---------------------------------------------
KOREA CAPITAL FUND
---------------------------------------------
3360 W. Olympic Blvd., Los Angeles, CA 90019
Tel. (800) 335-3381
KOREA CAPITAL FUND (the "Fund") is a mutual fund that seeks long-term
capital appreciation by investing at least 65% of its total assets in the
securities of Korean issuers which are listed on the Korea Stock Exchange. The
Fund invests in common stock and other equity securities, as well as debt
securities, including debt securities of the government of the Republic of
Korea, commonly referred to as "Korea."
There can be no assurance that the Fund will achieve its investment
objective. The Fund is an investment company designed for long-term investors
and not as a trading vehicle. The Fund does not present a complete investment
program nor is the Fund suitable for all investors. An investment in the Fund
should be considered speculative and is subject to special risk factors, related
primarily to the Fund's investments in Korea, which should be reviewed carefully
by potential investors.
The Fund intends to suspend the offering of its shares if Daehan
Securities, Inc. ("Daehan"), Korea Investment Management Europe Ltd. ("KIM") and
the Fund's Board of Trustees determine that the proceeds from the sale of Fund
shares cannot be effectively invested in securities of Korean issuers consistent
with the investment objectives and policies of the Fund. Currently, the Fund
expects to suspend sales when the value of its net assets reaches a point, as
determined by Daehan and KIM, between $100 million and $125 million. Thereafter,
the Fund will resume sales of its shares when doing so becomes consistent with
prudent portfolio management and the best interests of the Fund's shareholders.
This Prospectus sets forth concisely the information an investor
should know before investing. This Prospectus should be read carefully and
retained for future reference. Should more detailed information be desired, a
Statement of Additional Information, dated January 31, 1996, which has been
filed with the Securities and Exchange Commission and which, as amended or
supplemented from time to time, is incorporated by reference into this
Prospectus and is available without charge by writing to the Fund at 3360 West
Olympic Boulevard, Los Angeles, California 90019, or calling (213) 734-5000.
---------------------------------------------
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 ON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------------------------
The Date of this Prospectus is January 31, 1996
<PAGE>
(Continued from preceding page)
DAEHAN SECURITIES, INC. ("Daehan", "Administrator" or the "Investment
Adviser') is the investment adviser and administrator of the Fund and is
responsible for the day-to-day affairs of the Fund. Daehan consults with the
Fund's investment manager to identify industries and specific Korean issuers (as
defined herein) where political and economic factors are likely to produce
above-average growth rates. Daehan is a registered investment adviser and a
full-service broker-dealer which provides brokerage services to the
Korean-American community, but has not previously advised or administered a
mutual fund.
KOREA INVESTMENT MANAGEMENT EUROPE LTD. ("KIM") is the investment
manager for the Fund and, in consultation with Daehan, attempts to identify
industries and securities of specific Korean issuers which are likely to produce
above average long-term growth rates. KIM is 80% owned by Korea Investment Trust
Co., Ltd. ("KITC"), which was the first investment trust management company to
be established under the laws of Korea. KITC is presently the largest investment
fund management organization in Korea, with over $28 billion under management as
of November, 1995 in 425 investment funds which invest primarily in Korean
securities. KIM provides investment advice to collective investment trusts, but
has not previously managed a U.S. mutual fund.
An investment in the KOREA CAPITAL FUND offers the following
advantages:
* Access to companies listed on the Korea Stock Exchange
* Professional Management by KIM, a subsidiary of the largest
Korean investment management firm with over $28 billion under
management
* Automatic Dividend and Capital Gain Reinvestment
* $1,000 Minimum Investment ($250 for IRAs)
* Reduced Sales Charge Plans
FOR FURTHER INFORMATION, CONTACT:
DAEHAN SECURITIES, INC. (800) 335-3381
OR
SHAREHOLDER SERVICES (800) 424-2295.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Prospectus Summary.......................................................... 4
Table of Fees and Expenses.................................................. 7
Financial Highlights........................................................ 8
Investment Objective, Policies and Risks.................................... 10
How To Invest............................................................... 16
How To Redeem Shares........................................................ 20
Shareholder Account Manual.................................................. 21
Calculation of Net Asset Value.............................................. 23
Dividends, Other Distributions and Taxation................................. 23
Management.................................................................. 25
Other Information........................................................... 28
Appendix--Korean Risk Factors............................................... 32
- --------------------------------------------------------------------------------
In this Prospectus, unless otherwise specified, all references to
"billion" are to one thousand million; to "dollars," "US$" or "$" are to United
States dollars; and, to "Won" or "W" are to Korean Won.
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by the more detailed
information appearing in the body of this Prospectus. Cross-references in this
summary are to headings in the body of this Prospectus.
Investment Objective: The Fund seeks long-term capital appreciation
Principal Investments: Invests primarily in securities of companies listed
and primarily traded on the Korea Stock Exchange
Risk Factors: An investment in the Fund should be considered
speculative and is subject to special risk factors
Investment Adviser and
Administrator: Daehan Securities, Inc.
Investment Manager: Korea Investment Management Europe Ltd.
Shares Available Through: Daehan Securities, Inc., your own broker or directly
through the Fund
Dividends and Other
Distributions: Paid annually from available income and capital gain
Reinvestment: Distributions may be reinvested in Fund shares
automatically without a sales charge
Initial Purchase: $1,000 minimum ($250 for IRAs)
Subsequent Purchases: $100 minimum ($25 for IRAs)
Net Asset Value: Determined daily and available by calling the Fund
Other Features: Letter of Intent
Quantity Discounts
Reinstatement Privilege
4
<PAGE>
The Fund. Korea Capital Fund (the "Fund") is a mutual fund organized as
a non-diversified series of Korea Capital Trust (the "Trust"), a registered
open-end management investment company. Shares of beneficial interest of the
Fund are available through Daehan Securities, Inc. ("Daehan"), the Fund's
distributor, brokers which have entered into agreements with Daehan to sell
shares of the Fund or directly through the Fund. See "How To Invest" and
"Shareholder Account Manual." Shares may be redeemed either through brokers or
the Fund. See "How To Redeem Shares" and "Shareholder Account Manual."
Investment Adviser and Administrator. Daehan also acts as the Fund's
investment adviser and administrator. Daehan is a registered investment adviser
and also acts as a full-service broker-dealer which maintains an investment
research office in Los Angeles, California. Daehan specializes in the Korean
financial markets and provides investors of the Korean-American community access
to research and information regarding the U.S. securities markets and to the
Korean securities market through its business ties with major Korean securities
businesses. Daehan has no previous experience advising or administering a mutual
fund. See "Management."
Investment Manager. Korea Investment Management Europe Ltd. ("KIM") is
the Fund's investment manager. KIM was established in September 1991 under the
laws of the United Kingdom as a joint venture between KITC and Kleinwort Benson
Investment Management Limited and is 80% owned by KITC. KITC was organized in
1974 under the securities laws of Korea as the first investment trust management
company and is presently the largest investment trust fund sponsor in Korea.
KITC provides investment management services to 425 investment funds organized
and managed under the laws of Korea including 195 equity funds, 207 bond funds
and 23 funds designed primarily for non-Korean investors, with combined assets
of over $28 billion as of November 1995. See "Management."
Investment Objective and Policies and Risks. The Fund's investment
objective is long-term capital appreciation. The Fund invests primarily in
through investment in the securities of Korean issuers which are listed and
primarily traded on the Korea Stock Exchange ("Korean Issuers" and the "Stock
Exchange", respectively). The Fund invests in common stock and other equity
securities of Korean Issuers and may, to the extent permitted by Korean law,
invest in various debt securities, including debt securities of the Government
of the Republic of Korea, commonly referred to as South Korea ("Korea"). See
"Investment Objective, Policies and Risks" and "Appendix--Korean Risk Factors."
Under normal circumstances, the Fund will invest primarily (at least
65% of its total assets) in equity securities, consisting of common stock and
preferred stock, debt securities convertible into common stock and common stock
purchase warrants of Korean Issuers. The Fund may also invest, to the extent
permitted by Korean law, in corporate or governmental debt securities. In
selecting securities for the Fund, KIM, in consultation with Daehan, attempts to
identify Korean Issuers which, due to economic and political factors, are likely
to produce above-average growth.
5
<PAGE>
The Fund may invest up to 35% of its assets in the equity and debt
securities of United States issuers and may invest in certain money market
instruments for temporary defensive purposes. The Fund may also enter into
forward currency exchange contracts, futures contracts, covered call options and
repurchase agreements. See "Investment Objective, Policies and Risks."
Risk Factors. There is no assurance that the Fund will achieve its
investment objective. The Fund's net asset value fluctuates, reflecting
fluctuations in the market value of its portfolio positions and in the rate of
exchange between the Korean Won in which its positions are traded and the U.S.
dollar. Investing in securities of Korean companies and the Korean government
involves certain considerations not typically associated with investing in
securities of United States companies or the United States government, including
(1) restrictions on foreign investment in Korea, (2) restrictions on, and costs
associated with, conversion of principal invested in Korea from Won-denominated
to dollar-denominated assets, (3) currency exchange rate fluctuations, (4)
potential price volatility and lesser liquidity of the Korean securities market,
(5) governmental involvement in and influence on the private sector, and (6)
political and economic risks. Korean accounting, auditing and financial
reporting standards are not equivalent to United States standards and,
therefore, certain material disclosures may not be made and less information may
be available to investors investing in Korea than in the United States. There
also is less governmental regulation of the securities industry in Korea than in
the United States. See "Investment Objectives, Policies and Risks" and
"Appendix--Korean Risk Factors."
As a "non-diversified" investment company, the Fund may invest a larger
percentage of its assets in the securities of a single issuer than a diversified
company; its exposure to credit and market risks associated with each such
issuer is greater than that of a diversified company.
Management. The Fund pays investment advisory and administration fees
to Daehan at the annualized rate of 0.30% of the Fund's average daily net
assets. The Fund pays investment management fees to KIM at the annualized rate
of 0.70% of the Fund's average daily net assets. Such fees in the aggregate are
higher than similar fees of most other mutual funds but are comparable to the
fees paid by mutual funds which invest primarily in the securities of non-U.S.
countries or in a single geographic region.
As the Fund's distributor, Daehan retains the sales charges imposed on
sales of shares and reallows a portion of such charges to brokers that have made
such sales. Pursuant to a distribution plan adopted in accordance with Rule
12b-1 under the Investment Company Act of 1940 (the "1940 Act"), the Fund may
reimburse Daehan for a portion of Daehan's distribution expenses at the
6
<PAGE>
annualized rate of up to 0.25% of the Fund's average daily net assets. Daehan
may pay brokers and other financial institutions ongoing trail commission
payments for servicing shareholder accounts, for which Daehan may be reimbursed
pursuant to the Fund's distribution plan. The Fund pays all of its expenses not
assumed by Daehan or KIM. Daehan and KIM have undertaken to limit the Fund's
expenses to the annual level of 2.4% of the Fund's average net assets (exclusive
of brokerage commissions, interest, taxes and extraordinary expenses). See
"Management."
7
<PAGE>
---------------------------------------------
TABLE OF FEES AND EXPENSES
---------------------------------------------
The following table lists the costs and expenses that an investor in
the Fund will incur either directly or indirectly as a shareholder of the Fund.
The information is based on expenses incurred during the period September 1,
1993 through August 31, 1994.
Shareholder Transaction Expenses:
Maximum sales load imposed on purchases(1)................... 4.50%
Annual Fund Operating Expenses:
(Percent of average net assets)
Advisory Fees--After Fee Waiver.............................. 0.53%
12b-1 Expenses............................................... 0.25%
Other Expenses (including Administration Fee)................ 1.62%
Total Operating Expenses--After Fee Waivers............. 2.40%
Example: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
You would pay the following expenses
on a $1,000 investment, assuming a
5% annual return and redemption at
the end of each time period......... $68 $116 $167 $306
- --------------------------------------------------------------------------------
The foregoing table is to assist you in understanding the various costs and
expenses that an investor in the Fund will bear directly or indirectly. The
sales charge is a one-time charge paid at the time of purchase of the shares. An
investor may be entitled to a reduction in such sales charges. For more
information concerning the reduction in sales charges, see "How To Invest." The
Investment Adviser, the Administrator, Sub-Administrator and the Distributor
may, at their discretion, waive all or a portion of their fees. In addition,
Daehan and KIM have undertaken to limit the Fund's expenses to the annual level
of 2.4% of the Fund's average net assets (exclusive of brokerage commissions,
interest, taxes and extraordinary expenses). Absent such waivers and
undertaking, the advisory fee, administration fee, sub-administration fee and
maximum 12b-1 expenses would have been .70%, .30%, 0.34% and 0.25% of average
daily net assets, respectively. In addition, Total
- ---------------------------------
(1)Sales charges are reduced for purchases of $100,000 or more of shares of
the Fund. The National Association of Securities Dealers, Inc. limits total
annual sales charges (including 12b-1 expenses) to all purchasers of shares of a
Fund to 6.25% of new sales plus an interest factor. However, long-term
shareholders may pay more than the economic equivalent of such maximum sales
charges.
8
<PAGE>
Operating Expenses would have been 2.64%, absent any fee waivers. For a
further discussion of these fees see "Management" herein. The figures reflected
in this example should not be considered as a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown above.
9
<PAGE>
---------------------------------------------
FINANCIAL HIGHLIGHTS
---------------------------------------------
The following per share data has been audited by Coopers & Lybrand, L.L.P.,
whose unqualified report thereon appears in the Fund's Annual Report to
Shareholders for the year ended August 31, 1995. This financial data should be
read in conjunction with the related financial statements and notes thereto,
which appear in the Annual Report incorporated by reference in the Statement of
Additional Information.
<TABLE>
<CAPTION>
From October 1, 1992
For the For the (Commencement of
year ended year ended operation) to
August 31, 1995 August 31,1994 August 31, 1993
------------ ------------ ------------
<S> <C> <C> <C>
Beginning Net Asset Value $ 11.18 $10.89 $10.00
============ ============ ============
Net Investment Income (Deficit) ( 0.07) ( 0.17) ( 0.09)
Net Realized and Unrealized Gains
on Securities and Foreign Currency ( 1.20) 1.00 0.98
Distributions from Capital Gains ( 0.27) ( 0.54) --
Distributions from Capital (0.38) -- --
------------ ------------ --------------
Ending Net Asset Value $ 9.26 $ 11.18 $ 10.89
============ ============ ==============
Total Return (Annualized) ( 12.24%) 7.64% 9.71%
Net Assets at End of Period $ 11,856,897 $ 13,981,937 $ 10,046,655
Ratio of Expenses to Average Net Assets 2.40%(1) 2.40%(1) 2.40%(1)
Ratio of Net Investment Income
(Expense) to Average Net Assets ( 0.72%) 1.44% 1.60%
Portfolio Turnover Rate 60.59% 63.00% 139.00%
</TABLE>
(1) This data is net of expense reimbursement due from Advisor/Administrator and
Investment Manager.
10
<PAGE>
Ratio of gross expenses, before expense reimbursement, to average net
assets was 2.63% and 3.01% and 5.59% for the periods ended August 31, 1995 ,
1994 and 1993, respectively.
Management Discussion and Analysis. During the last quarter of 1995, the
Korean government initiated a political reform that had a profound impact on the
Korea stock market.
In investigating the slush funds created by two former Presidents of
Korea, government officials discovered that most of the slush fund contributions
were made by heads of Korean corporations. As a result of these investigations,
many senior management and Board members were prosecuted for charges of
corruption and bribery. News of such events sent stocks tumbling and created
uncertainty over the entire Korea stock market.
Nonetheless, the Fund management is still optimistic about future of
Korea. Management believes that such reforms were necessary to end years of
corruption between business and political officials and that these sweeping
reforms will provide stability for Korea's political and financial environment
in the long term. In addition, Korea's fundamental economic indicators are
stable. The Gross Domestic Product (GDP) continued to outperform that of the
United States. In 1995, average Korean GDP grew by approximately 9% with stable
inflation rate of approximately 5%. Korea's inflation appears to be in check as
the Korean Won remained relatively constant at approximately Won 760 to the
Dollar during 1995.
Index Comparison. The investment performance of the Fund is compared to
the performance of the Lipper International Fund Index and S&P 500 Index in the
following chart from October 2, 1992 (commencement of operation) through
December 31, 1995. A $10,000 investment in the Fund made on the inception date
would have declined to to $9,473 (as of December 31, 1995). The graph below
shows how this compares to the Index over the same period.
11
<PAGE>
KOREA CAPITAL FUND S&P 500 Index Lipper International
Performance from Fund Index
Inception to 1995
Load Included in
Calculation
TOTAL TOTAL TOTAL
DATE VALUE DATE VALUE DATE VALUE
- --------- --------- --------- ---------- --------- ---------
02-OCT-92 9,550.00 02-OCT-92 $10,000.00 02-OCT-92 10,000.00
31-OCT-92 10,294.90 31-OCT-92 $10,036.00 31-OCT-92 9,703.30
30-NOV-92 10,801.05 30-NOV-92 $10,374.21 30-NOV-92 9,754.93
31-DEC-92 10,705.55 31-DEC-92 $10,510.12 31-DEC-92 9,875.49
- -------------------- ---------------------- ---------------------
31-JAN-93 11,288.10 31-JAN-93 $10,586.84 31-JAN-93 9,911.63
28-FEB-93 10,858.35 28-FEB-93 $10,729.76 28-FEB-93 10,133.62
31-MAR-93 11,240.35 31-MAR-93 $10,960.45 31-MAR-93 10,721.86
30-APR-93 11,889.75 30-APR-93 $10,691.92 30-APR-93 11,276.99
31-MAY-93 11,870.65 31-MAY-93 $10,980.60 31-MAY-93 11,537.25
30-JUN-93 11,947.05 30-JUN-93 $11,016.84 30-JUN-93 11,310.09
31-JUL-93 11,517.30 31-JUL-93 $10,965.06 31-JUL-93 11,668.13
31-AUG-93 10,399.95 31-AUG-93 $11,382.83 31-AUG-93 12,441.01
30-SEP-93 10,820.15 30-SEP-93 $11,298.59 30-SEP-93 12,394.55
31-OCT-93 10,972.95 31-OCT-93 $11,527.96 31-OCT-93 13,088.29
30-NOV-93 11,813.35 30-NOV-93 $11,419.59 30-NOV-93 12,491.72
31-DEC-93 11,423.90 31-DEC-93 $11,560.05 31-DEC-93 13,760.89
- -------------------- ---------------------- ---------------------
31-JAN-94 12,584.30 31-JAN-94 $11,947.32 31-JAN-94 14,619.21
28-FEB-94 11,784.02 28-FEB-94 $11,624.74 28-FEB-94 14,267.73
31-MAR-94 11,383.89 31-MAR-94 $11,119.06 31-MAR-94 13,615.85
30-APR-94 11,273.85 30-APR-94 $11,263.61 30-APR-94 13,976.15
31-MAY-94 11,744.01 31-MAY-94 $11,447.21 31-MAY-94 13,954.26
30-JUN-94 11,834.04 30-JUN-94 $11,164.46 30-JUN-94 13,734.74
31-JUL-94 11,924.07 31-JUL-94 $11,534.01 31-JUL-94 14,158.28
31-AUG-94 11,183.82 31-AUG-94 $12,003.44 31-AUG-94 14,646.88
30-SEP-94 11,513.93 30-SEP-94 $11,714.16 30-SEP-94 14,268.34
31-OCT-94 12,844.39 31-OCT-94 $11,982.41 31-OCT-94 14,523.13
30-NOV-94 12,594.30 30-NOV-94 $11,542.66 30-NOV-94 13,845.11
31-DEC-94 11,592.96 31-DEC-94 $11,711.18 31-DEC-94 13,657.78
- -------------------- ---------------------- ---------------------
31-JAN-95 10,596.85 31-JAN-95 $12,015.67 31-JAN-95 12,981.82
28-FEB-95 9,971.64 28-FEB-95 $12,481.88 28-FEB-95 12,982.73
31-MAR-95 10,713.42 31-MAR-95 $12,851.34 31-MAR-95 13,321.63
30-APR-95 10,215.37 30-APR-95 $13,225.31 30-APR-95 13,813.07
31-MAY-95 9,961.04 31-MAY-95 $13,747.71 31-MAY-95 13,947.96
30-JUN-95 10,067.01 30-JUN-95 $14,070.79 30-JUN-95 13,999.72
31-JUL-95 10,183.58 31-JUL-95 $14,539.34 31-JUL-95 14,768.25
31-AUG-95 9,802.09 31-AUG-95 $14,578.60 31-AUG-95 14,518.57
30-SEP-95 10,480.29 30-SEP-95 $15,189.44 30-SEP-95 14,761.25
31-OCT-95 10,777.00 31-OCT-95 $15,136.28 31-OCT-95 14,455.54
30-NOV-95 10,077.61 30-NOV-95 $15,802.28 30-NOV-95 14,502.74
31-DEC-95 9,473.59 31-DEC-95 $16,094.62 31-DEC-95 14,925.36
- -------------------- ---------------------- ---------------------
Total Returns for Periods Ending December 31, 1995
Annualized Return One Year Return
Since Inception 01/01/95 - 12/31/95
----------------- -------------------
Korea Capital Fund ................... -1.65% -21.65%
Lipper International Fund Index ...... 13.10% 9.28%
S&P 500 Index ........................ 14.13% 31.25%
12
<PAGE>
---------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RISKS
---------------------------------------------
The Fund's investment objective is long-term capital appreciation. The
Fund normally invests at least 65% of its total assets in equity securities,
consisting of common stock and preferred stock, debt securities convertible into
common stock and common stock purchase warrants of Korean Issuers that are
listed and primarily traded on the Stock Exchange.
