December 17, 1999
To Our Shareholders:
We present the Annual Report of the Korea Equity Fund, Inc. (the "Fund")
for the fiscal year ended October 31, 1999.
The Net Asset Value per share ("NAV") of the Fund on October 31, 1999 was
$5.63, representing an increase of 102.5% for the year. The closing New York
Stock Exchange ("NYSE") market price of the Fund on October 31, 1999 was
$4.375, representing a 22.3% discount to the NAV. The Fund's net assets
aggregated $47,345,418 on October 31, 1999.
The Korea Composite Stock Price Index ("KOSPI") increased from 403.4 to
833.5 or 106.6% in local terms, for the year. Including the Korean won ("Won")
appreciation of 10.0% during the year, this represents a total increase of
127.3% in United States dollar terms. The Fund underperformed the KOSPI, in
U.S. dollar terms, by 24.8 percentage points during the year.
For the quarter ended October 31, 1999, the KOSPI, in U.S. dollar terms,
and the NAV of the Fund decreased by 13.8% and 10.4%, respectively. The Fund
outperformed the KOSPI, in U.S. dollar terms, by 3.4 percentage points during
the quarter.
South Korean Economy
Following the sharp contraction in 1998, the Gross Domestic Product
("GDP") has been recovering since the first quarter of this year. In the third
quarter of 1999, GDP growth accelerated to 12.3% year over year ("y-o-y"),
the largest growth rate for a single quarter since 1988.
Supported by a growing trade surplus and growth in foreign reserves, the
Won has stabilized at approximately 1,200 Won to the U.S. dollar, from its
trough of over 1,800 Won in early 1998. The stabilization of the Won has
allowed the Korean government to implement a loose monetary policy in order to
reflate the economy. The benchmark three-year corporate bond yield declined
from over 25% to 9% and the overnight call rate is currently below 5%.
Inflation has not yet become a concern for the South Korean economy, given the
excess capacity and the stronger currency.
Strong export growth in 1999, due to the recovery of intra-Asian trade,
has helped trade and current accounts stay positive this year, offsetting a
sharp import recovery. Consequently, usable foreign exchange reserves increased
to $66.2 billion by the end of October 1999 from $8.9 billion at the end of
1997. Due to this improvement, Standard and Poors has upgraded South Korea's
long-term rating to BBB+, from the B+ rating assigned in December 1997.
The strong export recovery has stimulated production activity, while at
the same time it has also eliminated excess inventory. Capacity utilization,
after reaching a low in October 1998 of 69%, has recovered to approximately
80%, close to the historical average. Along with a recovery in production,
the unemployment rate has declined to 4.8% in September 1999, from a peak of
8.5% recorded in January 1999. Wages have started to increase y-o-y since
February 1999 reflecting this tighter labor market.
Supported by these improvements in production and employment, the main
driver of growth in Year 2000 is likely to switch from exports to domestic
demand, including private investment and consumption. GDP growth is expected
to remain robust at approximately 6 to 7% for the coming year. Inflation
pressure is mounting gradually because of rising import prices. However, this
is manageable and can be absorbed considering the recent improvement in
production capacity, a move to lengthen working hours and the still high
unemployment rate by South Korean standards. The Bank of Korea is likely to
maintain its easy monetary policy for the moment, at least until the National
Assembly election next April.
Reforms
South Korea has made meaningful progress in reforming the Banking sector
over the past year. The government agreed to sell Korea First Bank to
Newbridge Capital, Ltd. (USA) after segregating its bad debts. At the same
time, the authorities directed several domestic banks to merge into a single
institution, known as Hanvit Bank, with the aim of promoting efficiency and
profitability. Although further consolidation is likely, especially in
relation to the Daewoo Group problem, the prospect of a financial crisis in
the Banking sector has been reduced. On the corporate side, despite the
government's eagerness for reform of corporate governance and financial
management, the large conglomerates ("Chaebols") have been reluctant to
reform. This would require painful actions such as employee lay-offs, the
writing off of bad loans to affiliates, more management transparency, and the
reduction of debt-to-equity ratios. There was optimism that the government
would not allow the top five Chaebols to go bankrupt due to the size of their
assets and labor force. The idea that they were just "too big to fail",
however, proved false. When the KOSPI index broke the 1,000 level and the
economy started to recover vigorously, the government seized the opportunity
to terminate its support for the debt-ridden Chaebols, especially the Daewoo
Group, and allowed it to fail. This policy decision shocked the other Chaebols
and forced them to move toward reforms. The largest and most indebted, Hyundai
Group, then announced a major restructuring plan including aggressive asset
sales and employee lay-offs.
The Daewoo Group Problem
In July 1999, the Daewoo Group received approval from creditors to freeze
its debt payments and to receive additional loans on the condition that the
Daewoo Group would implement drastic restructuring. This was viewed as an
actual default, and the dissolution of the Daewoo Group became an urgent
priority.
The Daewoo Group had expanded its business aggressively to become the
second-largest conglomerate in South Korea in terms of assets. Meanwhile, its
total debts, including those guaranteed, swelled to over 68 trillion Won, which
was equivalent to 17% of South Korea's GDP. During the currency crisis, there
were rumors that its financial position was deteriorating, but the South Korean
government was reluctant to let the Daewoo Group sink due to the size of its
business and its potential economic impact. Encouraged by the steady economic
recovery and the declining interest rates, however, the government decided to
dissolve the Daewoo Group. Resolving the problem of non-performing bank loans
will be handled in the normal manner, i.e., through write-offs, debt-to-equity
swaps, and rescheduling. Resolving the problem of bond issuance will be more
difficult, since corporate bonds are widely held by retail investors through
Beneficiary Certificates ("BC"), a type of mutual fund managed by International
Trust Companies ("ITC").
