AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON ^
SEPTEMBER 15 , 1994
SECURITIES ACT FILE NO. 33- 81186
INVESTMENT COMPANY ACT FILE NO. 811- 8608
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
^[ ] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
^[ ] AMENDMENT NO. 1
________________________
FIDELITY ADVISOR KOREA FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
82 DEVONSHIRE STREET
BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 426-5523
________________________
ARTHUR S. LORING, SECRETARY
FIDELITY ADVISOR KOREA FUND, INC.
82 DEVONSHIRE STREET
BOSTON, MASSACHUSETTS 02109
(NAME AND ADDRESS OF AGENT FOR SERVICE)
________________________
WITH COPIES TO:
LAURENCE E. CRANCH, ESQ.
ROGERS & WELLS
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(212) 878-8000
SARAH E. COGAN, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017-3909
(212) 455-2000________________________
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities
Act of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. ^[x]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TITLE OF SECURITIES AMOUNT BEING REGISTERED PROPOSED MAXIMUM PROPOSED AMOUNT OF
BEING REGISTERED OFFERING PRICE MAXIMUM REGISTRATION
PER SHARE (2) AGGREGATE FEE (3)
OFFERING PRICE (2)
Common Stock, $.001 Par Value 21,500 Shares(1) ^ $15.00 $322,500 $1,112
</TABLE>
(1) Includes 3,225 shares subject to the Underwriters' over-allotment
option.
(2) Estimated solely for purposes of calculating the registration fee.
(3) Includes $1,000 registration fee under the Investment Company Act of
1940.
________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
CROSS REFERENCE SHEET
PARTS A AND B OF PROSPECTUS*
ITEMS IN PARTS A AND B OF FORM N-2 LOCATION IN PROSPECTUS
1. Outside Front Cover Front Cover Page
2. Inside Front and Outside Back Cover
Page Front Cover Page; Inside Front Cover Page; Outside Back Cover Page
3. Fee Table and Synopsis Prospectus Summary; Summary of Expenses
4. Financial Highlights Not Applicable
5. Plan of Distribution Cover Page; Prospectus Summary; Underwriting
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Registrant Cover Page; Prospectus Summary;
The Fund; Investment Objective and Policies; Investment Restrictions; Risk
Factors and Special Considerations; Description of Capital Stock
9. Management Management of the Fund; Portfolio Transactions; Description
of Capital Stock; Custodians, Transfer Agent, Dividend Paying Agent and
Registrar
10. Capital Stock, Long-Term Debt and
Other Securities Prospectus Summary; Dividends and Distributions;
Dividend Reinvestment and Cash Purchase Plan; Taxation; Description of
Capital Stock; Underwriting
11. Defaults and Arrears on Senior
Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement
of Additional Information Not Applicable
14. Cover Page Not Applicable
15. Table of Contents Not Applicable
16. General Information and History The Fund
17. Investment Objective and Policies Investment Objective and Policies;
Investment Restrictions
18. Management Management of the Fund
19. Control Persons and Principal Holders
of Securities Not Applicable
20. Investment Advisory and Other Services Management of the Fund;
Custodian, Transfer Agent, Dividend Paying Agent and Registrar; Experts
21. Brokerage Allocation and Other
Practices Portfolio Transactions
22. Tax Status Taxation
23. Financial Statements Report of Independent Accountants; Statement of
Assets and Liabilities
____________
* Pursuant to the General Instructions to Form N-2, all information
required to be set forth in Part B: Statement of Additional Information has
been included in Part A: The Prospectus.
SUBJECT TO COMPLETION, DATED ^ SEPTEMBER 15 , 1994
User-defined Box 1
PROSPECTUS
, 1994
Shares
FIDELITY ADVISOR
KOREA FUND, INC.
[LOGO] COMMON STOCK
Fidelity Advisor Korea Fund, Inc. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund's
investment objective is long-term capital appreciation. The Fund seeks to
achieve its objective by investing primarily in equity and debt securities
of Korean Issuers (as defined in this Prospectus). Under normal market
conditions, the Fund will invest at least 65% of its total assets in such
securities. The Fund's investment manager and investment adviser currently
anticipate that, once fully invested, at least 80% of the Fund's net assets
will be invested in equity securities of Korean Issuers. There can be no
assurance that the Fund's investment objective will be achieved. Up to 35%
of the Fund's total assets may be invested in equity and debt securities of
Asian Issuers (as defined in the Prospectus) other than Korean Issuers.
Due to the risks inherent in international investments generally, the Fund
should be considered as a vehicle for investing a portion of an investor's
assets in foreign securities markets and not as a complete investment
program. INVESTMENT IN KOREAN SECURITIES INVOLVES RISKS THAT ARE NOT
NORMALLY INVOLVED IN INVESTMENTS IN SECURITIES OF U.S. COMPANIES. IN
ADDITION, ALTHOUGH THE FUND CURRENTLY INTENDS TO INVEST PRINCIPALLY IN
EQUITY SECURITIES, IT MAY INVEST WITHOUT LIMITATION IN HIGH RISK, HIGH
YIELD DEBT INSTRUMENTS THAT ARE LOW RATED OR UNRATED AND ARE PREDOMINANTLY
SPECULATIVE. INVESTMENT IN THE FUND SHOULD BE CONSIDERED SPECULATIVE. SEE
"INVESTMENT OBJECTIVE AND POLICIES" AND "RISK FACTORS AND SPECIAL
CONSIDERATIONS."
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE SHARES
(AS DEFINED IN THIS PROSPECTUS). THE ^ FUND'S COMMON STOCK HAS BEEN
APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE ^ UPON NOTICE OF
ISSUANCE UNDER THE SYMBOL "FAK." SHARES OF CLOSED-END INVESTMENT COMPANIES
HAVE IN THE PAST FREQUENTLY TRADED AT DISCOUNTS FROM THEIR NET ASSET
VALUES. THE RISK OF LOSS ASSOCIATED WITH THIS CHARACTERISTIC OF CLOSED-END
INVESTMENT COMPANIES MAY BE GREATER FOR INVESTORS PURCHASING SHARES IN THE
OFFERING AND EXPECTING TO SELL THE SHARES SOON AFTER THE COMPLETION
THEREOF. THERE IS NO RESTRICTION ON THE NUMBER OF SHARES THAT MAY BE
PURCHASED SUBJECT TO THE TRANSFER RESTRICTION DESCRIBED IN THE FOOTNOTES TO
THE TABLE BELOW, EXCEPT THAT THE FUND WILL COMPLY, WITH RESPECT TO
NON-RESTRICTED SHARES, WITH THE DISTRIBUTION REQUIREMENTS OF THE NEW YORK
STOCK EXCHANGE. SEE "UNDERWRITING." TO THE EXTENT INVESTORS WHO ARE
SUBJECT TO THE TRANSFER RESTRICTION SELL THEIR SHARES ONCE THE TRANSFER
RESTRICTION IS NO LONGER APPLICABLE, THE MARKET PRICE OF THE FUND'S COMMON
STOCK COULD BE ADVERSELY AFFECTED. IN ADDITION, THE TRANSFER RESTRICTION
WILL REDUCE THE NUMBER OF SHARES AVAILABLE FOR SALE IN THE SECONDARY MARKET
DURING THE 90-DAY RESTRICTION PERIOD.
This Prospectus sets forth concisely information about the Fund that a
prospective investor should know before purchasing Shares. Investors are
advised to read this Prospectus and retain it for future reference.
(CONTINUED ON FOLLOWING PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PRICE SALES LOAD PROCEEDS
TO PUBLIC(1) (1)(2) TO FUND(3)
Per Share $15.00 $ $
Total(4) $ $ $
(FOOTNOTES ON FOLLOWING PAGE)
The Shares are offered by the several U.S. Underwriters subject to prior
sale, when, as and if delivered to and accepted by them, subject to
approval of certain legal matters by counsel for the U.S. Underwriters and
certain other conditions, including the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the share certificates will be made in New York, New York on or
about , 1994.
________________________
BARING SECURITIES INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
IN CONNECTION WITH THIS OFFERING, THE U.S. UNDERWRITERS AND THE
INTERNATIONAL UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT LEVELS ABOVE THOSE
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKETS OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there by any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
(CONTINUED FROM PREVIOUS PAGE)
Of the __________ shares of the Fund's Common Stock offered (the
"Shares"), __________ Shares are being offered by the U.S. Underwriters in
the United States and Canada (the "U.S. Offering") and __________ Shares
are being offered by the International Underwriters outside the United
States and Canada (the "International Offering" and together with the U.S.
Offering, the "Offering"), subject to transfer between the U.S.
Underwriters and the International Underwriters (collectively, the
"Underwriters"). The initial public offering price and sales load per
Share are the same for both the U.S. Offering and the International
Offering.
In order to raise additional capital to take advantage of additional
investment opportunities expected to occur if and when Korea relaxes
certain of its investment restrictions currently imposed on foreign
investors, the Fund currently intends, subject to approval by its Board of
Directors, to make a rights offering to its shareholders at the time such
investment restrictions are relaxed. See "Future Rights Offering."
Fidelity Management & Research Company will serve as investment manager to
the Fund. Fidelity International Investment Advisors will serve as the
Fund's investment adviser. Pursuant to a Sub-Advisory Agreement, Fidelity
International Investment Advisors has delegated certain of its
responsibilities for the day-to-day management of the Fund to Fidelity
Investments Japan Limited, which will serve as the Fund's sub-adviser and
will manage the Fund's portfolio through its Tokyo office.
The address of the Fund is 82 Devonshire Street, Boston, Massachusetts
02109. The Fund's telephone number is (800) 426- ^ 5523 ^ .
________________________
(NOTES FROM PRIOR PAGE)
(1) THE "PRICE TO PUBLIC" AND "SALES LOAD" PER SHARE WILL BE REDUCED TO $
AND $ , RESPECTIVELY, FOR PURCHASES IN SINGLE TRANSACTIONS (AS
DEFINED HEREIN UNDER "UNDERWRITING") OF BETWEEN AND ^
SHARES , INCLUSIVE, TO $ AND $ , RESPECTIVELY, FOR
PURCHASES IN SINGLE TRANSACTIONS OF BETWEEN AND ^
SHARES , INCLUSIVE, AND TO $ AND $ , RESPECTIVELY, FOR
PURCHASES IN SINGLE TRANSACTIONS OF OR MORE ^ SHARES ,
SUBJECT TO THE FOLLOWING SENTENCE. PURCHASERS WHO AGREE TO PURCHASE
^ SHARES OF ^ COMMON STOCK AT THE REDUCED PRICE WILL BE
RESTRICTED FROM TRANSFERRING SUCH ^ SHARES FOR A PERIOD OF 90
DAYS AFTER THE CLOSING OF THE OFFERING.
(2) THE FUND, THE INVESTMENT MANAGER, THE INVESTMENT ADVISER AND THE
SUB-ADVISER HAVE AGREED TO INDEMNIFY THE SEVERAL UNDERWRITERS AGAINST
CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF
1933.
(3) BEFORE DEDUCTING EXPENSES PAYABLE BY THE FUND, ESTIMATED AT $
, WHICH INCLUDE $ TO BE PAID TO THE UNDERWRITERS IN PARTIAL
REIMBURSEMENT OF THEIR EXPENSES .
(4) THE FUND HAS GRANTED THE U.S. UNDERWRITERS OPTIONS, EXERCISABLE ONE OR
MORE TIMES WITHIN 45 DAYS AFTER THE DATE OF THIS PROSPECTUS, TO PURCHASE UP
TO AN AGGREGATE OF ADDITIONAL SHARES OF ^ COMMON
STOCK AT THE PRICE TO PUBLIC LESS SALES LOAD SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF ALL OF SUCH SHARES ARE PURCHASED, THE TOTAL
PRICE TO PUBLIC, SALES LOAD AND PROCEEDS TO FUND WILL BE $ , $
AND $ , RESPECTIVELY, ASSUMING NO REDUCTION AS
DESCRIBED IN (1) ABOVE. SEE "UNDERWRITING."
________________________
Unless otherwise specified, references in this Prospectus to "dollars,"
^"U.S.$, " or "$" are to U.S. dollars and references to "Won" or ""
are to Korean Won. On , the market average exchange rate
of the Won to the U.S. dollar, as published by the Korea Financial
Telecommunications and Clearings Institute (the "Market Average Exchange
Rate"), was = $1.00. Unless otherwise indicated, the U.S.
dollar equivalent of information in Korean Won as of a date or for a period
is as of such date or for the end of such period and is based on The Bank
of Korea concentration base rate, if pre-March 1990, or the Market Average
Exchange Rate, ^ from March 1990 ^ . No representation is
made that the Won or dollar amounts in this Prospectus could have been or
could be converted into Won or dollars, as the case may be, at any
particular rate or at all. See "Risk Factors - Exchange Rate Fluctuations"
and "The Republic of Korea - Foreign Exchange " for additional
information on the historical rate of exchange between the dollar and Won.
Certain numbers in this Prospectus have been rounded for ease of
presentation, and, as a result, may not total precisely.
^ SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.
The Fund The Fund is a newly organized, non-diversified, closed-end
management investment company established for investors seeking to invest a
portion of their assets in a professionally managed portfolio composed
primarily of securities of issuers in the Republic of Korea ("Korea").
Although the Fund currently intends to invest principally in equity
securities, it also may invest in debt securities as described below.
Fidelity Management & Research Company (the "Investment Manager") will
serve as the Fund's investment manager and will supervise the Fund's
investment program. Fidelity International Investment Advisors (the
"Investment Adviser"), will be the investment adviser and may in its sole
discretion either have day-to-day management responsibility or delegate
such responsibility to Fidelity Investments Japan Limited (the
"Sub-Adviser"). Pursuant to the Sub-Advisory Agreement, the Investment
Adviser has delegated certain of its responsibilities for the
day-to-day management of the Fund to the Sub-Adviser which will manage the
Fund's portfolio through its Tokyo office. The Investment Adviser will
assist the Sub-Adviser and will provide research and trading facilities to
the Sub-Adviser. See "The Fund" and "Management of the Fund - Investment
Manager, Investment Adviser and Sub-Adviser." (The Investment Manager,
Investment Adviser and Sub-Adviser may be collectively referred to as
"Fidelity").
Investment in Korea Fidelity believes that attractive investment
opportunities may ^ b e found in Korea due to its broad industrial
base, large consumer population and ample labor supply, together with
the evolving process of the liberalization and reform of the securities
markets in Korea. ^ Korea's ^ significant commitment to
research and development generally, coupled with its position as a
leading exporter in the Asia Pacific region may contribute significantly to
the potential for ^ growth in the Korean economy. Continued
liberalization of the securities markets along with an increase in the
number of Korean companies that are available for investment to foreign
investors would enable the Fund to participate in ^ Korea's
economic growth potential . There can be no assurance, however,
that such liberalization or economic growth will continue to occur or that
the Fund will be able to participate in and benefit from any future
liberalization or economic growth.
Investment Objective and Policies The Fund's investment objective is
long-term capital appreciation. The Fund will seek to obtain its objective
by investing primarily in equity and debt securities of Korean
Issuers (as defined below). As a matter of fundamental policy and under
normal market conditions, at least 65% of the Fund's total assets will be
invested in equity and debt securities of Korean Issuers. Fidelity
currently anticipates that, once the Fund is fully invested, at least 80%
of its net assets will be invested in equity securities of Korean Issuers.
No assurance can be given that the Fund's investment objective will be
realized. See "Investment Objective and Policies" and "Risk Factors and
Special Considerations."
As used in this Prospectus, Korean Issuers are entities that, as
determined by Fidelity, (i) are organized under the laws of Korea
^ and conduct business in Korea, (ii) regardless of where
organized, ^ derive at least 50% of their revenues or profits from
goods produced or sold, investments made or services performed or have at
least 50% of their assets located in Korea, (iii) have the primary trading
market for their securities in Korea or (iv) are governments, or their
agencies or instrumentalities or other political subdivisions, of Korea.
Equity securities in which the Fund may invest include common and preferred
stock, American, ^ global or other types of ^
depositary receipts , convertible bonds, notes and debentures, equity
interests in trusts, partnerships, joint ventures ^ and common stock
purchase warrants and rights. Korean law ^ currently ^
permits foreign investors, such as the Fund, to invest in ^
the following equity securities ^: (i) common and preferred
stock listed on the Korea Stock Exchange (the "KSE") ^ ; (ii)
non-guaranteed convertible bonds of listed small and medium-sized companies
which are listed on the KSE; (iii) global or other types of depositary
receipts representing rights in shares of a Korean company, which are
issued outside Korea; (iv) convertible bonds denominated in non-Won
currency and issued outside Korea; and (v) equity warrants issued together
with bonds denominated in non-Won currency outside Korea.
^ The Fund may invest in debt securities ^. Debt
securities of Korean Issuers will be considered as part of the Fund's
policy of investing at least 65% of its total assets in securities of
Korean Issuers under normal market conditions . The Fund's assets may
be invested in debt securities when Fidelity believes that such securities
offer opportunities for long-term capital appreciation. The Fund's
investments in debt securities will include bonds, notes, bills or other
fixed income or floating rate debt obligations, including participations in
and assignments of portions of loans. These debt securities may be unrated
or rated below investment grade. Non-convertible debt securities in which
the Fund may invest include U.S. dollar or Won-denominated debt securities
issued by Korean Issuers and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Korean law does not
currently permit foreign investors such as the Fund to acquire debt
securities denominated in Won , except for certain low interest rate
government or public bonds to be designated by the Securities and Exchange
Commission of Korea (the "KSEC") from time to time in the primary market
subject to certain foreign holding limits and procedural requirements.
Certain investment practices in which the Fund is authorized to engage,
such as investing in ^ Korean government debt ^ , certain
currency hedging techniques, the lending of portfolio securities, forward
commitments, standby commitment agreements and the purchase or sale of put
and call options are not currently permitted , with certain limited
exceptions, under Korean laws or regulations. The Fund may engage in
these investment practices to the extent the practices become permissible
under Korean law in the future ^ . See "Investment Objective and
Policies - Other Investment Policies."
^
Most of the securities purchased by the Fund are expected to be traded on a
foreign stock exchange or in a foreign over-the-counter market. However,
the Fund may invest up to 35% of its total assets in securities that are
illiquid, that is, securities for which there is no readily available
market, or no market at all. See "Investment Objective and Policies."
^ The Fund may invest up to 35% of ^ its total
assets ^ in equity and debt securities of Asian
Issuers, ^ if warranted, in Fidelity's judgment, by economic,
political or regulatory conditions in Korea or valuations in the Korean
securities markets relative to such conditions. Asian Issuers are
issuers (other than issuers meeting the definition of Korean Issuers as
defined above), ^ that, as determined by Fidelity, (i) are
organized under the laws of ^ Hong Kong, Japan or Taiwan and
conduct business in their country of organization , (ii)
regardless of where organized, ^ derive at least 50% of their
revenues or profits, from goods produced or sold, investments made, or
services performed, in ^ Hong Kong, Japan or Taiwan , (iii)
have the primary trading market for their securities in ^ Hong
Kong, Japan or Taiwan or (iv) are governments, or their agencies,
instrumentalities or other political sub-divisions, of ^ Hong
Kong, Japan or Taiwan. See "Risk Factors and Special Considerations -
Investments in Asian Issuers."
During the Fund's initial investment period, and for ^ temporary
^ defensive purposes, the Fund may invest without limitation in
Temporary Investments (as defined below). See "Investment Objective and
Policies - Temporary Investments."
After the Fund's initial investment period, for temporary defensive
purposes, the Fund may vary from its investment policies by investing,
without limitation in preferred stocks and investment grade debt
instruments, including unrated securities of equivalent quality as
determined by the Investment Adviser or the Sub-Adviser, short-term
indebtedness or cash equivalents denominated in U.S. dollars or, if it
becomes permissible for the Fund to so invest, denominated in Won. No
assurance can be given that the Fund's investment objective will be
achieved. See "Investment Objective and Policies" and "Risk Factors and
Special Considerations."
The Offering The Fund is offering shares of Common Stock,
$0.001 par value (the "Shares"), for sale in concurrent offerings. Of the
Shares being offered, Shares (the "U.S. Shares") are being offered
by a group of U.S. Underwriters (the " U.S. Underwriters") led by
Baring Securities, Inc. ^ , Donaldson, Lufkin & Jenrette Securities
Corporation and [other co-managers] and Shares (the
"International Shares") are being offered by a group of underwriters (the
"International Underwriters") led by Baring Brothers & Co., Limited
^ , Donaldson, Lufkin & Jenrette Securities Corporation and [other
co-managers] . The initial public offering price of the Shares is
$15.00 per share, which will be reduced to $ , respectively, for
purchases in single transactions (as defined under "Underwriting" below)
of between and Shares, inclusive, to $ and $ ,
respectively, for purchases in single transactions of between and
Shares, inclusive, and to $ and $ , respectively, for purchases
in single transactions of or more Shares, subject to the
following sentence. Purchasers who agree to purchase Shares at a reduced
price will be restricted from transferring such Shares for a period of 90
days after the closing of the Offering. There is no restriction on the
number of Shares that may be purchased subject to the transfer restriction
described above, except that the Fund will comply, with respect to
non-restricted Shares, with the distribution requirements of the New York
Stock Exchange (the "NYSE"). The U.S. Underwriters have also been granted
options to purchase an aggregate of additional shares of the Fund's
Common Stock to cover over-allotments. The Shares are subject to transfer
between the underwriting syndicates by their respective representatives.
See "Underwriting."
Future Rights Offering In order to raise additional capital to take
advantage of additional investment opportunities expected to occur if and
when Korea relaxes certain of its investment restrictions currently imposed
on foreign investors, the Fund currently intends, subject to approval by
its Board of Directors, to make a rights offering to its shareholders at
the time such investment restrictions are relaxed or when the timing of
such relaxation becomes more certain . See "Future Rights Offering."
Listing The ^ Fund's Common Stock has been approved for
listing on the ^ NYSE upon notice of issuance.
Stock Symbol ^ "FAK" ^
Investment Manager,
Investment Adviser and Sub-Adviser Fidelity Management & Research
Company, a leading international investment manager, will act as Investment
Manager of the Fund and will supervise the Fund's investment program. As
of , the Investment Manager and its affiliates had over $
billion under management of which more than $ billion was invested
in non-U.S. securities (including over $ billion in Asian
securities, over $ ____ billion in Korean securities and over $ ____
billion managed from Asian offices). The Fidelity organization has more
than 20 years experience investing in Asia. Fidelity International
Investment Advisors ("FIIA"), the Fund's Investment Adviser and an
affiliate of the Investment Manager is responsible for the day-to-day
management, of the Fund's investments. Pursuant to the Sub-Advisory
Agreement, the Investment Adviser has delegated certain of its
responsibilities for the day-to-day management of the Fund to Fidelity
Investments Japan Limited, which will manage the Fund's portfolio through
its Tokyo office.
^ The Investment Manager, together with the Investment Adviser, the
Sub-Adviser and its other affiliates (sometimes collectively referred to
herein as "Fidelity"), has extensive research capabilities within the Asian
region, and maintains offices in Hong Kong, Singapore and Tokyo, which are
staffed by [__] investment professionals. The Sub-Adviser, through its
Tokyo office, routinely researches and screens for investment potential in
Korean companies. The Sub-Adviser seeks to identify investments through
management contacts and on-site visits of companies within Korea. ^
In 1993, Fidelity conducted 179 company visits in Korea and contacted 38
Korean companies.
Edward ^ S.J. Bang, who has served as a Korean analyst for
various Fidelity funds managed by Fidelity since September 1993, will
serve as the Fund's principal portfolio manager. See "Management of the
Fund - Investment Manager, Investment Adviser and Sub-Adviser."
Advisory Fees and Expenses The Fund will pay the Investment Manager a
monthly basic fee at an annual rate of 1.00% of the Fund's average daily
net assets for its services. The Investment Manager will pay the
Investment Adviser 60% of the fees paid by the Fund to the Investment
Manager. The Investment Adviser will pay the Sub-Adviser a fee equal to
50% of the fee paid to the Investment Adviser with respect to any Fund
assets managed by the Sub-Adviser on a discretionary basis, and 30% of the
fee paid to the Investment Adviser with respect to any Fund assets managed
by the Sub-Adviser on a non-discretionary basis. See "Management of the
Fund - Compensation and Expenses." The advisory fee paid by the Fund is
higher than those paid by most U.S. investment companies investing
exclusively in the securities of U.S. issuers, primarily because of the
additional time and expense required of the Investment Manager, the
Investment Adviser and the Sub-Adviser in pursuing the Fund's policy of
investing in Korean securities, including illiquid Korean securities. In
addition, the operating expense ratio of the Fund can be expected to be
higher than that of a fund investing primarily in securities of U.S.
issuers. It is expected, however, that the Fund's investment advisory fee,
as well as its overall expense ratio, will be comparable to that of many
closed-end management investment companies of comparable size that invest
primarily in securities of issuers in a single foreign country.
Administration Fidelity Service Co. ("Service"), a division of FMR
Corp., the parent company of the Investment Manager, will serve as the
Fund's administrator pursuant to the terms of an Administration Agreement.
The Fund will pay to Service a monthly fee at an annual rate of .20% of the
Fund's average daily net assets for its services. See "Management of the
Fund - Administration."
Dividends and Distributions The Fund intends to distribute annually to
holders of Common Stock substantially all of its net investment income, and
to distribute any net realized capital gains at least annually. See
"Dividends and Distributions; Dividend Reinvestment and Cash Purchase
Plan."
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder may elect to have all dividends and distributions
automatically reinvested in additional shares of Common Stock of the Fund.
Participants also have the option of making additional cash payments,
annually, to be used to acquire additional shares of Common Stock of the
Fund in the open market. Shareholders whose shares are held in the name of
a broker or nominee should contact such broker or nominee to confirm that
they may participate in the Fund's Plan.
See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase
Plan."
Annual Tender Offers and
Share Repurchases Shares of common stock of closed-end investment
companies frequently trade at a discount from net asset value but may trade
at a premium. The Fund cannot predict whether shares of its Common Stock
will trade at, below or above net asset value. In recognition of the
possibility that the Fund's Common Stock may trade at a discount from net
asset value, the Board of Directors of the Fund has determined that annual
tender offers for shares of its Common Stock may help reduce any market
discount from net asset value that may develop. In this connection, during
the first calendar quarter of each calendar year commencing in ^
1998 , the Board of Directors of the Fund has committed to conduct a
tender offer for shares of its Common Stock on an annual basis under the
circumstances described below. During the fourth quarter of the previous
calendar year, the Board of Directors will fix in advance a period of 12
consecutive calendar weeks beginning during such fourth calendar quarter
and ending in the immediately following first quarter for the purpose of
calculating the average trading price of the Fund's Common Stock. In the
event that the average of the closing prices of the Common Stock of the
Fund for the last trading day in each week during such 12 week period, on
the principal securities exchange where listed, is below the initial
offering price of $15.00 per share and represents a discount of 10% or more
from the average net asset value of the Fund as determined on the same days
in the same period, a tender offer for up to 10% of the then outstanding
shares of Common Stock of the Fund will be conducted during such first
calendar quarter. In addition, the Board of Directors may consider
open market repurchases of its Common Stock or converting the Fund into an
open-end investment company. No assurance can be given that annual tender
offers or repurchases of shares of Common Stock will reduce or eliminate
any market discount from net asset value of the Fund's Common Stock. There
are certain risks associated with tender offers and repurchases. See
"Annual Tender Offers and Share Repurchases," "Risk Factors and Special
Considerations" and "Taxation - U.S. Federal Income Taxes."
