KOREA EQUITY FUNDING
June 23, 2000
To Our Shareholders:
We present the Semi-Annual Report of the Korea Equity Fund, Inc. (the
"Fund") for the six months ended April 30, 2000.
The Net Asset Value per Share ("NAV") of the Fund on April 30, 2000 was
$5.03, representing a decrease of 10.7% during the six months ended April 30,
2000. The closing market price of the Fund on April 30, 2000 on the New York
Stock Exchange was $3.5625, representing a 29.2% discount to the NAV. The
Fund's net as sets amounted to $42,336,911 on April 30, 2000.
The Korea Composite Stock Price Index ("KOSPI") decreased from 833 to
725, or 13.0%, in local currency terms during the six months ended April 30,
2000. Including the Korean won (the "Won") appreciation of 8.1% during the six
months ended April 30, 2000, this represents a total decrease of 5.9% in
United States dollar terms. The Fund underperformed the KOSPI, in U.S. dollar
terms, by 4.8% during the six months ended April 30, 2000. For the quarter
ended April 30, 2000, the KOSPI decreased in local currency and U.S. dollar
terms by 23.1% and 22.2%, respectively. For the quarter ended April 30, 2000,
the NAV of the Fund decreased by 24.9%; however, the Fund underperformed the
KOSPI, in U.S. dollar terms, by 2.7%.
Korean Economy
The robust gross domestic product ("GDP") growth of 12.8% and 13.0% year
over year ("yoy") in the third and the fourth quarters of 1999, the strong
recovery of capital investment and the improvement in domestic consumption
trends all raised concerns that the economy would overheat and generate
inflation in the second half of 2000. If the current upward trend in
international commodity prices continues, some mild inflation of 3% to 4% is
inevitable as the offsetting effect from the appreciation of the Won fades.
Nevertheless, high inflation is unlikely to resurface in Korea in the next
twelve months due to the economy's ability to absorb the demand driven
inflationary pressure in production capacity and labor. The shrinking trade
balance is becoming another concern for the Korean economy. Although January's
trade account deficit was a one time event attributed to strong imports
relating to the lunar New Year, the impact of oil price increases on Korea's
imports is likely to remain, and could erode the trade balance throughout the
rest of this year. While these concerns remain major risks, overall GDP growth
is likely to return to its potential growth rate of 6% to 7% with a healthier
growth pattern emerging. As for 2000, the main driving force for growth will
turn to domestic demand, including private investment and consumption. The
reversal in the inventory growth rate will provide further impetus. Exports
could remain strong, but the trade balance and current account surplus will
continue to decline due to robust imports.
The real problem in South Korea is not economic growth but the stability
of the financial system and how to improve corporate governance, both of which
are causing higher risk premiums on bonds and equities. When domestic asset
management companies started to liquidate funds, the weak financial structure
of the Investment Trust Companies ("ITCs") caused cash flow problems,
particularly in the Hyundai ITC, a member of the largest business group in
Korea. This in turn resulted in panic redemptions by retail investors. The
Government has already decided to bail out the troubled ITCs by injecting
public money into them. Nevertheless, the system is likely to remain fragile
until July when ITCs will be forced to introduce mark-to-market pricing
methods for their bond holdings. It is widely believed that the losses from
non-performing bonds, including Daewoo Group issues, at ITCs and banks might
be larger than currently announced when they are evaluated by the
mark-to-market method. To avoid further turbulence, it is necessary to
restructure the Banking sector by merging into a few solid banks to shelter
against the additional provisions.
The announcement that LG Chemical Ltd. would acquire an oil company at
extremely expensive prices from its owner families, Koo and Huh, shocked the
market as the LG Group was regarded as one of the country's best-run business
groups. Although the government ordered groups to reduce cross-liabilities and
the number of affiliated companies, and to report consolidated financial
statements, the progress on improvements in corporate governance has so far
been insufficient. The introduction of a better market-driven mechanism is
essential for further progress.
The result of the general election was nearly in line with expectations.
The ruling coalition due to the party, the Millennium Democratic Party ("MDP")
failed to gain a majority of seats in parliament. The winner of the election,
Hannara, or the Grand National Party ("GNP"), was also unable to achieve a
majority share. Consequently, President Kim will have to decide whether to
maintain the current coalition with the United Liberal Democrats or change to
a partnership with the GNP. Whichever the case, there are likely to be no
major changes in the government's reform policy, and this would be neutral for
the economy and the stock market.