To avoid any disorder, such as a rush to redeem BCs or a bank run, the
government issued a rescue package to inject sufficient liquidity into the
financial system. The most notable measures are the Bond Stabilization Fund and
the government's guarantees for Daewoo Group's outstanding issues. This swift
action to control the financial markets has limited the disruptive impact, even
after November 12 when the government raised its guarantees for the Daewoo
Group's issues from 50% to 80%. Simultaneously, the government and major
creditors compelled the Daewoo Group to accelerate its restructuring program.
Daewoo Securities Co. and Daewoo Heavy Industries are being separated from the
Daewoo Group in preparation for divestiture. A recent workout plan proposes a
loss of approximately 50% for creditors and substantial capital reductions for
Daewoo Group affiliates. The break-up of the Daewoo Group is expected to take
place faster and more smoothly than expected.
Stock Market
The swift increase in foreign reserves has restored confidence in the
South Korean economy, its currency, and the stock market. The current account
surplus, lower interest rates, and the appreciating Won, have all improved
liquidity in the stock market since the fourth quarter of 1998. Domestic
investors have been shifting to equity funds from bank deposits while foreign
investors have endorsed the progress in the Financial sector restructuring by
remaining net buyers for most of the period. The KOSPI surged from a recent
low of 292 (September 19, 1998) to 1028 (July 9, 1999) in ten months. Although
the rally was seen almost across the board, except for the Banking sector
which was struggling with non-performing loan problems, some blue chips like
Samsung Electronics Co., Ltd., Korea Electric Power Corp., Pohang Iron and
Steel Co., Ltd., and Korea Telecom Corp. have outperformed the index
significantly.
After a liquidity-driven rally lasting three consecutive quarters, the
stock market entered a consolidation phase in July, triggered by the Daewoo
Group problem. Just after it emerged, the massive redemption of BCs investing
in Daewoo Group issues forced the ITCs to dispose of their holdings in the
bond market. Interest rates consequently increased from 7.5% to 11% and
liquidity dried up quickly. The KOSPI lost approximately 150 points, declining
to 790, and has hovered around the 800 level throughout October on fears of
financial market turbulence amid panic-selling by the ITCs. Meanwhile,
electronic stocks, especially Samsung Electronics Co., Ltd., continued to gain
substantially, backed by a recovery in Dynamic Random Access Memory prices and
the stronger Japanese yen.
In November, amid reduced concern over the Daewoo Group problem, the
continuing economic recovery invited massive buying in the equity market. The
KOSPI regained momentum and recovered to the 1000 level.
The Portfolio
The Fund remains underweight in the Financial sector, although the degree
of under-exposure has been narrowing. This strategy has been generally
positive for the Fund's overall performance. On the other hand, the hefty
overweight position in the Steel and Electronics sectors, both of which are
beneficiaries of the strong export growth, contributed positively to the
Fund's performance. The underweight positions in telecommunications and the
certain exposure to defensive stocks were the main negative contributors
during the period. The Fund has since started to increase its weighting in
telecommunications stocks, while disposing of defensive small-capitalization
stocks.
As of October 31,1999, the Fund held 98.5% of its net assets in equities,
comprised of 27 Korean equities, 1 Korean GDR and 3 Korean ADRs. During the
last quarter, the Fund purchased one new issue: Shinhan Bank, a commercial
bank. Thirteen stocks were eliminated from the portfolio during the last
quarter: Daewoo Electronics Co., consumer and industrial electronic products;
Daewoo Heavy Industries, heavy industrial equipment; Daewoong Pharmaceutical
Co., Ltd., pharmaceuticals; Dong-won Industries Co., deep-sea fishing and
processing; Hyundai Marine and Fire Insurance Co., Ltd., automobile, marine
and fire insurance; Hyundai Merchant Marine, container ships and tankers;
Hyundai Pharmaceutical Co., pharmaceuticals; IIjin Corp., aluminum wires and
cables; Korea Export Packaging Industries, specialized corrugated board; Sae
Han Precision Co., Ltd., automobile audio deck mechanisms; Su Heung Capsule
Co., Ltd., pharmaceutical capsules; Korea Industrial Development Co.,
ready-mixed concrete; and Oriental Fire & Marine Insurance, non-life
insurance.
Investment Strategy
After reaching 1,000 again in November, underpinned by improved
confidence, the stock market appears nervous about future developments. The
Fund believes the recovery trend remains intact, but is aware of the
short-term risks associated with the restructuring and the increasing
inflation pressure. Over the longer term, the Fund expects the reform of the
banks and Chaebols will allow domestic interest rates to decrease to similar
levels as those of other developed countries. Meanwhile, stock market
valuations, which are currently held down at low levels by high interest
rates, may improve.
The expected investment strategy for the next quarter can be summarized
as follows:
Increase emphasis on electronics stocks; increase exposure to the
Telecommunications sector, and reduce exposure to the Transportation and Food
and Beverage sectors.
We appreciate your continuing support of your Fund.
Sincerely,
Nobuo Katayama
President
Nomura Asset Management Co., Ltd. ("NAM") provides investment
recommendations to Nomura Asset Management U.S.A. Inc. ("NAM-U.S.A."), the
Manager of the Fund. Mr Nobuo Katayama, President of the Fund and President of
NAM-U.S.A., is primarily responsible for the day-to-day management of the
portfolio of the Fund. Mr. Katayama has held such responsibilities for the
Fund and has served as President of NAM-U.S.A. since 1999.
