korea's GNP, and the international economic
environment is, accordingly, of crucial importance to Korea's economy.
Korea's trade balance has been highly sensitive to world crude oil prices.
The country's trade deficit reached US $4.4 billion in 1979, the year of the
second large oil price rise of the decade. After 1979, Korea's balance of trade
improved. In 1986, Korea recorded the first substantial trade surplus in the
nation's history, amounting to US $4.2 billion. The trade surplus nearly
doubled to US $7.7 billion in 1987 and increased further 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, Korea 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
40
<PAGE>
affected by increases in oil prices that occurred in late 1990 as a result of
the Persian Gulf crisis, increased imports of machinery and other capital goods
and consumer goods, the economic recession in countries constituting important
markets for Korean exports, principally the United States, and increased
competition for Korea's exports in certain markets, principally exports to
Japan from other Asian countries. In 1993 Korea recovered from its trade
deficit, reaching a trade surplus of US $1.9 billion. However, in 1994 Korea
again recorded a trade deficit of US $3.1 billion.
Korea's largest trading partners are the United States and Japan. In 1994,
the United States accounted for approximately 21.4% of total exports and
approximately 21.1% of total imports while Japan accounted for approximately
14.1% of total exports and approximately 24.8% of total imports. Over 85% of
Korea's exports are manufactured goods, machinery and transportation equipment.
Korea's primary imports are commodities such as oil, iron ore, and,
increasingly, consumer durables. From 1979 until the recent Gulf War, world oil
and commodity prices had risen more slowly than inflation rates, and several of
Korea's major imports (including oil, iron ore and coal) experienced price
weakness.
The following tables provide a breakdown of Korea's exports and imports by
major commodity groups from 1988 through 1994 and the geographic distribution
of Korea's foreign trade for each of the years 1989 through 1994.
EXPORTS BY MAJOR COMMODITY GROUPS (F.O.B.)
<TABLE>
<CAPTION>
AS % AS % AS % AS % AS % AS %
OF OF OF OF OF OF
1989 TOTAL 1990 TOTAL 1991 TOTAL 1992 TOTAL 1993 TOTAL 1994 TOTAL
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(U.S. $ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Crude Materials......... 902.0 1.4 990.6 1.5 989.1 1.4 1,072.6 1.4 1,160.0 1.4 1,430.4 1.5
Minerals (Including
Fuels)................. 686.6 1.1 697.2 1.1 1,508.6 2.1 1,742.3 2.3 1,851.7 2.3 1,745.8 1.8
Chemicals............... 2,049.7 3.3 2,511.3 3.9 3,190.0 4.4 4,454.9 5.8 4,921.9 6.0 6,339.2 6.6
Manufactured Goods...... 13,733.9 22.0 14,357.2 22.1 16,078.7 22.4 18,490.8 24.1 20,685.6 25.2 22,949.2 24.0
Machinery and
Transportation
Equipment.............. 23,590.3 37.8 25,544.5 39.3 29,978.3 41.7 32,547.4 42.5 36,950.4 44.9 47,067.5 49.0
Miscellaneous
Manufactured Goods..... 18,970.3 30.4 18,573.3 28.6 17,649.6 24.6 15,883.2 20.7 14,233.3 17.3 13,504.2 14.1
Others.................. 2,444.4 3.9 2,341.6 3.6 2,474.8 3.4 2,440.1 3.2 2,433 3.0 2,976.9 3.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total(1)............... 62,377.2 100.0 65,015.7 100.0 71,870.1 100.0 76,631.5 100.0 82,235.9 100.0 96,013.2 100.0
======== ===== ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
IMPORTS BY MAJOR COMMODITY GROUPS
<TABLE>
<CAPTION>
AS % AS % AS % AS % AS % AS %
OF OF OF OF OF OF
1989 TOTAL 1990 TOTAL 1991 TOTAL 1992 TOTAL 1993 TOTAL 1994 TOTAL
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- --------- -----
(U.S. $ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Crude Materials........ 8,728.2 14.2 8,647.8 12.4 8,900.2 10.9 8,314.9 10.2 8,869.5 10.6 9,404.5 9.2
Minerals (Including
Fuels)................ 7,627.1 12.4 11,023.2 15.8 12,747.9 15.6 14,636.1 17.9 15,052.6 18.0 15,414.5 15.1
Chemicals.............. 7,157.7 11.6 7,433.5 10.6 8,288.6 10.2 7,667.6 9.4 8,234.8 9.8 9,762.8 9.5
Manufactured Goods..... 9,672.2 15.7 10,580.8 15.1 13,461.7 16.5 11,898.4 14.6 12,069.7 14.4 15,936.4 15.6
Machinery and
Transportation
Equipment............. 21,104.8 34.3 23,940.0 34.3 28,250.7 34.7 28,965.7 35.4 28,416.8 33.9 37,408.2 36.5
Miscellaneous
Manufactured Goods.... 3,555.0 5.8 4,241.6 6.1 5,102.9 6.3 5,227.4 6.4 6,147.8 7.3 8,164.6 8.0
Others................. 3,610.2 5.9 3,976.8 5.7 4,772.9 5.9 5,065.2 6.2 5,008.9 6.0 6,257.1 6.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- --------- -----
Total(1).............. 61,464.8 100.0 69,843.7 100.0 81,524.9 100.0 81,775.3 100.0 83,800.1 100.0 102,348.2 100.0
======== ===== ======== ===== ======== ===== ======== ===== ======== ===== ========= =====
</TABLE>
--------
(1) Amounts may not add up due to rounding.
Source: The Bank of Korea, Monthly Bulletin, April 1995.
41
<PAGE>
EXPORTS
<TABLE>
<CAPTION>
COUNTRY 1989 1990 1991 1992 1993 1994
------- ----- ----- ----- ----- ----- -----
(PERCENTAGE OF TOTAL EXPORTS)
<S> <C> <C> <C> <C> <C> <C>
U.S.A. ..................................... 33.1 29.8 25.8 23.6 22.1 21.4
Canada...................................... 3.0 2.7 2.3 2.1 1.7 1.4
United Kingdom.............................. 3.0 2.7 2.5 2.4 2.0 1.9
France...................................... 1.4 1.7 1.6 1.3 1.1 1.0
Germany..................................... 3.4 4.4 4.4 3.8 4.4 4.5
Netherlands................................. 1.2 1.5 1.6 1.3 1.2 1.2
Japan....................................... 21.6 19.4 17.2 15.1 14.1 14.1
Hong Kong................................... 5.4 5.8 6.6 7.7 7.8 8.3
Singapore................................... 2.5 2.8 3.8 4.2 3.8 4.3
All Others.................................. 25.4 29.2 34.2 38.5 41.8 41.9
----- ----- ----- ----- ----- -----
Total..................................... 100.0 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== ===== =====
</TABLE>
IMPORTS
<TABLE>
<CAPTION>
COUNTRY 1989 1990 1991 1992 1993 1994
------- ----- ----- ----- ----- ----- -----
(PERCENTAGE OF TOTAL IMPORTS)
<S> <C> <C> <C> <C> <C> <C>
U.S.A. ..................................... 25.9 24.3 23.2 22.4 21.4 21.1
Canada...................................... 2.7 2.1 2.3 1.9 2.0 2.0
United Kingdom.............................. 1.5 1.8 1.9 1.7 1.7 1.6
France...................................... 1.4 1.8 1.7 1.7 1.8 1.8
Germany..................................... 4.3 4.7 4.5 4.6 4.7 5.0
Netherlands................................. 0.6 0.7 0.6 0.8 0.9 0.8
Japan....................................... 28.4 26.6 25.9 23.8 23.9 24.8
Hong Kong................................... 0.9 0.9 0.9 1.0 1.1 0.6
Singapore................................... 1.0 1.3 1.3 2.2 1.8 1.6
All Others.................................. 33.3 35.8 37.7 39.9 40.7 40.7
----- ----- ----- ----- ----- -----
Total..................................... 100.0 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== ===== =====
</TABLE>
--------
Source: National Statistical Office, Major Statistics of Korean Economy,
February 1995;
National Statistical Office, Monthly Statistics of Korea, April 1995.
The following table summarizes Korea's balance of trade from 1987 through
1994.
BALANCE OF TRADE
<TABLE>
<CAPTION>
BALANCE EXPORTS AS %
EXPORTS (1) IMPORTS (1) OF TRADE OF IMPORTS
----------- ----------- -------- ------------
(US $ MILLIONS)
<S> <C> <C> <C> <C>
1987............................. 46,243.8 38,584.8 7,659.0 119.8
1988............................. 59,648.2 48,202.8 11,445.4 123.7
1989............................. 61,408.7 56,811.5 4,597.2 108.1
1990............................. 63,123.6 65,127.2 (2,003.6) 96.9
1991............................. 69,581.5 76,561.3 (6,979.8) 90.9
1992............................. 75,169.4 77,315.8 (2,146.4) 97.2
1993............................. 80,949.9 79,089.7 1,860.2 102.4
1994(2).......................... 93,676.3 96,757.5 (3,081.2) 96.8
</TABLE>
--------
(1) These entries are derived from trade statistics and are valued on a F.O.B.
basis.
(2) Preliminary.
Source: National Statistical Office, Major Statistics of Korean Economy,
February 1995; The Bank of Korea, Monthly Bulletin, April 1995.
42
<PAGE>
BALANCE OF PAYMENTS. From 1987 to 1989, Korea had a surplus on the current
account of its balance of payments. The surplus increased to US $ 14.2 billion
in 1988 before declining to US $ 5.1 billion in 1989. Korea incurred a deficit
on the current account of its balance of payments of US $ 2.2 billion during
1990, with deficits in the visible and invisible trade balances. In 1990,
exports increased by 2.7% to US $63.1 billion. During the same period imports
increased 14.6% to US $65.1 billion. The invisible trade balance decreased from
a US $211 million surplus in 1989 to a deficit of US $451 million in 1990.
However, the deficit on the current account of its balance of payments
increased to US $8.7 billion in 1991 and US $4.5 billion in 1992. In 1993 Korea
had a surplus on the current account of its balance of payments of US $385
million and in 1994, a deficit of $4.8 billion.
The following table sets forth certain information with respect to Korea's
balance of payments from 1988 through 1994.
BALANCE OF PAYMENTS
<TABLE>
<CAPTION>
CLASSIFICATION 1988 1989 1990 1991 1992 1993 1994(4)
-------------- --------- -------- -------- -------- -------- -------- ---------
(US $ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Current Balance......... 14,160.7 5,054.6 (2,179.4) (8,727.7) (4,528.5) 384.6 (4,777.8)
Trade Balance......... 11,445.4 4,597.2 (2,003.6) (6,979.8) (2,146.4) 1,860.2 (3,081.2)
Exports (1)......... 59,648.2 61,408.7 63,123.6 69,581.5 75,169.4 80,949.2 93,676.3
Imports (1)......... 48,202.8 56,811.5 65,127.2 76,561.3 77,315.8 79,089.7 96,757.5
Invisible Trade
Balance.............. 1,267.2 210.8 (450.6) (1,595.5) (2,614.3) (1,966.8) (2,295.1)
Unrequired Transfers
(Net)................ 1,448.1 246.6 274.8 (152.4) 232.2 491.2 598.5
Long-term Capital
Balance (2)............ (2,732.8) (3,362.5) 547.5 4,185.8 7,232.7 8,899.8 6,133.0
Loans and Investment.. (1,891.7) (1,104.8) 33.3 3,091.2 5,160.3 8,707.3 7,406.8
Others (Net).......... (841.1) (2,257.7) 514.2 1,094.6 2,072.4 192.5 (1,273.8)
Basic Balance........... 11,427.9 1,692.1 (1,631.9) (4,541.9) 2,704.2 9,284.4 1,355.2
Short-term Capital
Balance (2)............ 1,336.3 60.3 3,333.7 41.2 1,109.9 (2,021.2) 2,951.1
Errors and Omissions.... (589.0) 700.7 (1,975.7) 759.9 1,084.0 (721.0) (1,504.1)
Overall Balance......... 12,175.2 2,453.1 (273.9) (3,740.8) 4,898.1 6,542.2 2,802.2
Financial Account (3)... (12,175.2) (2,453.1) 273.9 3,740.8 (4,898.1) (6,542.2) (2,802.2)
Liabilities........... (1,320.0) 966.3 1,486.6 8,429.8 1,947.4 673.7 8,353.4
Assets................ (10,855.2) (3,419.4) (1,212.7) (4,689.0) (6,845.5) (7,215.9) (11,155.6)
</TABLE>
--------
(1) These entries are derived from trade statistics and valued on an F.O.B.
basis.
(2) The distinction between long-term and short-term capital is based on an
original maturity of one year or more.
(3) Includes borrowings from the International Monetary Fund, syndicated bank
loans and short-term borrowings.
(4) Preliminary.
Source: National Statistical Office, Major Statistics of the Korean Economy,
February 1995.
43
<PAGE>
The following table shows Korea's total official reserves as of December 31
for the years 1989 through 1994.
TOTAL OFFICIAL RESERVES
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994(3)
-------- -------- -------- -------- -------- --------
(US $ MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Gold (1)................. 31.6 31.6 32.3 32.6 33.3 33.6
Foreign Exchange (2)..... 14,977.8 14,459.1 13,306.0 16,639.9 19,704.2 25,032.0
Total Gold and Foreign
Exchange................ 15,009.4 14,490.7 13,338.3 16,672.5 19,737.5 25,065.6
Reserve Position at IMF.. 234.2 317.3 364.9 439.3 466.7 530.8
Special Drawings Rights.. 1.6 14.3 29.8 42.1 58.2 76.3
-------- -------- -------- -------- -------- --------
Total Official
Reserves.............. 15,245.2 14,822.4 13,733.0 17,153.9 20,262.4 25,672.7
======== ======== ======== ======== ======== ========
</TABLE>
--------
(1) For this purpose, domestically-owned gold is valued at US $42.22 per troy
ounce (31.1035 grams) and gold deposited overseas is calculated at cost of
purchase.
(2) Since January 1, 1988, foreign exchange holdings of domestic foreign
exchange banks have been excluded.
Source: The Bank of Korea, Monthly Bulletin, April 1995.
EXCHANGE CONTROLS. Only authorized foreign exchange banks are permitted to
effect foreign exchange transactions. Approval by the MFE is required to become
an authorized foreign exchange bank.
Authorization or approval, either by the MFE, The Bank of Korea or authorized
foreign exchange banks, as appropriate, is necessary for overseas remittances,
issuance of international bonds and certain other instruments, overseas
investments and other transactions involving foreign exchange payments in
conformity with the foreign exchange control regulations unless such
authorization or approval is expressly exempted under the regulations.
FOREIGN EXCHANGE
Prior to 1989, The Bank of Korea set daily exchange rates for the Won based
on a trade-weighted multi-currency basket system. This rate was known as The
Bank of Korea concentration base rate. In 1989, the Korean government announced
a three-phase plan to produce a free-floating exchange rate system. The first
phase allowed the domestic banks to decide buying and selling rates of foreign
exchange within narrow limits of The Bank of Korea concentration base rate. In
the second phase, which took effect in March 1990, the trade-weighted multi-
currency basket system was replaced by a system whereby the foreign exchange
rates are determined by averaging the previous day's inter-bank rates settled
through the Korea Financial Telecommunications and Clearings Institute,
weighted by trading volume. This system is known as the market average exchange
rate system. Under this system, foreign exchange rates are permitted to move
each day within narrow ranges on either side of the market average exchange
rates published daily by the Korea Financial Telecommunications and Clearings
Institute. The government recently announced 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.
44
<PAGE>
The following table shows exchange rates (The Bank of Korea concentration
base rate until February 1, 1990 and the market average exchange rate
thereafter) of the Won from 1988 through 1994 and for the first three months of
1995.
EXCHANGE RATE OF THE WON
EXCHANGE RATE
<TABLE>
<CAPTION>
(IN WON PER DOLLAR)
<S> <C>
December 31, 1988......................................................... 684.1
December 31, 1989......................................................... 679.6
December 31, 1990......................................................... 716.4
December 31, 1991......................................................... 760.8
December 31, 1992......................................................... 788.4
December 31, 1993......................................................... 808.1
December 31, 1994......................................................... 788.7
January 31, 1995.......................................................... 786.7
February 28, 1995......................................................... 786.0
March 31, 1995............................................................ 771.5
April 30, 1995............................................................ 761.8
May 31, 1995.............................................................. 761.0
</TABLE>
--------
Source: The Bank of Korea, Monthly Bulletin, June 1995.
The market average exchange rate as of a recent date is set forth on the
inside cover page of the Prospectus.
GOVERNMENT FINANCE
The MFE is responsible for the preparation of the national budget. The fiscal
year commences on January 1, and the budget must be submitted to the National
Assembly for its approval not later than 90 days prior to the commencement of
the fiscal year. Supplementary budgets revising the original budget may be
submitted to the National Assembly for its approval at any time during 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.
45
<PAGE>
The following table sets out government revenues and expenditures, excluding
Special Accounts, for the years 1988 to 1994.
CONSOLIDATED CENTRAL GOVERNMENT REVENUES AND EXPENDITURES
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994(1)
-------- -------- -------- -------- -------- -------- --------
(WON BILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Internal Taxes........ 12,545.1 15,211.0 19,134.2 24,029.8 30,099.1 34.178.2 38,461.5
Customs Duties........ 2,573.3 2,099.1 2,774.5 3,435.3 3,153.4 2,885.9 3,448.9
Defense Surtax........ 2,978.4 3,614.7 4,575.1 1,462.5 329.7 269.1 79.5
Education Surtax...... 512.3 423.4 521.3 816.0 943.2 998.9 1,204.9
Monopoly Profits...... 874.0 74.6 -- -- -- -- --
Agricultural and
Fishery Special Tax.. -- -- -- -- -- -- 185.5
Government Enterprises
Receipts (Net)....... 331.5 408.3 590.5 810.2 1,042.2 902.3 1,078.9
Others................ 4,133.9 7,016.8 6,942.7 8,774.7 10,699.1 13,893.6 7,601.2
-------- -------- -------- -------- -------- -------- --------
Total Revenues...... 23,948.3 28,847.9 34,538.3 39,328.5 46,266.6 53,127.9 54,509.5
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Expenditures
Defense............... 5,572.1 6,147.4 6,854.0 8,012.0 8,770.8 9,308.1 10,055.5
General Expenses...... 11,241.9 14,703.7 18,973.0 22,319.5 23,682.6 26,951.1 31,118.1
Fixed Capital Forma-
tion................. 1,540.5 2,032.5 2,401.0 2,048.8 2,821.4 2,889.1 2,547.4
Others................ 2,968.9 5,483.5 5,609.0 8,616.6 11,685.6 13,721.3 9,053.4
-------- -------- -------- -------- -------- -------- --------
Total Expenditures.. 21,323.3 28,367.1 33,836.9 40,996.8 46,960.4 52,869.7 52,774.3
======== ======== ======== ======== ======== ======== ========
Net Lending............. (73.4) 37.0 (53.6) 38.4 (5.3) 23.3 5.5
Budget Surplus.......... 2,698.4 443.8 754.9 (1,706.7) (688.5) 234.8 1,729.7
</TABLE>
--------
(1) Preliminary.
Source: The Bank of Korea, Monthly Bulletin, April 1995.
EXTERNAL DEBT
The rapid economic development of Korea has led to large foreign borrowings.
The private and governmental external debt of Korea was US $40.5 billion at the
end of 1987. Since then, the external debt declined to US $31.7 billion as of
December 31, 1990 as a result of substantial current account surpluses, but
rose to US $39.1 billion, US $42.8 billion, US $43.9 billion and US $52.8
billion as of December 31, 1991, 1992, 1993 and October 31, 1994, respectively,
as a result of current account deficits in each of these years.
BROKERAGE AND PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Fund's Board of Directors, Alliance
is responsible, and, with respect to the Fund's investments in Korean
securities, Alliance and Orion are jointly responsible, for the placing of the
orders for portfolio transactions for the Fund. The Fund allocates portfolio
transactions for execution by brokers that offer best execution, taking into
account such factors as size of order, difficulty of execution and skill
required to execute, in the case of agency transactions, the commission, and in
the case of principal transactions, the net price. Any number of brokers may be
used for execution of the Fund's portfolio transactions. Alliance and Orion
effect the bulk of the Fund's transactions in Korean securities through
brokers, dealers or underwriters located in that country. U.S. government or
corporate debt or other U.S.
46
<PAGE>
securities constituting permissible investments will be purchased and sold
through U.S. brokers, dealers or underwriters. The Fund may place brokerage
orders with Donaldson, Lufkin & Jenrette Securities Corporation, a U.S.
registered broker-dealer and an affiliate of Alliance, and with Tong Yang
Securities, an affiliate of Orion. The Fund will not engage in principal
transactions with Tong Yang Securities or any other affiliate of the Fund
unless an exemption is received from the Securities and Exchange Commission
allowing the Fund to do so. At present, the Fund does not intend to apply for
such exemptive relief.
With respect to orders placed with Donaldson, Lufkin & Jenrette Securities
Corporation and Tong Yang Securities for execution on a securities exchange,
commissions received must conform to Section 17(e)(2)(A) of the 1940 Act and
Rule 17e-1 thereunder, which permit an affiliated person of a registered
investment company (such as the Fund), or any affiliated person of such person,
to receive a brokerage commission from such registered investment company
provided that such commission is reasonable and fair compared to the
commissions received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
Subject to best execution, orders may be placed with brokers that supply
research, market and statistical information to the Fund and Alliance or Orion.
The research may be used by Alliance or Orion in advising other clients, and
the Fund's negotiated commissions to brokers supplying research may not
represent the lowest obtainable commission rates.
The Fund's Board of Directors reviews periodically the commissions paid by
the Fund to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits realized by the Fund.
During the fiscal years ended April 30, 1993, 1994 and 1995, the Fund
incurred brokerage commissions amounting in the aggregate to $198,834, $60,853
and $276,480. During the fiscal years ended April 30, 1993, 1994 and 1995,
brokerage commissions amounting in the aggregate to $22,153, $9,623 and
$52,315, respectively, were paid to Tong Yang Securities. During the fiscal
years ended April 30, 1993, 1994 and 1995, no brokerage commissions were paid
to Donaldson, Lufkin & Jenrette Securities Corporation and brokerage
commissions amounting in the aggregate to $5,854, $5,110 and $17,125,
respectively, were paid to brokers utilizing the Pershing Division of
Donaldson, Lufkin & Jenrette Securities Corporation. During the fiscal year
ended April 30, 1995, the brokerage commissions paid to Tong Yang Securities
constituted 18.9% of the Fund's aggregate brokerage commissions, the brokerage
commissions paid to Donaldson, Lufkin & Jenrette Securities Corporation
constituted 0% of the Fund's aggregate brokerage commissions and the brokerage
commissions paid to brokers utilizing the Pershing Division of Donaldson,
Lufkin & Jenrette Securities Corporation constituted 6.2% of the Fund's
aggregate brokerage commissions. During the fiscal year ended April 30, 1995,
of the Fund's aggregate dollar amount of brokerage transactions involving the
payment of commissions, 19.9% were effected through Tong Yang Securities, 0%
were effected through Donaldson, Lufkin & Jenrette Securities Corporation and
6.4% were effected through brokers utilizing the Pershing Division of
Donaldson, Lufkin & Jenrette Securities Corporation. During the fiscal year
ended April 30, 1995, transactions in portfolio securities of the Fund
aggregated approximately $11,167,652 with associated brokerage commissions of
approximately $55,296, were allocated to persons or firms supplying research
services to the Fund, Alliance or Orion.
DIVIDENDS AND DISTRIBUTIONS
The Fund will distribute to shareholders of record, at least annually at
approximately year-end, substantially all of its net investment income from
dividends and interest and net realized capital gains, if any. If the Fund's
annual operating expenses exceed its dividend and interest income for the year,
the excess will be charged to the Fund's capital and no income dividends will
be paid.
47
<PAGE>
DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan") all
shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by
State Street Bank and Trust Company (the "Agent"), as agent under the Plan,
unless a shareholder elects to receive cash. Shareholders whose shares are held
in the name of a broker or nominee will automatically have distributions
reinvested by the broker or the nominee in additional shares under the Plan,
unless the shareholder elects to receive distributions in cash. If the service
is not available, such distributions will be paid in cash.
The Agent has furnished each shareholder with written information relating to
the Plan. Included in such information were procedures for electing to receive
dividends and distributions in cash (or, in the case of shares held in the name
of a broker or a nominee who does not participate in the Plan, for electing to
participate in the Plan). Shareholders whose shares are held in the name of a
broker or nominee should contact the broker or nominee for details. All
distributions to investors who elect not to participate in the Plan will be
paid by check mailed directly to the record holder by or under the direction of
State Street Bank and Trust Company, as the dividend-paying agent.
If the Board declares an income distribution or determines to make a capital
gain distribution payable either in shares or in cash, as holders of the shares
may have elected, non-participants in the Plan will receive cash and
participants in the Plan will receive the equivalent in shares of the Fund
valued as follows:
(i) If the shares are trading at net asset value or at a premium above
net asset value at the time of valuation, the Fund will issue new shares at
the greater of net asset value or 95% of the then current market price.
(ii) If the shares are trading at a discount from net asset value at the
time of valuation, the Agent will receive the dividend or distribution in
cash and apply it to the purchase of the Fund's shares in the open market,
on the New York Stock Exchange or elsewhere, for the participants'
accounts. Such purchase will be made on or shortly after the payment date
for such dividend or distribution and in no event more than 30 days after
such date except where temporary curtailment or suspension of purchase is
necessary to comply with Federal securities laws. If, before the Agent has
completed its purchases, the market price exceeds the net asset value of a
share of Common Stock, the average purchase price per share paid by the
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend or distribution had been
in shares issued by the Fund.
The Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations 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 Agent in the name of the participant
and each shareholder's proxy will include those shares purchased pursuant to
the Plan. Share certificates will not be issued in the name of individual Plan
participants.
There is no charge to participants for reinvesting dividends and capital
gains distributions. The fees of the Agent for handling the reinvestment of
dividends and capital gains distributions are paid by the Fund. There are no
brokerage charges with respect to shares issued directly by the Fund as a
result of dividends or capital gains distributions payable either in shares or
in cash. However, each participant will bear a pro-rata share of brokerage
commissions incurred with respect to the Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions
paid in cash.