The South Korean stock market was characterized by two distinct periods
of contrasting price market activity. Beginning in late October, the stock
market was driven by a Telephone, Media and Technology sector ("TMT") rally,
led by Internet Technology stocks ("IT") and Korea Securities Dealers
Association Index ("KOSDAQ") stocks. After the KOSPI exceeded 1000 in late
December, it later declined to 680, mainly due to worsening liquidity
conditions.
The government's rescue package, including a new Bond Stabilization Fund
and payment guarantees for individual investors in Daewoo Group bonds and
commercial paper, started to ease liquidity conditions in late October. Amid
this improved sentiment, market liquidity became concentrated in the
Telecommunication and Internet stocks, including the KOSDAQ, fueled by the
global boom in these sectors. Electronics stocks produced strong performances
also, on the back of solid demand for Dynamic Access Random Memory and
Telecommunication related products. Other sectors provided little upside.
Conventional blue-chips like Korea Electric Power Corp. ("KEPCO") and Pohang
Iron and Steel Co., Ltd. ("POSCO"), declined due to the postponement of a
reform program and share overhang. Gradually increasing interest rates have
impacted the Banking sector, which has come under pressure due to lingering
fears of larger losses from the Deawoo Group than originally anticipated.
Since the beginning of year 2000, the KOSPI has encountered constant
selling pressure amid concerns of shrinking liquidity, renewed worries
concerning the stability of financial institutions and increasing inflation.
An unexpected trade balance deficit in January, combined with speculation that
the Bank of Korea would tighten monetary policy generated serious liquidity
concerns. Retail investors sold their holdings of Beneficiary Certificates
("BC") managed by Investment Trust Companies. ITCs were forced to liquidate
their BCs at any price, to cover the massive redemptions. Foreign investors,
who in the early stages bought into the ITC selling, finally turned net
sellers due to liquidity concerns of the Hyundai Group, the largest group in
Korea. Inconclusive general election results exacerbated the negative
sentiment. The KOSPI index declined 29% in Won terms during the first four
months of 2000. Banks and other financial stocks were the hardest hit,
declining by approximately 50%. Only the Electronics and Medical sectors
recorded positive performances during the period, represented by Samsung
Electronics Co., Ltd.'s positive return of 13%. Traditional blue chips
including KEPCO and POSCO decreased less than the KOSPI. Meanwhile, the KOSDAQ
market endured a rollercoaster performance. A strong appetite for IT stocks
among retail investors caused a massive asset shift from the main board to the
KOSDAQ in February. This increased the KOSDAQ index by 59% from January 27 to
the turning point on March 10, when it collapsed along with the NASDAQ,
declining by 44% from its peak through the end of April.
During the period, the Fund normalized the balance of
large-capitalization and small-capitalization stocks, eliminating the
potential negative impact of an overexposure to smaller stocks. In sector
terms, the Fund maintained its overweight position in the Electronics sector,
while taking advantage of the price weakness among telecommunications stocks
to close the gap between the KOSPI weighting and the Fund's weighting. On the
other hand, the Fund reduced its exposure to bank stocks, fearing that the
government would force one of the quality banks, such as Kookmin Bank or H &
CB, to take over Seoul Bank, one of the debt-ridden state-owned institutions.
In addition, the sudden increase in the deposit rate by Bank of Korea was
expected to place pressure on earnings through a narrower interest spread. As
of April 30, 2000 the Fund held 94.2% of its net assets in equities,
comprising 28 Korean equities one Korean GDR and two Korean ADR's.
During the last quarter, the Fund purchased eight new issues: Digital
Chosun Co., Ltd., multimedia satelite based service; Hansol M. Com Co., Ltd.,
mobile telecommunications and voice mail services; Insung Information Co.,
Ltd., networking products; LG AD Inc., advertising agencies; Comtec System
Co., Ltd., networking products; Daum Communications Corp., internet portal
service; Serome Technology, Inc., computer telephony solutions and H & CB,
commercial bank. Three stocks were eliminated from the portfolio during the
last quarter: Hansol Paper Co., newsprint; Hite Brewery Co., Ltd., beer and
Nong Shim, instant noodles and snack foods.
The summit talks between President Kim and North Korea's Kim Jong II will
be held on June 12 to 14 in Pyongyang, North Korea. It is too early to assess
the impact on the stock market. However, the Fund believes a certain amount of
aid in the form of food and goods will be granted to North Korea.