Year 2000 Issues. Many computer systems were designed using only two
digits to designate years. These systems may not be able to distinguish the
Year 2000 from the Year 1900 (commonly known as the "Year 2000 Problem"). Like
other investment companies and financial and business organizations, the Fund
could be adversely affected if the computer systems used by Nomura Asset
Management U.S.A. Inc. "NAM-U.S.A." or other Fund service providers do not
properly address this problem prior to January 1, 2000. NAM-U.S.A. has hired
consultants to analyze these issues and to implement any system modifications
necessary to prepare for the year 2000. In addition, NAM-U.S.A. has sought
assurances from the Fund's other service providers that they are taking all
necessary steps to ensure that their computer systems will accurately reflect
the Year 2000, and NAM-U.S.A. will continue to monitor the situation. However,
no assurance can be given that the Fund's service providers have anticipated
every step necessary to avoid any adverse effect on the Fund attributable to
the Year 2000 Problem.
In addition the companies in which the Fund invests, the markets for
their securities and related securities trade processing could be adversely
affected by the Year 2000 Problem. If the value of a Fund investment is
adversely affected by a Year 2000 Problem, the Fund's investment return will
be reduced.
KOREA EQUITY FUND,INC.
FUND HIGHLIGHTS--OCTOBER 31,1999
KEY STATISTICS:
Net Assets ..................................................$47,345,418
Net Asset Value per Share ...................................$ 5.63
Closing NYSE Market Price ...................................$ 4.375
Percentage Change in Net Asset Value per Share* ............. 102.5%
Percentage Change in NYSE Market Price* ..................... 48.9%
MARKET INDEX:
Percentage change in market index*
KOREAN WON U.S.$
---------- -----
Korea Composite Stock Price Index* ................... 106.6% 127.3%
*From November 1, 1998 through October 31, 1999
ASSET ALLOCATION:
Korean Equity Securities ..........................................98.5%
Cash and Cash Equivalents ......................................... 2.1
------
Total Investments .................................................100.6%
Liabilities in Excess of Other Assets, Net ........................ (0.6)
------
Net Assets ........................................................100.6%
======
INDUSTRY DIVERSIFICATION:
<TABLE>
<CAPTION>
% of % of
Net Assets Net Assets
---------- ----------
<S> <C> <C> <C>
Consumer Electronics .......................18.7 Securities ...............................3.8
Iron and Steel .............................11.4 Energy .................. ................2.5
Electric and Electronics ...................11.3 Hotels and Restaurants....................1.9
Banking ....................................10.9 Non-Ferrous Metals .......................1.7
Telecommunications ......................... 9.8 Textiles and Apparel .....................1.6
Chemicals .................................. 9.3 Miscellaneous Manufacturing ..............1.5
Utilities .................................. 7.1 Wood and Paper ...........................0.8
Food and Beverages ......................... 5.5 Airlines .................................0.7
</TABLE>
TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE
Market % of
Value Net Assets
Security
Samsung Electronics Co., Ltd........................$8,032,182 17.0
Pohang Iron and Steel Co., Ltd...................... 5,413,105 11.4
Korea Telecom Corp.................................. 3,927,165 8.3
Korea Electric Power Corp........................... 3,382,710 7.1
Samsung Display Devices............................. 2,999,998 6.3
Dae Duck Electronics Co............................. 2,345,912 5.0
Shinhan Bank........................................ 2,255,190 4.8
L.G. Chemical Ltd................................... 2,212,711 4.7
Hana Bank........................................... 1,679,575 3.5
Dongwon Securities Co., Ltd......................... 1,500,625 3.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Korea Equity Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Korea Equity Fund,
Inc. (the "Fund") at October 31, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in
the period then ended and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 8, 1999
SCHEDULE OF INVESTMENTS*
OCTOBER 31,1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
KOREAN EQUITY SECURITIES
Airlines
<S> <C> <C> <C> <C>
Korean Airlines ...................................................25,000 $ 360,067 $ 327,220 0.7
International airline --------- --------- ---
Banking
Hana Bank ........................................................183,150 1,714,200 1,679,575 3.5
Commercial bank
Kookmin Bank .....................................................79,764 978,838 1,243,507 2.6
Commercial bank
Shinhan Bank .....................................................213,000 2,186,765 2,255,190 4.8
--------- --------- ----
Commercial bank
Total Banking .................................................... 4,879,803 5,178,272 10.9
--------- --------- ----
Chemicals
Korea Chemical Co.................................................15,000 1,692,119 1,000,417 2.1
Industrial paints
L.G. Chemical Ltd.................................................73,117 675,250 2,212,711 4.7
Petrochemicals
</TABLE>
See notes to financial statements
KOREA EQIUTY FUND, INC.