Consistent with its investment objective and policies, the Fund may invest
in equity securities consisting of common and preferred stock, debt securities
convertible into common stock and common stock purchase warrants and
substantially similar forms of equity securities with comparable risk
characteristics, and, to the extent permitted by Korean law, bonds, notes,
debentures or other forms of indebtedness that may be developed in the future.
The Fund's Prospectus will be revised to describe such other forms of
indebtedness prior to investment by the Fund. Under current regulations, the
Fund is permitted to directly purchase equity securities listed on the Stock
Exchange. The Fund may only purchase convertible bonds, bonds with warrants,
depositary receipts and other debt securities (including floating rate notes,
bonds and commercial paper) of Korean Issuers outside of Korea in currencies
other than the Won. Although the Government currently does not permit direct
foreign investment in debt securities issued by the Government or by privately
and publicly held Korean companies (other than as described above), if such
investments become lawful for the Fund, as a result of application by the Fund
or otherwise, the Fund may invest in such debt securities. The Fund may invest
up to 5% of its total assets in securities of foreign issuers in the form of
American Depository Receipts and European Depository Receipts or other
securities convertible into the securities of Korean Issuers. To the extent
permitted by applicable U.S. and Korean regulations, the Fund's assets may be
utilized to enter into foreign currency exchange contracts, currency and stock
index futures contracts, covered put and call options and repurchase agreements.
The Fund purchases most of its equity securities on the Stock Exchange. If
permitted by regulation, application of the Fund or otherwise, the Fund may
purchase equity securities in the over-the-counter market and reserves the right
to invest up to 15% of its net assets in securities of Korean companies that are
not publicly traded and therefore not readily marketable.
The Fund purchases and holds securities for long-term capital appreciation
and does not trade in securities for short-term gain. Capital appreciation in
debt securities may occur as a result of changes in relative currency exchange
rates, in relative interest rate levels or in the creditworthiness of issuers.
The receipt of income from such debt securities is incidental to the Fund's
objective of capital appreciation.
The Fund may invest its assets in a broad spectrum of Korean industries,
including, as conditions warrant from time to time, automobiles, cement,
chemicals, construction, electrical equipment, electronics, finance, food and
beverage, international trading, machinery, shipbuilding, steel and textiles. In
selecting industries and companies for investment, KIM, in consultation with
Daehan, considers overall growth prospects, competitive position in export
markets, technology, research and development, productivity, labor costs, raw
material costs and sources, profit
13
<PAGE>
margins, return on investment, capital resources, government regulation,
management and other factors.
Because the Fund is a non-diversified company, the only portfolio
diversification requirements to which the Fund is subject are contained (a) in
rules of the Securities and Exchange Commission of Korea (the "KSEC"), under
which the Fund currently may not hold more than 3% of certain equity securities
of any Korean issuer acquired upon exercise of certain conversion rights,
commonly referred to as "Converted Shares," and more than 3% of any equity
securities of Korean Issuers acquired through reinvestment of the proceeds of
any sale of Converted Shares which result in the Fund acquiring "Reinvested
Shares," and may not acquire Government and corporate bonds (excluding
convertible bonds, bonds with warrants and other debt securities issued by
Korean companies in non-Korean markets in currencies other than the Won); and
(b) in the rules applicable to regulated investment companies under the Internal
Revenue Code of 1986, as amended (the "Code").
While the relatively greater concentration in securities of particular
companies permitted to the Fund as a non-diversified company is expected to
increase risk, and could result in greater fluctuation in the Fund's net asset
value than for a diversified company, it also reflects the composition of the
Korean securities market, in that securities of relatively few companies account
for a greater share of the total capitalization of such market and trading in
those securities represents a greater share of the total trading market than is
the case in the United States.
Under normal circumstances, the Fund may invest up to 35% of its total
assets in a combination of equity and debt securities of U.S. issuers. In
evaluating investments in securities of U.S. issuers, KIM, in consultation with
Daehan, will consider, among other factors, the issuer's Korean business
activities and the impact that economic and political developments may have on
the value of the issuer's securities.
Investments in Debt Securities. Although the Fund invests primarily in
equity securities, the Fund may, consistent with its investment objective and
other policies, invest up to 35% of its total assets in debt securities of
Korean and United States issuers. The Fund does not invest in debt securities
rated below "A" by Standard & Poor's Corporation ("S&P") or Moody's Investors
Service ("Moody's") or which, if unrated, are of comparable credit quality as
determined by KIM, in consultation with Daehan, under procedures adopted and
periodically reviewed by the Board of Trustees. Debt securities rated "A"
possess many favorable investment attributes and are to be considered as upper
medium-grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future. Most of the debt securities of Korean
Issuers in which the Fund may invest, in all likelihood, will not be rated by
either S&P or Moody's; however, the Fund will not invest in any unrated debt
securities of Korean Issuers unless such securities are found by KIM, in
consultation with Daehan, to have attributes which are at least comparable to
"A" rated debt securities pursuant to procedures adopted by the Board of
Trustees.
Investment in Other Investment Companies. Consistent with provisions of
Investment Company Act of 1940 (the "1940 Act") and any administrative
exemptions that may be granted by the U.S. Securities and Exchange Commission
(the "SEC"), the Fund may invest in the securities of other investment companies
that invest in Korean securities. Absent special relief from the
14
<PAGE>
SEC, the Fund may invest up to 10% of its assets in the aggregate in shares of
other investment companies and up to 5% of its assets in any one investment
company, as long as that investment does not represent more than 3% of the
voting stock of the acquired investment company. As a shareholder in any
investment company, the Fund will bear its ratable share of such company's
expenses, and will remain subject to payment of the Fund's advisory, management
and administrative fees with respect to assets so invested.
Temporary Defensive Strategies. The Fund may invest in Money Market
Securities (as defined herein) to generate income to defray Fund expenses, for
temporary defensive purposes and pending investment in accordance with the
Fund's investment objective and policies. For temporary defensive purposes, the
Fund may invest up to 100% of its assets in Money Market Securities. In
addition, the Fund reserves the right to be primarily invested in U.S.
securities for temporary defensive purposes or pending investment of the
proceeds of the offering made hereby. The Fund may assume a temporary defensive
position when, due to political, market or other factors broadly affecting
Korea, KIM, in consultation with Daehan, determines that opportunities for
capital appreciation in the Korean market would be significantly limited over an
extended period, or that investing in the Korean market presents undue risk of
loss.
Money Market Securities are defined as short-term debt securities (less
than 12 months to maturity) denominated in U.S. dollars or in Korean Won (at the
time such investment is permitted), which consist of: (a) obligations issued or
guaranteed by (i) the U.S. government or the Korean government, their agencies
or instrumentalities, or municipalities or (ii) international organizations
designed or supported by multiple foreign governmental entities to promote
economic reconstruction or development ("supranational entities"); (b) finance
company obligations, corporate commercial paper and other short-term commercial
obligations; (c) bank obligations (including certificates of deposit, time
deposits, demand deposits and bankers' acceptances), subject to the restriction
that the Fund may not invest more than 25% of its total assets in bank
securities; and (d) repurchase agreements with respect to all the foregoing. The
Fund, as a matter of fundamental policy may invest up to 25% of its total assets
in the securities of the Korean government (at the time such investment is
permitted) and up to 25% of its total assets in the securities of supranational
entities.
The Fund may invest in commercial paper rated as low as A-3 by S&P or P-3
by Moody's and other Money Market Securities rated as low as A-2 by S&P or MIG-2
by Moody's or which, if unrated, are of comparable credit quality as determined
by KIM, in consultation with Daehan, pursuant to guidelines approved by the
Board of Trustees. Such obligations are considered to have an acceptable
capacity for timely repayment. However, these securities may be more vulnerable
to adverse effects of changes in circumstances than obligations carrying higher
designations.
The banks whose obligations may be purchased by the Fund and the banks and
broker-dealers with whom the Fund may enter into repurchase agreements include
any member bank of the Federal Reserve System, and any broker-dealer or any
foreign bank whose creditworthiness has been determined by KIM, in consultation
with Daehan, and in accordance with guidelines approved by the Board of
Trustees, to be at least equal to that of issuers of commercial paper that the
Fund may purchase, as described above. KIM and Daehan will review and monitor
the creditworthiness of such institutions under the Board's general supervision.
In this regard, KIM and Daehan will consider, among other factors, the
capitalization of the institution, the Fund's prior dealings with
15
<PAGE>
the institution, any rating of the institution's senior long-term debt by
independent rating agencies and other factors KIM or Daehan deem appropriate.
The Fund does not invest in the securities of any issuer which is affiliated
with KIM, KITC or Daehan.
Repurchase agreements are transactions in which the Fund purchases a
security from a bank or recognized securities dealer and simultaneously commits
to resell that security to the bank or dealer at an agreed-upon price, date and
market rate of interest separate from the coupon rate and maturity of the
purchased security. The Fund will invest only in repurchase agreements
collateralized at all times in an amount at least equal to the repurchase price
plus accrued interest. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase were less than the
repurchase price, the Fund would suffer a loss. Further, the Fund could suffer a
loss if the bank or dealer which is party to the repurchase agreement petitions
for bankruptcy or otherwise becomes subject to bankruptcy or other liquidation
proceedings, as this could restrict the Fund's ability to sell the collateral.
However, with respect to banks and dealers whose bankruptcy or liquidation
proceedings are subject to the U.S. Bankruptcy Code, the Fund intends to comply
with provisions of such Code that would allow it immediately to resell such
collateral.
Forward Currency Contracts, Options and Futures Contracts. In seeking to
protect against the effect of adverse changes in the financial markets in which
the Fund invests, or against currency exchange rate or interest rate changes
that are adverse to the present or prospective positions of the Fund, the Fund
may employ certain risk management practices, including forward currency
transactions and transactions in options, futures contracts and options on
futures contracts on U.S. and foreign government securities and currencies. Only
a limited market, if any, currently exists for hedging transactions relating to
the Korean Won, to securities denominated in Won or to securities of issuers
domiciled or principally engaged in business in Korea. To the extent that such a
market does not exist, the Fund may not be able to effectively hedge its
investment in the Korean market.
Hedging practices may involve certain risks which are summarized below.
Subject to the Fund's investment objective and policies as stated above, the
Fund may invest in forward contracts, options on securities and options on
currency transactions. The Fund may write and purchase put and call options on
securities that are traded on recognized securities exchanges and OTC markets.
The Fund may also enter into stock index and interest rate futures contracts and
purchase and write options to buy and sell such futures contracts, to the extent
permitted under regulations of the U.S. Commodity Futures Trading Commission
("CFTC"). The Fund intends to use these practices only for hedging purposes and
not for speculation; however, these practices may result in the loss of
principal under certain conditions. In addition, certain provisions of the Code
limit the extent to which the Fund may enter into forward contracts or futures
contracts or engage in options transactions. See "Taxes" in the Statement of
Additional Information.
In order to hedge against currency risks, the Fund may use forward
currency contracts, currency futures contracts, and put and call options on
foreign currencies, as described below and in the Statement of Additional
Information. The Fund"s use of currency hedging strategies would involve certain
investment risks and transaction costs to which it might not otherwise be
subject. These risks include: dependence on KIM's ability to predict movements
in exchange rates; imperfect correlation between movements in exchange rates and
movements in the currency
16
<PAGE>
hedged; and the fact that the skills needed to effectively hedge against the
Fund's currency risks are different from those needed to select the securities
in which the Fund invests. The Fund may also conduct its foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market.
To attempt to hedge against adverse movements in exchange rates between
the U.S. dollar and Korean Won, the Fund may enter into forward currency
contracts for the purchase or sale of a specified currency at a specified future
date. Such contracts may involve the purchase or sale of the Korean Won against
the U.S. dollar or vice versa. The Fund may enter into forward currency
contracts either with respect to specific transactions or with respect to the
Fund's portfolio positions. For example, when the Fund anticipates making a
purchase or sale of a security, it may enter into a forward currency contract in
order to set the rate (either relative to the U.S. dollar or the Korean Won) at
which a currency exchange transaction related to the purchase or sale will be
made. Further, when KIM believes that either the Korean Won or the dollar may
decline against the other, the Fund may enter into a forward contract to sell
the currency KIM expects to decline in an amount up to the value of the Fund's
portfolio securities denominated in that currency. The Fund may also purchase
put or call options on currencies for the same purposes as it may use forward
currency contracts.
When-Issued, Forward Commitment Securities and Reverse Repurchase
Agreements. The Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to hedge
against anticipated changes in interest rates and prices. 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.
When-issued securities and forward commitments may be sold prior to the
settlement date, but the Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. No income accrues on securities which have been
purchased pursuant to a forward commitment or on a when-issued basis prior to
delivery to the Fund. If the Fund disposes of the right to acquire a when-issued
security prior to its acquisition or disposes of its right to deliver or receive
against a forward commitment, it may incur a gain or loss. At the time the Fund
enters into a transaction on a when-issued or forward commitment basis, a
segregated account consisting of cash or high-grade liquid debt securities equal
to the value of the when-issued or forward commitment securities will be
established and maintained with its custodian and will be marked to market
daily. There is a risk that the securities may not be delivered and that the
Fund may incur a loss. The Fund may also enter into reverse repurchase
agreements, although it currently does not intend to do so with respect to more
than 5% of its total assets.
Lending of Portfolio Securities. For the purpose of realizing additional
income to meet current expenses, the Fund may make secured loans of portfolio
securities amounting to not more than 25% of its total assets. Securities loans
are made to broker-dealers or institutional investors pursuant to agreements
requiring that the loans be continuously secured by collateral at least equal at
all times to the value of the securities loaned, "marked to market" on a daily
basis. The collateral received will consist of cash, U.S. short-term government
securities, bank letters of credit or such other collateral as may be permitted
under the Fund's investment program and by regulatory agencies and approved by
the Board of Trustees. While the securities loan is outstanding, the Fund will
continue to receive the equivalent of the interest or dividends paid by
17
<PAGE>
the issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund will not have the right to vote
equity securities while they are being loaned, but it will call in a loan in
anticipation of any important vote. Securities loans involve risks of delay in
receiving additional collateral or in recovering the securities loaned should
the borrower default.
Additional Risk Factors. The Fund's classification as a non-diversified
investment company allows it, with respect to 50% of its assets, to invest more
than 5% of its total assets in the securities of any issuer. Because it is
non-diversified, the Fund's assets may be invested in the securities of a
limited number of Korean Issuers and the performance of any single issuer may
have a more significant effect upon the overall performance of the Fund than if
the Fund were a diversified investment company.
The Fund normally invests at least 65% of its total assets in the
securities of Korean Issuers. Accordingly, an investment in the Fund requires
consideration of certain factors not typically associated with investing in most
U.S. issuers.
The securities market of Korea is substantially smaller, less developed,
less liquid and more volatile than the major securities markets in the United
States. Disclosure and regulatory standards are in many respects less stringent
than U.S. standards. Furthermore, there is a lower level of monitoring and
regulation of the markets and the activities of investors in such markets, and
enforcement of existing regulations has been extremely limited.
The limited size of the Korean securities market and limited trading
volume in issues compared to volume of trading in U.S. securities could cause
prices to be erratic for reasons apart from factors that affect the quality of
the securities. For example, limited market size may cause prices to be unduly
influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on fundamental analysis, may
decrease the value and liquidity of portfolio securities, especially in these
markets.
Further, there is a risk that an emergency situation may arise in the
Korean market as a result of which prices for portfolio securities in such
markets may not be readily available. Section 22(e) of the 1940 Act permits a
registered investment company, such as the Fund, to suspend redemption of its
shares for any period during which an emergency, as determined by the SEC,
exists. Accordingly, if the Fund believes that appropriate circumstances exist,
it will promptly apply to the SEC for a determination that an emergency, within
the meaning of Section 22(e) of the 1940 Act, is present. During the period
commencing from the Fund's identification of such conditions until the date of
SEC action, the Fund's portfolio securities in the affected markets will be
valued at fair value determined in good faith by or under the direction of the
Board of Trustees.
The Fund may not invest more than 15% of its net assets in illiquid
securities. The Fund will treat any Korean securities that are subject to
restrictions on repatriation for more than seven days as illiquid securities for
purposes of this limitation. The Fund will also treat as illiquid for this
purpose: repurchase agreements with maturities in excess of seven days;
securities subject to conversion and transfer restrictions; securities in which
the Fund cannot receive the approximate
18
<PAGE>
amount at which it values such securities within seven days; securities of
Korean companies that are not publicly traded; and over-the-counter options and
their underlying securities.
Restricted securities issued pursuant to Rule 144A under the Securities
Act of 1933 that have a readily available market are not deemed illiquid for
purposes of this limitation, pursuant to liquidity procedures that have been
adopted by the Board of Trustees. Investing in Rule 144A securities could result
in increasing the level of a Fund's illiquidity if qualified institutional
buyers become, for a time, uninterested in purchasing these securities. KIM, in
consultation with Daehan, will monitor the liquidity of such restricted
securities under the supervision of the Board of Trustees.
Because the Fund invests in securities denominated in the Korean Won,
changes in the value of the Korean Won against the U.S. dollar will result in
corresponding changes in the U.S. dollar value of the Fund's assets denominated
in Korean Won. Such changes will also affect the Fund's income.
The economy of Korea may differ favorably or unfavorably from the U.S.
economy in such respects as the rate of growth of gross domestic product, the
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments position. Companies in Korea are subject to accounting, auditing and
financial standards and requirements that differ from those applicable to U.S.
companies. There is substantially less publicly available information about
Korean companies and the Korean government than there is about U.S. companies
and the U.S. Government. See "Appendix--Korean Risk Factors."
Other Information. The Fund's annual operating expenses, which are higher
than those of many other investment companies of comparable size, are believed
by the Fund's adviser to be comparable to expenses of other open-end management
investment companies that invest primarily in the securities of countries in a
single geographic region.
