LETTER TO SHAREHOLDERS
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Dear Shareholder:
We are pleased to present you with this annual report of Korea Capital Fund for
the year ended August 31, 1997.
During this fiscal year, the Korea Composite Stock Price Index (KOSPI) dropped
11% from 781.49 to 695.37 points. Bankruptcies of prominent companies have
increased the level of bad or questionable loans. The decrease in exports
compared to imports and high inventory levels precipitated uncertainty about the
Korean economy. As a result of these domestic factors, and the currency crisis
in South-East Asia, many foreign investors have pulled out from the Korean stock
market and domestic institutional investors have followed the trend. Experts
also attribute the bearish market to the decrease in customer deposits and the
increase in margin accounts.
We predict that the Korean stock market will gradually rise. We think that the
unstable financial market will continue to squeeze debt-laden firms, and demand
is still too weak to expect an immediate upturn. However, there are more
positives than negatives, such as the expected double taxation treaties with
Japan and Germany, and improving economic indicators such as the decrease in the
trade deficit, price stability and forecast steady growth. We also expect the
market to show a significant rebound after the presidential election and the
signing of additional trade agreements.
With our forecast for a stock market recovery, companies earnings should improve
accordingly. We will limit purchasing until after the presidential election. We
will start buying blue chip stocks that have dropped immensely during this
period. The Internal Revenue Service's rule limiting the Fund's ability to
realize short term gains, which is unsuitable for stock management in Korea, was
a major constraint to this year's performance. With the elimination of this rule
in the coming fiscal year, we expect an improvement in performance.
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
Value of $10,000 vs. Korea Composite Stock Price (KOSPI) Index
KCF KOSPI
DATE Non-Loaded INDEX
---- ---------- -----
02-Oct-92 10,000 10,000
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28-Feb-93 11,370 12,261
31-May-93 12,430 14,347
31-Aug-93 10,890 12,679
30-Nov-93 12,370 15,478
28-Feb-94 12,339 17,523
31-May-94 12,297 17,916
31-Aug-94 11,711 18,007
30-Nov-94 13,188 20,489
28-Feb-95 10,442 16,890
31-May-95 10,430 16,829
30-Jun-95 10,541 17,049
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31-Jul-95 10,663 17,803
31-Aug-95 10,264 17,431
30-Nov-95 10,552 17,741
29-Feb-96 9,620 16,264
31-May-96 9,831 17,222
30-Aug-96 8,533 14,929
29-Nov-96 7,545 13,854
28-Feb-97 7,090 12,902
31-May-97 7,301 14,432
31-Aug-97 7,224 13,261
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<PAGE>
KOREA CAPITAL FUND
SCHEDULE OF INVESTMENTS
AUGUST 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS 80.01% Market Value
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<S> <C> <C>
Apparel Manufacturers 1.41%
556 Nasan Company Limited $ 10,165
2,500 Youngone Corp. 51,245
----------------------
61,410
----------------------
Automobiles & Parts 2.26%
2,650 Mando Machinery 98,363
----------------------
Banks 4.58%
20,000 Commercial Bank of Korea 89,527
6,795 Kookmin Bank 85,076
1,766 Korea Long Term Credit Bank 19,528
490 Shinhan Bank 4,756
----------------------
198,887
----------------------
Building Materials 0.81%
3,000 Byucksan Corporation 35,235
----------------------
Cement 2.24%
1,150 Tae Won Mulsan 96,839
----------------------
Chemicals & Drugs 9.63%
10,000 Hansol Chemical 210,520
2,000 Kolon Chemical 84,208
5,000 Pacific Chemical Co. 123,542
----------------------
418,270
----------------------
Consumer Products 4.62%
2,000 Cho Kwang Paint Ind. 93,294
1,000 Hankuk Glass Ind. 28,808
1,400 Shinwon Industrial 35,212
1,000 Youlchon Chemical 43,212
----------------------
200,526
----------------------
Electronics 4.21%
6,000 Iljin Electric & Machinery 182,820
----------------------
Engineering & Construction 1.16%
5,000 Pum Yang Construction Co. * 50,525
----------------------
Fire & Casualty Insurance 5.54%
4,100 LG Insurance Co. LTD 240,768
----------------------
Food & Beverages 9.26%
3,000 Cheil Jedang Corp. 123,985
4,630 OB Brewery * 160,570
3,000 Taihan Sugar Ind. 118,002
----------------------
402,557
Machinery & Equipment 12.74%
2,500 Jungil Industrial 193,900
4,000 Kuk Dong 162,654
4,000 Rocket Electric co. 105,038
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
<TABLE>
<S> <C> <C>
2,000 Tongyang Elevator 91,964
----------------------
553,556
----------------------
Medical 5.16%