SCHEDULE OF INVESTMENTS*--(Continued)
OCTOBER 31,1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
<S> <C> <C> <C> <C>
SK Corporation .................................................. 62,651 $ 1,473,893 $ 1,201,311 2.5
Petrochemicals ----------- ----------- ---
Total Chemicals .................................................. 3,841,262 4,414,439 9.3
----------- ----------- ---
Consumer Electronics
Samsung Electronics Co., Ltd......................................35,828 3,409,538 5,973,822 12.6
Samsung Electronics Co., Ltd. GDR-1/2 Voting**....................24,216 1,638,456 2,058,360 4.4
Consumer electronics, computers, and telecommunications
Sindoh Ricoh Co., Ltd ............................................23,919 825,782 813,585 1.7
Office automation equipment ----------- ----------- ---
Total Consumer Electronics ....................................... 5,873,776 8,845,767 18.7
----------- ----------- ---
Electric and Electronics
Dae Duck Electronics Co..........................................206,906 1,089,362 2,345,912 5.0
Printed circuit boards
Samsung Display Devices...........................................57,119 3,325,334 2,999,998 6.3
Liquid display monitors and terminals ----------- ----------- ---
Total Electric and Electronics ................................... 4,414,696 5,345,910 11.3
----------- ----------- ---
Energy
Daesung Industries ...............................................45,199 2,229,039 1,160,591 2.5
Gas, anthracite coal and oil ----------- ----------- ---
Food and Beverages
Hite Brewery Co., Ltd.............................................38,330 1,211,748 1,342,109 2.8
Beer
Nong Shim Co., Ltd................................................25,000 925,977 1,277,616 2.7
Instant noodles and snack foods ----------- ----------- ---
Total Food and Beverages .......................................... 2,137,725 2,619,725 5.5
----------- ----------- ---
Hotels and Restaurants
Hotel Shilla Co..................................................124,904 1,256,728 887,188 1.9
Hotel management ----------- ----------- ---
Iron and Steel
Pohang Iron and Steel Co., Ltd....................................32,580 2,000,593 3,911,230 8.2
Pohang Iron and Steel Co., Ltd. ADR ..............................45,000 686,250 1,501,875 3.2
Hot and cold rolled steel products ----------- ----------- ---
Total Iron and Steel ............................................. 2,686,843 5,413,105 11.4
----------- ----------- ---
Miscellaneous Manufacturing
Medison Co., Ltd..................................................68,654 595,988 686,826 1.5
Diagnostic ultrasound scanners ----------- ----------- ---
</TABLE>
See notes to financial statements
SCHEDULE OF INVESTMENTS*--(Continued)
OCTOBER 31,1999
<TABLE>
<CAPTION>
% of
Market Net
Shares Cost value Assets
------ ---- ------ ------
<S> <C> <C> <C> <C>
Non-Ferrous Metals
Keumkang Co.......................................................10,000 $ 987,920 $ 541,892 1.1
Safety glass and building materials
Korea Zinc Co., Ltd...............................................11,000 213,830 268,695 0.6
---------- ---------- -----
Non-ferrous metal refiner
Total Non-Ferrous Metals ......................................... 1,201,750 810,587 1.7
---------- ---------- -----
Securities
Daewoo Securities Co..............................................23,723 599,058 303,583 0.6
Brokerage services
Dongwon Securities Co., Ltd.......................................50,000 985,455 1,500,625 3.2
---------- ---------- -----
Brokerage services
Total Securities ................................................. 1,584,513 1,804,208 3.8
---------- ---------- -----
Telecommunications
Korea Telecom Corp................................................37,100 2,438,652 2,496,015 5.3
Korea Telecom Corp. ADR ..........................................40,600 1,463,748 1,431,150 3.0
Telecommunications
SK Telecom Co., Ltd............................................... 440 467,394 508,045 1.1
SK Telecom Co., Ltd. ADR .........................................14,670 94,568 191,627 0.4
---------- ---------- -----
Mobile telecommunications and paging services
Total Telecommunications ......................................... 4,464,362 4,626,837 9.8
---------- ---------- -----
Textiles and Apparel
Handsome Co., Ltd.................................................171,640 590,850 736,929 1.6
---------- ---------- -----
Women's garments and accessories
Utilities
Korea Electric Power Corp.........................................115,600 3,246,222 3,382,710 7.1
---------- --------- -----
Power supplier
Wood and Paper
Hansol Co., Ltd...................................................38,396 1,232,998 371,316 0.8
Hansol Co., Ltd. (rights) ........................................10,276 75,009 26,557 0.0
---------- ---------- -----
Newsprint
Total Wood and Paper ............................................. 1,308,007 397,873 0.8
---------- ---------- -----
TOTAL KOREAN EQUITY SECURITIES .......................... 40,671,631 46,638,187 98.5
---------- ---------- -----
</TABLE>
See notes to financial statements
KOREA EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS*--(Continued)
OCTOBER 31,1999
<TABLE>
<CAPTION>
% of
Principal Market Net
Amount Cost Value Assets
--------- ---- ------ ------
INVESTMENTS IN SHORT-TERM SECURITIES
Time Deposit
<S> <C> <C> <C> <C>
Republic Bank of London-interest bearing call account
5.1875% due 11/1/99 ......................................... $1,000,000 $ 1,000,000 $ 1,000,000 2.1
----------- ----------- -----
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES ................... 1,000,000 1,000,000 2.1
----------- ----------- -----
TOTAL INVESTMENTS ............................................ 41,671,631 47,638,187 100.6
LIABILITIES IN EXCESS OF OTHER ASSETS, NET ................... (292,425) (292,769) (0.6)
----------- ----------- -----
NET ASSETS ................................................... $41,379,206 $47,345,418 100.0
=========== =========== =====
</TABLE>
* The description following each investment is unaudited and not covered by the
Report of Independent Accountants.
** Securities may only be sold to institutional buyers. At October 31, 1999 the
value of this security amounted to $2,058,360 or 4.4% of Net Assets.