As for the stock market, recent price declines on the KOSPI seem to be
the result of an overreaction by local investors. The MSCI's announcement of
major adjustments to its regional indices, such as the re-inclusion of
Malaysia, the increase in the exposure of Taiwan and the change of components
in China, negatively impacted certain Asian stock markets including South
Korea. Foreign investors started to re-allocate their assets by selling
securities of South Korea, Hong Kong and other smaller markets and shifting to
the other three. The withdrawal of foreign investors happened almost
simultaneously with the liquidation by ITCs. The trade deficit in January, the
signs of monetary tightening, concern over government-led bank restructuring,
and the NASDAQ collapse combined to undermine investor sentiment.
The Fund believes that most of these concerns have now diminished.
Foreign investors seem to have completed other reallocation, the government
revealed a concrete bailout program for ITCs, the trade balance has returned
positive, and the government clearly dismissed proposals for the forced merger
of banks. Nevertheless, the stock market is likely to fluctuate around the
current level for some time until the effect of the mark-to-market rule on
bond pricing is absorbed. However, the solid earnings growth and undemanding
valuations could attract long-term investors at this level. As a strategy, the
Fund may retain its overweighting in the Electronics sector and underweighting
in the Financial sector, while holding a neutral position in Utilities with a
relatively high cash position for sometime. Once a positive turnaround is
confirmed regarding the ITC problems and financial reforms, the Fund will
gradually position the portfolio more aggressively to take advantage of strong
economic growth.
The Nomura Securities Co., Ltd. has increased its ownership position in
Nomura Asset Management Co., Ltd. ("NAM"), the Fund's Investment Advisor from
4.9% to a majority ownership position (approximately 73.8% as of March 31,
2000), with the ultimate goal of acquiring 100% ownership. In addition, NAM
has increased its ownership of Nomura Asset Management U.S.A. Inc.
("NAM-U.S.A.") from 88% to 100% by acquiring the remaining shares from Nomura
Research Institute Ltd. After the the change, NAM and NAM-U.S.A. will continue
maintain their management and business autonomy.
We appreciate your continuing support of your Fund.
Sincerely,
Nobuo Katayama
President
VISIT OUR WEBSITE: www.nomura-asset.com
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.
<TABLE>
<CAPTION>
FUND HIGHLIGHTS-APRIL 30, 2000
(Unaudited)
<S> <C>
Net Assets....................................................................................... $42,336,911
Net Asset Value per Share........................................................................ $ 5.03
Closing NYSE Market Price........................................................................ $ 3.5625
Percentage Change in Net Asset Value per Share*.................................................. (10.7%)
Percentage Change in NYSE Market Price*.......................................................... (18.6%)
Percentage change in market index*
KOREAN WON U.S.$
---------- -----
Korea Composite Stock Price Index*............................................................... (13.0%) (5.9%)
*From November 1, 1999 through April 30, 2000
Korean Equity Securities......................................................................... 94.2%
Cash and Cash Equivalents........................................................................ 4.0
------
Total Investments................................................................................ 98.2
Other Assets Less Liabilities, Net............................................................... 1.8
-----
Net Assets....................................................................................... 100.0%
=====
</TABLE>
<TABLE>
<CAPTION>
% of % of
Net Assets Net Assets
---------- ----------
<S> <C> <C> <C>
Consumer Electronics.......................... 22.9 Services............................................. 3.6
Telecommunications............................ 21.5 Information and Software............................. 2.3
Banking....................................... 11.2 Miscellaneous Manufacturing......................... 1.8
Chemicals..................................... 10.7 Securities.......................................... 1.6
Utilities..................................... 6.7 Hotels and Restaurants................................. 1.5
Electrical Machinery.......................... 5.6 Motor Vehicles........................................ 0.9
Iron and Steel................................ 3.9
</TABLE>
<TABLE>
<CAPTION>
Market % of
Security Value Net Assets
-------- ---------- ----------
<S> <C> <C>
Samsung Electronics Co., Ltd............................................................................ $8,714,383 20.6
Korea Telecom Corp...................................................................................... 4,822,714 11.4
SK Telecom Co., Ltd..................................................................................... 3,102,031 7.3
Korea Electric Power Corp............................................................................... 2,829,016 6.7
L.G. Chemical Ltd....................................................................................... 1,907,577 4.5
Shinhan Bank............................................................................................ 1,871,367 4.4
Dae Duck Electronics Co................................................................................. 1,862,758 4.4
Pohang Iron and Steel Co., Ltd.......................................................................... 1,664,433 3.9
SK Corporation.......................................................................................... 1,471,002 3.5
Kumkang Korea Chemical Co., Ltd......................................................................... 1,149,156 2.7
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
APRIL 30, 2000
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