Custodian, Transfer Agent, Dividend
Paying Agent and Registrar The Chase Manhattan Bank, N.A. ("Chase")
will act as custodian for the Fund's assets. Chase or the Fund will
designate foreign sub-custodians approved by the Fund's Board of Directors
in accordance with the regulations of the Securities and Exchange
Commission (the "Commission" or the "SEC"). ^ The Hong Kong and
Shanghai Banking Corporation Limited, Seoul Branch will serve as the
Fund's sub-custodian for its assets held in Korea. Chase or the Fund may
designate additional sub-custodians. ^ State Street Bank and Trust
Company will act as transfer agent, dividend paying agent and registrar for
the Fund's Common Stock. See "Custodian, Transfer Agent, Dividend Paying
Agent and Registrar." ^
Risk Factors and Special Considerations Because the Fund currently
intends to invest primarily in equity securities of Korean Issuers, an
investor in the Fund should be aware of certain risks relating to Korea,
the Korean securities markets and international investments generally which
are not typically associated with U.S. domestic investments.
Consistent with its investment objective and policies, the Fund may also
invest in part in Asian Issuers (Japan, Hong Kong and Taiwan). The risk
factors identified below generally also apply to investments the Fund may
make in Asian Issuers, although the specific nature of such risks may vary
according to the country in which investments are made. See "Risk Factors
and Special Considerations - Investments in Asian Issuers." In
particular, considerations and risks not typically associated with
investing in securities of U.S. domestic companies include (i) certain
restrictions on foreign investment in the Korean securities markets which
will preclude investment in certain securities by the Fund and limit
investment opportunities for the Fund; (ii) currency devaluations and
fluctuations in the rate of exchange between the dollar and the Won with
the resultant fluctuations in the net asset value of the Fund (which is
expressed in dollars); (iii) substantial government involvement in, and
influence on, the economy and the private sector; (iv) political, economic
and social uncertainty and instability, including, the potential for
increasing militarization in North Korea; (v) the substantially smaller
size and lower trading volume of the securities markets for Korean equity
securities compared to the U.S. securities markets, resulting in a
potential lack of liquidity and increased price volatility; (vi) the risk
that the sale of portfolio securities by the Korea Securities Market
Stabilization Fund (the "Stabilization Fund"), a fund established in order
to stabilize the Korean securities markets, or other large Korean
institutional investors may adversely impact the market value of securities
in the Fund's portfolio; (vii) the risk that less information with respect
to Korean companies may be available due to the fact that Korean
accounting, auditing and financial reporting standards are not equivalent
to those applicable to U.S. companies; (viii) heavy concentration of market
capitalization and trading volume in a small number of issuers, which
result in potentially fewer investment opportunities for the Fund; (ix)
fluctuations in the prices and premium valuations of securities held by
the Fund that are traded over the counter among foreign investors; (x)
controls on foreign investment and limitations on repatriation of
invested capital and on the Fund's ability to exchange Won for U.S.
dollars; ^(xi) the risk of nationalization or expropriation of
assets or confiscatory taxation; ^ ( xii) higher rates of
inflation; ^ (xiii) less government supervision and regulation of
Korean securities markets and participants in those markets;
^ ( xiv) settlement delays; ^ (xv) the risk that
dividends will be withheld at the source; ^(xvi) unavailability of
currency hedging techniques in the Korean markets; ^ ( xvii)
the fact that companies in Korea may be smaller, less seasoned and newly
organized; ^ ( xviii) the risk that it may be more difficult to
obtain and/or enforce a judgment in a court in Korea and outside the United
States generally; and ^(xix) the risk of taxation of the Fund, its
investments and its income by Korea. See "Risk Factors and Special
Considerations."
In addition, securities of other Asian Issuers may be subject to
greater degree of economic, political and social instability than is the
case in the United States and Western European countries. Such instability
may result from, among other things, the following: (i) authoritarian
governments or military involvement in political and economic
decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v)
ethnic, religious and racial disaffection. Such social, political and
economic instability could disrupt the principal financial markets in which
the Fund invests and cause losses to the Fund. See "Risk Factors and
Special Considerations."
Investment in securities of Korean companies by foreign investors is
subject to significant restrictions and controls. As a result, the Fund
may be limited in its investments or precluded from investing in certain
Korean companies, which may adversely affect the performance of the Fund.
Under the current regulations, foreign investors are allowed to invest in
almost all shares listed on the KSE, subject to certain ceilings on foreign
shareholdings and procedural requirements . The percentage of each
class of a company's outstanding equity shares that may be held by a
particular foreign investor, and by all foreign investors as a group is
generally ^ limited to 3% and 10%, respectively. The 3% and 10%
limitations are reduced to 1% and 8%, respectively, for certain
government-designated public corporations ^ , shares of which
are listed on the KSE. Further, the 10% limitation may be increased
^ in certain cases , as determined by the ^ KSEC.
As of December 31, 1993, 165 companies listed on the KSE had reached or
exceeded the ^ aggregate foreign ownership limit ^ (23.8% of
all companies listed on the KSE) and an additional 159 companies were
within 0.5% of the limit. In addition, of the 30 largest KSE-listed
companies (as measured by market capitalization), [which accounted for
approximately 51.5% of the aggregate market capitalization of the KSE,] 22
had reached the applicable maximum aggregate foreign ownership limi t.
Foreign investors are, however, generally allowed to effect transactions
with other foreign investors through a securities company in Korea but off
the KSE ("foreign OTC transactions") in the shares of companies that
have reached or exceeded the maximum aggregate foreign ownership
limit (or such limit less odd-lot shares) . Such transactions may,
and often do, occur at a premium over prices on the KSE. There can be no
assurance that the Fund, if it purchases such shares at a premium, will be
able to realize such premium on the sale of such shares or that such
premium will not be adversely affected by changes in regulations (including
relaxation of the limitations on foreign ownership) or otherwise. See
"Risk Factors and Special Considerations - Investment Restrictions
and Foreign Exchange Controls." In determining the Fund's net asset
value, shares listed on the KSE which are traded by foreign investors in
foreign OTC transactions may be valued at prices at which it is expected
such securities may be sold by way of foreign OTC transactions, as
determined by or under direction of a committee appointed by the Board of
Directors. See "Net Asset Value."
The heavy concentration of market capitalization and trading volume in
a relatively small number of issuers, combined with U.S. regulatory
requirements, result in potentially fewer investment opportunities for the
Fund. As of June 30, 1994, the 30 largest companies by market
capitalization accounted for approximately 51.5% of the aggregate market
capitalization and from January 1, 1994 through June 30, 1994 accounted for
38.9% of the average daily trading volume of the KSE.
Because the Fund will invest in equity securities of Korean companies and,
^ to the extent permitted by applicable laws and regulations, it
may invest in Won-denominated fixed income securities (the market value
of each of which is determined in Won and the income from which will likely
be received in Won) and since the Fund's net asset value will be reported
and distributions from the Fund will be made in U.S. dollars, the value of
the Fund's assets will be adversely affected by a decline in the value of
the Won relative to the U.S. dollar. The Fund is authorized to engage in
foreign currency hedging transactions, which may involve special risks,
although such transactions, with certain exceptions, are not currently
permitted under Korean law or regulations. Given the restrictions,
limitations and risks associated with Won - U.S. dollar hedging
transactions, there can be no assurance that the Fund will be able to
effectively hedge currency exchange rate risk. See "Risk Factors and
Special Considerations - Exchange Rate Fluctuations" and "Appendix A -
General Characteristics and Risks of Derivatives."
The Korean government has historically exercised and continues to exercise
substantial influence over many aspects of the private sector. The Korean
government from time to time has informally influenced the payment of
dividends and the prices of certain products, encouraged companies to
invest or to concentrate in particular industries, induced mergers between
companies in industries suffering from excess capacity and induced private
companies to publicly offer their securities. The government has sought to
minimize excessive price volatility on the KSE through various steps,
including the imposition of limitations on daily price movements of
securities.
The value of the Fund's assets may be adversely affected by political,
economic or social instability in Korea, and by changes in Korean law or
regulations. ^ In addition, the economy of Korea may differ
favorably or unfavorably from the U.S. economy in such respects as the rate
of growth of gross domestic product, the rate of inflation, capital
investment, resource self-sufficiency and balance of payments position,
among others.
^ Political, economic and social uncertainty and instability,
including the possibility of increased militarization in North Korea, may
also adversely affect the value of the Fund's assets. The United States
maintains a military force in Korea to help deter the ongoing military
threat from North Korean forces. The situation remains a source of
tension, although negotiations to ease tensions and resolve the political
division of the Korean peninsula have been carried on from time to time.
There also have been efforts from time to time to increase economic,
cultural and humanitarian contacts between North Korea and Korea. There
can be no assurance that such negotiations or efforts will continue to
occur or will result in an easing of tensions between North Korea and
Korea.
The Korean securities markets are smaller than the securities markets of
the U.S. As of ^ June 30, ^ 1994 , the
aggregate market capitalization of equity securities listed on the KSE
totaled approximately ^ 128.4 trillion ^($159.4
billion), as compared to approximately $4.4 trillion ^ on the
^ NYSE on such date.
^
In 1990, the Stabilization Fund, a fund operated by its contributors which
include substantially all of the KSE-listed companies, Korean securities
companies and certain institutional investors, was established by the
securities industry with government co-operation in order to stabilize the
Korean securities markets primarily through the purchase and sale of
securities. As of [September 30, 1993], the Stabilization Fund owned
securities listed on the KSE with a value of approximately 4.5 trillion
($5.564 billion) and held cash reserves of approximately 0.7 trillion ^
($865 million) constituting, in the aggregate, approximately 4.9% of
the total listed equity market capitalization as of that date]. The sale
of portfolio securities by the Stabilization Fund could exert significant
downward pressure on the market prices of KSE-listed equity securities in
which the Fund may invest.
^
To the extent permitted by applicable law and regulations, the Fund may
invest up to 35% of its total assets in illiquid equity or debt securities,
that is securities for which there is no readily available market or no
market at all . Korean law does not currently permit foreign investors
such as the Fund to acquire debt securities denominated in Won or equity
securities of companies organized under the laws of Korea that are not
listed on the KSE , except for purchases of non-guaranteed convertible
bonds listed on the KSE which are issued by small and medium-sized
companies and participation in new issues of certain low interest rate
government and public bonds each of which are subject to certain investment
ceilings and procedural requirements . Investments in securities for
which there is no readily available market may involve a high degree of
business and financial risk that can result in substantial or total loss of
the Fund's investment in such securities. Because of the absence of any
trading market for these investments, the Fund may take longer to dispose
of these positions than it would for listed securities. In addition to
financial and business risks, issuers whose securities are not listed are
not subject to the same disclosure requirements applicable to issuers whose
securities are listed. See "Risk Factors and Special Considerations -
Thinly Traded Markets and Illiquid Investments."
^ Settlement ^ procedures in Korea are somewhat
less developed and reliable than those in the United States and in other
developed securities markets, and the Fund may experience settlement delays
or other material difficulties. Accordingly, the Fund may be subject to
significant delays or limitations on the ^ volume of trading during
any particular period as a result of these factors. The foregoing factors
could impede the ability of the Fund to effect portfolio transactions on a
timely basis and could have an adverse impact on the net asset value of the
shares of the Fund's Common Stock and the price at which the shares
trade. ^
The value of any debt securities held by the Fund, and thus to some degree
the net asset value of the Fund's Common Stock, generally will fluctuate
with (i) changes in the perceived creditworthiness of the issuers of those
securities (ii) movements in interest rates, and (iii) changes in currency
exchange rates. The extent of the fluctuation will depend on various other
factors, including the maturity of the Fund's investments, the extent to
which the Fund holds instruments denominated in currencies other than the
U.S. dollar and the extent to which the Fund hedges its interest rate and
currency exchange rate risks. The Investment Adviser and the Sub-Adviser
will make independent evaluations as to the creditworthiness of issuers of
debt securities that may differ from those of internationally recognized
credit rating agency organizations, such as Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Ratings Group ("S&P"). The Fund's
success in attaining its investment objective with respect to investments
in debt securities will depend largely on the Investment Adviser's and the
Sub-Adviser's evaluation of the current and future creditworthiness of
issuers , and of interest rate trends .
The Fund will not limit the percentage of its debt securities investments
that may be low rated or unrated. The Fund's investments in Korean debt
securities may have credit quality below investment grade as determined by
internationally recognized credit rating agency organizations. Debt
securities rated below investment grade (commonly referred to as "junk
bonds") are considered to be speculative. Investment in low rated
securities typically involves risks not associated with higher rated
securities, including, among others, overall greater risk of failure to pay
interest and principal, potentially greater sensitivity to general economic
conditions, greater market price volatility and less liquid secondary
market trading. Certain of the Fund's investments may be considered to
have extremely poor prospects of ever attaining any real investment
standing, to have a current vulnerability to default, to be unlikely to
have the capacity to pay interest and repay principal when due in the event
of adverse business, financial or economic conditions, or to be in default
or not current in the payment of interest or principal. See "Risk Factors
and Special Considerations - Debt Securities - High Yield, High Risk
Securities " and "Appendix B - Debt Ratings. "
The Fund's investment policies permit it to engage in various investment
practices that are not presently available in Korea ^. To the extent
that they become available within ^ Korea or are available
presently or in the future outside Korea, the Fund may use various
investment practices that involve special considerations, including
purchasing and selling options on securities, financial futures, fixed
income and stock indices, currencies and other financial instruments,
entering into financial futures contracts, entering into interest rate
transactions, entering into currency transactions, entering into equity
swaps and related transactions, entering into securities transactions on a
when-issued or delayed delivery basis, entering into repurchase agreements
and lending portfolio securities. See "Additional Investment Activities,"
"Investment Objective and Policies - Other Investments," "Risk Factors and
Special Considerations - Investment Practices" and "Appendix A - General
Characteristics and Risks of Derivatives."
The Fund is classified as a "non-diversified" investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), which means
that the Fund is not limited by the 1940 Act in the proportion of its
assets that may be invested in the securities of a single issuer. However,
the Fund intends to comply with the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. As a non-diversified
investment company, the Fund may invest a greater proportion of its assets
in the securities of a smaller number of issuers and, as a result, will be
subject to greater risk of loss with respect to its portfolio securities.
Moreover, because the Fund is non-diversified and will invest primarily in
securities of Korean Issuers, the Fund may be more susceptible than a more
widely-diversified fund to any single economic, political or regulatory
occurrence. An investment in the Fund is not a balanced investment program
by itself, and is intended to provide diversification as part of a more
complete investment program.
The Fund may borrow for temporary or emergency purposes and to finance
tender offers and share repurchases. Borrowings by the Fund create an
opportunity for greater total return but, at the same time increase
exposure to capital risk. In addition, borrowed funds are subject to
interest costs which may offset or exceed the return earned on investment
of such funds, and which, if the borrowed funds are used to pay dividends
or finance share repurchases or tender offers, will reduce the Fund's net
income. Although the Fund is permitted to borrow, as indicated above, the
Fund has no present intention of engaging in leveraging by borrowing.
Income and capital gains on securities held by the Fund may be subject to
withholding or other taxes imposed by Korean or other foreign governments,
which would reduce the return to the Fund on those securities. The Fund
does not intend to engage in activities that will create a permanent
establishment in Korea within the meaning of Korea-U.S. Tax Treaty.
Therefore, the Fund generally will not be subject to any Korean income
taxes other than Korean withholding taxes ^. These taxes may be
exempt or reduced ^ if the Korea-U.S. Tax Treaty applies to
the Fund . If the treaty provisions are not, or cease to be, applicable
to the Fund, significant additional withholding taxes would apply.
Korean counsel to the Fund ^ , Shin & Kim, have given their
opinion that the treaty presently does apply to the Fund if and so long
as the Fund operates as described in this Prospectus. In addition, the
Fund has received written confirmation from the Minister of Finance of
Korea that, so long as all of the issued shares of the Fund are listed on
one or more stock exchanges in the United States only and they are
traded on such exchanges by the general public, the Fund will be entitled
to the benefits of the Korea-U.S. Tax Treaty . See "Taxation - Korean
Taxes." The imposition of such taxes and the rates imposed are subject to
change. The Fund may elect, when eligible, to "pass-through" to the Fund's
shareholders, as a deduction or credit, the amount of foreign taxes paid by
the Fund. The taxes passed through to shareholders will be included in
each shareholder's income. Certain shareholders, including some non-U.S.
shareholders, will not be entitled to the benefit of a deduction or credit
with respect to foreign taxes paid by the Fund. If a shareholder is
eligible and elects to credit foreign taxes, such credit is subject to
limitations. Other foreign taxes, such as transfer taxes, may be imposed
on the Fund, but would not give rise to a credit, or be eligible to be
passed through to shareholders. See "Taxation."
The Fund's Articles of Incorporation contain certain anti-takeover
provisions that may have the effect of : (i) inhibiting the Fund's
possible conversion to open-end status by requiring a 75% shareholder vote
to make such a conversion or to enter into a business combination that
would result in such a conversion and ^(ii) limiting the ability of
other entities or persons to acquire control of the Fund or to change the
composition of its Board of Directors. Such provisions could have the
effect of depriving shareholders of an opportunity to sell their shares of
Common Stock at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund. The Fund's Board
of Directors has determined that these provisions are in the best interests
of shareholders generally. See "Risk Factors and Special Considerations"
and "Description of Capital Stock - ^ Special Voting
Provisions ^ ."
Shares of closed-end investment companies frequently trade at a discount
from net asset value. This characteristic is a risk separate and distinct
from the risk that the Fund's net asset value will decrease as a result of
its investment activities and may be greater for investors expecting to
sell their shares in a relatively short period following completion of
^ the Offering . It should be noted that shares of some
closed-end funds have sold at a premium to net asset value. The Fund
cannot predict whether its Shares will trade at, above or below net asset
value. The Fund is intended primarily for long-term investors and should
not be considered as a vehicle for short-term trading purposes. See "Risk
Factors and Special Considerations."
Investors who purchase Shares at a reduced price will be restricted from
transferring such Shares for a period of 90 days after the closing of the
^ Offering . There is no restriction on the number of Shares
that may be purchased subject to the transfer restriction described above,
except that the Fund will comply, with respect to non-restricted Shares,
with the distribution requirements of the NYSE. See "Underwriting." To the
extent these investors sell their Shares once the transfer restriction is
no longer applicable, the market price of the Fund's Common Stock could be
adversely affected. In addition, the transfer restriction will reduce the
number of shares of Common Stock available for sale in the secondary market
during the 90-day restriction period.
Investors should carefully consider their ability to assume the foregoing
risks before making an investment in the Fund. An investment in shares of
Common Stock of the Fund may not be appropriate for all investors and
should not be considered as a complete investment program. See "Risk
Factors and Special Considerations."
SUMMARY OF EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price) ^ 1
ANNUAL EXPENSES (as a percentage of net assets attributable to common
shares)
^ Management Fees 1.00%
Other Expenses (estimated) 1.00%
Administration Fees .20%
Other Operating Expenses (estimated) ^.80%
Total Annual Expenses (estimated) ^ 2.00%
____________
(1) The sales load is reduced for certain transactions. See
"Underwriting."
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly
or indirectly.
As of the date of this Prospectus, the Fund had not commenced investment
operations. The amount set forth in "Other Expenses" is, therefore, based
on estimated amounts for its first fiscal year, assuming no exercise of the
over-allotment options granted to the U.S. Underwriters. "Other
Operating Expenses" will include custodial and transfer agency fees,
legal and accounting fees, printing costs, registration and listing fees.
For additional information with respect to the expenses identified in the
table above, see "Management of the Fund."
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in the Fund. These amounts are based
upon payment by an investor of a ^___% sales load and payment by the
Fund of operating expenses at the levels set forth in the table above.
An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) reinvestment of all dividends and
distributions at net asset value:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
^ $____ $____ $____ $____
This example as well as the information set forth in the table above
should not be considered a representation of the future expenses of the
Fund, and actual expenses may be greater or less than those shown.
Moreover, while the example assumes a 5% annual return, the Fund's
performance will vary and may result in a return greater or less than 5%.
In addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, this may not be the case for participants
in the Plan. See "Dividends and Distributions; Dividend Reinvestment and
Cash Purchase Plan."
THE FUND
The Fund, incorporated in Maryland on May 25, 1994, is a non-diversified,
closed-end management investment company registered under the 1940 Act.
The Fund's investment objective is long-term capital appreciation. The
Fund seeks to achieve its objective by investing primarily in equity and
debt securities of Korean Issuers.
The address of the Fund is 82 Devonshire Street, Boston, Massachusetts
02109. The Fund's telephone number is (800) ^ 426-5523 ^ .
INVESTMENT STRATEGY
Fidelity believes that the investment environment in Korea offers
growth potential for investors who can identify undervalued companies with
strong growth fundamentals. In order to identify the most attractive
investment opportunities, Fidelity undertakes extensive research through a
"bottom-up" method. The bottom-up method focuses on individual companies
rather than sector or general market trends. As part of its research,
Fidelity visited 179 Korean companies and contacted 38 Korean companies
during 1993 to assess their growth potential. Fidelity believes that the
use of the bottom-up method will enable it to find fundamentally sound,
undervalued investments in Korea that offer long-term growth potential for
investors.
Fidelity will look for growth opportunities in blue chip stocks, either
due to increases in permitted foreign stock ownership or attractive
valuations. This may include investments, in instances where the aggregate
foreign investment limits on shareholding have been reached or exceeded by
purchasing stocks through the foreign over-the-counter market at a premium
to the KSE price when, in Fidelity's view, the growth potential justifies
the premium. Fidelity will also look for undervalued companies with strong
fundamentals within the large number of medium-and smaller-sized companies,
including companies traded on the second trading section of the KSE. The
weighting of the Fund's portfolio of investments between blue chip, medium-
and smaller-sized companies may therefore depend on Fidelity's judgment of
each company's long term growth potential.
INVESTMENT IN KOREA
^ Investment in Korea offers, in Fidelity's opinion, an
excellent long-term ^ growth opportunity. The strengths of the Korean
economy are its highly diversified industrial base, a large consumer
population and an ample labor supply. Public and private sectors
demonstrate a strong commitment to research and development, which amounts
to approximately 2% of GNP. Politically, Korea's internal trends are, in
Fidelity's opinion, moving towards reform and continuing its policy of
detente with North Korea. At the same time, the threat from North Korea
remains, and North Korean policies are difficult to forecast.
^ It should be noted that there are significant risks accompanying the
potential for economic growth in Korea and the securities markets in Korea
present the possibility of substantial losses as well as the potential for
gains. The Korean market is especially susceptible to sudden price
volatility in addition to other risks generally associated with investing
in foreign countries. Korea's economy tends to be dominated by
conglomerates, disclosure by companies tends to be limited and wage rates
are becoming relatively expensive. The Korean government has, from time to
time, undertaken various measures alternatively to cool or support the
market. Cooling measures include restrictions on foreign stock ownership,
requirements that investors make entrustment deposits before investing, as
well as other forms of intervention. Fidelity believes that although
interventions will continue they will not preclude long term growth.
Moreover, Fidelity believes that if restrictions on foreign ownership are
liberalized, the Fund may be presented with favorable investment
opportunities. See "Risk Factors and Special Considerations."
USE OF PROCEEDS
The net proceeds of the ^ Offering will be approximately $
(or approximately $ if the U.S. Underwriters (as
defined below) exercise the over-allotment options in full) after payment
of the sales load and organizational and offering expenses.
The net proceeds of the ^ Offering will be invested in
accordance with the Fund's investment objective and policies. The Fund
anticipates that, under current market conditions, the net proceeds of this
^ Offering will be fully invested in accordance with the
Fund's investment objective and policies within three months from the date
of this Prospectus, and in any event, no later than six months from the
date of this Prospectus. However, depending on market conditions, it may
not be in the best interests of the shareholders of the Fund for such
investments to be made within the six-month time period because of the
limitations on investment imposed on the Fund as a foreign investor by
Korean laws and the relatively small market capitalization
(approximately ^ $159.4 billion as of ^ June 30,
1994) and low trading volume (approximately 34.7 million shares
traded per day on average during the first six months of ^
1994) of the Korean equity securities markets. See "The Securities
Markets of Korea." It may be necessary to make such investments over a
longer period of time in order to avoid disruption of Korean securities
markets and to minimize the Fund's impact on the prices and trading of
securities of Korean Issuers. Under such circumstances, the Fund will
attempt to invest at least 65% of its total assets in ^ securities
of Korean Issuers within a one-year time period. Pending such investment,
it is anticipated that the proceeds will be invested in certain U.S.
dollar-denominated fixed income securities. See "Investment Objective and
Policies - Temporary Investments ."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term capital appreciation. The
Fund will seek to obtain its objective through investment primarily in
equity and debt securities of Korean Issuers. As a matter of fundamental
policy and under normal market conditions, the Fund will invest at least
65% of its total assets in ^ equity and debt securities
of Korean Issuers . Fidelity currently anticipates that, once
the Fund is fully invested, at least 80% of ^ its net
assets will be invested in equity securities of Korean Issuers. Equity
securities include common stocks, preferred stocks, American, ^
global or other types of ^ depositary receipts , rights
or warrants to purchase common or preferred stock, equity interests in
trusts, partnerships, joint ventures or similar enterprises and debt
securities convertible into common or preferred stock. As used in this
Prospectus, Korean Issuers are entities that , as determined by Fidelity,
(i) are organized under the laws of Korea and that conduct
business in Korea, (ii) regardless of where organized ^ derive at
least 50% of their revenues or profits from goods produced or sold,
investments made or services performed or have at least 50% of their assets
located in Korea, (iii) have the primary trading market for their
securities in Korea or (iv) are governments, or their agencies or
instrumentalities or other political subdivisions, of Korea. The Fund will
invest in companies that, in the opinion of Fidelity possess the potential
for growth. The Fund will not consider dividend income as a primary factor
in choosing securities, unless the Investment Adviser or the Sub-Adviser
believes the income will contribute to or is an indicator of the
securities' growth potential. Currently, foreign investors, including the
Fund, are ^ permitted to invest in ^ the following equity
securities: (i) common and preferred stock listed on the KSE; (ii)
non-guaranteed convertible bonds listed on the KSE of listed small and
medium-sized companies which are ^ listed on the KSE; (iii)
global or other types of depositary receipts representing rights in shares
of a Korean company which are issued outside Korea; (iv) convertible bonds
denominated in non-Won currency and issued outside Korea; and (v) equity
warrants issued together with bonds denominated in non-Won currency outside
Ko rea. Although the Fund is authorized to engage in various strategies
to hedge its portfolio against adverse changes in the relationship between
the U.S. dollar and the Won, it is not currently permitted to do so in
Korea under Korean laws or regulations , except as described below,
and there can be no assurance that such strategies will become permissible
and available in Korea in the future. Currently, under Korean law, the
Fund may enter into forward transactions between Won and foreign currency
with a foreign exchange bank in Korea up to the amount of Won which the
Fund holds in connection with its investment in Korean shares plus the
value of Korean shares which it has purchased and holds in its
portfolio. The Fund does not presently intend to engage in these
strategies outside of Korea but reserves the right to do so in the
future .
The Fund's investment objective and policy of investing at least 65% of
its total assets in equity and debt securities of Korean Issuers is
fundamental and cannot be changed without the approval of a majority of the
Fund's outstanding voting securities, which, as used in this Prospectus,
means the lesser of (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are present in person or
represented by proxy or (ii) more than 50% of the outstanding shares. The
Fund's investment policies that are not designated fundamental policies may
be changed by the Fund without shareholder approval. The Fund is designed
primarily for long-term investment, and investors should not consider it a
short-term trading vehicle. As with all investment companies, there can be
no assurance that the Fund's investment objective will be achieved.