ADR-American Depository Receipt
GDR-Global Depository Receipt
Portfolio securities and foreign currency holdings were translated
at the following exchange rate as of October 31, 1999,
Korean Won - KRW 1,199.50 = $1.00
See notes to financial statements
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31,1999
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities, at market value (cost-$40,671,631) ......................................$ 46,638,187
Investments in short-term securities, at market value (cost-$1,000,000) ............................ 1,000,000
Cash ............................................................................................... 67,577
Receivable for dividends and interest, net of withholding taxes..................................... 7,982
------------
Total Assets ................................................................................... 47,713,746
------------
LIABILITIES:
Payable for investments purchased .................................................................. 69,130
Accrued management fee ............................................................................. 44,043
Other accrued expenses ............................................................................. 255,155
------------
Total Liabilities .............................................................................. 368,328
------------
NET ASSETS:
Capital stock (par value of 8,409,000 shares of capital stock outstanding, authorized
100,000,000, par value $0.10 each) ............................................................ 840,900
Paid-in capital ................................................................................... 89,672,984
Accumulated net realized loss on investments and foreign currency transactions .................... (49,134,679)
Unrealized net appreciation on investments and foreign exchange ................................... 5,966,213
------------
Net Assets .................................................................................... $ 47,345,418
============
Net asset value per share ......................................................................... $ 5.63
============
</TABLE>
See notes to financial statements
KOREA EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
INCOME:
<S> <C> <C>
Dividend income (less $95,288 withholding taxes) ..............................$480,449
Interest income ............................................................... 93,581
--------
Total Income .............................................................. $ 574,030
---------
EXPENSES:
Management fee ................................................................447,245
Custodian fees ................................................................150,959
Legal fees ....................................................................106,426
Auditing and tax reporting fees ............................................... 49,889
Shareholder reports ........................................................... 36,468
Transfer agency fees .......................................................... 29,666
Directors' fees and expenses .................................................. 26,467
Registration fees ............................................................. 16,889
Annual meeting expenses ....................................................... 13,439
Insurance expenses ............................................................ 2,516
Miscellaneous ................................................................. 2,529
--------
Total Expenses ...................................................... 882,493
---------
NET INVESTMENT LOSS ........................................................... (308,463)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Realized loss on investments and foreign currency transactions:
Net realized loss on investments .............................................. (2,148,882)
Net realized loss on foreign exchange ........................................ (4,215,827)
-----------
Net realized loss on investments and foreign exchange ......................... (6,364,709)
-----------
Change in net unrealized appreciation on investments .......................... 23,816,481
Change in net unrealized appreciation on translation of foreign currency and
other assets and liabilities denominated in foreign currency ............... 6,858,982
-----------
Net realized and unrealized gain on investments and foreign exchange .......... 24,310,754
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... $24,002,291
===========
</TABLE>
See notes to financial statements
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended
October 31,
1999 1998
---- ----
FROM INVESTMENT ACTIVITIES:
<S> <C> <C>
Net investment loss ....................................................... $ (308,463) $ (271,595)
Net realized loss on investments .......................................... (2,148,882) (10,332,912)
Net realized loss on foreign exchange ..................................... (4,215,827) (9,901,486)
Change in net unrealized appreciation on investments ...................... 23,816,481 17,219,176
Change in net unrealized appreciation (depreciation) on transaction of
foreign currency and other assets and liabilities denominated in
foreign currency ....................................................... 6,858,982 (3,242,821)
------------ ------------
Increase (decrease) in net assets derived from investment activities 24,002,291 (6,529,638)
------------ ------------
NET ASSETS:
Beginning of year ......................................................... 23,343,127 29,872,765
------------ ------------
End of year ...............................................................-$47,345,418 $ 23,343,127
============ ============
</TABLE>
See notes to financial statements
KOREA EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Korea Equity Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. The Fund was incorporated in Maryland on September 7, 1993 and
investment operations commenced on December 3, 1993. The Fund's investment
objective is to seek long-term capital appreciation through investments
primarily in equity securities of Korean equities. The following is a summary
of significant accounting policies followed by the Fund.
(a) Valuation of Securities--Investments traded on stock exchanges are
valued at the last sale price on the principal market 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. Securities
traded in the over-the-counter market (as opposed to the OTC market for
foreign investors in Korea) are valued at the last reported sales price as of
the close of business on the day the securities are being valued or, if none
is available, at the mean of the bid and offer price at the close of the day
or, if none is available, at the last reported sales price available to the
Fund. Securities for which market quotations are not readily available and
restricted securities are valued in good faith at fair value using methods
determined by the Board of Directors. In determining fair value,
consideration is given to cost, operating and other financial data.
Short-term debt securities which mature in 60 days or less are valued at
amortized cost if their original maturity at the date of purchase was 60 days
or less, or by amortizing their value on the 61st day prior to maturity if
their term to maturity at the date of purchase exceeded 60 days. Securities
and other assets, including futures contracts and related options, are stated
at market value or otherwise at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund.
(b) Foreign Currency Transactions--Transactions denominated in Korean won
("Won") are recorded in the Fund's records at the prevailing rate at the time
of the transaction. Asset and liability accounts that are denominated in Won
are adjusted to reflect the current exchange rate at the end of the period.
Transaction gains or losse resulting from changes in the exchange rate duing
the reporting period or upon settlement of foreign currency transactions are
included in the results of operations for the current period.
The net assets of the Fund are presented at the exchange rate and market
values at the close of the period. The Fund isolates that portion of the
results of operations arising as a result of changes in the foreign exchange
rates on investments from the fluctuations arising from changes in the market
prices of securities held at October 31, 1999. Net realized foreign exchange
gains or losses include gains or losses arising from sales of portfolio
securities, sales and maturities of short-term securities, currency gains or
losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books and the United States
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains or losses includes gains or losses arising from changes
in the value of assets and liabilities including investments in securities at
October 31, 1999, resulting from changes in the exchange rate.
(c) Security Transactions, Investment Income, Distributions to
Shareholders--Security transactions are accounted for on the trade date.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. Realized gains and losses on the sale of
investments are calculated on the identified cost basis.
Distributions from net investment income and net realized capital gains
are determined in accordance with Federal income tax regulations, which may
differ from generally accepted accounting principles. To the extent these
"book/tax" differences are permanent in nature (i.e., that they result from
other than timing of recognition--"temporary"), such accounts are reclassified
within the capital accounts based on their Federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net realized capital gains for financial reporting
purposes, but not for tax purposes, are reported as distributions in excess of
net realized capital gains.
(d) Capital Account Reclassification--For the year ended October 31,
1999, the Fund's paid-in-capital was decreased by $354,557 with decrease in
accumulated net investment loss of $308,463 and decrease in accumulated net
realized loss on investments and foreign currency transactions of $46,094. The
adjustment was primarily a result of the reclassification of net investment
and foreign exchange losses.