<S> <C> <C> <C> <C>
Banking
Hana Bank................................................ 163,150 $1,333,737 $ 871,800 2.1
Commercial bank
H & CB................................................... 67,000 1,434,916 1,147,105 2.7
Commercial bank
Kookmin Bank............................................. 79,764 978,897 862,508 2.0
Commercial bank
Shinhan Bank............................................. 195,000 1,995,571 1,871,367 4.4
----------- ----------- -----
Commercial bank
Total Banking............................................ 5,743,121 4,752,780 11.2
----------- ----------- -----
Chemicals
Kumkang Korea Chemical Co., Ltd.......................... 30,509 2,680,039 1,149,156 2.7
Paint
L.G. Chemical Ltd........................................ 83,017 918,729 1,907,577 4.5
Petrochemicals
SK Corporation........................................... 77,921 1,704,428 1,471,002 3.5
----------- ----------- -----
Petrochemicals
Total Chemicals.......................................... 5,303,196 4,527,736 10.7
----------- ----------- -----
Consumer Electronics
L G Electronics Co., Ltd................................. 37,000 1,399,352 986,889 2.3
Consumer electronics
Samsung Electronics Co., Ltd............................. 28,828 2,722,333 7,793,107 18.4
Samsung Electronics Co., Ltd. GDR-1/2 Voting+............ 5,716 269,444 921,276 2.2
----------- ----------- -----
Consumer electronics, computers, and telecommunications
Total Consumer Electronics............................... 4,391,129 9,701,272 22.9
----------- ----------- -----
Electrical Machinery
Dae Duck Electronics Co.................................. 213,113 1,089,820 1,862,758 4.4
Printed circuit boards
Sindo Ricoh Co., Ltd..................................... 23,919 825,782 517,284 1.2
----------- ----------- -----
Office automation equipment
Total Electrical Machinery............................... 1,195,602 2,380,042 5.6
----------- ----------- -----
Hotels and Restaurants
Hotel Shilla Co.......................................... 124,904 1,256,728 641,543 1.5
----------- ----------- -----
Hotel management
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS-(Continued)
APRIL 30, 2000
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
<S> <C> <C> <C> <C>
Information and Software
Comtec System Co., Ltd.................................... 61,000 $ 763,356 $ 402,361 1.0
Networking products
Daum Communications Corp.*................................ 2,600 371,050 123,001 0.3
Internet portal service
Insung Information Co., Ltd.*............................. 24,000 739,203 402,253 1.0
----------- ----------- -----
Networking products
Total Information and Software............................ 1,873,609 927,614 2.3
----------- ----------- -----
Iron and Steel
Pohang Iron and Steel Co., Ltd............................ 21,280 1,109,069 1,664,433 3.9
----------- ----------- -----
Hot and cold rolled steel products
Miscellaneous Manufacturing
Medison Co., Ltd.......................................... 68,654 595,988 742,373 1.8
----------- ----------- -----
Diagnostic ultrasound scanners
Motor Vehicles
Hyundai Motor............................................. 40,000 802,973 376,661 0.9
----------- ----------- -----
Autmobile manufacturer
Securities
Dongwon Securities Co., Ltd............................... 23,100 393,796 231,052 0.5
Dongwon Securities Co., Ltd. (Rights)..................... 8,799 39,804 0 0.0
Brokerage services
Samsung Securities........................................ 27,000 981,638 454,967 1.1
----------- ----------- -----
Brokerage services
Total Securities.......................................... 1,415,238 686,019 1.6
----------- ----------- -----
Services
Digital Chosun Co., Ltd.*................................. 5,500 1,170,108 475,783 1.1
Multimedia satelite based services
LG AD Inc................................................. 12,000 600,005 735,301 1.7
Advertising agencies
Serome Technology Inc..................................... 11,400 979,495 335,913 0.8
----------- ----------- -----
Computer telephony solutions
Total Services............................................ 2,749,607 1,546,997 3.6
----------- ----------- -----
Telecommunications
Korea Telecom Corp........................................ 50,100 3,867,018 3,422,014 8.1
Korea Telecom Corp. ADR................................... 40,600 1,463,748 1,400,700 3.3
Telecommunications
Hansol M. Com Co., Ltd.*.................................. 14,000 495,032 279,432 0.7
Mobile telecommunications and voice mail services
LG Information and Communications Co., Ltd................ 11,500 1,033,978 886,010 2.1
Telecommunications
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS-(Continued)
APRIL 30, 2000
(Unaudited)
% of
Market Net
Shares Cost Value Assets
------ ---- ------ ------
<S> <C> <C> <C> <C>
SK Telecom Co., Ltd...................................... 9,900 $ 1,443,142 $ 2,631,674 6.2
SK Telecom Co., Ltd. ADR................................. 14,670 94,568 470,357 1.1
----------- ----------- ------
Mobile telecommunications and paging services
Total Telecommunications................................. 8,397,486 9,090,187 21.5
----------- ----------- ------
Utilities
Korea Electric Power Corp................................ 96,600 2,531,496 2,829,016 6.7
----------- ----------- ------
Power supplier
TOTAL KOREAN EQUITY SECURITIES........................... 38,085,243 39,866,673 94.2
----------- ----------- ------
Time Deposit Principal
First National Bank-interest bearing call account Amount
------
6.00% due 5/1/00....................................... $1,700,000 $ 1,700,000 $1,700,000 4.0
----------- ----------- ------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES............... 1,700,000 1,700,000 4.0
----------- ----------- ------
TOTAL INVESTMENTS........................................ 39,785,243 41,566,673 98.2
OTHER ASSETS LESS LIABILITIES, NET....................... 770,166 770,166 1.8
----------- ----------- ------
NET ASSETS............................................... $40,555,408 $42,336,839 100.0
=========== =========== ======
*Non-income producing security