Korean law ^ currently ^ permits foreign investors
such as the Fund to acquire debt securities denominated in Won to a very
limited extent. As of July 1, 1994 foreign investors are allowed (1) to
acquire non-guaranteed convertible bonds listed on the KSE which are issued
by small and medium-sized companies the shares of which are listed on the
KSE, with foreign investors in the aggregate and a single foreign investor
being allowed to invest in up to 30% and 5%, respectively, of the listed
value of each class of such bonds; and (2) to participate in new issues of
certain low interest rate government or public bonds to be designated from
time to time and up to the limit determined from time to time by the KSEC,
each denominated in Won and in each case subject to certain procedural
requirements . At the present time, however, foreign investors are
permitted to invest in debt securities issued by Korean companies outside
of Korea and denominated in currencies other than the Won (including, for
example, bonds (which may have attached warrants), convertible bonds,
floating rate notes and commercial paper). If, in the future,
additional Won-denominated debt securities become permissible
investments for foreign investors, the Fund may invest in such securities.
^ Debt securities may be unrated or be rated below
instrument grade. The Investment Adviser or the Sub-Adviser will make
independent evaluations as to the creditworthiness of issuers of debt
securities that may differ from those of internationally recognized credit
rating agency organizations, such as Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Ratings Group ("S&P"). The Fund's
success in attaining its investment objective with respect to investments
in debt securities will depend largely on the Investment Adviser's and the
Sub-Adviser's evaluation of the current and future creditworthiness of
issuers , and of interest rate trends . Sustained periods of
deteriorating economic conditions or rising interest rates are more likely
to lead to a weakening in the issuer's capacity to pay interest and repay
principal than in the case of higher-rated securities.
Most of the securities purchased by the Fund are expected to be traded on
a stock exchange or in an over-the-counter market. Korean law ^
currently ^ permits foreign investors such as the Fund to
acquire debt securities denominated in Won ^ to a very limited
extent and does not permit foreign investors to acquire equity
securities of companies organized under the laws of Korea that are not
listed on the KSE. Subject to applicable laws and regulations, the Fund,
however, may invest up to 35% of its total assets in illiquid securities,
that is, equity or debt securities for which there is no readily available
market or no market at al l. The Fund may therefore not be able to
readily sell such securities. Such securities are unlike securities that
are traded in the open market and which can be expected to be sold
immediately.
The sale price of securities that are not readily marketable may be lower
or higher than the Fund's most recent estimate of their fair value.
Generally, less public information is available with respect to the issuers
of these securities than with respect to companies whose securities are
traded on an exchange. Securities not readily marketable are more likely
to be issued by start-up, small or family businesses and therefore subject
to greater economic, business and market risks than the listed securities
of more well-established companies. Adverse conditions in the public
securities markets may at certain times preclude a public offering of an
issuer's securities. While Korean law requires registration with a
government agency of public offerings of securities, that law does not
contain restrictions like those contained in the U.S. Securities Act of
1933 , as amended (the "Securities Act") regarding the length of time
the securities must be held or manner of resale. There may also be
contractual restrictions on the resale of securities.
^ Up to 35% of the Fund's total assets may be invested in equity
or debt securities of Asian Issuers, if warranted, in Fidelity's
judgment, by economic or political conditions i n Korea or by
regulatory restrictions or overvaluation in the Korean securities
markets . Asian Issuers ^ are issuers (other than issuers
meeting the definition of Korean Issuers as defined above), ^
that , as determined by Fidelity, (i) are organized under the laws of
^ Hong Kong, Japan or Taiwan and conduct business in their
country of organization , (ii) regardless of where organized ^
derive at least 50% of their revenues or profits, from goods produced or
sold investments made, or services performed, in ^ Hong Kong,
Japan or Taiwan , (iii) have the primary trading market for their
securities in ^ Hong Kong, Japan or Taiwan or (iv) are
governments, or their agencies, instrumentalities or other political
sub-divisions, of ^ Hong Kong, Japan or Taiwan . The Fund may
also hold other instruments described below and in "Appendix A $ General
Characteristics and Risks of Derivatives."
The Fund may invest its assets in a broad spectrum of industries. In
selecting industries and companies for investment, ^ Fidelity
may consider overall growth prospects, financial condition, earnings,
valuations, competitive position, technology, research and development,
productivity, labor costs, raw material costs and sources, profit margins,
return on investment, structural changes in local economies, capital
resources, the degree of government regulation or deregulation, management
and other factors.
Fidelity normally will invest the Fund's assets according to its
investment strategy. For temporary, defensive purposes, the Fund may
invest without limitation in preferred stocks and investment grade debt
instruments, including unrated securities of equivalent credit quality as
determined by the Investment Adviser or the Sub-Adviser, short-term
indebtedness or cash equivalents denominated in U.S. dollars or, if it
becomes permissible for the Fund to so invest, denominated in Won. The
Fund may also at any time, with respect to up to 35% of its total assets,
invest funds in U.S. dollar-denominated money market instruments as
reserves for dividends and other distributions to shareholders.
TEMPORARY INVESTMENTS
The Fund may hold and/or invest its assets without limitation in cash
and/or Temporary Investments (as defined below) pending initial investment
in accordance with the Fund's investment objective and policies and for
temporary defensive purposes. To the extent that the Fund invests in
Temporary Investments, it may not achieve its investment objective. In
addition, for cash management purposes, the Fund may invest its assets in
cash and/or rated or unrated short-term debt securities of any quality.
Temporary Investments include high grade debt securities (rated A or above
by S&P or A or above by Moody's or with an equivalent rating by other
nationally recognized securities rating organizations) or unrated
securities judged by the Investment Manager to be of equivalent quality,
denominated in U.S. dollars or in another freely convertible currency
including: (1) short-term (less than 12 months to maturity) and medium-term
(not more than five years to maturity) obligations issued or guaranteed by
(a) the U.S. government, its agencies or instrumentalities or (b)
international organizations designated or supported by multiple foreign
governmental entities to promote economic reconstruction or development
("supranational entities"); (2) U.S. finance company obligations, corporate
commercial paper and other short-term commercial obligations; (3)
obligations (including certificates of deposit, time deposits, demand
deposits and bankers' acceptances) of banks; and (4) repurchase agreements
with respect to securities in which the Fund may invest.
Repurchase agreements are contracts pursuant to which the seller of a
security agrees at the time of sale to repurchase the security at an agreed
upon price and date. When the Fund enters into a repurchase agreement, the
seller will be required to maintain the value of the securities subject to
the repurchase agreement, at not less than their repurchase price.
Repurchase agreements may involve risks in the event of insolvency or other
default by the seller, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities. While it does not
appear possible to eliminate all risks from these transactions, it will be
the Fund's policy to limit repurchase agreement transactions to those
parties whose creditworthiness has been reviewed and found satisfactory by
the Investment Manager, the Investment Adviser or the Sub-Adviser.
OTHER INVESTMENTS
ILLIQUID SECURITIES. The Fund may invest up to 35% of its total assets,
valued at the time of purchase, in illiquid securities, that is, securities
for which there is no readily available market, or no market at all. The
Fund may be unable to dispose of its holdings in illiquid securities at
market prices and may have to dispose of such securities over extended
periods of time. See "Risk Factors and Special Considerations - Market
Characteristics and $ Thinly Traded Markets and Illiquid Investments." In
many cases, illiquid securities will be subject to contractual or legal
restrictions on transfer. In addition, issuers whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements that may be applicable if their securities were
publicly traded.
Although not all the securities held by the Fund will be illiquid, the
Fund anticipates that all or most of its portfolio securities generally
will be less liquid than those traded in U.S. securities markets.
DEPOSITORY RECEIPTS. The Fund may invest in securities of Korean
Issuers through sponsored or unsponsored American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs"), and other types of
Depositary Receipts (which, together with ADRs and GDRs, are hereinafter
referred to as "Depositary Receipts"). Depositary Receipts may not
necessarily be denominated in the same currency as the underlying
securities into which they may be converted. In addition, the issuers of
the stock of unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may not be
a correlation between such information and the market value of the
Depositary Receipts. ADRs are Depositary Receipts typically issued by a
United States bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. GDRs and other types of
Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by United States banks or trust
companies, and evidence ownership of underlying securities issued by either
a foreign or a United States corporation. Generally, Depositary
Receipts in registered form are designed for use in the United States
securities markets and Depositary Receipts in bearer form are designed for
use in securities markets outside the United States. For purposes of the
Fund's investment policies, the Fund's investments in ADRs, GDRs and other
types of Depositary Receipts will be deemed to be investments in the
underlying securities.
SHARES OF OTHER INVESTMENT FUNDS. The Fund may invest in investment funds
which invest principally in securities in which the Fund is authorized to
invest. The Fund does not intend to invest in such investment funds
unless, in the judgment of the Investment Adviser or the
Sub-Adviser, the potential benefits of such investment justify the payment
of any applicable premium, sales load and expenses. From time to time,
such investment funds may be the sole means by which the Fund may invest in
securities of certain Korean Issuers. See "Risk Factors and Special
Considerations - Investment ^ Restrictions and Foreign Exchange
Controls ." Under the 1940 Act, the Fund may invest a maximum of 10% of
its total assets in the securities of other investment companies. In
addition, under the 1940 Act, not more than 5% of the Fund's total assets
may be invested in the securities of any one investment company provided
that the investment does not represent more than 3% of the voting stock of
the related acquired investment company. To the extent the Fund invests in
other investment funds, the Fund's shareholders will indirectly incur
certain duplicative fees and expenses, including investment advisory fees
and sales loads paid for transactions in shares of such funds. For a
discussion of possible consequences under U.S. Federal income tax laws of
the Fund's investment in foreign investment funds, see "Taxation - U.S.
Federal Income Taxes."
RULE 144A SECURITIES. The Fund may purchase certain restricted securities
("Rule 144A securities") for which there is a secondary market of qualified
institutional buyers, as contemplated by Rule 144A under the Securities Act
^ . Rule 144A provides an exemption from the registration
requirements of the Securities Act for the resale of certain restricted
securities to qualified institutional buyers. One effect of Rule 144A is
that certain Rule 144A securities may be liquid, though there is no
assurance that a liquid market for any particular Rule 144A security will
develop or be maintained. In promulgating Rule 144A, the Commission stated
that the ultimate responsibility for liquidity determinations is that of an
investment company's board of directors. However, the Commission stated
that the board may delegate the day-to-day function for determining
liquidity to a fund's investment adviser, provided that the board retains
sufficient oversight. The Board of Directors reserves the right to adopt
policies and procedures for the purpose of determining whether securities
that are eligible for resale under Rule 144A are liquid or illiquid
securities. Pursuant to those policies and procedures, the Board of
Directors may delegate to the Investment Manager, the Investment Adviser or
the Sub-Adviser the determination as to whether a particular security is
liquid or illiquid. For the purpose of determining whether the Fund can
invest in additional illiquid securities, if any Rule 144A security
previously determined to be liquid is later determined to be illiquid, such
security will be considered illiquid.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities
including securities that are unrated or rated below investment grade. See
"Risk Factors and Special Considerations - Debt Securities - High Yield,
High Risk Securities."
A convertible security might be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for
redemption, the Fund may be required to permit the issuer to redeem the
security, convert it into the underlying common or preferred stock or sell
it to a third party.
WARRANTS. The Fund may invest in warrants, which are securities
permitting, but not obligating, their holder to subscribe for other
securities. Warrants do not carry the right to dividends or voting rights
with respect to their underlying securities, and they do not represent any
rights in the assets of the issuer. An investment in warrants may be
considered speculative. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to its expiration
date. Currently, foreign investors, including the Fund, are not permitted
to invest in rights or warrants to purchase equity securities issued
in Korea.
EQUITY-LINKED DEBT SECURITIES. The Fund may invest in equity-linked debt
securities. The amount of interest and/or principal payments which the
issuer of equity-linked debt securities is obligated to make is linked to
the performance of a specified index of equity securities and may be
significantly greater or less than payment obligations in respect of other
types of debt securities. As a result, equity-linked debt securities
are more volatile than other types of debt securities and an investment
in equity-linked debt securities may be considered speculative.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. The Fund may invest in loans and
other direct debt instruments. Loans and other direct debt instruments are
interests in amounts owed by a corporate, governmental or other borrower to
another party. They may represent amounts owed to lenders or lending
syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables), or to other parties. Direct
debt instruments involve the risk of loss in case of default or insolvency
of the borrower and may offer less legal protection to the Fund in the
event of fraud or misrepresentation. In addition, loan participations
involve a risk of insolvency of the lending bank or other financial
intermediary. Direct debt instruments may also include standby financing
commitments that obligate the Fund to supply additional cash to the
borrower on demand. Loans and other direct debt instruments are generally
illiquid and transfers are normally possible only through
individually negotiated private transactions. See "Risk Factors and
Special Considerations - Loans and Other Direct Debt Instruments."
^
BORROWINGS. The Fund will not employ leverage to purchase portfolio
securities. However, the Fund may borrow money for temporary or emergency
purposes (including, for example, clearance of transactions, share
repurchases or payments of dividends to shareholders) in an amount not
exceeding 5% of the value of the Fund's total assets (including the amount
borrowed), and may borrow money in connection with repurchases of its
Shares or tender offers in an amount up to one-third of the value of the
Fund's total assets (including the amount borrowed).
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the
Fund sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument
at a particular price and time. While a reverse repurchase agreement is
outstanding, the Fund will maintain appropriate assets in a segregated
custodial account to cover its obligation under the agreement, which will
consist only of liquid assets, such as cash, U.S. government securities or
other liquid high grade debt securities ("liquid assets"). The Fund will
enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by the Investment Manager, the
Investment Adviser or the Sub-Adviser. Such transactions may increase
fluctuations in the market value of the Fund's assets and may be viewed as
a form of leverage.
REAL ESTATE-RELATED INSTRUMENTS. The Fund may invest in real
estate-related instruments, including real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such
as changes in real estate values and property taxes, interest rates, cash
flow of underlying real estate assets, overbuilding, and the management
skill and creditworthiness of the issuer. Real estate-related instruments
may also be affected by tax and regulatory requirements, such as those
relating to the environment.
ADDITIONAL INVESTMENT ACTIVITIES
HEDGING AND DERIVATIVES
^ Certain investment practices in which the Fund is authorized to
engage to hedge market risk, such as certain currency hedging techniques,
including currency options and futures, options on such futures and forward
foreign currency transactions, and certain investment techniques, such
as the lending of portfolio securities, forward commitments, standby
commitment agreements and the purchase or sale of put and call options, are
not currently permitted under Korean laws or regulations. The Fund may
engage in these hedging or investment practices to the extent the
practices become available in the future or with respect to ^
instruments outside Korea. See "Appendix A - General
Characteristics and Risks of Derivatives" for a further discussion of
currency hedging techniques. ^ The Fund is also authorized to
manage the effective maturity or duration of debt instruments held by the
Fund, or to seek to increase the Fund's income or gain. Although these
strategies are regularly used by some investment companies and other
institutional investors, few of these strategies can practicably be used to
a significant extent by the Fund at the present time and may not become
available for extensive use in the future. Over time, techniques and
instruments may change as new instruments and strategies are developed or
regulatory changes occur.
Subject to the constraints described above, the Fund may purchase and sell
interest rate, currency or stock index futures contracts and enter into
currency forward contracts and currency swaps; it may purchase and sell (or
write) exchange listed and over-the-counter put and call options on debt
and equity securities, currencies, futures contracts, fixed income and
stock indices and other financial instruments and it may enter into
interest rate transactions, equity swaps and related transactions and other
similar transactions which may be developed to the extent the Investment
Manager, the Investment Adviser or the Sub-Adviser determines that they are
consistent with the Fund's investment objective and policies and applicable
regulatory requirements (collectively, these transactions are referred to
in this Prospectus as ^"Derivatives." See "Appendix A - General
Characteristics and Risks of Derivatives"). The Fund may enter into
futures contracts or options thereon for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial
margin and premiums on open contracts and options would not exceed 5% of
the liquidation value of the Fund's portfolio; provided, that in the case
of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
Fund's interest rate transactions may take the form of swaps, caps, floors
and collars, currency forward contracts, currency futures contracts,
currency swaps and options on currency or currency futures contracts.
Derivatives may be used to attempt to protect against possible changes in
the market value of securities held in or to be purchased for the Fund's
portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of those securities for
investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as
a substitute for purchasing or selling particular debt or equity
securities. The ability of the Fund to utilize Derivatives successfully
will depend on the Investment Adviser's and the Sub-Adviser's ability to
predict pertinent market movements, which cannot be assured. These skills
are different from those needed to select portfolio securities. The use of
Derivatives in certain circumstances will require that the Fund segregate
cash, liquid high grade debt obligations or other assets to the extent the
Fund's obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency.
A detailed discussion of Derivatives, including applicable requirements of
the Commodity Futures Trading Commission, the requirement to segregate
assets with respect to these transactions and special risks associated with
such strategies, appears in Appendix A. See also "Risk Factors and Special
Considerations - Investment Practices."
The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxation."
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities on a when-issued or delayed delivery
basis. Securities purchased on a when-issued or delayed delivery basis are
purchased for delivery beyond the normal settlement date at a stated price.
No income accrues to the purchaser of a security on a when-issued or
delayed delivery basis prior to delivery. Such securities are recorded as
an asset and are subject to changes in value based upon changes in market
prices. Purchasing a security on a when-issued or delayed delivery basis
can involve a risk that the market price at the time of delivery may be
lower than the agreed-upon purchase price, in which case there could be an
unrealized loss at the time of delivery. The Fund generally will establish
a segregated account in which it will maintain liquid assets in an amount
at least equal in value to the Fund's commitments to purchase securities on
a when-issued or delayed delivery basis. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a
daily basis so that the value of the assets in the account is equal to the
amount of such commitments. As an alternative, the Fund may elect to treat
when-issued or delayed delivery securities as senior securities
representing indebtedness, which are subject to asset coverage requirements
under the 1940 Act.
PURCHASE OF SECURITIES ON MARGIN
The Fund does not currently intend to purchase securities on margin,
except that the Fund may obtain such short-term credits as are necessary
for the clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures contracts will not
constitute purchasing securities on margin. Current Korean laws and
regulations do not allow foreign investors such as the Fund to purchase
Korean securities on margin.
SHORT SALES "AGAINST THE BOX"
^ The Fund may from time to time sell securities short
"against the box." If the Fund enters into a short sale against the box,
it will be required to set aside securities equivalent in kind and amount
to the securities sold short (or securities convertible or exchangeable
into such securities ^ at no added cost) and will be required
to hold such securities while the short sale is outstanding. The Fund will
incur transaction costs, including interest expense, in connection with
opening, maintaining, and closing short sales against the box. If the Fund
engages in any short sales against the box it will incur the risk that the
security sold short will appreciate in value after the sale, with the
result that the Fund will lose the benefit of any such appreciation.
^
^ The Fund may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if the
Investment Adviser or the Sub-Adviser anticipates a decline in the price of
the stock underlying a convertible security the Fund holds, it may sell the
stock short. If the stock price subsequently declines, the proceeds of the
short sale could be expected to offset all or a portion of the effect of
the stock's decline on the value of the convertible security.
The Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker
that consists of cash, U.S. government securities or other liquid high
grade debt obligations. In addition, the Fund will place in a segregated
account with its custodian, or designated sub-custodian, an amount of cash,
U.S. government securities or other liquid high grade debt obligations
equal to the difference, if any, between (1) the market value of the
securities sold at the time they were sold short and (2) any cash, U.S.
government securities or other liquid high grade debt obligations deposited
as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Until it replaces the borrowed
securities, the Fund will maintain the segregated account daily at a level
so that (1) the amount deposited in the account plus the amount deposited
with the broker (not including the proceeds from the short sale) will equal
the current market value of the securities sold short and (2) the amount
deposited in the account plus the amount deposited with the broker (not
including the proceeds from the short sale) will not be less than the
market value of the securities at the time they were sold short. A lesser
amount of assets may be set aside by the Fund if it owns certain types of
instruments, such as a call option on the security sold short, that
effectively "cover" the short sale.
Short sales by the Fund involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred
from a purchase of a security, because losses from short sales may be
unlimited, whereas losses from purchases can equal only the total amount
invested. The Fund is not currently permitted under Korean laws and
regulations to engage in short sales of Korean securities.
INVESTMENT RESTRICTIONS
The Fund's only fundamental policies, that is, policies that cannot be
changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, are (i) its investment objective, (ii) its
policy that under normal market conditions, at least 65% of the Fund's
total assets will be invested in equity and debt securities of Korean
Issuers, and (iii) the following seven restrictions. As used in this
Prospectus, a "majority of the Fund's outstanding voting securities" means
the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than 50% of
the outstanding shares. The other policies and investment restrictions
referred to in this Prospectus are not fundamental policies of the Fund and
may be changed by the Fund's Board of Directors without shareholder
approval. ^ Unless otherwise noted, whenever an investment
policy or limitation states a maximum percentage ^ of
the Fund's assets that may be invested in any security or other asset, or
sets forth a policy regarding quality standards, such standard or
percentage limitation will be determined immediately after and as a result
of the Fund's acquisition of such security or other asset. Accordingly,
any subsequent change in values, assets, or other circumstances will
not be considered ^ when determining whether the investment
complies with the Fund's investment policies and limitations . Under
its fundamental policies, the Fund may not:
(1) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities), if, as a result, more than 25% of the Fund's total
assets would be invested in companies whose principal business activities
are in the same industry;
(2) issue senior securities, except as permitted under the 1940 Act;
(3) borrow money, except that the Fund may borrow money for temporary or
emergency purposes or to finance tender offers and/or share repurchases in
an amount not exceeding 33$% of its total assets (including the amount
borrowed) less liabilities (other than borrowings); any borrowings that
come to exceed this amount will be reduced promptly in accordance with
reasonable investment practice to the extent necessary to comply with the
33$% limitation;
(4) underwrite securities issued by others, except to the extent that the
Fund may be considered an underwriter within the meaning of the Securities
Act in the disposition of restricted securities;
(5) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this will not prevent the Fund from
investing in securities or other instruments backed by real estate or
^ securities of companies engaged in the real estate business);
(6) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this will not prevent the
Fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by or indexed to, or
representing interests in, physical commodities or investing or trading in
derivative investments); or
(7) make any loan if, as a result, more than 33$% of its total assets
would be lent to other parties, but this limitation does not apply to
purchases of debt securities or to repurchase agreements.
As a matter of non-fundamental policy, the Fund will not purchase any
portfolio securities while borrowings representing more than 5% of its
total assets are outstanding. To meet federal tax requirements for
qualification as a "regulated investment company," the Fund intends to
limit its investments so that at the close of each quarter of its taxable
year: (a) with regard to at least 50% of total assets, no more than 5% of
total assets are invested in the securities of a single issuer and the Fund
will not hold more than 10% of the outstanding voting securities of that
issuer; and (b) no more than 25% of total assets are invested in the
securities of a single issuer. Limitations (a) and (b) do not apply to
"Government securities" as defined for federal tax purposes.
AFFILIATED FINANCIAL INSTITUTION TRANSACTIONS
The Fund may engage in transactions with financial institutions that are,
or may be considered to be, "affiliated persons" of the Fund under the 1940
Act. These transactions may include, for example, repurchase agreements
with custodian banks; purchase of short-term obligations of, and repurchase
agreements with, the 50 largest U.S. banks (measured by deposits);
municipal securities; U.S. government securities with affiliated financial
institutions that are primary dealers in these securities; short-term
currency transactions; and short-term borrowings. In accordance with
exemptive orders issued by the SEC, the Board of Directors will establish
and periodically review procedures applicable to transactions involving
affiliated financial institutions.
FUND'S RIGHTS AS A SHAREHOLDER
The Fund does not intend to direct or administer the day-to-day operations
of any company. The Fund, however, may exercise its rights as a
shareholder and may communicate its views on important matters of policy to
management, the Board of Directors, and shareholders of a company when the
Investment Manager, the Investment Adviser or the Sub-Adviser determines
that such matters could have a significant effect on the value of the
Fund's investment in the company. The activities that the Fund may engage
in, either individually or in conjunction with others, may include, among
others, supporting or opposing proposed changes in a company's corporate
structure or business activities; seeking changes in a company's directors
or management; seeking changes in a company's direction or policies;
seeking the sale or reorganization of the company or a portion of its
assets; or supporting or opposing third party takeover efforts. This area
of corporate activity is increasingly prone to litigation and it is
possible that the Fund could be involved in lawsuits related to such
activities. The Investment Manager, the Investment Adviser or the
Sub-Adviser will monitor such activities with a view to mitigating, to the
extent possible, the risk of litigation against the Fund, and the risk of
actual liability if the Fund is involved in litigation. No guarantee can
be made, however, that litigation against the Fund will not be undertaken
or liabilities incurred.
^ FUTURE RIGHTS OFFERING
^ In order to raise additional capital to take advantage of additional
investment opportunities expected to occur if and when Korea relaxes
certain of its investment restrictions currently imposed on foreign
investors, the Fund currently intends, subject to approval by its Board of
Directors, to make a rights offering to its shareholders at the time such
investment restrictions are relaxed or when the timing of such relaxation
becomes more certain. Under the current Korean regulations, the percentage
of each class of a company's outstanding equity shares listed on the KSE
that may be held by all foreign investors as a group is generally limited
to 10%, subject to certain exceptions. Recently, the Korean government
announced that it would increase such percentage gradually in the near
future. The Manager believes that when and if Korea opens the market to
increased foreign investments, investment opportunities will arise that are
not presently available for companies whose aggregate foreign investment
ceiling for shares has been reached or exceeded. An increase in the
aggregate foreign investment ceiling for shares will, for a limited time,
afford an investment opportunity. Typically, shares of Korean companies
whose aggregate foreign investment ceiling for shares is filled trade in
the over-the-counter market among foreign investors at a premium. The
rights offering is designed to encourage long-term investors to invest in
the Fund by offering to existing shareholders at the time of the rights
offering the right to subscribe for additional shares of Common
Stock. The proceeds of any future rights offering will be primarily used
in new direct investments as permitted on the KSE. It is currently
anticipated that the rights will be exercisable on a specific date or
during a specific period (not to exceed 120 days from the date of issuance
of the rights) at an exercise price to be determined by the Board of
Directors of the Fund. The Fund's present intention is to set the price at
which the rights can be exercised at a price below the market price, and
possibly below the net asset value, of the Fund's shares of Common Stock at
the time of the rights offering. These rights may be non-transferable.
^ Rightholders who do not fully exercise their rights will own a
smaller proportional interest in the Fund than would otherwise be the case.
In addition, to the extent that the exercise price is less than net asset
value, an immediate reduction of the net asset value per share may be
experienced by all shareholders as a result of the rights offering. It is
not possible to state precisely the amount of such a decrease in value, if
any, because it is not known at this time how many shares will be purchased
under the rights offering or what the net asset value or market price per
share will be on the date that the rights are exercised.
^ Issuance of the rights is subject to a determination by the Board of
Directors of the Fund at the time of issuance that such issuance is in the
best interests of the Fund's shareholders. Consequently, there can be no
assurance that such rights will be issued or that the terms of such rights
will be as stated above.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should recognize that investing in Korean securities involves
certain risks and special considerations including those set forth below,
which are not typically associated with investing in U.S. Securities.