The automatic reinvestment of income and capital gains distributions will not
relieve participants of any income tax that may be payable on such income and
capital gains distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any income or capital gain distributions paid subsequent
48
<PAGE>
to written notice of the change sent to the Plan participants at least 90 days
before the date of such income or capital gain distribution. The Plan may also
be amended or terminated by the Agent, with the Fund's prior consent, on at
least 90 days' written notice to Plan participants. All correspondence
concerning the Plan should be directed to State Street Bank and Trust Company,
at P.O. Box 1713, Boston, Massachusetts 02105.
TAXATION
The following summary addresses the principal United States and Korean income
tax considerations regarding the purchase, ownership and disposition of shares
in the Fund. The Fund and its shareholders may also be subject to other United
States federal, state, local and foreign taxes.
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 UNITED STATES FEDERAL, STATE AND LOCAL, AS WELL AS FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES THEREIN.
The statements regarding taxation set out below are based on those laws in
force on the date of this Prospectus and are subject to any subsequent changes
in such laws.
UNITED STATES FEDERAL INCOME TAXES
The following discussion of the United States federal income taxes is based
upon the advice of Seward & Kissel, counsel for the Fund.
GENERAL. The Fund intends to continue to qualify and elect to be treated as a
"regulated investment company" under sections 851 through 855 of the Code. To
so qualify, the Fund must, among other things, (i) derive at least 90% of its
gross income in each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currency, or certain other income (including, but not
limited to, gains from options, futures and forward contracts) derived with
respect to its business of investing in stock, securities or currency; (ii)
derive less than 30% of its gross income in each taxable year from the sale or
other disposition within three months of their acquisition by the Fund of (a)
stock or securities, (b) options, futures or forward contracts, and (c) foreign
currencies (or options, futures or forward contracts on foreign currencies)
that are not directly related to the Fund's principal business of investing in
stock or securities (or options and futures with respect to stocks or
securities); and (iii) diversify its holdings so that, at the end of each
quarter of its taxable year, the following two conditions are met: (a) at least
50% of the value of the Fund's assets is represented by cash, U.S. government
securities, securities of other regulated investment companies and other
securities with respect to which the Fund's investment is limited, in respect
of any one issuer, to an amount not greater than 5% of the Fund's assets and
10% of the outstanding voting securities of such issuer and (b) not more than
25% of the value of the Fund's assets is invested in securities of any one
issuer (other than U.S. government securities or securities of other regulated
investment companies).
The United States Treasury Department is authorized to issue regulations to
provide that foreign currency gains that are "not directly related" to the
Fund's principal business of investing in stock or securities may be excluded
from the income which qualifies for purposes of the 90% gross income
requirement described above with respect to the Fund's qualification as a
"regulated investment company." No such regulations have yet been issued.
If the Fund qualifies as a regulated investment company for any taxable year
and makes timely distributions to holders of the Fund's shares ("Holders") of
90% or more of its net investment income for
49
<PAGE>
that year (calculated without regard to its net capital gain, i.e., the excess
of its net long-term capital gain over its net short-term capital loss) it will
not be subject to federal income tax on the portion of its taxable income for
the year (including any net capital gain) that it distributes to Holders.
The Fund will also avoid the nondeductible 4% federal excise tax that would
otherwise apply to certain undistributed income for a given calendar year if it
makes timely distributions to the Holders equal to the sum of (i) 98% of its
ordinary income for such year, (ii) 98% of its capital gain net income for the
twelve-month period ending on October 31 (or November 30 or December 31 if
elected by the Fund) of such year, and (iii) any ordinary income or capital
gain net income from preceding calendar years that was not previously
distributed. For this purpose, income or gain retained by the Fund that is
subject to corporate income tax will be considered to have been distributed by
the Fund by year-end.
The Fund intends to make timely distributions of the Fund's taxable income
(including any net capital gain) so that the Fund will not be subject to
federal income or excise taxes (see "Dividends and Distributions"). However,
Korean exchange control or other regulations on the repatriation of investment
income, capital or the proceeds of securities sales by non-Korean individuals
or entities may limit the Fund's ability to make distributions sufficient in
amount to avoid being subject to one or both of such federal taxes. For federal
income and excise tax purposes, dividends declared in October, November or
December and payable to Holders of record as of a date in one of such months
will be treated as if they were paid on December 31 of such calendar year
provided that the dividends are actually paid during the following January.
These dividends will be taxable to Holders in the year declared and not in the
year in which Holders actually receive the dividend.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" for federal income tax purposes and the Fund does
not elect to treat the foreign corporation as a "qualified electing fund"
within the meaning of the Code, the Fund may be subject to United States
federal income taxation on a portion of any "excess distribution" it receives
from the foreign corporation or any gain it derives from the disposition of
such shares, even if such income is distributed as a taxable dividend by the
Fund to its United States Holders (as defined below). The Fund may also be
subject to additional tax in the nature of an interest charge in respect of
deferred taxes arising from such distributions or gains. Any tax paid by the
Fund as a result of its ownership of shares in a "passive foreign investment
company" will not give rise to any deduction or credit to the Fund or any
Holder. A "passive foreign investment company" means any foreign corporation
if, for any taxable year during which its stock was held by the Fund, either
(i) it derives at least 75% of its gross income from "passive income"
(including, but not limited to, interest, dividends, royalties, rents and
annuities), or (ii) at least 50% by value (or adjusted tax basis, if elected)
of the assets held by the corporation produce "passive income." If the Fund
owns shares in a "passive foreign investment company" and the Fund does elect
to treat the foreign corporation as a "qualified electing fund" under the Code,
the Fund may be required to include in its income each year a portion of the
ordinary income and net capital gains of the foreign corporation, even if this
income is not distributed to the Fund. Any such income would be subject to the
90% and calendar year distribution requirements described above. Proposed
federal income tax regulations would allow the Fund to elect to "mark to
market" shares it owns in "passive foreign investment companies" at the end of
each of the Fund's taxable years. If the Fund were to make this election, the
Fund would recognize annually as ordinary income the annual increase, if any,
in the value of any such shares held by the Fund at year-end, and the interest
charge on deferred taxes described above would be inapplicable. It is not clear
whether the Fund will ultimately be able to make this election.
CURRENCY FLUCTUATIONS--"SECTION 988" GAINS OR LOSSES. Under the Code, gains
or losses attributable to fluctuations in exchange rates which occur between
the time the Fund accrues interest or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses from the
disposition of foreign currencies or from the disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss.
50
<PAGE>
These gains or losses, referred to under the Code as "section 988" gains or
losses, increase or decrease the amount of the Fund's net investment income
available to be distributed to its Holders as ordinary income, rather than
increasing or decreasing the amount of the Fund's net capital gain. If section
988 losses exceed such other net investment income during a taxable year, the
Fund would not be able to make any ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as
a return of capital to Holders, rather than as an ordinary dividend, reducing
each Holder's basis in his Fund shares. To the extent that such distributions
exceed such Holder's basis, they will be treated as a gain from the sale of
shares. As discussed below, certain gains or losses with respect to forward
foreign currency contracts, over-the-counter options on foreign currencies and
certain options traded on foreign exchanges will also be treated as section 988
gains or losses.
OPTIONS, FUTURES CONTRACTS AND FORWARD FOREIGN CURRENCY CONTRACTS. Certain
listed options, regulated futures contracts and forward foreign currency
contracts are considered "section 1256 contracts" for federal income tax
purposes. Section 1256 contracts held by the Fund at the end of each taxable
year will be "marked to market" and treated for federal income tax purposes as
though sold for fair market value on the last business day of such taxable
year. Gain or loss realized by the Fund on section 1256 contracts other than
forward foreign currency contracts and non-equity options and regulated futures
contracts for non-U.S. currency for which the Fund elects section 988 treatment
will be considered 60% long-term and 40% short-term capital gain or loss. Gain
or loss realized by the Fund on forward foreign currency contracts and non-
equity options and regulated futures contracts for non-U.S. currency for which
the Fund elects section 988 treatment will be treated as section 988 gain or
loss and will therefore be characterized as ordinary income or loss and will
increase or decrease the amount of the Fund's net investment income available
to be distributed to Holders as ordinary income, as described above. The Fund
can elect to exempt its section 1256 contracts which are part of a "mixed
straddle" (as described below) from the application of Code section 1256.
The Internal Revenue Service has the authority to issue regulations that
would permit or require the Fund either to integrate a foreign currency hedging
transaction with the investment that is hedged and treat the two as a single
transaction, or otherwise to treat the hedging transaction in a manner that is
consistent with the hedged investment. Temporary regulations that were recently
issued under this authority generally should not apply to the type of hedging
transactions in which the Fund intends to engage.
Gain or loss realized by the Fund on the lapse or sale of put and call
options on foreign currencies which are traded over-the-counter or on certain
foreign exchanges will be treated as section 988 gain or loss and will
therefore be characterized as ordinary income or loss and will increase or
decrease the amount of the Fund's net investment income available to be
distributed to Holders as ordinary income, as described above. The amount of
such gain or loss shall be determined by subtracting the amount paid, if any,
for or with respect to the option (including any amount paid by the Fund upon
termination of an option written by the Fund) from the amount received, if any,
for or with respect to the option (including any amount received by the Fund
upon termination of an option held by the Fund). In general, if the Fund
exercises such an option on a foreign currency, or such an option that the Fund
has written is exercised, gain or loss on the option will be recognized in the
same manner as if the Fund had sold the option (or paid another person to
assume the Fund's obligation to make delivery under the option) on the date on
which the option is exercised, for the fair market value of the option. The
foregoing rules will also apply to other put and call options which have as
their underlying property foreign currency and which are traded over-the-
counter or on certain foreign exchanges, to the extent gain or loss with
respect to such options is attributable to fluctuations in foreign currency
exchange rates.
Any option, futures contract, forward foreign currency contract or other
position entered into or held by the Fund in conjunction with any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. A straddle of which at least one, but not all, the positions are
section 1256 contracts may constitute a "mixed straddle." In general, straddles
are subject to certain rules that may affect the character and timing of the
Fund's gains and losses with respect to straddle positions by requiring, among
other things, that (i) loss realized on disposition on one position of a
straddle not be recognized to the extent
51
<PAGE>
that the Fund has unrealized gains with respect to the other position in such
straddle; (ii) the Fund's holding period in straddle position be suspended
while the straddle exists (possibly resulting in gain being treated as short-
term capital gain rather than long-term capital gain); (iii) losses recognized
with respect to certain straddle positions which are part of a mixed straddle
and which are non-section 1256 positions be treated as 60% long-term capital
loss and 40% short-term capital loss; (iv) losses recognized with respect to
certain straddle positions which would otherwise constitute short-term capital
losses be treated as long-term capital losses; and (v) the deduction of
interest and carrying charges attributable to certain straddle positions be
deferred. Various elections are available to the Fund which may mitigate the
effects of the straddle rules, particularly with respect to mixed straddles. In
general, the straddle rules described above do not apply to any straddles held
by the Fund all of the offsetting positions of which consist of section 1256
contracts.
UNITED STATES HOLDERS--DISTRIBUTIONS. Distributions payable by the Fund
either in cash or in additional shares to an individual Holder who is a citizen
or resident of the United States or a United States corporation (a "United
States Holder") will be subject to United States federal income taxes. United
States Holders electing to receive such distributions in the form of additional
shares will be treated as receiving a distribution in an amount equal to the
fair market value, determined as of the payment date, of the shares received.
Such value may exceed the amount of the cash distribution that would have been
paid. In either event, the Holder's cost basis in the shares received will
equal the amount recognized as a taxable distribution. Distributions to United
States Holders of the Fund's dividend and interest income and of any net short-
term capital gain in any year will be taxable as ordinary income to such
Holders to the extent of the Fund's taxable income (without regard to any net
capital gain) for that year.
It is anticipated that substantially all of the distributions of the Fund's
ordinary income and any net short-term capital gain will be taxable as ordinary
income to United States Holders. Distributions which are so taxable will
constitute dividends for federal income tax purposes but in general will not be
eligible for the 70% dividends-received deduction for corporations. To the
extent that such distributions to a United States Holder in any year are not
taxable as ordinary income, they will be treated as a nontaxable return of
capital and will reduce the United States Holder's basis in his shares. The
amount of such distributions, if any, in excess of the Holder's basis in his
shares, will be treated as a gain from the sale of shares, as discussed below.
Distributions of the Fund's net capital gain (which will be designated as
capital gain dividends by the Fund) will be taxable to United States Holders as
long-term capital gain, regardless of the length of time the Holder has held
his shares.
After the end of the taxable year, the Fund will notify United States Holders
of the United States federal income tax status of any distributions made by the
Fund to such Holders during such year.
UNITED STATES HOLDERS--SALES AND REDEMPTIONS. A United States Holder will
recognize taxable gain or loss if the Holder sells or redeems shares of the
Fund. Any gain or loss arising from such sale or redemption generally will be
capital gain or loss except in the case of a dealer or a financial institution
and will be long-term capital gain or loss if such Holder has held such shares
for more than one year at the time of the sale or redemption; otherwise it will
be short-term capital gain or loss. However, any capital loss arising from the
sale or redemption of shares held for six months or less by a Holder shall be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received by the Holder with respect to the shares. In determining the
holding period of such shares for this purpose, any period during which a
Holder's risk of loss is offset by means of options, short sales or similar
transactions is not counted. Under current law, capital gains are taxed at the
same rate as ordinary income, except that the maximum rate on long-term capital
gains is 28% for individuals.
Any loss realized by a United States Holder on a sale or exchange of shares
of the Fund will be disallowed to the extent the shares disposed of are
replaced within a period of 61 days beginning 30 days before and ending 30 days
after the shares are sold or exchanged. For this purpose, acquisitions pursuant
to the Plan will constitute a replacement if made within the period. If
disallowed, the loss will be reflected in an upward adjustment to the basis of
the shares acquired.
52
<PAGE>
UNITED STATES HOLDERS--FOREIGN TAX CREDITS. Income received by the Fund may
also be subject to foreign income taxes, including withholding taxes. See
"Korean Taxes" below. If more than 50% of the value of the Fund's total assets
at the close of its taxable year consists of stocks or securities of foreign
corporations, the Fund will be eligible and intends to file an election with
the Internal Revenue Service to pass through to its Holders the amount of
foreign taxes paid by the Fund. While the Fund expects to meet the foregoing
requirements, there can be no assurance that the Fund will be able to do so.
Pursuant to this election a United States Holder will be required to (i)
include in gross income (in addition to taxable dividends actually received)
his pro rata share of foreign taxes paid by the Fund, (ii) treat his pro rata
share of such foreign taxes as having been paid by him, and (iii) either deduct
such pro rata share of foreign taxes in computing his taxable income or treat
such foreign taxes as a credit against United States federal income taxes. No
deduction for foreign taxes may be claimed by an individual United States
Holder who does not itemize deductions. In addition, certain individual United
States Holders may be subject to rules which limit or reduce their ability to
fully deduct their pro rata share of the foreign taxes paid by the Fund. Each
Holder will be notified within 60 days after the close of the Fund's taxable
year whether the foreign taxes paid by the Fund will pass through for that year
and, if so, such notification will designate (i) such Holder's portion of the
foreign taxes paid to each such country and (ii) the portion of dividends that
represents income derived from sources within each such country.
Generally, a credit for foreign taxes may not exceed the United States
Holder's United States tax attributable to its total foreign source taxable
income. Generally, the source of the Fund's income flows through to its
Holders. Thus, dividends and interest received by the Fund in respect of Korean
securities will give rise to foreign source income to the Holders. However,
certain items of the Fund's income, including income and gains from securities
transactions (including Korean securities) as well as certain foreign currency
gains, are ordinarily treated as United States source income to Holders under
the Code. However, if the Fund becomes subject to Korean taxation on its
capital gain income due to the inapplicability of certain provisions of the
Korean Tax Treaty, as described below, the Fund should be able to elect to
treat such gains as foreign source, with the result that United States Holders
would be deemed to receive foreign source income against which the foreign tax
credit could be applied. The overall limitation on a foreign tax credit is also
applied separately to specific categories of foreign source income, including
foreign source "passive income," such as dividends, interest and capital gains.
Further, the foreign tax credit is allowed to offset only 90% of any
alternative minimum tax to which a United States Holder may be subject. As a
result of these rules, certain United States Holders may be unable to claim a
credit for the full amount of their proportionate share of the foreign taxes
paid by the Fund. If the United States Holder could not credit the foreign tax
paid because of an absence of sufficient foreign source income, double taxation
of such gain could only be mitigated by deducting the Korean tax paid, which
may be subject to limitation as described above.
The federal income tax status of each year's distributions by the Fund will
be reported to Holders and to the Internal Revenue Service. The foregoing is
only a general description of the treatment of foreign taxes under the United
States federal income tax laws. Because the availability of a foreign tax
credit or deduction will depend on the particular circumstances of each Holder,
potential investors are advised to consult their own tax advisers.
UNITED STATES HOLDERS--BACKUP WITHHOLDING. The Fund may be required to
withhold United States federal income tax at the rate of 31% of all taxable
distributions payable to United States Holders who fail to provide the Fund
with their correct taxpayer identification numbers or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain
other shareholders specified in the Code are exempt from such backup
withholding. Backup withholding is not an additional tax; any amounts so
withheld may be credited against a United States Holder's United States federal
income tax liability or refunded.
NON-UNITED STATES HOLDERS--DISTRIBUTIONS. A Holder who is not a United States
Holder (a "Non-United States Holder") and whose income from the Fund is not
effectively connected with the conduct of a
53
<PAGE>
United States trade or business carried on by such Holder (i) will have tax
withheld on ordinary income considered distributed by the Fund at a rate of 30%
or a lower tax treaty rate, if applicable, and (ii) will not be subject to tax
on capital gain dividends as long as such Holder is not a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year. Non-United States Holders may also be subject to United States
withholding tax (at a rate of 30% or a lower tax treaty rate) on dividend
income treated as arising from the pass-through of foreign taxes paid by the
Fund, but may not be able to claim a foreign credit or deduction with respect
to such taxes.
A Non-United States Holder whose holdings in the Fund are effectively
connected with a United States trade or business carried on by such Holder will
be taxed on actual and deemed distributions received from the Fund in the same
manner as a United States Holder as discussed above. Each Non-United States
Holder should consult his own tax adviser to determine whether his holdings in
the Fund would be treated as effectively connected with the conduct of a United
States trade or business.
NON-UNITED STATES HOLDERS--SALES AND REDEMPTIONS. Any gain arising from (or
treated as arising from) the sale or redemption by a Non-United States Holder
of his shares will not be subject to United States federal income tax unless
(i) the gain is effectively connected with a United States trade or business
carried on by such Holder, in which event the gain will be taxed in the same
manner as for a United States Holder as discussed above, or (ii) the gain is a
capital gain and, among other requirements, the Non-United States Holder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year. Usually a nonresident alien present in the
United States for 183 days or more during a taxable year will be taxed in the
same manner as a United States Holder, as discussed above. When this is not the
case, the capital gain (less any capital losses) may be taxed at a 30% rate
unless such capital gain is exempt from United States taxation, or subject to a
lower rate of tax, by reason of an applicable tax treaty.
NON-UNITED STATES HOLDERS--BACKUP WITHHOLDING. Under existing Code provisions
and the Treasury regulations thereunder, (i) ordinary income dividends
distributed to a Non-United States Holder will not be subject to United States
information reporting or to 31% backup withholding if the payor thereof is
satisfied that the payee is a Non-United States Holder, and (ii) the gross
proceeds from the sale or redemption by a Non-United States Holder of his
shares will not be subject to United States information reporting or to 31%
backup withholding if the payor thereof is satisfied that (a) the payee is a
Non-United States Holder, (b) any gain arising from the sale or redemption is
not effectively connected with a trade or business that the Non-United States
Holder is or expects to be engaged in, and (c) the Non-United States Holder (if
an individual) has not been and does not plan to be present within the United
States for 183 days or more during the taxable year of the sale or redemption
(or, in lieu of (b) and (c) above, any gain arising from the sale or redemption
is exempt from United States federal income tax under an income tax treaty with
the United States of which such Holder is a beneficiary). Non-dividend
distributions made by the Fund may be subject to United States information
reporting, regardless of the status of the Holder. These results may be altered
by future amendments to applicable Treasury regulations. Notwithstanding
anything to the contrary contained in the foregoing, distributions will not be
subject to 31% backup withholding if the payor is satisfied that the payee is a
corporation.
The foregoing contains a general discussion of the federal income tax
consequences to Non-United States Holders of distributions by the Fund and
sales and redemptions of shares. Non-United States Holders should consult their
own tax advisers as to the application of the principles discussed to their
particular circumstances and as to the foreign, state and local tax
consequences of the purchase, ownership and disposition of shares of the Fund.
KOREAN TAXES
The following discussion of certain Korean tax matters relating to the Fund
and its shareholders is based upon the advice of Shin & Kim, Korean counsel to
the Fund.
54
<PAGE>
Assuming the Fund does not maintain any permanent establishment within Korea,
under the provisions of the income tax treaty between the United States and
Korea (the "Korean Tax Treaty"), the Fund generally will not be subject to any
Korean income taxes other than those Korean withholding taxes described below.
Under current Korean law, when the Korean Tax Treaty applies, payments to the
Fund of interest income by Korean corporations would be subject to a 12% Korean
withholding tax and a resident withholding tax of 7.5% of that tax, for a total
Korean tax of 12.9%, and dividends received by the Fund from Korean
corporations will generally be subject to a 15% Korean withholding tax and a
resident withholding tax of 7.5% of that tax, for a total Korean tax of
16.125%. The rate of this total tax on dividends is reduced to 10.75% if the
Fund owns at least 10% of the outstanding voting shares of the Korean
corporation paying the dividend and if certain other conditions are satisfied.
Under the rules of the KSEC currently in effect, each foreign investor, such as
the Fund, generally may not own more than 3% of the total outstanding equity
shares of each class of a listed company. Under current Korean law, when the
Korean Tax Treaty applies, capital gains derived by the Fund upon the sale of
stock or other securities of Korean corporations will be exempt from any Korean
withholding tax.
Neither the reduced tax rate nor the exemption under the provisions of the
Korean Tax Treaty will apply to the dividend, interest and capital gain income
derived by the Fund from Korean corporations if both (i) the Fund is treated by
the Korean tax authorities, by reason of the existence of special measures
under United States federal income tax law, as being subject to United States
federal income tax with respect to any of those types of income in an amount
substantially less than the United States federal income tax generally imposed
on corporate profits, and (ii) at least 25% of the Fund's outstanding shares
are considered owned, directly or indirectly, by one or more persons who are
not individual residents of the United States. The MFE has ruled that a U.S.
investment company incorporated in order to invest in Korean securities will
not be considered 25% or more owned by persons who are not individual residents
of the United States as long as all the shares of such company are listed
solely on a recognized stock exchange(s) in the United States and the shares of
such company are traded on such stock exchange(s) by general investors. At
present, all of the Fund's shares are listed solely on the New York Stock
Exchange and the shares of the Fund are traded on such stock exchange by
general investors within the meaning of this ruling. The Board of Directors has
no intention of listing the shares on any other stock exchange. Accordingly,
insofar as all of the Fund's shares are listed solely on the New York Stock
Exchange and the shares of the Fund are traded on such stock exchange by
general investors, the benefits of the Korean Tax Treaty will be available to
the Fund.
The Korean tax treatment described above with respect to income derived by
the Fund could change in the event of changes in Korean or United States tax
laws or changes in the terms of, or the interpretation by the Korean tax
authorities of, the Korean Tax Treaty. If the benefits of the Korean Tax Treaty
are not applicable to the Fund, the total rate of Korean withholding taxes
(including the resident tax) imposed on the dividend and interest income
derived by the Fund from Korean corporations will be 26.875%, and capital gains
derived by the Fund from the sale of Korean stock or other securities will be
subject to a Korean withholding tax equal to the lower of (i) 10.75% of the
gross sales proceeds, or (ii) 26.875% of the difference between the gross sales
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), provided the Fund can provide satisfactory evidence of the
acquisition cost.
Whether or not the Korean Tax Treaty applies, payments of interest on bonds
denominated in a foreign currency issued by Korean entities are currently
exempted from income taxes, including withholding taxes, by virtue of the
Korean Tax Exemption and Reduction Control Law of 1993 as amended ("TERCL"). As
a result of such exemption, the resident tax referred to above is also
eliminated. Under the TERCL, the tax exemptions on such interest payments will
expire on December 31, 1998, and it is not certain whether such exemption will
be extended.
Under current Korean law, no Korean inheritance and gift tax will apply to
any testamentary, intestate or intervivos transfer of the shares of the Fund
unless the decedent or the donee, as the case may be, is domiciled in Korea.
55
<PAGE>
A securities transaction tax is payable on the transfer of shares issued by a
Korean corporation. The securities transaction tax is assessed at the rate of
0.3% of the sale price of the shares (except when the sale price is less than
the par value of the share traded on the Exchange, in which case no tax is
charged, or when the shares are traded outside the Exchange, in which case the
tax is payable at the rate of 0.5% of the sale price); provided, however, that
any such securities transaction tax will not be imposed if (i) the shares are
listed on a foreign stock exchange and the sales are executed on such exchange;
or (ii) the sales are executed between non-residents without a permanent
establishment in Korea and the non-resident investor did not own 10% or more of
the total issued and outstanding shares at any time during the five years
before the year within which the transfer occurs and the non-resident investor
does not sell such shares through a securities company in Korea. Effective as
of July 1, 1994, an additional agricultural and fishery special tax will be
imposed on securities transactions on the Exchange which will equal 0.15% of
the sales price. Under the terms of the relevant law, this agricultural and
fishery special tax expires on June 30, 2004.
The transferor of shares is obliged to pay the securities transaction tax.
When the transfer is effected through the Korea Securities Depository, the
Korea Securities Depository will withhold the tax, and when such transfer is
made through a securities company only such securities company will make the
withholding. Where the transfer is effected by a non-resident individual or a
non-resident corporation without a permanent establishment in Korea other than
through the Korea Securities Depository or a securities company in Korea, the
transferee is required to withhold the securities transaction tax. For the
purpose of the securities transaction tax, warrants or rights to subscribe
shares are deemed shares.