The investment objective of the Fund is fundamental and may not be changed
without the approval of a majority of the Fund's outstanding voting securities.
As defined in the 1940 Act and as used in this Prospectus, a "majority of the
Fund's outstanding voting securities" means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented, and (ii) more than 50% of the outstanding shares. In addition, the
Fund has adopted certain investment limitations which also may not be changed
without shareholder approval. A complete description of these limitations is
included in the Statement of Additional Information. Unless specifically noted,
the Fund's investment policies described in this Prospectus, and in the
Statement of Additional Information, including its policies with respect to
investment in Korean securities and the percentage limitations with respect to
such investments, may be changed by the Board of Trustees without shareholder
approval. See "Investment Limitations" in the Statement of Additional
Information.
19
<PAGE>
---------------------------------------------
HOW TO INVEST
---------------------------------------------
Orders received before 4:00 p.m. Eastern Time on any Business Day will be
executed at the public offering price determined that day. A "Business Day" is
any day Monday through Friday on which the New York Stock Exchange ("NYSE") is
open for business. The minimum initial investment is $1,000 ($250 for IRAs) and
the minimum for additional purchases is $100 ($25 for IRAs). All purchase orders
will be executed at the public offering price next determined after the purchase
order is received. See "Public Offering Price" below. The Fund and the Transfer
Agent reserve the right to reject any purchase order and to suspend the offering
of shares for a period of time. The Fund intends to suspend the offering of its
shares if KIM and Daehan advise that doing so is in the best interests of the
portfolio management process. Currently, the Fund expects to suspend sales when
the value of its net assets reaches a point, as determined by KIM and Daehan and
the Fund's Board of Trustees, between $100 million and $125 million. Thereafter,
the Fund will resume sales of its shares when doing so becomes consistent with
prudent portfolio management.
Purchases Through Brokers. Shares of the Fund may be purchased through
brokers or dealers with which Daehan has entered into dealer agreements. Orders
received by such brokers or dealers before 4:00 p.m. Eastern Time on a Business
Day will be effected that day, provided such orders are promptly transmitted to
Daehan; in such case the broker or dealer will be responsible for forwarding the
investor's order to the Fund. After an initial investment is made and a
shareholder account is established through a broker, at the investor's option
subsequent purchases may be made directly with the Fund. See "Shareholder
Account Manual."
Brokers who do not have dealer agreements with Daehan also may offer to
place orders for the purchase of shares. Such a broker may charge the investor a
transaction fee as determined by the broker. That fee will be in addition to the
sales charge payable by the investor, and may be avoided if shares are purchased
through a broker which has a dealer agreement with Daehan or directly through
the Fund.
Purchases Through the Fund. Investors may purchase shares and open an
account directly through the Fund by completing and signing the Account
Application located at the end of this Prospectus. Investors should mail to the
Fund the completed Application together with a check to cover the purchase in
accordance with the instructions provided in the Shareholder Account Manual.
Purchases will be executed at the public offering price next determined after
the Fund has received the Application and check. Subsequent investments do not
need to be accompanied by an application.
Investors also may purchase shares of the Fund directly through the Fund
by bank wire. Bank wire purchases will be effected at the next determined public
offering price after the bank wire is received; accordingly, a purchase by a
bank wire received by 4:00 p.m. Eastern Time on a Business Day will be effected
that day. A wire investment is considered received when the Fund or its agent is
notified that the bank wire has been credited to the Fund. The investor is
responsible for providing prior telephonic notice to the Fund that a bank wire
is being sent. An investor's
20
<PAGE>
bank may charge a service fee for wiring money to the Fund. Investors desiring
to open an account by bank wire should call the Fund at the telephone number
provided in the Shareholder Account Manual to obtain an account number and
detailed instructions.
21
<PAGE>
Public Offering Price. The Fund's public offering price per share is equal
to the net asset value per share (see "Calculation of Net Asset Value") plus a
sales charge determined in accordance with the following schedule:
Broker
Reallowance
Amount of Purchase at Sales Charge as Percentage of as Percentage
------------------------------- of the
the Public Offering Price Offering Price Net Investment Offering Price
- ------------------------- -------------- -------------- --------------
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.00%
$250,000 but less than $500,000 2.25% 2.30% 1.85%
$500,000 but less than $1,000,000 1.75% 1.78% 1.45%
$1,000,000 or more 0.00% 0.00% 0.00%
The following purchases may be aggregated for purposes of determining
the "Amount of Purchase":
(a) Individual purchases on behalf of a single purchaser, the
purchaser's spouse and their children under the age of 21 years. This includes
shares purchased in connection with an employee benefit plan(s) exclusively for
the benefit of such individual(s), such as an IRA, individual Section 403(b)
plan or single-participant Keogh-type plan. This also includes purchases made by
a company controlled by such individual(s).
(b) Individual purchases by a trustee or other fiduciary purchasing
shares for a single trust estate or a single fiduciary account, including an
employee benefit plan (such as employer-sponsored pension, profit-sharing and
stock bonus plans, including Section 401(k) plans, and medical, life and
disability insurance trusts) other than a plan described in "(a)" above.
(c) Individual purchases by a trustee or other fiduciary purchasing
shares concurrently for two or more employee benefit plans of a single employer
or of employers affiliated with each other (again excluding an employee benefit
plan described in "(a)" above).
Sales Charge Waivers. Fund shares are sold at net asset value without
imposition of sales charges when investments are made by the following classes
of investors:
(i) Trustees or other fiduciaries purchasing shares for employee
benefit plans which are sponsored by organizations with collective employee
benefit plans that have at least $100 million of assets in the aggregate and
which have 1,000 or more employee participants.
(ii) Current or retired trustees of the Trust; current or retired
employees or directors of Daehan, KIM or any of their affiliated companies;
their children, siblings and parents; and trusts primarily for the benefit of
such persons.
(iii) Registered representatives or full-time employees of brokers and
dealers which have entered into dealer agreements with Daehan, and their
children, siblings and parents.
22
<PAGE>
(iv) Accounts managed by one of the companies comprising or affiliated
with Daehan or KIM.
(v) Any of the companies comprising or affiliated with Daehan or KIM.
Automatic Investment Plan. Investors may purchase shares of the Fund
through the Automatic Investment Plan. Under this Plan, an amount specified by
the shareholder of $100 or more ($25 or more for IRA) on a monthly or quarterly
basis will be sent to the Fund from the investor's bank for investment in the
Fund. To participate in the Automatic Investment Plan, investors should complete
the appropriate portion of the Application provided at the end of this
Prospectus. Investors should contact their brokers or the Fund for more
information and the Application.
Letter of Intent. In executing a Letter of Intent ("LOI"), an investor
indicates an aggregate investment amount he or she intends to invest in the Fund
in the following thirteen months. The LOI is included as part of the purchase
application located at the end of this Prospectus. The sales charge applicable
to that aggregate amount then becomes the applicable sales charge on all
purchases made concurrently with the execution of the LOI and in the thirteen
months following that execution.
If at the end of the thirteen month period covered by the LOI the total
amount of purchases does not equal the amount indicated, the investor will be
required to pay the difference between the sales charges paid at the reduced
rate and the sales charges applicable to the purchases actually made. Shares
having a value equal to 5% of the amount specified in the LOI will be held in
escrow during the thirteen month period (while remaining registered in the
investor's name) and are subject to redemption to assure any necessary payment
of a higher applicable sales charge.
For purposes of an LOI, registered investment advisers, trust companies
and bank trust departments which exercise investment discretion and which intend
within thirteen months to invest $5 million or more can be treated as a single
purchaser, provided further that all purchases and redemptions are placed
through such entity. Such entities should be prepared to establish their
qualifications hereunder.
Reinstatement Privilege. Shareholders who redeem their shares in the
Fund have a one-time privilege of reinstating their investment by reinvesting
the proceeds of the redemption at net asset value without a sales charge in
shares of the Fund. The Fund must receive from the investor or the investor's
broker within 30 days after the date of the redemption both a written request
for reinvestment and a check not exceeding the amount of the redemption
proceeds. The reinstatement purchase will be effected at the net asset value per
share next determined after such receipt. Gain on a redemption is taxable
regardless of whether the reinstatement privilege is exercised; however, a loss
arising out of a redemption will not be deductible to the extent the
reinstatement privilege is exercised, and an adjustment will be made to the
shareholder's tax basis for shares acquired pursuant to the reinstatement
privilege.
Certificates. In the interest of economy and convenience, physical
certificates representing the Fund's shares will not be issued unless an
investor submits a written request to the Fund, or unless the investor's broker
requests that the Fund provide certificates. Shares of the Fund are
23
<PAGE>
recorded on a register by the Fund's shareholder servicing agent, and
shareholders who do not elect to receive certificates have the same rights of
ownership as if certificates had been issued to them. Redemptions by
shareholders who hold certificates may take longer to effect than similar
transactions involving noncertificated shares because the physical delivery and
processing of properly executed certificates is required. ACCORDINGLY, THE FUND
STRONGLY RECOMMENDS THAT SHAREHOLDERS DO NOT REQUEST ISSUANCE OF CERTIFICATES.
---------------------------------------------
HOW TO REDEEM SHARES
---------------------------------------------
As described below, Fund shares may be redeemed at their net asset
value and redemption proceeds will be sent within seven days of the execution of
a redemption request. Shareholders with brokers who sell shares may redeem
shares through such brokers; if the shares are held in the broker's "street
name", the redemption must be made through the broker. Other shareholders may
redeem shares through the Fund.
Redemptions Through Brokers. Shareholders with accounts with brokers
who sell shares of the Fund may submit redemption requests to such brokers.
Brokers may honor a redemption request either by repurchasing shares from a
redeeming shareholder or by forwarding such requests to the Fund. In either
event, shareholders will receive the shares' net asset value next computed after
receipt of the redemption request by the broker. Redemption proceeds normally
will be paid by check or, if offered by the broker, credited to the
shareholder's brokerage account at the election of the shareholder. Brokers may
impose a service charge for handling redemption transactions placed through them
and may have other requirements concerning redemptions. Accordingly,
shareholders should contact their brokers for more details.
Redemptions Through the Fund. Redemption requests must be transmitted
to the Fund by mail, in accordance with the instructions provided in the
Shareholder Account Manual. All redemptions will be effected at the net asset
value next determined after the Fund has received the request and any required
supporting documentation. Redemption requests will not require a signature
guarantee if the redemption proceeds are to be sent either: (i) to the redeeming
shareholder at the shareholder's address of record as maintained by the Fund,
provided the shareholder's address of record has not been changed in the
preceding thirty days; or (ii) directly to a predesignated bank, savings and
loan or credit union account ("Predesignated Account"). All other redemption
requests must be accompanied by a signature guarantee of the redeeming
shareholder's signature. A signature guarantee can be obtained from any
commercial bank, broker, dealer, credit union, securities exchange or
association, clearing agency or savings association which is a member of the
U.S. Federal Deposit Insurance Corporation, U.S. trust company, a member firm of
a U.S. stock exchange or a foreign branch of any of the foregoing. A notary
public is not an acceptable guarantor.
Shareholders may qualify to have redemption proceeds sent to a
Predesignated Account by completing the appropriate section of the Account
Application. Shareholders with Predesignated
24
<PAGE>
Accounts should request that redemption proceeds be sent either by bank wire or
by check; the minimum redemption amount for a bank wire is $1,000. Shareholders
requesting a bank wire should allow one business day from the time the
redemption request is effected for the proceeds to be deposited in the
shareholder's Predesignated Account. See "How to Redeem Shares--Other Important
Redemption Information." Shareholders may change their Predesignated Accounts
only by a letter of instruction to the Fund containing all account signatures,
each of which must be guaranteed.
Redemption requests should be mailed directly to the Fund at the
appropriate address provided in the Shareholder Account Manual. As discussed
above, requests for payment of redemption proceeds to a party other than the
registered account owner(s) and/or requests that redemption proceeds be mailed
to an address other than the shareholder's address of record require a signature
guarantee. Redemptions of shares for which certificates have been issued must be
accompanied by properly endorsed share certificates.
Other Important Redemption Information. A request for redemption will
not be processed until all of the necessary documentation has been received in
good order. A shareholder in doubt about what documents are required should
contact his or her broker or the Fund.
Except in extraordinary circumstances and as permitted under the 1940
Act, payment for redemption of shares will be made promptly after receipt of a
redemption request, if in good order, but not later than seven days after the
date the request is executed. Requests for redemption which are subject to any
special conditions or which specify a future or past effective date cannot be
accepted.
If the Fund is requested to redeem shares for which good payment has
not yet been received, the Fund may delay payment of redemption proceeds until
it has assured itself that good payment has been collected for the purchase of
the shares. In the case of purchases by check, it can take up to 15 days to
confirm that the check has cleared and good payment has been received.
Redemption proceeds will not be delayed when shares have been paid for by wire
or when the investor's account holds a sufficient number of shares for which
funds already have been collected.
The Fund may redeem the shares of any shareholder whose account is
reduced to less than $1,000 in value through redemptions or other action by the
shareholder. Notice will be given to the shareholder at least 60 days prior to
the date fixed for such redemption, during which time the shareholder may
increase his or her holdings to an aggregate amount of $1,000 or more (with a
minimum purchase of $100 or more).
---------------------------------------------
SHAREHOLDER ACCOUNT MANUAL
---------------------------------------------
Shareholders are encouraged to place purchase and redemption orders through
their brokers. Shareholders also may place such orders directly through the Fund
which acts as its own transfer
25
<PAGE>
agent in accordance with this Manual. See "How to Invest" and "How to Redeem
Shares" for more information.
Investments by Mail. Send completed Account Application (if initial
purchase) or letter stating Fund name, shareholder's registered name and account
number (if subsequent purchase) with a check to:
Korea Capital Fund
c/o The Provident Bank
Attn: Mutual Fund Services
P.O. Box 14967
Cincinnati, OH 45250-0967
Investments by Bank Wire. An investor opening a new account should call
l-800-424-2295 to obtain an account number. WITHIN SEVEN DAYS OF PURCHASE, SUCH
AN INVESTOR MUST SEND A COMPLETED APPLICATION CONTAINING THE INVESTOR'S
CERTIFIED TAXPAYER IDENTIFICATION NUMBER TO THE PROVIDENT BANK AT THE ADDRESS
PROVIDED ABOVE UNDER "INVESTMENTS BY MAIL." Wire instructions must state the
name of the Fund, shareholder's registered name and account number. Bank wires
should be sent through the Federal Reserve Bank Wire System to:
The Provident Bank
Attn: Mutual Fund Services
ABA Routing Number: 042-000-424
For Further Credit to Korea Capital Fund
Account Number
(stating Fund name, shareholder's registered account name and account
number)
Redemptions by Mail. Send complete instructions, including name of
Fund, amount of redemption, shareholder's registered name and account number,
to:
Korea Capital Fund
c/o The Provident Bank
Attn: Mutual Fund Services
P.O. Box 14967
Cincinnati, OH 45250-0967
Overnight Mail. Overnight mail services do not deliver to post office
boxes. To send purchase or redemption orders by overnight mail, comply with the
instructions above, but send to the following:
Korea Capital Fund
c/o The Provident Bank
Mutual Fund Services
One East Fourth Street
Cincinnati, OH 45202
26
<PAGE>
Additional Questions. Shareholders with additional questions regarding
purchase and redemption procedures may call the Fund at 1-800-424-2295.
---------------------------------------------
CALCULATION OF NET ASSET VALUE
---------------------------------------------
The Fund calculates its net asset value as of the close of normal
trading on the NYSE, currently 4:00 p.m. Eastern Time, each day Monday through
Friday on which the NYSE is open for business. The Fund's net asset value per
share is computed by determining the value of its assets (the securities it
holds plus any cash or other assets, including the interest accrued but not yet
received), subtracting all the Fund's liabilities (including accrued expenses),
and dividing the result by the total number of shares outstanding at such time.
Equity securities are valued at the last sale price (for exchange-listed
securities) or the last bid price (for over-the-counter securities). Debt
securities generally are valued at the mean of representative quoted bid or
asked prices. Securities with 60 days or less remaining to maturity are valued
on an amortized cost basis.
Securities for which market quotations are not readily available are
valued at fair value determined in good faith by or under the direction of the
Board of Trustees. Assets or liabilities initially quoted in the Korean Won will
be valued in U.S. dollars based on the prevailing exchange rates on that day
quoted by the Korean Exchange Bank. In instances where the price determined
above is deemed not to represent fair market value (for example, if the price of
a security listed on the Stock Exchange was fixed by reason of a limit on the
daily price change, and KIM and Daehan have determined that the quoted price
does not reflect the value of the security because of unusual and material
changes affecting the issuer), the price will be determined in such manner as
the Board of Trustees may prescribe.
Because the Fund's portfolio securities are listed primarily on the
Stock Exchange, which trades on days when the NYSE may be closed (such as a
Saturday), the net asset values of the Fund may be significantly affected by
such trading on days when shareholders have no access to the Fund.
---------------------------------------------
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXATION
---------------------------------------------
Dividends and Other Distributions. The Fund annually distributes all
its net investment income, net short-term capital gain and substantially all of
its realized net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any, and net realized gains from
27
<PAGE>
foreign currency transactions, if any. The annual distribution is declared after
the end of the Fund's fiscal year on August 31. Shareholders may elect to:
have all dividends and capital gain distributions automatically
reinvested in additional Fund shares;
receive dividends in cash and have capital gain distributions
automatically reinvested in additional Fund shares;
receive capital gain distributions in cash and have dividends
automatically reinvested in additional Fund shares; or
receive dividends and capital gain distributions in cash.
Automatic reinvestments in additional Fund shares are made at net asset
value without imposition of a sales charge. If no election is made by a
shareholder, all dividends and capital gain distributions will be automatically
reinvested in additional Fund shares. These elections may be changed by a
shareholder at any time; to be effective with respect to a distribution, the
shareholder or the shareholder's broker must contact the Fund by mail or
telephone at least 15 business days prior to the payment date. The federal
income tax status of dividends and capital gain distributions is the same
whether they are received in cash or reinvested in additional Fund shares.
Any dividend or capital gain distribution paid by the Fund has the
effect of reducing the net asset value per share on the record date by the
amount thereof. Therefore, a dividend or capital gain distribution paid shortly
after a purchase of shares would represent, in substance, a return of capital to
the shareholder (to the extent it is paid on the shares so purchased), even
though subject to income taxes, as discussed below.
Taxes. The Fund qualifies as a "regulated investment company" under the
Code. In each taxable year that the Fund so qualifies, the Fund (but not its
shareholders) will be relieved of federal income tax on that part of its
investment company taxable income (consisting generally of net investment
income, net gains from foreign currency transactions and the excess of net
short-term capital gain over net long-term capital loss) and net capital gain
that is distributed to its shareholders. Dividends from the Fund's investment
company taxable income (whether paid in cash or reinvested in additional Fund
shares) are taxable to shareholders as ordinary income to the extent of the
Fund's earnings and profits. Distributions of the Fund's net capital gain
(whether paid in cash or reinvested in additional Fund shares) are taxable to
the shareholders as long-term capital gain, regardless of how long they have
held their Fund shares.
The Fund provides federal tax information to shareholders annually,
including information about dividends and other distributions paid during the
preceding year and, under certain circumstances, the shareholders' respective
shares of any foreign taxes paid by the Fund (in which event the shareholder
would be required to include in his gross income his pro rata share of those
taxes but might be entitled to claim a credit or deduction for them).
28
<PAGE>
Dividends and other distributions declared by the Fund in, and payable
to shareholders of record as of a date in, October, November or December of any
year will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
The Fund must withhold 31% from dividends, capital gain distributions
and redemption proceeds payable to any individuals and certain other
noncorporate shareholders who have not furnished to the Fund a correct taxpayer
identification number or a properly completed claim for exemption on Form W-8 or
Form W-9. Withholding from dividends and capital gain distributions also is
required for shareholders who otherwise are subject to backup withholding.
