KOREA EQUITY FUND, INC.
June 15, 1999
To Our Shareholders:
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We present the Semi-Annual Report of the dented financial and economic crisis. The
Korea Equity Fund, Inc. (the "Fund") for the six Gross Domestic Product ("GDP") decreased
months ended April 30, 1999. by 5.8% and industrial production fell 7.2%,
while private consumption declined 9.6%.
The Net Asset Value per Share ("NAV") of Fixed capital formation declined by 21.1% af-
the Fund on April 30, 1999 was $5.03, repre- ter a 2.2% decrease in 1997. Although imports
senting an increase of 80.9% during the six declined 22%, exports increased 13.3% in lo-
months ended April 30, 1999. The closing cal currency terms. Unemployment rose to a
market price of the Fund on April 30, 1999 on record high of 8.7% in February 1999, but de-
the New York Stock Exchange was $4.50, rep- clined to 7.2% in April 1999.
resenting a 10.5% discount to the NAV. The
Fund's net assets amounted to $42,329,754 However, South Korea's external accounts
on April 30, 1999. improved substantially in 1998 easing con-
cerns about a potential foreign currency crisis.
The Korea Composite Stock Price Index Collapsing import volume made the largest
("KOSPI") increased from 403 to 752 or contribution to the first trade surplus in nine
86.4%, in local currency terms during the six years, amounting to $39.9 billion, which also
months ended April 30, 1999. Including the served as a major factor in propelling the cur-
Korean won (the "Won") appreciation of 11.0% rent account surplus to $40 billion, equivalent
during the six months ended April 30, 1999, to 12.3% of GDP. As a result, South Korea's
this represents a total increase of 107.1% in usable foreign exchange reserves increased
United States dollar terms. The Fund under- to $48.5 billion at the end of 1998 from $8.9
performed the KOSPI, in U.S. dollar terms, by billion the year before.
26.2% during the six months ended April 30,
1999. For the quarter ended April 30, 1999, Supported by rising foreign reserves, the
the KOSPI increased in local currency and Won has stabilized at 1,200 Won to one U.S.
U.S. dollar terms by 31.7% and 30.2%, re- dollar, from its trough of over 1,800 Won to
spectively. For the quarter ended April 30, one U.S. dollar in early 1998. The stabilized
1999, the NAV of the Fund increased by Won has allowed the South Korean govern-
25.4%; however, the Fund underperformed ment to aggressively implement a loose mon-
the KOSPI, in U.S. dollar terms, by 4.8%. etary policy in order to stimulate the economy.
Korean Economy The benchmark three-year corporate bond
yield declined from over 25% to 8%, and the
The South Korean economy suffered a se- overnight call rate is currently hovering below
vere contraction in 1998, amid an unprece- 5%.
<PAGE>
Positive results of this loose monetary pol- This should also help prevent the Won from
icy have been evident since the fourth quarter appreciating further. The government implied
of 1998. Recent economic indicators have fur- that intervention was possible if the Won ap-
ther suggested the South Korean economy preciates too quickly, in an effort to maintain
had turned the corner. The ratio of dishonored the country's international competitiveness.
bills decreased to pre-crisis levels. Industrial
production increased and capacity utilization South Korea's total foreign currency debt
also improved. According to the economic in- was $145.5 billion as of the end of March
dicators for the first quarter of 1999, an- 1999, down from $158.1 billion at the end of
nounced by the Bank of Korea ("BOK"), the 1997. The ratio of short-term debt to total debt
GDP has expanded 4.6% year-over-year has been substantially reduced to 22% from over 40%.
("yoy"), the first growth since the economic cri- South Korea repaid $4.8 billion of
sis. The lower comparison basis from the prior the $19 billion that it has borrowed from the In-
year serves as one of the reasons for the bet- ternational Monetary Fund ("IMF") as a part of
ter than expected growth. The rebound in the a total rescue package of $58 billion. The gov-
first quarter was driven by private consump- ernment plans to repay an additional $7.7 bil-
tion, which increased 6.3% yoy. Meanwhile, in- lion during 1999 and may repay a portion be-
vestment during the quarter slowed to 2.9%, fore maturity in an effort to curb the strength of
from a decline of 38.5% in 1998. Although ex- the Won.