Korean stamp duty will not apply to the sale of Korean securities made on the
Exchange or over the counter by the Fund.
CERTAIN OWNERS OF RECORD
Set forth below is certain information as to all persons who owned of record
5% or more of the outstanding shares of Common Stock of the Fund as of the
close of business on September 8, 1995.
<TABLE>
<S> <C>
The Chase Manhattan Bank, N.A.
1 Chase Manhattan Plaza
3B-Proxy Dept.
New York, NY 10081 5.09%
Smith Barney, Inc.
c/o ADP Proxy Services
51 Mercedes Way
Edgewood, NY 11717 6.60%
Morgan Guaranty Trust Co. of New York
37 Wall Street, 16th Floor
New York, NY 10260 7.97%
Merrill Lynch, Pierce, Fenner & Smith
4 Corporate Place
Corporate Park 287, 2nd Floor
Piscataway, NJ 08855 10.34%
</TABLE>
56
The Korean
Investment
Fund
PORTFOLIO OF INVESTMENTS
April 30, 1995 The Korean Investment Fund
-------------------------------------------------------------------------------
Company Shares U.S.$Value
-------------------------------------------------------------------------------
COMMON & PREFERRED STOCKS - 99.0%
CONSUMER MANUFACTURING - 20.6%
AUTO & RELATED - 9.8%
Hanil E Wha Corp Ltd. 8,300 $ 338,598
Hyundai Motor Co., Ltd. 15,000 924,772
Kia Motors Corp.* (GDS)(a) 67,200 991,200
Sam Lip Industrial Co. 39,310 2,114,134
Sam Sung Radiator Industries 24,000 2,156,490
Yoosung Enterprise 15,000 869,679
7,394,873
BUILDING & RELATED - 6.0%
Hanil Cement Manufacturing 30,132 1,660,056
Hanshin Construction Co. 52,473 450,840
Hyundai Cement Co. 100 4,329
Keum Kang, Ltd. 29,000 2,438,382
4,553,607
TEXTILE PRODUCTS - 4.8%
Baikyang Co. 2,880 487,335
Cheil Synthetics Inc. 39,690 963,160
Korea Moolsan Co., Ltd. 30,000 527,317
new #1 7,721 111,407
Sunkyong Industrial 38,254 1,530,461
3,619,680
15,568,160
BASIC INDUSTRIES - 20.4%
CHEMICALS - 3.2%
Hannong 15,000 $ 948,383
Hanwha Chemical Corp. 20,000 459,107
Kun Sul Chemical Industries 20,150 1,044,041
2,451,531
CONTAINERS - 1.2%
Jindo Corp. 126 2,727
Hyundai Precision 36,050 912,658
915,385
MINING & METALS - 11.6%
Dae Han Jung Suok 9,364 389,373
new #1 645 26,820
new # 2 3,110 129,320
Dongkuk Steel Mill 95,811 2,425,595
Dong Won Co. Ltd.* 5,000 141,011
Inchon Iron & Steel 10,400 477,471
Moon Bae Steel Co. Ltd. 13,700 767,530
Nam Sun Aluminum 10,000 253,165
Pohang Iron & Steel Mill 48,100 4,138,991
8,749,276
PAPER & FOREST PRODUCTS - 4.0%
Donghae Pulp Co. 11,300 398,728
Hansol Paper Manufacturing Co. 61,408 2,601,795
3,000,523
OTHER - 0.4%
Doosan Glass Co. 17,510 298,590
15,415,305
4
The Korean Investment Fund
-------------------------------------------------------------------------------
Company Shares U.S.$Value
-------------------------------------------------------------------------------
FINANCIAL SERVICES - 19.0%
BANKING - 7.1%
Cho Hung Bank 60,390 $ 732,744
Daegu Bank, Ltd. 16,000 197,285
Hana Bank 72,800 1,308,270
Kookmin Bank 50,000 977,241
Korea Exchange Bank 100,000 951,007
new #1 29,090 251,845
Shinhan Bank 40,000 813,275
new #1 7,344 136,794
5,368,461
BROKERAGE & MONEY
MANAGEMENT - 8.1%
Daewood Securities 60,000 1,739,359
Samsung Securities 81,200 3,067,567
KFB Securities 35,145 673,073
Ssangyong Investments & Securities 38,858 652,433
6,132,432
INSURANCE - 2.9%
Korea Reinsurance Co. 24,789 1,203,113
Samsung Fire & Marine Insurance Co. 3,700 970,683
2,173,796
OTHER - 0.9%
Shinhan Investment & Finance 30,000 554,863
pfd. 10,553 105,205
660,068
14,334,757
CAPITAL GOODS - 14.2%
ELECTRICAL EQUIPMENT - 9.8%
Kumho Electric 34,204 1,166,530
Korea Electro Devices Manufacturing Co. 20,000 314,816
Orion Electric 70,000 $ 1,781,334
Saehan Precision 26,750 1,438,643
Samsung Electro - Mechanics 35,765 1,843,726
new # 1 17,895 849,740
7,394,789
ENGINEERING & CONSTRUCTION - 2.8%
Chonggu Housing and Construction 24,833 1,195,476
Sungwon Construction Co. 32,100 795,816
new #1 4,892 121,281
2,112,573
MACHINERY - 1.6%
Daewoo Heavy Industries 65,586 808,695
Tong Yang Mool San 20,005 362,129
1,170,824
10,678,186
UTILITY - 10.1%
Korea Electric Power Corp. 208,000 7,612,252
TRANSPORTATION - 5.0%
SHIPPING - 3.9%
Hanjin Shipping 28,580 1,874,467
Korea Line Co. 32,310 1,084,982
2,959,449
OTHER - 1.1%
Global Enterprise 10,000 811,963
3,771,412
MULTI-INDUSTRY - 3.4%
Korea Mobile Telecom Corp.* (GDS) 89,200 2,576,096
CONSUMER SERVICES - 2.8%
RETAIL - 1.2%
Hwasung Industries 18,415 886,509
OTHER - 1.6%
Hyundai Motor Service Co. 22,626 1,261,370
2,147,879
5
PORTFOLIO OF INVESTMENTS (continued) The Korean Investment Fund
-------------------------------------------------------------------------------
Company Shares U.S.$Value
-------------------------------------------------------------------------------
ENERGY - 1.3%
OIL SERVICE - 1.3%
Yukong Ltd. (GDR)(a) 85,440 $ 982,560
CONSUMER STAPLES - 1.2%
FOOD - 1.2%
Dongwon Industries, Co. 25,000 583,721
Woo Sung Feedmill 10,000 289,893
873,614
HEALTHCARE - 1.0%
DRUGS -1.0 %
Dong Sung Pharmaceuticals 10,602 278,140
Shin Poong Pharmaceuticals 10,000 $ 491,900
770,040
Total Common & Preferred Stocks
(cost $ 67,738,585 ) 74,730,261
TOTAL INVESTMENTS - 99.0%
(cost $ 67,738,585 ) 74,730,261
Other assets less liabilities - 1.0% 730,637
NET ASSETS - 100% $75,460,898
6
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1995 The Korean Investment Fund
-------------------------------------------------------------------------------
ASSETS
Investments in securities, at value (cost $67,738,585) $74,730,261
Cash, at value (cost $1,987,394) 2,055,217
Dividends receivable 303,946
Deferred organization expense and other assets 61,284
Total assets 77,150,708
LIABILITIES
Payable for investment securities purchased 1,396,369
Management fee payable 54,285
Sub-advisory fee payable 25,546
Accrued expenses and other liabilities 213,610
Total liabilities 1,689,810
NET ASSETS
(equivalent to $12.66 per share, based on 5,962,912
shares outstanding) $75,460,898
COMPOSITION OF NET ASSETS
Capital stock, at par $59,629
Additional paid-in capital 65,884,104
Accumulated net realized gain on investments and
foreign currency transactions 2,453,441
Net unrealized appreciation of investments and
foreign currency denominated assets and liabilities 7,063,724
$75,460,898
NET ASSET VALUE PER SHARE $12.66
See notes to financial statements.
7
STATEMENT OF OPERATIONS
Year Ended April 30, 1995 The Korean Investment Fund
-------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $165,081) $724,413
Interest 185,528 $ 909,941
EXPENSES
Management fee 655,205
Sub-advisory fee 308,335
Custodian 210,787
Audit and legal 159,163
Directors' fees and expenses 91,107
Printing 41,261
Transfer agency 33,456
Amortization of organization expenses 22,995
Registration 20,367
Miscellaneous 8,095
Total expenses 1,550,771
Net investment loss (640,830)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain on investment transactions 4,477,623
Net realized gain on foreign currency transactions 178,806
Net change in unrealized appreciation (depreciation) of:
Investments (4,899,124)
Foreign currency denominated assets and liabilities 72,308
Net loss on investments and foreign currency denominated
assets and liabilities (170,387)
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (811,217)
STATEMENT OF CHANGES IN NET ASSETS
-------------------------------------------------------------------------------
Year Ended Year Ended
April 30, April 30,
1995 1994
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment loss $(640,830) $(391,295)
Net realized gain on investments and
foreign currency transactions 4,656,429 350,580
Net change in unrealized appreciation
(depreciation) of investments and foreign
currency denominated assets and liabilities (4,826,816) 11,455,405
Net increase (decrease) in net assets from operations (811,217) 11,414,690
CAPITAL STOCK TRANSACTIONS
Proceeds from sale of shares of common stock
in rights offering 21,809,342 -0-
Offering costs charged to additional paid-in-capital (615,279) -0-
Total increase 20,382,846 11,414,690
NET ASSETS
Beginning of year 55,078,052 43,663,362
End of year $75,460,898 $55,078,052
8
NOTES TO FINANCIAL STATEMENTS
April 30, 1995 The Korean Investment Fund
-------------------------------------------------------------------------------
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
The Korean Investment Fund, Inc. (the 'Fund') was incorporated in the State of
Maryland on November 1, 1991 as a non-diversified, closed-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
1. SECURITY VALUATION
Investments are stated at value. Investments for which market quotations are
readily available are valued at the closing price on the Korea Stock Exchange
on the day of valuation or if no such closing price is available, at the last
bid price quoted on such day. Securities for which market quotations are not
readily available and restricted securities are valued in good faith at fair
value using methods determined by the Board of Directors. In determining fair
value, consideration is given to cost, operating and other financial data.
Securities that mature in 60 days or less are valued at amortized cost, which
approximates market value, unless this method does not represent fair value.
2. CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at the mean of the quoted bid and asked price of the respective
currency against the U.S. dollar on the valuation date. Purchases and sales of
portfolio securities are translated at the rates of exchange prevailing when
such securities were acquired or sold. Income and expenses are translated at
rates of exchange prevailing when earned or accrued.
Net realized gain on foreign currency transactions of $178,806 represents net
foreign exchange gains and losses from holding of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends and foreign
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized currency gains and losses from
valuing foreign currency denominated assets and liabilities at fiscal year end
exchange rates are reflected as a component of unrealized appreciation on
investments and foreign currency denominated assets and liabilities. The Fund
does not isolate that portion of the results of operations arising as a result
of changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of securities during the fiscal year.
The exchange rate for the Korean Won at April 30, 1995 was Won 762.35 to U.S.
$1.00.
3. ORGANIZATION EXPENSES
Organization expenses of approximately $115,000 have been deferred and are
being amortized on a straight-line basis through February, 1997.
4. TAXES
It is the Fund's policy to meet the requirements of the U.S. Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to its
shareholders. Therefore, no provision for U.S. income or excise taxes is
required. Withholding taxes on foreign interest and dividends have been
provided for in accordance with the applicable tax requirements. To reflect
reclassifications arising from permanent book/tax differences for the year
ended April 30, 1995, $640,830 and ($178,325) was reclassified from accumulated
net investment loss and accumulated net realized gain, respectively, to
additional paid-in-capital.
5. INVESTMENT INCOME AND SECURITY TRANSACTIONS
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily. Security transactions are accounted for on the date securities are
purchased or sold. Realized and unrealized gains and losses from security and
currency transactions are calculated on the identified cost basis. The Fund
accretes discounts as adjustments to interest income.
6. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income dividends and capital gain distributions are determined in
accordance with income tax regulations, which may differ from generally
accepted accounting principals.
9
NOTES TO FINANCIAL STATEMENTS (continued) The Korean Investment Fund
-------------------------------------------------------------------------------
NOTE B: MANAGEMENT FEE, SUB-ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Management and Administration Agreement, the Fund paid
Alliance Capital Management L.P. ('Alliance') a fee at an annualized rate of
.85 of 1% of the Fund's average weekly net assets. Such fee is calculated
weekly and paid monthly.
Under the terms of the Management Agreement, the Fund pays Orion Asset
Management Co., Ltd. (the 'Co-Manager') a fee at an annualized rate of .40 of
1% of the Fund's average weekly net assets. Such fee is calculated weekly and
paid monthly.
Brokerage commissions paid on securities transactions for the year ended April
30, 1995 amounted to $276,480, of which $52,315 was paid to Tong Yang
Securities Co., Ltd., an affiliate of the Co-Manager and $17,125 was paid to
Baring Securities, a broker utilizing the services of the Pershing Division of
Donaldson, Lufkin & Jenrette Securities Corp., an affiliate of Alliance.
NOTE C: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments)
aggregated $44,271,881 and $23,663,524, respectively, for the year ended April
30, 1995. At April 30, 1995, the cost of securities for federal income tax
purposes was $67,755,564. Accordingly, gross unrealized appreciation of
investments was $13,220,875 and gross unrealized depreciation of investments
was $6,246,178 resulting in net unrealized appreciation of $6,974,697
(excluding foreign currency translations). The Fund fully utilized its capital
loss carryover of $2,007,203 to offset gains realized during the year ended
April 30, 1995.
NOTE D: CAPITAL STOCK
There are 100,000,000 shares of $.01 par value common stock authorized. Of the
5,962,912 shares outstanding at April 30, 1995, the Investment Manager owned
9,000 shares.
NOTE E: RIGHTS OFFERING
During the year ended April 30, 1995, the Fund issued 1,753,797 shares in
connection with a rights offering of the Fund's shares. Shareholders of record
on June 10, 1994, were issued one non-transferable right for each share of
common stock owned, entitling shareholders the opportunity to acquire one newly
issued share of common stock for every three rights held at a subscription
price of $12.92 per share. Offering costs of $615,279 attributed to the rights
offering were charged to additional paid-in-capital. Dealer management and
soliciting fees of $849,715 were netted against the proceeds of the
subscription.
10
The Korean Investment Fund
-------------------------------------------------------------------------------
NOTE F: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Net Realized and Net Increase
Unrealized Gain (Loss) (Decrease)
on Investments and in Net Assets
Net Investment Foreign Currency Resulting from Market Price
Income (loss) Transactions Operations on NYSE
----------------- ------------------ ------------------ ------------------
Total Per Total Per Total Per
Quarter Ended (000) Share (000) Share (000) Share High Low
---------------------- ------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
April 30, 1995 $(341) $(.06) $(4,179) $ (.69) $(4,520) $(.75) $13.500 $11.750
January 31, 1995 258 .04 (7,838) (1.31) (7,580) (1.27) 14.375 11.625
October 31, 1994 (272) (.05) 7,915 1.33 7,643 1.28 15.125 13.500
July 31, 1994 (286) (.06) 3,931 .95 3,645 .89 16.375 13.125
$(641) $(.13) $(171) $ .28 $(812) $ .15
April 30, 1994 $(252) $(.06) $(1,009) $ (.23) $(1,261) $(.29) $17.250 $11.875
January 31, 1994 346 .08 11,463 2.72 11,809 2.80 18.500 12.375
October 31, 1993 (181) (.04) 863 .20 682 .16 13.500 10.750
July 31, 1993 (304) (.07) 489 .12 185 .05 13.250 11.125
$(391) $(.09) $11,806 $ 2.81 $11,415 $2.72
</TABLE>
11
FINANCIAL HIGHLIGHTS The Korean Investment Fund
-------------------------------------------------------------------------------
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Year Ended April 30, Feb. 24, 1992 (a)
--------------------------------- through
1995 1994 1993 April 30, 1992
---------- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.09 $10.37 $ 11.00 $10.90(b)
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (.13)* (.09) (.03) (.01)
Net realized and unrealized gain (loss) on
securities and foreign currency transactions .28 2.81 (.59) .11
Net increase (decrease) in net asset value .15 2.72 (.62) .10
LESS: DISTRIBUTIONS
Distributions from net realized gains on
investments and foreign currency transactions -0- -0- (.01) -0-
CAPITAL SHARE TRANSACTIONS
Dilutive effect of rights offering (.48) -0- -0- -0-
Offering costs charged to additional
paid-in-capital (.10) -0- -0- -0-
Total capital share transactions (.58) -0- -0- -0-
Net asset value, end of period $12.66 $13.09 $ 10.37 $11.00
Market value, end of period $12.375 $13.375** $12.125 $10.00
TOTAL RETURN
Total investment return based on:(c)
Market value (5.88)% 10.31%** 21.39% (10.39)%
Net asset value (3.28)% 26.23% (5.62)% (1.43)%
Net assets, end of period (000's omitted) $75,461 $55,078 $43,663 $46,278
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets 2.00% 2.26% 2.55% 2.37%(d)
Ratio of net investment loss to
average net assets (.83)% (.82)% (.27)% (.49)%(d)
Portfolio turnover rate 34% 14% 43% 8%
</TABLE>
* Based on average shares outstanding.
** Restated.
(a) Commencement of operations.
(b) Net of offering costs of $.26.
(c) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of each period reported. Dividends and distributions, if any, are assumed
for purposes of this calculation, to be reinvested at prices obtained
under the Fund's dividend reinvestment plan. Rights offerings, if any, are
assumed for purposes of this calculation, to be fully subscribed under the
terms of the rights offering. Generally, total investment return based on
net asset value will be higher than total investment return based on
market value in periods where there is an increase in the discount or a
decrease in the premium of the market value to the net asset value from
the beginning to the end of such periods. Conversely, total investment
return based on the net asset value will be lower than total investment
return based on market value in periods where there is a decrease in the
discount or an increase in the premium of the market value to the net
asset value from the beginning to the end of such periods. Total
investment return for a period of less than one year is not annualized.
(d) Annualized.
The per share amounts reported herein are not necessarily consistent with
the corresponding amounts reported on the Statement of Operations due to
the change in capital stock caused by the rights offering.
12
REPORT OF INDEPENDENT ACCOUNTANTS The Korean Investment Fund
-------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE KOREAN INVESTMENT FUND, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Korean Investment Fund, Inc.
(the 'Fund') at April 30, 1995, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the three years in the
period then ended and for the period February 24, 1992 (commencement of
operations) through April 30, 1992, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at April 30, 1995 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations were not received, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
June 16, 1995
13
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. FINANCIAL STATEMENTS
Included in Part A:
Financial Highlights
Included in Part B:
Portfolio of Investments, April 30, 1995.
Statement of Assets and Liabilities, April 30, 1995.
Statement of Operations for the year ended April 30, 1995.
Statement of Changes in Net Assets for the year ended April 30, 1995
and for the year ended April 30, 1994.
Notes to Financial Statements, April 30, 1995. Financial Highlights
for the year ended April 30, 1995, for the year ended April 30,
1994, for the year ended April 30, 1993 and for the period from
February 24, 1992 (commencement of operations) to April 30, 1992.
Report of Independent Accountants dated June 16, 1995.
2. EXHIBITS
<TABLE>
<C> <S>
A(1) Articles of Incorporation/1/
A(2) Articles of Amendment to Articles of Incorporation/2/
B By-Laws/1/
C Not Applicable
D(1) Form of Subscription Certificate
D(2) Form of Notice of Guaranteed Delivery
D(3) Form of DTC Participant Over-Subscription Exercise Form/Nominee
Holder Over-Subscription Exercise Form
D(4) Form of Beneficial Owner Listing Certification
D(5) Subscription, Distribution and Escrow Agency Agreement
E Dividend Reinvestment Plan/3/
F Inapplicable
G(1) Investment Management and Administration Agreement between the
Registrant and Alliance Capital Management L.P./3/
G(2) Investment Management Agreement between the Fund and Orion Asset
Management Co. Ltd./3/
H Dealer Manager Agreement
I Inapplicable
J Custodian Agreement/4/
K Registrar, Transfer Agency and Service Agreement/4/
L(1) Opinion and Consent of Seward & Kissel
L(2) Opinion and Consent of Venable, Baetjer and Howard, LLP
L(3) Consent of Shin & Kim
M Inapplicable
N Consent of Independent Accountants
O Inapplicable
P Investment Representation Letter/5/
Q Inapplicable
Other Exhibits: Powers of Attorney of Messrs. Carifa, Cho, Dievler,
Foulk, Hester, Hodgson, Kim and Koh./6/ Financial Data Schedule.
</TABLE>
--------
1. Incorporated by reference from Registrant's Registration Statement on Form
N-2 (File Nos. 33-43867 and 811-6467) as filed with the Securities and
Exchange Commission on November 8, 1991.
2. Incorporated by reference from Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-2 (File Nos. 33-43867 and 811-6467) as
filed with the Securities and Exchange Commission on November 27, 1991.
3. Incorporated by reference from Registrant's Registration Statement on Form
N-2 (File Nos. 33-77974 and 811-6467) as filed with the Securities and
Exchange Commission on April 20, 1994.
4. Incorporated by reference from Amendment No. 3 to Registrant's Registration
Statement on Form N-2 (File Nos. 33-43867 and 811-6467) as filed with the
Securities and Exchange Commission on September 8, 1992.
5. Incorporated by reference from Pre-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-2 (File Nos. 33-43867 and 811-6467) as
filed with the Securities and Exchange Commission on February 13, 1992.
6. Incorporated by reference from Registrant's Registration Statement on Form
N-2 (File Nos. 33-61849 and 811-6467) as filed with the Securities and
Exchange Commission on August 16, 1995.
C-1
<PAGE>
ITEM 25. MARKETING ARRANGEMENTS
See Dealer Manager Agreement filed herewith as Exhibit H.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration fees.................................................. $ 9,745
National Association of Securities Dealers, Inc. fees.............. $ 3,326
Printing........................................................... $160,000
Fees and expenses of qualifications under state securities laws
(including fees of counsel)....................................... $ 10,000
Legal fees and expenses............................................ $195,000
Dealer Manager expenses............................................ $100,000
Auditing fees and expenses......................................... $ 15,000
New York Stock Exchange listing fees............................... $ 8,696
Subscription Agent fees and expenses............................... $ 20,000
Information Agent fees and expenses................................ $ 20,000
Miscellaneous...................................................... $ 4,233
--------
$546,000
========
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable
ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF JUNE 30, 1995)
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Common Stock ($.01 par value per share)............. 4,572
</TABLE>
ITEM 29. INDEMNIFICATION
Item 3 of Part II of the Registrant's Pre-Effective Amendment No. 2 to its
Registration Statement on Form N-2, File Nos. 33-43687 and 811-6467, as filed
with the Securities and Exchange Commission on February 13, 1992, is
incorporated herein by reference.
The Registrant's liability for indemnification and contribution to the Dealer
Manager and soliciting broker-dealers is set forth in Section 7 of the Dealer
Manager Agreement, as set forth below.
C-2
<PAGE>
SECTION 7 OF THE DEALER MANAGER AGREEMENT READS AS FOLLOWS:
"7. Indemnification and Contribution.
(a) Each of the Company, Alliance and Orion jointly and severally, will
indemnify and hold harmless the Dealer Manager and each person, if any, who
controls the Dealer Manager within the meaning of Section 15 of the Act
against any and all losses, claims, damages and liabilities, joint or
several (including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in the settlement of, any
action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Act, the Exchange Act, the Investment
Company Act, the Advisers Act or other statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based on any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
or the Prospectus, and any amendment or supplement thereto, or the omission
or alleged omission to state in any or all such documents a material fact
required to be stated therein or necessary to make the statements in it not
misleading (in the case of the Prospectus, in light of the circumstances
under which such statements were made), provided neither the Company,
Alliance nor Orion will be liable to the extent that such loss, claim,
damage or liability arises from an untrue statement or omission or alleged
untrue statement or omission (1) made in reliance on and in conformity with
information furnished in writing to the Company by the Dealer Manager
expressly for use in the document, or (2) if a copy of the Prospectus was
not sent or given to such person at or before the written confirmation of
the sale to such person in any case where such delivery is required by the
Act. This indemnity agreement will be in addition to any liability that the
Company, Alliance or Orion might otherwise have.
(b) The Dealer Manager will indemnify and hold harmless the Company,
Alliance and Orion, each person, if any, who controls the Company, Alliance
or Orion within the meaning of Section 15 of the Act, each director of the
Company and each officer of the Company who signs the Registration
Statement to the same extent as the foregoing indemnity from the Company,
Alliance and Orion to the Dealer Manager, but only insofar as losses,
claims, damages or liabilities arise out of or are based on any untrue
statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to the Dealer
Manager furnished in writing to the Company by the Dealer Manager expressly
for use in the Registration Statement, the Prospectus, any amendment or
supplement thereto, or any preliminary prospectus in which the statement or
omission is made or alleged to be made. This indemnity agreement will be in
addition to any liability that the Dealer Manager might otherwise have.
(c) Any party that proposes to assert the right to be indemnified under
this Section will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 7, notify each such
indemnifying party of the commencement of such action, enclosing a copy of
all papers served, but the omission so to notify such indemnifying party
will not, except to the extent set forth below, relieve it from liability
that it may have to any indemnified party. No indemnification provided for
in Section 7(a) or (b) hereof shall be available to any party who shall
fail to give notice as provided in this Section 7(c) if the party to whom
notice was not given was unaware of the proceeding to which such notice
would have related and was prejudiced by the failure to give such notice,
but the omission so to notify such indemnifying party of such action shall
not relieve it from any liability that it may have to any indemnified party
for contribution or otherwise than on account of the provisions in Section
7(a) or (b). If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the
indemnifying party will be entitled to participate in, and, to the extent
that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly
notified, to assume the defense of the action, with counsel reasonably
satisfactory to the indemnified party, and, after notice from the
indemnifying party to the indemnified party of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and
C-3
<PAGE>
except for the reasonable costs of investigation subsequently incurred by
the indemnified party in connection with the defense. The indemnified party
will have the right to employ its counsel in any such action, but the fees
and expenses of such counsel will be at the expense of such indemnified
party unless (1) the employment of counsel by the indemnified party has
been authorized in writing by the indemnifying party, (2) the indemnified
party has reasonably concluded that there may be legal defenses available
to it or other indemnified parties that are different from or in addition
to those available to the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such
action on behalf of the indemnified party) or (3) the indemnifying party
has not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees and expenses of counsel
will be at the expense of the indemnifying party or parties. All such fees
and expenses will be reimbursed promptly as they are incurred. An
indemnifying party will not be liable for any settlement of any action or
claim effected without its written consent or, in connection with any
proceeding or related proceeding in the same jurisdiction, for the fees and
expenses of more than one separate counsel for all indemnified parties
except to the extent provided herein.
