KOREA CAPITAL FUND
ANNUAL REPORT TO SHAREHOLDERS
AUGUST 31, 1996
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Fellow Shareholders:
We are pleased to present you with this annual report of Korea Capital Fund for
the year ended August 31, 1996.
This fiscal year has been a difficult year for the Korean Composite Stock Price
Index ("KOSPI") which had lost 14.35% of its value. The bearish market is mainly
attributable to concerns about the economy, that soft landing may not be
possible, and the widening current account deficit caused by falling prices of
products such as semiconductors.
Recently, the government announced a package of measures in response to the
economy's mounting problems. The main objectives of the measures were said to be
price stability and reducing the current account deficit. It also cut down the
bank's reserve requirement ratio by 2% to 5.4%.
We expect the economic slowdown to be maintained for the time being and resume
its high rate of growth beginning in the second or third quarter of 1997, led by
exports and the construction industry based on the following reasons:
o In preparation for Korea's presidential election in the second half of
1997, the government is expected to concentrate on the recovery of the
economy and it will attempt to boost the economy by keeping interest
rates low and increasing SOC expenditure in the first half of 1997.
o The export environment for Korean products is expected to improve in
1997. World trade volume growth is anticipated to bounce back again
next year due to the general economic recovery in the world. In
addition, we can expect unit export prices of major Korean export
products, such as semiconductors and petrochemicals to be rebound and
the Yen/Dollar exchange rate to move to Korea's benefit.
With our forecast for the economy to recover from the middle of next year,
company's earnings should rebound accordingly. The monetary policy is not
expected to be tighter in the face of a slowdown, and should result in declining
interest rates and sufficient liquidity in the market. Foreign liquidity should
increase as foreign ownership ceilings are raised to 20% and in response to
changes in the MSCI weighting. Relative to the rest of the Asian regions, Korea
is still cheapest country on a price-to-cash flow basis.
We will maintain the Fund's investment strategy in order to take advantage of
the hopefully recovering Korean economy and we look forward to putting our
investment strategy and dedication to work for you.
Respectfully submitted,
/s/ Indong Oh
Dr. Indong Oh
Chairman of the Board and Principal Executive Officer
<PAGE>
KOREA CAPITAL FUND
----------
REPORT ON AUDITED FINANCIAL STATEMENTS
For the Year Ended August 31, 1996
----------
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Shareholders of
Korea Capital Fund and
the Board of Trustees of
Korea Capital Trust
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Korea Capital Fund (a series of Korea
Capital Trust) as of August 31, 1996, and the related statements of operations
and changes in net assets and the financial highlights for the fiscal year then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The financial statements for the year ended August 31, 1995 and the
financial highlights of the Fund for the years ended August 31, 1995, August 31,
1994, and for the period October 1, 1992 (commencement of operations) to August
31, 1993 were audited by other auditors whose report dated October 13, 1995
expressed an unqualified opinion on those financial statements and financial
highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Korea Capital Fund as of August 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
October 15, 1996
<PAGE>
K O R E A C A P I T A L F U N D
S C H E D U L E O F I N V E S T M E N T S
AUGUST 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value ($U.S.)
---------------- -------------------
<S> <C> <C> <C>
COMMON STOCK 73.56%
Automobile and Parts 2.61%
-------------------------------------------------------
Mando Machinery Corp. 4,560 $ 211,511
-------------
Banks 16.90%
-------------------------------------------------------
Commercial Bank of Korea 30,000 270,980
Daegu Bank 12,181 169,500
Kook Min Bank (formerly Citizens National Bank) 38,750 728,410
Korea Long Term Credit Bank 8,564 198,616
-------------
Total Banks 1,367,506
-------------
Brokerage 6.44%
-------------------------------------------------------
Daewoo Securities Co. 10,608 231,776
Hanshin Securities Co. 10,600 178,554
Shin Young Securities Co. 5,000 110,467
-------------
Total Brokerage 520,797
-------------
Building and Construction 0.06%
-------------------------------------------------------
Daelim Industrial 340 4,648
-------------
Cement 1.51%
-------------------------------------------------------
Asia Cement Manufacturing 3,919 122,461
-------------
Chemicals & Drugs 0.04%
-------------------------------------------------------
Hanwha Chemical 260 2,634
Oriental Chemical Industries Co. 7 246
-------------
Total Chemicals & Drugs 2,880
-------------
Electronics 5.29%
-------------------------------------------------------
LG Electronics Inc. (formerly Goldstar Co.) 15,000 280,134
Samsung Electronics 1,157 90,103
Samsung Electronics - New 800 57,711
-------------
Total Electronics 427,948
-------------
Engineering & Construction 6.94%
-------------------------------------------------------
Hyundai Engineering & Construction Co. 14,790 561,451
Hyundai Eng. & Con. Common Rights 14,790 0
Hyundai Eng. & Con. Preferred Rights 8,140 0
-------------
Total Engineering & Construction 561,451
-------------
Fire & Casualty Insurance 6.78%
-------------------------------------------------------
Daehan Fire & Marine Insurance Co. 7,018 234,719
Haedong Fire & Marine Insurance Co. 1,360 63,746
Samsung Fire & Marine Insurance Co. 480 250,473
-------------
Total Fire & Casualty Insurance 548,938
-------------
</TABLE>
4
See Accompanying Notes to Financial Statements.