These include: (i) certain restrictions on foreign investment in the Korean
securities markets which will preclude investment in certain securities by
the Fund and limit investment opportunities for the Fund; (ii) fluctuations
in the rate of exchange between the dollar and the Won with the resultant
fluctuations in the net asset value of the Fund (which is expressed in
dollars); (iii) substantial government involvement in, and influence on,
the economy and the private sector; (iv) political, economic and social
instability, including ^ the potential for increased militarization
in North Korea; (v) the substantially smaller size and lower trading volume
of the securities markets for Korean equity securities compared to the U.S.
securities markets, resulting in a potential lack of liquidity and
increased price volatility; (vi) the risk that the sale of portfolio
securities by the Korea Securities Stabilization Fund (the "Stabilization
Fund"), a fund established in order to stabilize the Korean securities
markets, or other large Korean institutional investors may adversely impact
the market value of securities in the Fund's portfolio; (vii) the risk that
less information with respect to Korean companies may be available due to
the fact that Korean accounting, auditing and financial reporting standards
are not equivalent to those applicable to U.S. companies; (viii) heavy
concentration of market capitalization and trading volume in a small number
of issuers, which result in potentially fewer investment opportunities for
the Fund ^; (ix) fluctuations in the prices and premium valuations
of securities held by the Fund that are traded over the counter among
foreign investors; (x) controls on foreign investment and limitations
on repatriation of invested capital and on the Fund's ability to exchange
Wons for U.S. dollars; ^ (xi) the risk of nationalization or
expropriation of assets or confiscatory taxation; ^(xii) higher
rates of inflation; ^(xiii) less government supervision and
regulation of Korean securities markets and participants in those markets;
^ (xiv) settlement delays; ^(xv) the risk that dividends will
be withheld at the source; ^(xvi) unavailability of currency hedging
techniques in the Korean markets; ^(xvii) the fact that companies in
Korea may be smaller, less seasoned and newly organized; ^ (xviii)
the risk that it may be more difficult to obtain and/or enforce a judgment
in a court outside the United States; and ^ (xix) the risk of
taxation of the Fund, its investments and its income by Korea.
INVESTMENT RESTRICTIONS AND FOREIGN EXCHANGE CONTROLS
Investment in securities of Korean ^ companies by foreign
investors is subject to significant restrictions and controls. As a
result, the Fund may be limited in its investments or precluded from
investing in certain Korean ^ companies , which may adversely
affect the performance of the Fund. Conversion of Won into U.S. dollars or
other foreign exchange, transfer of funds from Korea to foreign countries
and repatriation of foreign capital invested in Korea are subject to
certain regulatory requirements pursuant to foreign exchange control laws
and regulations. See "The Securities Markets of Korea - Regulation of
Foreign Investment." Under the Foreign Exchange Management Act, if the
Minister of Finance of Korea deems that an event of emergency is likely to
occur, he may impose any necessary restrictions such as requiring foreign
investors, including the Fund, to obtain approval for the acquisition of
Korean equity shares or for the remittance overseas of the sale proceeds
thereof.
On January 3, 1992, the Korean ^ stock markets were opened
to general investment directly by foreign investors following the adoption
and implementation by the ^ KSEC and the MOF of certain
regulations (as amended from time to time , the ^"New
Regulations") that allow foreign investors to directly purchase and sell
equity shares listed on the KSE ^ subject to certain investment
ceilings and procedural requirements . Pursuant to the ^
New Regulations, the percentage of each class of a company's
outstanding equity shares that may be held by a particular foreign investor
and by all foreign investors as a group is limited generally to 3% and 10%,
respectively. ^ Certain designated public corporations
^ are subject to an aggregate 8% ceiling on acquisitions of
equity shares by foreigners. Of the Korean companies listed on
the KSE ^, Pohang Iron & Steel Co., Ltd. and Korea Electric Power
Corporation have been so designated ^. In addition to the ceiling
set by the KSEC, ^ under the authority of the SEA, the
Articles of Incorporation of Pohang Iron & Steel Co., Ltd. and Korea
Electric Power Corporation set a 1% ceiling on acquisition by a single
investor of equity shares of their respective common stock. The KSEC has
the authority to increase or decrease foreign investment ^
limits and from time to time has exercised such authority. The
Korean government announced its intention to gradually raise the ^
aggregate foreign investment ^ limit . While no
specific date has been set for such action, the government has targeted
1994-1995 as its goal. If, and when, the ^ aggregate foreign
investment limit is raised, the Fund may have more flexibility in
selecting investments for its portfolio. There can be no assurance that
the ^ aggregate foreign investment limit will be raised.
^ As of July 1, 1994, foreign investors are allowed (1) to invest
in non-guaranteed convertible bonds listed on the KSE which are issued by
small and medium-sized companies the shares of which are listed on the KSE,
with foreign investors in the aggregate and a single foreign investor being
allowed to invest in up to 30% and 5% of the listed value of each class of
such bonds, respectively; and (2) to participate in new issues of certain
low interest rate government or public bonds to be designated from
time to time and up to the limit determined from time to time by the KSEC,
^ each denominated in Won and in each case subject to certain procedural
requirements .
The limitation on individual and aggregate holdings by foreign investors
may preclude the Fund from making particular investments or may limit the
size of investments that may be made. The Korean government has
implemented a system to monitor foreign investment limits and transactions,
including the issuance of an investment registration ^
card to ^ each foreign ^ investor for stock
investment and a separate card for bond investment . The Fund will
apply to obtain both of such ^ investment registration
^ cards.
^ Securities acquired by foreign investors must be traded on
the KSE, with certain exceptions as described below. For transactions on
the KSE, a foreign investor must open a Won account for securities
transactions with a securities company for stock investment and a
separate account for bond investment and at that time must present its
investment registration card to the securities company.
A foreign investor who intends to acquire shares must designate a
foreign exchange bank in Korea at which it must open a foreign currency
account and a Won account ("Foreign Currency Account" and "Won Account",
respectively) exclusively for stock investments and a separate set of such
accounts for bond investments. No approval is required for remittance into
Korea and deposit of foreign currency funds in the Foreign Currency
Account. Upon confirmation by the designated foreign exchange bank,
foreign currency funds may be transferred from the Foreign Currency Account
at the time required to place a deposit for, or to settle the purchase
price of, a stock purchase transaction to a Won account opened at a
securities company. Funds in the Foreign Currency Account may be remitted
abroad without any governmental approval.
Dividends on shares, or interest on bonds, of Korean companies are paid
in Won. No governmental approval is required for foreign investors to
receive dividends or interest on, or the Won proceeds of the sale of, any
such shares or bonds to be paid, received and retained in Korea. Dividends
paid on, and the Won proceeds of the sale of, any such shares or bonds held
by a non-resident of Korea must be deposited either in a Won account with
the investor's securities company or its Won Account according to the type
of investment (i.e., monies relating to stock investment must be deposited
at the stock account and monies relating to debt investment must be placed
in the debt account). Funds in the investor's Won Account may be
transferred to its Foreign Currency Account or withdrawn for local living
expenses (subject to a certain limitations), in each case subject to
approval by the investor's designated foreign exchange bank. In addition,
funds in the Won Account may be used for future investment in stocks or
bonds or for payment of the subscription price of new shares obtained
through the exercise of pre-emptive rights.
The repatriation of capital invested by foreign investors may be
restricted by the Korean government in its discretion in certain emergency
circumstances including, but not limited to, sudden fluctuations in
interest rates or exchange rates, extreme difficulty in stabilizing the
balance of payments or a substantial disturbance in the Korean financial
^ or capital markets. It is impossible to predict the extent
to which foreign investment will continue to increase in Korea or the
Fund's ability to participate in such increased foreign investment in light
of the foreign holding limitations or governmental restrictions that may be
imposed in the future. ^
Foreign investors such as the Fund are unable to effect share
purchase transactions on the KSE in a security that has reached or
exceeded the maximum aggregate foreign ownership limit (or the limit
less odd-lot shares) . As of ^ December 31 , 1993, of the
^ 30 largest KSE-listed companies (as measured by total
market capitalization), [which accounted for approximately 47.1% of the
aggregate market capitalization of the KSE,] 22 had reached or
exceeded the applicable maximum aggregate foreign ownership limit.
As of December 31, 1993, 165 companies of the 693 companies listed on
the KSE had reached or exceeded the applicable maximum aggregate foreign
ownership limit (23.8% of all companies listed on the KSE) and an
additional 159 companies were within 0.5% of the limit. At such date, ^
84.5% and 77.0% of the permitted foreign holding amount were invested by
foreign investors in terms of KSE market capitalization and the number of
shares, respectively. During 1992 and 1993, U.S.$10.3 billion was invested
in Korea by foreign investors for stock investment, of which U.S.$2.6
billion has been repatriated outside Korea. During the first six months in
1994, U.S.$3.6 billion was invested in Korea by foreign investors for stock
investment, of which U.S.$2.5 billion has been repatriated outside
Korea.
^ The following table shows the amount of foreign capital for
stock investment invested in Korea and repatriated from Korea since
1992.
<TABLE>
<CAPTION>
<S> <C> <C>
INCOMING REPATRIATED
INVESTMENT CAPITAL
(IN MILLIONS (IN MILLIONS
OF DOLLARS) OF DOLLARS)
1992 2,735.5 662.5
1993 7,636.8 1,935.7
1994 Jan 898.4 265.8
Feb 749.3 300.5
Mar 473.1 610.3
Apr 300.1 379.6
May 639.0 433.9
June(1) 582.8 517.5
(1) Preliminary
Source: MONTHLY BULLETIN, July 1994, Securities Supervisory Board
</TABLE>
The following table shows the volume and value of transactions in stocks
in Korea by foreigners since 1992.
(In Millions of Shares, In Millions of Won)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ON THE KSE(1) OUTSIDE THE KSE(1)
SALES VOLUME SALES VALUE SALES SALES
YEAR PURCHASE SALE PURCHASE SALE VOLUME VALUE
1992 123 52 2,385 877 2 113
1993 383 126 6,419 2,089 23 571
1994 Jan 41 10 639 193 4 160
Feb 20 7 448 124 7 195
Mar 12 22 199 383 14 409
Apr 16 17 331 309 6 125
May 24 16 370 255 8 210
June(2) 21 22 326 375 11 262
(1) Sales Volume and Sales Value are calculated on either purchase or sale side.
(2) Preliminary.
</TABLE>
Source: MONTHLY BULLETIN, July 1994, Securities Supervisory Board.
As of the end of 1993, foreign investors held 503.3 million shares,
which amounted to 8.74% of the total number of listed shares and 9.81% of
total KSE market capitalization at that time.
Foreign investors may trade securities of Korean companies only through
the KSE except in certain limited circumstances, which include odd-lot
trading of securities, acquisition of shares by exercise of warrant,
conversion rights under convertible bonds or withdrawal rights under
depositary receipts issued outside of Korea by a Korean company,
acquisition of shares as a result of inheritance, donation, bequeathal or
exercise of shareholders' rights (preemptive rights or rights to
participate in free distributions and receive dividends), and direct
transactions between foreigners involving the transfer of a class of shares
for which the ceiling on acquisition by foreigners in total (as explained
above) has been reached or exceeded ("foreign OTC transactions"). Odd-lot
trading of shares outside the KSE must involve a licensed securities
company in Korea as the second party. For direct transfers of shares
outside the KSE between foreigners, a securities company licensed in Korea
must act as an intermediary. However, foreign investors such as the Fund
are not permitted to enter into such foreign OTC transactions with branches
and subsidiaries of foreign banks, securities companies and insurance
companies. Foreign OTC transactions typically occur at a premium over
prices on the KSE. The Fund may invest in shares of KSE-listed companies
through such foreign OTC transactions, and thus pay a premium over the
share prices quoted on the KSE. There can be no assurance that the Fund
will be able to realize such premium if it sells the shares to another
foreign investor. Such premium may be affected by changes in regulation
and otherwise, including any change in the percentage of foreign stock
ownership permitted in KSE-listed companies. Foreign investors are
prohibited from engaging in margin transactions.
Certificates evidencing securities acquired by the Fund must be kept in
custody with an eligible custodian in Korea. Only foreign exchange banks
(including Korean branches of foreign banks), securities companies
(including Korean branches of foreign securities companies) and the Korea
Securities Depository are eligible to act as a custodian of securities for
a foreign investor. Further, a foreign investor is required to have its
custodian deposit its securities with the Korea Securities Depository on a
fungible basis for book transfer unless otherwise approved by the Governor
of the Securities Board ("Governor").
^ Unless otherwise approved by the Governor , a foreign
investor such as the Fund must appoint one or more standing proxies from
among the Korea Securities Depository, securities ^
companies (including Korean branches of foreign securities ^
companies) which have obtained a license to act as standing proxy and
foreign exchange banks (including Korean branches of foreign banks) to
exercise shareholders' rights, apply to change a name on the shareholders'
registry, place an order to sell or purchase shares or engage in any
matters related to these activities, if any such activities are not
conducted by the foreign investor itself. [The Fund has appointed
[Ssangyon Securities, Inc.] and also intends to appoint a subsidiary
of the Fund's sub-custodian as ^ standing proxy.] Because the Fund
will be ^ engaging in transactions with several Korean
brokers, it may need to appoint a number of standing proxies to efficiently
conduct its trading activities. Each such standing proxy appointed will
receive a commission for its services. If and only to the extent that a
standing proxy other than the Fund's custodian or sub-custodian were deemed
to have custody over certain assets of the Fund, the Fund may be required
to obtain relief from the Commission or a waiver or modification of the
standing proxy requirement from the KSEC or the Governor . There can
be no assurance that such relief, waiver or modification will be obtained.
EXCHANGE RATE FLUCTUATIONS
Fidelity currently anticipates that, once fully invested, at least
80% of the Fund's total assets will be invested in equity securities of
Korean Issuers. As a result, most of the income received by the Fund, and
assets held by the Fund will be denominated in Won. The computation of net
asset value and the distribution of income by the Fund, however, will be
made in dollars. Therefore, the Fund's reported net asset value and its
computation and distribution of income in dollars will be affected
adversely by reductions in the value of the Won relative to the dollar.
The Fund also will incur costs of conversion between currencies. In
addition, the computation of income will be made on the date of its accrual
by the Fund at the foreign exchange rate in effect on that date, and thus,
if the value of the Won falls relative to the dollar between recognition of
the income and the making of Fund distributions, the Fund may be required
to liquidate investments in order to make distributions if the Fund has
insufficient cash in dollars to meet distribution requirements under the
Code. Such liquidation of investments, if required, may have adverse
effects on the Fund's performance. In addition, if the liquidated
investments include securities that have been held less than three months,
such sales may jeopardize the Fund's status as a regulated investment
company under the Code. See "Taxation - the Fund."
Prior to 1980, the value of the Won was fixed against the dollar. In
January 1980, the Korean government devalued the Won against the dollar by
16.6%, in part to enhance the competitiveness of Korean exports. From
February 1980 to March 1990, the Won was traded on the basis of a floating
exchange rate, known as the concentration base rate, which was determined
by The Bank of Korea by reference to a multi-currency basket. In March
1990, The Bank of Korea concentration base rate system was abolished, and
since such date, the exchange rate has been determined by averaging the
previous day's inter-bank rates. This system is known as the Market
Average Exchange Rate System. Under this system, foreign exchange rates
are permitted to move each day within narrow ranges on either side of the
market average exchange rates announced by the Korea Financial
Telecommunications and Clearings Institute. As of October 1,1993, the
permitted daily range of fluctuation was increased to plus or minus 1.0%.
See "The Securities Markets of Korea - Recent Market and Economic
Developments - Financial Liberalization and Market Opening Plan" and "The
Republic of Korea ^ - Foreign Exchange." The Won ^
appreciated in value an aggregate of ^ 23.74% relative
to the dollar between ^ December 1985 and December ^
1989, and then depreciated by ^ 18.9% in value relative to
the dollar ^ between December 1989 and December 1993 .
See "The Republic of Korea."
The Fund is permitted to engage in a variety of currency hedging
transactions, which may involve certain risks, although such transactions,
with certain exceptions, are not currently permitted under Korean law or
regulations. See "Investment Objective and Policies - Other
Investments ^ ," "Additional Investment Activities" and "Appendix A -
General Characteristics and Risks of Derivatives."
POLITICAL AND ECONOMIC FACTORS
The value of the Fund's assets may be adversely affected by political,
economic or social instability in Korea. Following World War II, the
Korean peninsula was partitioned. The demilitarized zone at the boundary
between ^ Korea and North Korea was established after the
Korean War of 1950-1953 and is supervised by United Nations forces. The
United States maintains a military force in ^ Korea to help
deter the ongoing military threat from North Korean forces. The situation
remains a source of tension, although negotiations to ease tensions and
resolve the political division of the Korean peninsula have been carried on
from time to time. There also have been efforts from time to time to
increase economic, cultural and humanitarian contacts between North Korea
and ^ Korea . There can be no assurance that such
negotiations or efforts will continue to occur or will result in an easing
of tensions between North Korea and the Republic. Tension between the two
Koreas rose following the announcement in March, 1993 by North Korea of its
intention to withdraw from the Nuclear Non-Proliferation Treaty.
Subsequent ^ events involving, among other things, North
Korea's ^ r efusal to comply with the Nuclear Non-Proliferation
Treaty and the death on July 8, 1994 of North Korea's President, Kim
Il-Sung, have caused the level of tension between the two Koreas to
fluctuate. No assurance can be given that the level of tension with North
Korea will not increase or change abruptly as a result of future
events, including ^ political developments in North Korea
following the death of Kim Il-Sung, developments in the dispute concerning
North Korea's nuclear program (such as any moves to impose trade sanctions
against North Korea , further increasing political tensions and the risk
of military conflict ^) or developments related to the proposed meetings
between Korea and North Korea ^ . See "The Republic of Korea."
^
The heightened tensions between Korea and North Korea have depressed new
foreign investment in Korea and the availability of foreign financing for
Korean companies, and the uncertainty surrounding the situation may
adversely affect the economic climate in Korea. The tensions between North
Korea and Korea also may adversely affect both the prices of the Fund's
portfolio securities and the Fund's share price.
In addition, there are reports of increasing militarization in North
Korea, accompanied by a general economic decline in that country. Military
action or the risk of military action or the economic collapse of North
Korea could have a material adverse effect on Korea, and consequently, on
the ability of the Fund to achieve its investment objective.
The domestic political situation in Korea has undergone significant change
in recent years. Following the 1979 assassination of President Park Chung
Hee, General Chun Doo Hwan became President under an authoritarian regime
which emphasized social and political order, while encouraging renewed
economic growth. Following public demonstrations, Roh Tae Woo was
democratically elected as President in December 1987. In December 1992,
the Korean people elected Kim Young Sam as President. Kim Young Sam is the
first popularly elected President of Korea since 1960 not affiliated with
the military.
With its lack of natural resources and with exports constituting a large
proportion of GNP, the Korean economy is significantly affected by changes
in commodity prices (particularly oil), changes in protectionist sentiment
among its trading partners and exchange rate movements. ^ The
rapid economic development of Korea has in the past led to large
foreign ^ borrowings. Korea's private and governmental debt
reached a peak of U.S.$46.8 billion at the end of 1985 ^, making it the
fourth largest borrower in the world. Since then, the external debt was
reduced to U.S.$31.7 billion as of December 31, 1990 as a result of
substantial current account surpluses, but rose to U.S.$39.1 billion and
U.S.$42.7 billion as of December 31, 1991 and 1992, respectively, as a
result of current account deficits in each of these years. The net
external debt of Korea declined from U.S.$22.4 billion at the end of 1987
to U.S.$11.1 billion at the end of 1992. See "The Republic of Korea."
Korean companies tend to be substantially more leveraged than United
States and European companies. The high degree of leverage increases the
risk of business failures should adverse business conditions develop. In
addition, Korean accounting, auditing and financial reporting standards and
practices are not equivalent to those in the United States. Therefore,
certain material disclosures (including disclosures as to off-balance sheet
financing loan guaranties) may not be made, and less information may be
available with respect to investments in Korea than with respect to those
in the United States.
^
MARKET CHARACTERISTICS
DIFFERENCES BETWEEN THE U.S. AND KOREAN MARKETS. The Korean securities
markets have substantially less volume than the ^ NYSE , and
equity and debt securities of most Korean companies are less liquid and
more volatile than equity and debt securities of U.S. companies of
comparable size. Many companies traded on Korean securities markets are
smaller, newer and less seasoned than companies whose securities are traded
on securities markets in the United States. Investments in smaller
companies involve greater risk than is customarily associated with
investing in larger companies. Smaller companies may have limited product
lines, markets or financial or managerial resources and may be more
susceptible to losses and risks of bankruptcy. Additionally, market making
and arbitrage activities are generally less extensive in such markets,
which may contribute to increased volatility and reduced liquidity of such
markets. Accordingly, the Korean securities markets may be subject to
greater influence by adverse events generally affecting the market, and by
large investors trading significant blocks of securities, than is usual in
the United States. To the extent that Korea experiences rapid increases in
its money supply and investment in equity securities for speculative
purposes, the equity securities traded in Korea may trade at price-earnings
multiples higher than those of comparable companies trading on securities
markets in the United States, which may not be sustainable. Korean
securities markets may also be subject to substantial governmental control,
which may cause sudden or prolonged disruptions in market prices unrelated
to supply and demand considerations. This may also be true of currency
markets. The development of the Korean securities markets may be
attributed to, among other things, the Korean government's extensive
involvement in the private sector, including the securities markets. The
aggregate market capitalization of domestic equity securities listed on the
KSE was approximately ^ W ^ 128.4 trillion
(approximately ^ U.S.$159.4 billion) at ^ June
30, ^ 1994 , as compared to ^ U.S.$4.4 trillion
on the ^ NYSE . As discussed above in "Investment and
Repatriation Restrictions," however, only a small portion of the equity
securities that compose this market capitalization may be purchased by
foreign investors.
The Korean government has from time to time taken measures to minimize
excessive price volatility on the KSE, including the imposition of
limitations on daily price movements of securities and varying margin
requirements. Such actions by the Korean government have had and in the
future could have a significant effect on the market prices and dividend
yields of Korean equity securities. In particular, during 1990, the Korea
Securities Market Stabilization Fund (the "Stabilization Fund"), a
partnership operated by its contributors which include substantially all
KSE-listed companies, Korean securities companies and certain institutional
investors, was formed to stabilize the market through the purchase and sale
of securities. In January and February 1994, the Stabilization Fund sold
approximately 500 billion (approximately ^ U.S.$616 million)
and approximately 300 billion (approximately ^ U.S.$370
million) worth of equity securities, respectively. Future liquidations of
the Stabilization Fund's portfolio could exert significant downward
pressure on the market price of KSE-listed securities in which the Fund may
invest. In addition, any purchases by the Stabilization Fund could reduce
the shares available for investment by foreign investors such as the Fund
or retard a decline in the market price of KSE-listed securities. As of
____, 1994, the Stabilization Fund held cash reserves of approximately
________ trillion and owned Korean securities with a value of approximately
__________ trillion constituting, in the aggregate, approximately ____% of
the total listed equity market capitalization of _________ trillion as of
that date.
In an attempt to avoid market manipulation, regulations of the KSE require
that institutional investors place an "entrustment guarantee" deposit in an
amount equal to 20% of the purchase order price with the relevant broker on
or prior to placing a purchase order. Non-institutional investors are
required to place an entrustment guarantee deposit in an amount equal to
40% of the purchase order price. The remaining purchase price must be paid
on or prior to the settlement date, which typically occurs two days after
the date of execution. The "entrustment guarantee" deposit requirement
applies to both Korean and foreign investors and will expose the Fund to
the broker's credit risk. If an entity other than the Fund's custodian or
sub-custodian were deemed to have custody over certain assets of the Fund,
the Fund may be required to obtain relief from the Commission or a waiver
or modification of the entrustment guarantee requirements from the KSE.
There can be no assurance that such relief, waiver or modification will be
obtained.
There are currently a limited number of securities firms engaged in
securities underwriting and trading in Korea. In addition, under current
Korean laws and regulations, the Fund is prohibited from participating in
initial public offerings of securities except for certain low interest
rate government or public bonds to be designated from time to time by the
KSEC as explained above . Brokerage commissions and other transaction
costs on ^ the KSE are generally higher than in the United
States. In addition, security settlements may in some instances be subject
to delays and related administrative uncertainties, including risk of loss
associated with the credit of local brokers.
GOVERNMENT SUPERVISION OF KOREAN SECURITIES MARKETS; LEGAL SYSTEM. There
is less government supervision and regulation of securities exchanges,
listed companies and brokers in Korea than exists in the United States.
Less information, therefore, may be available to the Fund than in respect
of investments in the United States. Further, in Korea, less information
may be available to the Fund than to local market participants. Brokers in
Korea may not be as well capitalized as those in the United States, so that
they are more susceptible to financial failure in times of market,
political, or economic stress. In addition, existing laws and regulations
are often inconsistently applied. As legal systems in Korea develop,
foreign investors may be adversely affected by new laws and regulations,
changes to existing laws and regulations and preemption of local laws and
regulations by national laws. In circumstances where adequate laws exist,
it may not be possible to obtain swift and equitable enforcement of the
law. Currently a mixture of legal and structural restrictions affect the
Korean securities markets.
FINANCIAL INFORMATION AND STANDARDS. Korean accounting, auditing and
financial standards and requirements differ, in some cases significantly,
from those applicable to U.S. issuers. In particular, the assets and
profits appearing on the financial statements of a Korean issuer may not
reflect its financial position or results of operations in accordance with
U.S. generally accepted accounting principles. In addition, for an issuer
that keeps accounting records in local currency, inflation accounting rules
may require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express
items in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits. Consequently,
financial data may be materially affected by restatements for inflation and
may not accurately reflect the real condition of those issuers and
securities markets. Moreover, substantially less information may be
publicly available about issuers in Korea than is available about U.S.
issuers.
SUBSTANTIAL GOVERNMENT INFLUENCE ON THE PRIVATE SECTOR
The Korean government has historically exercised and continues to exercise
substantial influence over many aspects of the private sector. The Korean
government from time to time has informally influenced the payment of
dividends and the prices of certain products, encouraged companies to
invest or to concentrate in particular industries, induced mergers between
companies in industries suffering from excess capacity and induced private
companies to publicly offer their securities. In addition, the government
has sought to minimize excessive price volatility on the KSE through
various steps, including the imposition of limitations on daily price
movements of securities. Such actions by the government in the future
could have a significant effect on the market prices and dividend yields of
equity securities, including those in the Fund's portfolio.
^ The Korean government ^ has attempted, through
regulation or other measures ^ , to stabilize the securities
market. These included measures intended to channel additional funds from
various financial institutions into investment in KSE-listed
securities. ^ Another measure was to authorize securities "buy-back
funds" to be established as open-ended unit investment trusts with a
limited life of five years. Each such trust is managed by one of the three
largest Korean securities investment trust management companies. The
stated objective of the trusts is to invest in shares of the largest listed
companies. However, it is expected that each trust will invest in the
shares of companies holding units of such trust. Such trusts are generally
restricted from investing in excess of 20% of their total assets in any
class of shares of a company. The redemption rights of unit holders are
subject to certain restrictions for a period of three years following
subscription for the relevant units. Other measures ^ taken
include tax incentives for small investors, regular government
oversight to ensure that financial institutions are not net sellers of
shares and changes in margin requirements for securities transactions.
Indirect measures have included from time to time urging institutional
investors to act as net buyers to forestall a significant decline in the
market.