(d) In no case shall the indemnification provided in this Section 7 be
available to protect any person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its or his obligations or
duties hereunder, or by reason of its or his reckless disregard of its or
his obligations and duties hereunder.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7
is applicable in accordance with its terms but for any reason is held to be
unavailable from the Company, Alliance, Orion and the Dealer Manager, the
Company, Alliance, Orion and the Dealer Manager will contribute to the
total losses, claims, damages and liabilities (including any investigation,
legal and other expenses reasonably incurred in connection with, and any
amount paid in settlement of, any action or any claims asserted, but after
deducting any contribution received by the Company, Alliance, Orion or the
Dealer Manager from persons other than the Company, Alliance, Orion and the
Dealer Manager, such as persons who control the Company, Alliance, Orion or
the Dealer Manager within the meaning of the Act, officers of the Company
who signed the Registration Statement and directors of the Company, who may
also be liable for contribution) to which the Company, Alliance, Orion or
the Dealer Manager may be subject in such proportion as is appropriate to
reflect (i) the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party on the other hand from
the Offer of the Shares or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative
benefits but also the relative fault of the indemnifying party or parties
on the one hand and the indemnified party on the other hand in connection
with the statements or omissions or alleged statements or omissions that
resulted in the losses, claims, damages or liabilities, joint or several
(including any investigation, legal or other expenses reasonably incurred
in connection with, and any amount paid in settlement of, any action, suit
or proceeding or any claim asserted), for which contribution is sought. The
relative benefits received by the Company, Alliance and Orion on the one
hand (treated jointly for this purpose as one person) and the Dealer
Manager on the other hand shall be deemed to be in the same proportion as
the total proceeds from the Offer (before deducting the sales load and
other expenses) received by the Company bear to the total fees received by
the Dealer Manager. The relative fault of the parties shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, Alliance,
Orion or the Dealer Manager, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission and any other equitable considerations appropriate in
the circumstances. Notwithstanding any other provisions of this Section 7,
the Dealer Manager will not be responsible for any amount in excess of the
fees paid by the Company pursuant to Section 3 hereof and (2) no person
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) will be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. For purposes of
C-4
<PAGE>
this Section, any person who controls a party to this Agreement within the
meaning of the Act will have the same rights to contribution as that party,
and each officer of the Company who signed the Registration Statement and
each director of the Company will have the same rights to contribution as
the Company, subject in each case to clause (i) of the first sentence of
this Subsection (e). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action against such party in
respect of which a claim for contribution made be made under this Section
7, notify such party or parties from whom contribution may be sought, but
the omission so to notify will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have
otherwise than under this Section. No party will be liable for contribution
with respect to any action or claim settled without its written consent.
(f) The Company, Alliance and Orion agree to indemnify each Soliciting
Dealer and its controlling persons to the same extent and subject to the
same conditions and to the same agreements, including with respect to
contribution, provided for in subsections (a), (b), (c), (d) and (e) of
this Section 7."
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF ALLIANCE AND ORION
The description of each of Alliance Capital Management L.P. and Orion Asset
Management Co. Ltd. under the caption "Management of the Fund--Management and
Administration Arrangements" in the Prospectus and Statement of Additional
Information is incorporated by reference herein.
The information as to the directors and executive officers of Alliance
Capital Management Corporation, the general partner of Alliance, set forth in
Alliance Capital Management L.P.'s Form ADV filed with the Securities and
Exchange Commission on April 21, 1988 (File No. 801-32361) and as amended
through the date hereof is incorporated herein by reference. The information as
to the directors and executive officers of Orion Asset Management Co. Ltd. set
forth in Orion Asset Management Co. Ltd.'s Form ADV filed with the Securities
and Exchange Commission on October 30, 1991 (File No. 801-40145) and as amended
through the date hereof is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained as follows: journals, ledgers, securities records and other original
records are maintained principally at the offices of Alliance Capital
Management L.P., 500 Plaza Drive, Secaucus, New Jersey 07094, and at the
offices of State Street Bank and Trust Company, the Registrant's Dividend-
Paying Agent, Transfer Agent and Registrar, 225 Franklin Street, Boston,
Massachusetts 02110. All other records so required to be maintained are
maintained at the offices of Alliance Capital Management L.P., 1345 Avenue of
the Americas, New York, New York 10105. Additional records are maintained at
the offices of Brown Brothers Harriman & Co., the Registrant's Custodian, 40
Water Street, Boston, MA 02109.
ITEM 32. MANAGEMENT SERVICES
Not applicable
ITEM 33. UNDERTAKINGS
1. Registrant undertakes to suspend offering of the shares covered hereby
until it amends its Prospectus contained herein if subsequent to the effective
date of this Registration Statement, its net asset value per share declines
more than 10 percent from its net asset value per share as of the effective
date of this Registration Statement.
2. Not applicable
C-5
<PAGE>
3. Not applicable
4. (a) Registrant undertakes to file, during any period in which offers or
sales are being made, a post-effective amendment to this Registration
Statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(2) to reflect in the prospectus any facts or events after the effective
date of this Registration Statement (or the most recent post-effective
amendment hereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration
Statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(b) Registrant undertakes that, for the purpose of determining any
liability under the Securities Act of 1933, each subsequent post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of those securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Registrant undertakes to remove from registration by means of a post-
effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
5. Not applicable
6. Registrant undertakes to send the SAI by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request for the SAI.
C-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT HAS DULY CAUSED
THIS AMENDMENT TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK AND THE STATE
OF NEW YORK, ON THE 18TH DAY OF SEPTEMBER, 1995.
The Korean Investment Fund, Inc.
/s/ John D. Carifa
By __________________________________
JOHN D. CARIFA CHAIRMAN
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE
(1) Principal Executive:
/s/ John D. Carifa Chairman
------------------------------------- September 18,
JOHN D. CARIFA 1995
(2) Principal Financial and Accounting Officer:
/s/ Mark D. Gersten Treasurer and Chief
------------------------------------- Financial Officer September 18,
MARK D. GERSTEN 1995
(3) All of the Directors:
John D. Carifa*
Wang Ha Cho*
David H. Dievler*
William H. Foulk, Jr.*
Dr. James M. Hester*
Hon. James D. Hodgson*
Sung Jin Kim*
Choong H. Koh*
/s/ Edmund P. Bergan, Jr.
*By _________________________________ September 18,
EDMUND P. BERGAN, JR. ATTORNEY-IN- 1995
FACT
C-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C> <C>
D (1) Form of Subscription Certificate
D (2) Form of Notice of Guaranteed Delivery
D (3) Form of DTC Participant Over-Subscription Exercise
Form/Nominee Holder Over-Subscription Exercise Form
D (4) Form of Beneficial Owner Listing Certification
D (5) Form of Subscription, Distribution and Escrow Agency
Agreement
H Form of Dealer Management Agreement
L (1) Opinion and Consent of Seward & Kissel
L (2) Opinion and Consent of Venable, Baetjer and Howard, LLP
L (3) Consent of Shin & Kim
N Consent of Independent Accountants
Other Exhibits Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 99(D)(1)
THE OFFER EXPIRES AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 20, 1995*
THE KOREAN INVESTMENT FUND, INC.
SUBSCRIPTION RIGHTS FOR COMMON STOCK
SUBSCRIPTION CERTIFICATE
Dear Shareholder:
You are entitled to exercise the Rights issued to you as of September 25,
1995, the Record Date for the Fund's rights offering, to subscribe for the
number of Shares of Common Stock of The Korean Investment Fund, Inc. shown on
this Subscription Certificate pursuant to the Primary Subscription upon the
terms and conditions specified in the Fund's Prospectus dated September 19,
1995 (the "Prospectus"). The terms and conditions of the rights offering (the
"Offer") set forth in the Prospectus are incorporated herein by reference.
Capitalized terms not defined herein have the meanings attributed to them in
the Prospectus. As holder of these rights you are entitled to purchase one
Share of the Fund for each three Rights you exercise. In accordance with the
Over-Subscription Privilege, as a Record Date shareholder, you are also
entitled to subscribe for additional Shares if Shares remaining after exercise
of Rights pursuant to the Primary Subscription are available and you have
fully exercised all Rights issued to you. If sufficient Shares remain after
completion of the Primary Subscription, all over-subscriptions will be honored
in full. If sufficient Shares are not available after completion of the
Primary Subscription to honor all over-subscriptions, the Fund may, at the
discretion of the Board of Directors, issue shares of Common Stock up to an
additional 496,909 Shares in order to cover such over-subscription requests.
To the extent the Fund determines not to issue additional Shares to honor all
over-subscriptions, the available Shares will be allocated among those who
over-subscribe based on the number of Rights originally issued to them by the
Fund, so that the number of Shares issued to shareholders who subscribe
pursuant to the Over-Subscription Privilege will generally be in proportion to
the number of Shares owned by them on the Record Date. The Fund will not offer
or sell any Shares which are not subscribed for pursuant to the Primary
Subscription or the Over-Subscription Privilege.
SAMPLE CALCULATION
FULL PRIMARY SUBSCRIPTION ENTITLEMENT
(one share for each three rights)
<TABLE>
<S> <C>
No. of shares owned on the Record Date 100 divided by 3 = 33 new shares
--------------- ---------------
(equals no. of Rights issued) (ignore fractions)
</TABLE>
SUBSCRIPTION PRICE
The Subscription Price will be 95% of the lower of (i) the average of the
last reported sales prices on the NYSE on the expiration date of the Offer
(the "Pricing Date") and the four preceding business days, and (ii) the net
asset value per share on the Pricing Date.
METHOD OF EXERCISE OF RIGHTS
IN ORDER TO EXERCISE YOUR RIGHTS, YOU MUST EITHER (I) COMPLETE AND SIGN THIS
SUBSCRIPTION CERTIFICATE ON THE BACK AND RETURN IT TOGETHER WITH PAYMENT AT
THE ESTIMATED SUBSCRIPTION PRICE FOR THE SHARES, OR (II) PRESENT A PROPERLY
COMPLETED NOTICE OF GUARANTEED DELIVERY, IN EITHER CASE TO THE SUBSCRIPTION
AGENT, STATE STREET BANK AND TRUST COMPANY, BEFORE 5:00 P.M., NEW YORK CITY
TIME, ON OCTOBER 20, 1995* (THE "EXPIRATION DATE").
<TABLE>
<CAPTION>
BY FIRST CLASS MAIL: BY EXPRESS MAIL OR OVERNIGHT COURIER: BY HAND:
<S> <C> <C>
State Street Bank and Trust Company State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Reorganization Dept. Corporate Reorganization Dept. Corporate Reorganization Dept.
P.O. Box 9061 Two Heritage Drive, MB2 225 Franklin Street-Concourse Level
Boston, Massachusetts 02205-8686 North Quincy, Massachusetts 02171 Boston, Massachusetts 02110
U.S.A. U.S.A. U.S.A.
or
State Street Bank and Trust Company
Corporate Reorganization Dept.
61 Broadway--Concourse Level
New York, New York 10006
U.S.A.
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL NOT
CONSTITUTE VALID DELIVERY.
FULL PAYMENT OF THE ESTIMATED SUBSCRIPTION PRICE PER SHARE FOR ALL SHARES
SUBSCRIBED FOR PURSUANT TO BOTH THE PRIMARY SUBSCRIPTION AND OVER-SUBSCRIPTION
PRIVILEGE MUST ACCOMPANY THIS SUBSCRIPTION CERTIFICATE AND MUST BE MADE
PAYABLE IN UNITED STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK
LOCATED IN THE UNITED STATES PAYABLE TO THE KOREAN INVESTMENT FUND, INC.
BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF
CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. ALTERNATIVELY, IF A NOTICE OF
GUARANTEED DELIVERY IS USED, A PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION
CERTIFICATE, AND FULL PAYMENT, AS DESCRIBED IN SUCH NOTICE, MUST BE RECEIVED
BY THE SUBSCRIPTION AGENT NO LATER THAN THE CLOSE OF BUSINESS ON THE THIRD
BUSINESS DAY AFTER THE EXPIRATION DATE. FOR ADDITIONAL INFORMATION, SEE THE
PROSPECTUS.
Stock certificates for the shares acquired on Primary Subscription will be
mailed promptly after the expiration of the Offer and full payment for the
shares subscribed for has been received and cleared. Certificates representing
shares acquired pursuant to the Over-Subscription Privilege will be mailed as
soon as practicable after full payment has been received and cleared and all
allocations have been effected. Any excess payment to be refunded by the Fund
to a shareholder will be mailed by the Subscription Agent to such shareholder
as promptly as possible.
THESE SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE
-------------------
* Unless the Offer is extended.
Any questions regarding this Subscription Certificate and the Offer may be
directed to the Information Agent, Shareholder Communications Corporation,
toll-free at (800) 733-8481, extension 325.
<PAGE>
Account #: Control #:
Number of Primary Subscription Rights:
Number of Shares Entitled in Primary
Subscription:
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY
SECTION 1: DETAILS OF SUBSCRIPTION
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
A: I apply for ALL of my entitlement of new shares pursuant to the Primary
Subscription. ___________________ X $11.88+ = $________
(no. of new shares)
B: I apply for new shares pursuant to the Over-Subscription
Privilege* __________________________ X $11.88+ = $________
(no. of additional shares)
AMOUNT ENCLOSED $_____________
* You can only over-subscribe if you have fully exercised your Primary
Subscription Rights.
--------------------------------------------------------------------------------
IF YOU DO NOT WISH TO APPLY FOR YOUR FULL ENTITLEMENT:
C:I apply for ____________________ X $11.88+ = $________________________
(no. of new shares) (AMOUNT ENCLOSED)
SECTION 2: TO SUBSCRIBE
I acknowledge that I have received the Prospectus for this Offer and I
hereby irrevocably subscribe for the number of new shares indicated above on
the terms and conditions set out in the Prospectus. I understand and agree
that I will be obligated to pay any additional amount to the Fund if the
Subscription Price as determined on the Pricing Date is in excess of the
$11.88 Estimated Subscription Price per share.
I hereby agree that if I fail to pay in full for the shares for which I
have subscribed, the Fund may exercise any of the remedies provided for in
the Prospectus.
Signature of subscriber(s) __________________________________________________
__________________________________________________________
__________________________________________________________
Telephone number (including area code) ( ) ________________________________
--------------------------------------------------------------------------------
If you wish to have your shares and refund check (if any) delivered to an
address other than that listed on this Subscription Certificate you must
have your signature guaranteed by a member of the New York Stock Exchange or
a bank or trust company. Please provide the delivery address below and note
if it is a permanent change.
_____________________________________________________________________________
_____________________________________________________________________________
SECTION 3: DESIGNATION OF BROKER-DEALER
The following broker-dealer is hereby designated as having been
instrumental in the exercise of the Rights hereby exercised:
FIRM: _______________________________________________________________________
REPRESENTATIVE NAME: ________________________________________________________
REPRESENTATIVE NUMBER: ______________________________________________________
+ NOTE: $11.88 per share is an estimated price only. The Subscription Price
will be determined on October 20, 1995, the Pricing Date (which is the same as
the Expiration Date, unless extended), and could be higher or lower depending
on the changes in the net asset value and share price of the Common Stock.
<PAGE>
EXHIBIT 99(D)(2)
NOTICE OF GUARANTEED DELIVERY FOR SHARES OF
COMMON STOCK OF THE KOREAN INVESTMENT FUND, INC.
SUBSCRIBED FOR PURSUANT TO THE PRIMARY SUBSCRIPTION
AND THE OVER-SUBSCRIPTION PRIVILEGE
The Korean Investment Fund, Inc. Rights Offering
As set forth in the Fund's Prospectus dated September 19, 1995 (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 Korean Investment Fund, Inc.
Common Stock subscribed for by exercise of Rights pursuant to the Primary
Subscription and the Over-Subscription Privilege. Such form may be delivered
by hand or sent by facsimile transmission, overnight courier or mail to the
Subscription Agent and must be received prior to 5:00 p.m. New York City time
on October 20, 1995 (the "Expiration Date")*. The terms and conditions of the
Offer set forth in the Prospectus are incorporated by reference herein.
Capitalized terms not defined herein have the meanings attributed to them in
the Prospectus.
The Subscription Agent is:
STATE STREET BANK AND TRUST COMPANY
<TABLE>
<CAPTION>
BY FACSIMILE: BY EXPRESS MAIL OR OVERNIGHT COURIER: BY HAND:
<S> <C> <C>
(TELECOPIES) State Street Bank and Trust Company State Street Bank and
(617) 774-4519 Corporate Reorganization Dept. Trust Company
Confirm by telephone Two Heritage Drive, MB2 Corporate Reorganization Dept.
(617) 774-4511 North Quincy, Massachusetts 02171 225 Franklin Street--Concourse Level
U.S.A. Boston, Massachusetts 02110
U.S.A.
or
BY MAIL OR EXPRESS MAIL: State Street Bank and Trust Company
State Street Bank and Trust Company Corporate Reorganization Dept.
Corporate Reorganization Dept. 61 Broadway--Concourse Level
P.O. Box 9061 New York, New York 10006
Boston, Massachusetts 02285-8686 U.S.A.
U.S.A.
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA
A TELECOPY OR 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 guaranteeing delivery of (i) payment in full for all subscribed
shares and (ii) a properly completed and executed Subscription Certificate to
the Subscription Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.* The Subscription Certificate and full payment must then be
delivered by the close of business on the third business day after the
Expiration Date* to the Subscription Agent. Failure to do so will result in a
forfeiture of the Rights.
(continued on other side)
--------
* Unless extended by the Fund.
<PAGE>
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank or
trust company guarantees delivery of payment to the Subscription Agent by the
close of business (5:00 p.m., New York City time) on the third business day
(October 25, 1995) after the Expiration Date (October 20, 1995, unless
extended) of (i) a properly completed and executed Subscription Certificate
and (ii) payment of the full Subscription Price for shares subscribed for on
Primary Subscription and pursuant to the Over-Subscription Privilege, if
applicable, as subscription for such shares is indicated herein or in the
Subscription Certificate.
<TABLE>
<S> <C> <C> <C>
1. Primary
Subscription Number of Primary Shares
requested for which you Payment to be made
Number of Rights are guaranteed delivery of in connection with
to be exercised Rights and Payment Primary Shares
Rights Shares $ __________________
(Rights divided by 3)
2. Over-Subscription Number of Over- Payment to be made
Subscription Shares in connection with
requested for which you Over-Subscription
are guaranteeing payment Shares
Shares $ __________________
3. Totals Total Number of
Rights to be Delivered
Rights $ __________________
Total Payment
</TABLE>
Method of Delivery of Rights A. Through The Depository Trust Company ("DTC")*
(circle one) B. Direct to the Subscription Agent
Please note that if you are guaranteeing for Over-Subscription Shares and
are a DTC participant, you must also execute and forward to State Street Bank
and Trust Company a Nominee Holder Over-Subscription Certification.
_____________________________________ _____________________________________
Name of Firm Authorized Signature
_____________________________________ _____________________________________
Address Title
_____________________________________ _____________________________________
Zip Code Name (Please Type or Print)
_____________________________________
Name of Registered Holder
(If Applicable)
_____________________________________ _____________________________________
Telephone Number Date
* IF THE RIGHTS ARE TO BE DELIVERED THROUGH DTC, CALL THE SUBSCRIPTION AGENT
TO OBTAIN A PROTECT IDENTIFICATION NUMBER, WHICH NEEDS TO BE COMMUNICATED BY
YOU TO DTC.
2
<PAGE>
EXHIBIT 99(D)(3)
THE KOREAN INVESTMENT FUND, INC.
RIGHTS OFFERING
DTC PARTICIPANT OVER-SUBSCRIPTION EXERCISE FORM
NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM
THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS OR BY THE DEPOSITORY TRUST
COMPANY ("DTC") PARTICIPANTS TO EXERCISE THE OVER-SUBSCRIPTION PRIVILEGE IN
RESPECT OF RIGHTS WITH RESPECT TO WHICH THE PRIMARY SUBSCRIPTION PRIVILEGE WAS
EXERCISED IN FULL AND DELIVERED THROUGH THE FACILITIES OF A COMMON DEPOSITORY
OR DTC. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST BE EFFECTED
BY THE DELIVERY OF THE SUBSCRIPTION CERTIFICATE.
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE FUND'S
PROSPECTUS DATED SEPTEMBER 19, 1995 (THE "PROSPECTUS") AND ARE INCORPORATED
HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM
THE INFORMATION AGENT.
PLEASE COMPLETE ALL APPLICABLE INFORMATION
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL OR
WITH A PROPERLY COMPLETED NOTICE OF GUARANTEED DELIVERY BEFORE 5:00 P.M.,
NEW YORK CITY TIME, ON OCTOBER 20, 1995 (THE "EXPIRATION DATE"), UNLESS
EXTENDED BY THE FUND.
<TABLE>
<CAPTION>
BY FACSIMILE: BY EXPRESS MAIL OR OVERNIGHT COURIER: BY HAND:
<S> <C> <C>
(TELECOPIES) State Street Bank and Trust Company State Street Bank and Trust Company
(617) 774-4519 Corporate Reorganization Corporate Reorganization
Confirm by telephone to: Two Heritage Drive, MB2 225 Franklin Street--Concourse Level
(617) 774-4511 North Quincy, Massachusetts 02171 Boston, Massachusetts 02110
U.S.A. U.S.A.
or
BY FIRST CLASS MAIL:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Reorganization Corporate Reorganization
P.O. Box 9061 61 Broadway--Concourse Level
Boston, Massachusetts 02205-8686 New York, New York 10006
U.S.A. U.S.A.
</TABLE>
1. The undersigned hereby certifies to the Subscription Agent that it is a
participant in [Name of Depository] (the "Depository") and that it
---------
has either (i) exercised the Primary Subscription in respect of the Rights and
delivered such exercised Rights to the Subscription Agent by means of transfer
to the Depository Account of the Fund or (ii) delivered to the Subscription
Agent a Notice of Guaranteed Delivery in respect of the exercise of the
Primary Subscription Privilege and will deliver the Rights called for in such
Notice of Guaranteed Delivery to the Subscription Agent by means of transfer
to such Depository Account of the Fund.
2. The undersigned hereby exercises the Over-Subscription Privilege to
purchase, to the extent available, shares of Common Stock and certifies
-----
to 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 Estimated Subscription
Price of $11.88 per share for each Share of Common Stock subscribed for
pursuant to the Over-Subscription Privilege must be received by the
Subscription Agent before 5:00 p.m., New York City time, on the Expiration
Date, unless a Notice of Guaranteed Delivery is used, in which case, payment
in full must be received by the Subscription Agent not later than the close of
business on the third business day after the Expiration Date and represents
that such payment, in the aggregate amount of $ , either
-------
(continued on other side)
1
<PAGE>
(check appropriate box):
[_] has been or is being delivered to the Subscription Agent pursuant to the
Notice of Guaranteed Delivery referred to above
or
[_] is being delivered to the Subscription Agent herewith
or
[_] has been delivered separately to the Subscription Agent;
________________________________________ ___________________________________
Primary Subscription Confirmation Number Name of Nominee Holder
________________________________________ ___________________________________
Depository Participant Number Address
Contact Name: __________________________ ___________________________________
City State Zip Code
Phone Number: __________________________ By: ______________________________
Name: ____________________________
Title: ___________________________
Dated: _________ , 1995
PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE POSITION
OF RIGHTS OWNED, THE NUMBER OF PRIMARY SHARES SUBSCRIBED AND THE NUMBER OF
OVER-SUBSCRIPTION SHARES, IF APPLICABLE, REQUESTED BY EACH SUCH OWNER.
PLEASE NOTE: THIS FORM WILL NOT BE ACCEPTED AS VALID UNLESS THE FOLLOWING
INFORMATION IS PROVIDED FOR THE ALLOCATION OF OVER-SUBSCRIPTION SHARES.
The positions below pertain to those persons on whose behalf the Over-
Subscription is being exercised:
_________________________ Total number of record date shares
_________________________ Total number of primary rights exercised
2
<PAGE>
EXHIBIT 99(D)(4)
THE KOREAN INVESTMENT FUND, INC. RIGHTS OFFERING
BENEFICIAL OWNER LISTING CERTIFICATION
The undersigned, a bank, broker or other nominee holder of Rights ("Rights")
to purchase shares of Common Stock, $.01 par value ("Common Stock"), of The
Korean Investment Fund, Inc. (the "Fund") pursuant to the Rights Offering (the
"Offer") described and provided for in the Fund's Prospectus dated September
19, 1995 (the "Prospectus"), hereby certifies to the Fund and to State Street
Bank and Trust Company, as Subscription Agent for such Offer, that for each
numbered line filled in below, the undersigned has exercised, on behalf of the
beneficial owner thereof (which may be the undersigned), the number of Rights
specified on such line pursuant to the Primary Subscription (as defined in the
Prospectus) and such beneficial owner wishes to subscribe for the purchase of
additional shares of Common Stock pursuant to the Over-Subscription Privilege
(as defined in the Prospectus), in the amount set forth in the third column of
such line.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF RECORD DATE NUMBER OF RIGHTS EXERCISED REQUESTED PURSUANT TO THE
SHARES OWNED PURSUANT TO PRIMARY SUBSCRIPTION OVER-SUBSCRIPTION PRIVILEGE
<S> <C> <C>
1)__________________ _____________________ ______________________
2)__________________ _____________________ ______________________
3)__________________ _____________________ ______________________
4)__________________ _____________________ ______________________
5)__________________ _____________________ ______________________
6)__________________ _____________________ ______________________
7)__________________ _____________________ ______________________
8)__________________ _____________________ ______________________
9)__________________ _____________________ ______________________
10)__________________ _____________________ ______________________
</TABLE>
______________________________________________
Name of Nominee Holder
By: __________________________________________
Name: ______________________________________
Title: _____________________________________
Dated: _________ , 1995
Provide the following information, if applicable:
______________________________________________ Name of Broker: _______________
Depository Trust Corporation ("DTC")
Participant Number
______________________________________________ Address: ______________________
DTC Primary Subscription Confirmation Number(s)
<PAGE>
EXHIBIT 99(D)(5)
----------------
STATE STREET BANK AND TRUST COMPANY
SUBSCRIPTION DISTRIBUTION AND ESCROW AGENCY AGREEMENT
This Subscription, Distribution and Escrow Agency Agreement (the "Agreement") is
made as of between The Korean Investment Fund, Inc. a Maryland
Corporation and State Street Bank and Trust Company, a national banking
association, as subscription, distribution and escrow agent ("Agent").