(e) Income Taxes--A provision for United States income taxes has not been
made since it is the intention of the Fund to qualify as a regulated
investment company under the Internal Revenue Code and to distribute within
the allowable time limit all taxable income to its shareholders.
Under Korean tax laws, a withholding tax is imposed on dividends and
interest income at the rate of 16.5% and 13.2%, respectively, and such
withholding taxes are reflected as a reduction of the related revenue. There
is no withholding tax on realized gains.
(f) Subscription for New Shares--As part of their annual corporate action
matters, certain Korean companies offer rights to their shareholders to
subscribe to new shares which are eligible for a portion of the dividends paid
on existing shares in the year of subscription. The Fund normally subscribes
to new share offerings by Korean companies.
(g) Use of Estimates in Financial Statement Preparation--The preparation
of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from these estimates.
(h) Concentration of Risk--A significant portion of the Fund's net assets
consists of South Korean securities which involve certain considerations and
risks not typically associated with investments in the United States. In
addition to the smaller size, less liquidity and greater volatility, the
South Korean securities market is less developed than the U.S. securities
market and there is often substantially less publicly available information
about South Korean issuers than there is about U.S. issuers. Future economic
and political developments in South Korea could adversely affect the
liquidity or value, or both, of securities in which the Fund is invested.
Further, the Fund may be exposed to currency devaluation and other exchange
rate fluctuations.
2. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH AFFILIATED PERSONS
Nomura Asset Management U.S.A. Inc. (the "Manager") acts as the Manager
of the Fund pursuant to a management agreement. Under the agreement, the
Manager provides all office space, facilities and personnel necessary to
perform its duties. Pursuant to such management agreement, the Manager has
retained its parent company, Nomura Asset Management Co., Ltd. ("NAM"), as
investment adviser for the Fund.
As compensation for its services to the Fund, the Manager receives a
monthly fee computed daily, at the annual rate of 1.10% of the Fund's average
weekly net assets. For services performed, NAM receives a monthly fee from the
Manager at the annual rate of 0.55 of 1% of the average weekly net assets of
the Fund. Under the Management Agreement, the Fund paid or accrued fees to the
Manager of $447,245 for the year ended October 31, 1999. For the year ended
October 31, 1999, the Manager informed the Fund that NAM received fees of
$223,623 from the Manager. At October 31, 1999, the fee payable to the Manager
by the Fund was $44,043.
Certain officers and/or directors of the Fund are officers and/or
directors of the Manager. The Nomura Securities Co., Ltd. ("Nomura Securi-
ties") (the Manager's indirect parent) earned $9,938 in commissions from the
Fund on the execution of portfolio securities transactions for the year ended
October 31, 1999. In addition, the Fund purchased a security in an initial
public offering from an unaffiliated broker dealer for a total of $16,536
where a Nomura Securities affiliate was a co-manager. The Fund pays each
Director not affiliated with the Manager an annual fee of $5,000 plus $500 per
meeting attended, together with such Director's actual expenses related to
attendance at meetings. Such fees and expenses for the unaffiliated Directors
aggregated $26,467 for the year ended October 31, 1999.
3. PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, exclusive of investments in foreign
currency and short-term securities, for the year ended October 31, 1999 were
$15,166,960 and $12,888,126, respectively.
As of October 31,1999, net unrealized appreciation on investments,
exclusive of investments in foreign currency and short-term securities, for
Federal income tax purposes was $5,919,753 of which $10,458,068 related to
appreciated securities and $4,538,315 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currency
and short-term securities, at October 31, 1999 for Federal income tax purposes
was $40,718,434. The Fund has a capital loss carryforward as of October 31,
1999 of approximately $49,088,000 of which $14,274,000 expires on October 31,
2003, $3,203,000 expires on October 31, 2004, $5,211,000 expires on October
31, 2005, $20,128,000 expires on October 31, 2006 and $6,272,000 expires on
October 31, 2007.
Selected per share data and ratios for a share of common stock outstanding
throughout each period:
<TABLE>
<CAPTION>
For the Year Ended
October 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ...................$2.78 $3.55 $7.42 $10.06 $11.08
----- ----- ----- ------ ------
Net investment loss ................................(0.04) (0.03) (0.02) (0.06) (0.07)
Net realized and unrealized gain (loss) on
investments and foreign currency..................2.89 (0.74) (3.85) (2.56) (0.67)
----- ----- ----- ------ ------
Total from investment operations ...................2.85 (0.77) (3.87) (2.62) (0.74)
Distributions to shareholders from:
Net investment income .............................. - - - (0.02) -
----- ----- ----- ------ ------
Net realized capital gains ........................ - - - - (0.28)
----- ----- ----- ------ ------
Total distributions ................................. - - - (0.02) (0.28)
----- ----- ----- ------ ------
Net asset value, end of year .........................$5.63 $2.78 $3.55 $7.42 $10.06
===== ===== ===== ====== ======
Market value, end of year ...........................$4.375 $2.9375 $3.6875 $7.000 $9.125
Total investment return* .............................48.9% (20.3%) (47.3%) (23.1%) (2.0%)
Net asset value total returns**......................102.5% (21.7%) (50.3%) (26.1%) (6.6%)
Ratio to average net assets/supplemental data:
Net assets, end of year (000) ....................$47,345 $23,343 $29,873 $62,356 $84,603
Operating expenses .................................2.22% 3.13% 2.29% 1.89% 1.86%
Net investment loss ...............................(0.78%) (1.21%) (0.40%) (0.73%) (0.70%)
Portfolio turnover ...................................34% 25% 22% 53% 117%
</TABLE>
* Based on market value per share, adjusted for reinvestment of income
dividends and capital distributions and capital share transactions. Total
return does not reflect sales commissions.
** Based on net asset value per share, adjusted for reinvestment of income
dividends and capital distributions and capital share transactions. Total
return does not reflect sales commissions.