<PAGE>
K O R E A C A P I T A L F U N D
S C H E D U L E O F I N V E S T M E N T S
AUGUST 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value ($U.S.)
---------------- -------------------
<S> <C> <C> <C>
Metals 0.00%
-------------------------------------------------------
Korea Tungsten Mining Co. 3 $ 78
------------
Miscellaneous 18.00%
-------------------------------------------------------
Byucksan Corporation 10,000 133,049
Kolon Industries 179 3,780
Hyun Dae Paint * 10,000 383,277
Hyundai Securities Co. * 10,000 207,507
Iljin Corp. * 6,800 371,022
Samchully Co. 610 49,664
Samsung Electro-Mechanics 10,000 307,598
-------------
Total Miscellaneous 1,455,897
-------------
Steel 0.11%
-------------------------------------------------------
Hanil Iron & Steel Co. 256 8,906
-------------
Transportation 1.30%
-------------------------------------------------------
Korean Air 5,000 104,974
-------------
Utilities 7.58%
-------------------------------------------------------
Korea Electric Power Corp. 20,100 613,366
-------------
TOTAL COMMON STOCK 5,951,361
-------------
PREFERRED STOCK 3.11%
Non-Convertibles
------------------------------------------------
Hyundai Engineering & Construction Co. 8,140 158,974
Shin Poong Pharm Co. 6,000 92,280
-------------
TOTAL PREFERRED STOCK 251,254
-------------
REPURCHASE AGREEMENT 20.41%
State Street Bank & Trust Co.
$1,651,000 at 4.00%
(Agreement dated 8/30/96; to be
repurchased at $1,651,733.78 on
9/03/96; collateralized by U.S. Treasury
Notes due 2/15/21, Value $1,781,157)
(Cost $1,651,000) 1,651,000
-------------
TOTAL INVESTMENTS (Cost $8,925,430) 97.08% $ 7,853,615
-------------
OTHER ASSETS IN EXCESS OF LIABILITIES 2.92% 236,063
-------------
NET ASSETS 100.00% $ 8,089,678
=============
- ---------------------
*Non-income producing security.
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE>
K O R E A C A P I T A L F U N D
S T A T E M E N T O F A S S E T S A N D L I A B I L I T I E S
AUGUST 31, 1 9 9 6
- --------------------------------------------------------------------------------
ASSETS
Investments in securities (Cost of $7,274,430) $6,202,615
Repurchase agreement (Cost of $1,651,000) 1,651,000
Foreign currency (Cost of $352,963) 352,826
Cash 903
Income receivable 367
Deferred organizational costs 56,920
Receivable from manager and advisor 124,248
---------------
Total Assets 8,388,879
---------------
LIABILITIES
Accrued expenses payable for:
Investment management fee 199,125
Advisory and administration fee 11,152
Distribution fees 4,772
Other accrued expenses 84,152
---------------
Total Liabilities 299,201
---------------
NET ASSETS $8,089,678
===============
COMPOSITION OF NET ASSETS
Paid in capital $11,364,056
Accumulated net realized loss (1,788,614)
Accumulated net investment expense (413,812)
Net unrealized depreciation on investments and
foreign currency (1,071,952)
---------------
Net Assets $8,089,678
===============
CAPITAL SHARES OUTSTANDING 1,052,078
---------------
NET ASSET VALUE PER SHARE $7.69
===============
MAXIMUM OFFERING PRICE PER SHARE $8.05
===============
See Accompanying Notes to Financial Statements.
