------------------
Korea Capital Fund
------------------
Dear Fellow Shareholders:
We are pleased to present you with this semi-annual report of Korea Capital Fund
for the period ended February 28, 1997.
Despite the increase in the foreign investment ceiling to 20% in October 1996,
poor economic indicators dampened investor sentiment and there was concern that
the sluggish economy would take some time to recover. The stock market remained
bearish because of several negative factors including the depreciation of the
Japanese yen against the US dollar, introduction of new labor laws, and the
default of Hanbo Steel in January 1997. Also the supply and demand situation
worsened with a decline in customers' deposits at securities companies and an
increase in maturing margin loan accounts.
The Korean government's plans to support the economy and expansion of the money
supply created a minor liquidity driven rally in early 1997, but this lacked the
strength to recover all of the market's losses. The Korea Composite Stock Price
Index showed a decline of 13.4% (17.9% on a US dollar basis) in the six month
period ended February 28, 1997.
In the remainder of 1997, the Korean stock market is expected to regain some of
its strength as the economic cycle appears to have reached the bottom. A
liquidity driven rally is possible if market sentiment improves. Korea Capital
Fund will increase its holdings of small and medium capitalization stocks and
companies with improving earnings in the first half of 1997. Korea Capital Fund
will begin to move into large blue chip stocks and financial issues in order to
take the most advantage of the expected rally in the market. With our forecast
for the economy to recover, the Fund's earnings should rebound accordingly.
We thank you for selecting Korea Capital Fund and look forward to serving you in
the future.
Sincerely,
/s/ Indong Oh
Indong Oh
Chairman of the Board
Korea Capital Fund
<PAGE>
------------------
Korea Capital Fund
------------------
PORTFOLIO OF INVESTMENTS at February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 77.68% Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Apparel: 2.32%
947 Nasan Company Limited................................................... $ 15,010
4,010 Shin Won Corp........................................................... 71,446
3,000 Yurim Co., Ltd.......................................................... 25,649
-----------
112,105
-----------
Banks: 13.88%
30,000 Commercial Bank of Korea................................................ 264,939
5,000 Daegu Bank.............................................................. 99,381
6,300 Korea Housing & Commercial Bank......................................... 88,193
8,992 Korea Long Term Credit Bank............................................. 130,040
8,564 Korea Technology Banking Corp........................................... 86,770
-----------
669,323
-----------
Brokerage: 3.65%
13,000 Hyundai Securities Co................................................... 175,970
-----------
Building Materials: 0.84%
3,506 Byucksan Corporation.................................................... 40,522
-----------
Business Services: 3.50%
2,000 Hyundai Motor Service Co................................................ 47,666
500 S1 Corporation.......................................................... 121,189
-----------
168,855
-----------
Chemicals: 1.88%
5,000 Sunkyong Industries..................................................... 90,820
-----------
Commercial Builders: 4.87%
5,750 Pum Yang Construction Co................................................ 235,061
-----------
Confections and Beverages: 5.16%
3,020 Cho Sun Brewery Co., Ltd................................................ 84,903
5,060 Doo San Beverage........................................................ 163,915
-----------
248,818
-----------
Electric: 2.97%
5,000 Korea Electric Power Corp............................................... 143,461
-----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
------------------
Korea Capital Fund
------------------
PORTFOLIO OF INVESTMENTS at February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Shares Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Electronics: 5.84%
5,000 LG Electronics, Inc. (formerly Goldstar Co.)............................ $ 64,210
10,000 Samsung Electro-Mechanics............................................... 215,191
34 Samsung Electronics..................................................... 2,281
-----------
281,682
-----------
Engineering & Construction: 5.63%
10,000 Hanshin Contruction Co.................................................. 48,591
10,200 Hyundai Engineering & Construction Co................................... 223,035
-----------
271,626
-----------
Household Furniture/Appliances: 3.68%
9,900 Lady Furniture Co., Ltd................................................. 177,532
-----------
Life Insurance: 3.69%
500 Samsung Fire & Marine Insurance Co...................................... 178,169
-----------
Manufacturing: 3.50%
14,630 Daewoo Precision Industries............................................. 168,922
-----------
Miscellaneous: 3.66%
7,000 Shinkwang Enterprise.................................................... 176,549
-----------
Printing and Publishing: 10.16%
15,745 Kemongsa Publishing..................................................... 490,010
-----------
Rail Transportation: 2.45%
10,000 Korea Line Co........................................................... 118,008
-----------
Total Common Stocks..................................................... 3,747,433
-----------
PREFERRED STOCKS: 2.70%
- ------------------------------------------------------------------------------------------------------------------
Non-Convertibles: 2.70%
8,302 Hyundai Engineering & Construction Co................................... 71,076
6,010 Shin Poong Pharm Co..................................................... 59,102
-----------
130,178
-----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
------------------
Korea Capital Fund
------------------
PORTFOLIO OF INVESTMENTS at February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Principle REPURCHASE AGREEMENT: 20.61% Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$994,000 State Street Bank & Trust Co., 4.00%, dated 2/28/97, to
be repurchased at $994,331 on 3/3/97, collateralized by
U.S. Treasury Notes due 10/31/97, value $1,018,803
(cost $994,000)......................................................... $ 994,000
-----------
Total investments (cost $6,142,888): 100.99%............................ 4,871,611
liabilities in excess of other assets: (0.99%).......................... (47,994)
-----------
Net assets: 100.00%..................................................... $ 4,823,617
===========
</TABLE>
*Non-income producing security.