See notes to financial statements
KOREA EQUITY FUND,INC.
SUPPLEMENTAL SHAREHOLDER INFORMATION (Unaudited)
The 1999 Annual Meeting of the Shareholders of the Fund was held at the
Fund's offices, 180 Maiden Lane, New York, New York on May 11, 1999. The
purpose of the meeting was to elect six Directors to serve for the ensuing
year; to consider and act upon a proposal to ratify the selection of
PricewaterhouseCoopers LLP as independent accountants of the Fund for its
fiscal year ending October 31, 1999; and to transact such other business as
may properly come before the Meeting or any adjournment thereof.
At the Meeting, the following persons were elected by the shareholders to
serve as Directors of the Fund: William G. Barker, Jr., George H. Chittenden,
Haruo Sawada, Chor Weng Tan, Arthur R. Taylor, and John F. Wallace. The
shareholders ratified the selection of PricewaterhouseCoopers LLP, to serve as
the Fund's independent accountants for the fiscal year ending October 31,
1999. No other business was transacted at the meeting.
The results of the voting at the Annual Meeting are as follows:
1. To elect the Fund's Board of Directors:
<TABLE>
<CAPTION>
% Of % of
Shares Voted outstanding Shares Voted outstanding
For Shares Withhold Authority Shares
------------ ----------- ------------------ -----------
<S> <C> <C> <C> <C>
William G. Barker, Jr........................ 6,898,414 82.1 129,280 1.5
George H. Chittenden ........................ 6,900,518 82.1 127,426 1.5
Haruo Sawada* ............................... 6,901,114 82.1 126,580 1.5
Chor Weng Tan ............................... 6,903,218 82.1 124,476 1.5
Arthur R. Taylor ............................ 6,898,414 82.1 129,280 1.5
John F. Wallace ............................. 6,903,218 82.1 124,476 1.5
2. To ratify the selection of PricewaterhouseCoopers LLP as the independent accountants of the Fund:
</TABLE>
<TABLE>
<CAPTION>
% Of % of % Of
Shares Voted outstanding Shares Voted outstanding Shares outstanding
For Shares Against Shares Abstained Shares
------------ ----------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
6,954,337 82.7 44,797 0.5 28,560 0.4
</TABLE>
- ---------------
*Mr. Sawada resigned as a director on May 31, 1999. Mr. Nobuo Katayama was
elected as a director to replace Mr. Sawada on May 31, 1999.
KOREA EQUITY FUND, INC.
REVIEW OF THE FUND'S MARKET PRICE COMPARED TO NET ASSET VALUE
Shares of closed-end investment companies, including funds focusing on a
single country, have at various times traded at both premiums and discounts to
their net asset value. Although the shares of the Fund have traded at such a
premium, they also have traded at a discount from NAV.
Since the Fund was established, the Board of Directors on a quarterly
basis has reviewed the trading price of the Fund's shares. The purpose of such
review has been to determine whether a discount exists and, if so, whether it
would be in shareholders' overall best interests for the Fund to conduct share
repurchases, make an issuer tender offer for shares or consider another means
of possibly reducing the discount. For example, the Board of Directors has
also considered whether it would be in the best interests of the Fund to
convert to an open-end fund or to an interval fund, which is a form of
investment company that makes periodic share repurchases at prices based on
NAV.
To date, the Board of Directors has not authorized open-market share
repurchases or a tender offer for shares of the Fund. The Board also has not
felt that it would be in the best interests of the Fund or its shareholders to
convert to an open-end fund or to have interval fund status. As a "country
fund," the Fund's NAV is more volatile than might be the case for a fund with
a broader investment focus. The Directors believe that converting the Fund to
either an open-end or interval fund would subject the Fund to redemptions or
repurchases at times when liquidation of portfolio securities could
disadvantage remaining shareholders, and they believe that the recent sometime
extreme volatility of the financial markets in South Korea supports their
view. Additionally, since an open-end fund has a limited ability to invest in
illiquid securities, such a conversion could hinder the Fund's ability to
pursue its investment objectives. The Directors intend to continue to review,
on a quarterly basis, the trading market for the Fund's shares.
DIVIDEND REINVESTMENT PLAN
The Dividend Reinvestment Plan (the "Plan") is available automatically for
any holder of Common Stock with shares registered in his/her own name who
wishes to purchase additional shares with income dividends or capital gains
distributions received on shares owned, unless such shareholder elects to
receive all dividends and capital gain distributions in cash, paid by check
and mailed to the shareholder. If a shareholder holds shares in his/her own
name, communications regarding the Plan should be addressed to the Plan Agent,
State Street Bank and Trust Company, P.O. Box 8209, Boston, Massachusetts
02266-8209. Under the Plan, shareholders appoint the Plan Agent to reinvest
dividends and distributions in shares of the Fund. Such shares will be
acquired by the Plan Agent for shareholders either through open market
purchases if the Fund is trading at a discount or through the issuance of
authorized but unissued shares if the Fund is trading at net asset value or a
premium. If the market price of a share on the payable date of a dividend or
distribution is at or above the Fund's net asset value per share on such date,
the number of shares to be issued by the Fund to each shareholder receiving
shares in lieu of cash dividends or distributions will be determined by
dividing the amount of the cash dividends or distributions to which such
shareholder would be entitled by the greater of the net asset value per share
on such date or 95% of the market price of a share on such date. If the market
price of a share on such distribution date is below the net asset value per
share, the number of shares to be issued to such shareholders will be
determined by dividing such amount, less brokerage commission, by the per
share market price.