THINLY TRADED MARKETS AND ILLIQUID INVESTMENTS
Compared to securities traded in the United States, generally all
securities of ^ Korean Issuers may be considered to be thinly
traded. Even relatively widely held securities in Korea may not be able to
absorb trades of a size customarily transacted by institutional investors,
without price disruptions. Accordingly, the Fund's ability to reposition
itself will be more constrained than would be the case for a ^
mutual fund that invests in the U.S. equity marke t. The Fund, in
addition, may invest up to 35% of its total assets in illiquid equity or
debt securities, that is, securities for which there is no readily
available market, or no market at all. Investment of the Fund's assets in
relatively illiquid securities may restrict the ability of the Fund to
dispose of its investments in a timely fashion and for a fair price as well
as its ability to take advantage of market opportunities. The risks
associated with illiquidity will be particularly acute in situations in
which the Fund's operations require cash, such as when the Fund repurchases
shares, commences a tender offer, or pays dividends or distributions, and
could result in the Fund borrowing to meet short-term cash requirements or
incurring capital losses on the sale of illiquid investments. Further,
companies whose securities are not publicly traded are not subject to the
disclosure and other investor protection requirements which would be
applicable if their securities were publicly traded.
Illiquid investments are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they
are valued because of the absence of a market for such investments. Under
the supervision of the Board of Directors, the Investment Manager will
determine the liquidity of the Fund's investments and, through reports from
the Investment Manager, the Board will monitor investments in illiquid
instruments. In determining the liquidity of the Fund's investments, the
Investment Manager may consider various factors, including (1) the
frequency of trades and quotations, (2) the number of dealers and
prospective purchasers in the marketplace, (3) dealer undertakings to make
a market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the Fund's rights and obligations relating to
the investment). In the absence of market quotations, illiquid investments
are priced at fair value as determined in good faith by a committee
appointed by the Board of Directors. ^ If through a change in
values, assets, or other circumstances, the Fund were in a position where
more than ^ 35% ^ of its total assets were invested in
illiquid securities, the Fund would seek to take appropriate steps to
protect liquidity. ^
^ SETTLEMENT PROCEDURES AND DELAYS
Settlement procedures in Korea are somewhat less developed and
reliable than those in the United States and in other developed
securities markets, and the Fund may experience settlement delays or
other material difficulties. Accordingly, the Fund may be subject to
significant delays or limitations on the volume of trading during any
particular period as a result of these factors. The foregoing factors
could impede the ability of the Fund to effect portfolio transactions on a
timely basis and could have an adverse impact on the net asset value of the
shares of the Fund's Common Stock and the price at which the shares
trade. ^
DEBT SECURITIES - HIGH YIELD, HIGH RISK SECURITIES
^ The Fund's investment policies do not limit the percentage
of the Fund's debt securities investments which may be invested in debt
securities issued or guaranteed by the Korean government, its agencies or
instrumentalities, or other political subdivisions, or by other Korean
Issuers, including unrated debt securities and debt securities rated below
investment grade. Under current Korean laws and regulations, the Fund
is prohibited from investing in debt securities denominated in Won except
to a very limited extent as explained above. The market value of debt
securities generally varies in response to changes in interest rates and
the financial conditions of each issuer. During periods of declining
interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be
reflected in the Fund's net asset value.
The Fund's investments in Korean debt securities may generally be
considered to have credit quality below investment grade as determined by
internationally recognized credit rating agency organizations. Debt
securities rated below investment grade (commonly referred to as "junk
bonds" when issued in the United States) are considered to be speculative.
Investment in low rated securities typically involves risks not associated
with higher rated securities, including, among others, overall greater risk
of timely and ultimate payment of interest and principal, potentially
greater sensitivity to general economic conditions, greater market price
volatility and less liquid secondary market trading. Certain of the Fund's
investments may be considered to have extremely poor prospects of ever
attaining any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to pay
interest and repay principal when due in the event of adverse business,
financial or economic conditions, or to be in default or not current in the
payment of interest or principal.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a decline in low rated debt
securities prices because the advent of a recession could lessen the
ability of a highly leveraged company to make principal and interest
payments on its debt securities. If the issuer of low rated debt
securities defaults, the Fund may incur additional expenses in seeking
recovery. See "Appendix B - Debt Ratings" for a description of ratings
of debt instruments.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS
Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of
principal and interest. Direct debt instruments may not be rated by any
nationally recognized rating service. If the Fund does not receive
scheduled interest or principal payments on such indebtedness, the Fund's
share price and yield could be adversely affected. Loans that are fully
secured offer the Fund more protections than an unsecured loan in the event
of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan would
satisfy the borrower's obligation, or that the collateral can be
liquidated. Indebtedness of borrowers whose creditworthiness is poor
involves substantially greater risks, and may be highly speculative.
Borrowers that are in bankruptcy or restructuring may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Direct
indebtedness of Korea will also involve a risk that the Korean governmental
entities responsible for the repayment of the debt may be unable, or
unwilling, to pay interest and repay principal when due.
Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks
to the Fund. For example, if a loan is foreclosed, the Fund could become
part owner of any collateral, and would bear the costs and liabilities
associated with owning and disposing of the collateral. In addition, it is
conceivable that under emerging legal theories of lender liability, the
Fund could be held liable as a co-lender. Direct debt instruments may also
involve a risk of insolvency of the lending bank or other intermediary.
Direct debt instruments that are not in the form of securities may offer
less legal protection to the Fund in the event of fraud or
misrepresentation. In the absence of definitive regulatory guidance, the
Fund relies on the Investment Manager's, the Investment Adviser's and the
Sub-Adviser's research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the
loan, as specified in the loan agreement. Unless, under the terms of the
loan or other indebtedness, the Fund has direct recourse against the
borrower, it may have to rely on the agent to apply appropriate credit
remedies against a borrower. If assets held by the agent for the benefit
of the Fund were determined to be subject to the claims of the agent's
general creditors, the Fund might incur certain costs and delays in
realizing payment on the loan or loan participation and could suffer a loss
of principal or interest.
Direct indebtedness purchased by the Fund may include letters of credit,
revolving credit facilities, or other standby financing commitments
obligating the Fund to pay additional cash on demand. These commitments
may have the effect of requiring the Fund to increase its investment in a
borrower at a time when it would not otherwise have done so, even if the
borrower's condition makes it unlikely that the amount will ever be repaid.
The Fund will set aside appropriate liquid assets in a segregated custodial
account to cover its potential obligations under standby financing
commitments.
The Fund limits the amount of total assets that it will invest in any one
issuer. For purposes of these limitations, the Fund generally will treat
the borrower as the "issuer" of indebtedness held by the Fund. In the case
of loan participations where a bank or other lending institution serves as
financial intermediary between the Fund and the borrower, if the
participation does not shift to the Fund the direct debtor-creditor
relationship with the borrower, SEC interpretations require the Fund, in
appropriate circumstances, to treat both the lending bank or other lending
institution and the borrower as "issuers" for these purposes. Treating a
financial intermediary as an issuer of indebtedness may restrict the Fund's
ability to invest in indebtedness related to a single financial
intermediary, even if the underlying borrowers represent many different
companies.
SWAP AGREEMENTS
Swap agreements can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long- or short-term interest rates (in the United States
or abroad), foreign currency values, mortgage securities, corporate
borrowing rates, or other factors such as security prices or inflation
rates. Swap agreements can take many different forms and are known by a
variety of names. The Fund is not limited to any particular form of swap
agreement if the Investment Manager, the Investment Adviser or the
Sub-Adviser determines it is consistent with the Fund's investment
objective and policies.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee
by the other party. For example, the buyer of an interest rate cap obtains
the right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level, while the seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, the swap agreement
would tend to decrease the Fund's exposure to U.S. interest rates and
increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on
how they are used, swap agreements may increase or decrease the overall
volatility of the Fund's investments and its share price and yield.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from the Fund. If a swap
agreement calls for payments by the Fund, the Fund must be prepared to make
such payments when due. In addition, if the counterparty's
creditworthiness declined, the value of a swap agreement would be likely to
decline, potentially resulting in losses. The Fund expects to be able to
eliminate its exposure under swap agreements either by assignment or other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party.
The Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If the
Fund enters into a swap agreement on a net basis, it will segregate assets
with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount the
Fund is entitled to receive under the agreement. If the Fund enters into a
swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement.
INDEXED SECURITIES
The Fund may purchase securities whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices.
Currency-indexed securities typically are short-term to intermediate-term
debt securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies, and
may offer higher yields than U.S. dollar-denominated securities of
equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign currency-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on
the values of a number of different foreign currencies relative to each
other.
To the extent that the Fund invests in indexed securities, it will be
subject to the risks associated with changes in the particular indices,
which may include reduced or eliminated interest payments and losses of
invested principal. Certain indexed securities may have the effect of
providing a degree of investment leverage, because they may increase or
decrease in value at a rate that is a multiple of the changes in applicable
indices. As a result, the market value of such securities will generally
be more volatile than the market values of fixed-rate securities.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, indexed securities are subject
to the credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's creditworthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations, and certain U.S. government agencies. Indexed securities may
be more volatile than the underlying instruments.
INVESTMENT PRACTICES
Certain risks and special considerations of certain of the investment
practices in which the Fund may engage are described above under
"Investment Objective and Policies" and "Additional Investment Activities."
In addition, the Fund's ability to engage in these investment practices may
be limited by certain rules and regulations in Korea. Derivatives involve
special risks, including possible default by the other party to the
transaction, illiquidity and, to the extent the Investment Adviser's or the
Sub-Adviser's view as to certain market movements is incorrect, the risk
that the use of a Derivative could result in greater losses than if it had
not been used. Use of put and call options could result in losses to the
Fund, force the purchase or sale of portfolio securities at inopportune
times or for prices higher or lower than current market values, or cause
the Fund to hold a security it might otherwise sell. The use of currency
transactions could result in the Fund's incurring losses as a result of the
imposition of exchange controls, suspension of settlements, or the
inability to deliver or receive a specified currency in addition to
exchange rate fluctuations. The use of options and futures transactions
entails certain special risks. In particular, the variable degree of
correlation between price movements of futures contracts and price
movements in the related portfolio position of the Fund could create the
possibility that losses on the derivative instrument will be greater than
gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. The Fund might not be able
to close out certain positions without incurring substantial losses. To
the extent the Fund utilizes futures and options transactions for hedging,
such transactions should tend to minimize the risk of loss due to a decline
in the value of the hedged position and, at the same time, limit any
potential gain to the Fund that might result from an increase in value of
the position. Finally, the daily variation margin requirements for futures
contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of
the initial premium and transaction costs. Losses resulting from the use
of Derivatives will reduce the Fund's net asset value, and possibly income,
and the losses may be greater than if Derivatives had not been used.
Additional information regarding the risks and special considerations
associated with Derivatives appears in "Appendix A $ General
Characteristics And Risks of Derivatives ^ ."
NON-DIVERSIFICATION
The Fund is classified as a non-diversified investment company under the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a
single issuer. Thus, the Fund may invest a greater proportion of its
assets in the securities of a smaller number of issuers and, as a result,
could be subject to greater risk of loss. The Fund, however, intends to
comply with the diversification requirements imposed by the Code for
qualification as a regulated investment company, which generally limits
investments in any one issuer to 25% of the Fund's total assets. See
"Taxation $ U.S. Federal Income Taxes" and "Investment Restrictions."
WITHHOLDING AND OTHER TAXES
The Fund may be subject to certain taxes, including withholding or other
taxes on income and capital gains, that are or may be imposed by Korea or
other foreign governments, which will reduce the return to the Fund.
The Fund does not intend to engage in activities that will create a
permanent establishment in Korea within the meaning of Korea-U.S. Tax
Treaty. Therefore, the Fund generally will not be subject to any Korean
income taxes other than Korean withholding taxes. These taxes may be
exempt or reduced if the Korea-U.S. Tax Treaty applies to the Fund. If the
treaty provisions are not, or cease to be, applicable to the Fund,
significant additional withholding taxes would apply. Korean counsel to
the Fund, Shin & Kim, have given their opinion that the treaty presently
does apply to the Fund if and so long as the Fund operates as described in
this Prospectus. See "Taxation - Korean Taxes." The imposition of
such taxes and the rates imposed are subject to change. The Fund may
elect, when eligible, to "pass-through" to the Fund's shareholders such
taxes that are treated as income taxes for U.S. Federal income tax
purposes. If the Fund makes such election, shareholders will be required
to include in income their proportionate shares of the amount of non-U.S.
income taxes paid by the Fund and may be entitled to claim either a credit
or deduction for all or a portion of such taxes. See "Taxation - U.S.
Income Taxes" below for a discussion of the rules and limitations
applicable to the treatment of non-U.S. income taxes under the U.S. Federal
income tax laws. Certain shareholders, including some non-U.S.
shareholders, will not be entitled to the benefit of a deduction or credit
with respect to non-U.S. income taxes paid by the Fund. If a shareholder
is eligible and elects to credit foreign taxes, such credit is subject to
limitations. Other foreign taxes, such as transfer taxes, may be imposed
on the Fund, but would not be eligible to be passed through to shareholders
as a credit or deduction. Also, additional U.S. Federal income taxes and
charges may be incurred as a result of any investment made in "passive
foreign investment companies." See "Taxation - U.S. Federal Income Taxes"
and "- Other Taxation."
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Directors.
Such provisions could have the effect of depriving shareholders of an
opportunity to sell their shares of Common Stock at a premium over
prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund. See "Description of Capital Stock - Special
Voting Provisions."
NET ASSET VALUE DISCOUNT
The Fund is a newly organized company with no prior operating history.
Prior to this offering, there has been no public market for the Fund's
shares of Common Stock. Shares of closed-end investment companies have in
the past frequently traded at a discount from their net asset values and
initial offering prices. This characteristic of shares of a closed-end
fund is a risk separate and distinct from the risk that a fund's net asset
value will decrease. The Fund cannot predict whether its own shares will
trade at, below or above net asset value. The risk of loss associated with
purchasing shares of a closed-end investment company is more pronounced for
investors who purchase in the initial public offering and who wish to sell
their shares of Common Stock in a relatively short period of time.
^ FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES
Rules adopted under the 1940 Act permit the Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be
eligible sub-custodians for the Fund under such rules, in which event the
Fund may be precluded from purchasing securities in which it would
otherwise invest, and other banks that are eligible foreign sub-custodians
may be recently organized or otherwise lack extensive operating experience.
In addition, in certain countries, such as Korea, there may be legal
restrictions or limitations on the ability of the Fund to recover assets
held in custody by foreign sub-custodians in the event of the bankruptcy of
the sub-custodian. The Fund also may experience settlement delays or other
material difficulties. See "Risk Factors and Special Considerations -
Settlement Procedures and Delays." ^
TRANSFER RESTRICTIONS
Investors who purchase shares of Common Stock at a reduced price will be
restricted from transferring such shares for a period of 90 days after the
closing of the ^ Offering . There is no restriction on the
number of shares that may be purchased subject to the transfer restriction
described above, except that the Fund will comply, with respect to
non-restricted shares, with the distribution requirements of the NYSE. See
"Underwriting." To the extent these investors sell their shares once the
transfer restriction is no longer applicable, the market price of the
Common Stock could be adversely affected. In addition, the transfer
restriction will reduce the number of shares available for sale in the
secondary market during the 90-day restriction period.
EXPENSES
The operating expense ratio of the Fund can be expected to be higher than
that of a fund investing primarily in the securities of U.S. issuers since
the expenses of the Fund (such as custodial, currency exchange and
communication costs) are higher. See "Summary of Expenses." Brokerage
commissions and transaction costs for transactions both on and off the KSE
are generally higher than in the United States.
INVESTMENTS IN ASIAN ISSUERS
Up to 35% of the Fund's total assets may be invested in equity and debt
securities of Asian Issuers, if warranted, in Fidelity's judgment, by
economic, political or regulatory conditions in Korea or valuations in the
Korean securities markets relative to such conditions. Asian Issuers are
issuers (other than issuers meeting the definition of Korean Issuers as
defined above), that (i) are organized under the laws of Hong Kong, Japan
or Taiwan, (ii) regardless of where organized, and as determined by
Fidelity, derive at least 50% of their revenues or profits, from goods
produced or sold, investments made, or services performed in Hong Kong,
Japan or Taiwan, (iii) have the primary trading market for their securities
in Hong Kong, Japan or Taiwan or (iv) are governments, or their agencies,
instrumentalities or other political sub-divisions of Hong Kong, Japan or
Taiwan.
The risk factors identified above generally also apply to investments
the Fund may make in Asian Issuers, although the specific nature of such
risks may vary according to the country in which investments are made. In
addition, Korea, Hong Kong, Japan and Taiwan may be subject to
greater degrees of economic, political and social instability than is the
case in the United States and Western European countries. Such instability
may result from, among other things, the following: (i) authoritarian
governments or military involvement in political and economic
decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii)internal
insurgencies; (iv) hostile relations with neighboring countries; and (v)
ethnic, religious and racial disaffection. Such social, political and
economic instability could disrupt the principal financial markets in which
the Fund invests and cause losses to the Fund.
HONG KONG. In Hong Kong, British proposals to extend limited democracy
have caused a political rift with the Peoples Republic of China (the
"PRC"), which is scheduled to assume sovereignty over the colony in 1997.
Although the PRC has committed by treaty to preserve the economic and
social freedoms enjoyed in Hong Kong for fifty years after regaining
control of Hong Kong, the continuance of the current form of economic
system in Hong Kong after the reversion will depend on the actions of the
government of the PRC. The PRC and the United Kingdom have also yet to
resolve their differences on certain issues relating to the reversion of
sovereignty, such as the nationality status of certain ethnic minorities in
Hong Kong, the construction of a new international airport and most
recently, electoral reforms. In addition, such reversion has increased
sensitivity in Hong Kong to political developments and statements by public
figures in the PRC. Business confidence in Hong Kong, therefore, can be
significantly affected by such developments and statements, which in turn
can affect markets and business performance.
Hong Kong's economy, followed by Taiwan's economy, is the most likely
to be affected by reform in the PRC. Hong Kong and Taiwan have been the
leading investors in the PRC. Because direct travel and investment from
Taiwan to the PRC is generally banned, Hong Kong has served as an important
conduit for Taiwanese trade and investment with the PRC. Rapid development
of the PRC's southern provinces has created a diversification of investment
from Hong Kong. Producers which originally sought to utilize low cost
labor for export production are now investing in facilities that produce an
array of goods and services aimed at meeting emerging consumer demand
within the PRC. These include finance, telecommunications, electricity
production, leisure facilities and consumer goods distribution.
The Hong Kong stock market can be volatile and is sensitive both to
developments in the PRC and to the strength of other world markets. As an
example, in 1989, the Hang Seng Index of the Hong Kong stock market rose to
3,310 in May from its previous year-end level of 2,687, but fell to 2,094
in early June following the events at Tiananmen Square. The Hang Seng
Index gradually climbed in subsequent months, but fell by 181 points on
October 16, 1989 (approximately 6.5%) following a substantial fall in the
U.S. stock market, and at the year end closed at a level of 2,837. More
recently, the Hong Kong stock market has shown its volatility with the Hang
Seng Index dropping approximately 26% to 9,029.91 on March 31, 1994 after
reaching a record high of 12,201.09 on January 4, 1994 following a
sustained bull run that began in December 1992.
JAPAN. Japan currently has the second-largest GDP in the world. The
Japanese economy has grown substantially over the last three decades. Its
growth rate averaged over 5% in the 1970s and 1980s. However, in 1992, the
growth rate in Japan slowed to 0.6% and the budget showed a deficit of 1.5%
percent of GDP. Despite small rallies and market gains, Japan has been
plagued with economic sluggishness. Economic conditions have weakened
considerably in Japan since October 1992. The boom in Japan's equity and
property markets during the expansion of the late 1980s supported high
rates of investment and consumer spending on durable goods, but both of
these components of demand have now retreated sharply following the decline
in asset prices. Profits have fallen sharply, the previously tight labor
market conditions have eased considerably, and consumer confidence is low.
The banking sector has experienced a sharp rise in non-performing loans,
and strains in the financial system are likely to continue. The decline in
interest rates and the two large fiscal stimulus packages should help to
contain the recessionary forces, but substantial uncertainties remain. The
general government position has deteriorated as a result of weakening
economic growth, as well as stimulative measures taken recently to support
economic activity and to restore financial stability.
Although Japan's economic growth has declined significantly since 1990,
many Japanese companies seem capable of rebounding due to increased
investments, smaller borrowings, increased product development and
continued government support. Growth has recovered in 1994. Japan's
economic growth in the early 1980s was due in part to government
borrowings. Japan is heavily dependent upon international trade and,
accordingly, has been and may continue to be adversely affected by trade
barriers, and other protectionist or retaliatory measures of, as well as
economic conditions in, the United States and other countries with which
they trade. Industry, the most important sector of the economy, is heavily
dependent on imported raw materials and fuels. Japan's major industries
are in the engineering, electrical, textile, chemical, automobile, fishing
and telecommunication fields. Japan imports iron ore, copper, and many
forest products. Only 19% of its land is suitable for cultivation.
Japan's agricultural economy is subsidized and protected. Japan's high
volume of exports such as automobiles, machine tools, and semiconductors
have caused trade tensions with other countries, particularly the United
States. Attempts to approve trading agreements between the countries may
reduce the friction caused by the current trade imbalance.
TAIWAN. As Taiwan's domestic labor costs have risen, Taiwanese
manufacturers have been aggressively relocating production facilities to
the southern PRC provinces of Guangdong and Fuijan. In addition, as costs
in the southern PRC have increased, Taiwanese manufacturers are developing
facilities further north, utilizing their historic ties to the region
surrounding Shanghai. If official relations between the PRC and Taiwan
improve, Taiwan may eventually replace Hong Kong as the PRC's largest
regional trading partner.
Taiwan imposes a waiting period on the repatriation of investment
capital for certain foreign investors. Although these restrictions may in
the future make it undesirable to invest in Taiwan, Fidelity does not
believe that any current repatriation restrictions would preclude the Fund
from effectively managing its assets. In addition, in Hong Kong and
Taiwan, there are restrictions on the percent of permitted foreign
investment in shares of certain companies, mainly those in highly regulated
industries, although in Taiwan there are limitations on foreign ownership
of shares of any listed company. Investment in Taiwan requires an
investment permit. The Investment Manager intends to apply for a permit on
behalf of the Fund and certain other funds managed by the Investment
Manager.
With respect to investments in Taiwan, it should be noted that Taiwan
lacks formal diplomatic relations with many nations, although it conducts
trade and financial relations with most major economic powers. Both the
government of the PRC and the government of the Republic of China in Taiwan
claim sovereignty over all of China. Although relations between Taiwan and
the PRC are currently peaceful, renewed frictions or hostility could
interrupt operations of Taiwanese companies in which the Fund invests and
create uncertainty that could adversely affect the value and marketability
of its Taiwan investments. Tension also exists over the PRC's possession
of nuclear capabilities and its proximity to Taiwan.
THE REPUBLIC OF KOREA
GENERAL INFORMATION
GENERAL
The Republic of Korea ("Korea") was founded on August 15, 1948
following elections held in southern Korea. Korea has since controlled and
administered the portion of the Korean peninsula that lies generally to the
south of the 38th parallel.
The Korean peninsula is about 625 miles long and 135 miles wide. Korea
has a land area of about 38,000 square miles (99,300 square kilometers),
approximately one-fourth of which is arable. It is bordered to the north
by The Democratic People's Republic of Korea ("North Korea") and to the
east, west and south by the East Sea, the Yellow Sea and the Korean Strait,
respectively.
The country was under Japanese rule from 1910 until 1945 when,
following the Japanese surrender at the end of World War II, United States
forces occupied the southern half of the Korean peninsula and Soviet forces
established a presence in the northern half. In 1948 the United Nations
General Assembly declared Korea to be the only legal government in the
Korean peninsula.
The Korean War of 1950-1953 began with the invasion by communist forces
from the North, and following a military stalemate, ended with an armistice
establishing a demilitarized zone in the vicinity of the 38th parallel
which became the boundary between Korea and North Korea. The armistice
agreement continues to be supervised by United Nations forces.
By 1993, the population of Korea had risen to approximately 44 million
from 25 million in 1960. The proportion of the population engaged in
agriculture and forestry was decreasing over the same period, reaching
approximately 14 percent of the economically active population in 1993.
Correspondingly, the population segment engaged in manufacturing was
increasing, reaching approximately 24 percent of the economically active
population in 1993. The population density, at approximately 444 per
square kilometers, is one of the highest in the world. Over half the
population lives in cities, the largest of which is the capital Seoul, with
a population of about 10.9 million in 1993. Pusan is the second largest
city (population around 3.9 million in 1993) and is also Korea's largest
port.
POLITICS AND FOREIGN RELATIONS
The early years of Korea were dominated by the successive presidencies
of Dr. Syngman Rhee, who was first elected in 1948 and re-elected in 1952,
1956 and 1960. President Rhee resigned shortly after his 1960 re-election,
partly in response to pressure from student-led demonstrations, and was
succeeded by Yoon Bo Sun. In 1961, a group of military leaders headed by
Park Chung Hee assumed power. A civilian government was subsequently
established, and Mr. Park was formally elected President in October 1963.
President Park served until 1979 when he was assassinated following a
period of increasing strife between the Government and its critics.
Martial law was declared and an interim government was formed under Prime
Minister Choi Kyu Hah who became the next President. After clashes between
the Government and its critics, President Choi resigned and was succeeded
in August 1980 by General Chun Doo Hwan.
Under the leadership of President Chun, a new Constitution, providing
for the indirect election of the President and for certain democratic
reforms, was approved in a national referendum and shortly thereafter, in
early 1981, President Chun was re-elected and inaugurated as President. In
1987, following public demonstrations against the prospect of choosing
President Chun's successor through indirect elections in an electoral
college, the Constitution was revised to permit the direct election of the
President. In December 1987, Roh Tae Woo was elected President by a narrow
plurality, after the opposition parties led by Kim Young Sam and Kim Dae
Joong failed to unite behind a single candidate. In February 1990, members
of two opposition political parties, including the party led by Kim Young
Sam, merged into the ruling Democratic Liberal Party led by President
Roh.
In December 1992, Kim Young Sam was elected President as the candidate
of the Democratic Liberal Party. This election of a civilian and former
opposition party leader as President significantly reduced the controversy
concerning the legitimacy of the political regime. President Kim has
emphasized reform, the liberalization of politics, deregulation and the
revitalization of the economy of Korea.
Relations between Korea and North Korea have been tense over most of
Korea's history. North Korea maintains a regular military force estimated
at close to one million troops, the majority of which are concentrated near
the northern border of the demilitarized zone. Korea maintains a
state of military preparedness along the southern border of the
demilitarized zone. Korea has a national conscription system and a regular
military force consisting of approximately 655,000 troops. In addition to
the regular forces, there are reserves of almost 3.2 million troops. The
United States currently maintains military forces of approximately 40,000
troops in Korea.
Political contacts between Korea and North Korea have increased in
recent years. Commencing in September 1990, the Prime Ministers of Korea
and North Korea have from time to time held talks in Seoul and Pyongyang to
discuss various matters. On December 13, 1991, the Prime Ministers of
Korea and North Korea signed an "Agreement on Reconciliation, Nonaggression
and Exchange and Cooperation" in which the two sides agreed, among other
things, to take further steps toward conciliation, nonaggression and
economic cooperation. The agreement was put into force on February 19,
1992. Tension between the two Koreas rose following the announcement in
March 1993 by North Korea of its intention to withdraw from the Nuclear
Non-Proliferation Treaty and North Korea's continuing refusal to allow full
inspection of its nuclear facilities by officials of the International
Atomic Energy Commission. Subsequent events involving, among other things,
North Korea's refusal to comply with the Nuclear Non-Proliferation Treaty
and the death on July 8, 1994 of North Korea's President, Kim Il-Sung, have
caused the level of tension between the two Koreas to fluctuate. No
assurance can be given that the level of tension with North Korea will not
increase or change abruptly as a result of future events, including
political developments in North Korea following the death of Kim Il-Sung,
developments in the dispute concerning North Korea's nuclear program (such
as any moves to impose trade sanctions against North Korea, further
increasing political tensions and the risk of military conflict) or
developments related to the proposed meetings between Korea and North
Korea. The Fund cannot predict the effect, if any, of recent events in
North Korea on the securities markets in Korea or elsewhere.