WHEREAS, The Korean Investment Fund, Inc. proposes to make a subscription offer
by issuing certificates or other evidences of subscription rights, in the form
designated by The Korean Investment Fund, Inc. ("Subscription Certificates") to
shareholders of record ("Record Date Shareholders") of its Common Stock as of a
record date specified by The Korean Investment Fund, Inc. (the "Record Date"),
pursuant to which each Record Date Shareholder will have certain rights (the
"Rights") to subscribe to shares of The Korean Investment Fund, Inc. Common
Stock par value $.01 ("Common Stock"), as described in and upon such terms as
are set forth in the prospectus (the "Prospectus") included in the Form N-2
Registration Statement filed by The Korean Investment Fund, Inc. with the
Securities and Exchange Commission on August 16, 1995, as amended by any
amendment filed with respect thereto (the "Registration Statement");
WHEREAS, The Korean Investment Fund, Inc. wishes the Agent to perform certain
acts on behalf of The Korean Investment Fund, Inc. and the Agent is willing to
so act, in connection with the distribution of the Subscription Certificates and
the issuance and exercise of the Rights to subscribe therein set forth, all upon
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements
set forth herein, the parties agree as follows:
1. Pursuant to resolution of its Board of Directors, The Korean Investment
Fund, Inc. hereby appoints and authorizes the Agent to act on its behalf in
accordance with the provisions hereof, and the Agent hereby accepts such
appointment and agrees to so act.
2. (a) Each Subscription Certificate shall evidence the Rights of the
Record Date Shareholder therein named to purchase Common Stock upon
the terms and conditions therein and herein set forth.
(b) Upon the written advice of The Korean Investment Fund, Inc. signed by
its Chairman, President, Secretary or Assistant Secretary, as to the
Record Date, the Agent shall, from a list of The Korean Investment
Fund, Inc. Shareholders as of the Record Date to be delivered to the
Agent by The Korean Investment Fund, Inc. Transfer Agent, prepare and
record Subscription Certificates in the names of the Record Date
Shareholders, setting forth the number of Rights to subscribe to The
Korean Investment Fund, Inc. Common Capital Stock calculated on the
<PAGE>
basis of one right for each share recorded on The Korean Investment
Fund, Inc. books in the name of each such Record Date Shareholder as
of the Record Date. Each Subscription Certificate shall be dated as
of the Record Date and shall be executed manually or by facsimiles
signature of a duly authorized Officer of The Korean Investment Fund,
Inc. Upon the written advice, signed as aforesaid, as to the
effective date of the Registration Statement, the Agent shall as
promptly as practicable countersign and deliver the Subscription
Certificates, together with a copy of the Prospectus, to all Record
Shareholders.
No Subscription Certificate shall be valid for any purpose unless so
executed. Should any Officer whose signature has been placed upon any
Subscription Certificate cease to hold such office at any time
thereafter, such event shall have no effect on the validity of such
Subscription Certificate.
3. (a) Each Subscription Certificate shall be irrevocable and non-
transferable. The Agent shall maintain a register of Subscription
Certificates and the holders of record thereof (each of whom shall be
deemed a "Record Date Shareholder" hereunder for purposes of
determining the rights of holders of Subscription Certificates). Each
Subscription Certificate shall, subject to the provisions thereof,
entitle the Record Date Shareholder in whose name it is recorded to
the following:
(1) The right (the "Basic Subscription Right") to purchase a number
of shares of Common Stock equal to one share of Common Stock for
every three Subscription Rights; provided, however, that no
fractional shares of Common Stock shall be issued; and
(2) The right (the "Oversubscription Right") to purchase from The
Korean Investment Fund, Inc. additional shares of Common Stock,
subject to the availability of such shares and to allotment of
such shares as may be available among Record Date Shareholders
who exercise Oversubscription Rights on the basis specified in
the Prospectus; provided, however, that a Record Date Shareholder
who has not exercised his Basic Subscription Rights with respect
to the full number of shares that such Record Date Shareholder is
entitled to purchase by virtue
2
<PAGE>
of his Basic Subscription Rights as of the Expiration Date, if
any, shall not be entitled to any Oversubscription Rights.
(b) A Record Date Shareholder may exercise his Basic Subscription Rights
and Oversubscription Rights by delivery to the Agent at its corporate
office specified in the Prospectus of (i) the Subscription Certificate
with respect thereto, duly executed by such Record Date Shareholder in
accordance with and as provided by the terms and conditions of the
Subscription Certificate, together with (ii) the purchase price of
for each share of Common Stock subscribed for by exercise of such
Rights, in United States dollars in cash, by check, or bank draft
drawn on a bank in the continental United States or by postal,
telegraphic, or express money order, in each case payable to the order
of The Korean Investment Fund, Inc.
(c) Rights may be exercised at any time after the date of issuance of the
Subscription Certificates with respect thereto but no later than 5:00
P.M. Eastern Daylight Time on such date as The Korean Investment Fund,
Inc. shall designate to the Agent in writing (the "Expiration Date").
For the purpose of determining the time of the exercise of any Rights,
delivery of any material to the Agent shall be deemed to occur when
such materials are received at the corporate office of the Agent
specified in the Prospectus.
(d) Not withstanding the provisions of Section 3(b) and 3(c) regarding
delivery of an executed Subscription Certificate to the Agent prior to
5:00 P.M. Eastern Daylight Time on the Expiration Date, if prior to
such time the Agent receives notice of guaranteed delivery by telegram
or otherwise from a bank, trust company or a New York Stock Exchange
member guaranteeing delivery of (i) full payment for shares purchased
and subscribed for by virtue of a Rights Holder's Rights, and (ii) a
properly completed and executed Subscription Certificate, then such
exercise of Basic Subscription Rights and Oversubscription Rights
shall be regarded as timely, subject, however, to receipt of the duly
executed Subscription Certificate and full payment for the Capital
Common Stock by the Agent within three business days after the
Expiration Date (as defined in the Prospectus).
3
<PAGE>
(e) Within eight business days following the Expiration Date (the
"Confirmation Date"), the Agent shall send a confirmation to each
Shareholder (or, if shares of Common Stock on the Record Date are held
by Cede & Co. or any other depository or nominee, to Cede & Co. or
such other depository or nominee), showing (i) the number of shares
acquired pursuant to the Basic Subscription Rights, (ii) the number of
shares, if any, acquired pursuant to the Oversubscription Rights,
(iii) the per share and total purchase price for the shares, (iv) any
amount payable to the Shareholder pursuant to Section 9, and (v) any
excess to be refunded by The Korean Investment Fund, Inc. to such
Shareholder, in each case based on the Subscription Price. Any excess
payment to be refunded by The Korean Investment Fund, Inc. to a
Shareholder, shall be mailed by the Agent to the Shareholder within
EIGHT BUSINESS days after the Expiration Date, as provided in Section
6 below.
4. If, after allocation of shares of Common Stock to persons exercising Basic
Subscription Rights, there remain unexercised Rights, then the Agent shall
allot the shares issuable upon exercise of such unexercised Rights (the
"Remaining Shares") to persons exercising Oversubscription Rights, in the
amounts of such oversubscriptions. If the number of shares for which
Oversubscription Rights have been exercised is greater than the Remaining
Shares, the Agent shall allot the Remaining Shares to the persons
exercising Oversubscription Rights pro rata based solely on the number of
Basic Subscription Rights exercised by each of them. The Agent shall
advise The Korean Investment Fund, Inc. (the Company) immediately upon the
completion of the allocation set forth above as to the total number of
shares subscribed and distributable.
5. (a) The Agent, will deliver (i) certificates representing those shares
purchased pursuant to exercise of Basic Subscription Rights as soon as
practicable after the corresponding Rights have been validly exercised and
full payment for such shares has been received and cleared; (ii)
certificates representing those share purchased pursuant to the exercise of
Oversubscription Rights as soon as practicable after the Expiration Date
and after all allocations have been effected; (iii) in the case of each
Rights Holder whose rights were sold pursuant to Section 9, within FIFTEEN
BUSINESS days after the Expiration Date, proceeds of such sale (provided,
however, that proceeds of sales on behalf of Record Date Shareholders whose
Subscription Certificates are
4
<PAGE>
undeliverable shall be held by the Agent until they are either claimed or
escheated); (iv) in the case of each Record Date Shareholder who
subscribed, pursuant to the exercise of Oversubscription Rights, for a
greater number of shares than was allotted to such Record Date Shareholder
under Section 4, within EIGHT BUSINESS days after the Expiration Date, and
refund (and interest on such) in the amount of the difference between the
purchase price delivered for the shares subscribed for pursuant to the
exercise of such Oversubscription Rights and the purchase price of the
shares so allotted under Section 4 (an "Excess Payment"); (v) in the case
of record shareholders who are participants in the dividend reinvestment
plan, within EIGHT BUSINESS days after expiration date, account statements
reflecting a credit of uncertificated shares for their primary and
oversubscription shares unless such shareholders have elected to receive
certificates.
6. (a) All proceeds received by the Agent from Rights holders in respect
of the exercise of rights shall be held by the Agent, on behalf of The
Korean Investment Fund, Inc. in a segregated, interest-bearing escrow
account (the "Escrow Account") pending disbursement in the manner
described in Section 6 (b) below.
(b) The Agent shall deliver all proceeds received in respect of the
exercise of the Rights (including interest earned thereon) to The
Korean Investment Fund, Inc. as promptly as practicable, but in no
event later than fifteen business days after the Confirmation Date.
Proceeds held in respect of Excess Payments (including interest earned
thereon) shall be refunded to Record Date Shareholders entitled to
such a refund within fifteen business days after the Expiration Date.
7. The Agent shall promptly advise The Korean Investment Fund, Inc. as to the
date of delivery of Common Stock hereunder and shall supply The Korean
Investment Fund, Inc. with a certified list of Shareholders as of the
Record Date.
8. The Agent shall account promptly to The Korean Investment Fund, Inc. with
respect to Rights exercised and concurrently account for all monies
received and returned by the Agent with respect to the purchase of shares
of Common Stock upon the exercise of Rights.
9. In the event the Agent does not receive, within five business days after
the Expiration Date, any amount due
5
<PAGE>
from a Rights Holder as specified in Section 3(e), then it shall take such
action with respect to such Rights Holder's Subscription Rights as may be
instructed in writing by The Korean Investment Fund, Inc. including without
limitation (i) applying any payment actually received by it toward the
purchase of the greatest whole number of shares of Common Stock which could
be acquired with such payment, (ii) allocating the shares subject to such
Subscription Rights to one or more other Record Date Shareholders, and
(iii) selling all or a portion of the shares of Common Stock deliverable
upon exercise of such Subscription Rights on the open market, and applying
the proceeds thereof to the amount owed.
10. No Subscription Certificate shall entitle a Rights Holder to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purpose, nor shall anything contained in any Subscription Certificate be
construed to confer upon any Right Holder any of the rights of a
shareholder of The Korean Investment Fund, Inc. or any right to vote, give
or withhold consent to any action by The Korean Investment Fund, Inc.
(whether upon any recapitalization, issue of stock, reclassification of
stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings of other action affecting shareholders, or receive dividends or
otherwise, until the Rights evidenced thereby shall have been exercised and
the shares of Common Stock purchasable upon the exercise thereof shall have
become deliverable as provided in this Agreement and in the Prospectus.
11. If any Subscription Certificate is lost, stolen, mutilated, or destroyed
the Agent may, on such terms which will indemnify The Korean Investment
Fund, Inc. as the Agent may in its discretion impose (which shall, in the
case of a Subscription Certificate include the surrender thereof), issue a
new Subscription Certificate of like denomination in substitution for the
Subscription Certificate so lost, stolen or mutilated or destroyed.
12. (a) The Korean Investment Fund, Inc. covenants that all shares of Common
Stock issued on exercise of Rights set forth in the Subscription
Certificates will be validly issued, fully paid, nonassessable and
free of preemptive rights.
(b) The Korean Investment Fund, Inc. shall furnish to the Agent, upon
request, an opinion of counsel satisfactory to the Agent to the effect
that a registration statement under the Securities Act of 1933, as
amended (the "Act"), is then in effect with
6
<PAGE>
respect to its shares of Common Stock issuable upon exercise of the
Rights set forth in the Subscription Certificates. Upon written
advice to the Agent that the Securities and Exchange Commission shall
have issued or threatened to have issued any order preventing or
suspending the use of the Prospectus, or if for any reason it shall be
necessary to amend or supplement the Prospectus in order to comply
with the Act, the Agent shall cease acting hereunder until receipt of
written instructions from The Korean Investment Fund, Inc. and such
assurances as it may reasonably request that it may comply with such
instruction without violations of the Act.
13. (a) Any corporation into which the Agent may be merged or converted or
with which it may be consolidated, or any corporation resulting from
any merger, conversion or consolidation to which the Agent shall be a
party, or any corporation succeeding to the corporate trust business
of the Agent, shall be the successor to the Agent hereunder without
the execution or filing of any of the parties hereto, provided that
such corporation would be eligible for appointment as a successor
Agent. In case at the time such successor to the Agent shall succeed
to the agency created by this Agreement, any of the Subscription
Certificates shall have been countersigned by not delivered, any such
successor to the Agent may adopt the countersignature of the original
Agent and deliver such Subscription Certificates so countersigned, and
in case at that time any of the Subscription Certificates shall not
have been countersigned, any successor to the Agent may countersign
such Subscription Certificates either in the name of the predecessor
Agent or in the name of the successor Agent, and in all such cases
such Subscription Certificates shall have the full force provided in
the Subscription Certificates and in this Agreement.
(b) In case at any time the name of the Agent shall be changed and at such
time any of the Subscription Certificates shall have been
countersigned but not delivered, the Agent may adopt the
countersignature under its prior name and deliver Subscription
Certificates so countersigned, and in case at that time any of the
Subscription Certificates shall not have been countersigned, the Agent
may countersign such Subscription Certificates either in its prior
name or in its changed name, and in all such cases such Subscription
Certificates shall have the full
7
<PAGE>
force provided in the Subscription Certificates and in this Agreement.
14. The Korean Investment Fund, Inc. agrees to pay to the Agent from time to
time, on demand of the Agent, reasonable compensation for all services
rendered by it hereunder and also its reasonable expenses and other
disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder.
15. The Agent undertakes the duties and obligations imposed by this Agreement
upon the following terms and conditions:
(a) Whenever in the performance of its duties under this Agreement the
Agent shall deem it necessary or desirable that any fact or matter be
proved or established, prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect
thereof is herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the
Chairman of the Board or President or a Vice president or the
Secretary or Assistant Secretary or the Treasurer of The Korean
Investment Fund, Inc. delivered to the Agent, and such certificate
shall be full authorization to the Agent for any action taken or
suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(b) The Agent shall not be responsible for and The Korean Investment Fund,
Inc. shall indemnify and hold the Agent harmless from and against, any
and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to all actions
of the Agent or its agents or subcontractors required to be taken
pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(c) The Agent shall be liable hereunder only for its own negligence or
willful misconduct.
(d) Nothing herein shall preclude the Agent from acting in any other
capacity for The Korean Investment Fund, Inc. or for any other legal
entity.
(e) The Agent is hereby authorized and directed to accept instructions
with respect to the performance
8
<PAGE>
of its duties hereunder form any officer or assistant officer of The
Korean Investment Fund, Inc. and to apply to any such officer of The
Korean Investment Fund, Inc. for advice or instructions in connection
with its duties, and shall be indemnified and not be liable for any
action taken or suffered by it in good faith in accordance with
instructions of any officer or assistant officer.
(f) The Agent shall be indemnified and shall incur no liability for or in
respect of any action taken, suffered, or omitted by it in reliance
upon any Subscription Certificate or certificate for Common Stock,
instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement
or other paper or document that it reasonably believes to be genuine
and to be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons.
(g) Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act
hereunder.
16. The Agent may, without the consent or concurrence of the Shareholders in
whose names Subscription Certificates are registered, by supplemental
agreement or otherwise, concur with The Korean Investment Fund, Inc. in
making any changes or corrections in a Subscription Certificate that it
shall have been advised by counsel (who may be counsel for The Korean
Investment Fund, Inc.) is appropriate to cure any ambiguity or to correct
any defective or inconsistent provision or clerical omission or mistake or
manifest error therein or herein contained, and which shall not be
inconsistent with the provision of the Subscription Certificate except
insofar as any such change may confer additional rights upon the Rights
Holders.
17. Assignment
a. Except as provided in Section c below, neither this Agreement nor any
rights or obligations hereunder may be assigned by either party
without the written consent of the other party.
b. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
9
<PAGE>
c. The Agent may, without further consent on the part of The Korean Investment
Fund, Inc., subcontract for the performance hereof with (i) Boston
Financial Data Services, Inc., a Massachusetts corporation ("BFDS") which
is duly registered as a transfer agent pursuant to Section 17(c)(1) of the
Securities Exchange Act of 1934, or (ii) the current third party vendor
utilized by BFDS; provided, however, that the Agent shall be as fully
responsible to The Korean Investment Fund, Inc. for the acts and omissions
of any subcontractor as it is for its own acts and omissions.
18. All the covenants and provisions of this Agreement by or for the benefit of
The Korean Investment Fund, Inc. or the Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
19. The validity, interpretation and performance of this Agreement shall be
governed by the law of the Commonwealth of Massachusetts.
STATE STREET BANK AND The Korean Investment
TRUST COMPANY Fund, Inc.
By:_______________________________ By:___________________________
Vice President (Officer)
Dated:____________________________ Dated:________________________
10
<PAGE>
EXHIBIT 99(H)
-------------
Draft of 9/15/95
THE KOREAN INVESTMENT FUND, INC.
1,987,637 Shares of Common Stock Issuable Upon Exercise
of Non-Transferable Rights to Subscribe for
Such Shares of Common Stock
DEALER MANAGER AGREEMENT
New York, New York
September 19, 1995
PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
The Korean Investment Fund, Inc., a Maryland corporation (the
"Company"), Alliance Capital Management L.P. ("Alliance") and Orion Asset
Management Co., Ltd. ("Orion") each confirms its agreement with and appointment
of PaineWebber Incorporated to act as dealer manager (the "Dealer Manager") in
connection with the issuance by the Company to the holders of record at the
close of business on September 25, 1995 or such other date as is established as
the record date for such purpose (the "Holders"), of the shares of common stock,
par value $.01 per share, of the Company (the "Common Stock"), of non-
transferable rights entitling such Holders to subscribe for an aggregate of
1,987,637 shares (each a "Share" and, collectively, the "Shares") of Common
Stock (the "Offer"). Pursuant to the over-subscription privilege in connection
with the Offer, the Company may, at the discretion of the Board of Directors,
increase the number of Shares subject to subscription by up to 25%. Pursuant to
the terms of the Offer, the Company is issuing each Holder one nontransferable
right (each a "Right" and, collectively, the "Rights") for each whole share of
Common Stock held by such Holder on the record date set forth in the Prospectus
(as defined herein) (the "Record Date"). The Rights entitle Holders to acquire
during the subscription period set forth in the Prospectus (as defined herein)
(the "Subscription Period"), at the price set forth in the Prospectus (the
"Subscription Price"), one Share for each three Rights exercised on the terms
and conditions set forth in such Prospectus. No fractional Shares will be
issued.
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form N-2 (No. 33-61849) and a related
preliminary prospectus and statement of additional information for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations of the Commission thereunder (the "1933
Act Rules and Regulations"), and has filed such amendments to such registration
statement on Form N-2, if any, and such amended preliminary prospectuses and
statements of additional information as may have been required to the date
hereof. The Company will prepare and file such additional amendments thereto
and such amended prospectuses and statements of additional information as may
hereafter be required. The registration statement (as amended, if applicable)
and the prospectus and statement of additional information constituting a part
thereof, as from time to time amended or supplemented pursuant to the Act, are
herein referred to as the "Registration Statement" and such prospectus and
statement of additional information are collectively referred to herein as the
"Prospectus", except that if any revised prospectus or statement of additional
information shall be provided to the Dealer Manager by the Company for use in
connection with the Offer which differs from the Prospectus on file at the
Commission at the time the Registration Statement becomes effective (whether
such revised prospectus or statement of additional information is required to be
filed by the Company pursuant to Rule 497(b) or Rule 497(h) of the 1933 Act
Rules and Regulations), the term "Prospectus" shall refer to each such revised
prospectus and statement of additional information from and after the time it is
first provided to the Dealer Manager for such use. Any letters to beneficial
owners of the shares of Common Stock of the Company, forms used to exercise
rights, any letters from the Company to securities dealers, commercial banks and
other nominees and any newspaper announcements, press releases and other
offering materials and information that the Company may use, approve, prepare or
authorize in writing for use in connection with the Offer, are collectively
referred to hereinafter as the "Offering Materials".
1. Representations and Warranties.
------------------------------
(a) The Company represents and warrants to, and agrees with, the
Dealer Manager as of the date hereof and as of the date of the commencement of
the Offer (such later date being hereinafter referred to as the "Representation
Date") that:
(i) The Company meets the requirements for use of Form N-2 under the
Act, the 1933 Act Rules and Regulations, the Investment Company Act of
1940, as amended (the "Investment Company Act"), and the rules and
regulations of the Commission under the Investment Company Act, (the
2
<PAGE>
"Investment Company Act Rules and Regulations"). At the time the
Registration Statement becomes effective, the Registration Statement will
contain all statements required to be stated therein in accordance with and
will comply in all material respects with the requirements of the Act, the
Investment Company Act, the 1933 Act Rules and Regulations and the
Investment Company Act Rules and Regulations (the 1933 Act Rules and
Regulations and the Investment Company Act Rules and Regulations will
together hereinafter be referred to as the "Rules and Regulations") and
will not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. From the time the Registration
Statement becomes effective through the expiration date of the Offer set
forth in the Prospectus (the "Expiration Date"), the Prospectus (unless the
term "Prospectus" refers to a prospectus which has been provided to the
Dealer Manager by the Company for use in connection with the Offer which
differs from the Prospectus on file with the Commission at the time the
Registration Statement becomes effective, in which case at the time such
prospectus is first provided to the Dealer Manager for such use) and the
Offering Materials then authorized by the Company for use will not include
an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
--------
however, that the representations and warranties in this subsection shall
-------
not apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by the Dealer Manager expressly for use
in the Registration Statement or Prospectus.
(ii) The Company is registered with the Commission under the
Investment Company Act as a closed-end, diversified, management investment
company, and no order of suspension or revocation of such registration has
been issued or proceedings therefor initiated or threatened by the
Commission.
(iii) Price Waterhouse LLP, the accountants who certified the
financial statements of the Company set forth or incorporated by reference
in the Registration Statement and the Prospectus, are independent public
accountants as required by the Act and the 1933 Act Rules and Regulations.
(iv) The financial statements of the Company set forth or
incorporated by reference in the Registration Statement
3
<PAGE>
and the Prospectus fairly present in all material respects the financial
condition of the Company as of the dates indicated in conformity with
generally accepted accounting principles; and the information set forth in
the Prospectus under the headings "Expense Information" and "Financial
Highlights" each presents fairly in all material respects the information
stated therein.
(v) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Maryland, has
full power and authority (corporate and other) to conduct its business as
described in the Registration Statement and the Prospectus and is duly
qualified to do business in each jurisdiction in which it owns or leases
real property or in which the conduct of its business requires such
qualification, except where the failure to be so qualified would not result
in a material adverse effect upon the business, properties, financial
position or results of operations of the Company. The Company has no
subsidiaries.
(vi) The Company's authorized capitalization is as set forth in the
Prospectus; the outstanding shares of Common Stock have been duly
authorized and validly issued and are fully paid and non-assessable and
conform in all material respects to the description thereof in the
Prospectus under the heading "Description of Common Stock"; the Rights have
been duly authorized by all requisite action on the part of the Company for
issuance pursuant to the Offer; the Shares have been or, with respect to
the Shares to be issued pursuant to the over-subscription privilege, will
be duly authorized by all requisite action on the part of the Company for
issuance and sale pursuant to the terms of the Offer and, when issued and
delivered by the Company pursuant to the terms of the Offer against payment
of the consideration set forth in the Prospectus will be validly issued and
fully paid and non-assessable; the Shares and the Rights conform in all
material respects to all statements relating thereto contained in the
Registration Statement and the Prospectus; and the issuance of each of the
Rights and the Shares is not subject to any preemptive rights.
(vii) Except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, (A) the Company has not incurred any
liabilities or obligations, direct or contingent, or entered into any
transactions, other than in the ordinary course of business, that are
material to the Company, (B) there has not been any material change in the
capital stock of the Company, or any
4
<PAGE>
material adverse change, or to the Company's knowledge any development
involving a prospective material adverse change, in the condition
(financial or otherwise), business, prospects, net worth or results of
operations of the Company, (C) there has been no dividend or distribution
paid or declared in respect of the Company's capital stock and (D) the
Company has no outstanding long-term debt.
(viii) Except as set forth in the Prospectus, there is not pending
or, to the knowledge of the Company, threatened, any action, suit or
proceeding affecting the Company or to which the Company is a party before
or by any court or governmental agency or body, which might result in any
material adverse change in the condition (financial or otherwise),
business, prospects, net worth or results of operations of the Company, or
which might materially and adversely affect the properties or assets
thereof.