Purchases will be made by the Plan Agent from time to time on the New
York Stock Exchange (the "Exchange") or elsewhere to satisfy dividend and
distribution investment requirements under the Plan. Purchases will be
suspended on any day when the closing price (or the mean between the closing
bid and ask prices if there were no sales) of the shares on the Exchange on
the preceding trading day was higher than the net asset value per share. If on
the dividend payable date, purchases by the Fund are insufficient to satisfy
dividend or distribution investments and on the last trading day immediately
preceding the dividend payable date the closing price or the mean between the
closing bid and ask prices of the shares is lower than or the same as the net
asset value per share, the Plan Agent will continue to purchase shares until
all investments by shareholders have been completed or the closing price or
the mean between the bid and ask prices of the shares becomes higher than the
net asset value, in which case the Fund will issue the necessary additional
shares from authorized but unissued shares. If on the last trading day
immediately preceding the dividend payable date, the closing price or the mean
between the bid and ask prices of the shares is higher than the net asset
value per share and if the number of shares previously purchased on the
Exchange or elsewhere is insufficient to satisfy dividend investments, the Fund
will issue the necessary additional shares from authorized but unissued
shares. There will be no brokerage charges with respect to shares issued
directly by the Fund to satisfy the dividend investment requirements. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Fund's open market purchases of shares. In each case, the
cost per share of shares purchased for each shareholder's account will be the
average cost, including brokerage commissions, of any shares purchased in the
open market plus the cost of any shares issued by the Fund. For the fiscal
year ended October 31, 1999, the Fund did not purchase any shares in the open
market or issue any new shares for dividend reinvestment purposes.
Shareholders who elect to hold their shares in the name of a broker or
other nominee should contact such broker or other nominee to determine whether
they may participate in the Plan. To the extent such participation is
permitted, the Plan Agent will administer the Plan on the basis of the number
of shares certified from time to time by the broker as representing the total
amount registered in the shareholder's name and held for the account of
beneficial owners who are participating in such Plan. Shareholders that
participate in the Plan holding shares in a brokerage account may not be able
to transfer the shares to another broker and continue to participate in the
Plan. Shareholders who are participating in the Plan may withdraw from the
Plan at any time. There will be no penalty for withdrawal from the Plan, and
shareholders who have previously withdrawn from the Plan may rejoin it at any
time. Changes in participation in the Plan should be made by contacting the
Plan Agent if the shares are held in the shareholder's own name and must be in
writing and should include the shareholder's name and address as they appear
on the account registration. If the shares are held in the name of a broker or
other nominee, such person should be contacted regarding changes in
participation in the Plan. Upon withdrawal from the Plan, the Plan Agent will
deliver to the shareholder a certificate or certificates for the appropriate
number of full shares and a cash payment for any fractional shares. In lieu of
receiving a certificate, the shareholder may request the Plan Agent to sell
part or all of the shareholder's shares at the market price and remit the
proceeds to the shareholder, net of any brokerage commissions. A $2.50 fee
will be charged by the Plan Agent upon any cash withdrawal or termination. An
election to withdraw from the Plan will, until such election is changed, be
deemed to be an election by a shareholder to take all subsequent distributions
in cash. An election will be effective only for a dividend or distribution if
it is received by the Plan Agent not less than 10 days prior to such record
date.
The Plan Agent will maintain all shareholders accounts in the Plan, and
furnish written confirmation of all transactions in such account, including
information needed by shareholders for tax records. Shares in the account of
each Plan participant may be held by the Plan Agent in non-certificated form
in the name of the participant, and each shareholder's proxy will include
those shares purchased or received pursuant to the Plan.
The automatic reinvestment of dividends will not relieve participants of
any income taxes that may be payable (or required to be withheld) on such
dividends. Shareholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for Federal income
tax purposes as receiving a distribution in an amount equal to the amount of
money that the shareholders receiving cash dividends or distributions will
receive and should have a cost basis in the shares received equal to such
amount.
The Fund reserves the right to amend or terminate the Plan as applied to
any dividend paid subsequent to written notice of the change sent to
participants in the Plan at least 90 days before the record date for such
dividend. There is no service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service charge payable
by the participants. All correspondence concerning the Plan, including
requests for additional information about the Plan, should be directed to the
Plan Agent.
- -----------------------------------------------------------------------------
SHAREHOLDER ACCOUNT INFORMATION
Shareholders whose accounts are held in their own name may contact the Fund's
transfer agent, State Street Bank and Trust Company at (800)426-5523 for
information concerning their accounts.
- -----------------------------------------------------------------------------
William G. Barker, Jr.
George H. Chittenden
Nobuo Katayama
Chor Weng Tan
Arthur R. Taylor
John F. Wallace
OFFICERS
Nobuo Katayama, President
Keisuke Haruguchi, Vice President
David G. Stoeffel, Vice President
John F Wallace, Vlce President
John J. Boretti, Secretary and Treasurer
Terence P. Brennan, Assistant Secretary and
Assistant Treasurer
MANAGER
Nomura Asset Management U.S.A. Inc.
180 Maiden Lane
New York, New York 10038-4936
Internet Address
www.nomura-asset.com
INVESTMENT ADVISER
Nomura Asset Management Co., Ltd.
2-1-14 Nihonbashi, Chuo-ku, KOREA
Tokyo 103-8260, Japan Equity
Fund, Inc.
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109-3661
DIVIDEND PAYING AGENT, TRANSFER AGENT
AND REGISTRAR
State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
COUNSEL
Brown & Wood LLP ANNUAL REPORT
One World Trade Center
New York, New York 10048-0557 OCTOBER 31, 1999
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of The Americas
New York, New York 10036-2798
KOREA EQUITY FUND, INC.
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4936
- -----------------------------------------
This Report, including the Financial
Statements, is transmitted to the
Shareholders of Korea Equity Fund, Inc.
for their information. This is not a
prospectus, circular or representation
intended for use in the purchase of
shares of the Fund or any securities
mentioned in the Report.