See accompanying notes to financial statements.
4
<PAGE>
------------------
Korea Capital Fund
------------------
STATEMENT OF ASSETS AND LIABILITIES - February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities (Cost of $6,142,888)......................................... $ 4,871,611
Cash................................................................................... 753
Income receivable...................................................................... 68,015
Other assets........................................................................... 177,602
-----------
Total Assets............................................................... 5,117,981
-----------
LIABILITIES
Accrued expenses....................................................................... 294,364
-----------
Total Liabilities................................................................ 294,364
-----------
NET ASSETS................................................................................... $ 4,823,617
===========
COMPOSITION OF NET ASSETS
Paid in capital........................................................................ $ 9,969,203
Accumulated net realized loss................................................................ (3,320,422)
Accumulated net investment loss........................................................ (552,208)
Net unrealized depreciation on investments and foreign currency.................. (1,272,956)
-----------
Net Assets................................................................. $ 4,823,617
===========
CAPITAL SHARES OUTSTANDING................................................................... 754,869
-----------
NET ASSET VALUE PER SHARE.................................................................... $6.39
=====
MAXIMUM OFFERING PRICE PER SHARE............................................................. $6.69
=====
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
------------------
Korea Capital Fund
------------------
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividend income (Net of withholding taxes)............................................. $ 69,583
Interest income........................................................................ 25,911
-----------
TOTAL INCOME..................................................................... 95,494
-----------
EXPENSES:
Investment management fees............................................................. 23,140
Advisory and administration fees....................................................... 9,917
Sub-Administration fees................................................................ 12,254
12b-1 fees............................................................................. 8,264
Custodian and accounting fees.......................................................... 14,114
Amortization of deferred organizational costs.......................................... 34,595
Audit fees............................................................................. 5,000
Transfer agent fees.................................................................... 3,076
Other operating expenses............................................................... 9
-----------
Gross expenses................................................................... 110,369
Expense reimbursement............................................................ (31,028)
-----------
Total expenses................................................................... 79,341
-----------
NET INVESTMENT EXPENSE....................................................................... 16,153
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS
Net realized loss on investments and foreign currency transactions..................... (1,200,044)
Net change in unrealized loss on depreciation on investments and foreign
currency transactions................................................................ (201,004)
-----------
NET LOSS ON INVESTMENTS...................................................................... (1,401,048)
-----------
NET DECREASE IN NET ASSETS FROM OPERATIONS................................................... $(1,384,895)
===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
------------------
Korea Capital Fund
------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the Year For the Period
Ended Ended
August 31, 1996 February 28, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment expense.................................................. $ (108,134) $ 16,153
Realized loss on securities and foreign currency transactions........... (825,081) (1,200,044)
Net change in unrealized depreciation................................... (662,075) (201,004)
----------- -----------
Net decrease in net assets from operations.............................. (1,595,290) (1,384,895)
Distributions:
Capital gains........................................................... - -
Return of Capital....................................................... - -
----------- -----------
Total distributions............................................... - -
Capital Share Activity
Issued and Reinvested................................................... - -
Redeemed................................................................ (2,171,929) (1,881,166)
----------- -----------
Net increase in net assets from capital share activity.................. (2,171,929) (1,881,166)
----------- -----------
Total decrease in net assets...................................... (3,767,219) (3,266,061)
Net assets beginning of year.................................................. 11,856,897 8,089,678
----------- -----------
Net assets end of year........................................................ $ 8,089,678 $ 4,823,617
=========== ===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
------------------
Korea Capital Fund
------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
For the year For the year For the year For the year For the period
ended ended ended ended ended
August 31, 1993* August 31, 1994 August 31, 1995 August 31, 1996 Feb. 28, 1997+
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning net asset value............ $10.00 $10.89 $11.18 $ 9.26 $ 7.69
Net investment expense............... (0.06)(1) (0.17)(1) (0.07)(1) (0.15)(1) (0.34)
Net realized and unrealized gain (loss) on
securities and foreign currency.... 0.98(2) 1.00(2) (1.20)(2) (1.42)(2) (0.96)
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 $ 6.39
====== ====== ====== ====== ======
Total return(5)...................... 9.71% 7.52% (12.24)% (16.68)% (16.91)%
Net assets at end of year............ $10,046,655 $13,981,937 $11,856,897 $8,089,678 $4,823,617
Ratio of expenses to average net assets 2.40%(4) 2.40%(4) 2.40%(4) 2.40%(4) 2.40%(4)
Ratio of net investment income (expense)
to average net assets.............. (1.60%)(4) (1.44)%(4) (0.40)%(4) (1.06)%(4) 0.49%(4)
Portfolio turnover rate.............. 139.00% 63.00% 60.59% 43.23% 108.41%
Average commission rate paid......... - - - $ .1408 $.1088
</TABLE>
* Since October 1, 1992 (commencement of operation).