Taxpayer identification numbers may be furnished on the Account Application
provided at the end of this Prospectus. Fund accounts opened via a bank wire
purchase (see "How to Invest--Purchases Through the Fund") are considered to
have uncertified taxpayer identification numbers unless a completed Form W-8 or
W-9 or Account Application is received by the Fund within seven days after the
purchase. Amounts withheld reduce the shareholder's tax liability, and a refund
may be obtained from the Internal Revenue Service if withholding results in
overpayment of taxes. A shareholder should contact the Fund if the shareholder
is uncertain whether a proper taxpayer identification number is on file with the
Fund.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending upon whether the redemption proceeds are more
or less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any sales charges paid). However, special tax rules apply when
a shareholder (1) disposes of Fund shares through a redemption within 90 days of
purchase and (2) subsequently acquires shares of the Fund on which an initial
sales charge normally is imposed without paying a sales charge due to the 30-day
reinstatement privilege. In these cases, any gain on the disposition of the Fund
shares will be increased, or loss decreased, by the amount of the sales charge
paid when those shares were acquired, and that amount will increase the adjusted
basis of the shares subsequently acquired. In addition, if Fund shares are
purchased within 30 days of redeeming Fund shares at a loss, the loss will not
be deductible and instead will increase the basis of the newly purchased shares.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting the Fund and its shareholders; the Statement
of Additional Information contains a further discussion of other important tax
matters, including Korean income taxes and taxation of non-U.S. shareholders.
There may be other federal, state or local tax considerations applicable to a
particular investor. Prospective investors are therefore urged to consult their
tax advisers.
---------------------------------------------
MANAGEMENT
---------------------------------------------
The Trust's Board of Trustees has overall responsibility for the
operation of the Fund. Pursuant to such responsibility, the Board has approved
contracts with various financial
29
<PAGE>
organizations to provide, among other things, day-to-day management, advisory
and administration services required by the Fund.
Investment Adviser and Administrator. Daehan Securities, Inc., 3360
West Olympic Blvd., Los Angeles, CA 90019 serves as investment adviser and
administrator to the Fund. Under an Advisory and Administration Agreement with
the Fund, Daehan is responsible for reviewing investment decisions of and
consulting with KIM; providing investment research regarding U.S. companies and
recommending securities of U.S. issuers to KIM for purchase by the Fund;
reviewing and overseeing the operations of the Sub-Administrator; furnishing
corporate officers and clerical staff; providing office space, services and
equipment; and supervising all matters relating to the Fund's operations. For
these services, the Fund pays Daehan investment advisory and administration
fees, computed daily and paid quarterly, at the annualized rate of 0.30% of the
Fund's average daily net assets.
Investment Manager. Korea Investment Management Europe Ltd. ("KIM"),
3rd Floor, Fengate House, 14 Philpot Lane, London EC3M 8AJ, United Kingdom, a
U.S. registered investment adviser, serves as the investment manager to the
Fund. Under an Investment Management Agreement with the Fund, KIM has primary
responsibility for determining the composition of the Fund's portfolio and
places all orders to buy or sell securities on behalf of the Fund. For these
services, the Fund pays KIM investment management fees, computed daily and paid
quarterly at the annualized rate of 0.70% of the Fund's average daily net
assets.
KIM was established in September 1991 under the laws of the United
Kingdom as a joint venture between KITC and Kleinwort Benson Investment
Management Limited. KIM has a paid-in capital of (pound)3.0 million and is 80%
owned by KITC and 20% owned by Kleinwort Benson Investment Management Limited.
KIM's objective is to provide complete investment management and advisory
services in London to Korean and other international investors. The company is a
member of The Investment Management Regulatory Organization, Ltd. and commenced
business during December 1991. KIM currently provides investment advisory and
management services for $430 million invested primarily in Korean securities
market. As well as being the investment manager of the Fund, KIM is also the
sub-investment adviser of the Korea Vision
30
<PAGE>
Portfolio, part of the Jupiter Tyndall Global Fund SICAV, and the Korea Smaller
Companies Class, part of the Jupiter Tyndall Specialist Fund Limited and the
investment adviser of The Asia Emerging Markets Fund plc, KIME, Korea Fund plc,
Asia Portfolio Fund plc, Kim Europe Worldwide Fund, Korea Growth Geared Fund
plc, Korean Growth Fund, Korea Far East Fund, Korea Plus Fund, Korea Balanced
Return Fund, Atlas KITC Arbitrage Fund and KITC Phillipines Growth Fund. Mr. Jae
Bong Chung, of KIM, is the individual who is primarily responsible for the
Fund's day-to-day management.
KITC was the first investment trust management company to be
established under the laws of Korea. KITC is presently the largest investment
fund management organization in Korea , with assets over $28 billion under
management as of November 1995 in 425 investment funds which invest primarily in
Korean Securities.
Sub-Administrator. Investment Company Administration Corporation
("ICAC"), 2025 E. Financial Way, Suite 101, Glendora, CA 91741, acts as
Sub-Administrator of the Fund, pursuant to a Sub-Administration Agreement with
the Trust. ICAC also serves as administrator of other mutual funds. Under the
Sub-Administration Agreement, ICAC provides certain management and
administrative services necessary for the Fund's operations including: (1)
general supervision of the operation of the Fund, including coordination of the
service performed by the Fund's Investment Manager, custodian, independent
accountants and legal counsel; regulatory compliance, including the compilation
of information for documents such as reports to, and filings with the SEC and
state securities commissions; and preparation of proxy statements and
shareholder reports for the Fund; and (ii) general supervision relative to the
compilation of data required for the
31
<PAGE>
preparation of periodic reports distributed to the Trust's officers and Board of
Trustees. ICAC also furnishes office space and certain facilities required for
conducting the business of the Fund. For these services, the Fund pays ICAC a
monthly fee at a maximum annual rate of 0.10% of the Fund's average daily net
assets.
Portfolio Transactions. Commissions or discounts on the Stock Exchange
or OTC markets typically are fixed but generally are comparable to those
typically charged in U.S. securities exchanges or markets. Debt securities are
generally traded on a "net" basis with a dealer acting as principal for its own
account with a stated commission, although the price of the security usually
includes a profit to the dealer. U.S. and foreign government securities and
money market instruments are generally traded in the OTC markets. In
underwritten offerings, securities are usually purchased at a fixed price which
includes an amount of compensation to the underwriter. On occasion, securities
may be purchased directly from an issuer, in which case no commissions or
discounts are paid. Brokers and dealers may receive commissions on futures,
currency and options transactions. Consistent with its obligation to obtain best
net results, KIM may consider a broker's or dealer's sale of Fund shares as a
factor in considering through whom portfolio transactions will be effected. KIM
has no agreements or commitments to place orders with any broker-dealer.
32
<PAGE>
The Fund anticipates that its annual portfolio turnover rate will generally not
exceed 100%. However, KIM does not regard portfolio turnover as a limiting
factor and will buy or sell securities for the Fund as necessary in response to
market conditions to meet the Fund's objective. The portfolio turnover rate is
calculated by dividing the lesser of sales or purchases of portfolio securities
by the Fund's average month-end assets. For purposes of this calculation,
portfolio securities exclude purchases and sales of debt securities having a
maturity at the date of purchase of one year or less. High portfolio turnover
involves correspondingly greater transaction costs in the form of brokerage
commissions or dealer spreads and other costs that the Fund will bear directly,
and may result in the realization of net capital gains, which are taxable when
distributed to shareholders.
The Fund may effect portfolio transactions with or through Daehan or
affiliates of KIM when KIM determines that the Fund will receive competitive
execution, price and commissions. This standard will allow such affiliates of
the Fund to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a similar arm's-length transaction. The
Fund will not effect portfolio transactions with or through Daehan or affiliates
of KIM where any such broker or dealer is acting as principal. The Fund does not
expect this policy to limit the availability of securities for investment by the
Fund.
Distribution of Fund Shares. Daehan is the distributor, or principal
underwriter, of the Fund's shares. Daehan is a U.S. broker-dealer registered
with the SEC and the National Association of Securities Dealers, Inc. As
distributor, Daehan collects the sales charges imposed on purchases of shares
and reallows a portion of such charges to brokers and dealers that have sold
such shares in accordance with the schedule set forth above under "How to
Invest." From time to time, Daehan may reallow to brokers the full amount of the
sales charge. Daehan may, at its expense, provide additional promotional
incentives to brokers that sell shares of the Fund. In some instances, these
incentives may be offered only to certain brokers which have sold or may sell
significant amounts of shares.
Under a plan of distribution adopted on behalf of the Fund pursuant to
Rule 12b-1 under the 1940 Act ("Plan"), the Fund reimburses Daehan for a portion
of its distribution expenditures at the annualized rate of up to 0.25% of the
Fund's average daily net assets. Daehan pays ongoing trail commissions to
organizations which are not affiliated with the Fund, such as brokerage firms,
financial institutions (including banks) and others that facilitate the
administration and servicing of shareholder accounts. All expenses for which
Daehan is reimbursed under the Plan will have been incurred within one year of
such reimbursement. Daehan's distribution expenses include the payment of trail
commissions; the cost of any additional compensation paid by Daehan to brokers
and dealers; the costs of printing and mailing to prospective investors
prospectuses and other materials relating to the Fund; the costs of developing,
printing, distributing and publishing advertisements and other sales literature;
and allocated costs relating to Daehan's distribution activities, including
among other things employee salaries, bonuses and other overhead expenses.
33
<PAGE>
Fund Expenses. The Fund pays all its expenses not assumed by Daehan,
KIM and other agents. These expenses include, in addition to the management,
administration, advisory, distribution and brokerage fees discussed above, legal
and audit expenses, custodian and transfer agency fees, trustee's fees,
organizational fees, fidelity bond and other insurance premiums, taxes,
extraordinary expenses and the expenses of reports and prospectuses sent to
existing investors. Daehan and KIM have undertaken to limit the Fund's expenses
to the annual level of 2.4% of the Fund's average net assets.
---------------------------------------------
OTHER INFORMATION
---------------------------------------------
Confirmations and Reports to Shareholders. Each time a transaction is
made that affects a shareholder's account in the Fund, such as an additional
investment, redemption or the payment of a dividend or distribution, the
shareholder will receive from the Fund a confirmation statement reflecting the
transaction. Shortly after the end of the Fund's fiscal year on August 31 and
fiscal half-year on February 28 of each year, shareholders will receive an
annual and semiannual report, respectively. These reports will list the
securities held by the Fund and financial statements relating to the Fund. In
addition, the federal income status of distributions made by the Fund to
shareholders will be reported after the end of the calendar year on Form
1099-DIV.
Organization. The Trust was organized as a Massachusetts business trust
on February 12, 1992 and is registered with the SEC as an open-end management
investment company. From time to time, the Trust may establish other funds, each
corresponding to a distinct investment portfolio and which will be a distinct
series of the Trust's shares. Shares of the Fund are entitled to one vote per
share (with proportional voting for fractional shares) and are freely
transferable. Shareholders have no preemptive or conversion rights.
On any matter submitted to a vote of shareholders, shares of the Fund
will be voted by the Fund's shareholders individually when the matter affects
the specific interest of the Fund only, such as approval of its investment
management arrangements. The shares of the Fund (and any other funds of the
Trust) will be voted in the aggregate on other matters, such as the election of
Trustees and ratification of the Board of Trustees' selection of the Trust's
independent accountants.
There normally will be no annual meeting of shareholders in any year,
except as required under the 1940 Act. The Fund would be required to hold a
shareholders meeting in the event that at any time less than a majority of the
Trustees holding office had been elected by shareholders. Trustees shall
continue to hold office until their successors are elected and have qualified.
Shares of the Trust's funds (at present only the Fund) do not have cumulative
voting rights, which means that the holders of a majority of the shares voting
for the election of Trustees can elect all the Trustees. A Trustee may be
removed upon a majority vote of the shareholders qualified to vote in the
election. Shareholders holding 10% of the Trust's outstanding shares may call a
meeting of shareholders. The 1940 Act requires the Trust to assist shareholders
in calling such a meeting.
34
<PAGE>
Shareholder Inquiries. Shareholder inquiries may be made by calling the
Fund at 1-800-424-2295 or by writing to the Fund at 3360 W. Olympic Blvd., Los
Angeles, CA 90019.
Performance Information. The Fund from time to time may include
information on its investment results and/or comparisons of its investment
results to various unmanaged indices or results of other mutual funds or groups
of mutual funds in advertisements, sales literature or reports furnished to
present or prospective shareholders.
In such materials the Fund may quote its average annual total return
("Standardized Return"). Standardized Return shows percentage rates reflecting
the average annual change in the value of an assumed investment in the Fund at
the end of a one-year period and at the end of five-and ten-year periods,
reduced by the maximum applicable sales charge imposed on sales of Fund shares.
If a one-, five-and/or ten-year period has not yet elapsed, data will be
provided as of the end of a shorter period corresponding to the life of the
Fund. Standardized Return assumes the reinvestment of all dividends and capital
gain distributions at net asset value on the reinvestment date as established by
the Board of Trustees.
In addition, in order to more completely represent the Fund's
performance or more accurately compare such performance to other measures of
investment return, the Fund also may include in advertisements, sales literature
and shareholder reports other total performance data ("Nonstandardized Return").
Nonstandardized Return reflects percentage rates of return encompassing all
elements of return (i e., income and capital appreciation or depreciation); it
assumes reinvestment of all dividends and capital gain distributions.
Nonstandardized Return may be quoted for the same or different periods as those
for which Standardized Return is quoted; it may consist of an aggregate or
average annual percentage rate of return, actual year-by-year rates or any
combination thereof. Nonstandardized Return may or may not take sales charges
into account; performance data calculated without taking the effect of sales
charges into account will be higher than data including the effect of such
charges.
The Fund's performance data reflects past performance and is not
necessarily indicative of future results. The Fund's investment results will
vary from time to time depending upon market conditions, the composition of its
portfolio and its operating expenses. These factors and possible differences in
calculation methods should be considered when comparing the Fund's investment
results with those published for other investment companies, other investment
vehicles and unmanaged indices. The Fund's results also should be considered
relative to the risks associated with its investment objective and policies. See
"Investment Results" in the Statement of Additional Information.
Transfer Agent. The Provident Bank, One East Fourth Street, Cincinnati,
Ohio, 45202, acts as the Fund's transfer agent to perform certain shareholder
servicing and accounting and general transfer agent functions.
Custodian. State Street Bank & Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 is custodian of the Fund's assets and Bank of Seoul,
10-1 Namdaemun-no, No 2-Ga, Chung-Gu, Seoul, Korea has been approved by the
Board of Trustees as the subcustodian of the Fund's assets held in Korea.
35
<PAGE>
Independent Accountants. The Fund's independent accountants are Ernst &
Young L.L.P. Ernst & Young, L.L.P. will conduct an annual audit of the Fund,
assist in the preparation of the Fund's federal and state income tax returns and
consult with the Trust and the Fund as to matters of accounting, and federal and
state income taxation.
36
<PAGE>
[This page intentionally left blank]
37
<PAGE>
---------------------------------------------
APPENDIX:
KOREAN RISK FACTORS
---------------------------------------------
Investing in securities of Korean companies and of the government (the
"Government") of the Republic of Korea (the "Republic" or "Korea") involves
certain risks not typically associated with investing in securities of United
States companies or the United States government, in addition to those discussed
under "Prospectus Summary" and "Investment Objective, Policies and Risks."
Investment and Repatriation Restrictions. Until recently, Korean
security regulations limited the percentage of any class of equity shares of an
issuer that may be held by a particular foreign investor to 3% and to 12% by all
foreign investors as a group. Currently, the limit on direct foreign investment
is up to 15% of any class of equity shares outstanding. The Ministry of Finance
has indicated that they will consider removing the ceiling on direct foreign
investment in the future.
Transfer of funds from Korea to foreign countries and repatriation of
foreign capital invested in Korea are subject to certain regulatory approvals
pursuant to foreign exchange control laws and regulations.
Generally, as long as the original investment was approved or allowed
under the applicable laws and regulations of Korea, the conversion and
remittance of cash or cash equivalents into U.S. dollars in relation to such
investment will be freely allowed upon receipt of the appropriate payment
approvals from the Bank of Korea or a designated Class A foreign exchange bank
such as the Bank of Seoul, the Korean sub-custodian for the Fund's assets,
depending on the type of transaction.
38
<PAGE>
Currency Fluctuations. The Fund's assets will be invested primarily in
Korean securities, the market value of which is determined in Won, and
substantially all of its income will be received or realized in the Korean Won.
The Fund will be required, however, to compute its net asset value and income,
and to distribute its income, in U.S. dollars. As a result, the Fund's net asset
value and its distribution amounts will be subject to foreign exchange rate
fluctuations.
39
<PAGE>
The Korean Won was devalued against the US dollar in the early 1980s to
reach approximately Won 890 to the US dollar by the end of 1985. The Korean Won
appreciated against the US dollar from 1986 to approximately 665 Won per US
dollar by May 1989. Since then the Korean Won has slowly lost value against the
US dollar and the exchange rate stood at approximately Won 770 per US dollar at
the end of 1995.
The Fund expects to incur certain transaction costs in connection with
its conversions between currencies and, in light of the history of fluctuating
currency values of the Korean Won relative to the dollar, it is impossible to
predict what effect currency conversion costs may have on the operations of the
Fund.
Potential Market Volatility. The Korean securities market is still
relatively small in comparison to the Japanese, United States and major European
securities markets. Because of this small size and low volume, the Korean
securities market is subject to greater price volatility and lesser liquidity
than is usual in the Japanese, United States or major European securities
markets. Because of these liquidity limitations and the Fund's investment
policies, it may be more difficult for the Fund to purchase and sell portfolio
positions than would be the case in the United States. Accordingly, in periods
of rising market prices, the Fund may be unable to participate fully in such
price increases to the extent that it is unable to acquire desired portfolio
positions quickly; conversely, the Fund's inability to dispose fully and
promptly of positions in declining markets will cause its net asset value to
decline as the value of unsold positions is determined by references to lower
prices.
40
<PAGE>
Political and Economic Factors. The partition of Korea following World
War II has created a political risk to the Republic. The demilitarized zone at
the boundary between the Republic and North Korea established after the Korean
War of 1950-1953 is supervised by United Nations forces. The United States
maintains a significant military force in the Republic. The situation remains a
source of tension, although negotiations to resolve the political division of
the Korean peninsula have been carried on intermittently for several years, and
in recent years there have been several meetings between representatives of the
Republic and of North Korea on political, economic and humanitarian issues. See
"Appendix A--The Korean Securities Market" in the Statement of Additional
Information.
The domestic political situation in Korea has been relatively stable
since Kim, Young Sam, who had been for many years a leader of an opposition
party, was elected as president of Korea in December 1992. During last quarter
of 1995, the Kim administration initiated a campaign to prosecute illegal slush
fund contributors. Contributions were made to major political figures, including
two former Presidents, mostly by heads of Korean corporations. Such reform
caused uncertainty in the Korean securities market and
41
<PAGE>
had a significant adverse impact on the security prices. Nonetheless, management
believes that the Fund will benefit from these reforms in the long term. Such
activities are believed to provide increased political stability and reduce
corruption.
42
<PAGE>
[This page intentionally left blank]
43
<PAGE>
KOREA CAPITAL FUND
ACCOUNT APPLICATION
Mail To: KOREA CAPITAL FUND For assistance in completing
c/o The Provident Bank the application, contact your
P.O. Box 14967 account executive or call the
Cincinnati, OH 45250-0967 Korea Capital Fund at
1-800-424-2295
Please Print
1.