ports declined 5.4% yoy, mainly due to extra-
ordinary items such as gold exports last year, Progress in the restructuring of the Finan-
imports rose by 8.3% yoy compared with a cial and Corporate sectors is uneven. The
35.5% decline in 1998. South Korean government has achieved quite
impressive progress in addressing the prob-
lems in its beleaguered Banking sector. The
The BOK recently adjusted its GDP growth government has injected public money into
forecast for 1999 upwards to 4% from 3.1%. weak banks and agreed to sell two banks to
The BOK expects the recovery in private con- foreign investors. While the due diligence
sumption to gain further momentum in the process for setting the prices is underway for
second half of 1999, while inventory destock- both deals, and some disagreements have
ing is slowing down significantly, limiting the been raised during the negotiations, the South
negative impact on economic growth. The Korean government seems to be in a weak
BOK forecasts private consumption to in- bargaining position and is likely to accept any
crease 2.7% in 1999 and fixed investment to price to avoid risking its credibility by losing
turn positive, increasing by 2.5%. Exports are the deals. However, many South Korean com-
expected to increase 1.3%, but imports are panies have yet to properly address chronic
forecast to surge 20.1%. The trade surplus is problems, such as excess capacity and high
therefore likely to narrow to $20 billion, but this debts. Even in 1998, these problems wors-
still represents an acceptable figure. ened. The nation's top thirty conglomerates,
had their debt to equity ratio decline to 380%
Given the benign Consumer Price Index in 1998 from 519% in 1997, mainly due to as-
("CPI") increase of 0.7% in March, the BOK is set revaluation. However, actual debt in-
expected to maintain the existing monetary creased to 357 trillion Won from 348 trillion
policy to keep the economic recovery on track.
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Won. Asset swaps among the top five con- The Portfolio
glomerates, which are viewed as symbols of
corporate restructuring, are progressing but During the three months ended April 30,
very slowly and with little substance. 1999, the Fund slightly increased its equity ex-
Korean Stock Market posure compared with the previous quarter.
While the Fund has yet to shift decisively from
The Korean stock market continued its its cautious stance, the exposure to equities
strong rally with the support of several items of has been increased given the signs of im-
good news. Announcements of some aggres- provement in economic activity. The Fund
sive corporate restructuring plans, abundant added shares in the nation's monopolistic
liquidity inflows, growing optimism for an ear- electricity company and a leading apparel
lier economic recovery, and sovereign debt company. Meanwhile, the Fund reduced its
upgrades from the major international rating holdings in the Shipbuilding sector. While its
agencies have together overcome the con- expertise and world-leading status remain in-
cerns about labor unrest. Lower interest rates tact, with a substantial order backlog of
and the strength of the Japanese yen against around two years, the shipbuilding industry
the U.S. dollar have also fueled the positive seems to be gradually peaking out, which will
sentiment. lead to fewer new orders. As of April 30, 1999,
the Fund held 96.0% of its net assets in equi-
Including a short-lived consolidation period ties, comprising 38 Korean equities, one Ko-
when the market dropped below the 500 level rean GDR and three Korean ADRS
in response to the renewed weakness of the
Japanese yen at the end of February, the During the last quarter, the Fund did not
KOSPI increased by 86.4% in local currency purchase any new issues. One stock was elim-
terms over the six-month period ended April inated from the portfolio during the quarter:
30, 1999. Foreign investors have endorsed the Kumho Electric Inc., a maker of general light-
progress made in the restructuring of the Fi- ing products.
nancial sector and have remained net buyers.
Spurred by lower interest rates and the estab- Investment Strategy
lishment of new mutual funds by securities
companies, retail investors are now shifting As there is growing consensus that the
their bank deposits into the stock market. South Korean economy is poised to
strengthen, investor sentiment has substan-
During the quarter ended April 30, 1999, tially improved amid abundant liquidity flowing
most sectors continued to gain, with a few no- into the stock market. Nevertheless, the sus-
table exceptions. The sectors leading the mar- tainability of economic recovery still remains
ket were Mining (+41.3%), Food and Beverage fragile. Since robust export growth is less likely
(+29.9%), Banks (+24.2%) and Transportation under conditions of deflationary pressure in
and Storage (+22.7%). Among the laggards the world economy, the improving economic
were Automobile (-3.3%), Machinery (-1.8%), forecast is mainly based on expectations of re-
and Utilities (-0.7%) covery in domestic demand, driven by fiscal
stimulus and relaxed monetary policy. Given
. the combination of excess capacity and high
<PAGE>
corporate indebtedness, facility investment is Under these circumstances, the Fund's in-
expected to remain weak. As witnessed in the vestment strategy will continue to be cautious,
first quarter of 1999, private consumption as the liquidity-driven rally has stretched over-
shows some signs of recovery, but this may be all market valuations. The Fund intends to
short-lived. With the initial shock from the sud- keep its current level of investment in U.S.
den economic crisis abating, consumers have short-term debt basically unchanged.
resumed their purchases of durable goods.