+ Unaudited.
(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, 1996and February 28, 1997 were 5.59%, 3.01%, 2.63%, 3.55%, and
3.36% respectively. The ratio of net investment income (expense) to average net
assets before expense reimbursements for the periods ended August 31, 1993,
1994, 1995, 1996 and February 28, 1997 were (4.79%), (2.04), (0.65%), (2.20%)
and (0.45%), respectively.
(5) The Fund's sales charge is not included in the computation of total returns.
See accompanying notes to financial statements.
8
<PAGE>
------------------
Korea Capital Fund
------------------
NOTES TO FINANCIAL STATEMENTS - February 28, 1997 (Unaudited)
- --------------------------------------------------------------------------------
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 February 28, 1997. 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.
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
9
<PAGE>
------------------
Korea Capital Fund
------------------
NOTES TO FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
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 February 28, 1997 were as follows:
Shares Amount
------------ ------------
Beginning balance 1,052,078 $ 11,364,056
Shares sold/reinvested 0 0
Shares redeemed (297,208) (1,881,166)
------------ ------------
Ending balance 754,870 $ 9,969,203
============ ============
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 period ended February 28, 1997, the Fund incurred
$9,917 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 period ending February 28, 1997, the Fund incurred $23,140 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 $8,264 for period ended
February 28, 1997.
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 period ended February 28, 1997, this amount was $31,028.
As of February 28, 1997, the Fund had the following receivables and
payables with Daehan and the Manager:
Daehan Manager
-------- --------
Receivable for expense reimbursement $ 46,583 $108,693
Payable for advisory and administration/management fees $ 17,288 $222,264
10
<PAGE>
------------------
Korea Capital Fund
------------------
NOTES TO FINANCIAL STATEMENTS, continued
- --------------------------------------------------------------------------------
Related Party Transactions. As of February 28, 1997, the Fund shares owned
by the Fund's sub-custodian, Bank of Seoul, totaled approximately 630,344 shares
of 754,869 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 February
28, 1997.
Note 4. Investment Transactions.
Purchases and sales of securities, other than short-term investments, for
the period ended February 28, 1997 were $5,486,791 and $6,446,272, respectively.
The gross unrealized appreciation and depreciation for book purposes of
portfolio securities at February 28, 1997 was:
Unrealized appreciation $ 14,304
Unrealized depreciation (1,293,500)
----------
Net unrealized depreciation $(1,279,196)
===========
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 February 28, 1997, the Fund held approximately 80% 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.
11
<PAGE>
<TABLE>
<S> <C>
Investment Adviser and Administrator
Daehan Securities, Inc.
3360 West Olympic Blvd.
Los Angeles, CA 90019
Investment Manager
Korea Investment Management Europe Ltd. ------------------
3rd Floor, Fengate House Korea Capital Fund
14 Philpot Lane ------------------
London, EC3M 8AJ, U.K.
Principal Underwriter and Distributor
Daehan Securities, Inc.
3360 West Olympic Blvd.
Los Angeles, CA 90019
Transfer Agent
The Provident Bank
P.O. Box 14967
Cincinnati, OH 45250-0967
Custodian
State Street Bank & Trust Company
225 Franklin Street
Boston, MA 02110
Sub-Custodian
Bank of Seoul
101-1 Namdaemun-no, No 2 Ga.
Chung-Gu, Seoul, Korea
Auditors
Ernst & Young LLP
515 South Flower Street
Los Angeles, CA 90071
Legal Counsel
Paul, Hastings, Janofsky & Walker
555 South Flower Street, 23rd Floor Semi-Annual Report
Los Angeles, CA 90071 to Shareholders
Sub-Administrator February 28, 1997
Investment Company Administration Corporation
2025 East Financial Way, Suite 101
Glendora, CA 91741
</TABLE>
12