+Securities may only be sold to institutional buyers. At April 30, 2000 the value of these securities amounted to $921,276
or 2.2% 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, 2000.
Korean Won KRW 1,109.75 = $1.00
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2000
(Unaudited)
<S> <C>
Investments in securities, at market value (cost-$38,085,243).......................................... $ 39,866,673
Investments in short-term securities, at market value (cost-$1,700,000)................................ 1,700,000
Receivable for dividends and interest, net of withholding taxes........................................ 20,327
Cash................................................................................................... 906,579
------------
Total Assets................................................................................... 42,493,579
------------
Accrued management fee................................................................................. 43,733
Other accrued expenses................................................................................. 112,935
Total Liabilities............................................................................... 156,668
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......................... (50,084,843)
Unrealized net appreciation on investments and foreign exchange........................................ 1,781,420
Accumulated net investment income...................................................................... 126,450
------------
Net Assets .................................................................................... $ 42,336,911
============
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, 2000
(Unaudited)
<S> <C> <C>
Dividend income (less $108,840 withholding taxes)................................... $550,794
Interest income..................................................................... 27,145
--------
Total lncome................................................................... $577,939
--------
Management fee...................................................................... 290,055
Custodian fees...................................................................... 54,782
Auditing and tax reporting fees..................................................... 29,666
Shareholder reports................................................................. 24,024
Transfer agency fees................................................................ 14,924
Legal fees.......................................................................... 12,376
Directors' fees and expenses........................................................ 10,010
Annual meeting expenses............................................................. 10,010
Insurance expenses.................................................................. 728
Miscellaneous....................................................................... 4,914
--------
Total Expenses................................................................. 451,489
----------
NET INVESTMENT INCOME............................................................... 126,450
----------
Realized gain (loss) on investments and foreign currency transactions:
Net realized gain on investments.................................................... 2,087,730
Net realized loss on foreign exchange............................................... (3,037,894)
----------
Net realized loss on investments and foreign exchange............................... (950,164)
----------
Change in net unrealized depreciation on investments................................ (9,780,840)
Change in net unrealized appreciation on translation of foreign currency and
other assets and liabilities denominated in foreign currency................ 5,596,047
----------
Net realized and unrealized loss on investments and foreign exchange................ (5,134,957)
----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................ ($5,008,507)
==========
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months
Ended For the Year
April 30, 2000 Ended
(Unaudited) October 31, 1999
------------------ ----------------
<S> <C> <C>
Net investment income (loss)....................................................... $ 126,450 ($308,463)
Net realized gain (loss) on investments............................................ 2,087,730 (2,148,882)
Net realized loss on foreign exchange.............................................. (3,037,894) (4,215,827)
Change in net unrealized appreciation/(depreciation) on investments................ (9,780,840) 23,816,481
Change in net unrealized appreciation on transaction of foreign
currency and other assets and liabilities denominated in foreign
currency......................................................................... 5,596,047 6,858,982
------------ ------------
Decrease in net assets derived from investment activities.......................... (5,008,507) 24,002,291
------------ ------------
Beginning of period................................................................. 47,345,418 23,343,127
------------ ------------
End of period (including accumulated undistributed net investment
income of $126,450 and $0, respectively).......................................... $42,336,911 $47,345,418
============ ============
See notes to financial statements
</TABLE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
Korea Equity Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a nondiversified, closed-end management investment
company. The Fund was incorporated in Maryland on September 7, 1993 and
investment operations commenced on December 3, 1993. 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
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 losses resulting from changes in the exchange rate during
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 April 30, 2000. 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
April 30, 2000, 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 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 an increase in
accumulated net investment income of $308,463 and an increase 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.