The recent stock market rally could result in a In terms of sector allocation, the Fund is
temporary wealth effect. However, unemploy- looking to increase its weightings in the Finan-
ment is still high and average household in- cial sector by slashing its substantial over
come will decline due to depressed wages, weighting in sectors such as Food and Bever-
which will discourage private consumption in age, because the outlook for non-performing
due course. Without sound consumption loans is improving as a result of bank recapi-
growth, any economic recovery will only be talizations. The Fund continues to favor semi-
modest even with the replenishment of inven- conductors and steel companies, which
tories. should continue to move toward a better cycli-
cal phase in the coming years. Signs of sus-
A sustainable economic recovery also re- tainable consumption growth will lead to an in-
quires the completion of corporate restructur- creased weighting in the Consumer-related
ing. While there has been substantial progress sectors.
in South Korea's reform process, particularly
based on regional comparisons, the overall re- We welcome any questions or comments
structuring program is still in its early stages. about your Fund.
Corporate restructuring needs to be executed
in greater substance, in addition to the con-
ceptual changes already implemented. Fur-
thermore, if complacency sets in as a result of Sincerely,
recent developments, and the government
and corporations shelve reform plans, it will
nullify any of the achievements made during Nobuo Katayama
the course of the current painful restructuring President
efforts. Meanwhile, developments in Japan
and China may continue to influence the
South Korean economy and the stock market
as well.
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The Board of Directors and officers of the Korea Equity Fund, Inc. take
this opportunity to express their appreciation to Mr. Haruo Sawada, who has
been reassigned, effective May 31, 1999, to new duties at Nomura Asset
Management Co., Ltd. ("NAM"). Mr. Sawada had served as President of Nomura
Asset Management U.S.A. Inc., the Fund's manager ("Manager") and President and
Portfolio Manager of the Fund since 1997.
The Board of Directors of the Fund has elected Mr. Nobuo Katayama to
serve as the President of the Fund and a member of its Board of Directors. Mr.
Katayama, who succeeded Mr. Sawada as President of the Manager, will also act
as Portfolio Manager of the Fund. Mr. Katayama has been Marketing Officer of
NAM, the parent company of the Manager, since 1997. Mr. Katayama served as
Director and Chief Portfolio Manager of NAM from 1993 to 1997.
NAM provides investment recommendations to the Manager regarding the
Fund's portfolio. As Portfolio Manager for the Fund and President of the
Manager, Mr. Katayama will be primarily responsible for the day-to-day
portfolio management of the Fund.
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.
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.
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KOREA EQUITY FUND, INC.
FUND HIGHLIGHTS-APRIL 30,1999
(Unaudited)
Net Assets ......................................$42,329,754
Net Asset Value per Share .......................$ 5.03
Closing NYSE Market Price .......................$ 4.50
Percentage Change in Net Asset Value per Share* . 80.9%
Percentage Change in NYSE Market Price* ......... 53.2%
MARKET INDEX:
Percentage change in market index*
KOREAN WON U.S.$
---------- -----
Korea Composite Stock Price Index* ................. 86.4% 107.1%
*From November 1, 1998 through April 30, 1999
ASSET ALLOCATION:
Korean Equity Securities ............................. 96.0%
Cash and Cash Equivalents ............................ 4.5
------
Total Investments ....................................100.5
Liabilities in Excess of Other Assets, Net ........... (0.5)
------
Net Assets ...........................................100.0%
======
INDUSTRY DIVERSIFICATION:
% of % of