6
<PAGE>
K O R E A C A P I T A L F U N D
S T A T E M E N T O F O P E R A T I O N S
FOR THE YEAR ENDED AUGUST 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividend income (Net of withholding taxes) $98,969
Interest income 37,649
-------------
TOTAL INCOME 136,618
-------------
EXPENSES:
Investment management fees 71,387
Advisory and administration fees 30,594
Sub-Administration fees 50,121
12b-1 fees 25,495
Custodian fees 53,122
Amortization of deferred organizational costs 52,704
Audit fees 12,646
Fund accounting fees 26,868
Shareholder reports fees 7,312
Transfer agent fees 5,687
Insurance fees 3,645
Legal fees 5,850
Trustees fees 3,569
Miscellaneous expenses 12,335
-------------
Gross expenses 361,335
Expense reimbursement (116,583)
-------------
Total expenses 244,752
NET INVESTMENT EXPENSE (108,134)
-------------
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS
Net realized loss on investments and foreign
currency transactions (825,081)
Net change in unrealized loss on depreciation on
investments and foreign currency transactions (662,075)
-------------
NET LOSS ON INVESTMENTS (1,487,156)
-------------
NET DECREASE IN NET ASSETS FROM OPERATIONS ($1,595,290)
=============
See Accompanying Notes to Financial Statements.
7
<PAGE>
K O R E A C A P I T A L F U N D
S T A T E M E N T O F C H A N G E S I N N E T A S S E T S
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
For the Year For the Year
Ended Ended
08/31/95 08/31/96
-------------- --------------
<S> <C> <C>
Operations:
Net investment expense $ (53,597) $ (108,134)
Realized loss on securities and foreign currency transactions (1,087,549) (825,081)
Net change in unrealized depreciation (489,745) (662,075)
------------ ------------
Net decrease in net assets from operations (1,630,891) (1,595,290)
Distributions:
Capital gains (341,560) --
Return of Capital (474,207) --
------------ ------------
Total distributions (815,767) --
Capital Share Activity
Issued and Reinvested 355,055 --
Redeemed (33,437) (2,171,929)
------------ ------------
Net increase in net assets from capital share activity 321,618 (2,171,929)
------------ ------------
Total decrease in net assets (2,125,040) (3,767,219)
Net assets beginning of year 13,981,937 11,856,897
------------ ------------
Net assets end of year $ 11,856,897 $ 8,089,678
------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements.
8
<PAGE>
K O R E A C A P I T A L F U N D
F I N A N C I A L H I G H L I G H T S
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For period For the year For the year For the year
ended ended ended ended
Description 08/31/93 * 08/31/94 08/31/95 08/31/96
- ------------------------------------------------------------- ---------- -------- -------- --------
<S> <C> <C> <C> <C>
Beginning net asset value $10.00 $10.89 $11.18 $9.26
Net investment expense (0.09)(1) (0.17)(1) (0.07)(1) (0.15)(1)
Net realized and unrealized gain (loss) on
securities and foreign currency 0.98 (2) 1.00 (2) (1.20)(2) (1.42)(2)
Distributions from capital gains - (0.54)(3) (0.27)(3) -
Return of capital - - (0.38) -
--------------- --------------- ---------------- ---------------
Ending net asset value $10.89 $11.18 $9.26 $7.69
=============== =============== ================ ===============
Total return (5) 9.71% 7.52% -12.24% -16.68%
Net assets at end of year $10,046,655 $13,981,937 $11,856,897 $8,089,678
Ratio of expenses to average net assets 2.40%(4) 2.40%(4) 2.40%(4) 2.40%(4)
Ratio of net investment (expense) to average net assets -1.60%(4) -1.44%(4) -0.40%(4) -1.06%(4)
Portfolio turnover rate 139.00% 63.00% 60.59% 43.23%
Average commission rate paid - - - $0.1408
- -------------------------------------------------------------
</TABLE>
* Since October 1, 1992 (commencement of operation).
1 Per share data is based on average number of shares outstanding at the end
of each period.
2 This amount may not agree with the change in aggregate gains and losses of
the securities in the portfolio for the period because of the timing of
sales and redemptions of the Fund's shares in relation to fluctuating
market values for each portfolio.