3,580 Whan In Pharmaceutical 224,115
----------------------
Oil Refining & Marketing 4.38%
3,000 Daehan City Gas Co. 130,301
3,000 Ssangyong Oil Refining 59,832
----------------------
190,133
----------------------
Paper & Related Products 2.13%
3,000 Serim Paper Mfg. 92,740
----------------------
Textiles 4.79%
4,700 Taechang Enterprise Co. 208,304
----------------------
Transportation 2.08%
6,000 Korea Airlines * 90,413
----------------------
Utilities 3.01%
5,000 Korea Electric Power Corp. 130,744
----------------------
TOTAL COMMON STOCK 3,476,205
----------------------
Shares PREFERRED STOCKS 0.85% Market Value
- --------------------------------------------------------------------------------------------------------
Oil Refining & Marketing
9,040 Korea Kumho Petro 37,060
TOTAL PREFERRED STOCK 37,060
----------------------
Principle REPURCHASE AGREEMENT 20.05% Market Value
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$871,000 State Street Bank & Trust Co., 2.00%, dated
8/29/97, to be repurchased at $871,214 on
9/02/97; collateralized by U.S. Treasury Notes
due 1/31/99 and 1/15/20, Value $885,000)
(Cost $871,000) $ 871,000
----------------------
TOTAL INVESTMENTS (Cost $4,813,606) 100.91% 4,384,265
----------------------
LIABILITIES IN EXCESS OF OTHER ASSETS -0.91% (39,323)
----------------------
NET ASSETS 100.00% $ 4,344,942
======================
</TABLE>
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*Non-income producing security.
See Accompanying Notes to Financial Statements
<PAGE>
KOREA CAPITAL FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities (Cost of $4,813,606) $4,384,265
Cash 428
Interest Receivable 145
Receivable for securities sold 271,277
Due From Advisor 22,788
Prepaid Expense 6,120
-----------------------
Total Assets 4,685,023
-----------------------
LIABILITIES
Foreign currency overdraft (Cost of $117,583) 116,822
Due to Investment Manager 99,784
Accrued expenses 32,191
Payable for Securities Purchased 91,284
-----------------------
Total Liabilities 340,081
-----------------------
NET ASSETS $4,344,942
=======================
COMPOSITION OF NET ASSETS
Paid in capital $8,896,797
Accumulated net investment expense ($448,911)
Accumulated net realized loss (3,672,221)
Net unrealized depreciation on investments and
foreign currency (430,723)
-----------------------
Net Assets $4,344,942
=======================
CAPITAL SHARES OUTSTANDING 667,918
-----------------------
NET ASSET VALUE PER SHARE $6.51
=======================
MAXIMUM OFFERING PRICE PER SHARE $6.82
=======================
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
KOREA CAPITAL FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividend income (Net of withholding taxes) $65,955
Interest income 34,673
-----------------------
TOTAL INCOME 100,628
-----------------------
EXPENSES:
Investment management fees 39,555
Advisory and administration fees 16,952
Sub-Administration fees 10,093
12b-1 fees 14,127
Custodian fees 19,136
Fund Accounting fees 12,373
Amortization of deferred organizational costs 56,920
Audit fees 9,945
Transfer agent fees 6,286
Insurance expenses 1,680
Other operating expenses 235
-----------------------
Gross expenses 187,302
Expense reimbursement (51,575)
-----------------------
Total expenses 135,727
NET INVESTMENT EXPENSE (35,099)
-----------------------
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS
Net realized loss on investments and foreign
currency transactions (1,883,607)
Net change in unrealized loss on depreciation on
investments and foreign currency transactions 641,229
-----------------------
NET LOSS ON INVESTMENTS (1,242,378)
-----------------------
NET DECREASE IN NET ASSETS FROM OPERATIONS ($1,277,477)
=======================
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE>
KOREA CAPITAL FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
For the For the For the For the For the
year ended year ended year ended year ended year ended
Description 08/31/97 08/31/96 08/31/95 08/31/94 08/31/93*
- ------------------------------------------ -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Beginning net asset value $ 7.69 $ 9.26 $ 11.18 $ 10.89 $ 10.00
Net investment expense (0.28) (0.15) (0.07) (0.17) (0.09)
Net realized and unrealized gain (loss) on
securities and foreign currency (0.90) (1.42) (1.20) 1.00 0.98
Distributions from capital gains -- -- (0.27) (0.54) --
Return of capital -- -- (0.38) -- --
---------- ----------- --------- --------- -----------
Ending net asset value $ 6.51 $ 7.69 $ 9.26 $ 11.18 $ 10.89
---------- ----------- --------- --------- -----------
Total return(1) -15.34% -16.68% -12.24% 7.52% 9.71%
Ratios/supplemental data:
Net assets at end of year (millions) $ 4.3 $ 8.1 $ 11.9 $ 14.0 $ 10.0
Ratio of expenses to average net assets:
Before expense reimbursement 3.32% 3.55% 2.63% 3.01% 5259%
After expense reimbursement 2.40% 2.40% 2.40% 2.40% 2240%
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement -1.53% -2.20% -0.65% -2.04% -4279%
After expense reimbursement -0.62% -1.06% -0.40% -1.44% -1260%
Portfolio turnover rate 257.43% 43.23% 60.59% 63.00% 139.00%
Average commission rate paid(3) $ 0.1186 $ 0.1408 -- -- --
- ----------------------------
</TABLE>
* Since October 1, 1992 (commencement of operation).
(1) The Fund's sales charge is not included in the computation of total
returns.
(2) Annualized.
(3) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commissio rate per share for security
trades on which commissions are charged. This amount may vary from period
to period and fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate structures may
differ.
See Accompanying Notes to Financial Statements
<PAGE>
KOREA CAPITAL FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1997
- --------------------------------------------------------------------------------
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. Assets or
liabilities initially quoted in Korean Won will be valued in U.S.
dollars based on the prevailing exchange rate on the valuation date.
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. 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>
KOREA CAPITAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
AUGUST 31, 1997
- --------------------------------------------------------------------------------
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. As of August 31, 1997, all of the deferred organization
costs were fully amortized.
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 for the period ended August 31, 1997 were as follows:
Shares Amount
------ ------
Shares sold/reinvested 0 $ 0
Shares redeemed (384,160) (2,467,259)
-------------- -------------
Net decrease (384,160) $ (2,467,259)
============== =============
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
August 31, 1997, the Fund incurred $16,952 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 ended August 31, 1997, the
Fund incurred $39,555 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 $14,127 for the period ended August 31, 1997.
Expense Limitations: Daehan and the Manager have undertaken to limit
the Fund's
11
<PAGE>
KOREA CAPITAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
AUGUST 31, 1997
- --------------------------------------------------------------------------------
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 August 31,
1997, this amount was $42,259.
As of August 31, 1997, the Fund had the following receivables and
payables with Daehan and the Manager:
<TABLE>
<CAPTION>
Daehan Manager
------ -------
<S> <C> <C>
Receivable for expense reimbursement $ 27,610 $ 138,896
Payable for advisory and administration/management fees $ (4,822) $ (238,680)
---------------------------
Net receivable/(payable) $ (22,788) $ (99,784)
===========================
</TABLE>
Related Party Transactions. As of August 31, 1997, the Fund shares owned by the
Fund's sub-custodian, Bank of Seoul, totaled approximately 630,344 shares of
667,918 outstanding.
Note 4. Investment Transactions. Purchases and sales of securities, other than
short-term investments, for the period ended August 31, 1997 were $11,728,956
and $13,386,180, respectively.
The gross unrealized appreciation and depreciation for book purposes of
portfolio securities at August 31, 1997 was:
Unrealized appreciation $ 23,400
Unrealized depreciation (452,741)
-----------
Net unrealized depreciation $ (429,341)
===========
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, 1997, the Fund held
approximately 80% of its 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.
<PAGE>
KOREA CAPITAL FUND
NOTES TO FINANCIAL STATEMENTS - (Continued)
AUGUST 31, 1997
- --------------------------------------------------------------------------------
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.
<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, 1997, 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, 1996 and the
financial highlights of the Fund for the years ended August 31, 1996, 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 15, 1996 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, 1997, 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 1997 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, 1997, 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.
George S. Bay & Co.
Los Angeles, California
October 30, 1997