Korea maintains diplomatic relations with most nations of the world.
Korea's strongest ties are with the United States and include a mutual
defense treaty and several agreements designed to promote Korea's economy.
Korea's relationship with Japan, now its largest trading partner after the
United States, is also increasingly important. Japan constitutes Korean's
leading source of imported capital goods, technology and direct foreign
investment and provides 49% of foreign visitors to Korea.
Korea continues to seek improved relations with communist and formerly
communist countries. Since the beginning of 1989, Korea has established
diplomatic relations with Hungary, Poland, Yugoslavia, the Czech Republic,
Slovakia, Bulgaria, Rumania, Mongolia, Russia and the People's Republic of
China. In January 1991, the Government announced an accord with the Soviet
Union contemplating a general purpose loan to the Soviet Union in the
amount of U.S.$1.0 billion and loans aggregating approximately U.S.$2.0
billion for the purchase of Korean products. Such loans were to be made
available pursuant to Korean bank facilities over the subsequent three year
period. Pursuant to the accord, a general purpose loan of U.S.$1.0 billion
and approximately U.S.$470 million of loans to finance the purchase of
Korean products have been provided to the Soviet Union and the successor
Commonwealth of Independent States. Advances of the remaining
approximately U.S.$1.5 billion of loans to be made pursuant to the accord
have been suspended by the Government and discussions have been held with
Russia concerning possible lifting of such suspension. Korea has
established diplomatic relations with Russia and other members of the
Commonwealth of Independent States.
GOVERNMENT
Governmental authority in Korea is highly centralized and is
concentrated in a strong Presidency. The Constitution provides for the
direct election of the President by popular vote. Under the Constitution,
the term of office of the President is five years and he may not be
re-elected.
The President, who is Chief of State and head of government, is also
Chairman of the State Council (cabinet), which consists of the Prime
Minister, who is appointed by the President with the consent of the
National Assembly, the deputy prime ministers, the heads of the government
ministries and ministers of state. The President has the authority to
select who shall serve in the State Council on the recommendation of the
National Assembly and also can appoint or remove other government
officials, including local officials such as governors and mayors. The
Prime Minister, by order of the President, is responsible for the overall
coordination of various ministries and agencies.
The President has the right to veto new legislation and to take
emergency measures in case of natural disaster, serious fiscal or economic
crisis, state of war or similar conditions. The President is required to
notify the National Assembly promptly of any such emergency measures taken,
and to seek its concurrence, failing which the emergency measures are
automatically invalidated.
Legislative power is vested in the National Assembly, consisting of 299
members. About three-quarters (224) of the members of the National
Assembly are elected by popular vote for a term of four years, and the
remaining seats (75) are distributed proportionately among parties winning
over 3% of the votes in the direct election. The term of office of all
members is set at four years. The National Assembly enacts laws, approves
treaties and approves the national budget. Most legislation is drafted by
the executive branch, which then submits the bill to the National Assembly
for approval. In the event of violation of the constitution by the
President, the Prime Minister, members of the State Council, heads of
executive ministries, judges, or other public officials, the National
Assembly has the power to pass a motion for impeachment.
Judicial power is vested in the Supreme Court, the Constitutional Court
and other lower courts at various levels. The highest court of Korea is
the Supreme Court which has the final power to review the constitutionality
or legality of administrative decrees, regulations or dispositions. There
are 14 justices on the Supreme Court.
The Constitutional Court consisting of nine members appointed by the
President for six year terms has the power to rule on the constitutionality
of a law, impeach public officials, dissolve political parties and review
petitions relating to the constitution. Disputes relating to the
separation of powers between the branches of national government,
governmental agencies and local autonomous entities are also resolved by
the Constitutional Court.
Administratively, Korea is divided into nine provinces and six cities
with provincial status, Seoul, Pusan, Taegu, Inchon, Kwangju and Taejon.
Local governments are directed by the Government and principal officials
are appointed by the President. However, the Government has announced its
intention to introduce some measure of local autonomy. In March and June
1991, the Government held local assembly elections at the county and
province levels. The next local assembly elections at the county and
province levels are scheduled to be held in April 1995.
POLITICAL ORGANIZATIONS
Three opposition parties were officially formed in anticipation of the
Presidential elections of December 1987. The first election to the
National Assembly under the current constitution occurred in April 1988.
In February 1990, two of the opposition parties and the ruling party led by
President Roh were each disbanded to form the Democratic Liberal Party (the
"DLP"). Certain members of the two opposition parties so disbanded
established a new party, which merged later into the other remaining
opposition party forming a consolidated new opposition party named the
Democratic Party (the "DP"). The last National Assembly elections were
held on March 24, 1992 and the next election is scheduled to be held by
April 11, 1996. As of August 31, 1993, the distribution of seats in the
National Assembly by parties was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
DLP DP OTHER TOTAL
Number of Seats 176 98 25 299
</TABLE>
INTERNATIONAL ORGANIZATIONS
Korea maintains membership in a number of supranational organizations,
including the International Monetary Fund, the International Bank for
Reconstruction and Development (the World Bank), the International
Development Association, the Asian Development Bank and the International
Finance Corporation. It is a party to the General Agreement on Tariffs and
Trade. In September 1991, Korea and North Korea became members of the
United Nations.
THE ECONOMY
ECONOMIC POLICY AND THE FIVE YEAR PLANS
Korean industry and commerce are predominantly privately owned and
operated. The Government, however, is actively involved in establishing
economic policy objectives and implementing such policies with a view
toward maintaining national security, encouraging industrial development
and improving living standards. Economic, financial and business
priorities can be influenced by the Government through its control of
approvals and licenses and through the allocation of credit. However, such
Government influence has gradually diminished through deregulation and
market self-regulation, in keeping with Korea's liberalization policy.
The Economic Planning Board, headed by the Deputy Prime Minister, is
primarily responsible for formulating economic policies, including the Five
Year Economic and Social Development Plans which have guided economic
policy since 1962. The Economic Planning Board exercises overall
direction of the economy by means of economic policies in cooperation with
the various ministries. The Ministry of Finance implements fiscal,
financial and monetary policies. To encourage particular industries, the
Government uses such measures as financial assistance and tax
incentives.
The emphasis of the Five Year Plans has changed over the years from the
development of import substitution industries, the building up of
infrastructure and the development of industries with export potential to a
focus on economic stabilization, liberalization of the economy, reduction
of restrictions on direct foreign investment and improvements in social
conditions. Since the establishment of the Five Year Plans, the economy of
Korea has changed from one characterized by agricultural production and the
export of raw materials, textiles and clothing to one characterized by the
production and export of manufactured goods, particularly electronic
products, ships, machinery and steel. The new Government announced in
early 1993 economic reform and development programs to be implemented in a
new Five Year Economic Plan for the period through 1997. Pursuant to the
Plan, the Government will promote fiscal, financial and administrative
reforms and changes in prevailing patterns of economic behavior. The
current plan anticipates enhancing the growth of the economy by a variety
of measures, including industrial structural adjustment, the establishment
of new competition rules and the development of the information industry,
small and medium-sized firms and the agriculture and fishery sectors. The
plan also anticipates fiscal reform in a number of areas and further reform
and liberalization of the financial sector. Growth in GNP is projected to
be maintained at or above 7% in real terms, with a balance of payments
surplus by 1995 and consumer price inflation reduced steadily to a rate of
under 3% per annum. The Plan is also intended to promote stable growth and
globalization of the Korean economy and to improve the quality of life in
Korea.
GROSS NATIONAL PRODUCT
During the past two decades, the average annual real increase in GNP
has been approximately 9.0%. Such increase is attributable in part to
Government policies, as articulated in the Five Year Economic Plan,
favoring export-led growth and an industrious and well-trained labor force.
During this period, Korea made significant progress toward the
transformation of its economy from one characterized by agricultural
production and the export of raw materials to that of a modern industrial
state.
The Korean economy has in recent years displayed high growth and, until
1988 when inflation accelerated, low inflation rates. In 1989, GNP growth
slowed by comparison to the strong performances of the previous two years,
12.9% in 1986 and 13.0% in 1987, with GNP rising by 6.8%. This drop in the
GNP growth rate was largely attributable to appreciation of the Won and to
nationwide labor-management disputes which reduced the competitiveness of
Korean products in international markets. In 1990 and 1991, GNP rebounded
and grew at a rate of 9.3% and 8.4%, respectively, due in part to increased
domestic demand. In 1992, GNP grew at a rate of 5%. This low growth rate
of GNP in 1992 was affected by various factors, including the previous
administration's policy of cooling down the overheated economy to ensure
stable growth. In 1993, GNP grew at a rate of 5.6% based on preliminary
figures published by the Bank of Korea.
The following table shows the composition of Korea's GNP at current
market prices and GNP in constant 1990 market prices from 1989 to 1993.
Also shown is the annual average increase in Korea's GNP.
GROSS NATIONAL PRODUCT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993(1) AS %
OF GNP
1993
(BILLIONS OF WON)
Gross National Product at Current Market Prices:
Private Consumption 54.5%
79,424.0 96,387.7 115,042.8 129,735.2 143,743.3
General Government
Consumption 10.8
15,237.4 18,187. 0 22,169.5 26,110.3 28,563.2
Gross Domestic Fixed Capital
Formation 35.7
47,625.3 66,568.7 82,946.5 87,907.0 94,322.3
Increase in Stocks (1.2)
2,538.7 (270.0) 973.0 35.2 (3,115 .2)
Exports of Goods and
Services 29.6
48,828.7 53,467.0 60,735.0 69,423 .7 78,007.1
Less Imports of Goods and
Services (29.2)
(44,784.8) (54,417.2) (66,049.7) (71,840.0) (76,948.9)
Statistical Discrepancy 0.4
295.4 (384 .3) (82.6) (988.2) 976.4
Expenditures on Gross
Domestic Product 100.6
149,164.7 179,539.0 215,734.4 240,392.2 265,548.1
Net Factor Income from the
Rest of the (0.6)
World (1,223.1) (1,276.9) (1,494.5) (1,687.6) (1,687.2)
Total
147,941.6 178,262.1 214,239.9 238,704.6 263,860.9 00.0%
Percentage Increase of GNP over
Previous Year
At Current Prices 12.6% 20.5% 20.2% 11.4% 10.5%
At Constant 1990 Market
Prices 6.9% 9.6% 9.1% 5.0% 5.6%
(1) Preliminary.
Source:
MONTHLY BULLETIN, April 1994, The Bank of Korea.
</TABLE>
From 1988 through 1993, real GNP increased at an average annual rate of
7.2%. This high rate of growth was due to rapid growth in the export of
goods and services and in domestic fixed capital formation. The growth in
the volume of exports has been achieved by diversification of geographical
markets and a shift in emphasis in the composition of exports from
agricultural products, raw materials and textile products to manufactured
goods. In 1989 and 1990, as growth in exports slowed compared to prior
periods, domestic construction expenditures and private consumption
expenditures increased, primarily as a result of the steady increase in
income levels in recent years and the concomitant demand for housing and
consumption goods, particularly consumer durables such as passenger cars
and household electric appliances. See "Foreign Trade and Balance of
Payments - Foreign Trade." The following table sets forth the industrial
origin of Korea's GNP in current prices for the years 1989 to 1993.
GROSS NATIONAL PRODUCT BY INDUSTRIAL SECTOR
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
<C>
1989 1990 1991 1992 1993(1)
AS %
OF GNP
1993
(BILLIONS OF WON)
Primary Industries
Agriculture, Forestry and 7.1%
Fisheries 14,380.6 15,592.4 16,549.8 17,805.8 18,785.0
Secondary Industries
Mining and Quarrying 0.3
992.0 1,025.0 1,142.4 928.5 923.3
Manufacturing 27.3
46,252.9 52,351.0 61,527.3 66,710.1 71,960.0
Construction 13.7
13,358.2 20,736.6 30,035.3 32,870.6 36,228.2
Tertiary Industries
Electricity, Gas and Water 2.3
3,731.5 3,888.7 4,056.7 5,285.2 6,080.4
Transport, Storage and
Communication 7.1
10,328.1 12,017.3 14,356 .7 16,390.1 18,626.0
Wholesale and Retail Trade,
Restaurants 11.9
and Hotels 19,822.0 23,110.6 26,419.5 28,802.6 31,487.2
Financing, Insurance, Real
Estate 17.2
and Business Services 21,302.1 26,801.0 33,052.3 39,923.0 45,303.4
Public Administration and Defense 4.4
5,984.4 7,386.0 8,995.1 10,616.1 11,674.5
Community, Social and Personal
Services 7.6
9,966.1 11,974.5 14,617.0 17,593.8 20,092.7
Net Private Household Services, Import 1.7
Duties and Bank Service Charges 3,046.6 4,655.9 4,532.3 3,466.1 4,387.5
Net Factor Income from the Rest of the (0.6)
World (1,223.1) (1,276.9) (1,494.5) (1,687.6) (1,687.2)
Total
147,941.6 178,262.1 214,239.9 238,704.6 263,860.9 100.0%
(1) Preliminary.
Source: MONTHLY BULLETIN, April 1994, The Bank of Korea.
</TABLE>
PRICES, WAGES AND EMPLOYMENT
During the 1960s and early 1970s, Korea experienced a period of
increasingly high inflation rates. Government measures successfully
reduced inflation rates from 1982 to 1987, inflation, as measured by the
Consumer Price Index, increased by an average of 2.8%. However, inflation,
as measured by the Consumer Price Index, began to accelerate from 3.0% in
1987 to 7.1% in 1988, 5.7% in 1989, 8.6% in 1990 and 9.3% in 1991.
Recently, the rate of inflation has decreased to 6.2% in 1992 and 4.8% in
1993.
The following table shows selected price and wage indices for the
periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCER INCREASE CONSUMER INCREASE WAGE INCREASE UNEMPLOYMENT
PRICE OVER PRICE OVER INDEX(1)(2) OVER RATE(1)(3)
INDEX(1) PREVIOUS INDEX(1) PREVIOUS PREVIOUS
YEAR YEAR YEAR
(1990=100) (%) (1990=100) (%) (1990=100) (%) (%)
1989 96.0 1.5 92 .1 5.7 166.7 21.2 2.6
1990 100.0 4.2 100.0 8.6 198.1 18.8 2.4
1991 104.7 4.7 109 .3 9.3 232.7 17.5 2.3
1992 107.0 2.2 116.1 6.2 268.1 15.2 2.4
1993 108.6 1.5 121 .7 4.8 300.7 12.2 2.8
(1) Average for year.
(2) Nominal wages index of earnings in all industries.
(3) Expressed as a percentage of the economically active population.
Source: MONTHLY BULLETIN, April 1994, The Bank of Korea; REPORT ON MONTHLY LABOR SURVEY, December 1993, The
Ministry of Labor.
</TABLE>
The history of the labor movement in Korea is short. Until the mid
1980s, the Korean labor movement had been constrained by labor laws and
policies which limited the ability of workers and their unions to take
collective action. In December 1986 and November 1987, these laws were
amended, relaxing constraints on the formation of democratic unions and the
staging of strikes. In 1988 and 1989, backed by stronger labor unions, the
Korean work force won significant wage concessions as workers demanded
higher pay to compensate for the large increases in productivity that they
achieved in the 1980s. Labor disputes in Korea have decreased since 1990.
Since 1987, wages have increased sharply. The rate of increase in the Wage
Index in recent years has greatly exceeded the rates of increase in both
the Producer Price Index and the Consumer Price Index. Monthly wages in
all industries rose 10.1% in 1987, 15.5% in 1988, 21.1% in 1989, 18.8% in
1990, 17.5% in 1991, 15.2% in 1992 and 12.2% in 1993. These wage increases
can be compared with increases in productivity of 10.4% in 1988, 7.5% in
1989, 12.7% in 1990, 13.3% in 1991, 10.2% in 1992 and 7.8% in 1993. These
wage increases put increased inflationary pressure on the economy,
resulting in an increase of 8.6% in consumer prices in 1990, 9.3% in 1991,
6.2% in 1992 and 4.8% in 1993.
Korea's labor force is one of the economy's principal assets. In the
period from 1988 to 1993, the economically active population of Korea
increased by 16.7% to 19.7 million, while the number of employees increased
17.2% to 19.2 million. The economically active population over 15 years
old as a percentage of the total population over 15 years old has remained
fairly stable at between 58% and 61% over the past decade. The labor force
is well educated, with literacy being almost universal among workers under
50.
INDUSTRY
Industrial production increased by 13.2% in 1988, 3.2% in 1989, 8.8% in
1990, 9.6% in 1991, 5.8% in 1992 and 4.4% in 1993. The drop in production
in 1989 was due in large part to the large number of working days lost as a
result of labor strikes. Because of the importance of exports to Korean
industry, increases in protectionist trade barriers by countries to which
Korean industry exports products would adversely affect industrial
production. See "Foreign Trade and Balance of Payments - Foreign
Trade."
The following table sets forth production indices for the principal
industrial products of Korea for the years 1989-1993 and their relative
contribution to total industrial production:
INDUSTRIAL PRODUCTION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1990 1989 1990 1991 1992 1993
INDEX
WEIGHT(1)
Mining 184.5 109.7 100.0 99.8 85.9 79.9
Coal 95.8 116.2 100.0 84.1 66.5 51.6
Metal ores 4.9 117.2 100.0 94.8 95.8 69.3
Other mining & quarrying 83.8 97.4 100.0 117.7 107.2 112.9
Manufacturing 9,392.9 91.8 100.0 109.7 116.2 121.1
Food products & beverages 709.9 94.3 100.0 108.4 109.5 112.7
Tobacco products 93.2 94.2 100.0 101.1 104.7 107.2
Textiles 633.1 100.8 100.0 98.2 94.4 86.5
Wearing apparel & fur articles 343.3 103.5 100.0 94.9 86.0 73.3
Leather, luggage, saddlery harness, handbags & footwear 385.7 93.2 100.0 93.2 85.6 66.0
Wood & products of wood & cork 104.5 96.2 100.0 108.2 103.1 85.6
Pulp, paper & paper products 227.7 94.9 100.0 103.7 110.5 119.5
Publishing, printing & reproduction of record media 223.4 92.2 100.0 102.0 113.2 110.6
Coke, refined petroleum products & nuclear fuel 379.8 93.6 100.0 128.8 164.0 179.4
Chemicals & chemical products 826.5 86.6 100.0 115.8 136.3 152.3
Rubber & plastic products 449.4 96.4 100.0 108.2 114.5 119.9
Non-metallic mineral products 504.1 93.2 100.0 116.1 122.1 124.7
Basic metals 555.3 89.4 100.0 110.7 116.0 129.0
Fabricated metal products 416.6 92.7 100.0 107.9 102.7 102.4
Machinery & equipment, n.e.c. 916.2 89.7 100.0 110.5 107.0 114.4
Office, accounting & computing machinery 150.5 89.6 100.0 105.7 111.4 139.9
Electrical machinery & apparatus, n.e.c. 276.6 83.4 100.0 108.5 114.0 121.4
Radio, television & communication equipment 768.1 92.2 100.0 109.2 117.2 136.3
Medical precision & optical instrument, watches 118.9 104.0 100.0 106.1 105.5 118.0
Motor vehicles & trailers 814.0 80.8 100.0 115.3 132.6 153.2
Other transport equipment 205.6 89.7 100.0 117.0 140.9 136.3
Furniture & n.e.c. 290.5 102.2 100.0 100.8 92.4 87.7
Electricity & Gas 422.6 87.8 100.0 111.3 124.4 139.2
Electricity 410.8 87.8 100.0 110.2 121.6 134.2
Gas 11.8 - 100.0 152.2 221.2 315.3
All Items 10,000.0 91.9 100.0 108.9 114.7 121.1
Percentage Increase of All Items Over Previous Year - 3.3% 8.8% 9.6% 5.8% 4.4%
(1) Index weights were established on the basis of an industrial census in 1990 and reflect the average annual
value added by production in each of the classifications shown, expressed as a percentage of total value added in the
mining, manufacturing and electricity and gas industries in that year.
Source: MONTHLY STATISTICS OF KOREA, April 1994, National Statistical Office, MONTHLY BULLETIN, April 1994, The
Bank of Korea.
</TABLE>
MANUFACTURING. The manufacturing sector has grown rapidly in recent
years. In 1992 and 1993, however, the production of manufactured goods
increased only 5.9% and 4.2%, respectively, compared with 9.7% in 1991, as
a result of overall slow economic growth. Production activities,
especially in the light industries, were not brisk due to reduced price
competitiveness in world markets. The heavy chemical industry, which had
shown steady growth including in export markets, increased only 9.2% in
1992 and 8.4% in 1993, compared with 13.7% in 1991.
Performance has been particularly strong in the petrochemical,
semiconductor and automobile industries, which have experienced strong
growth in domestic and overseas markets.
The petrochemical industry in 1992 remained strong. Production grew by
35.7% over the previous year, as petrochemical facilities completed in 1991
became fully operational in 1992. Domestic demand increased 11.5% in 1992,
compared with a 5.8% increase in 1991, because of substantial growth in the
automobile and electronics industries. Exports in 1992 grew 95.7% with a
surge in demand from China attributable to the progressing
industrialization of that country. In 1993 the production of petrochemical
industry grew by 11.4%.
The electronics industry grew at an average annual rate of
approximately 12.0% during the period 1987 to 1992. This growth may be
traced to both domestic and overseas demand, as well as to encouragement by
the Korean government of technology through tax incentives, loans at
favorable interest rates and tariff protection. Korea is among the world's
largest producers of electronic products and semiconductors. The
electronics goods produced in Korea include personal computers,
videocassette recorders and compact disc players.
Semiconductor sales grew 30.4% from 46,892 billion in 1991 to 61,143
billion in 1992. Semiconductor exports increased 20.2% from U.S.$5,660
million in 1991 to U.S.$6,804 million in 1992. Both domestic and overseas
demand grew with the recovery of the computer and communications industries
in the United States and with the growth of the computer and consumer
electronics industries in Southeast Asian countries.
The Korean automobile industry made significant progress in the 1980's.
In 1984, Hyundai Motor, Korea's leading car manufacturer, began exporting
cars to Canada and in 1986 shipped its first cars to the United States.
Daewoo Motors began exporting cars to the United States in 1987, and Kia
Motors began exporting cars to the United States in 1988. Recently,
exports to Europe and Asia have become increasingly important as United
States demand for Korean cars has declined. Automobile manufacturers grew
by 18.5% from 1,730,000 cars in 1992 to 2,051,000 cars in 1993. This
growth reflects increasing domestic demand, sales stimulated by the
introduction of new models, and the diversification of exports markets.
Export growth, which faltered in 1989 and 1990, has since shown gradual
recovery.
The textiles and apparel industry, which grew rapidly in the early
1970's, has grown more slowly in recent years as a result of severe
worldwide price competition and increased trade barriers.
Supported by large increases in domestic demand for steel due to the
growth of other heavy industry and large scale public investment in road,
harbor and housing construction, steel production increased from 16.8
million tons in 1987 to 33.8 million tons in 1993. This growth has been
achieved in large part by the expansion of Pohang Iron & Steel Co., Ltd.
("POSCO") integrated facilities, which in 1993 produced 22.0 million tons
of crude steel. These increases in production have permitted a substantial
increase in iron and steel exports.
The shipbuilding industry is an important aspect of the Korean economy.
Korea's share of world shipbuilding production is second only to
Japan's.
CONSTRUCTION. The construction industry has become one of the major
industries in Korea, contributing 15.1% to Korea's GNP in 1993. Recently,
the domestic construction markets have expanded rapidly with orders rising,
from 34,851 billion in 1992 to 43,402 billion in 1993. In 1993, the
amount of new overseas construction orders under contract reached
U.S.$5,117 million.
AGRICULTURE, FORESTRY AND FISHERIES
The contribution of agriculture, forestry and fisheries to Korea's GNP
has declined from 9.7% in 1989 to 7.1% in 1993 as a result of
industrialization.
The Government's agricultural policy continues to emphasize increasing
food grain production, the development of irrigation systems, land
consolidation and reclamation, seed improvement, mechanization measures to
combat drought and flood damage, and increasing agricultural incomes. The
Government has encouraged the development of the fishing industry by
encouraging the building of large fishing vessels, and the modernization of
fishing equipment, marketing techniques and distribution outlets.
Owing to geographical and physical constraints, crop yields are
limited, thereby necessitating dependence on imports for certain basic
foodstuffs.
ENERGY
Korea has no domestic oil or gas production and is heavily dependent on
imported oil to meet its energy requirements. The performance of the
Korean economy is, therefore, broadly affected by the price of oil,
resulting in high inflation when world oil prices have risen sharply. Any
significant long-term increase in the price of oil may increase
inflationary pressures on the Korean economy and adversely affect Korea's
balance of trade. See "Foreign Trade and Balance of Payments - Foreign
Trade." The following table shows Korea's dependence on imports for energy
consumption for the years 1989 to 1993:
DEPENDENCE ON IMPORTS FOR ENERGY CONSUMPTION
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TOTAL ENERGY IMPORTS IMPORT
CONSUMPTION DEPENDENCE
RATIO
(MILLION TONS OF OIL EQUIVALENTS)
1989 81.7 69.8 85.5%
1990 93.2 81.9 87.9%
1991 103.6 94.6 91.3%
1992 116.0 108.5 93.6%
1993 126.6 119.8 94.6%
Source: MONTHLY ENERGY STATISTICS, May 1994, Korea Energy Economics Institute; MAJOR STATISTICS OF THE
KOREAN ECONOMY, 1994, National Statistical Office.
</TABLE>
To reduce its dependence on oil imports, the Government has encouraged
efforts to implement an energy source diversification program, with primary
emphasis on nuclear energy. The total Korean nuclear power generating
capacity at the end of 1992 was 7,616 megawatts, accounting for 31.6% of
total annual power generation. Under the government's program, 18 nuclear
power plants are scheduled to be completed during the period from 1991 to
2006. Growing public resistance against nuclear power, however, has become
a major obstacle to accomplishing this program. The following table sets
out the primary sources of energy consumed in Korea, expressed in oil
equivalents and as a percentage of total energy consumption, for the period
1989 to 1993:
CONSUMPTION OF ENERGY BY SOURCE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COAL PETROLEUM NUCLEAR OTHER TOTAL
QUANTITY % QUANTITY % QUANTITY % QUANTITY % QUANTITY %
(MILLION TONS OF OIL EQUIVALENTS)
1989 24.5 30.0 40.5 49.6 11 .8 14.4 4.9 6.0 81.7 100.
0
1990 24.4 26.2 50.2 53.8 13.2 14.2 5.4 5.8 93.2 100.
0
1991 24.5 23.7 59.6 57.5 14.1 13.6 5.4 5.2 103.6 100.
0
1992 23.6 20.4 71.7 61.8 14.1 12.2 6.5 5.6 116.0 100.
0
1993 25.5 20.1 78.5 62.0 14.5 11.5 8.1 6.4 126.6
100.