3 This data per share is calculated based on number of shares outstanding on
dividend ex-date.
4 Net of expense reimbursement. The ratios of total operating expenses to
average net assets before expense reimbursement for the periods ended
August 31, 1993, 1994, 1995 and 1996 were 5.59%, 3.01%, 2.63% and 3.55%,
respectively. The ratio of net investment income (expense) to average net
assets before expense reimbursements for the periods ended August 31, 1993,
1994, 1995 and 1996 were (4.79%), (2.04), (0.65%) and (2.20%),
respectively.
5 The Fund's sales charge is not included in the computation of total
returns.
See Accompanying Notes to Financial Statements.
9
<PAGE>
K O R E A C A P I T A L F U N D
N O T E S T O F I N A N C I A L S T A T E M E N T S
AUGUST 31,1996
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies. Korea Capital Fund (the
"Fund") is a series of Korea Capital Trust (the "Trust"), an open-end registered
investment company under the Investment Company Act of 1940. The Fund was
incorporated in Massachusetts on August 24, 1992. The Fund seeks long term
capital appreciation by investing primarily in securities of Korean issuers
which are listed on the Korean Stock Exchange.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
1) Securities Valuation: 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.
In the event there are securities for which market quotations are not
readily available, they are valued at fair value as determined in good
faith by or under the direction of the Board of Trustees. There were no
such securities as of August 31, 1996. Assets or liabilities initially
quoted in Korean Won will be valued in U.S. dollars based on the
prevailing exchange rate on that day quoted by an independent
investment data service.
2) Securities Transactions: It is the Fund's policy to recognize security
transactions on the trade date. Dividend income is recognized on the
ex-dividend date and interest income is recorded on an accrual basis.
Distributions to shareholders are recorded on the ex-dividend date.
3) Foreign Currency Transactions: The books and records of the Fund are
maintained in United States dollars.
Investment securities and other assets and liabilities are translated
at the exchange rate on the valuation date, and purchases and sales of
investment securities, income and expenses are translated at the
exchange rate prevailing on the respective date of such transactions.
4) Federal Income Taxes: It is the Fund's policy to continue to comply
with the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of
its taxable income to its shareholders. Therefore, no federal income
tax provision is required.
Dividends and interest from non-U.S. sources received by the Fund are
generally subject to non-U.S. withholding taxes at a rate of 16.50%.
Such withholding taxes may be reduced or eliminated under the terms of
applicable United States income tax treaties, and the Fund intends to
undertake any procedural steps required to claim the benefits of such
treaties. If more than 50% in value of the Fund's total assets at the
close of any taxable year consists of stocks or securities of non-U.S.
corporations, the Fund is permitted and may elect to treat any non-U.S.
taxes paid by it as paid by its shareholders.
10
<PAGE>
K O R E A C A P I T A L F U N D
N O T E S T O F I N A N C I A L S T A T E M E N T S - (Continued)
AUGUST 31, 1996
- --------------------------------------------------------------------------------
5) Deferred Organization Costs: These costs have been deferred and are
being amortized ratably on a straight line basis over a period of sixty
months from the date the Fund commenced investment operations. In the
event that any of the initial shares are redeemed by the holder during
the period of amortization of the Fund's organization costs, the
redemption proceeds will be reduced by any such unamortized
organization costs in the same proportion as the number of initial
shares being redeemed bears to those shares outstanding at the time of
redemption.
6) Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2. Capital Stock Transactions. The Fund is authorized to issue an
unlimited number of shares of beneficial interest with a par value of $0.01.
Transactions of capital stock during the annual period ended August 31, 1996
were as follows:
Shares Amount
Beginning balance 1,280,293 $ 13,535,985
Shares sold/reinvested 0 0
Shares redeemed (228,215) (2,171,929)
-------- ----------
Ending balance 1,052,078 $ 11,364,056
========= ===============
Note 3. Transactions with Affiliates
Advisory and Administration Agreement: The Trust, on behalf of the
Fund, has approved an Investment Advisory and Administration Agreement
with Daehan Securities, Inc. ("Daehan"). The Investment Advisory fee is
computed daily and paid monthly by the Fund at the annualized rate of
.30% of the Fund's average daily net assets. For the year ended August
31, 1996, the Fund incurred $30,594 in advisory and administration
fees.