Net Assets Net Assets
---------- ----------
Electric and Electronics .13.8 Wood and Paper ..................2.9
Consumer Electronics .....13.0 Hotels and Restaurants ..........2.3
Chemicals ................11.4 Transportation Equipment ........2.1
Iron and Steel ...........9.6 Non-Ferrous Metals ..............1.6
Utilities ................9.4 Securities ......................1.4
Food and Beverages .......8.5 Textiles and Apparel ............1.2
Banking ..................5.3 Construction ....................1.1
Insurance ................4.0 Airlines ........................0.7
Energy ...................3.6 Telecommunications ..............0.7
Miscellaneous
Manufacturing............3.4
TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE:
Market % of
Security Value Net Assets
- -------- --------- ----------
Samsung Electronics Co., Ltd. ......................$4,178,748 9.9
Pohang Iron and Steel Co., Ltd. .....................4,044,949 9.6
Korea Electric Power Corp............................3,986,479 9.4
Samsung Display Devices .............................2,931,644 6.9
Daesung Industries ..................................1,521,212 3.6
Hana Bank ...........................................1,514,788 3.6
Dae Duck Electronics Co . ...........................1,462,453 3.5
Dongwon Industries, Co . ............................1,420,922 3.4
Nong Shim Co., Ltd . ................................1,409,339 3.3
SK Corporation.......................................1,387,274 3.3
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KOREA EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
APRIL 30,1999
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
AIRLINES
Korean Airlines ................... 25,000 $ 360,067 $ 311,317 0.7
International airline --------- --------- ---
BANKING
Hana Bank .......... .............. 116,150 1,114,496 1,514,788 3.6
Commercial bank
Kookmin Bank ...................... 52,484 513,019 715,390 1.7
Commercial bank --------- -------- ---
Total Banking ..................... 1,627,515 2,230,178 5.3
--------- --------- ---
CHEMICALS
Daewoong Pharmaceutical Co., Ltd... 8,855 281,383 144,168 0.3
Pharmaceuticals
Hyundai Pharmaceutical Co ......... 53 285 722 0.0
Pharmaceuticals
Korea Chemical Co . ............... 15,000 1,692,119 1,034,918 2.4
Industrial paints
L.G. Chemical Ltd . ............... 73,117 675,250 1,261,168 3.0
Petrochemicals
Su Heung Capsule Co., Ltd ......... 51,000 437,941 1,008,414 2.4
Pharmaceutical capsules
SK Corporation .................... 65,951 1,708,757 1,387,274 3.3
Petrochemicals --------- --------- ----
Total Chemicals ................... 4,795,735 4,836,664 11.4
CONSTRUCTION --------- --------- ----
Korea Industrial Development Co ... 70,000 1,295,410 394,026 0.9
Korea Industrial Development
Co. (rights)..................... 54,427 201,447 77,393 0.2
Ready-mixed concrete --------- -------- ---
Total Construction ................ 1,496,857 471,419 1.1
--------- -------- ---
CONSUMER ELECTRONICS
Daewoo Electronics Co ............. 80,000 714,169 344,636 0.8
Consumer and industrial electronic
products
Samsung Electronics Co., Ltd....... 36,076 3,309,138 2,774,376 6.6
Samsung Electronics Co.,
Ltd. GDR-1/2 Voting(++)......... 31,630 2,049,142 1,404,372 3.3
Consumer electronics, computers,
and telecommunications
Sindoh Ricoh Co., Ltd.............. 23,450 825,782 966,807 2.3
Office automation equipment --------- --------- ----
Total Consumer Electronics ..... 6,898,231 5,490,191 13.0
--------- --------- ----
</TABLE>
<TABLE>
<CAPTION>
See notes to financial statements
SCHEDULE OF INVESTMENTS-(CONTINUED)
APRIL 30,1999
(UNAUDITED)
% of
Net Market
Shares Cost Value Assets
------ ---- ------ ------
<S> <C> <C> <C> <C>
ELECTRIC AND ELECTRONICS
Chung Ho Computer Co ................ 31,247 $ 2,102,147 $ 675,682 l.6
Cash dispensers and ATM's
Dae Duck Electronics Co ............. 139,050 875,443 1,462,453 3.5
Printed circuit boards
Sae Han Precision Co., Ltd........... 38,295 574,823 789,422 1.8
Automobile audio deck mechanisms