0
Source: MONTHLY ENERGY STATISTICS, May 1994, Korea Energy Economics Institute; MAJOR STATISTICS OF THE
KOREAN ECONOMY, 1994, National Statistical Office.
</TABLE>
Korea's first nuclear power plant went into full operation on March 3,
1978 with a rated generating capacity of 587 megawatts. Eight more nuclear
power plants were completed between 1982 and 1989, adding 7,029 megawatts
of generating capacity.
THE FINANCIAL SECTOR
Korea's financial sector has grown to accommodate the development of
the economy and today comprises a banking system, a range of non-banking
financial institutions and a securities market.
Korean financial institutions may be divided into two main categories:
monetary institutions and other financial institutions. Monetary
institutions are comprised of The Bank of Korea and deposit-taking banks.
Deposit-taking banks are in turn divided into commercial banks and special
banks according to their legal status and the banking businesses in which
they may engage. Other financial institutions consist of development
institutions, life insurance companies and investment companies.
Commercial banks are classified into city banks, regional banks and
foreign bank branches. City banks engage in both domestic and foreign
business and are owned by the private sector. Regional banks perform
similar functions to the city banks.
Korea's commercial banks have a high level of non-performing assets,
reflecting in part the high leverage typical of Korean companies and the
decline in several Korean industries, notably shipping and overseas
construction during the 1980s. The Bank of Korea selectively extends
concessional loans (at 3% annual interest) to commercial banks burdened by
such non-performing loans.
Specialized banks are established by statutes and currently include:
Industrial Bank of Korea, The Citizens National Bank, The Korea Housing
Bank, National Agricultural Cooperative Federation, The National Federation
of Fisheries Cooperatives and National Livestock Cooperative
Federation.
Other financial institutions are divided into development institutions,
investment institutions, savings institutions and insurance institutions.
Development institutions include The Korea Development Bank, The
Export-Import Bank of Korea and the Korea Long Term Credit Bank. There are
24 investment and finance companies and six joint-venture merchant banks.
The financial sector also includes a number of domestic and foreign
insurance companies and mutual savings companies.
In June 1993, the Korean government announced a plan for restructuring
and liberalizing the financial services industry. The plan includes
accelerating a 1991 plan for deregulation of interest rates, changing the
measures of monetary control, liberalization of loans by banks, development
and liberalization of short-term financing markets, internationalization of
the Won and reducing restrictions on foreign currency transactions. The
plan also includes opening capital markets and financial industry
liberalization programs. The financial industry will be restructured
through specialization as well as adjustments in the business scope of
financial service firms.
In August 1993, the Government introduced a real-name financial
transactions system. Financial institutions are now required to confirm,
whenever they enter into financial transactions with their clients, that
those clients are using their real names. The system was introduced to
increase transparency in financial transactions and is expected by the
Government to enhance the integrity and efficiency of the Korean financial
markets. See "The Securities Markets of Korea - Recent Market and Economic
Developments."
In addition to the officially regulated financial institutions
described above, there has been an unofficial money market or "curb" market
which consists of individual brokers and professional money lenders who
make or arrange loans to business borrowers. The curb market is
significantly less important now than it was several years ago. The
increase in interest rates on officially regulated markets, the increase in
the number of lending institutions, and increased price stability, as well
as steps taken by the government, have contributed to the substantial
decline of the curb market.
MONETARY POLICY
Established in 1950, The Bank of Korea is the central bank and the sole
currency issuing bank in Korea. Monetary and credit policies of The Bank
of Korea are formulated and controlled by a nine-member Monetary Board
comprised of the Minister of Finance, the Governor of The Bank of Korea and
seven other members. The Monetary Board regulates the activities of
banking institutions and sets and implements monetary policy. The Monetary
Board determines maximum interest rates and the rediscount rate of The Bank
of Korea. It also fixes reserve ratios and exercises other normal methods
of monetary control as well as regulating the activities of banking
institutions.
Although The Bank of Korea has primary responsibility for monetary
policy in Korea, the Government, through the Ministry of Finance, does
exert considerable influence on monetary policy. For example, the Ministry
of Finance has the power to request the reconsideration of resolutions
adopted by the Monetary Board and, if such a request is rejected by the
Monetary Board, the President has the authority to override the Monetary
Board's decision.
Monetary policy is implemented by influencing the reserve positions of
banking institutions, principally through changes in the terms and
conditions of discounts, open market operations and changes in reserve
requirements. The Bank of Korea also sets interest rates on certain types
of deposits and loans and, in periods of extreme monetary expansion, may
directly control the volume and nature of bank credit. In practice, The
Bank of Korea's power to set interest rates and to impose direct credit
controls have proved to be the most effective means of implementing
monetary policy.
Effective in December 5, 1988, the Government deregulated interest
rates on loans (other than loans entailing government subsidies) and
certain types of deposits (including such money market instruments as
certain types of commercial paper, certificates of deposit, bank
debentures, corporate bonds, cash management accounts and development trust
funds, but excluding traditional time deposits and savings deposits).
In August 1991, the Monetary Board adopted a four-stage interest rate
deregulation plan in furtherance of the deregulation process. Pursuant to
such plan, the Government has recently further deregulated interest rates
on other financial products, including certain time deposits. In addition,
The Bank of Korea has indicated that it will rely increasingly on
adjustments in the discount rate and in reserve requirements to implement
monetary policy, and less frequently on direct restrictions on bank credit
policies. In June 1993, the Korean government announced that by the end of
1993 it would lift all restrictions on interest rates for loans, long-term
(not less than two years) deposits, short-term (less than two years)
corporate and financial debts, monetary stabilization bonds and public
bonds. It also announced that during 1994 to 1996, interest rates will be
liberalized for all deposits other than demand deposits, and that in 1997
limitations on interest rates for demand deposits gradually will be lifted.
The Korean government has also taken steps to encourage Korean companies to
replace debt with equity financing. See "The Securities Markets of Korea -
Recent Market and Economic Developments."
MONEY SUPPLY
From 1983 to 1984, the Korean government, in an effort to consolidate a
foundation for price stability, maintained a tight control of monetary
aggregates. However, as economic growth slowed in 1985, the government
reversed its tight monetary policy and money supply increased 15.6% in
1985. In response to greatly expanded economic activity, the money supply
increased at a rate of 18.4% in 1986, 19.1% in 1987, 21.5% in 1988, 19.8%
in 1989, 17.2% in 1990, 21.9% in 1991, 14.9% in 1992 and 16.6% in 1993.
The following table shows the money supply for the period 1989 to
1993:
MONEY SUPPLY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
DECEMBER 31,
1989 1990 1991 1992 1993
(BILLIONS OF WON)
Money Supply (M1)
14,329.0 15,905.3 21,752.4 24,586.3 29,041.4
Quasi-money (1)
44,309 .0 52,802.2 61,993.5 71,672.3 83,177.8
Money Supply (M2)(2)
58,638.0 68,707.5 83,745.9 96,258.6 112,219.2
Percentage Increase Over 19.8% 17.2% 21.9% 14.9% 16.6%
Previous Year
(1) Comprising time and savings deposits and residents' foreign currency deposits at monetary institutions.
(2) Money supply is the sum of currency in circulation, demand deposits and quasi-money.
Source: MONTHLY BULLETIN, April 1994, The Bank of Korea; MAJOR STATISTICS OF THE KOREAN ECONOMY, 1994, National Statistical
Office.
</TABLE>
FOREIGN TRADE AND BALANCE OF PAYMENTS
FOREIGN TRADE
Foreign trade is vital to the economy of Korea, which lacks natural
resources and must rely on extensive trading activity as a base for growth.
Virtually all domestic requirements for petroleum, wood and rubber are
imported, as are much of Korea's requirements for coal and iron ore. Korea
has a very high ratio of exports as a percentage of GNP, and the
international economic environment is accordingly of crucial importance to
Korea's economy. From 1989 to 1993, export growth averaged 6.4%. In 1991,
1992 and 1993 export growth was 10.2%, 8.0% and 7.7%, respectively. Such
growth levels reflect reduced international competitiveness resulting
primarily from the continuation of the relatively high value of the Won,
domestic wage increases, increased foreign competition, and economic
slowdowns in countries constituting Korea's principal export markets.
Korea's trade balance has been highly sensitive to world crude oil
prices. The country's trade deficit reached U.S.$4.4 billion in 1979, the
year of the second large oil price rise of that decade. After that year,
Korea's balance of trade improved. In 1986, Korea recorded the first
substantial trade surplus, U.S.$4.2 billion, in the nation's history. The
trade surplus nearly doubled to U.S.$7.7 billion in 1987 and increased to
U.S.$11.4 billion in 1988. In 1989, the trade surplus declined to U.S.$4.6
billion, due principally to the decline in export growth. In 1990, 1991
and 1992, Korea recorded trade deficits of U.S.$2.0 billion, U.S.$7.0
billion and U.S.$2.1 billion, respectively. The balance of trade in 1990,
1991 and 1992 has been adversely affected by increases in oil prices that
occurred in late 1990 as a result of the Persian Gulf crisis, by increased
imports of machinery and other capital goods and consumer goods, by the
economic recession in countries constituting important markets for Korean
exports, principally the United States, and by increased competition for
Korea's exports in certain markets, principally exports to Japan from other
Asian countries. The balance of trade could continue to be adversely
affected if, among other things, Korea's trading partners increase barriers
against imports, prices for essential natural resources imported by Korea
increased or the economic slowdown continues in countries constituting
important markets for Korean exports. However, Korea recorded a trade
surplus of U.S.$1.9 billion in 1993.
Korea's largest trading partners are the United States and Japan. In
1993, the United States accounted for approximately 22.1% of Korea's total
exports and approximately 21.4% of Korea's total imports, while Japan
accounted for approximately 14.1% of Korea's total exports and
approximately 23.9% of Korea's total imports. No other trading partner
accounted for over 8.0% of Korea's total exports or total imports. Over
85% of Korea's exports are manufactured goods, machinery and transportation
equipment, whereas the bulk of imports are commodities such as oil and iron
ore, although imports of consumer durables have grown in recent years
following the lowering of customs tariffs on many items as part of a
five-year import liberalization program begun in 1984. From 1979 until the
recent Gulf War, world oil and commodity prices had risen more slowly than
inflation rates, and several of Korea's major imports (including oil, iron
ore and coal) experienced price weakness.
The following tables contain information regarding Korea's exports and
imports by major commodity groups for the years 1989 to 1993, and the
geographic distribution of Korea's foreign trade for each of the years 1989
through 1993.
EXPORTS BY MAJOR COMMODITY GROUPS (F.O.B.)(1)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 AS % 1990 AS % 1991 AS % 1992 AS % 1993 AS %
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
(MILLIONS OF DOLLARS)
Crude Materials
$ $ $ $ $
902.0 1.4% 990.6 1.5% 989.1 1 .4% 1,072.6 1.4% 1,160.0 1.4%
Minerals (including Fuels)
686 .6 1.1 697.2 1.1 1,508.6 2.1 1,742.3 2.3 1,851.7 2.2
Chemicals
2,049 .7 3.3 2,511.3 3.9 3,190.0 4.4 4,454.9 5.8 4,921.9 6.0
Manufactured Goods
13,733.9 22.0 14,357.2 22.1 16,078.7 22.4 18,490.8 24.1 20,685 .6 25.2
Machinery and
Transportation Equipment
23,590.3 37.8 25,544.5 39.3 29,978.3 41.7 32,547.4 42.5 36,950.4 44.9
Miscellaneous Manufactured Goods
18,970.3 30 .4 18,573.3 28.6 17,649.6 24.6 15,883.2 20.7 14,233.3 17.3
Others
2,444.4 3.9 2,341.63 3.6 2,474.8 3.4 2,440.1 3.2 2,433.0 3.0
Total
$ $ $ $ $
62,377.2 100.0% 65,015.7 100.0% 71,870.1 100.0% 76,631 .5 100.0% 82,235.9 100.0%
(1)
These entries are derived from customs clearance statistics.
Source: MONTHLY BULLETIN, April 1994, The Bank of Korea; ECONOMIC STATISTICS YEARBOOK, 1994, The Bank of Korea.
</TABLE>
IMPORTS BY MAJOR COMMODITY GROUPS (C.I.F.)(1)
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 AS % 1990 AS % 1991 AS % 1992 AS % 1993 AS %
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
Crude Materials
$8,728.2 $ $ $ $
14.2% 8,647.8 12.4% 8,900.2 10.9% 8,314.9 10.2% 8,869.5 10.6%
Minerals (including Fuels)
7,627.1 12.4 11,023.2 15.8 12,747.9 15.6 14,636.14 17.9 15,052.6 18.0
Chemicals
7,157.7 11.6 7,433.5 10.6 8,288.6 10.2 7,667.6 9 .4 8,234.8 9.8
Manufactured Goods
9,672.2 15.7 10,580.8 15.1 13,461.7 16.5 11,898.4 14 .5 12,069.7 14.4
Machinery and
Transportation Equipment
21,104.8 34.3 23,940.0 34.3 28,250.7 34.6 28,965.7 35.4 28,416.8 33.9
Miscellaneous Manufactured Goods
3,555.0 5.8 4,241.6 6.1 5,102.9 6.3 5,227.4 6 .4 6,147.8 7.3
Others
3,610.2 5.9 3,976.8 5.7 4,772.9 5.9 5,065.2 6.2 5,009.1 6.0
Total
$ $ $ $ $
61,464.8 100.0% 69,843.7 100.0% 81,524.9 100.0% 81,775.3 100.0% 83,800.1 100.0%
(1)
These entries are derived from customs clearance statistics.
Source: MONTHLY BULLETIN, April 1994, The Bank of Korea; ECONOMIC STATISTICS YEARBOOK, 1994, The Bank of Korea.
</TABLE>
EXPORTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
COUNTRY 1988 1989 1990 1991 1992 1993
(PERCENTAGE OF TOTAL EXPORTS)
U.S.A. 35.3 33.1 29.8 25.8 23.6 22.0
Canada 2.8 3.0 2.7 2.4 2.1 1.7
United Kingdom 3.2 3.0 2.7 2.5 2.4 2.0
France 1.8 1.4 1.7 1.6 1.3 1.1
Germany 3.9 3.4 4.4 4.4 3.8 4.4
Netherlands 1.4 1.2 1.5 1.6 1.3 1.2
Japan 19.8 21.6 19.4 17.2 15.1 14 .1
Hong Kong 5.9 5.4 5.8 6.6 7.7 7.8
Saudi Arabia 1.9 1.3 1.1 1.4 1.2 1.1
All Others 24.2 26.5 30.9 36.5 41.5 44.6
Total(1) 100.0 100.0 100.0 100 .0 100.0 100.0
</TABLE>
IMPORTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
COUNTRY 1988 1989 1990 1991 1992 1993
U.S.A. 24.6 25.9 24.3 23.2 22.4 21.4
Canada 2.3 2.7 2.1 2.3 1.9 2.0
United Kingdom 1.8 1.5 1.8 1.9 1.7 1.7
France 2.2 1.4 1.8 1.9 1.9 2.0
Germany 4.0 4.3 4.7 4.5 4.6 4.7
Netherlands 1.0 0.6 0.7 0.7 0 .8 0.9
Japan 30.7 28.4 26.6 25.9 23.8 23.9
Hong Kong 1.1 1.0 0.9 0.9 1.0 1.1
Saudi Arabia 1.6 1.7 2.5 4.0 4.6 4.5
All Others 30.7 32.5 34.8 34.7 37.3 37.8
Total(1) 100.0 100.0 100.0 100.0 100.0 100.0
(1) Amounts may not add up due to rounding
Source: MONTHLY BULLETIN, April 1994, The Bank of Korea; ECONOMIC STATISTICS YEARBOOK, 1994, The Bank of
Korea.
</TABLE>
Following export surges in 1986, 1987 and the beginning of 1988, the
export growth rate began to decline under the influence of the "triple
demerits" of an appreciating Won, rising costs of raw materials and rising
wages. To offset these adverse trends, domestic enterprises have invested
more in factory automation, thereby accelerating the movement away from low
value-added, labor-intensive production. Efforts have also been made to
diversify export markets.
The following table summarizes Korea's balance of trade from 1989 to
1993:
BALANCE OF TRADE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EXPORTS(1) IMPORTS(1) BALANCE EXPORTS AS
OF TRADE % OF IMPORTS
(MILLIONS OF DOLLARS)
1989 61,408.7 56,811.5 4,597.2 108.1
1990 63,123.6 65,127.2 (2,003.6) 96.9
1991 69,581.5 76,561.3 (6,979.8) 90 .9
1992 75,169.4 77,315.8 (2,146.4) 97.2
1993 80,949.9 79,089.7 1,860.2 102 .4
Average Annual Percentage Growth Rate 6.3% 10.7%
1989-1993
(1) These entries are derived from trade statistics and are valued on a f.o.b. basis.
Source: ECONOMIC STATISTICS YEARBOOK, 1994, The Bank of Korea.
</TABLE>
BALANCE OF PAYMENTS
From 1986 to 1989, Korea had a surplus on the current account of its
balance of payments. The surplus increased to U.S.$14.2 billion in 1988
before declining to U.S.$5.1 billion in 1989. Korea incurred a deficit on
the current account of its balance of payments of U.S.$2.2 billion during
1990, with deficits in the visible and invisible trade balances. In 1990,
exports increased by 2.8% to U.S.$63.1 billion. During the same period
imports increased 14.6% to U.S.$65.1 billion. The invisible trade balance
decreased from a U.S.$0.2 billion surplus in 1989 to a deficit of U.S.$0.5
billion in 1990. The deficit on the current account of its balance of
payments increased to U.S.$8.7 billion in 1991, U.S.$4.5 billion in 1992.
However, in 1993 the current account recorded a U.S.$0.4 billion
surplus.
The following table sets forth certain information with respect to
Korea's balance of payments for the years 1989 to 1993:
BALANCE OF PAYMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CLASSIFICATION 1989 1990 1991 1992 1993
Current Balance 5,054.6 (2,179.4) (8,727.7) (4,528.5) 384.6
Trade Balance 4,597.2 (2,003.6) (6,979.8) (2,146.4) 1,860.2
Exports(1) 61,408.7 63,123.6 69,581 .5 75,169.4 80,949.9
Imports(1) 56,811.5 65,127.2 76,561.3 77,315 .8 79,089.7
Invisible Trade Balance 210.8 (450.6) (1,595.5) (2,614 .3) (1,966.8)
Unrequited Transfer (Net) 246.6 274.8 (152.4) 232.2 491 .2
Long-Term Capital Balance(2) (3,362.5) 547.5 4,185.8 7,232.7 8,899.8
Loans and Foreign Investment (1,104.8) 33.3 3,091.2 5,160.3 9,576.7
Other (Net) (2,257.7) 514.2 1,094.6 2,072.4 (676.9)
Basic Balance 1,692 .1 (1,631.9) (4,541.9) 2,704.2 9,284.4
Short-term Capital Balance(2) 60 .3 3,333.7 41.2 1,109.9 (2,021.2)
Errors and Omissions 700.7 (1,975.7) 759.9 1,084.0 (721.0)
Overall Balance 2,453.1 (273.9) (3,740.8) 4,898.1 6,542.2
Financial Account(3) (2,453.1) 273.9 3,740.8 (4,898.1) (6,542 .2)
Liabilities 966.3 1,486.6 8,429.8 1,947.4 673.7
Assets (3,419 .4) (1,212.7) (4,689.0) (6,845.5) (7,215.9)
(1) These entries are derived from trade statistics and are valued on a f.o.b. basis.
(2) The distinction between long-term and short-term capital is based on an original maturity of one year or more.
(3) Includes borrowings from the International Monetary Fund, syndicated bank loans and short-term borrowings.
Source: ECONOMIC STATISTICS YEARBOOK, 1994, The Bank of Korea.
</TABLE>
The following table shows Korea's total official reserves as of
December 31 for the years 1989 to 1993:
TOTAL OFFICIAL RESERVES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993
(MILLIONS OF DOLLARS)
Gold(1) $ $ $ $ $
31.6 31.6 32.3 32.6 33.3
Foreign Exchange (2)
14,977.8 14,459.1 13,306.0 16,639.9 19,704.2
Total Gold and Foreign Exchange
15,009.4 14,490.7 13,338 .3 16,672.5 19,737.5
Reserve Position at IMF
234.2 317.3 364.9 439.3 466 .7
Special Drawings Rights
1.6 14.3 29.8 42.1 58.2
Total Official Reserves $ $ $ $ $
15,245.2 14,822.4 13,733.0 17,153.9
20,262.4
(1) For this purpose, domestically-owned gold is valued at U.S.$42.22 per troy ounce (31.1035 grams) and gold
deposited overseas is calculated at cost of purchase.
(2) Since January 1, 1988, foreign exchange holdings of domestic foreign exchange banks have been excluded.
Source: MONTHLY BULLETIN, July 1994, The Bank of Korea.
</TABLE>
EXCHANGE CONTROLS
Only authorized foreign exchange banks are permitted to effect foreign
exchange transactions. Approval by the Ministry of Finance is required to
become an authorized foreign exchange bank. Authorized foreign exchange
banks can enter into foreign exchange transaction contracts directly with
overseas banks.
Authorization or approval, either by the Ministry of Finance, The Bank
of Korea or authorized foreign exchange banks, as applicable, is necessary
for overseas remittances, the issuance of international bonds and certain
other instruments, overseas investments and certain other transactions
involving foreign exchange payments in conformity with the Foreign Exchange
Management Law and Regulations thereunder unless such authorization or
approval is exempted under such regulations. Remittance of principal and
profits to their home countries by overseas investors is guaranteed under
the Foreign Capital Inducement Act.
FOREIGN EXCHANGE
The Bank of Korea, prior to 1989, set daily exchange rates for the Won
based on a trade-weighted multi-currency basket system. This rate was
known as The Bank of Korea concentration base rate. In 1989, the Korean
government announced a three phase plan to produce a free-floating exchange
rate system. The first phase allowed the domestic banks to decide buying
and selling rates of foreign exchange within narrow limits of The Bank of
Korea concentration base rate. In the second phase, which took effect in
March 1990, the trade-weighted multi-currency basket system was replaced by
a system whereby the foreign exchange rates are determined by averaging the
previous day's inter-bank rates settled through the Korean Financial
Telecommunications and Clearings Institute ("KFTCI"), weighted by trading
volume. This system is known as the Market Average Exchange Rate System.
Under this system, foreign exchange rates are permitted to move each day
within narrow ranges on either side of that day's published market average
exchange rates announced by the KFTCI. In the third phase, the Government
intends to gradually enlarge the ranges through 1996 and to remove controls
on exchange rates by 1997.
The following table shows the exchange rate between the Won and the
Dollar (in Won per Dollar) at the dates indicated:
EXCHANGE RATE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
WON/DOLLAR
EXCHANGE RATE(1)
June 30, 1989 667.20
December 31, 1989 679.60
June 30, 1990 716.00
December 31, 1990 716.40
June 30, 1991 723.10
December 31, 1991 760.80
June 30, 1992 790.20
December 31, 1992 788.40
June 30, 1993 803.70
December 31, 1993 808.10
January 31, 1994 808.10
February 28, 1994 808.00
March 31, 1994 806.50
April 30, 1994 807.50
May 31, 1994 806.10
June 30, 1994 805.50
July 31, 1994 802.60
August 31, 1994 801.10
(1) For all dates prior to March 31, 1990, exchange rates are The Bank of Korea concentration base rates on
such dates. Exchange rates for subsequent dates are the market average exchange rates on such dates, as
announced by the Korea Financial Telecommunications and Clearings Institute.
Source: MONTHLY BULLETIN, July 1994, The Bank of Korea.
</TABLE>
The market average exchange rate between the Won and the Dollar as of a
recent date is set forth on the inside cover page of this Prospectus.
GOVERNMENT FINANCE
Responsibility for the preparation of the national budget lies with the
Economic Planning Board, and the administration of the Government's
finances is the responsibility of the Ministry of Finance. The fiscal year
commences on January 1, and the budget must be submitted to the National
Assembly for its approval not later than 90 days prior to the commencement
of the fiscal year. Supplementary budgets revising the original budget may
be submitted to the National Assembly for its approval at any time during
the fiscal year.
The fiscal budget of the Government consists of a General Account and
Special Accounts. Revenues in the General Account include national taxes,
stamp duties and profits from government monopolies. Expenditures include
those for general administration, national defense, community service,
education, health, social security services, certain annuities and pensions
and local finance which comprises the transfer of tax revenues to local
governments.
Special Accounts are set up to segregate the accounts of certain
functions of the Government to achieve more effective budgetary control and
administration. They include government activities of a business nature,
such as economic development, roads, monopolies, railways and
communications and administration of loans received from official
international financial organizations and from foreign governments.
The following table sets forth Government revenues and expenditures for
the years 1989 through 1993:
CONSOLIDATED CENTRAL GOVERNMENT REVENUES AND EXPENDITURES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993(1)
(BILLIONS OF WON)
Revenues
Internal Taxes
15,211.0 19,134.2 24,029.8 30,099.1 34,178.2
Customs Duties
2,099.1 2,774.5 3,435.3 3,153.4 2,885.9
Defense Surtax
3,614.7 4,575.1 1,462 .5 329.7 269.1
Education Surtax
423.4 521.3 816.0 943.2 998.3
Monopoly Profits - - - -
74.6
Government Enterprises
Receipts (Net) 408.3 590.5 810.2 1,042.2 902.3
Others
7,016.8 6,942.7 8,774.7 10,699.1 13,893.6
Total Revenues
28,847.9 34,538.3 39,328.5 46,266.6 53,127.9
Expenditures
Defense
6,147.4 6,854.0 8,012 .0 8,770.8 9,308.1
General Expenses
14,703.7 18,973.0 22,319.5 23,682 .6 26,951.1
Fixed Capital Formation
2,032.5 2,401.0 2,048.8 2,821.4 2,889.1
Others
5,483.5 5,609.0 8,616.6 11,685.6 13,721.3
Total Expenditures
28,367.1 33,836.9 40,996.8 46,960.4 52,869.7
Net Lending
37.0 (53.6) 38.4 (5.3) 23.3
Budget Surplus (Deficit)
443.8 754 .9 (1,706.7) (688.5) 234.9
(1) Preliminary.
Source: MONTHLY BULLETIN, July 1994, The Bank of Korea.
</TABLE>
The decrease in Defense Surtax Revenues after 1991, as compared to
prior years, is primarily attributable to the repeal of Korea's defense tax
effective January 1, 1991.
EXTERNAL AND INTERNAL DEBT
The rapid economic development of Korea has in the past led to large
foreign borrowings. The country's private and governmental external debt
reached a peak of U.S.$46.8 billion at the end of 1985, making it the
fourth largest borrower in the world. Since then, however, such external
debt was reduced to U.S.$31.7 billion as of December 31, 1990 as a result
of substantial current account surpluses, but rose to U.S.$39.1 billion,
U.S.$42.7 billion, and U.S.$43.9 billion as of December 31, 1991, 1992 and
1993, respectively, as a result of current account deficits in each of
these years.
The following tables summarizes, as of December 31 of the years
indicated, the outstanding direct external and internal debt of Korea. The
term "floating debt" is used herein to mean all debt with maturities of one
year or less from the date of issue. All other debt is classified as
"funded debt."