44
<PAGE>
45
<PAGE>
INITIAL INVESTMENT $ ______ (Minimum Initial Purchase: $1,000.00; $250.00 for
IRAs)
2. ACCOUNT REGISTRATION
h Individual
First M.I. Last Social Security
#/Tax ID
h Joint Tenant
First M.I. Last Social Security
#/Tax ID
Check one M With Right to Survivorship M Tenants in Common M Tenants by the
Entireties
h Uniform Gifts/Transfers to Minors Act as Customer for
Customer's Name
Minor's Name Minor's SS # Minor's Birthdate State of Residency
h Trust
Trustee's Name Date of Trust Tax ID
h Other
Legal Entity Name Tax ID
(Additional forms, such as a Corporate Resolution may be required.)
3. ACCOUNT ADDRESS
Street Address ______________ Citizen of: M U.S. M Other Country ______________
Country of Residency
City/State/Zip () ()
Home Phone # Business Phone
#
4. DISTRIBUTION OPTION (If no option is indicated, option A will be assigned).
h A. Dividends and capital gains distributions reinvested in additional
shares.
h B. Dividends in cash; capital gains distribution in additional shares.
46
<PAGE>
h C. Receive capital gains distribution in cash and have dividends reinvested
in additional shares.
h D. Dividends and capital gains distributions in cash.
5. LETTER OF INTENT
h I agree to the terms of the Letter of Intent set forth below. Although I am
not obligated to do so, it is my intention to invest over a thirteen-month
period in shares of Korea Capital Fund an aggregate amount at least equal
to:
h $100,000 h $250,000 h $500,000 h $1,000,000 h $2,000,000
When a shareholder signs a Letter of Intent in order to qualify for a
reduced sales charge, shares equal to 5% (in no case in excess of 1/2 of 1%
after an aggregate of $1,000,000 has been purchased under the Letter) of the
dollar amount specified in this Letter will be held in escrow in the
Shareholder's Account out of the initial purchase (or subsequent purchases,
if necessary) by the Fund. All dividends will be credited to the
Shareholder's Account in shares (or paid in cash, if requested). If the
intended investment is not completed within the specified thirteen-month
period, the purchaser will remit to the Fund the difference between the
sales charge actually paid and the sales charge which would have been paid
if the total of such purchases had been made at a single time. If this
difference is not paid within twenty days after written request by the Fund
or the shareholder's Authorized Agent, the appropriate number of escrowed
shares will be redeemed to pay such difference. If the proceeds from this
redemption are inadequate, the purchaser will be liable to the Fund for the
balance still outstanding. The Letter of Intent may be revised upward at any
time during the thirteen-month period, and such a revision will be treated
as a new Letter, except that the thirteen-month period during which the
purchase must be made will remain unchanged.
Any questions relating to this Letter of Intent should be directed to The
Provident Bank, P.O. Box 14967, Cincinnati, OH 45250-0967
6. SIGNATURE AND CERTIFICATIONS
By signing this Application I (I refers herein to all persons named on the
Account) hereby certify under the penalties of perjury that the information
on this application is complete and correct and that (check one):
h Under the penalty of perjury I certify (1) the number(s) shown on this form
is my correct taxpayer identification number and (2) that I am not subject
to backup withholding either because I have not been notified by the
Internal Revenue Service that I am subject to backup withholding as a
result of a failure to report all interest and dividends, or (3) the
Internal Revenue Service has notified me that I am no longer subject to
backup withholding; or
h I am subject to backup withholding; or
h No taxpayer I.D. Number or Social Security Number has been provided above. I
have applied, or intend to apply, to the Internal Revenue Service or the
Social Security Administration for a Taxpayer I.D. Number, and I understand
that if I do not provide this number to the Fund within 60 days of the date
of this Application, the Fund is required to withhold 20% of all reportable
payments thereafter made to me until I provide this number. (Please provide
this number on Form W-9. You may request the Form by calling the Fund at
1-800-424-2295.)
Irepresent that I am of legal age and capacity and agree to appoint __________
as my Agent. I have received, read and carefully reviewed a copy of the Fund's
current prospectus and agree to its terms.
SIGNATURE X_____________________ DATE____________________
47
<PAGE>
Additional Signature(s) (if any) X______________
7. FOR USE OF AUTHORIZED AGENT (BROKER/DEALER) ONLY
We hereby submit this application for the purchase of shares in accordance
with the terms of our Selling Agreement
with _________________________________________________________________________
and with the Prospectus and Statement of Additional Information of the Korea
Capital Fund. We agree to
notify _______________________________________________________________________
of any purchases made under a Letter of Intent.
Investment Dealer Name
Main Office Address Branch No.
Representative's Number Representative's Name
()
Branch Address Telephone Number
Investment Dealer's Authorized Signature Title
SIGNATURE
DATE
48
<PAGE>
KOREA CAPITAL FUND
3360 W. Olympic Blvd., Los Angeles, CA 90019
Tel. 800 335-3381
M INVESTMENT ADVISER AND ADMINISTRATOR
DAEHAN SECURITIES, INC.
3360 West Olympic Blvd.
Los Angeles, California 90019
M INVESTMENT MANAGER
KOREA INVESTMENT MANAGEMENT
EUROPE LTD.
3rd Floor, Fengate House
14 Philpot Lane
London EC3M 8AJ, U.K.
M PRINCIPAL UNDERWRITER AND DISTRIBUTOR
DAEHAN SECURITIES, INC.
3360 West Olympic Blvd.
Los Angeles, California 90019
M TRANSFER AGENT
The Provident Bank
P.O. Box 14967
Cincinnati, OH 45250-0967
M CUSTODIAN
STATE STREET BANK & TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02110
M SUB-CUSTODIAN
BANK OF SEOUL
101-1 Namdaemun-no, No 2 Ga,
Chung-Gu, Seoul, Korea
M AUDITORS
ERNST & YOUNG L.L.P.
515 S. Flower St.
Los Angeles, California 90071
LEGAL COUNSEL
PAUL, HASTINGS, JANOFSKY & WALKER
555 S. Flower St., 23rd Floor
Los Angeles, CA 90071
[BACK COVER]
49
<PAGE>
M SUB-ADMINISTRATOR
INVESTMENT COMPANY ADMINISTRATION
CORPORATION
2025 East Financial Way, Suite 101
Glendora, California 91741
PROSPECTUS
[INSERT LOGO]
-------------------------------------------------
KOREA CAPITAL FUND
-------------------------------------------------
January 31, 1996
50
<PAGE>
KOREA CAPITAL FUND
3360 West Olympic Boulevard
Los Angeles, California 90019
(213) 734-5000
Toll Free (800) 335-3381
STATEMENT OF ADDITIONAL INFORMATION
January 31, 1996
- --------------------------------------------------------------------------------
KOREA CAPITAL FUND (the "Fund") is a nondiversified mutual fund
organized as a separate series of Korea Capital Trust (the "Trust"), formerly
Korea Investment Trust, a registered open-end management investment company.
This Statement of Additional Information concerning the Fund is not a
prospectus; it supplements the Fund's Prospectus. Investors interested in the
Fund should read this Statement in conjunction with the Prospectus, a copy of
which is available without charge by writing or calling the Fund at the address
and phone number printed above.
Daehan Securities, Inc. ("Daehan") serves as the Fund's investment
adviser and administrator. Korea Investment Management Europe Ltd. ("KIM")
serves as the Fund's investment manager. Daehan also serves as the distributor
of the Fund's shares.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Investment Objective and Policies....................................... B-2
Options, Futures and Currency Strategies................................ B-5
Risk Factors............................................................ B-14
Investment Limitations.................................................. B-15
Execution of Portfolio Transactions..................................... B-17
Trustees and Officers................................................... B-18
Management.............................................................. B-20
Valuation of Shares..................................................... B-22
Information Relating to Sales and Redemptions........................... B-24
Taxes................................................................... B-26
Additional Information.................................................. B-30
Investment Results...................................................... B-30
Appendix A - The Korean Securities Market............................... A-1
Appendix B - Description of Debt Ratings................................ B-1
B-1
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
Investment Objective
The investment objective of the Fund is capital appreciation. The Fund
will normally invest at least 65% of its total assets in securities of Korean
issuers. Although the Fund can normally invest up to 35% of its total assets in
U.S. securities, the Fund reserves the right to be primarily invested in U.S.
securities for temporary defensive purposes or pending investment of the
proceeds of the offering made hereby.
Selection of Investments
KIM is the investment manager of the Fund and is primarily responsible,
in consultation with Daehan, for determining the securities of Korean issuers to
select for the Fund. In selecting investments for the Fund, KIM ordinarily
considers the following factors, among others: prospects for relative economic
growth in Korea; expected levels of inflation; government policies influencing
business conditions; the outlook for interest rates; the outlook for currency
relationships; and the range of the individual investment opportunities
available to international investors.
In analyzing companies for investment by the Fund, KIM ordinarily looks
for one of the following characteristics: an above-average earnings growth per
share; high return on invested capital; healthy balance sheet; sound financial
and accounting policies and overall financial strength; strong competitive
advantages; effective research and product development and marketing; efficient
service; pricing flexibility; strength of management; and general operating
characteristics which will enable the companies to compete successfully in their
respective marketplaces.
There may be times when, in the opinion of KIM, prevailing market,
economic or political conditions warrant reducing the proportion of the Fund's
assets invested in equity and debt securities and increasing the proportion held
in cash or short-term obligations denominated in U.S. dollars. A portion of the
Fund's assets normally will be held in dollars or short-term interest-bearing
dollar-denominated securities to provide for ongoing expenses and redemptions.
Although the Fund values its assets daily in terms of U.S. dollars, the
Fund does not intend to convert its holdings of Korean Won into U.S. dollars on
a daily basis. The Fund will do so from to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to sell that
currency to the dealer.
B-2
<PAGE>
The Fund may be prohibited under the Investment Company Act of 1940
("1940 Act") from purchasing the securities of any company that, in its most
recent fiscal year, derived more than 15% of its gross revenues from
securities-related activities. Pursuant to rules adopted by the U.S. Securities
and Exchange Commission ("SEC"), the Fund may purchase securities of such a
company if, immediately after any such purchase, the Fund owns no more than 5%
of the outstanding class of equity securities (or 10% of the outstanding
principal amount of the company's debt securities, as the case may be), and the
Fund has invested no more than 5% of the value of its total assets in the
securities of the company.
Depository Receipts
The Fund may invest up to 5% of it total assets in securities of
foreign issuers in the form of American Depository Receipts ("ADRs") and
European Depository Receipts ("EDRs") or other securities convertible into
securities of Korean issuers. These securities may not necessarily be
denominated in the same currency as the securities for which they may be
exchanged. The Fund may also hold American Depository Shares ("ADSs") which are
similar to ADRs. ADRs and ADSs are typically issued by an American bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depository
Receipts ("CDRs"), are receipts issued in Europe typically by foreign banks and
trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets. For purposes of the Fund's investment policies, the Fund's
investments in ADRs, ADSs, EDRs, and CDRs will be deemed to be investments in
the equity securities representing securities of foreign issues into which they
may be converted.
Warrants and Rights
Warrants and rights may be acquired by the Fund in connection with
other securities or separately and provide the Fund with the right to purchase
at a later date other securities of the issuer. As a condition of its continuing
registration in a state, the Fund has undertaken that its investments in
warrants or rights, valued at the lower of cost or market, will not exceed 5% of
the value of its net assets and not more than 2% of such assets will be invested
in warrants and rights which are not listed on the American or New York Stock
Exchange. Warrants or rights acquired by the Fund in units or attached to
securities will be deemed to be without value for purpose of this restriction.
These limits are not fundamental policies of the Fund and may be changed by the
Board of Trustees without shareholder approval. Investment in warrants involves
certain risks, including the possible lack of a liquid market for resale,
potential price fluctuations as a result of speculation or other factors, and
the failure of the price of the underlying security to reach or have reasonable
prospects of reaching a level at which the warrant can be prudently exercised,
in which event, the warrant may expire without being exercised, resulting in the
loss of the Fund's investment in the warrant.
B-3
<PAGE>
Commercial Bank Obligations
For the purposes of the Fund's investment policies with respect to bank
obligations, obligations of foreign branches of U.S. banks and of foreign banks
may be general obligations of the parent bank in addition to the issuing bank,
or may be limited by the terms of a specific obligation and by government
regulation. As with investment in non-U.S. securities in general, investments in
the obligations of foreign branches of U.S. banks and of foreign banks may
subject the Fund to investment risks that are different in some respects from
those of investments in obligations of domestic issuers. Although the Fund will
typically acquire obligations issued and supported by the credit of U.S. or
foreign banks having total assets at the time of purchase in excess of $1
billion, this $1 billion figure is not a fundamental investment policy or
restriction of the Fund. For the purposes of calculation with respect to the $1
billion figure, the assets of a bank will be deemed to include the assets of its
U.S. and non-U.S. branches. The Fund will not invest in the securities of Korean
banks that are affiliated with the Fund or KIM.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements, which involve
the sale of a security by the Fund and its agreement to repurchase the security
at a specified time and price. However, the Fund does not currently intend to
engage in reverse repurchase agreements with respect to more than 5% of its
total assets. The Fund will maintain in a segregated account with a custodian
cash, U.S. government securities or other liquid, high-grade debt securities in
an amount sufficient to cover its obligations under reverse repurchase
agreements with broker-dealers. Reverse repurchase agreements are considered to
be borrowings under the 1940 Act.
Portfolio Trading and Turnover
Although the Fund does not intend generally to trade for short-term
profits, the securities in the Fund's portfolio will be sold whenever KIM
believes it is appropriate to do so, without regard to the length of time a
particular security may have been held. The Fund anticipates that its annual
portfolio turnover rate should not exceed 100%; however, the portfolio turnover
rate will not be a limiting factor when management deems portfolio changes
appropriate. A 100% portfolio turnover rate would occur if the lesser of the
value of purchases or sales of portfolio securities for the Fund for a year
(excluding purchases of securities with a maturity of one year of less) were
equal to 100% of the average monthly value of the securities held by the Fund
during such year. Higher portfolio turnover involves correspondingly greater
brokerage commissions and other transaction costs that the Fund will bear
directly.
B-4
<PAGE>
- --------------------------------------------------------------------------------
OPTIONS, FUTURES AND CURRENCY STRATEGIES
- --------------------------------------------------------------------------------
Writing Covered Call Options
The Fund may write (sell) covered call options for hedging purposes.
Covered call options will generally be written on securities and currencies
which, in the opinion of KIM, are not expected to make any major price moves in
the near future but which, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the right to purchase a security
or currency at a specified price (the exercise price) at any time until a
certain date (the expiration date). So long as the obligation of the writer of a
call option continues, he may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by purchasing an
option identical to that previously sold. KIM believes that writing of covered
call options is less risky than writing uncovered or "naked" options, which the
Fund will not do.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objectives. When writing a covered call option, the
Fund, in return for the premium, gives up the opportunity for profit from a
price increase in the underlying security or currency above the exercise price,
and retains the risk of loss should the price of the security or currency
decline. Unlike one who owns securities or currencies not subject to an option,
the Fund has no control over when it may be required to sell the underlying
securities or currencies, since the option may be exercised at any time prior to
the option's expiration. If a call option which the Fund has written expires,
the Fund will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security or
currency during the option period. If the call option is exercised, the Fund
will realize a gain or loss from the sale of the underlying security or
currency. The security or currency covering the call option will be maintained
in a segregated account by the Fund's custodian. The Fund does not consider a
security or currency covered by a call option to be "pledged" as that term is
used in the Fund's policy which limits the pledging or mortgaging of its assets.
The premium which the Fund receives for writing a call option is deemed
to constitute the market value of the option. The premium the Fund will receive
from writing a call option will reflect, among other things, the current market
price of the underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of the underlying
security or currency, and the length of the option period. In determining
whether a particular call option should be written on a particular security or
currency, KIM will consider the reasonableness of the anticipated premium and
the likelihood that a liquid secondary market will exist for those options. The
premium received by the Fund for writing covered call options will be recorded
as a liability in the Fund's statement of assets and liabilities. This liability
will be adjusted daily to the option's current market value, which will be the
latest sales price at the time
B-5
<PAGE>
which the net asset value per share of the Fund is computed (at the close of
regular trading on the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The liability will be extinguished upon expiration
of the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price, expiration date or both. If the Fund desires to sell a
particular security or currency from its portfolio on which it has written a
call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security or currency. There is no assurance
that the Fund will be able to effect such closing transactions at favorable
prices. If the Fund cannot enter into such a transaction, it may be required to
hold a security or currency that it might otherwise have sold, in which case it
would continue to be at market risk with respect to the security or currency.
The Fund will pay transaction costs in connection with the writing of
options and in entering into closing purchase contracts. Transaction costs
relating to options activity are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with the exercise of an option, rather than delivering such security
or currency from its portfolio. In such cases, additional costs will be
incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more, respectively, than
the premium received from the writing of the option. Because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security or currency, any loss resulting from a closing
purchase transaction is likely to be offset in whole or in part by appreciation
of the underlying security or currency owned by the Fund.
Writing Covered Put Options
The Fund may write covered put options. A put option gives the
purchaser of the option the right to sell, and the writer (seller) the
obligation to buy, the underlying security or currency at the exercise price
during the option period. The option may be exercised at any time prior to its
expiration date. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
The Fund will write put options only on a covered basis, which means
that the Fund will maintain in a segregated account cash, U.S. Government
securities or other liquid, high-grade debt securities in an amount not less
than the exercise price at all times while the put option is outstanding. (The
rules of the Options Clearing Corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.) The Fund will
generally write
B-6
<PAGE>
covered put options in circumstances where KIM wishes to purchase the underlying
security or currency for the Fund's portfolio at a price lower than the current
market price of the security or currency. In such event, the Fund will write a
put option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund will also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received.
Purchasing Put Options
The Fund may purchase put options. As the holder of a put option, the
Fund will have the right to sell the underlying security or currency at the
exercise price at any time during the option period. The Fund may enter into
closing sale transactions with respect to such options, exercise them or permit
them to expire.
The Fund may purchase a put option on an underlying security or
currency (a "protective put") owned by the Fund as a hedging technique in order
to protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the Fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange value.
For example, a put option may be purchased in order to protect unrealized
appreciation of a security or currency when KIM deems it desirable to continue
to hold the security or currency because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any capital gain
otherwise available for distribution when the security or currency is eventually
sold.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Fund will lose its entire investment in the put
option. In order for the purchase of a put option to be profitable, the market
price of the underlying security or currency must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the put option
is sold in a closing sale transaction.
The Fund will commit no more than 5% of its assets to premiums for the
purchase of put options. The premium paid by the Fund when purchasing a put
option will be recorded as an asset in the Fund's statement of assets and
liabilities. This asset will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which the net asset
value per share of the Fund is computed (close of regular trading on the New
York Stock Exchange), or, in the absence of such sale, the latest bid price. The
asset will be extinguished upon expiration of the option, the writing of an
identical option in a closing transaction, or the delivery of the underlying
security or currency upon the exercise of the option.
B-7
<PAGE>
Purchasing Call Options
The Fund may purchase call options. As the holder of a call option, the
Fund will have the right to buy the underlying security or currency at the
exercise price at any time during the option period. The Fund may enter into
closing sale transactions with respect to such options, exercise them or permit
them to expire. Call options may be purchased by the Fund for the purpose of
acquiring the underlying security or currency for its portfolio. Utilized in
this fashion, the purchase of call options will enable the Fund to acquire the
security or currency at the exercise price of the call option plus the premium
paid. At times the net cost of acquiring the security or currency in this manner
may be less than the cost of acquiring the security or currency directly. This
technique may also be useful to the Fund in purchasing a large block of
securities that will be more difficult to acquire by direct market purchases. So
long as it holds such a call option rather than the underlying security or
currency itself, the Fund is partially protected from any unexpected decline in
the market price of the underlying security or currency and in such event could
allow the call option to expire, incurring a loss only to the extent of the
premium paid for the option.