Investment Management Agreement: The Trust, on behalf of the Fund, has
approved a Management Agreement with Korea Investment Management Europe
Ltd. (the "Manager"). Management fees are computed daily and paid
quarterly by the Fund at the annualized rate of .70% of the Fund's
average daily net assets. For the year ending August 31, 1996, the Fund
incurred $71,387 in management fees.
Distribution Agreements: The Trust has approved an agreement with
Daehan whereby Daehan shall be the principal underwriter for the sale
of shares of the Fund. For its services as distributor, Daehan receives
a fee calculated as 0.25% of the Average Daily Net Assets which
amounted to $25,495 for fiscal year ended August 31, 1996.
11
<PAGE>
K O R E A C A P I T A L F U N D
N O T E S T O F I N A N C I A L S T A T E M E N T S - (Continued)
AUGUST 31, 1996
- --------------------------------------------------------------------------------
Expense Limitations: Daehan and the Manager 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. Of this limitation, Daehan and the Manager have
agreed to reimburse 30% and 70%, respectively. For the year ended
August 31, 1996, this amount was $116,583.
As of August 31, 1996, the Fund had the following receivables and
payables with Daehan and the Manager:
<TABLE>
<CAPTION>
Daehan Manager
------ -------
<S> <C> <C>
Receivable for expense reimbursement $ 37,274 $ 86,973
Payable for advisory and administration/management fees $ 11,152 $ 199,125
</TABLE>
Related Party Transactions. As of August 31, 1996, the Fund shares owned by the
Fund's sub-custodian, Bank of Seoul, totaled approximately 630,344 shares of
1,052,078 outstanding.
In addition, the Fund has an investment in Korea Long Term Credit Bank, which
owns approximately 8% of the outstanding shares of the Fund at August 31, 1996.
Certain officers of Daehan and the Manager are members of the Board of Trustees
of the Trust.
Note 4. Investment Transactions. Purchases and sales of securities,
other than short-term investments, for the year ended August 31, 1996 were
$3,564,252 and $5,839,735, respectively.
The gross unrealized appreciation and depreciation for book purposes of
portfolio securities at August 31, 1996 was:
Unrealized appreciation $ 493,947
Unrealized depreciation (1,565,762)
----------------
Net unrealized depreciation $ (1,071,815)
================
At August 31, 1996, the net unrealized appreciation (depreciation) based on the
cost of investments for federal income tax purposes was as follows:
Tax cost of investments $ 8,928,929
Unrealized appreciation $ 493,947
Unrealized depreciation (1,569,261)
----------------
Net unrealized depreciation $ (1,075,314)
================
12
<PAGE>
K O R E A C A P I T A L F U N D
N O T E S T O F I N A N C I A L S T A T E M E N T S - (Continued)
AUGUST 31, 1996
- --------------------------------------------------------------------------------
Note 5. Repurchase Agreements. The Fund may enter into repurchase
agreements with government securities dealers recognized by the Federal Reserve
Board, with member banks of the Federal Reserve System or with such other
brokers or dealers that meet the credit guidelines established by the Board of
Trustees. The Fund will always receive and maintain, as collateral, securities
whose market value, including accrued interest, will be at least equal to 100%
of the dollar amount invested by the fund in each agreement, and the Fund will
make payment for such securities only upon physical delivery or upon evidence of
book entry transfer to the account of the custodian. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral.
If the seller defaults and the value of the collateral declines, or if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Note 6. Off Balance Sheet Risks. As of August 31, 1996, the Fund held
approximately 77% of total net assets in Korean equities. Accordingly, this
investment style involves consideration of certain factors not typically
associated with investing in securities of U.S. issuers. The securities market
of Korea is substantially smaller and less developed than that of the United
States. As a result, there may be greater price fluctuations. Disclosure and
regulatory standards in Korea are less stringent than U.S. standards.
Furthermore, there is a lower level of monitoring the regulation of the markets
and investor activities by the Korean governing agencies. As these balances
represent significant portions of the Fund's net assets, certain market and
currency exchange fluctuations as well as the Korean economic and political
situations, may have a significant impact on the Fund's net asset value. It is
the Fund's policy to continuously monitor its exposure to these risks.
Note 7. Capital Loss Carryover. As of August 31, 1996, the Fund had
available for Federal tax purposes $1,087,549 and $825,081 of unused capital
loss carryovers which expire in 2003 and 2004, respectively.
13