<TABLE>
<CAPTION>
Selected per share data and ratios for a share of common stock outstanding throughout each period:
For the Six
Months Ended For the Year Ended
April 30, 2000 October 31,
-------------- ----------------------------------------------------
(Unaudited) 1999 1998 1997 1996 1995
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........................ $5.63 $2.78 $3.55 $7.42 $10.06 $11.08
----- ----- ----- ----- ------ ------
Net investment income (loss) .......................... 0.02 (0.04) (0.03) (0.02) (0.06) (0.07)
Net realized and unrealized gain (loss) on
investments and foreign currency ..................... (0.62) 2.89 (0.74) (3.85) (2.56) (0.67)
----- ----- ----- ----- ------ ------
Total from investment operations .......................... (0.60) 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 period ............................ $5.03 $5.63 $2.78 $3.55 $7.42 $10.06
Market value, end of period ............................... $3.5625 $4.375 $2.9375 $3.6875 $7.000 $9.125
Total investment return+ .................................. (18.6%) 48.9% (20.3%) (47.3%) (23.1%) (2.0%)
Net asset value total return++ ............................ (10.7%) 102.5% (21.7%) (50.3%) (26.1%) (6.6%)
Net assets, end of period (000) ....................... $42,337 $47,345 $23,343 $29,873 $62,356 $84,603
Operating expenses .................................... 1.77%* 2.22% 3.13% 2.29% 1.89% 1.86%
Net investment income (loss) .......................... 0.50%* (0.78%) (1.21%) (0.40%) (0.73%) (0.70%)
Portfolio turnover .................................... 55%* 34% 25% 22% 53% 117%
===== ===== ===== ===== ====== ======
------------------------
* 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
</TABLE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)-(Continued)
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 $290,055 for the six months ended April 30, 2000. For the six
months ended April 30, 2000, the Manager informed the Fund that NAM received
fees of $144,773 from the Manager. At April 30, 2000, the fee payable to the
Manager by the Fund was $43,733.
Certain officers and/or directors of the Fund are officers and/or
directors of the Manager. The Nomura Securities Co., Ltd. ("Nomura
Securities") (the Manager's indirect parent) earned $1,165 in commissions from
the Fund on the execution of portfolio securities transactions for the six
months ended April 30, 2000. 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 $10,010 for the
six months ended April 30, 2000.
Purchases and sales of investments, exclusive of investments in foreign
currency and short-term securities, for the six months ended April 30, 2000
were $13,723,419 and $15,402,626 respectively.
As of April 30, 2000, net unrealized appreciation on investments,
exclusive of investments in foreign currency and short-term securities, for
Federal income tax purposes was $1,781,430 of which $10,183,278 related to
appreciated securities and $8,401,848 related to depreciated securities. The
aggregate cost of investments, exclusive of investments in foreign currency
and short-term securities, at April 30, 2000 for Federal income tax purposes
was $38,085,243. 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.
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 J. Boretti, Secretary and Treasurer
MANAGER
Nomura Asset Management U.S.A. Inc.
180 Maiden Lane
New York, New York 10038-4936
Internet Address
www.normura-asset.com
INVESTMENT ADVISOR KOREA
EQUITY
Nomura Asset Management Co., Ltd. FUND, INC.
1-14, 2-chome, Nihonbashi, Chuoku,
Tokyo 103-8260, Japan
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 SEMI-ANNUAL REPORT
P.O. Box 8209
Boston, Massachusetts 02266-8200
COUNSEL APRIL 30, 2000
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
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.
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.