The Fund may also purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option will be purchased for this purpose where
tax considerations make it inadvisable to realize such gains through a closing
purchase transaction. Call options may also be purchased at times to avoid
realizing losses that would result in a reduction of the Fund's current return.
For example, where the Fund has written a call option on an underlying security
or currency having a current market value below the price at which such security
or currency was purchased by the Fund, an increase in the market price could
result in the exercise of the call option written by the Fund and the
realization of a loss on the underlying security or currency with the same
exercise price and expiration date as the option previously written.
The Fund will commit no more than 5% of its assets to premiums when
purchasing call options.
The Fund may attempt to accomplish objectives similar to those involved
in using Forward Contracts (defined below), by purchasing put or call options on
currencies. A put option gives the Fund as purchaser the right (but not the
obligation) to sell a specified amount of currency at the exercise price until
the expiration of the option. A call option gives the Fund as purchaser the
right (but not the obligation) to purchase a specified amount of currency at the
exercise price until its expiration. The Fund might purchase a currency put
option, for example, to protect itself during the contract period against a
decline in the dollar value of a currency in which it holds or anticipates
holding securities. If the currency's value should decline against the dollar,
the loss in currency value should be offset, in whole or in part, by an increase
in the value of the put. If the value of the currency instead should rise
against the dollar, any gain to the Fund would be reduced by the premium it had
paid for the put option. A currency call option might be purchased, for example,
in anticipation of, or to protect against, a rise in the value against the
dollar of a currency in which the Fund anticipates purchasing securities.
B-8
<PAGE>
OTC Options
Options may be either listed on an exchange or traded over the counter
("OTC options"). Listed options are third-party contracts (i.e., performance of
the obligations of the purchaser and seller is guaranteed by the exchange or
clearing corporation), and have standardized strike prices and expiration dates.
OTC options are two-party contracts with negotiated strike prices and expiration
dates. The Fund will not purchase an OTC option unless it believes that daily
valuations for such options are readily obtainable. OTC options differ from
exchange-traded options in that OTC options are transacted with dealers directly
and not through a clearing corporation (which guarantees performance).
Consequently, there is a risk of nonperformance by the dealer. Since no exchange
is involved, OTC options are valued on the basis of a quote provided by the
dealer.
In the case of OTC options, there an be no assurance that a liquid
secondary market will exist for any particular option at any specific time. In
such cases, the Fund will generally be able to close out the option prior to its
expiration only by entering into a closing transaction with the same dealer.
While the Fund will seek to enter into dealer options only with dealers who will
agree to, and are expected to be capable of, entering into closing transactions
with the Fund, there can be no assurance that the Fund will at any time be able
to liquidate a dealer option at a favorable price at any time prior to
expiration. The staff of the SEC has taken the position that in most cases
purchased dealer options are illiquid securities.
Interest Rate and Currency Futures Contracts
The Fund may enter into interest rate or currency futures contracts
("Futures" or "Futures Contracts") as a hedge against changes in prevailing
levels of interest rates or currency exchange rates in order to establish more
definitely the effective return on securities or currencies held or intended to
be acquired by the Fund. The Fund's hedging may include sales of Futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates, and purchases of Futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Fund will not enter into Futures Contracts for speculation and will
only enter into Futures Contracts which are traded on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal interest rate and currency Futures exchanges in the United States
are the Board of Trade of the City of Chicago and the Chicago Mercantile
Exchange. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"). Futures are
also traded in London at the London International Financial Futures Exchange and
on other exchanges.
Although techniques other than sales and purchases of Futures Contracts
could be used to reduce the Fund's exposure to interest rate and currency
exchange rate fluctuations, the Fund may be able to hedge its exposure more
effectively and at a lower cost through using Futures Contracts.
B-9
<PAGE>
The Fund will not enter into a Futures Contract if, as a result
thereof, more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to "margin" (down
payment) deposits on such Futures Contracts.
An interest rate Futures Contract provides for the future sale by one
party and purchase by another party of a specified amount of a specific
financial instrument (such as a debt security) for a specified price at a
designated date, time and place. Brokerage fees are incurred when a Futures
Contract is bought or sold, and margin deposits must be maintained at all times
the Futures Contract is outstanding.
Although Futures Contracts typically require future delivery of and
payment for financial instruments or currencies, Futures Contracts are usually
closed out before the delivery date. Closing out an open Futures Contract or
sale or purchase is effected by entering into an offsetting Futures Contract
purchase or sale, respectively, for the same aggregate amount of the identical
financial instrument or currency and the same delivery date. If the offsetting
purchase price is less than the original sale price, the Fund realizes a gain;
if it is more, the Fund realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the Fund realizes a gain; if it
is less, the Fund realizes a loss. The transaction costs must also be included
in these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
Futures Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one Futures Contract of September U.S. Treasury Bills
on an exchange may be fulfilled at any time before delivery under the Futures
Contract is required (i.e., on a specified date in September, the "delivery
month") by the purchase of another Futures Contract of September Treasury Bills
on the same exchange. In such instance, the difference between the price at
which the Futures Contract was sold and the price paid for the offsetting
purchase, after allowance for transaction costs, represents the profit or loss
to the Fund.
Persons who trade in Futures Contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, such as the Fund, whose business activity
involves investment or other commitment in securities or other obligations, use
the Futures markets primarily to offset unfavorable changes in value that may
occur because of fluctuations in the value of the securities and obligations
held or expected to be acquired by them or fluctuations in the value of the
currency in which the securities or obligations are denominated. Debtors and
other obligors may also hedge the interest cost of their obligations.
Speculators, like hedgers, generally expect neither to deliver nor to receive
the financial instrument underlying the Futures Contract, but, unlike hedgers,
hope to profit from fluctuations in prevailing interest rates or currency
exchange rates.
The Fund's Futures transactions will be entered into for traditional
hedging purposes; that is, Futures Contracts will be used to protect against a
decline in the price of securities or currencies that the Fund owns, or Futures
Contracts will be purchased to protect the Fund against an increase in the price
of securities or currencies it has committed to purchase or expects to purchase.
As evidence of this hedging intent, the Fund expects that under normal
circumstances at least 75% of Futures Contract purchases will be "completed";
that is, upon the closing out of the Futures Contract used to hedge, or delivery
under the Futures Contract, equivalent related securities or currencies will
have been purchased by the Fund in the cash market.
B-10
<PAGE>
"Margin" with respect to Futures Contracts is the amount of funds that
must be deposited by the Fund in a segregated account with the Fund's custodian
in order to initiate Futures trading and to maintain the Fund's open positions
in Futures Contracts. A margin deposit made when the Futures Contract is entered
into ("initial margin") is intended to assure the Fund's performance of the
Futures Contract. The margin required for a particular Futures Contract is set
by the exchange on which the Futures Contract is traded and may be significantly
modified from time to time by the exchange during the term of the Futures
Contract. Futures Contracts are customarily purchased and sold on margins that
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
Futures Contract reaches a point at which the margin on deposit does not equal
the amount of the increase or decrease, as the case may be, the broker will
require an increase in the margin deposit ("variation margin") to an amount
equal to the difference. However, if the value of a position increases because
of favorable price changes in the Futures Contract so that the margin deposit
exceeds the required margin, the broker will pay the excess to the Fund. In
computing daily net asset values, the Fund will mark to market the current value
of its open Futures Contracts. The Fund expects to earn interest income on its
margin deposits.
The prices of Futures Contracts are volatile and are influenced, among
other things, by actual and anticipated changes in interest rates, which in turn
are affected by fiscal and monetary policies and national and international
political and economic events.
At best, the correlation between changes in prices of Futures Contracts
and of the securities or currencies being hedged can be only approximate. The
degree of imperfection of correlation depends upon circumstances such as:
variations in speculative market demand for Futures and for debt securities or
currencies, including technical influences in Futures trading; and differences
between the financial instruments being hedged and the instruments underlying
the standard Futures Contracts available for trading, with respect to interest
rate levels, maturities and creditworthiness of issuers. A decision of whether,
when and how to hedge involves skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of unexpected market behavior
or interest rate trends.
Because of the low margin deposits required, Futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Contract were closed out. Thus, a
purchase or sale of a Futures Contract may result in losses in excess of the
amount invested in the Futures Contract. However, the Fund would presumably have
sustained comparable losses if, instead of the Futures Contract, it had invested
in the underlying financial instrument and sold it after the decline.
B-11
<PAGE>
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that the Fund has sufficient assets to satisfy its obligations under a
Futures Contract, the Fund segregates and commits to back the Futures Contract
an amount of cash, U.S. Government securities and other liquid, high-grade debt
securities equal in value to the current value of the underlying instrument less
the margin deposit. In the case of a Futures Contract sale, the Fund will either
establish a segregated account, as in the case of a Futures Contract purchase,
own the security underlying the contract, or hold a call option permitting the
Fund to purchase the same Futures Contract at a price no higher than the
contract price.
Most U.S. Futures exchanges limit the amount of fluctuation permitted
in Futures Contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
Futures Contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and, therefore, does not limit potential losses, because the limit may
prevent the liquidation of unfavorable positions. Futures Contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of Futures positions
and subjecting some Futures traders to substantial losses.
Options on Futures Contracts
Options on Futures Contracts are similar to options on securities or
currencies except that options on Futures Contracts give the purchaser the
right, in return for the premium paid, to assume a position in a Futures
Contract (a long position if the option is a call and short position if the
option is a put), rather than to purchase or sell the Futures Contract, at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the Futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's Futures margin account which represents the
amount by which the market price of the Futures Contract, at exercise, exceeds
(in the case of a call) or is less than (in the case of a put) the exercise
price of the option on the Futures Contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement will
be made entirely in cash equal to the difference between the exercise price of
the option and the closing level of the securities, currencies or index upon
which the Futures Contracts are based on the expiration date. Purchasers of
options who fail to exercise their options prior the exercise date suffer a loss
of the premium paid.
As an alternative to purchasing call and put options on Futures, the
Fund may purchase call and put options on the underlying securities or
currencies themselves. Such options would be used in a manner identical to the
use of options on Futures Contracts.
B-12
<PAGE>
To reduce or eliminate the leverage then employed by the Fund or to
reduce or eliminate the hedge position then currently held by the Fund, the Fund
may seek to close out an option position by selling an option covering the same
securities or contract and having the same exercise price and expiration date.
Trading in options on Futures Contracts began relatively recently. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop.
Forward Currency Contracts and Options on Currency
A forward currency contract ("Forward Contract" or "Contract") is an
obligation to purchase or sell a currency against another currency at a future
date and price as agreed upon by the parties. The Fund may either accept or make
delivery of the currency at the maturity of the Forward Contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract. The Fund will utilize Forward Contracts only on a covered
basis, which means that the Fund will maintain in a segregated account cash,
U.S. Government securities or other liquid high-grade debt securities in an
amount not less than the contract price at all times while the contract is
outstanding. The Fund will engage in forward currency transactions in
anticipation of, or to protect itself against, fluctuations in exchange rates.
The Fund may enter into Forward Contracts either with respect to specific
transactions or with respect to the Fund's portfolio positions. For example,
when the Fund anticipates making a purchase or sale of a security, it may enter
into a Forward Contract to set the rate (either relative to the U.S. dollar, the
Korean Won or another currency) at which a currency exchange transaction related
to the purchase or sale will be made. Further, when KIM believes that the Won
may decline compared to the U.S. dollar or another currency, the Fund may enter
into a Forward Contract to sell the Won or other currency KIM expects to decline
in an amount approximating the value of some or all of the Fund's portfolio
securities denominated in that currency.
Forward Contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A Forward Contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. The Fund will enter into such
Forward Contracts with major U.S. or foreign banks and securities or currency
dealers in accordance with guidelines approved by the Trust's Board of Trustees.
The Fund may enter into Forward Contracts either with respect to
specific transactions or with respect to the Fund's portfolio positions. The
precise matching of the Forward Contract amounts and the value of specific
securities will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the Forward Contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency the Fund is obligated to deliver. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain. Forward Contracts involve
the risk that anticipated currency movements will not be accurately predicted,
causing the Fund to sustain losses on these Contracts and transaction costs.
B-13
<PAGE>
At or before the maturity of a Forward Contract requiring the Fund to
sell a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency which it is obligated to deliver. Similarly, the Fund may
close out a Forward Contract requiring it to purchase a specified currency by
entering into a second Contract entitling it to sell the same amount of the same
currency on the maturity date of the first Contract. The Fund would realize a
gain or loss as a result of entering into such an offsetting Forward Contract
under either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution of the first Contract and the
offsetting Contract.
The cost to the Fund of engaging in Forward Contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because Forward Contracts are usually
entered into on a principal basis, no fees or commissions are involved. The use
of Forward Contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does establish
a rate of exchange in advance. In addition, although Forward Contracts limit the
risk of loss due to a decline in the value of the hedge currencies, at the same
time they limit any potential gain that might result should the value of the
currencies increase.
While Forward Contracts are not presently regulated by the U.S.
Commodity Futures Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate Forward Contracts. In that event, the Fund's ability to
utilize Forward Contracts in the manner set forth above may be restricted.
- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
Political and Economic Risks. Investing in securities of Korean issuers
may entail additional risks due to the potential of political and economic
instability in Korea and the risks of expropriation, nationalization,
confiscation or the imposition of restrictions on foreign investment and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by Korea, the Fund could lose its entire
investment in any such country. See "Appendix A - The Korean Securities Market."
Illiquid Securities. The Fund may invest no more than 15% of its total
assets in illiquid securities. Securities may be considered illiquid if, among
other things, the Fund cannot reasonably expect to receive approximately the
amount at which the Fund values such securities within seven days. See
"Investment Limitations" and "Additional Risk Factors" in the Prospectus. The
sale of illiquid securities, if they can be sold at all, generally will require
more time and result in higher brokerage charges or dealer discounts and other
selling expense than will the sale of liquid securities such as securities
eligible for trading on U.S. securities exchanges or in the over-the-counter
markets. Moreover, restricted securities, which may be illiquid for purposes of
this limitation, often sell, if at all, at a price lower than similar securities
that are not subject to restrictions on resale.
B-14
<PAGE>
With respect to liquidity determinations generally, the Board of
Trustees has the ultimate responsibility for determining whether specific
securities are liquid or illiquid. The Board has delegated the function of
making day-to-day determinations of liquidity to KIM pursuant to guidelines
established by the Board. KIM will take into account a number of factors in
reaching liquidity decisions, including, but not limited to: (i) the frequency
of trading in the security; (ii) the number of dealers that make quotes for the
security; (iii) the number of dealers that have undertaken to make a market in
the security; (iv) the number of other potential purchasers; and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). KIM will
monitor the liquidity of securities in the Fund's portfolio and report
periodically on such decisions to the Board of Trustees.
Illiquid securities are more difficult to value accurately due to,
among other things, the fact that such securities often trade infrequently or
only in smaller amounts. In addition, certain major events affecting Korean
markets may cause all or a high proportion of the Fund's holdings to become
illiquid. Such circumstances may make it impossible to determine net asset value
per share which, in turn, would cause the Fund to suspend sales and redemptions
of its shares until net asset value could be determined. In such a case, the
Fund would apply to the SEC for a determination that an emergency, within the
meaning of Section 22(e) of the 1940 Act, is present. See "Additional Risk
Factors," in the Prospectus.
- --------------------------------------------------------------------------------
INVESTMENT LIMITATIONS
- --------------------------------------------------------------------------------
The Fund has adopted the following fundamental investment limitations
which (unless otherwise noted) may not be changed without approval by the
holders of the lesser of (i) 67% of the Fund's shares represented at a meeting
at which more than 50% of the outstanding shares are represented, and (ii) more
than 50% of the Fund's outstanding shares. The Fund may not:
(1) Invest more than 25% of the value of its total assets in
the securities of issuers conducting their principal business
activities in the same industry, except that this limitation shall not
apply to securities issued or guaranteed as to principal and interest
by the U.S. Government or any of its agencies or instrumentalities;
(2) Buy or sell real estate (including real estate limited
partnerships) or commodities or commodity contracts; however, the Fund
may invest in debt securities secured by real estate or interests
therein or issued by companies which invest in real estate or interests
therein, including real estate investment trusts, and may purchase or
sell currencies (including forward currency exchange contracts),
futures contracts and related options generally as described in the
Prospectus and Statement of Additional Information;
(3) Engage in the business of underwriting securities of other
issuers, except to the extent that the disposal of an investment
position may technically cause it to be considered an underwriter as
that term is defined under the Securities Act of 1933;
B-15
<PAGE>
(4) Make loans, except that the Fund may purchase debt
securities and enter into repurchase agreements and may make loans of
portfolio securities;
(5) Purchase securities on margin, provided that the Fund may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities, and may make margin deposits in
connection with futures contracts;
(6) Issue senior securities or borrow money except from banks
for temporary or emergency purposes not in excess of 33-1/3% of the
value of the Fund's total assets (at the lower of cost or fair market
value). The Fund will not purchase securities while borrowings
(including reverse repurchase agreements) in excess of 5% of total
assets are outstanding.
(7) Mortgage, pledge, or hypothecate any of its assets,
provided that this restriction shall not apply to the transfer of
securities in connection with any permissible borrowing or to
collateral arrangements in connection with permissible activities;
(8) Invest in direct interests in oil, gas or other mineral
exploration or development programs; however, the Fund may invest in
the securities of companies that engage in these activities.
For purposes of the Fund's concentration policy contained in limitation
(1) above, the staff of the SEC takes the position that securities issued or
guaranteed as to principal and interest by any foreign government are considered
to be securities of issuers in the same industry.
Further investment policies of the Fund, which are not fundamental
limitations and may be changed by action of the Board of Trustees of the Trust
without shareholder approval, are that the Fund will not:
(1) Invest in securities of an issuer if the investment would
cause the Fund to own more than 10% of any class of securities of any
one issuer;
(2) Invest in companies for the purpose of exercising control
or management;
(3) Invest more than 15% of its total assets in illiquid
securities, including securities that are illiquid by virtue of the
absence of a readily available market;
(4) Invest more than 5% of its total assets in securities of
companies having, together with their predecessors, a record of less
than three years of continuous operation;
(5) Purchase or retain the securities of any issuer, if those
individual officers and Trustees of the Trust, its investment manager
or investment adviser or distributor, each owning beneficially more
than 1/2 of 1% of the securities of such issuer, together own more than
5% of the securities of such issuer; or
(6) Enter into a futures contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be
B-16
<PAGE>
committed to initial deposits and premiums on open contracts and
options on such contracts.
Policies that are designated as operating policies may be changed only
upon approval by the Board of Trustees and following appropriate notice to
shareholders.
The Fund has the authority to invest up to 10% of its total assets in
shares of other investment companies. Under the 1940 Act the Fund may not invest
more than 5% of its total assets in any one investment company or acquire more
than 3% of the outstanding voting securities of any one investment company.
Investors should refer to the Prospectus for further information with
respect to the Fund's investment objective, which may not be changed without the
approval of the shareholders, and other investment policies, techniques and
limitations, which may be changed without shareholder approval.
- --------------------------------------------------------------------------------
EXECUTION OF PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to policies established by the Board of Trustees of the Trust
on behalf of the Fund, KIM is responsible for the execution of the Fund's
portfolio transactions and the selection of brokers and dealers who execute such
transactions on behalf of the Fund. In executing portfolio transactions, KIM
seeks the best net results for the Fund, taking into account such factors as the
price (including the applicable brokerage commission or dealer spread), size of
the order, difficulty of execution and operational facilities of the firm
involved. While KIM generally seeks reasonably competitive commission rates and
spreads, payment of the lowest commission or spread is not necessarily
consistent with the best net results. The Fund has no obligation to deal with
any broker or dealer or group of brokers or dealers in the execution of
portfolio transactions.