(ix) There are no contracts or documents of the Company that are
required to be filed as exhibits to the Registration Statement by the Act
or the Investment Company Act or by the Rules and Regulations that have not
been so filed or incorporated by reference therein as permitted by the
Rules and Regulations.
(x) This Agreement, the Subscription Rights Agency Agreement (the
"Subscription Agency Agreement") dated as of September , 1995 between
the Company and State Street Bank and Trust Company (the "Subscription
Agent"), the Investment Management and Administration Agreement between the
Company and Alliance (the "Investment Management and Administration
Agreement"), the Investment Management Agreement between the Company and
Orion (the "Management Agreement"), the Custodian Agreement between the
Fund and Brown Brothers Harriman & Co. and the Registrar, Transfer Agency
and Service Agreement (the "Transfer Agency Agreement") between the Company
and State Street Bank and Trust Company (collectively, all the foregoing
are the "Company Agreements") have been duly authorized, executed and
delivered by the Company; the Company Agreements are, assuming due
authorization, execution and delivery by the other parties thereto, legal,
valid, binding and enforceable obligations of the Company subject, as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws of general applicability relating to or affecting creditors'
rights and to general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law) and
except as enforcement of rights to indemnity and contribution hereunder may
be limited by Federal or state securities laws or principles of
5
<PAGE>
public policy, and the performance of the Company's obligations under the
Company Agreements and the consummation of the transactions contemplated
therein or in the Registration Statement will not result in a material
breach or violation of any of the terms and provisions of, constitute a
default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any properties or assets of the Company pursuant to any
material agreement, indenture, mortgage, lease or other instrument to which
the Company is a party or by which it may be bound or to which any of the
property or assets of the Company is subject, nor will such action result
in any violation of the Company's charter or by-laws, or any order, law,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties; no consent,
approval, authorization, notification or order of, or filing with, any
court or governmental agency or body is required for the consummation by
the Company of the transactions contemplated by the Company Agreements or
the Registration Statement, except such as have been obtained, or if the
registration statement filed with respect to the Shares is not effective
under the Act as of the time of execution hereof, such as may be required
(and shall be obtained as provided in this Agreement) under the Investment
Company Act, the Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and state securities laws.
(xi) Each of the Company Agreements complies in all material respects
with all applicable provisions of the Investment Company Act.
(xii) The Common Stock has been duly listed on the New York Stock
Exchange and prior to their issuance the Shares will have been approved for
listing, subject to official notice of issuance.
(xiii) The Company owns or possesses or has obtained all material
governmental licenses, permits, consents, orders or approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its business as contemplated in the
Prospectus, including registration as a foreign investor in Korea able to
invest directly in securities of Korean issuers to the extent permitted
under Korean laws and regulations as of the date of the Prospectus.
(xiv) The Company (A) has not taken, directly or indirectly, any
action designed to cause or to result in, or that has constituted or which
might reasonably be expected
6
<PAGE>
to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the issuance of the Rights or the
sale or resale of the Shares, (B) has not since the filing of the
Registration Statement sold, bid for or purchased, or paid anyone any
compensation for soliciting purchases of, shares of Common Stock of the
Company and (C) will not, until the later of the expiration of the Rights
or the completion of the distribution (within the meaning of Rule 10b-6
under the Exchange Act) of the Shares, sell, bid for or purchase, pay or
agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the solicitation
of the exercises of Rights pursuant to this Agreement); provided that any
-------- ----
action in connection with the Company's dividend reinvestment plan will not
be deemed to be within the terms of this Section 1(a)(xiv).
(xv) The Company intends to direct the investment of the proceeds of
the Offer described in the Registration Statement and the Prospectus in
such a manner as to comply with the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended ("Subchapter M of the Code"), and
is qualified and intends to continue to qualify as a regulated investment
company under Subchapter M of the Code.
(xvi) The Prospectus and the Offering Materials complied and comply
with the requirements of the Act, the Investment Company Act and the Rules
and Regulations.
(xvii) There are no material restrictions, limitations or regulations
with respect to the ability of the Company to invest its assets as
described in the Prospectus other than as described therein.
(b) Alliance represents and warrants to, and agrees with, the Dealer
Manager as of the date hereof and as of the Representation Date that:
(i) It has been duly organized and is validly existing as a limited
partnership under the laws of the State of Delaware, with partnership power
and authority to own its properties and conduct its business as described
in the Prospectus, and is duly licensed or qualified as a foreign entity
and in good standing to do business in each other jurisdiction in which its
ownership of property or the conduct of its business requires such
qualification or license, except where the failure to be so qualified would
not have a material adverse effect on Alliance.
7
<PAGE>
(ii) It is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is
not prohibited by the Advisers Act or the Investment Company Act, or the
rules and regulations under such Acts, from acting under the Investment
Management and Administration Agreement for the Company as contemplated by
the Prospectus.
(iii) Each of this Agreement and the Investment Management and
Administration Agreement has been duly authorized, executed and delivered
by Alliance; the Investment Management and Administration Agreement is,
assuming due authorization, execution and delivery by the other parties
thereto, a legal, valid, binding and enforceable obligation of Alliance,
subject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium and other laws of general applicability relating to or affecting
creditors' rights, and to general principles of equity (regardless of
whether enforceability is considered in a proceeding in equity or at law),
and the performance by Alliance of its obligations under such agreements
and the consummation of the transactions therein contemplated to be
consummated by Alliance will not result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any statute,
any material agreement or instrument to which Alliance is a party or and by
which it is bound or to which any of the property of Alliance is subject,
the Agreement of Limited Partnership of Alliance, or any order, rule or
regulation of any court or governmental agency or body, stock exchange or
securities association having jurisdiction over Alliance or any of its
properties or operations.
(iv) Except as set forth in the Prospectus, there is not pending or,
to the knowledge of Alliance, threatened, any action, suit or proceeding to
which Alliance is a party before or by any court or governmental agency or
body, which is likely to have a material adverse effect upon the Company or
upon the ability of Alliance to perform its obligations under the
Investment Management and Administration Agreement.
(v) Alliance (i) has not taken, directly or indirectly, any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the issuance of the
Rights or the sale or resale of the Shares, (ii) has not since the filing
of the Registration Statement sold, bid for or purchased, or paid anyone
any compensation
8
<PAGE>
for soliciting purchases of, shares of Common Stock of the Company and
(iii) will not, until the later of the expiration of the Rights or the
completion of the distribution (within the meaning of Rule 10b-6 under the
Exchange Act) of the Shares, sell, bid for or purchase, pay or agree to pay
any person any compensation for soliciting another to purchase any other
securities of the Company (except for the solicitation of exercises of
Rights pursuant to this Agreement); provided that any action in connection
-------- ----
with the Company's dividend reinvestment plan will not be deemed to be
within the terms of this Section 1(b)(v).
(vi) Alliance owns, possesses or has obtained and currently maintains
all material governmental licenses, permits, consents, orders, approvals
and other authorizations ("Authorizations") as are necessary for Alliance
to carry on its business as set forth in and contemplated by the Prospectus
except where the failure to obtain such Authorizations would not have a
material adverse effect on the ability of Alliance to perform its
obligations under the Investment Management and Administration Agreement.
(vii) The description of Alliance and its businesses in the
Registration Statement and the Prospectus complies with the requirements of
the Act, the Investment Company Act and the Rules and Regulations and does
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading in light of the circumstances under
which they were made.
(viii) There are no material restrictions, limitations or regulations
with respect to the ability of the Company to invest its assets as
described in the Prospectus other than as may be described therein.
(c) Orion represents and warrants to, and agrees with, the Dealer
Manager as of the date hereof and as of the Representation Date that:
(i) It has been duly organized and is validly existing as a
corporation under the laws of the Cayman Islands, with corporate power and
authority to conduct its business as described in the Prospectus, and is
duly qualified to do business as a foreign corporation and in good standing
in each other jurisdiction in which it owns or leases real property or in
which the conduct of its business requires such qualification, except where
the failure to be so qualified does not involve a material adverse risk to
its
9
<PAGE>
business, properties, financial position or results of operations.
(ii) It is duly registered as an investment adviser under the
Advisers Act, and is not prohibited by the Advisers Act or the Investment
Company Act, or the rules and regulations under such Acts, from acting
under the Management Agreement for the Company as contemplated by the
Prospectus.
(iii) Each of this Agreement and the Management Agreement have been
duly authorized, executed and delivered by Orion; the Management Agreement
is, assuming due authorization, execution and delivery by the other parties
thereto, a legal, valid, binding and enforceable obligation of Orion,
subject as to enforcement to bankruptcy, insolvency, reorganization,
moratorium and other laws of general applicability relating to or affecting
creditors' rights, and to general principles of equity (regardless of
whether enforceability is considered in a proceeding in equity or at law),
and the performance by Orion of its obligations under such agreements and
the consummation of the transactions therein contemplated to be consummated
by Orion will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any material
agreement or instrument to which Orion is a party or and by which it is
bound or to which any of the property of Orion is subject, Orion's
corporate charter, or any order, rule or regulation of any court or
governmental agency or body, stock exchange or securities association
having jurisdiction over Orion or any of its properties or operations.
(iv) Except as set forth in the Prospectus, there is not pending or,
to the knowledge of Orion, threatened, any action, suit or proceeding to
which Orion is a party before or by any court or governmental agency or
body, which is likely to have a material adverse effect upon the Company or
upon the ability of Orion to perform its obligations under the Management
Agreement.
(v) Orion (i) has not taken, directly or indirectly, any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the issuance of the
Rights or the sale or resale of the Shares, (ii) has not since the filing
of the Registration Statement sold, bid for or purchased, or paid anyone
any compensation for soliciting purchases of, shares of Common Stock of the
Company and
10
<PAGE>
(iii) will not, until the later of the expiration of the Rights or the
completion of the distribution (within the meaning of Rule 10b-6 under the
Exchange Act) of the Shares, sell, bid for or purchase, pay or agree to pay
any person any compensation for soliciting another to purchase any other
securities of the Company (except for the solicitation of exercises of
Rights pursuant to this Agreement); provided that any action in connection
-------- ----
with the Company's dividend reinvestment and cash purchase plan will not be
deemed to be within the terms of this Section l(c)(v).
(vi) Orion owns, possesses or has obtained and currently maintains
all material Authorizations as are necessary for Orion to carry on its
business as contemplated in the Prospectus except where the failure to
obtain such Authorizations would not have a material adverse effect on the
ability of Orion to perform its obligations under the Management Agreement.
(vii) The description of Orion and its businesses in the Registration
Statement and the Prospectus complies with the requirements of the Act, the
Investment Company Act and the Rules and Regulations and does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading in light of the circumstances under which they were
made.
(viii) There are no material restrictions, limitations or regulations
with respect to the ability of the Company to invest its assets as
described in the Prospectus other than as may be described therein.
(d) Any certificate required by this Agreement that is signed by any
officer of the Company, Alliance Capital Management Corporation, the General
Partner of Alliance (the "General Partner"), or Orion and delivered to the
Dealer Manager or counsel for the Dealer Manager shall be deemed a
representation and warranty by the Company, Alliance or Orion, as the case may
be, to the Dealer Manager, as to the matters covered thereby.
2. Agreement to Act as Dealer Manager.
----------------------------------
(a) On the basis of the representations and warranties contained
herein, and subject to the terms and conditions of the Offer:
(i) The Company hereby appoints the Dealer Manager and other
soliciting dealers entering into a Soliciting Dealer Agreement, in the form
attached hereto as Exhibit A, with
11
<PAGE>
the Dealer Manager (the "Soliciting Dealers"), to solicit, in accordance
with the Act, the Investment Company Act and the Exchange Act, and their
customary practice, the exercise of the Rights, subject to the terms and
conditions of this Agreement, the procedures described in the Registration
Statement and, where applicable, the terms and conditions of such
Soliciting Dealer Agreement; and
(ii) The Company agrees to furnish, or cause to be furnished, to the
Dealer Manager lists, or copies of those lists, showing the names and
addresses of, and number of shares of Common Stock held by, Holders as of
the Record Date, and the Dealer Manager agrees to use such information only
in connection with the Offer, and not to furnish the information to any
other person except for securities brokers and dealers that have been
requested by the Dealer Manager to solicit exercises of Rights.
(b) The Dealer Manager agrees to provide to the Company, in addition
to the services described in paragraph (a) of this Section 2, financial advisory
and marketing services in connection with the Offer. No advisory fee, other
than the fees provided for in Section 3 of this Agreement and the reimbursement
of the Dealer Manager's out-of-pocket expenses as described in Section 5 of this
Agreement, will be payable by the Company to the Dealer Manager in connection
with the financial advisory and marketing services provided by the Dealer
Manager pursuant to this Section 2(b).
(c) The Company and the Dealer Manager agree that the Dealer Manager
is an independent contractor with respect to the solicitation of the exercise of
Rights and the performance of financial advisory and marketing services to the
Company contemplated by this Agreement.
(d) In rendering the services contemplated by this Agreement, the
Dealer Manager will not be subject to any liability to the Company, Alliance or
Orion or any of their affiliates, for any act or omission on the part of any
securities broker or dealer (except with respect to the Dealer Manager acting in
such capacity) or any other person and the Dealer Manager will not be liable for
acts or omissions in performing its obligations under this Agreement, except for
any losses, claims, damages, liabilities and expenses that are finally
judicially determined to have resulted primarily from the bad faith, willful
misconduct or gross negligence of the Dealer Manager or by reason of the
reckless disregard of the obligations and duties of the Dealer Manager under
this Agreement.
12
<PAGE>
3. Dealer Manager and Solicitation Fees. In full payment for the
------------------------------------
financial advisory and marketing services rendered and to be rendered hereunder
by the Dealer Manager, the Company agrees to pay the Dealer Manager a fee (the
"Dealer Manager Fee"), equal to 1.25% of the aggregate Subscription Price per
Share for each Share issued pursuant to the exercise of Rights and the over-
subscription privilege. The Company also agrees to pay Soliciting Dealers and
the Dealer Manager, in full payment for their soliciting efforts, fees (the
"Soliciting Fees") equal to 2.50% of the Subscription Price per Share for each
Share issued pursuant to the exercise of Rights and the over-subscription
privilege. The Company agrees to pay the Soliciting Fees to the broker-dealer
designated on the applicable portion of the form used by the Holder to exercise
Rights, and if no broker-dealer is so designated or a broker-dealer is otherwise
not entitled to receive compensation pursuant to the terms of the Soliciting
Dealer Agreement, then to pay the Dealer Manager the Soliciting Fee for such
exercise of Rights. Payment to the Dealer Manager by the Company will be in the
form of a wire transfer of same day funds to an account or accounts identified
by the Dealer Manager. Such payment will be made on each date on which the
Company issues Shares acquired during the Primary Subscription or pursuant to
the Over-Subscription Privilege. Payment to a Soliciting Dealer will be made by
the Company directly to such Soliciting Dealer by certified or official bank
check payable to the order of such Soliciting Dealer to an address identified by
such Soliciting Dealer in the Soliciting Dealer Agreement or otherwise. Such
payments shall be made as soon as practicable immediately following the receipt
of payment by the Subscription Agent for Shares acquired during Primary
Subscription or pursuant to the Over-Subscription Privilege. The Company shall
be under no liability for any payment of Soliciting Fees made to any Soliciting
Dealer which payment is made in accordance with instructions received from the
Dealer Manager.
4. Covenants of the Company, Alliance and Orion.
--------------------------------------------
(a) The Company covenants with the Dealer Manager as follows:
(i) The Company will use its best efforts to cause the Registration
Statement to become effective under the Act, and will advise the Dealer
Manager promptly as to the time at which the Registration Statement and any
amendments thereto (including any post-effective amendment) becomes so
effective.
(ii) The Company will notify the Dealer Manager immediately, and
confirm the notice in writing, (A) of the effectiveness of the Registration
Statement and any
13
<PAGE>
amendment thereto (including any post-effective amendment), (B) of the
receipt of any comments from the Commission, (C) of any request by the
Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information, (D) of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the initiation of any proceedings for that
purpose, (E) of the suspension of the qualification of the Shares or the
Rights for offering or sale in any jurisdiction. The Company will make
every reasonable effort to prevent the issuance of any stop order described
in subsection (D) hereunder and, if any such stop order is issued, to
obtain the lifting thereof at the earliest possible moment.
(iii) The Company will give the Dealer Manager notice of its
intention to file any amendment to the Registration Statement (including
any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for
use by the Dealer Manager in connection with the Offer, which differs from
the prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether such revised prospectus is required to
be filed pursuant to Rule 497(b) or Rule 497(h) of the 1933 Act Rules and
Regulations), whether pursuant to the Investment Company Act, the Act, or
otherwise, and will furnish the Dealer Manager with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such amendment or
supplement to which the Dealer Manager or counsel for the Dealer Manager
shall reasonably object.
(iv) The Company will, without charge, deliver to the Dealer Manager,
as soon as practicable, the number of copies (one of which is manually
executed) of the Registration Statement as originally filed and of each
amendment thereto as it may reasonably request, in each case with the
exhibits filed therewith.
(v) The Company will, without charge, furnish to the Dealer Manager,
from time to time during the period when the Prospectus is required to be
delivered under the Act, such number of copies of the Prospectus (as
amended or supplemented) as the Dealer Manager may reasonably request for
the purposes contemplated by the Act or the 1933 Act Rules and Regulations.
(vi) If any event shall occur as a result of which it is necessary,
in the reasonable opinion of counsel for the
14
<PAGE>
Dealer Manager, to amend or supplement the Registration Statement or the
Prospectus in order to make the Prospectus not misleading in the light of
the circumstances existing at the time it is delivered to a Holder, the
Company will forthwith amend or supplement the Prospectus by preparing and
filing with the Commission (and furnishing to the Dealer Manager a
reasonable number of copies of) an amendment or amendments of the
Registration Statement or an amendment or amendments of or a supplement or
supplements to, the Prospectus (in form and substance satisfactory to
counsel for the Dealer Manager), at the Company's expense, which will amend
or supplement the Registration Statement or the Prospectus so that the
Prospectus will not contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein,
in the light of the circumstances existing at the time the Prospectus is
delivered to a Holder, not misleading.
(vii) The Company will endeavor, in cooperation with the Dealer
Manager and its counsel, to assist such counsel to qualify the Rights and
the Shares for offering and sale under the applicable securities laws of
such states and other jurisdictions of the United States as the Dealer
Manager may designate and maintain such qualifications in effect for the
duration of the Offer; provided, however, that the Company will not be
-------- -------
obligated to file any general consent to service of process, or to qualify
as a foreign corporation or as a dealer in securities in any jurisdiction
in which it is not now so qualified. The Company will file such statements
and reports as may be required by the laws of each jurisdiction in which
the Rights and the Shares have been qualified as above provided.
(viii) The Company will make generally available to its security
holders as soon as practicable, but no later than 60 days after the close
of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 of the Rules and Regulations) covering a
twelve-month period beginning not later than the first day of the Company's
second fiscal quarter following the "effective" date (as defined in said
Rule 158) of the Registration Statement.
(ix) For a period of 180 days from the date of this Agreement, the
Company will not, without the prior consent of the Dealer Manager, offer or
sell, or enter into any agreement to sell, any equity or equity related
securities of the Company or securities convertible into such securities,
other than the Shares and the Common Stock issued in reinvestment of
dividends or distributions.
15
<PAGE>
(x) The Company will apply the net proceeds from the Offer as set
forth under "Use of Proceeds" in the Prospectus.
(xi) The Company will use its best efforts to cause the Shares to be
duly authorized for listing by the New York Stock Exchange prior to the
time the Shares are issued.
(xii) The Company will use its best efforts to maintain its
qualification as a regulated investment company under Subchapter M of the
Code.
(xiii) The Company will advise or cause the Subscription Agent to
advise the Dealer Manager and each Soliciting Dealer from day to day during
the period of, and promptly after the termination of, the Offer, as to the
names and addresses of all Holders exercising Rights, the total number of
Rights exercised by each Holder during the immediately preceding day,
indicating the total number of Rights verified to be in proper form for
exercise, rejected for exercise and being processed and, for the Dealer
Manager and each Soliciting Dealer, the number of Rights exercised on
exercise forms indicating the Dealer Manager or such Soliciting Dealer, as
the case may be, as the broker-dealer with respect to such exercise, and as
to such other information as the Dealer Manager may reasonably request; and
will notify the Dealer Manager and each Soliciting Dealer, not later than
5:00 P.M., New York City time, on the first business day following the
Expiration Date, of the total number of Rights exercised and Shares related
thereto, the total number of Rights verified to be in proper form for
exercise, rejected for exercise and being processed and, for the Dealer
Manager and each Soliciting Dealer, the number of Rights exercised on
exercise forms indicating the Dealer Manager or such Soliciting Dealer, as
the case may be, as the broker-dealer with respect to such exercise, and as
to such other information as the Dealer Manager may reasonably request.
(b) The Company, Alliance and Orion will not take, directly or
indirectly, any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute the
stabilization or manipulation of the price of any security of the Company to
facilitate the issuance of the Rights or the sale or resale of the Shares;
provided that any action in connection with the Company's dividend reinvestment
-------- ----
plan will not be deemed to be within the meaning of this Section 4(b).
16
<PAGE>
5. Payment of Expenses.
-------------------
(a) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, including, but not limited to, expenses
relating to (i) the printing and filing of the Registration Statement as
originally filed and of each amendment thereto, (ii) the preparation, issuance
and delivery of the certificates for the Shares and exercise forms relating to
the Rights, (iii) the fees and disbursements of the Company's counsel (including
the fees and disbursements of local counsel) and accountants, (iv) the
qualification of the Rights and the Shares under securities laws in accordance
with the provisions of Section 4(a)(vii) of this Agreement, including filing
fees and the preparation of the Blue Sky Survey by counsel to the Dealer
Manager, (v) the printing or other production and delivery to the Dealer Manager
of copies of the Registration Statement as originally filed and of each
amendment thereto and of the Prospectus and any amendments or supplements
thereto, (vi) the printing and other production and delivery of copies of the
Blue Sky Survey, (vii) the fees and expenses incurred with respect to filing
with the National Association of Securities Dealers, Inc., (viii) the fees and
expenses incurred in connection with the listing of the Shares on the New York
Stock Exchange, (ix) the printing or other production, mailing and delivery
expenses incurred in connection with the Prospectus and the Offering Materials,
and (x) the fees and expenses incurred with respect to the Subscription Agent
and the Information Agent.
(b) In addition to any fees that may be payable to the Dealer Manager
under this Agreement, the Company agrees to reimburse the Dealer Manager upon
request made from time to time for its reasonable expenses incurred in
connection with its activities under this Agreement, including the reasonable
fees and disbursements of its legal counsel (excluding Blue Sky fees and
expenses which are paid directly by the Company), in an amount up to $100,000.
(c) If this Agreement is terminated by the Dealer Manager in
accordance with the provisions of Section 6 or Section 9(a)(i), 9(a)(ii) or
9(a)(iii), the Company agrees to reimburse the Dealer Manager for all of its
reasonable out-of-pocket expenses incurred in connection with its performance
hereunder, including the reasonable fees and disbursements of counsel for the
Dealer Manager. In the event the transactions contemplated hereunder are not
consummated, the Company agrees to pay all of the costs and expenses set forth
in paragraphs (a) and (b) of this Section 5 which the Company would have paid if
such transactions had been consummated.