Samsung Display Devices ............. 57,119 3,325,334 2,931,644 6.9
Liquid display monitors and terminals
Total Electric and Electronics ...... 6,877,747 5,859,201 13.8
ENERGY
Daesung Industries .................. 45,199 2,229,039 1,521,212 3.6
Gas, anthracite coal and oil
FOOD AND BEVERAGES
Dongwon Industries, Co .............. 75,560 1,495,994 1,420,922 3.4
Deep-sea fishing and processing
Hite Brewery Co., Ltd ............... 32,916 1,131,779 775,472 1.8
Beer
Nong Shim Co., Ltd .................. 25,000 925,977 1,409,339 3.3
Instant noodles and snack foods
Total Food and Beverages ............ 3,553,750 3,605,733 8.5
HOTELS AND RESTAURANTS
Hotel Shilla Co ..................... 93,543 993,168 968,093 2.3
Hotel management
INSURANCE
Hyundai Marine and Fire Insurance
Co., Ltd.......................... 36,980 2,081,822 1,101,466 2.6
Automobile, marine and fire insurance
Oriental Fire & Marine Insurance.... 30,000 764,571 593,185 1.4
Non-life insurance
Total Insurance .................... 2,846,393 1,694,651 4.0
IRON AND STEEL
Pohang Iron and Steel Co., Ltd. ..... 32,580 2,000,593 2,371,199 5.6
Pohang Iron and Steel Co., Ltd. ADR . 65,000 991,250 1,673,750 4.0
Hot and cold rolled steel products
Total -Iron and Steel .............. 2,991,843 4,044,949 9.6
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS-(CONTINUED)
APRIL 30,1999
(UNAUDITED)
% of
Market Net
Shares Cost Value Assets
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MISCELLANEOUS MANUFACTURING
Daewoo Heavy Industries ............. 150,000 $ 743,954 $ 662,600 1.6
Heavy industrial equipment
Medison Co., Ltd ..................... 68,654 595,988 768,278 1.8
Diagnostic ultrasound scanners
Total Miscellaneous Manufacturing .... 1,339,942 1,430,878 3.4
NON-FERROUS METALS
Keumkang Co . ........................ 10,000 987,920 387,042 0.9
Safety glass and building materials
Korea Zinc Co., Ltd . ................ 11,000 213,830 309,129 0.7
Non-ferrous metal refiner
Total Non-Ferrous Metals ............. 1,201,750 696,171 1.6
SECURITIES
Daewoo Securities Co ................. 23,754 674,159 586,605 1.4
Brokerage services
TELECOMMUNICATIONS
Korea Telecom Corp. .................. 100 3,158 4,375 0.0
Telecommunications
SK Telecom Co., Ltd . ................ 142 77,732 118,881 0.3
SK Telecom Co., Ltd. ADR ............. 11,970 70,701 166,084 0.4
Mobile telecommunications and paging services
Total Telecommunications ............. 151,591 289,340 0.7
TEXTILES AND APPAREL
Handsome Co., Ltd. .................. 17,164 590,850 522,791 1.2
Women's garments and accessories
TRANSPORTATION EQUIPMENT
Hyundai Merchant Marine ............. 62,647 809,404 869,731 2.1
Container ships and tankers
UTILITIES
Korea Electric Power Corp ........... 115,600 3,246,222 3,326,479 7.8
Korea Electric Power Corp. ADR ...... 40,000 977,200 660,000 1.6
Power supplier
Total Utilities ..................... 4,223,422 3,986,479 9.4
WOOD AND PAPER
Hansol Co., Ltd . .................. 38,396 1,308,007 646,125 1.5
Newsprint
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS-(CONTINUED)
APRIL 30,1999
(UNAUDITED)
% of
Market Net
Shares Cost Value Assets
------ ---- ----- ------
<S> <C> <C> <C> <C>
Korea Export Packaging Industries..... 37,539 $ 929,093 $ 562,216 1.4
Specialized corrugated board
Total Wood and Paper ................. 2,237,100 1,208,341 2.9
TOTAL KOREAN EQUITY SECURITIES ....... 45,898,563 40,623,944 96.0
PRINCIPAL
TIME DEPOSIT AMOUNT
West Deutsche Bank of London 4.875%, due 5/3/99 $1,900,000 1,900,000 1,900,000 4.5
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES 1,900,000 1,900,000 4.5
TOTAL INVESTMENTS ................. 47,798,563 42,523,944 100.5
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (194,797) (194,190) (0.5)
NET ASSETS ........................ $47,603,766 $42,329,754 100.0
</TABLE>
=+Securities may only be sold to institutional buyers. At April 30, 1999
the value of this security amounts to $1,404,372 or 3.3% 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 April 30, 1999.