Consistent with the interests of the Fund and subject to the
supervision of the Board of Trustees, KIM may select brokers and dealers on the
basis of the research, statistical and pricing services they provide to KIM for
its use in managing the Fund and its other advisory accounts. Information and
research received from such brokers and dealers is in addition to, and not in
lieu of, the services required to be performed by KIM under the Investment
Management Agreement (defined below). A commission or spread paid to such
brokers and dealers may be higher than that which another qualified broker or
dealer would have charged for effecting the same transaction, provided that KIM
determines in good faith that such commission or spread is reasonable in terms
either of that particular transaction or the overall responsibility of KIM to
the Fund and its other clients and that the total commissions and spreads paid
by the Fund will be reasonable in relation to the benefits received by the Fund
over the long term.
Investment decisions for the Fund and for other investment accounts
managed by KIM are made independently of each other in light of differing
conditions. However, the same investment decision may occasionally be made for
two or more of such accounts including the Fund. In such cases, purchases or
sales are allocated as to price or amount in a manner deemed fair and equitable
to all accounts involved. While in some cases this practice could have a
detrimental effect upon
B-17
<PAGE>
the price or value of the security as far as the Fund is concerned, in other
cases KIM believes that coordination and the ability to participate in volume
transactions will be beneficial to the Fund.
The Fund contemplates purchasing most Korean equity securities through
the Korea Stock Exchange or in the over-the-counter markets to the extent the
securities available in the over-the-counter markets consistent with the
investment policies of the Fund. There generally is less government supervision
and regulation of the Korea Stock Exchange and brokers than in the United
States. Security settlements of Korean securities may in some instances be
subject to delays and related administrative uncertainties.
The Fund engages in portfolio trading when KIM has concluded that the
sale of a security owned by the Fund and/or the purchase of another security of
better value can enhance principal and/or increase income. A security may be
sold to avoid any prospective decline in market value, or a security may be
purchased in anticipation of a market rise. Consistent with the Fund's
investment objective, a security also may be sold and a comparable security
purchased coincidentally in order to take advantage of what is believed to be a
disparity in the normal yield and price relationship between the two securities.
Although the Fund does not intend generally to trade for short-term profits, the
securities in the Fund's portfolio will be sold whenever KIM believes it is
appropriate to do so, without regard to the length of time a particular security
may have been held.
For the periods fiscal years ended August 31, 1995 and August 31, 1994 and for
the period October 1, 1992 (inception) to August 31, 1993, the Fund incurred
total brokerage commissions of $70,767, $86,699 and $95,487, respectively.
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Officers of the Trust and their principal occupations
during the last five years are listed below. Trustees who are deemed to be
"interested persons" of the Trust, as defined in the 1940 Act are marked with an
asterisk ("*").
* Dr. Indong Oh, Trustee and Chairman of the Board, 3360 West Olympic
Boulevard, Los Angeles, California 90019. Director and President of
Joint Implant and Orthopedic Surgery in Pasadena, California since
1981.
Hyung Joo Park, Trustee, 3360 West Olympic Boulevard, Los Angeles,
California 90019. Partner with the Certified Public Accounting and Law
firm of Park & Kirwan since 1984.
Young J. Paik, Trustee, 3360 West Olympic Boulevard, Los Angeles,
California 90019. President of Paco Steel & Engineering Corporation
since 1974.
* Chung Soo Han, Trustee, 3360 West Olympic Boulevard, Los Angeles,
California 90019. General Manager, International Department of Korea
Investment Trust Co., Ltd. since 1981.
B-18
<PAGE>
Jai Young Son, President and Secretary, 3360 West Olympic
Boulevard, Los Angeles, California 90019. Account Executive of
Daehan Securities, Inc. from 1992 to present, Marketing
Manager for Subnex Corp. from 1989 to 1991, Assistant
Financial Manager for Union Auto Sales and Leasing from 1988.
Young Jin Lee, Vice President, 3360 West Olympic Boulevard,
Los Angeles, California 90019. President of Trigem Amerstock
Corporation from 1992 to 1994, Vice President of Trigem
Amerstock Corporation from 1991 to 1992, Resarch Director of
Great Korea Securities from 1990 to 1991.
As of December 31, 1995, the officers and Trustees and their
families as a group owned in the aggregate beneficially or of record
4.0% of the outstanding shares of the Fund.
The Board of Trustees has an Audit Committee, comprised of Mr.Young J.
Paik and Dr. Indong Oh, which is responsible for reviewing audits of the Fund
and recommending firms to serve as independent auditors of the Trust, and a
Nominating Committee, comprised of Dr. Indong Oh and Mr. Young J. Paik, which is
responsible for nominating persons to serve as Trustees.
The following compensation was paid to each of the following Trustees.
B-19
<PAGE>
No other compensation or retirement benefits were received by any
Trustee or officer from the Registrant or other registered investment company in
the Trust.
Name of Trustee Total Compensation
--------------- ------------------
Hyung Joo Park $900
Young J. Paik $900
As of December 31, 1995, the following persons held of record more than
5% of the outstanding shares of the Fund:
Bank of Seoul, 10-1 Nandaunun - No 2 GA, Seoul, Korea 100-092 (57.23%)
Asia Emerging Mkt Fund PLC, Lifetime House 4th Floor, Earlsfort Centre,
Earlsfort Terrace, Dublin, Ireland (27.71%)
Korea Long Term Credit Bank, Young Poong Bldg/2nd Floor, 33 Seoria-Dong
Chongro-KU, Seoul, Korea (7.89%)
B-20
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
Investment Advisory and Administration Services
Daehan serves as the Fund's investment adviser and administrator under
an Investment Advisory and Administration Agreement ("Advisory Agreement")
between the Trust and Daehan. As investment adviser and administrator, Daehan,
among other things, furnishes the services and pays the compensation and travel
expenses of persons who perform the executive, administrative, clerical and
bookkeeping functions of the Trust and the Fund, and provides suitable office
space, necessary small office equipment and utilities. Daehan is also
responsible for monitoring and reviewing the investment decisions of KIM,
shareholder servicing and accounting, Fund accounting and the day-to-day affairs
of the Fund.
Investment Management Services
KIM serves as the Fund's investment manager under an Investment
Management Agreement (the "Management Agreement") between KIM and the Trust. As
investment manager to the Fund, KIM is primarily responsible for investing and
reinvesting the assets of the Fund consistent with the Fund's investment
objective and policies and other guidelines established by the Board of
Trustees. KIM consults with Daehan on a continuous basis regarding investment
decisions on behalf of the Fund and also reports to the Board of Trustees on a
quarterly basis.
Each of the Advisory Agreement and the Management Agreement has an
initial two-year term from the date of the commencement of Fund operations, and
may be renewed for additional one-year terms thereafter , provided that any such
renewal has been specifically approved at least annually by: (i) the Board of
Trustees, or by the vote of a majority of the Fund's outstanding voting
securities (as defined in the 1940 Act), and (ii) a majority of Trustees who are
not parties to the Agreements or "interested persons" of any such party (as
defined in the 1940 Act), cast in person at a meeting called for the purpose of
voting on such approval. Each Agreement was last approved by the vote of the
Board of Trustees on August 10, 1995, and by Daehan as the initial shareholder
of the Fund. Each Agreement provides that either the Trust, or KIM or Daehan, as
appropriate, may terminate the appropriate Agreement without penalty upon sixty
(60) days' written notice to the other party. Either Agreement would terminate
automatically in the event of its assignment (as defined in the 1940 Act).
Under the Advisory Agreement and the Management Agreement, Daehan and
KIM, respectively, have agreed to reimburse the Fund if the Fund's annual
ordinary expenses exceed the most stringent limits prescribed by any state in
which the Fund's shares are offered for sale. Currently, the most restrictive
applicable limitation provides that the Fund's expenses may not exceed an annual
rate of 2-1/2% of the first $30 million of average net assets, 2% of the next
$70 million of average net assets and 1-1/2% of assets in excess of that amount.
Expenses which are not subject to this limitation are interest, taxes, the
amortization of organizational expenses, payments of distribution fees, and
extraordinary expenses. Daehan and KIM have undertaken to limit the Fund's
expenses to 2.4% of average net assets, and have agreed to reimburse the Fund if
B-21
<PAGE>
the Fund's annual ordinary expenses exceed such level (exclusive of brokerage
commissions, foreign exchange spreads, interest, taxes and extraordinary items).
For the periods September 1, 1994 through August 31,1995, September 1, 1993
through August 31, 1994 and October 1, 1992 (commencement of operations) through
August 31, 1993 the Fund incurred $32,987, $44,148 and $14,731, respectively, in
advisory and administration fees and $ 93,484, $103,016 and $34,372,
respectively in management fees. No payment for these fees has been made due to
the Fund's expense limitation at the annual level of 2.4% of the Fund's average
net assets. Investment Company Administration Corporation ("ICAC") was paid
$45,500 and $32,979 for periods ended August 31, 1995 and August 31, 1994,
respectively.
Regulation of KIM
KIM is an entity organized under the laws of the United Kingdom ("UK")
and operates substantially outside the regulations of Korea. KIM is subject to
UK law and regulations and in order to provide investment management and
investment advisory services it has applied for and been accepted as a member of
The Investment Management Regulatory Organization (IMRO), which regulates
activities carried out by KIM. KIM is also a U.S. registered investment adviser
and subject to the Investment Advisers Act of 1940 and the rules and regulations
thereunder.
Distribution
The Fund's shares are continuously offered by Daehan, the Principal
Underwriter and Distributor for the Fund, on a "best efforts" basis pursuant to
a Distribution Agreement between the Trust and Daehan. The Distribution
Agreement was approved by the Board of Trustees of the Fund on August 27, 1992.
As described in the Prospectus, the Trust has adopted a Distribution
Plan in accordance with the provisions of rule 12b-1 under the 1940 Act
("Plan"). The rate of payments by the Fund under the Plan, as described in the
Prospectus, may not be increased without the approval of the majority of the
outstanding voting securities of the Fund. The Fund makes no payments to any
party other than Daehan.
The Plan was last approved on August 10, 1995 by the Board of Trustees,
including a majority of the Trustees who are not "interested persons" of the
Trust (as defined in the 1940 Act) and who have no direct or indirect financial
interests in the operation of the Plan or in any agreement related thereto
("Disinterested Trustees"). In approving the Plan, the Trustees determined that
the Plan was in the best interests of the shareholders of the Fund. Agreements
related to the Plan must also be approved by such vote of the Trustees and
Disinterested Trustees as described above. The Plan was approved by Daehan, as
the initial shareholder of the Fund, on September 1, 1992.
The Plan requires that, at least quarterly, the Trustees review the
amounts expended thereunder and the purposes for which such expenditures were
made. The Plan requires that so long as it is in effect the selection and
nomination of Trustees who are not "interested persons" of the Trust will be
committed to the discretion of the Disinterested Trustees.
B-22
<PAGE>
As discussed in the Prospectus, Daehan collects sales charges on sales of Fund
shares, retains certain amounts of such charges and reallows other amounts of
such charges to brokers and dealers which sell shares. Daehan receives no other
compensation or reimbursements relating to its distribution efforts other than
as described above. For the periods September 1, 1994 through August 31, 1995,
and September 1, 1993 through August 31, 1994 and October 1, 1992 (commencement
of operations) through August 31, 1993, the Fund paid $ 33,383, $42,892 and
$12,126, respectively, in distribution expenses. These payments were used by
Daehan to pay broker dealers and distribution related expenses.
Expenses of the Fund
As described in the Prospectus, the Fund pays all of its own expenses
not assumed by other parties. The allocation of general Trust expenses and
expenses shared by the Fund and any other funds which may be organized as series
of the Trust in the future will be allocated on a basis deemed fair and
equitable, which may be based on the relative net assets of the funds or the
nature of the services performed and relative applicability to the funds.
Expenditures, including costs incurred in connection with the purchase or sale
of portfolio securities, which are capitalized in accordance with generally
accepted accounting principles applicable to investment companies, are accounted
for as capital items and not as expenses. The ratio of the Fund's expenses to
its relative net assets can be expected to be higher than the expense ratios of
funds investing solely in domestic securities, since the cost of maintaining the
custody of foreign securities and the rate of investment management and advisory
fees paid by the Fund generally are higher than the comparable expenses of such
other funds.
- --------------------------------------------------------------------------------
VALUATION OF SHARES
- --------------------------------------------------------------------------------
As described in the Prospectus, the Fund's net asset value per share is
determined each Business Day as of the close of normal trading on the New York
Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern Time), on days on which the
NYSE is open for business. Currently, the NYSE is closed on weekends and on the
following holidays: (i) New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, July 4th, Labor Day, Thanksgiving Day and Christmas Day; and (ii)
the preceding Friday when any one of those holidays falls on a Saturday or the
subsequent Monday when any one of those holidays falls on a Sunday.
The Fund's portfolio securities and other assets are valued as follows:
Equity securities, including ADRs, ADSs and EDRs, which are traded on
stock exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. In cases
where securities are traded on more than one exchange, the securities are valued
on the exchange determined by KIM to be the primary market. Securities traded in
the over-the-counter market are valued at the last available bid price prior to
the time of valuation. Securities and assets for which market quotations are not
readily available (including restricted
B-23
<PAGE>
securities which are subject to limitations as to their sale) are valued at fair
value as determined in good faith by or under the direction of the Board of
Trustees.
Long-term debt obligations are valued at the mean of representative
quoted bid or asked prices for such securities or, if such prices are not
available, at prices for securities of comparable maturity, quality and type;
however, when KIM deems it appropriate, prices obtained for the day of valuation
from a bond pricing service will be used. Short-term debt obligations with
remaining maturities in excess of 60 days are valued at the mean of
representative quoted bid and asked prices for such securities or, if such
prices are not available, such securities are valued using the prices for
securities of comparable maturity, quality and type. Short-term securities with
60 days or less remaining to maturity are amortized to maturity based on their
cost to the Fund if acquired within 60 days of maturity or, if already held by
the Fund on the 60th day, based on the value determined on the 61st day.
Options on currencies purchased by the Fund are valued at their last
bid price in the case of listed options or at the average of the last bid prices
obtained from dealers in the case of OTC options.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees. The valuation procedures applied in any
specific instance are likely to vary from case to case. However, consideration
is generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Fund in connection with such disposition). In addition, specific
factors are also generally considered, such as the cost of the investment, the
market value of any unrestricted securities of the same class (both at the time
of purchase and at the time of valuation), the size of the holding, the prices
of any recent transactions or offers with respect to such securities and any
available analysts' reports regarding the issuer.
The fair value of any other assets is added to the value of all
securities positions to arrive at the value of the Fund's total assets. The
Fund's liabilities, including accruals for expenses, are deducted from its total
assets. Once the total value of the Fund's net assets is so determined, that
value is then divided by the total number of shares outstanding , and the
result, rounded to the nearer cent, is the net asset value per share.
Any assets or liabilities initially expressed in terms of Korean Won or
other foreign currencies are translated into U.S. dollars at the official
exchange rate or, alternatively, at the mean of the current bid and asked prices
of such currencies 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. If neither of these alternatives is available or both are deemed not to
provide a suitable methodology for converting a foreign currency into U.S.
dollars, the Board of Trustees in good faith will establish a conversion rate
for such currency.
B-24
<PAGE>
Korean securities trading may not take place on all days on which the
NYSE is open, or trading may take place on days on which the NYSE is not open
and therefore the Fund's net asset value is not calculated. The calculation of
the Fund's net asset value, therefore, may not take place contemporaneously with
the determination of the prices of securities held by the Fund. Events affecting
the values of portfolio securities that occur between the time their prices are
determined and the close of the NYSE will not be reflected in the Fund's net
asset value unless KIM, under the supervision of the Board of Trustees,
determines that the particular event would materially affect net asset value. As
a result, the Fund's net asset value may be significantly affected by such
trading on days when a shareholder has no access to the Fund.
- --------------------------------------------------------------------------------
INFORMATION RELATING TO SALES AND REDEMPTIONS
- --------------------------------------------------------------------------------
Payment and Terms of Offering
Payment of shares purchased should accompany the purchase order, or
funds should be wired to the Fund as described in the Prospectus. Payment, other
than by wire transfer, must be made by check or money order drawn on a U.S.
bank. Checks or money orders must be payable in U.S. dollars.
As a condition of this offering, if an order to purchase shares is
cancelled due to nonpayment (for example, on account of a check returned for
"not sufficient funds"), the person who made the order will be responsible for
any loss incurred by reason of such cancellation, and if such purchaser is a
shareholder, the Distributor will have the authority as agent of the shareholder
to redeem shares in his or her account at their then-current net asset value per
share to reimburse the Fund for the loss incurred. Investors whose purchase
orders have been cancelled due to nonpayment may be prohibited from placing
future orders.
The Fund reserves the right at any time to waive or increase the
minimum requirements applicable to initial or subsequent investments with
respect to any person or class of persons. An order to purchase shares is not
binding on the Fund until it has been confirmed in writing (or other
arrangements made with the Fund, in the case of orders utilizing wire transfer
of funds, as described above) and payment has been received. To protect existing
shareholders, the Fund reserves the right to reject any offer for a purchase of
shares by any individual.
Sales Outside the United States
Sales of Fund shares made through brokers outside the United States
will be at net asset value plus a sales commission, if any, established by that
broker or by local law; such a commission, if any, may be more or less than the
sales charges listed in the sales charge table included in the Prospectus.
B-25
<PAGE>
Letter of Intent
The Letter of Intent ("LOI") is not a binding obligation to purchase
the indicated amount. During such time as shares are held in escrow under an LOI
to assure payment of applicable sales charges if the indicated amount is not
met, all dividends and capital gain distributions on escrowed shares will be
reinvested in additional shares or paid in case, as specified by the
shareholder. If the intended investment is not completed within the specified
13-month period, the purchaser must remit to Daehan the difference between the
sales charge actually paid and the sales charge which would have been applicable
if the total purchases had been made at a single time. If this amount is not
paid to Daehan within 20 days after written request, the appropriate number of
escrowed shares will be redeemed and the proceeds paid to Daehan.
A registered investment adviser, trust company or trust department
seeking to execute an LOI as a single purchaser with respect to accounts over
which it exercises investment discretion is required to provide the Fund with
information establishing that it has discretionary authority with respect to the
money invested (e.g., by providing a copy of the pertinent investment advisory
agreement). Shares purchased in this manner must be restrictively registered
with the Fund so that only the investment adviser, trust company or trust
department, and not the beneficial owner, will be able to place purchase,
redemption and exchange orders.
Individual Retirement Accounts (IRA)
Shares of the Fund may also be purchased as the underlying investment
for an individual retirement account meeting the requirements of Section 408(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
Suspension of Redemption Privileges
The Fund may suspend redemption privileges or postpone the date of
payment for more than seven days after a redemption order is received during any
period (1) when the NYSE is closed other than customary weekend and holiday
closings, or trading on the NYSE is restricted as determined by the SEC, (2)
when an emergency exists, as defined by the SEC, which makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets, or (3) as the SEC may otherwise permit.