17
<PAGE>
6. Conditions of Dealer Manager's Obligations. The obligations of the
------------------------------------------
Dealer Manager hereunder are subject to the accuracy of the representations and
warranties of the Company, Alliance and Orion contained herein, to the
performance by the Company, Alliance and Orion of their respective obligations
hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., on the Representation Date, or at such later time and date as
may be approved by the Dealer Manager; the Prospectus and any amendment or
supplement thereto shall have been filed with the Commission in the manner and
within the time period required by Rule 497(b), (d) or (h), as the case may be,
under the Act; no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or, to the knowledge
of the Company, Alliance, Orion or the Dealer Manager, shall be contemplated by
the Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) On the Representation Date, the Dealer Manager shall have
received:
(1) The favorable opinion, dated the Representation Date, of Seward &
Kissel, counsel for the Company, or, with respect to matters of Maryland
law, Venable, Baetjer and Howard LLP, Maryland counsel for the Company, in
form and substance satisfactory to counsel for the Dealer Manager, to the
effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Maryland, has full corporate power and authority to conduct its
business as described in the Registration Statement and the
Prospectus, and is duly qualified to do business as a foreign
corporation in each jurisdiction wherein it owns or leases material
properties or conducts material business, except where the failure to
be so qualified, considering all such cases in the aggregate, does not
involve a material adverse risk to the business, properties, financial
position or results of operations of the Company;
(ii) the Company's authorized capitalization is as set forth in
the Prospectus; the outstanding shares of Common Stock have been duly
authorized and validly
18
<PAGE>
issued and are fully paid and non-assessable and conform in all
material respects to the description thereof in the Prospectus under
the heading "Description of Common Stock"; the Rights have been duly
authorized by all requisite action on the part of the Company for
issuance pursuant to the Offer; the Shares have been or, with respect
to the Shares to be issued pursuant to the over-subscription
privilege, will be, duly authorized by all requisite action on the
part of the Company for issuance and sale pursuant to the terms of the
Offer and, when issued and delivered by the Company pursuant to the
terms of the Offer against payment of the consideration set forth in
the Prospectus, will be validly issued and fully paid and non-
assessable; the Shares and the Rights conform in all material respects
to all statements relating thereto contained in the Registration
Statement and the Prospectus; and the issuance of each of the Rights
and the Shares is not subject to any preemptive rights under the
charter or bylaws of the Company or, to such counsel's knowledge,
otherwise. The outstanding Common Stock has been duly listed on the
New York Stock Exchange and the Shares have been duly authorized for
listing subject to official notice of issuance, on the New York Stock
Exchange;
(iii) to the best knowledge of such counsel, there is no pending
or threatened action, suit or proceeding before any court or
governmental agency, authority or body or any arbitrator involving the
Company of a character required to be disclosed in the Registration
Statement or the Prospectus which is not adequately disclosed therein,
and there is no franchise, contract or other document of a character
required to be described in the Registration Statement or the
Prospectus, or to be filed or incorporated by reference as an exhibit
which is not described or filed or incorporated by reference as
required;
(iv) the statements in the Prospectus under the heading
"Taxation", insofar as such statements describe or summarize United
States tax laws, treaties, doctrines or practices, provide an accurate
description thereof as of the date of the Prospectus;
(v) the Registration Statement has become effective under the
Act; any required filing of the Prospectus or any supplement thereto
pursuant to Rule 497(b), (d) or (h) required to be made to the date
hereof has been made in the manner and within the time
19
<PAGE>
period required by Rule 497(b), (d) or (h), as the case may be; to the
best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceedings for that purpose have been instituted or threatened; and
the Registration Statement, the Prospectus and each amendment thereof
or supplement thereto (other than the financial statements and other
financial and statistical information contained therein, as to which
such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Investment Company Act and the Rules and Regulations;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution
and delivery by the other parties hereto, is a legal, valid, binding
and enforceable obligation of the Company, subject to the
qualification that the enforceability of the Company's obligations
hereunder may be limited by bankruptcy, insolvency, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights, and to general principles of equity
(regardless of whether enforceability is considered in a proceeding in
equity or at law) subject to the qualification that the right to
indemnity and contribution thereunder may be limited by Federal or
state laws; the Subscription Agency Agreement, the Investment
Management and Administration Agreement, the Management Agreement, the
Custodian Agreement and the Transfer Agency Agreement have been duly
authorized, executed and delivered by the Company, comply in all
material respects with all applicable provisions of the Investment
Company Act and, assuming due authorization, execution and delivery by
the other parties thereto, are legal, valid, binding and enforceable
obligations of the Company, subject to the qualification that the
enforceability of the Company's obligations thereunder may be limited
by bankruptcy, insolvency, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights,
and to general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law);
(vii) no consent, approval, authorization or order of any court
or governmental agency or body is required under Maryland corporate
law, the laws of New York or Federal law or, to the best of such
counsel's
20
<PAGE>
knowledge, the laws of any other jurisdiction in the United States,
for the consummation by the Company of the transactions contemplated
in the Company Agreements, except (A) such as have been obtained under
the Act, the Exchange Act, the Investment Company Act, or from the New
York Stock Exchange, (B) such as may be required under the blue sky
laws of any jurisdiction in connection with the transactions
contemplated hereby and (C) such other approvals as have been obtained
or the failure to have obtained will not have a material adverse
effect on the Company or its ability to perform its obligations under
the Company Agreements;
(viii) neither the issuance of the Rights, nor the issuance and
sale of the Shares by the Company, nor the consummation by the Company
of any other of the transactions contemplated in the Company
Agreements or the Prospectus nor the fulfillment by the Company of the
terms of the Company Agreements will conflict with, result in a breach
of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company pursuant to the charter or bylaws of the Company
or, to the knowledge of such counsel, the terms of any material
agreement, indenture, mortgage, lease or other instrument to which the
Company is a party or bound or to which any of the property or assets
of the Company is subject, or any order of which such counsel has
knowledge, law, rule or regulation applicable to the Company of any
United States court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over the Company
or any of its properties; and
(ix) the Company is registered with the Commission under the
Investment Company Act as a closed-end, diversified management
investment company, all required action has been taken under the Act
and the Investment Company Act to make the Offer and consummate the
issuance of the Rights and the issuance and sale of the Shares by the
Company upon exercise of the Rights, and the provisions of the
Company's charter and bylaws comply as to form in all material
respects with the requirements of the Investment Company Act.
In rendering such opinion, Seward & Kissel may rely (A) as to matters involving
the application of the laws of the State of Maryland, on the opinion of Venable,
Baetjer and Howard, (B) as to matters involving the application of laws of any
jurisdiction other than the States of New York or Maryland or the United
21
<PAGE>
States, to the extent they deem proper and specified in such opinion, upon the
opinion of other counsel of good standing whom they believe to be reliable and
who are satisfactory to counsel for the Dealer Manager and (C) as to matters of
fact, to the extent they deem proper, on certificates of responsible officers of
the Company and public officials.
Such counsel shall also have stated that, while they have not
themselves checked the accuracy and completeness of or otherwise verified, and
are not passing upon and assume no responsibility for the accuracy or
completeness of, the statements contained in the Registration Statement or the
Prospectus, except to the limited extent stated in paragraphs (ii) and (iv)
above, in the course of their review and discussion of the contents of the
Registration Statement and Prospectus with certain officers and employees of the
Company and its independent accountants and others, no facts have come to their
attention which cause them to believe that the Registration Statement as of the
effective date thereof or the Prospectus, as of the effective date thereof and
as of the Representation Date, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements contained therein not misleading, or, if there has been
any supplement to the Prospectus made by the Company, that any such supplement,
at the date of such supplement, contained an untrue statement of a material fact
or omitted to state a material fact necessary to make the statements contained
therein, in the light of the circumstances under which they were made, not
misleading (except that such counsel need express no opinion or belief as to
financial statements, schedules or other financial data included therein or
excluded therefrom).
(2) The favorable opinion, dated the Representation Date, of Seward &
Kissel, counsel for Alliance, in form and substance satisfactory to counsel
for the Dealer Manager, to the effect that:
(i) Alliance has been duly organized and is validly existing as a
limited partnership under the laws of the State of Delaware, with
partnership power and authority to own its properties and conduct its
business as described in the Prospectus, and is duly licensed or
qualified as a foreign entity and in good standing to do business in
each other jurisdiction in which its ownership of property or the
conduct of its business requires such qualification or license, except
where the failure to be so qualified, considering all such cases in
the aggregate, would not have a material adverse effect on Alliance;
22
<PAGE>
(ii) Alliance is duly registered as an investment adviser under
the Advisers Act and is not prohibited by the Advisers Act or the
Investment Company Act, or the rules and regulations under such Acts,
from acting as an investment manager and administrator for the Company
as contemplated in the Prospectus and the Investment Management and
Administration Agreement;
(iii) this Agreement and the Investment Management and
Administration Agreement have each been duly authorized, executed and
delivered by Alliance and the Investment Management and Administration
Agreement complies with all applicable provisions of the Advisers Act
and the Investment Company Act and is, assuming due authorization,
execution and delivery by the other parties thereto, a legal, valid,
binding and enforceable obligation of Alliance, subject to the
qualification that the enforceability of Alliance's obligations
thereunder may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws of general applicability relating to or
affecting creditors' rights, and to general principles of equity
(regardless of whether enforceability is considered in a proceeding in
equity or at law);
(iv) neither the performance by Alliance of its obligations
under this Agreement or the Investment Management and Administration
Agreement nor the consummation of the transactions contemplated
therein nor the fulfillment of the terms thereof will conflict with,
or result in a breach of, or constitute a default under the Agreement
of Limited Partnership of Alliance or, to the knowledge of such
counsel, the terms of any material agreement or instrument to which
Alliance is a party or is bound or to which any of its property is
subject, which conflict, breach or default would have a material
adverse effect on the ability of Alliance to carry out its obligations
under such Agreements, or any law, order of which such counsel has
knowledge, rule or regulation applicable to Alliance of any United
States court, regulatory body, administrative agency, governmental
body, stock exchange or securities association having jurisdiction
over Alliance or its properties or operations;
(v) to the knowledge of such counsel, except as set forth in the
Prospectus, there is not pending or threatened, any action, suit or
proceeding to which Alliance is a party before or by any court or
governmental agency or body, which is likely to have a
23
<PAGE>
material adverse effect upon the Company or upon the ability of
Alliance to perform its obligations under the Investment Management
and Administration Agreement;
(vi) to the knowledge of such counsel, Alliance owns, possesses
or has obtained and currently maintains all material Authorizations
under New York, Delaware or United States law as are necessary for
Alliance to perform its obligations under the Investment Management
and Administration Agreement as set forth in and contemplated by the
Prospectus except where the failure to obtain such Authorizations
would not have a material adverse effect on Alliance; and
(vii) the description of Alliance and its business in the
Registration Statement and the Prospectus complies with the
requirements of the Act, the Investment Company Act, and the rules and
regulations of the Commission under such Acts and, to the knowledge of
such counsel, does not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading in
light of the circumstances under which they were made.
In rendering such opinion, Seward & Kissel may rely (A) as to matters involving
the application of laws of any jurisdiction other than the State of New York or
the United States to the extent such counsel deems proper and specified in such
opinion, upon the opinion of other counsel of good standing whom such counsel
believes to be reliable and who are satisfactory to counsel for the Dealer
Manager, (B) as to matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of Alliance and public officials and (C) as
to the legal proceeding to which Alliance is a party referred to in Part II,
Item 1, of the Quarterly Report on Form 10-Q filed by Alliance with the
Securities and Exchange Commission pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, for the quarterly period ended June 30, 1995,
with respect to which proceeding Seward & Kissel is not representing Alliance,
as the basis for such opinion, on the representation of Alliance set forth in
Section 1(b)(iv) of this Agreement as certified to pursuant to Section 6(e) of
the Agreement.
(3) The favorable opinion, dated the Representation Date, of Edmund P.
Bergan, Jr., Assistant General Counsel of Alliance Capital Management
Corporation, in form and substance satisfactory to counsel for the Dealer
Manager, to the effect that:
24
<PAGE>
the Offering Materials comply as to form in all material respects with
the requirements of the Act, the Investment Company Act and the Rules
and Regulations.
(4) The favorable opinion, dated the Representation Date, of Gibson,
Dunn & Crutcher, or as to matters of Cayman Island law, Bruce Campbell &
Co., counsel for Orion, in form and substance satisfactory to counsel for
the Dealer Manager, to the effect that:
(i) Orion has been duly incorporated and is validly existing as a
corporation under the laws of the Cayman Islands, with corporate power
and authority to own its properties and conduct its business as
described in the Prospectus, and is duly qualified as a foreign
corporation and in good standing to do business in each other
jurisdiction wherein it owns or leases material properties or conducts
material business, except where the failure to be so qualified,
considering all such cases in the aggregate, would not have a material
adverse effect on Orion;
(ii) Orion is duly registered as an investment adviser under the
Advisers Act and is not prohibited by the Advisers Act or the
Investment Company Act, or the rules and regulations under such Acts,
from acting as an investment manager for the Company as contemplated
in the Prospectus and the Management Agreement;
(iii) this Agreement and the Management Agreement have each been
duly authorized, executed and delivered by Orion and the Management
Agreement complies with all applicable provisions of the Advisers Act
and the Investment Company Act and is, assuming due authorization,
execution and delivery by the other parties thereto, a legal, valid,
binding and enforceable obligation of Orion, subject to the
qualification that the enforceability of Orion's obligations
thereunder may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws of general applicability relating to or
affecting creditors' rights, and to general principles of equity
(regardless of whether enforceability is considered in a proceeding in
equity or at law), and with respect to this Agreement, subject to the
qualification that the right to indemnity and contribution thereunder
may be limited by Federal or state securities laws;
25
<PAGE>
(iv) neither the performance by Orion of its obligations under
this Agreement or the Management Agreement nor the consummation of the
transactions contemplated therein nor the fulfillment of the terms
thereof will conflict with, or result in a breach of, or constitute a
default under Orion's corporate charter or, to the knowledge of such
counsel, the terms of any material agreement or instrument to which
Orion is a party or is bound or to which any of its property is
subject, or any law, order of which such counsel has knowledge, rule
or regulation applicable to Orion of any United States or Cayman
Islands court, regulatory body, administrative agency, governmental
body, stock exchange or securities association having jurisdiction
over Orion or its properties or operations;
(v) except as set forth in the Prospectus, there is not pending
or, to the knowledge of such counsel, threatened, any action, suit or
proceeding to which Orion is a party before or by any court or
governmental agency or body, which is likely to have a material
adverse effect upon the Company or upon the ability of Orion to
perform its contract with the Company;
(vi) Orion owns, possesses or has obtained and currently
maintains all material Authorizations as are necessary for Orion to
carry on its business as contemplated in the Prospectus except where
the failure to obtain such Authorizations would not have a material
adverse effect on Orion; and
(vii) the description of Orion and its businesses in the
Prospectus complies with the requirements of the Act, the Investment
Company Act, and the rules and regulations of the Commission under
such Acts, and, to the knowledge of such counsel, does not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading in light of the circumstances under
which they were made.
In rendering such opinion, such counsel may rely as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of Orion and
public officials.
(5) The favorable opinion, dated the Representation Date, of Shin &
Kim, special Korean counsel for the Company and Orion, in form and
substance satisfactory to counsel for the Dealer Manager, to the effect
that:
26
<PAGE>
(i) the Company has obtained all material governmental licenses, permits,
consents, orders, approvals and other authorizations under the laws of
Korea or any political subdivision thereof, as is necessary for the
Company to invest its assets in Korean equity shares listed on the
Korea Stock Exchange, certain convertible bonds and public debts
issued in Korea and denominated in Won, and convertible bonds, bonds
with warrants and depositary receipts issued by Korean companies
outside of Korea as contemplated in the Prospectus, including
registration of the Company with the Securities Supervisory Board of
Korea as a foreign investor able to invest directly in equity shares
and Korean debt securities of Korean issuers; provided that if the
--------
Company acquires, sells, or transfers Korean equity shares or Korean
debt securities outside the Korea Stock Exchange as permitted under
the rules of the Securities and Exchange Commission of Korea, the
Company must immediately report to the Governor of the Securities
Supervisory Board of Korea regarding such acquisition, sale or
transfer; provided further that foreign exchange approvals and/or
-------- -------
payment authorizations will be required under the Foreign Exchange
Management Regulation of Korea (the "FEMR") for foreign exchange
transactions by the Company except for those exempted under the FEMR;
and provided further that if the Minister of Finance and Economy of
-------- -------
Korea deems that certain emergency events are likely to occur, he may
impose any necessary restriction such as requiring foreign investors,
including the Company, to obtain approval for the acquisition of
Korean equity shares or Korean debt securities or for the remittance
outside of Korea of the proceeds of sales thereof;
(ii) none of (A) the execution and delivery by the Company of
this Agreement or the Company Agreements, (B) the issue and sale by
the Company of the Shares sold by the Company as contemplated by this
Agreement, (C) the consummation by the Company of the other
transactions as contemplated by such agreements and (D) the execution
and delivery by Orion of the Dealer Manager Agreement or the
Management Agreement and the consummation by Orion of the transactions
contemplated therein, conflicts or will conflict with, or results or
will result in a breach of any Korean law or regulation or any order,
to the best of such counsel's knowledge, of any Korean court,
governmental instrumentality or arbitrator binding on the Company or
Orion, as the case may be, provided that sale or
27
<PAGE>
distribution of the Shares in Korea or to a resident of Korea may
require compliance with Korean securities, foreign exchange control
and other related laws;
(iii) subject to the provisions in paragraph (i) and (ii) above,
no consent, approval, authorization or order of any Korean court or
governmental agency or body or Korean securities exchange or
securities association is required (A) by the Company for the
consummation of the transactions contemplated in this Agreement or the
Company Agreements or (B) by Orion for the consummation of the
transactions contemplated in the Dealer Manager Agreement or the
Management Agreement, except those that have been obtained;
(iv) all descriptions in the Prospectus of statutes or
regulations of Korea or legal or governmental proceedings under the
laws of Korea are accurate in all material respects and fairly present
the information required to be shown in all material respects;
(v) no taxes are or will be payable in or to Korea, or any
political subdivision thereof, by the Dealer Manager (except to the
extent that the Dealer Manager may do business in Korea) with respect
to this Agreement or the purchase and sale of the Shares thereunder,
provided that the Shares are not sold or distributed in Korea. The
statements set forth under the heading "Taxation--Korean Taxes" in the
Prospectus, insofar as such statements describe or summarize Korean
tax laws or treaties, provide an accurate description thereof in all
material respects as of the date of the Prospectus;
(vi) assuming that the Dealer Manager is a resident of the
United States, within the meaning of the relevant provisions of the
income tax treaty between the United States and Korea, and except to
the extent that the Dealer Manager may otherwise do business in Korea,
participation in the Offer of the Shares as contemplated in this
Agreement will not cause the Dealer Manager to be subject to taxation
in Korea, provided that the Shares are not sold or distributed in
Korea;
(vii) there are no material restrictions, limitations or
regulations under the laws of Korea with respect to the ability of the
Company to invest its
28
<PAGE>
assets as described in the Prospectus other than as described therein;
(viii) except as set forth in the Prospectus, such counsel is
not aware of any pending action, suit or proceeding to which Orion is
a party before or by any Korean court or governmental agency or body,
which is likely to have a material adverse effect upon the Company or
upon the ability of Orion to perform its contract with the Company;
and
(ix) Orion owns, possesses or has obtained and currently
maintains all material Korean governmental licenses, permits,
consents, orders, approvals and other authorizations as are necessary
for Orion to carry on its investment management for the Company as
contemplated in the Prospectus except where the failure to obtain such
authorizations would not have a material adverse effect on Orion.
Such counsel shall also have stated that, although they have not independently
verified and are not passing upon and do not assume any responsibility for the
accuracy, completeness or fairness of the information contained in the
Registration Statement (as defined in this Agreement) and the Prospectus (except
as expressly set forth herein), nothing has come to their attention that would
cause them to believe that with respect to matters relating to Korea, Korean
securities regulations and other Korean law or legal conclusions as described in
the Registration Statement as of its date and the date hereof contained or
contains any untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, or the information regarding Korea, Korean
securities regulations and other Korean law or legal conclusions as described in
the Prospectus as of its date and the date hereof contained or contains any
untrue statement of a material fact or omitted or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading
(except that they need express no opinion or belief as to financial statements,
schedules and other financial information included therein or excluded therefrom
or the exhibits to the data contained in the Registration Statement).
The statement in the foregoing paragraph is to be based upon such
counsel's participation in preparing the disclosure for the Registration
Statement and the Prospectus regarding the statutes or regulations of Korea or
legal or governmental proceedings under the laws of Korea, and upon their review
and
29
<PAGE>
discussion of the contents of the Registration Statement and the Prospectus.
(c) The Dealer Manager shall have received from Brown & Wood, counsel
for the Dealer Manager, such opinion or opinions, dated the Representation Date,
with respect to the Offer, the Registration Statement, the Prospectus and other
related matters as the Dealer Manager may reasonably require, and the Company
shall have furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(d) The Company shall have furnished to the Dealer Manager a
certificate of the Company, signed by the Chairman of the Board, the President
or a Vice President of the Company, dated the Representation Date, to the effect
that the signer of such certificate has carefully examined the Registration
Statement, the Prospectus, any supplement to the Prospectus and this Agreement
and that, to the best of his knowledge:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the
Representation Date with the same effect as if made on the Representation
Date and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to the
Representation Date; and
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, threatened.
(e) Alliance shall have furnished to the Dealer Manager a certificate,
signed by the Chairman or other senior officer of its general partner, dated the
Representation Date, to the effect that the signer of such certificate has read
the Registration Statement, the Prospectus, any supplement to the Prospectus and
this Agreement and, to the best knowledge of such signer, (i) the
representations and warranties of Alliance in this Agreement are true and
correct in all material respects on and as of the Representation Date with the
same effect as if made on the Representation Date, (ii) Alliance has complied
with all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Representation Date and (iii) as of
the Representation Date, the Registration Statement did not include any untrue
statement of a material fact and did not omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
and on such Representation Date, the Prospectus and any Offering
30
<PAGE>
Materials did not include any untrue statement of a material fact and did not
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and, since the date of the Prospectus, no
event has occurred which should have been set forth in a supplement to, or
amendment of, the Prospectus which has not been set forth in such a supplement
or amendment. Alliance shall have furnished to Seward & Kissel a certificate,
similarly executed and dated the Representation Date, to the same effect as in
clause (i) of this paragraph, with respect to the representation in clause (C)
of Section 6(b)(2).
(f) Orion shall have furnished to the Dealer Manager a certificate,
signed by the Chairman or other senior officer, dated the Representation Date,
to the effect that the signer of such certificate has read the Registration
Statement, the Prospectus, any supplement to the Prospectus and this Agreement
and, to the best knowledge of such signer, (i) the representations and
warranties of Orion in this Agreement are true and correct in all material
respects on and as of the Representation Date with the same effect as if made on
the Representation Date, (ii) Orion has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to the Representation Date and (iii) as of the Representation Date,
insofar as such information relates to the description of Orion and the services
to be provided by Orion as contemplated in the Prospectus, the Registration
Statement did not include any untrue statement of a material fact and did not
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading and on such Representation Date, the
Prospectus, insofar as such information relates to the description of Orion and
the services to be provided by Orion as contemplated in the Prospectus, did not
include any untrue statement of a material fact and did not omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and since the date of the Prospectus, insofar as such
information relates to the description of Orion and the services to be provided
by Orion as contemplated in the Prospectus, no event has occurred which should
have been set forth in a supplement to, or amendment of, the Prospectus which
has not been set forth in such a supplement or amendment.
(g) Price Waterhouse LLP shall have furnished to the Dealer Manager a
letter, dated the Representation Date, in form and substance satisfactory to the
Dealer Manager, and stating in effect that:
31
<PAGE>
(i) they are independent accountants with respect to the Company
within the meaning of the Act and the applicable Rules and Regulations;
(ii) in their opinion, the audited financial statements examined by
them and included or incorporated by reference in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Investment Company Act and the
respective Rules and Regulations;
(iii) they have performed specified procedures, not constituting an
audit, including a reading of the latest available interim financial
statements of the Company, a reading of the minute books of the Company,
inquiries of officials of the Company responsible for financial or
accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and procedures
nothing came to their attention that caused them to believe that at the
date of the latest available financial statements read by such accountants,
or at a subsequent specified date not more than five days prior to the
Representation Date, there was any change in the capital stock, net assets
or absence of long-term debt of the Company as compared with amounts shown
on the audited financial statements included or incorporated by reference
in the Prospectus, except as the Prospectus discloses has occurred or may
occur or as disclosed in their letter;
(iv) in addition to the procedures referred to in clause (iii) above,
they have performed other specified procedures, not constituting an audit,
with respect to certain amounts, percentages, numerical data, financial
information and financial statements appearing in the Registration
Statement, which have previously been specified by the Dealer Manager and
which shall be specified in such letter, and have compared such items with,
and have found such items to be in agreement with, the accounting and
financial records of the Company.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
been (i) any change or decrease specified in the letter or letters referred to
in paragraph (g) of this Section 6, or (ii) any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company, the effect of which, in any case referred to in clause (i) or (ii)
above, is, in the reasonable judgment of the Dealer Manager, so material and
adverse as to
32
<PAGE>
make it impractical or inadvisable to proceed with the Offer as contemplated by
the Registration Statement and the Prospectus.
(i) Prior to the Representation Date, the Company shall have furnished
to the Dealer Manager such further information, certificates and documents as
the Dealer Manager may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Dealer Manager and its counsel, this Agreement and all
obligations of the Dealer Manager hereunder may be canceled at, or at any time
prior to, the Representation Date by the Dealer Manager. Notice of such
cancellation shall be given to the Company in writing or by telephone or
telegraph confirmed in writing.
7. Indemnification and Contribution.
--------------------------------
(a) Each of the Company, Alliance and Orion jointly and severally,
will indemnify and hold harmless the Dealer Manager and each person, if any, who
controls the Dealer Manager within the meaning of Section 15 of the Act against
any and all losses, claims, damages and liabilities, joint or several (including
any investigation, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claim asserted), to which they, or any of them, may become subject under the
Act, the Exchange Act, the Investment Company Act, the Advisers Act or other
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based on any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, and any amendment or supplement thereto, or the
omission or alleged omission to state in any or all such documents a material
fact required to be stated therein or necessary to make the statements in it not
misleading (in the case of the Prospectus, in light of the circumstances under
which such statements were made), provided neither the Company, Alliance nor
Orion will be liable to the extent that such loss, claim, damage or liability
arises from an untrue statement or omission or alleged untrue statement or
omission (1) made in reliance on and in conformity with information furnished in
writing to the Company by the Dealer Manager expressly for use in the document,
or (2) if a copy of the Prospectus was not sent or given to such person at or
before the written confirmation of the sale to such person in any case where
such delivery is required
33
<PAGE>
by the Act. This indemnity agreement will be in addition to any liability that
the Company, Alliance or Orion might otherwise have.
(b) The Dealer Manager will indemnify and hold harmless the Company,
Alliance and Orion, each person, if any, who controls the Company, Alliance or
Orion within the meaning of Section 15 of the Act, each director of the Company
and each officer of the Company who signs the Registration Statement to the same
extent as the foregoing indemnity from the Company, Alliance and Orion to the
Dealer Manager, but only insofar as losses, claims, damages or liabilities arise
out of or are based on any untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to the Dealer Manager furnished in writing to the Company by the Dealer
Manager expressly for use in the Registration Statement, the Prospectus, any
amendment or supplement thereto, or any preliminary prospectus in which the
statement or omission is made or alleged to be made. This indemnity agreement
will be in addition to any liability that the Dealer Manager might otherwise
have.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 7, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not,
except to the extent set forth below, relieve it from liability that it may have
to any indemnified party. No indemnification provided for in Section 7(a) or
(b) hereof shall be available to any party who shall fail to give notice as
provided in this Section 7(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
prejudiced by the failure to give such notice, but the omission so to notify
such indemnifying party of such action shall not relieve it from any liability
that it may have to any indemnified party for contribution or otherwise than on
account of the provisions in Section 7(a) or (b). If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in, and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly notified,
to assume the defense of the action, with counsel reasonably satisfactory to the
indemnified party, and, after notice from the indemnifying party to the
indemnified party of
34
<PAGE>
its election to assume the defense, the indemnifying party will not be liable to
the indemnified party for any legal or other expenses except as provided below
and except for the reasonable costs of investigation subsequently incurred by
the indemnified party in connection with the defense. The indemnified party
will have the right to employ its counsel in any such action, but the fees and
expenses of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded that there may be legal defenses available to it or other indemnified
parties that are different from or in addition to those available to the
indemnifying party (in which case the indemnifying party will not have the right
to direct the defense of such action on behalf of the indemnified party) or (3)
the indemnifying party has not in fact employed counsel to assume the defense of
such action within a reasonable time after receiving notice of the commencement
of the action, in each of which cases the reasonable fees and expenses of
counsel will be at the expense of the indemnifying party or parties. All such
fees and expenses will be reimbursed promptly as they are incurred. An
indemnifying party will not be liable for any settlement of any action or claim
effected without its written consent or, in connection with any proceeding or
related proceeding in the same jurisdiction, for the fees and expenses of more
than one separate counsel for all indemnified parties except to the extent
provided herein.