Korean Won KRW 1,188.50 = $1.00
See notes to financial statements
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30,1999
(UNAUDITED)
<S> <C>
Investments in securities, at market value (cost-$45,898,563)............ $40,623,944
Investments in short-term securities, at market value (cost-$1,900,000).. 1,900,000
Receivable for dividends and interest, net of withholding taxes 35,509
Cash .................................................................... 37,852
Other assets ............................................................ 5,593
Total Assets ............................................................ 42,602,898
Accrued management fee .................................................. 54,607
Other accrued expenses .................................................. 218,537
Total Liabilities ....................................................... 273,144
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 ......................................................... 90,027,541
Accumulated net realized loss on investments and foreign currency
transactions............................................................ (43,372,712)
Unrealized net depreciation on investments and foreign exchange.......... (5,274,012)
Accumulated net investment income ....................................... 108,037
Net Assets .............................................................. $42,329,754
Net asset value per share ............................................... $ 5.03
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30,1999
(UNAUDITED)
<S> <C> <C> <C>
Dividend income (less $85,713 withholding taxes) $432,796
Interest income ................................... 60,631
Total Income ........................................... $ 493,427
Management fee ......................................... 174,423
Custodian fees .................................... 52,797
Legal fees ............................................. 37,642
Auditing and tax reporting fees ........................ 34,897
Shareholder reports .................................... 25,180
Transfer agency fees ................................... 18,960
Registration fees ...................................... 16,170
Directors'fees and expenses ............................ 11,614
Annual meeting expenses ................................ 8,582
Insurance expenses ..................................... 232
Miscellaneous .......................................... 4,893
Total Expenses ......................................... 385,390
INVESTMENT INCOME (LOSS)-NET ........................... 108,037
Realized gain (loss) on investments and foreign currency transactions:
Net realized loss on investments ....................... (269,044)
Net realized loss on foreign exchange .................. (287,604)
Net realized loss on investments and foreign exchange .. (556,648)
Change in net unrealized depreciation on investments ... 16,164,463
Change in net unrealized depreciation on translation of foreign
currency and other assets and liabilities denominated in foreign
currency 3,270,775
Net realized and unrealized gain on investments and foreign exchange 18,878,590
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ... $18,986,627
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Six
Months
Ended For the Year
April 30, 1999 Ended
(Unaudited) October 31, 1998
<S> <C> <C>
Net investment income (loss) ............................. $ 108,037 $ (271,595)
Net realized loss on investments ......................... (269,044) (10,332,912)
Net realized loss on foreign exchange .................... (287,604) (9,901,486)
Change in unrealized appreciation on investments 16,164,463 17,219,176
Change in unrealized appreciation (depreciation)
on translation of foreign currency and other assets
and liabilities denominated in foreign currency ........ 3,270,775 (3,242,821)
Increase (decrease) in net assets derived from investment
activities ............................................... 18,986,627 (6,529,638)
Beginning of period ...................................... 23,343,127 29,872,765
End of period (including accumulated undistributed net
investment income of $108,037 and $0, respectively)....... $42,329,754 $23,343,127
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
<S> <C>
[Heading Missing] (b) Foreign Currency Transactions-Transactions
Korea Equity Fund, Inc. (the "Fund") is registered denominated in Korean won are recorded in the
under the Investment Company Act of 1940 as a Fund's records at the prevailing rate at the time of
nondiversified, closed-end management investment the transaction. Asset and liability accounts that are
company. The Fund was incorporated in Maryland denominated in won are adjusted to reflect the cur-
on September 7, 1993 and investment operations rent exchange rate at the end of the period. Trans-
commenced on December 3, 1993. The following is action gains or losses resulting from changes in the
a summary of significant accounting policies fol- exchange rate during the reporting period or upon
lowed by the Fund. settlement of foreign currency transactions are in-
(a) Valuation of Securities-Investments traded cluded in the results of operations for the current pe-
on stock exchanges are valued at the last sale price riod.
on the principal market on which such securities are The net assets of the Fund are presented at the
traded as of the close of business on the day the se- exchange rate and market values at the close of the
curities are being valued or, lacking any sales, at the period. The Fund isolates that portion of the results
last available bid price. Securities traded in the over- of operations arising as a result of changes in the
the-counter market (as opposed to the OTC market foreign exchange rates on investments from the
for foreign investors in Korea) are valued at the last fluctuations arising from changes in the market
reported sales price as of the close of business on prices of securities held at April 30,1999. Net real-
the day the securities are being valued or, if none is ized foreign exchange gains or losses include gains
available, at the mean of the bid and offer price at or losses arising from sales of portfolio securities,
the close of the day or, if none is available, at the last sales and maturities of short-term securities, cur-
reported sales price available to the Fund. Securi- rency gains or losses realized between the trade
ties for which market quotations are not readily and settlement dates on securities transactions, the
available and restricted securities are valued in difference between the amounts of dividends, inter-
good faith at fair value using methods determined by est, and foreign withholding taxes recorded on the
the Board of Directors. In determining fair value, Fund's books, and the United States dollar equiva-
consideration is given to cost, operating and other lent of the amounts actually received or paid. Net
financial data. Short-term debt securities which ma- unrealized foreign exchange gains or losses in-
ture in 60 days or less are valued at amortized cost cludes gains or losses arising from changes in the
if their original maturity at the date of purchase was value of assets and liabilities including investments
60 days or less, or by amortizing their value on the in securities at April 30, 1999, resulting from
61st day prior to maturity if their term to maturity at changes in the exchange rate.