Redemptions in Kind
It is possible that conditions may arise in the future which would, in
the opinion of the Board of Trustees, make it undesirable for the Fund to pay
for all redemptions. In such cases, the Board may authorize payment to be made
in portfolio securities or other property of the Fund. Securities delivered in
payment of redemptions would be valued at the same value assigned to them in
computing the net asset value per share. Shareholders receiving such securities
would incur brokerage costs in selling any such securities so received. However,
despite the foregoing, the Trust has filed with the SEC an election pursuant to
rule 18f-1 under the 1940 Act. This means that the Fund will pay in cash all
requests for redemption made by any shareholder of record,
B-26
<PAGE>
limited in amount with respect to each shareholder during any ninety-day period
to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of such period. This election will be irrevocable so long as rule
18f-1 remains in effect, unless the SEC by order upon application permits the
withdrawal of such election.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
General
In order to qualify for treatment as a regulated investment company
("RIC") under the Code, the Fund must distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income (consisting
generally of net investment income, net short-term capital gain and net gains
from certain foreign currency transactions) and must meet several additional
requirements. These requirements include the following: (1) the Fund must derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures, or forward contracts) derived with respect to its
business of investing in securities or those currencies ("Income Requirement");
(2) the Fund must derive less than 30% of its gross income each taxable year
from the sale or other disposition of securities, or any of the following, that
were held for less than three months--options, futures, or forward contracts
(other than those on foreign currencies), or foreign currencies (or options,
futures, or forward contracts thereon) that are not directly related to the
Fund's principal business of investing in securities (or options and futures
with respect to securities) ("Short-Short Limitation"); (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs, and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer. Corporations owned or
controlled by the Korean Government will be treated as separate issuers for this
purpose, except that a debt obligation of such a corporation may be treated as
issued by the Government if the obligation is backed by the full faith and
credit of the Government.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any distribution, the shareholder will pay full price for the
shares and receive some portion of the price back as a taxable dividend or
capital gain distribution.
B-27
<PAGE>
The Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending October 31 of that year, plus certain other amounts.
B-28
<PAGE>
Non-U.S. Shareholders
Distributions of net investment income by the Fund to a shareholder
who, as to the U.S. is a nonresident alien individual, nonresident alien
fiduciary of a trust or estate, foreign corporation, or foreign partnership (a
"foreign shareholder") will be subject to U.S. withholding tax at a rate of 30%
(or lower treaty rate). Withholding will not apply if a dividend paid by the
Fund to a foreign shareholder is "effectively connected with the conduct of a
U.S. trade or business," in which case the reporting and withholding
requirements applicable to domestic taxpayers will apply. Distributions of net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) are not subject to withholding, but in the case of a foreign
shareholder who is a nonresident alien individual, those distributions
ordinarily will be subject to U.S. income tax at a rate of 30% (or lower treaty
rate) if the individual is physically present in the United States for more than
183 days during the taxable year and the distributions are attributable to a
fixed place of business maintained by the individual in the U.S.
Passive Foreign Investment Companies
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain from disposition of that stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If the Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund" ("QEF") then in lieu of
the foregoing tax and interest obligation, the Fund will be required to include
in income each year its pro rata share of the QEF's annual ordinary earnings and
net capital gain, even if they are not distributed to the Fund; those amounts
would be subject to the distribution requirements described above. In most
instances it will be very difficult, if not impossible, to make this election
because of certain requirements thereof.
U.S. Tax Treatment of Foreign Income
The Fund will be subject to Korean income taxes, including certain
withholding taxes. So long as more than 50% in value of the Fund's total assets
at the close of any taxable year in which it is a regulated investment company
consists of stocks or securities of non-U.S. corporations, the Fund may elect to
treat any such foreign "income" taxes paid by it during such year as paid by its
shareholders. The Fund expects to qualify for this election annually. The Fund
will notify shareholders in writing each year if it makes the election and of
the amount of foreign income
B-29
<PAGE>
taxes, if any, to be treated as paid by the shareholders and the amount to be
treated by them as income from non-U.S. sources. If the Fund makes the election,
shareholders will be required to include in income their proportionate shares of
the amount of foreign income taxes paid by the Fund and will be entitled to
claim either a credit (subject to the limitations discussed below) or, if they
itemize their deductions, a deduction for their shares of the foreign income
taxes in computing their U.S. Federal income tax liability. (No deduction will
be permitted in computing the alternative minimum tax imposed on corporations
and individuals.) Shareholders that are exempt from tax under Section 501(a) of
the Code, such as pension, plans, generally will derive no benefit from the
Fund's election. However, such shareholders should not be disadvantaged because
the amount of additional income they are deemed to receive generally will not be
subject to U.S. Federal income tax.
Generally, a credit for foreign taxes is subject, to the limitation
that it may not exceed the shareholder's U.S. Federal income tax (determined
without regard to the availability of the credit) attributable to his or her
total foreign source taxable income. For this purpose, the portion of
distributions paid by the Fund from its foreign source income, will be treated
as foreign source income. The Fund's gains from the sale of securities will
generally be treated as derived from U.S. sources, and certain currency
fluctuation gains and losses, including fluctuation gains from foreign currency
denominated debt securities, receivables and payables will be treated as derived
from U.S. sources. The limitation on the foreign tax credit is applied
separately to foreign source "passive income", such as the portion of dividends
received from the Fund which qualifies as foreign source income. In addition,
the foreign tax credit is allowed to offset only 90% of the alternative minimum
tax imposed on corporations and individuals. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by the Fund.
The foregoing is only a general description of the treatment of foreign
income taxes under the U.S. Federal income tax laws. Because the availability of
a credit or deduction depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
Korean Taxes
Under current Korean law, payments to nonresidents of Korea (such as
the Fund) by Korean corporations in respect of income are subject to Korean
withholding tax and capital gains derived by nonresidents of Korea (such as the
Fund) with respect to stock and securities of Korean corporations are subject to
Korean withholding tax, unless exempted by relevant laws or tax treaties.
The applicable withholding tax rate under the United States-Korea
income tax treaty, as presently in effect, generally is 15%, plus a resident tax
of 7.5% of such amount, or a total of 16.125%, on dividends paid to the Fund by
Korean issuers, and generally 12% (plus a resident tax of 7.5% of such amount,
or a total of 12.9%) on interest paid to the Fund by Korean issuers. Under the
United States-Korea income tax treaty, as presently in effect, no withholding
tax will be applicable to capital gains realized by the Fund. This tax treatment
could change in the event of changes in Korean or United States tax laws or
changes, in the terms of, or the Korean Ministry of Finance and Economy's
interpretation of, the United States-Korea income tax treaty.
B-30
<PAGE>
Notwithstanding the foregoing, the Tax Exemption and Reduction Control Law (the
"TERCL") exempts interest on bonds denominated in a non-Korean currency, from
Korean income and corporation taxes. The residents tax referred to above is
therefore eliminated with respect to such investments.
Under present Korean law, the Korean Inheritance and Gift Tax will not
apply to any testate, intestate or inter vivos transfer of shares of the Fund to
the extent the deceased or the donee, as the case may be, is not domiciled in
Korea; Korean stamp duty will not apply to transfers of Fund shares unless any
document for, such transfer is executed in Korea, nor to the Fund's portfolio
securities transactions; but the Korean Securities Transaction Tax will apply to
the sale of securities made through the Stock Exchange by the Fund.
Options, Futures and Foreign Currency Transactions
The use of hedging strategies, such as entering into Futures Contracts
and Forward Contracts and selling (writing) and purchasing options, involves
complex rules that will determine the character and timing of recognition of the
income received in connection therewith by the Fund. Income from foreign
currencies (except certain gains therefrom that may be excluded by future
regulations), and income from transactions in options, Futures Contracts and
Forward Contracts derived by the Fund with respect to its business of investing
in securities or foreign currencies, will qualify as permissible income under
the Income Requirement. However, income from the disposition of foreign
currencies, and options, Futures Contracts and Forward Contracts on foreign
currencies, that are not directly related to the Fund's principal business of
investing in securities, will be subject to the Short-Short Limitation if they
are held for less than three months.
Any increase in value on a position that is part of a "designated
hedge" will be offset by any decrease in value (whether realized or not) of the
offsetting hedging position during the period of the hedge for purposes of
determining whether the Fund satisfies the Short-Short Limitation. Thus, only
the net gain (if any) from the designate hedge will be included in gross income
for purposes of that Limitation. The Fund intends that, when it engages in
hedging transactions, it will qualify for this treatment, but at the present
time it is not clear whether this treatment will be available for all of the
Fund's hedging transactions. To the extent this treatment is not available, the
Fund may be forced to defer the closing out of certain options beyond the time
when it otherwise would be advantageous to do so, in order for the Fund to
qualify as a RIC.
Futures Contracts and Forward Contracts that are subject to section
1256 of the Code (other than those that are part of a "mixed straddle")
("Section 1256 Forward Contracts") and that are held by the Fund at the end of
its taxable year generally will be required to be "marked to market" for federal
income tax purposes; that is, deemed to have been sold at market value. Sixty
percent of any net gain or loss recognized on these deemed sales and 60% of any
net gain or loss realized from any actual sales of Section 1256 Forward
Contacts, will be treated as long-term capital gain or loss, and the balance
will be treated as short-term capital gain or loss. Section 988
B-31
<PAGE>
of the Code also may apply to Forward Contracts and options on foreign
currencies. Under section 988, each foreign currency gain or loss generally is
computed separately and treated as ordinary income or loss. In the case of
overlap between sections 1256 and 988, special provisions determine the
character and timing of any income, gain or loss. The Fund attempts to monitor
section 988 transactions to minimize any adverse tax impact.
The foregoing is a general and abbreviated summary of certain U.S.
federal tax considerations affecting the Fund and its shareholders. Investors
are urged to consult their own tax advisers for more detailed information and
for information regarding any foreign, state and local taxes applicable to
distributions received from the Fund.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Custodian
State Street Bank & Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110 acts as custodian of the Fund's assets.
State Street is authorized to establish and has established separate accounts in
Korean Won and to cause securities of the Fund to be held in separate accounts
outside the United States in the custody of non-U.S. banks.
Independent Accountants
The Fund's independent accountants are Ernst & Young, L.L.P., Los
Angeles. Ernst & Young, L.L.P. will conduct an annual audit of the Fund, assist
in the preparation of the Fund's federal and state income tax returns and
consult with the Trust and the Fund as to matters of accounting and federal and
state income taxation.
Audited financial statements for the Fund for the fiscal year ended
August 31, 1995, as contained in the Annual Report to the Shareholders are
incorporated herein by reference to the Annual Report.
- --------------------------------------------------------------------------------
INVESTMENT RESULTS
- --------------------------------------------------------------------------------
The Fund's "Standardized Return", as referred to in the Prospectus (see
"Other Information--Performance Information"), is calculated as follows:
Standardized Return ("T") is computed by using the value at the end of the
period ("EV") of a hypothetical initial investment of $1,000 ("P") over a period
of years ("n") according to the following formula, as required by the SEC:
P(1+T)n=EV. The following assumptions will be reflected in computations made in
accordance with this formula: (1) deduction of the maximum sales charge of 4.50%
from the $1,000 initial investment; (2) reinvestment of dividends and other
distributions at net asset value on the reinvestment date determined by the
Board; and (3) a complete redemption at the end of any period illustrated.
B-32
<PAGE>
As discussed in the Prospectus, the Fund may quote nonstandardized
total returns that do not reflect the effect of sales charges. Nonstandardized
Returns may be quoted for the same or different time periods for which
Standardized Returns are quoted.
The Fund's investment results will vary from time to time depending
upon market conditions, the composition of the Fund's portfolio and operating
expenses of the Fund, so that the current or past yield or total return should
not be considered representations of what an investment in the Fund may earn in
any future period. These factors and possible differences in the methods used in
calculating investment results should be considered when comparing the Fund's
investment results with those published for other investment companies and other
investment vehicles. The Fund's results also should be considered relative to
the risks associated with the Fund's investment objective and policies.
The Fund may from time to time compare itself with the following:
(1) Average of Savings Accounts, which is a measure of all
kinds of savings deposits, including longer-term certificates (based on
figures supplied by the U.S. League of Savings Institutions). Savings
accounts offer a guaranteed rate of return on principal, but no
opportunity for capital growth. During a portion of the period, the
maximum rates paid on some savings deposits were fixed by law.
(2) The Consumer Price Index, which is a measure of the
average change in prices over time in a fixed market basket of goods
and services (e.g., food, clothing, shelter, fuels, transportation
fares, charges for doctors' and dentists' services, prescription
medicines, and other goods and services that people buy for day-to-day
living).
(3) Data and mutual fund rankings published or prepared by
Lipper Analytical Data Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Company Service
("Wiesenberger") and/or other companies that rank and/or compare mutual
funds by overall performance, investment objectives, assets, expense
levels, periods of existence and/or other factors. In this regard, the
Fund may be compared to the Fund's "peer group" as defined by Lipper,
CDA, Wiesenberger and/or other firms, as applicable, or to specific
funds or groups of funds within or without such peer group.
(4) Bear Stearns Foreign Bond Index, which provides simple
average returns for individual countries and GNP-weighted index,
beginning in 1975. The returns are broken down by local market and
currency.
(5) Ibbottson Associates International Bond Index, which
provides a detailed breakdown of local market and currency returns
since 1960.
B-33
<PAGE>
(6) Standard & Poor's "500" Index, which is a widely
recognized index composed of the capitalization-weighted average of the
price of 500 of the largest publicly traded stocks in the U.S.
(7) Salomon Brothers Broad Investment Grade Index, which is a
widely used index composed of U.S. domestic government, corporate and
mortgage-backed fixed-income securities.
(8) Dow Jones Industrial Average, which is a widely used index
composed of 30 companies, representing the manufacturing and other
major industries, that are listed on the New York Stock Exchange.
(9) Morgan Stanley Capital International World Indices,
including, among others, the Morgan Stanley Capital International Europe,
Australia, Far East Index ("EAFE Index"). The EAFE Index is an unmanaged index
of more than 800 companies of Europe, Australia and the Far East.
(10) Country specific indices (i.e. Korea Composite Stock
Price Index) which may be deemed appropriate by the Fund management.
Indices prepared by the research departments of such financial
organizations as Salomon Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith,
Inc., Bear Stearns & Co., Inc., Morgan Stanley, and Ibbottson Associates may be
used, as well as information provided by the Federal Reserve Board. In addition,
performance rankings and ratings reported periodically in national financial
publications, including but not limited to Money Magazine, Forbes, Business
Week, The Wall Street Journal and Barron's may also be used.
The Fund believes that the above information relating to foreign market
performance, market capitalization and diversification may be useful to
investors considering whether and to what extent to diversify their investments
through the purchase of mutual funds investing in securities on a global basis.
However, this data is not a prediction of the performance of the Fund. The
performance of the Fund will differ from the historical performance of the
indices represented above. The performance of indices does not take expenses
into account, while the Fund incurs expenses in its operations which will reduce
performance. Moreover, the Fund is actively managed, i.e., KIM as the Fund's
investment manager actively purchases and sells securities in seeking the Fund's
investment objective; this will cause the performance of the Fund to differ from
the indices shown above.
B-34
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
KOREAN RISK FACTORS
Investing in securities of Korean companies and of the government (the
"Government") of the Republic of Korea (the "Republic" or "Korea") involves
certain risks not typically associated with investing in securities of United
States companies or the United States government, in addition to those discussed
under "Prospectus Summary" and "Investment Objective, Policies and Risks."
Investment and Repatriation Restrictions. Until recently, Korean
security regulations limited the percentage of any class of equity shares of an
issuer that may be held by a particular foreign investor to 3% and to 12% by all
foreign investors as a group. Currently, the limit on direct foreign investment
is up to 15% of any class of equity shares outstanding. The Ministry of Finance
will consider removing the ceiling on direct foreign investment in the future.
Transfer of funds from Korea to foreign countries and repatriation of
foreign capital invested in Korea are subject to certain regulatory approvals
pursuant to foreign exchange control laws and regulations. Generally, as long as
the original investment was approved or allowed under the applicable laws and
regulations of Korea, the conversion and remittance of cash or cash equivalents
into U.S.dollars in relation to such investment will be freely allowed upon
receipt of the appropriate payment approvals from the Bank of Korea or a
designated Class A foreign exchange bank such as the Bank of Seoul, the Korean
sub-custodian for the Fund's assets, depending on the type of transaction.
Currency Fluctuations. The Fund's assets will be invested primarily in
Korean securities , the market value of which is determined in Won, and
substantially all of its income will be received or realized in the Korean Won.
A-1
<PAGE>
The Fund will be required, however, to compute its net asset value and
income, and to distribute its income, in U.S. dollars. As a result, the Fund's
net asset value and its distribution amounts will be subject to foreign exchange
rate fluctuations.
The Korean Won was devalued against the US dollar in the early 1980s to
reach approximately Won 890 to the US dollar by the end of 1985. The Korean Won
appreciated against the US dollar from 1986 to approximately 665 Won per US
dollar by May 1989. Since then the Korean Won has slowly lost value against the
US dollar and the exchange rate stood at approximately Won 770 US dollar at the
end of 1995.
The Fund expects to incur certain transaction costs in connection with
its conversions between currencies and, in light of the history of fluctuating
currency values of the Korean Won relative to the dollar, it is impossible to
predict what effect currency conversion costs may have on the operations of the
Fund.
Potential Market Volatility. The Korean securities market is still
relatively small in comparison to the Japanese, United States and major European
securities markets.
Because of this small size and low volume, the Korean securities market
is subject to greater price volatility and lesser liquidity than is usual in the
Japanese, United States or major European securities markets.Because of these
liquidity limitations and the Fund's investment policies, it may be more
difficult for the Fund to purchase and sell portfolio positions than would be
the case in the United States.
Accordingly, in periods of rising market prices, the Fund may be unable
to participate fully in such price
A-2
<PAGE>
increases to the extent that it is unable to acquire desired portfolio positions
quickly; conversely, the Fund's inability to dispose fully and promptly of
positions in declining markets will cause its net asset value to decline as the
value of unsold positions is determined by references to lower prices.
Political and Economic Factors. The partition of Korea following World
War II has created a political risk to the Republic. The demilitarized zone at
the boundary between the Republic and North Korea established after the Korean
War of 1950-1953 is supervised by United Nations forces. The United States
maintains a significant military force in the Republic.
The situation remains a source of tension, although negotiations to
resolve the political division of the Korean peninsula have been carried on
intermittently for several years, and in recent years there have been several
meetings between representatives of the Republic and of North Korea on
political, economic and humanitarian issues. See "Appendix A--The Korean
Securities Market" in the Statement of Additional Information.
The domestic political situation in Korea has been relatively stable
since Kim, Young Sam, who had been for many years a leader of an opposition
party, was elected as president of Korea in December 1992. During last quarter
of 1995, the Kim administration initiated a campaign to prosecute illegal slush
fund contributors. Contributions were made to major political figures, including
two former Presidents, mostly Korean corporations. Such reform caused
uncertainty in the Korean securities market and had a significant adverse impact
on the security prices.
Nonetheless, management believes that the Fund will benefit from these
reforms. Such activities is believed to provide political stability and reduce
corruption.
A-3
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
DESCRIPTION OF DEBT RATINGS
Moody's Investors Service ("Moody's"):
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
B-1
<PAGE>
B-2
<PAGE>
B-3
<PAGE>
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Those bonds in the Aa and A group which Moody's believes possess the strongest
investment attributes are designated by the symbols Aa-1 and A-1.
Standard & Poor's Corporation ("S&P"):
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.The AA rating may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the AA
rating category.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
B-4
<PAGE>
NOTE RATINGS
Moody's:
Moody's rating for short-term obligations will be designated Moody's Investment
Grade ("MIG"). This distinction is in recognition of the differences between
short-term credit risk and long-term risk. Factors affecting the liquidity of
the borrower are uppermost in importance in short-term borrowing, while various
factors of the first importance in bond risk are of lesser importance in the
short run. Symbols used are as follows:
MIG-1 - Notes bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing or both.
MIG-2 - Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
S&P:
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment.
- -- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
- -- Source of Payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Commercial paper rated A by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated A
or better. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated A-1, A-2
or A-3.
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 - Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
B-5