(d) In no case shall the indemnification provided in this Section 7 be
available to protect any person against any liability to which any such person
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its or his obligations or duties hereunder, or
by reason of its or his reckless disregard of its or his obligations and duties
hereunder.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 7 is
applicable in accordance with its terms but for any reason is held to be
unavailable from the Company, Alliance, Orion and the Dealer Manager, the
Company, Alliance, Orion and the Dealer Manager will contribute to the total
losses, claims, damages and liabilities (including any investigation, legal and
other expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action or any claims asserted, but after deducting any
contribution received by the Company, Alliance, Orion or the Dealer Manager from
persons other than the Company, Alliance, Orion and the Dealer Manager, such as
persons who control the Company, Alliance, Orion or the Dealer Manager within
the meaning of the
35
<PAGE>
Act, officers of the Company who signed the Registration Statement and directors
of the Company, who may also be liable for contribution) to which the Company,
Alliance, Orion or the Dealer Manager may be subject in such proportion as is
appropriate to reflect (i) the relative benefits received by the indemnifying
party or parties on the one hand and the indemnified party on the other hand
from the Offer of the Shares or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the one hand
and the indemnified party on the other hand in connection with the statements or
omissions or alleged statements or omissions that resulted in the losses,
claims, damages or liabilities, joint or several (including any investigation,
legal or other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted),
for which contribution is sought. The relative benefits received by the
Company, Alliance and Orion on the one hand (treated jointly for this purpose as
one person) and the Dealer Manager on the other hand shall be deemed to be in
the same proportion as the total proceeds from the Offer (before deducting the
sales load and other expenses) received by the Company bear to the total fees
received by the Dealer Manager. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, Alliance, Orion
or the Dealer Manager, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such statement or
omission and any other equitable considerations appropriate in the
circumstances. Notwithstanding any other provisions of this Section 7, the
Dealer Manager will not be responsible for any amount in excess of the fees paid
by the Company pursuant to Section 3 hereof and (2) no person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section, any person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each officer of the Company who
signed the Registration Statement and each director of the Company will have the
same rights to contribution as the Company, subject in each case to clause (i)
of the first sentence of this Subsection (e). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim for contribution may be
made under this Section 7, notify such party or parties from whom contribution
may be sought, but the omission so to notify will not relieve the party or
parties from whom
36
<PAGE>
contribution may be sought from any other obligation it or they may have
otherwise than under this Section. No party will be liable for contribution
with respect to any action or claim settled without its written consent.
(f) The Company, Alliance and Orion agree to indemnify each Soliciting
Dealer and its controlling persons to the same extent and subject to the same
conditions and to the same agreements, including with respect to contribution,
provided for in subsections (a), (b), (c), (d) and (e) of this Section 7.
(g) The Dealer Manager confirms that the statements with respect to
the Offer set forth under the caption "Distribution Arrangements" in the
Prospectus are correct, and this is the only information furnished in writing to
the Company by or on behalf of the Dealer Manager expressly for use in the
Registration Statement and the Prospectus.
8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
The respective agreements, representations, warranties, indemnities and other
statements of the Company or its officers, of Alliance, of Orion and of the
Dealer Manager set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
Dealer Manager, Alliance, Orion or the Company or any of the officers, directors
or controlling persons referred to in Section 7 hereof, and will survive
delivery of and payment for the Shares pursuant to the Offer; provided, however,
-------- -------
that following delivery and payment for the Shares, the remedies against
Alliance or Orion for breach of their representations and warranties shall, in
the absence of fraudulent misrepresentation by Alliance or Orion, as the case
may be, which, in the case of Alliance, shall not include fraudulent
misrepresentation attributed to Alliance solely by virtue of and in the event of
its being a controlling person of the Company, be limited to those available
pursuant to Section 7 hereof. The provisions of Sections 5 and 7 hereof shall
survive the termination or cancellation of this Agreement.
9. Termination of Agreement. (a) This Agreement shall be subject
------------------------
to termination in the absolute discretion of the Dealer Manager, by notice given
to the Company prior to the expiration of the Offer, if prior to such time (i)
financial, political, economic, currency or banking conditions in the United
States or the Republic of Korea shall have undergone any material change the
effect of which on the financial markets makes it, in the Dealer Manager's
reasonable judgment, impracticable to proceed with the Offer, (ii) there has
occurred any outbreak or material escalation of hostilities or other calamity or
crisis the effect of which on the financial markets of the United States
37
<PAGE>
or the Republic of Korea is such as to make it, in the Dealer Manager's
reasonable judgment, impracticable to proceed with the Offer, (iii) trading in
the shares of Common Stock shall have been suspended by the Commission or the
New York Stock Exchange, (iv) trading in securities generally on the New York
Stock Exchange or the Korea Stock Exchange shall have been suspended or limited
or minimum prices that, as of the date hereof, do not already exist, shall have
been established on such exchanges, or (v) a banking moratorium shall have been
declared either by Federal, New York State or Korean authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 5.
10. Notices. All communications hereunder will be in writing and
-------
effective only on receipt, and, if sent to the Dealer Manager, will be mailed,
delivered or telegraphed and confirmed to PaineWebber Incorporated, 1285 Avenue
of the Americas, New York, New York 10019; or if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 1345 Avenue of the
Americas, New York, New York 10105; or if sent to Alliance, will be mailed,
delivered or telegraphed and confirmed to it at 1345 Avenue of the Americas, New
York, New York 10105; or if sent to Orion, will be mailed, delivered or
telegraphed and confirmed to it at 767 Fifth Avenue, 23rd Floor, New York, New
York 10153.
11. Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto and their respective successors and will inure
to the benefit of the officers and directors and controlling persons referred to
in Section 7 hereof, and no other person will have any right or obligation
hereunder.
12. Applicable Law. This Agreement will be governed by and construed
--------------
in accordance with the laws of the State of New York without reference to choice
of law principles thereof.
13. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
38
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the Company,
Alliance, Orion and the Dealer Manager.
Very truly yours,
The Korean Investment Fund, Inc.
By: ____________________________
Name:
Title:
Alliance Capital Management L.P.
By Alliance Capital Management
Corporation, its general partner
By: ____________________________
Name:
Title:
Orion Asset Management Co., Ltd.
By: ____________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PaineWebber Incorporated
as Dealer Manager
By: __________________________________
Name:
Title:
39
<PAGE>
EXHIBIT 99(A)
-------------
Draft of 9/14/95
THE KOREAN INVESTMENT FUND, INC.
Rights Offering for Shares of Common Stock
SOLICITING DEALER AGREEMENT
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
OCTOBER 20, 1995,
UNLESS EXTENDED
To Securities Dealers and Brokers:
The Korean Investment Fund, Inc. (the "Company") is issuing to its
shareholders of record ("Record Date Shareholders") as of the close of business
on September 25, 1995 (the "Record Date") non-transferable rights ("Rights")
entitling the Record Date Shareholders to subscribe for an aggregate of
1,987,637 shares (the "Shares") of common stock, par value $.01 per share
("Common Stock"), of the Company upon the terms and subject to the conditions
set forth in the Company's Prospectus and Statement of Additional Information
(the "Prospectus") dated September 19, 1995 (the "Offer"). Pursuant to the
over-subscription privilege in connection with the Offer, the Company may, at
the discretion of the Board of Directors, increase the number of Shares subject
to subscription by up to 25%. Each such Record Date Shareholder is being issued
one Right for each whole share of Common Stock owned on the Record Date. The
Rights entitle the Record Date Shareholder, during the Subscription Period (as
hereinafter defined) to acquire at the Subscription Price (as hereinafter
defined), one Share for each three Rights held in the primary subscription. No
fractional Shares will be issued. The Subscription Price will be 95% of the
lower of (i) the average of the last reported sales price of a share of the
Fund's Common Stock on the New York Stock Exchange on the date of the expiration
of the Offer (the "Pricing Date") and on the four preceding business days and
(ii) the net asset value per share as of the close of business on the Pricing
Date. The Subscription Period will commence on September 25, 1995 and end on
the Expiration Date. (With respect to the Offer, the term "Expiration Date"
means 5:00 p.m., New York City time, on October 20, 1995, unless and until the
Company shall, in its sole discretion, have extended the period for which the
Offer is open, in which event the term "Expiration Date" with respect to the
Offer will mean the latest time and date on which the Offer, as so extended by
the Company, will expire.) Any Record Date Shareholder who fully exercises all
Rights issued to him is entitled to subscribe for Shares which were not
otherwise subscribed for by others on primary subscription (the "Over-
<PAGE>
Subscription Privilege"). Shares acquired pursuant to the Over-Subscription
Privilege are subject to allotment, as more fully discussed in the Prospectus.
For the duration of the Offer, the Company has agreed to pay Soliciting
Fees to any qualified broker or dealer executing a Soliciting Dealer Agreement
who solicits the exercise of Rights in connection with the Offer and who
complies with the procedures described below (a "Soliciting Dealer"). Upon
timely delivery to State Street Bank and Trust Company, the Company's
Subscription Agent for the Offer, of payment for Shares purchased pursuant to
the exercise of Rights and the Over-Subscription Privilege and of properly
completed and executed documentation as set forth in this Soliciting Dealer
Agreement, a Soliciting Dealer will be entitled to receive Soliciting Fees equal
to 2.50% of the Subscription Price per Share for each Share so purchased. A
qualified broker or dealer is a broker dealer which is a member of a registered
national securities exchange in the United States or the National Association of
Securities Dealers, Inc. ("NASD") or any foreign broker or dealer not eligible
for membership who agrees to conform to the Rules of Fair Practice of the NASD,
including Sections 8, 24, 25 and 36 thereof, in making solicitations in the
United States to the same extent as if it were a member thereof.
The Company has agreed to pay the Soliciting Fees payable to the
undersigned Soliciting Dealer and to indemnify such Soliciting Dealer on the
terms set forth in the Dealer Manager Agreement, dated September 18, 1995, among
PaineWebber Incorporated, as Dealer Manager, the Company, Alliance Capital
Management L.P. and Orion Asset Management Co., Ltd., the Company's investment
managers. Solicitation and other activities by Soliciting Dealers may be
undertaken only in accordance with the applicable rules and regulations of the
Securities and Exchange Commission and only in those states and other United
States jurisdictions where such solicitations and other activities may lawfully
be undertaken and in accordance with the laws thereof. Compensation will not be
paid for solicitations in any state or other jurisdiction in which, in the
opinion of counsel to the Company or counsel to the Dealer Manager, such
compensation may not lawfully be paid. No Soliciting Dealer shall be paid
Soliciting Fees with respect to Shares purchased pursuant to an exercise of
Rights or the Over-Subscription Privilege for its own account or for the account
of any affiliate of the Soliciting Dealer, except that the Dealer Manager shall
receive the Soliciting Fees with respect to Shares purchased pursuant to an
exercise of Rights or the Over-Subscription Privilege for its own account
provided that such Shares are offered and sold by the Dealer Manager to its
clients. No Soliciting Dealer or any other person is authorized by the Company
or the Dealer Manager to give any information or make any representations in
connection with the Offer other than those
2
<PAGE>
contained in the Prospectus and other authorized solicitation material furnished
by the Company through the Dealer Manager. No Soliciting Dealer is authorized
to act as agent of the Company or the Dealer Manager in any connection or
transaction. In addition, nothing herein contained shall constitute the
Soliciting Dealers partners with the Dealer Manager or with one another, or
agents of the Dealer Manager or of the Company, or create any association
between such parties, or shall render the Dealer Manager or the Company liable
for the obligations of any Soliciting Dealer. The Dealer Manager shall be under
no liability to make any payment to any Soliciting Dealer, and shall be subject
to no other liabilities to any Soliciting Dealer, and no obligations of any sort
shall be implied.
In order for a Soliciting Dealer to receive Soliciting Fees, the
Subscription Agent must have received from such Soliciting Dealer no later than
5:00 p.m., New York City time, on the Expiration Date, either (i) a properly
completed and duly executed Subscription Certificate with respect to Shares
purchased pursuant to the exercise of Rights and full payment for such Shares;
or (ii) a Notice of Guaranteed Delivery guaranteeing delivery to the
Subscription Agent by close of business on the third business day after the
Expiration Date, of (a) full payment for such Shares and (b) a properly
completed and duly executed Subscription Certificate with respect to Shares
purchased pursuant to the exercise of Rights. Soliciting Fees will only be paid
after receipt by the Subscription Agent of a properly completed and duly
executed Soliciting Dealer Agreement (or a facsimile thereof). In the case of a
Notice of Guaranteed Delivery, Soliciting Fees will only be paid after delivery
in accordance with such Notice of Guaranteed Delivery has been effected.
Soliciting Fees will be paid by the Company to the Soliciting Dealer by
certified or official bank check payable to the order of such Soliciting Dealer
to the address identified by such Soliciting Dealer below as soon as practicable
immediately following the receipt of payment by the Subscription Agent for
Shares acquired during the Primary Subscription or pursuant to the Over-
Subscription Privilege.
All questions as to the form, validity and eligibility (including time of
receipt) of this Soliciting Dealer Agreement will be determined by the Company,
in its sole discretion, which determination shall be final and binding. Unless
waived, any irregularities in connection with a Soliciting Dealer Agreement or
delivery thereof must be cured within such time as the Company shall determine.
None of the Company, the Dealer Manager, the Subscription Agent, the Information
Agent for the Offer (Shareholder Communications Corporation) or any other person
will be under any duty to give notification of any defects or irregularities in
any Soliciting Dealer Agreement or incur any liability for failure to give such
notification.
3
<PAGE>
The acceptance of Soliciting Fees from the Company by the undersigned
Soliciting Dealer shall constitute a representation by such Soliciting Dealer to
the Company that: (i) it has received and reviewed the Prospectus; (ii) in
soliciting purchase of Shares pursuant to the exercise of the Rights or the
Over-Subscription Privilege, it has complied with the applicable requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
applicable rules and regulations thereunder, any applicable securities laws of
any state or jurisdiction where such solicitations may lawfully be made, and the
applicable rules and regulations of any self-regulatory organization or
registered national securities exchange; (iii) in soliciting purchases of Shares
pursuant to the exercise of the Rights or the Over-Subscription Privilege, it
has not published, circulated or used any soliciting materials other than the
Prospectus and any other authorized solicitation material furnished by the
Company through the Dealer Manager; (iv) it has not purported to act as agent of
the Company or the Dealer Manager in any connection or transaction relating to
the Offer; (v) the information contained in this Soliciting Dealer Agreement is,
to its best knowledge, true and complete; (vi) it is not affiliated with the
Company; (vii) it will not accept Soliciting Fees paid by the Company pursuant
to the terms hereof with respect to Shares purchased by the Soliciting Dealer
pursuant to an exercise of Rights or the Over-Subscription Privilege for its own
account; (viii) it will not remit, directly or indirectly, any part of
Soliciting Fees paid by the Company pursuant to the terms hereof to any
beneficial owner of Shares purchased pursuant to the Offer; and (ix) it has
agreed to the amount of the Soliciting Fees and the terms and conditions set
forth herein with respect to receiving such Soliciting Fees. By returning a
Soliciting Dealer Agreement and accepting Soliciting Fees, a Soliciting Dealer
will be deemed to have agreed to indemnify the Company and the Dealer Manager
against losses, claims, damages and liabilities to which the Company may become
subject as a result of the breach of such Soliciting Dealer's representations
made herein and described above. In making the foregoing representations,
Soliciting Dealers are reminded of the possible applicability of Rule 10b-6
under the Exchange Act if they have bought, sold, dealt in or traded in any
Shares for their own account since the commencement of the Offer.
Soliciting Fees due to eligible Soliciting Dealers will be paid as soon as
practicable immediately following the receipt of payment by the Subscription
Agent for Shares acquired during the Primary Subscription or pursuant to the
Over-Subscription Privilege. Upon expiration of the Offer, no Soliciting Fees
will be payable to Soliciting Dealers with respect to Shares purchased
thereafter.
4
<PAGE>
Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the Dealer Manager Agreement or, if not defined therein, in
the Prospectus.
This Soliciting Dealer Agreement will be governed by the laws of the State
of New York without reference to the choice of law principles thereof.
Please execute this Soliciting Dealer Agreement below accepting the terms
and conditions hereof and confirming that you are a member firm of a registered
national securities exchange or of the NASD or a foreign broker or dealer not
eligible for membership who has conformed to the Rules of Fair Practice of the
NASD, including Sections 8, 24, 25 and 36 thereof, in making solicitations of
the type being undertaken pursuant to the Offer in the United States to the same
extent as if you were a member thereof, and certifying that you have solicited
the purchase of the Shares pursuant to exercise of the Rights or the Over-
Subscription Privilege, all as described above, in accordance with the terms and
conditions set forth in this Soliciting Dealer Agreement. Please forward two
executed copies of this Soliciting Dealer Agreement to PaineWebber Incorporated,
1285 Avenue of the Americas, New York, New York 10019, Attention: Todd A. Reit
(tel. number (212) 713-4908 and fax number (212) 713-1054). A signed copy of
this Soliciting Dealer Agreement will be promptly returned to the Soliciting
Dealer at the address set forth below.
Very truly yours,
PaineWebber Incorporated
By: ____________________________
Name:
Title:
5
<PAGE>
ACCEPTED AND CONFIRMED BY
SOLICITING DEALER
____________________________ ______________________________
Printed Firm Name Address
____________________________ ______________________________
Authorized Signature Area Code and Telephone Number
____________________________
Name and Title
Dated:______________________
Payment of the Solicitation Fee
shall be mailed by check to the following:
Name of Bank or other
Recipient Institution:___________________________
Address:________________________________
Attention:______________________________
6
<PAGE>
EXHIBIT 99(L)(1)
----------------
[SEWARD & KISSEL LETTERHEAD]
September 18, 1995
The Korean Investment Fund, Inc.
1345 Avenue of the Americas
New York, New York 10105
The Korean Investment Fund, Inc.
Registration Statement on Form N-2
(File No. 33-61849)
----------------------------------
Dear Sirs:
We are acting as counsel for The Korean Investment Fund, Inc., a
Maryland corporation (the "Fund"), in connection with the proposed registration,
under the Securities Act of 1933, of 2,484,546 shares, consisting of 1,987,637
Primary Subscription Shares and 496,909 Additional Over-Subscription Shares, of
the Fund's common stock, par value $.01 per share (the "Common Stock"), to be
issued pursuant to the exercise of non-transferable rights (the "Rights") to
purchase Common Stock to be distributed to the Fund's shareholders in accordance
with the Fund's Registration Statement on Form N-2.
As counsel for the Fund we have participated in the preparation of the
Registration Statement on Form N-2 (Securities and Exchange Commission File No.
33-61849) relating to the Shares (the "Registration Statement") and the form of
Subscription Certificate relating to the exercise of the Rights and have
examined and relied upon such corporate records of the Fund and such other
documents and certificates as to factual matters as we have deemed to be
necessary to render the opinion expressed herein. We have assumed that the Fund
has no "Principal Shareholder" as defined in Article Seventh of its Articles of
Incorporation and have relied upon the Certificate of the Secretary of the Fund
to the effect that the Fund has no knowledge of any
<PAGE>
The Korean Investment
Fund, Inc. -2- September 18, 1995
such Principal Shareholder.
Based on the foregoing, we are of the opinion that:
1. The Fund has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
2. The Primary Subscription Shares of Common Stock to be issued upon
exercise of the Rights have been duly authorized, and, upon such exercise, when
the Primary Subscription Shares have been issued and paid for as contemplated by
the Registration Statement, the Primary Subscription Shares will have been
validly and legally authorized and issued and will be fully paid and
nonassessable. When the Pricing Committee of the Board of Directors has
authorized the issuance of the Additional Over-Subscription Shares pursuant to
the authority delegated to it by the Board of Directors, the Additional
Over-Subscription Shares of Common Stock to be issued upon exercise of the
Rights will have been duly authorized and, upon such exercise, when the
Additional Over-Subscription Shares have been issued and paid for as
contemplated by the Registration Statement, the Additional Over-Subscription
Shares will have been validly and legally authorized and issued and will be
fully paid and nonassessable.
As to the matters of Maryland law contained in the foregoing opinion we
have relied on the opinion of Venable, Baetjer and Howard, LLP of Baltimore,
Maryland, dated September 18, 1995, pertaining to the subject matter hereof.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
reference to our firm under the captions "Taxation" and "Legal Matters" in the
Registration Statement.
Very truly yours,
/s/ Seward & Kissel
<PAGE>
EXHIBIT 99(L)(2)
----------------
[LETTERHEAD OF VENABLE]
September 18, 1995
Seward & Kissel
One Battery Park Plaza
New York, New York 10004
Re: The Korean Investment Fund, Inc.
--------------------------------
Ladies and Gentlemen:
We have acted as special Maryland counsel to The Korean Investment Fund,
Inc., a Maryland corporation (the "Company"), in connection with the issuance
of up to 2,484,546 shares, consisting of 1,987,637 Primary Subscription Shares
and 496,909 Additional Over-Subscription Shares, of the Company's common stock,
par value $.01 per share (the "Common Stock"), pursuant to the exercise of
rights (the "Rights") to purchase Common Stock to be distributed to the Fund's
shareholders in accordance with the Fund's Registration Statement on Form N-2
(File No. 33-61849) (the "Registration Statement").
We have examined the Company's prospectus included in the Registration
Statement substantially in the form in which it is to become effective (the
"Prospectus"), the form of subscription certificate for exercise of the Rights,
the Company's Charter and Bylaws, and resolutions adopted by the Board of
Directors of the Company and its Pricing Committee, and have further examined
and relied upon a certificate of the Maryland State Department of Assessments
and Taxation to the effect that the Company is duly incorporated and existing
under the laws of the State of Maryland and is in good standing and duly
authorized to transact business in The State of Maryland. We have assumed that
the Company has no "Principal Shareholder" as defined in Article Seventh of the
Charter and have relied upon the Certificate of the Secretary of the Company to
the effect that the Company has no knowledge of any such Principal Shareholder.
We have also assumed that if the initial Expiration Date of the offering is
extended as described in the Registration Statement, such action will have been
duly authorized by the Pricing Committee of the Board of Directors pursuant to
the authority that has heretofore been delegated to the Pricing Committee by the
Board of Directors.
<PAGE>
VENABLE
ATTORNEYS AT LAW
Seward & Kissel
September 18, 1995
Page 2
We have also examined and relied upon such other corporate records of
the Company and documents and certificates with respect to factual matters as
we have deemed necessary for purposes of this opinion. With respect to the
documents we have received, we have assumed, without independent verification,
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, and the conformity with originals of all documents submitted
to us as copies.
Based on the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
2. The Primary Subscription Shares of Common Stock to be issued upon
exercise of the Rights have been duly authorized, and, upon such exercise, when
the Primary Subscription Shares have been issued and paid for as contemplated by
the Registration Statement, the Primary Subscription Shares will have been
validly and legally authorized and issued and will be fully paid and
nonassessable. When the Pricing Committee of the Board of Directors has
authorized the issuance of the Additional Over-Subscription Shares pursuant to
the authority delegated to it by the Board of Directors, the Additional Over-
Subscription of Common Stock to be issued upon exercise of the Rights will have
been duly authorized and, upon such exercise, when the Additional Over-
Subscription Shares have been issued and paid for as contemplated by the
Registration Statement, the Additional Over-Subscription Shares will have been
validly and legally authorized and issued and will be fully paid and
nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock. It does not extend to the securities or "Blue Sky" laws
of Maryland, to federal securities laws or to other laws.
You may rely on this opinion in rendering your opinion to the Company
that is to be filed as an exhibit to the Registration Statement. We consent to
the filing of this opinion as an exhibit to the Registration Statement and to
the reference to us in the Prospectus under the caption "Legal Matters." We do
not thereby admit that we are "experts" within the meaning of the Securities Act
of 1933 and the regulations thereunder.
<PAGE>
VENABLE
ATTORNEYS AT LAW
Seward & Kissel
September 18, 1995
Page 3
This opinion may not be relied upon by any other person or for any other purpose
without our prior written consent.
Very truly yours,
/s/ Venable, Baetjer and Howard, LLP
<PAGE>
EXHIBIT 99(L)(3)
----------------
[LETTERHEAD OF SHIN & KIM]
September 18, 1995
The Korean Investment Fund, Inc.
1345 Avenue of the Americas
New York, New York 10105
U.S.A.
Dear Sirs:
We hereby consent to the quotation and summarization of our advice to
The Korean Investment Fund, Inc. (the "Fund") and the reference to our name each
as set forth in the Fund's Registration Statement on Form N-2 in the section of
the Fund's Statement of Additional Information entitled "Taxation - Korean
Taxes" and in the section of the Fund's Prospectus entitled "Legal Matters".
Very truly yours,
/s/ Shin & Kim
Shin & Kim
<PAGE>
EXHIBIT 99(N)
-------------
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-2 (the "Registration Statement") of our report dated June
16, 1995, relating to the financial statements and financial highlights of The
Korean Investment Fund, Inc., which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the references to us under the headings "Financial Highlights" and
"Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
September 18, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 67,738,585
<INVESTMENTS-AT-VALUE> 74,730,261
<RECEIVABLES> 2,359,163
<ASSETS-OTHER> 61,284
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 77,150,708
<PAYABLE-FOR-SECURITIES> 1,396,369
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 293,441
<TOTAL-LIABILITIES> 1,689,810
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 65,884,104
<SHARES-COMMON-STOCK> 5,962,912
<SHARES-COMMON-PRIOR> 4,209,115
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,453,441
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,063,724
<NET-ASSETS> 75,460,898
<DIVIDEND-INCOME> 724,413
<INTEREST-INCOME> 185,528
<OTHER-INCOME> 0
<EXPENSES-NET> 1,550,771
<NET-INVESTMENT-INCOME> (640,830)
<REALIZED-GAINS-CURRENT> 4,656,429
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> (811,217)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21,194,063
<NUMBER-OF-SHARES-REDEEMED> 1,753,797
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 21,194,063
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2,202,988)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,550,771
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