the date of purchase exceeded 60 days. Securities
and other assets, including futures contracts and re- (c) Security Transactions, Investment Income,
lated options, are stated at market value or other- Distributions to Shareholders-Security transac-
wise at fair value as determined in good faith by or tions are accounted for on the trade date. Dividend
under the direction of the Board of Directors of the income is recorded on the ex-dividend date and in-
Fund. terest income is recorded on the accrual basis. Re-
NOTES TO FINANCIAL STATEMENTS (Unaudited)-(Continued)
alized gains and losses on the sale of investments (f) Subscription for New Shares-As part of their
are calculated on the identified cost basis. annual corporate action matters, certain Korean
companies offer rights to their shareholders to sub-
Distributions from net investment income and net scribe to new shares which are eligible for a portion
realized capital gains are determined in accordance of the dividends paid on existing shares in the year
with Federal income tax regulations, which may dif- of subscription. The Fund normally subscribes to
fer from generally accepted accounting principles. new share offerings by Korean companies.
To the extent these "book/tax" differences are per-
manent in nature (i.e., that they result from other (g) Use of Estimates in Financial Statement
than timing recognition-"temporary"), such ac- Preparation-The preparation of financial state-
counts are reclassified within the capital accounts ments in accordance with generally accepted ac-
based on their Federal tax-basis treatment; tempo- counting principles requires management to make
rary differences do not require reclassification. Divi- estimates and assumptions that affect the reported
dends and distributions which exceed net realized amounts and disclosures in the financial state-
capital gains for financial reporting purposes, but ments. Actual results could differ from these esti-
not for tax purposes, are reported as distributions in mates.
excess of net realized capital gains. (h) Concentration of Risk-A significant portion of
(d) Capital Account Reclassification- For the year the Fund's net assets consists of South Korean se-
ended October 31, 1998, the Fund's paid-in-capital curities which involve certain considerations and
was decreased by $377,978 with an increase in ac- risks not typically associated with investments in the
cumulated net investment income of $271,595 and United States. In addition to the smaller size, less
an increase in accumulated net realized loss on in- liquidity and greater volatility, the South Korean se-
vestments and foreign currency transactions of curities market is less developed than the U.S. se-
$106,383. The adjustment was primarily a result Of curities market and there is often substantially less
the reclassification of net investment and foreign ex- publicly available information about South Korean
change losses. issuers than there is about U.S. issuers. Future eco-
nomic and political developments in South Korea
(e) Income Taxes-A provision for United States could adversely affect the liquidity or value, or both,
income taxes has not been made since it is the in- of securities in which the Fund is invested. Further,
tention of the Fund to qualify as a regulated invest- the Fund may be exposed to currency devaluation
ment company under the Internal Revenue Code and other exchange rate fluctuations.
and to distribute within the allowable time limit all
taxable income to its shareholders.
Under Korean tax laws, a withholding tax is imposed on 2. Management Agreement and Transactions
dividends and interest income at the rate of 16.5% and 13.2%, With Affiliated Persons
respectively, and such withholding taxes are reflected as a
reduction of the related revenue. There is no withholding tax on Nomura Asset Management U.S.A. Inc. (the
realized gains. "Manager") acts as the Manager of the Fund pur-
suant to a management agreement. Under the
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)-(CONTINUED)
3. Purchases and Sales of Investments
agreement, the Manager provides all office space,
facilities and personnel necessary to perform its du- Purchases and sales of investments, exclusive
ties. Pursuant to such management agreement, the of investments in foreign currency and short-term
Manager has retained its parent company, Nomura securities, for the six months ended April 30, 1999
Asset Management Co., Ltd. ("NAM") as investment were $3,521,738 and $1,798,086, respectively.
adviser for the Fund.
As compensation for its services to the Fund, the As of April 30, 1999, net unrealized depreciation
Manager receives a monthly fee computed daily, at on investments, exclusive of investments in foreign
the annual rate of 1.10% of the Fund's average currency and short-term securities, for Federal in-
weekly net assets. For services performed, NAM come tax purposes was $5,274,619 of which
receives a monthly fee from the Manager at the an- $4,784,515 related to appreciated securities and
nual rates of 0.55 of 1 % of the average weekly net $10,059,134 related to depreciated securities. The
assets of the Fund. Under the Management Agree- aggregate cost of investments, exclusive of invest
ment, the Fund paid or accrued fees to the Manager ments in foreign currency and short-term securities,
of $174,423 for the six months ended April 30, at April 30, 1999 for Federal income tax purposes
1999. For the six months ended April 30, 1999, the was $45,898,563. The Fund has a capital loss car-
Manager informed the Fund that NAM received fees ryforward as of October 31, 1998 of approximately
of $106,973 from the Manager. At April 30, 1999, $42,816,000 of which $14,274,000 expires October
the fee payable to the Manager by the Fund, was 31, 2003, $3,203,000 expires October 31, 2004,
$54,607. $5,211,000 expires October 31, 2005, and
$20,128,000 expires October 31, 2006.
Certain officers and/or directors of the Fund are
officers and/or directors of the 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
$11,614 for the six months ended April 30, 1999.
</TABLE>
<PAGE>
Selected per share data and ratios for a share of common stock outstanding
throughout each period:
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year Ended December 3,1993*
April 30,1999 October 31, to
(Unaudited) 1998 1997 1996 1995 October 31, 1994
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...... $2.78 $3.55 $7.42 $10.06 $11.08 $ 10.98**
Net investment income (loss).............. 0.01 (0.03) (0.02) (0.06) (0.07) (0.03)
Net realized and unrealized gain (loss) on
investments and foreign currency........ 2.24 (0.74) (3.85) (2.56) (0.67) 0.13
Total from investment operations.......... 2.25 (0.77) (3.87) (2.62) (0.74) 0.10
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 period.............. $5.03 $2.78 $3.55 $7.42 $10.06 $11.08
Market value, end of period.................. $4.500 $2.9375 $3.6875 $7.000 $9.125 $9.625
Total investment return++ .................... 53.2% (20.3%) (47.3%) (23.1%) (2.0%) (19.8%)
Net asset value total returns+++........... 80.9% (21.7%) (50.3%) (26.1%) (6.6%) (0.1%)
Ratio to average net assets/supplemental data:
Net assets, end of period (in 000)......... $42,330 $23,343 $29,873 $62,356 $84,603 $93,206
Operating expenses ........................ 3.11%+ 3.13% 2.29% 1.89% 1.86% 1.67%
Net investment income (loss)............... 0.87%+ (1.21%) (0.40%) (0.73%) (0.70%) (0.29%)
Portfolio turnover ........................ 9% 25% 22% 53% 117% 55%
</TABLE>
* Commencement of operations
** Net of offering costs ($0.18).
+Annualized
++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
<PAGE>
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 Share Withhold Authority Shares
<S> <C> <C> <C> <C>
William G. Barker, Jr ..... 6,898,414 82.0 129,280 1.5
George H. Chittenden ...... 6,900,517 82.1 127,177 1.5
Haruo Sawada .............. 6,901,114 82.1 126,580 1.5
Chor Weng Tan ............. 6,903,217 82.1 124,477 1.5
Arthur R. Taylor .......... 6,898,414 82.0 129,280 1.5
John F. Wallace ........... 6,903,217 82.1 124,477 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> <C>
6,954,337 82.7 44,797 0.5 28,560 0.3
</TABLE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
BOARD OF DIRECTORS
William G. Barker, Jr.
George H. Chittenden
Nobuo Katayama
Chor Weng Tan
Arthur R. Taylor
John F. Wallace
OFFICERS
Nobuo Katayama, President
Mitsutoyo Kohno, Vice President
John F. Wallace, Vice President
John J. Boretti, Secretary and Treasurer
Terence R 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,
Tokyo 103-8260, Japan
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
One World Trade Center
New York, New York 10048-0557
INDEPENDENT ACCOUNTANTS
PricewaterhouseCooperS LLP
1177 Avenue of The Americas
New York, New York 10036-2798
KOREA EQUITY FUND, INC.
180 MAIDEN LANE
NEWYORK, NEWYORK 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.
The accompanying Financial Statements, including the Schedule of Investments,
have not been examined by the Fund's independent accountants,
PricewaterhouseCoopers LLP, and accordingly they express no opinion thereon.
KOREA EQUITY FUND, INC.
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4936
SEMI-ANNUAL REPORT
APRIL 30, 1999