SUMMARY OF DIRECT DEBT OF KOREA
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FUNDED DEBT FLOATING
DEBT(1)
INTERNAL EXTERNAL INTERNAL
(BILLIONS (MILLIONS (BILLIONS
OF WON) OF DOLLARS) OF WON)
1987 6,131.8 9,871.4 3,403.8
1988 7,099.3 8,690.3 4,148.8
1989 8,401.5 7,484.9 5,508.0
1990 11,880.8 7,729.8 4,614.8
1991 14,066.9 7,448 .6 5,069.8
1992 17,193.5 6,975.5(2) 5,022.2
(1) There is no outstanding external floating debt of Korea.
(2) 5,521.1 billion at foreign exchange banks' telegraphic transfer selling rate applicable to customers in effect
on December 31, 1992 of 791.5=U.S.$1.00.
</TABLE>
The following table sets forth Korea's outstanding external and
internal debt, including debt guaranteed by Korea, as of December 31, 1992,
categorized by type of indebtedness:
OUTSTANDING DEBT
<TABLE>
<CAPTION>
<S> <C> <C>
PRINCIPAL AMOUNTS
OUTSTANDING AS OF
DECEMBER 31, 1992(1)
(BILLIONS OF WON)
Bonds 19,
948.1
Borrowings
Domestic 2,267.6
Overseas 5,521.1
7,7
88.7
Guaranteed Debt
13,687.8
Total 41,
424.6
(1) Foreign currency amounts are converted to Won at foreign exchange banks' telegraphic transfer selling rates
applicable to customers in effect on December 31, 1992.
</TABLE>
OUTSTANDING EXTERNAL DEBT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993
(BILLIONS OF DOLLARS)
Total External Debt 29.4 31.7 39.1 42.8 43.9
Foreign Assets 26.4 26.9 27.3 31.7 36.0
(Foreign currency holding) (15.2) (14.8) (13.7) (17.2) (20.3)
Net External Debt 3 .0 4.8 11.8 11.1 7.9
Debt Service Ratio 11.4% 9.4% 6.0% 6.0% N/A
Source: Ministry of Finance
</TABLE>
In addition, the Government provides statutory support for the
operations of certain governmental institutions, such as The Korea
Development Bank and The Export-Import Bank of Korea.
THE SECURITIES MARKETS OF KOREA
BACKGROUND AND DEVELOPMENT
The development of the Korean securities markets has been substantially
influenced by Korean government policy designed to stimulate the Korean
economy and investment in Korea. The Korea Stock Exchange (the "KSE") was
established in 1956, at which time it functioned primarily as a market for
the trading of Korean government bonds, with only twelve equity securities
and three government bonds listed for trading. As part of the First
Five-Year Economic Development Plan (1962-1966), the Korean government
adopted its first securities law to regulate the primary and secondary
markets. Beginning in 1968, the Korean government passed additional
measures to encourage Korean companies to list on the KSE by means of a
wide variety of tax, credit and other benefits only available to listed
companies and to facilitate trading on the KSE. Primarily as a result of
these measures, the number of listed companies on, and the market
capitalization of, the KSE increased significantly in the 1970s. In 1976,
the Securities and Exchange Act of Korea (the "SEA") was amended to provide
for, among other things, the establishment of the Securities and Exchange
Commission of Korea (the "KSEC") and its executive body, the Securities
Supervisory Board (the "Securities Board"). Since 1981, the Korean
government has adopted or announced measures to open the Korean securities
markets to foreign investment.
RECENT MARKET AND ECONOMIC DEVELOPMENTS
FINANCIAL LIBERALIZATION AND MARKET OPENING PLAN. The Ministry of
Finance of Korea (the "MOF") has adopted a Financial Liberalization and
Market Opening Plan (the "Liberalization Plan") for the Korean financial
markets. The Liberalization Plan's main focus is to deregulate and
liberalize the financial industry, traditionally tightly controlled by the
government and to open Korean securities markets. The first phase of the
Liberalization Plan, which was announced in March of 1992, liberalized the
requirements for the issuance of certificates of deposit, extended national
treatment (I.E., treatment on a parity with domestic financial
institutions) to foreign financial institutions operating in Korea for
their investments in Korean securities and liberalized the requirements
regarding underlying transaction documents in foreign exchange
dealings.
The second phase of the Liberalization Plan, announced in June of 1992,
included allowing further openings of representative and branch offices of
foreign securities companies, expansion of overseas securities investments
by Korean institutional investors, establishment of representative offices
of foreign investment trust and advisory companies, and investment in the
aggregate by foreign entities in up to 10% of the equity ownership of
Korean investment trust and advisory companies.
On June 30,1993, the MOF announced the third phase of the
Liberalization Plan. The principal proposals under such phase relate to
interest rate deregulation, improvement of monetary control measures and
the development of money markets, improvement of credit control management,
and foreign exchange and capital market liberalization. Related proposals
would further ease access to the Korean securities industry for foreign
securities companies and credit rating agencies wishing to establish
branches in Korea. Each area of deregulation is to be phased in under
three stages from 1993 to 1997.
The third phase of the Liberalization Plan also provides for capital
market liberalization on a step-by-step basis. The areas of regulation
that the third phase seeks to liberalize include direct investment by
foreigners in Korean companies, overseas investment in securities by Korean
institutions and individuals, limits on foreign investment in both equity
and debt securities and overseas borrowing by Korean companies. The third
phase of the Liberalization Plan also provides for the gradual
liberalization of regulation on foreign equity participation in Korean
banks.
Specifically, with respect to foreign investment in the Korean
securities market, the third phase of the Liberalization Plan provides for
the gradual raising of the aggregate foreign ownership limit (generally 10%
per class of shares) applicable to equity securities of individual
companies listed on the KSE, commencing in 1994. Other measures provided
for under the third phase of the Liberalization Plan include permitting
international institutions to issue Won-denominated debt securities and
permitting foreign investors to invest in funds investing in debt
securities and to acquire non-guaranteed long-term debt securities issued
by small and medium-sized companies and low interest rate national or
public bonds. As part of this process, as of July 1, 1994, foreign
investors are allowed to (i) invest directly in non-guaranteed convertible
bonds listed on the KSE which are issued by small or medium-sized listed
companies, with foreign investors in the aggregate and a single foreign
investor being allowed to invest in up to 30% and 5% of the listed amount
of each such issue, respectively, and (ii) underwrite certain low interest
rate government or public bonds to be designated by the KSEC from
time to time up to the limit determined by the KSEC from time to time, each
denominated in Won and in each case subject to certain procedural
requirements.
In order to facilitate the conversion from the current system of direct
monetary controls to market-based controls, under the third phase of the
Liberalization Plan the MOF intends to accelerate the timetable to
deregulate the deposit and lending rates of banks and non-bank financial
institutions, and the interest rates on corporate bonds, financial debt
instruments, monetary stabilization bonds and government/public bonds. The
deregulation of all lending rates of both banks and non-bank financial
institutions, except for rates on certain loans regarded by the government
as furthering policy goals, and of the interest rates on corporate bonds
with maturities of less than two years, financial bonds, monetary
stabilization bonds and government/public bonds occurred as of November 1,
1993.
The MOF, pursuant to the third phase of the Liberalization Plan, seeks
to promote effective monetary control through the development of
traditional indirect monetary control measures. Such measures include the
implementation of rediscount policies, bank minimum reserve requirements
and government open market operations. The third phase of the
Liberalization Plan seeks to develop the money markets in order to allow
the government to pursue indirect monetary policies. Such development is
intended to lead to a greater variety of short-term instruments available
for investment in the money markets.
Pursuant to the third phase of the Liberalization Plan, the MOF also
seeks to improve credit control management separately for large business
conglomerates and small and medium sized enterprises. With respect to
large business conglomerates, the credit control provisions focus on
streamlining excessive credit control. Lending to small and medium sized
enterprises is currently required at a certain ratio of the overall lending
of financial institutions. Under the third phase of the Liberalization
Plan, the current compulsory lending system to such companies will continue
for the immediate future, but will be gradually phased out as interest rate
deregulation proceeds and the practice of credit-based lending is
established.
The third phase of the Liberalization Plan also reflects the MOF's
intention of pursuing more consistently the internationalization of the
Won. Under the third phase, regulations on foreign exchange transactions
will be relaxed and the foreign exchange market will be further developed.
The third phase of the Liberalization Plan provides for further expanding
the daily range of exchange rate fluctuations, which was increased as of
October 1, 1993 from a range of plus or minus 0.8% to a range of plus or
minus 1.0%. It is anticipated that such relaxation of controls will
enhance the pricing function of the exchange rate mechanism. The third
phase of the Liberalization Plan would also eliminate certain documentation
requirements for foreign exchange transactions.
There can be no assurance that the provisions of the third phase of the
Liberalization Plan will be put into effect or have the intended
impact.
REAL-NAME FINANCIAL TRANSACTION SYSTEM. On August 12, 1993, President
Kim Young Sam issued an Emergency Executive Order (the "Order") containing
measures designed to establish a real-name financial transaction system, to
deter the use of false names in financial dealings and to provide for the
confidentiality of financial transactions. The announced purpose of the
Order is to protect the integrity of Korea's financial markets and to
achieve greater economic justice. The Order was ratified by the Korean
National Assembly as of August 19, 1993.
The Order applies to all financial transactions, including transactions
involving deposits, installment savings, checks, certificates of deposit,
stocks and bonds. Pursuant to the Order, in any transaction involving a
financial institution, the financial institution must verify the real name
of the counterparty before entering into the transaction. In addition,
existing account holders at financial institutions as of August 12, 1993
who did not confirm their real names or convert aliases to real names by
October 12, 1993 are subject to severe penalties.
In order to provide for confidentiality of financial transactions, the
Order states that, unless otherwise approved by the relevant customer,
information about financial transactions may be made available only in
accordance with stipulated procedures and for such limited purposes as tax
investigations, court proceedings, regulatory supervision and mandatory
requirement.
The practice of engaging in financial transactions under false or
borrowed names had been prevalent in Korea. On the day following the
issuance of the Order, the Index, the major measure of changes in stock
values on the KSE declined 4.46% to 693.57. However, by August 20, 1993,
the Index had increased to close at 729.86.
REGULATION OF FOREIGN INVESTMENT
The Korean securities markets have historically been closed to direct
investment by most foreign investors although the Korean government has
allowed direct foreign investment by foreigners who intended to or could
participate in the management of an invested enterprise under the Foreign
Capital Inducement Act ("FCIA") and the Foreign Exchange Management Act
("FEMA"), and indirect foreign investment in Korean securities such as
through certain domestic trusts of foreign investment funds specifically
authorized by the MOF. In 1981, the MOF announced its intention to
gradually internationalize the Korean securities markets. Since then, the
Korean government has progressively implemented steps to liberalize foreign
investment in the Korean securities markets. Beginning on January 3, 1992,
foreign investors have been able to invest directly in equity shares listed
on the KSE, subject to certain restrictions that are described below. At
the present time, however, foreign investors, including the Fund, generally
are not permitted to make direct or indirect investments in Won-denominated
debt securities except that as of July 1, 1994 foreign investors are
allowed to purchase (i) non-guaranteed convertible bonds of listed small
and medium-sized companies, which are listed on the KSE and (ii) certain
low interest rate government or public bonds to be designated by the KSEC
from time to time in the primary market subject to certain foreign holding
limits and procedural requirements as described below. In addition,
foreign investors currently may not participate in the purchase of shares
through initial or secondary public offerings (other than through rights
issues).
The liberalization of the Korean securities markets has generally
progressed in gradual stages beginning with the authorization of indirect
investment by foreign investors in Korean securities through Korean
investment trusts and foreign investment funds, investing in Korean
securities with a specific license from the MOF. The first type of
permitted indirect foreign investments in Korea was a Korean unit
investment trust established in late 1981. By June 30, 1994 there were a
total of 39 such trusts aggregating approximately U.S.$1,705 million
outstanding including matching funds (which invest in Korean and non-Korean
securities markets). As of August 31, 1994, three foreign investment funds
had been licensed by the MOF to invest in Korean securities subject to
certain limitations. The units of such trusts or shares of such funds have
been offered to foreign investors who participate in Korean securities
markets by purchasing such units or shares.
Since 1985 a limited number of Korean companies have been permitted to
issue equity-related securities denominated in currencies other than Won,
including convertible bonds, bonds with equity warrants and depositary
receipts, to foreign investors outside of Korea as a means of raising
capital. These types of equity-related securities are convertible into the
issuer's equity shares listed on the KSE. In 1992, seven issues of
convertible bonds, two issues of bonds with equity warrants and one issue
of depositary receipts representing equity shares, were made outside of
Korea by companies listed on the KSE aggregating U.S.$639 million. In
1993, eleven issues of convertible bonds, one issue of bonds with equity
warrants and three issues of depositary receipts were made outside of Korea
by companies listed on the KSE aggregating U.S.$916 million. During the
first six months in 1994, thirteen issues of convertible bonds, one issue
of bonds with equity warrants and six issues of depositary receipts,
aggregating U.S.$780 million, were made.
Since January 3, 1992, foreigners have been permitted to invest in all
shares listed on the KSE, subject to the ceilings on foreign shareholdings
and procedural limitations set out below. Except as described below,
foreign investors are only permitted to trade such shares on the KSE itself
and are currently prohibited from engaging in margin transactions. In
addition, a foreign investor is subject to specific registration and
reporting requirements, custody requirements and requirements prescribing
the use of certain types of entities as proxies to exercise shareholder's
rights, to place orders to sell or purchase shares or to take other related
action that it does not undertake directly.
Current regulations generally limit the percentage of any class of
shares of a listed issuer in which a single foreign investor and all
foreign investors in the aggregate may acquire beneficial ownership to 3%
and 10%, respectively. The KSEC, however, may increase or decrease these
percentages if it deems necessary for the public interest, protection of
investors or industrial policy. Currently, the KSEC has authorized several
exceptional ceilings, including the following: (1) subject to the approval
by the KSEC of an application submitted by a company whose shares are held
by foreign investors under the FCIA or certain sections of the FEMA if such
holdings by foreigners do not reach 25% of the company's outstanding
shares, a ceiling on acquisition of shares by foreigners in the aggregate
may be established separately for each such company, depending on the
shareholding of foreigners under the FCIA and the FEMA, but in any case not
equal to or exceeding 25%; (2) a special ceiling determined by any company
more than 50% of whose shares are held by foreigners under the FCIA or
certain sections of the FEMA; and (3) an 8% ceiling on the acquisition of
shares by foreigners in the aggregate established for certain corporations
designated by the Finance Minister (currently, only Korea Electric Power
Corporation ("KEPCO") and POSCO are subject to this lower ceiling).
The Government has announced its intention to raise the aggregate
foreign ownership limit gradually during the period from 1994 to 1997. No
assurances can be given, however, as to whether or when such increase will
be implemented and, if and when implemented, to what levels such limit will
be raised.
These ceilings may be exceeded, however, (i) as a result of acquiring
shares obtained pursuant to the FCIA or the FEMA, (ii) by a depositary
acquiring shares for the purpose of the issue of depositary receipts
evidencing an interest in such shares, (iii) as a result of acquiring
shares listed on the KSE upon conversion of, or exercise of warrants or
withdrawal rights under or attached to equity-related securities issued
overseas by Korean companies (collectively, "Converted Shares"), (iv) as a
result of acquiring shares of a small or medium-sized company through the
exercise of a conversion right attached to non-guaranteed convertible bonds
listed on the KSE of such company, or (v) by the acquisition of shares
arising from the exercise of shareholder's rights and other rights and
shares obtained by way of gift, inheritance or bequest; provided that the
number of shares exceeding the 3% limit (except in the cases of (i) and
(ii) above) must be sold within three months from the date of
acquisition.
In calculating these ceilings, all foreign shareholdings (other than
those owned by Korean branches and subsidiaries of certain foreign
financial institutions) must be counted regardless of whether the shares
were purchased through the KSE, or whether they are newly issued shares or
outstanding shares. Newly issued shares (including Converted Shares) are
calculated as of the date of their listing on the KSE. When applying a
ceiling with respect to acquisitions by a single foreign investor, each
entity (including individuals, corporations, foreign government agencies,
and foreign funds, unit trusts and partnerships) is entitled to a separate
3% limitation. In calculating the holding of shares of a class in a
particular company, foreign investors are entitled to disregard holdings of
shares held indirectly through an investment in a Korean securities
investment trust or through a holding in any funds or investment trusts
established overseas. All branches in Korea of any foreign investor as a
group are entitled to their own 3% limitation separate from that of their
head office. When calculating these ceilings, shares purchased are deemed
to be acquired at the time of placing the relevant order and shares sold
are deemed to be disposed of at the time of execution.
A foreigner who has acquired shares in excess of any ceiling described
above may not exercise its voting rights with respect to the shares
exceeding such limit, and the KSEC may take necessary corrective action
with regard to such foreigner pursuant to the SEA. The Governor of the
Securities Board may, at his discretion, disclose the numbers of shares of
a class available for investment by a single foreign investor and foreign
investors in the aggregate, and provide a list of shares that have reached
or exceeded the ceiling on acquisition by foreign investors in the
aggregate. Currently, the Governor discloses this list every morning on
which trading occurs. Orders for shares made during a trading day which,
if executed, will lead to the relevant ceiling being exceeded would not be
accepted by the KSE's trading system.
Under the SEA, certain companies designated by the MOF are generally
authorized to adopt provisions in their articles of incorporation
restricting or prohibiting foreign ownership of such companies' shares. At
present, KEPCO and POSCO have adopted a provision in each of their articles
of incorporation restricting ownership of their common shares by a single
foreigner to 1% of their common shares. In addition, under the
Telecommunications Basic Act, foreign investors are prohibited from
acquiring any shares in Dacom Corporation.
The SEA generally imposes a 10% beneficial ownership limitation on the
total outstanding voting shares of a listed company that may be held by any
one individual or entity, including Korean nationals, without the approval
of the KSEC (which limitation is due to be repealed as of January 1, 1997).
The KSEC rules also provide that a company may not issue convertible bonds,
bonds with warrants or depositary receipts outside of Korea if the sum of
(i) shares which may be acquired by foreigners by the exercise of the
conversion rights, warrants or withdrawal rights for underlying shares
under the proposed issue and under any previously issued bonds, warrants or
depositary receipts and (ii) shares held by foreigners in excess of the
applicable ceiling (generally 10%) on aggregate foreign investment (except
any such excess held under the FCIA), in the aggregate, exceeds or would
exceed 15% (or such greater percentage as may in exceptional circumstances
be permitted by the KSEC) of the issued capital of the issuer at the date
of issue of the relevant securities. If foreign investors hold or will
hold, upon exercise of conversion rights, warrants or withdrawal rights,
50% or more of the outstanding shares of a company, the shares to be
issued, upon exercise of conversion rights, warrants or withdrawal rights
by foreign investors must be non-voting shares to the extent that shares
held or which may be held by foreign investors exceeds or will exceed this
50% limit. In addition, the Foreign Exchange Management Regulations
currently provide that the percentage of the outstanding shares of a
company (including shares which would be outstanding as a result of the
conversion of convertible bonds and the exercise of warrants attached to
bonds or withdrawal rights attached to depositary receipts) that may be
held by non-residents or foreigners, unless provided otherwise in any other
relevant laws and regulations (including those of the KSEC), is limited to
50%.
Foreigners are permitted to trade shares only on the KSE, except that
foreigners may (i) acquire shares by gift or inheritance, (ii) acquire
shares pursuant to rights issues or pursuant to investments, convertible
bonds or depositary receipts issued outside Korea, (iii) buy and sell odd
lots of shares with Korean securities companies, (iv) buy and sell shares
directly with other foreigners once the relevant ceiling on aggregate
foreign ownership in a class of shares in a company (or such ceiling less
the number of odd-lot shares) is reached or exceeded through a Korean
broker as an intermediary ("foreign OTC transactions") and (v) trade shares
off the KSE with the approval of the KSEC for specific trades.
The Fund may acquire a substantial portion of its portfolio securities
in foreign OTC transactions involving premium prices in excess of the KSE
price. There can be no assurance that the Fund will be able to realize
such premiums if it sells the shares to another foreign investor. Such
premiums may be affected by changes in regulations and otherwise, including
changes in the percentage of foreign ownership permitted in KSE-listed
companies.
Since July 1, 1994, foreigners have been permitted (1) to invest in
non-guaranteed convertible bonds listed on the KSE which are issued by
small and medium-sized companies the shares of which are listed on the KSE,
with foreign investors in the aggregate and a single foreign investor being
allowed to invest in up to 30% and 5% of the listed value of each class of
such bonds, respectively; and (2) to participate in new issues of certain
low interest rate government or public bonds to be designated from time to
time by the KSEC up to the limit determined by the KSEC from time to time,
each denominated in Won and in each case subject to certain procedural
requirements described below.
A foreign investor who wishes to invest in shares or bonds issued in
Korea by Korean companies is required to register its identity with the
Securities Board prior to making any such investment in shares or bonds,
respectively. Upon registration, the Securities Board will issue to the
foreign investor an Investment Registration Card for stock or bond, as the
case may be, which must be presented each time the foreign investor opens a
brokerage account with a securities company.
Upon a foreign investor's purchase or sale of shares or bonds through
the KSE, no separate report by the investor is required because the
Investment Registration Card system is designed to control and oversee
foreign investment through a computer system. However, a foreign
investor's acquisition or sale of shares or bonds outside the KSE (as
discussed above) must be reported by the foreign investor or his standing
proxy to the Governor at the time of each such acquisition or sale, and,
upon request of such securities company, a copy of that report must be
submitted to the securities company with which the foreign investor opened
a brokerage account; provided, however, that a foreign investor must ensure
that his acquisition or sale of shares or bonds outside the KSE for odd-lot
trading or in a foreign OTC transaction is reported by the securities
company engaged to facilitate such transaction and his acquisition of
shares as a result of a rights issue, stock dividend and bonus issue is
reported by the company issuing the shares concerned.
A foreign investor must appoint one or more standing proxies from among
the Korea Securities Depository, foreign exchange banks (including domestic
branches of foreign banks) and securities companies (including domestic
branches of foreign securities companies) which have obtained a license to
act as a standing proxy to exercise rights as a holder of shares or bonds,
place an order to sell or purchase shares or bonds or perform any matters
related to the foreign activities if the foreign investor does not perform
these activities himself. However, a foreign investor may be exempted from
complying with these standing proxy rules with the approval of the Governor
in cases in which such exemption is deemed inevitable by reason of conflict
between laws of Korea and the home country of such foreign investor.
Certificates evidencing shares or bonds of Korean companies must be
kept in custody with an eligible custodian in Korea. Only foreign exchange
banks (including domestic branches of foreign banks), securities companies
(including domestic branches of foreign securities companies) and the Korea
Securities Depository are eligible to be a custodian of shares or bonds for
a foreign investor. A foreign investor must ensure that his custodian
deposits such shares or bonds with the Korea Securities Depository.
However, a foreign investor may be exempted from complying with this
deposit requirement with the approval of the Governor in circumstances
where such compliance is made impracticable, including cases where such
compliance would contravene the laws of the home country of such foreign
investor.
A foreign investor who intends to acquire shares or bonds must
designate a single foreign exchange bank and open Won and foreign currency
account (respectively, "Won Account" and "Foreign Currency Account"), for
investment in shares and separately for investment in bonds. No approval
is required for remittance into Korea and the deposit of foreign currency
funds in the Foreign Currency Account. With the confirmation of the
investor's designated foreign exchange bank, foreign currency funds may be
transferred to a Won Account for stock investment or bond investment, as
the case may be, held with a broker (i.e., securities company) only at the
time Won funds are necessary for the purchase of shares or bonds, as the
case may be (i.e., for payment of the deposit money at the time of placing
an order, and the remainder of the purchase price outstanding at the time
of settlement). Funds in the Foreign Currency Account may be remitted
abroad without any governmental approval.
Dividends on shares or interest on bonds of Korean companies are paid
in Won. No governmental approval is required for foreign investors to
receive dividends or interest on, or the Won proceeds of the sale of, any
such shares or bonds, as the case may be, to be paid, received and retained
in Korea. Dividends or interest paid on, and the Won proceeds of the sale
of, any such shares or bonds, as the case may be, held by a non-resident of
Korea must be deposited either in a Won Account for stock investment or
bond investment, as the case may be, with the investor's securities company
or its Won Account. Funds in the investor's Won Account may be transferred
to its Foreign Currency Account or withdrawn for local living expenses
(subject to certain limitations), in each case subject to approval of the
investor's designated foreign exchange bank. In addition, funds in the Won
Account may be used for future investment in shares or bonds or for payment
of the subscription price of new shares obtained through the exercise of
pre-emptive rights.
Foreign investors may, without any governmental approval, enter into
forward transactions between Won currency and foreign currency with a
foreign exchange bank in Korea to the extent necessary to hedge foreign
exchange risk resulting from their investment in Korean shares or bonds or
holding of Won currency for the purposes of such investment.
The MOF or the KSEC may issue orders imposing additional restrictions
when deemed in the public interest, for the protection of investors or in
the interest of maintaining an orderly securities market. Under the FEMA,
the MOF has the authority, with prior public notice of scope and duration,
to suspend all or a part of foreign exchange transactions when emergency
measures are deemed necessary in case of a radical change in the
international or domestic economic situation. To date, the MOF has not
exercised this authority.
THE KOREA STOCK EXCHANGE
The KSE, established in 1956, is the only stock exchange in Korea and
has its only trading floor in Seoul. The KSE is a non-profit organization,
the shares of which are wholly-owned by its 32 member firms. Both equity
and debt securities are traded on the KSE. Although the KSE market
capitalization and trading volume have increased substantially over the
past ten years, it is still small relative to the United States exchanges.
The aggregate market value of equity securities listed on the KSE was
approximately 128.4 trillion (approximately U.S.$159.4 million) at June
30, 1994, and the average daily trading value of such securities was
578,048 million (approximately U.S.$717.1 thousand) for 1993. Equity
securities listed on the KSE are divided into two separate trading
sections
THE PRIMARY MARKETS
EQUITY MARKET
Securities companies with requisite MOF approval are permitted to
underwrite new issues, and managers of underwriting syndicates are required
to endorse two year profit forecasts submitted to the Securities Board.
The KSEC may issue warnings to lead managers or restrict their
participation in the managing of public offerings if the company's profits
are less than 60% of the forecasts in the first year and less than 50% of
the forecasts in the second year or if the company is declared bankrupt.
All shares must have a par value, but the offering price of a new issue
will generally exceed par value. Before June 1991, listed companies were,
unless otherwise qualified, required to offer 100% of their issues at
"market price" although it was possible to apply a discount to the
theoretical ex-rights price when establishing the "market price." However,
in an attempt to stimulate the securities market, the KSEC repealed the
rules requiring issues at "market price" in June 1991, and adopted a new
rule allowing the Chairman of the KSEC to impose a ceiling on any discount
from "market price." The Chairman has not yet published any such ceiling
but may do so in the future.
Listed companies may issue further shares for cash or non-cash
consideration; further issues are normally in the form of rights issues to
existing shareholders. However, by law, members of a listed company's
employee stock ownership association are entitled to subscribe up to 20% in
aggregate of any new shares publicly issued irrespective of whether or not
they are already shareholders. Companies may also issue shares without
consideration as bonus issues.
In common with other foreign investors, the Fund is not permitted to
subscribe for new issues otherwise than by exercising its rights in a
rights issue. It may not underwrite new issues or buy or sell rights.
The following table indicates the number and aggregate size of new
issues of equity through public offerings or rights issues during the past
decade.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL PUBLIC OFFERINGS OFFERINGS TOTAL EQUITY
TO SHAREHOLDERS CAPITAL RAISED
YEAR NUMBER IN IN NUMBE IN IN IN IN
MILLIONS THOUSAND R MILLIONS THOUSANDS MILLIONS THOUSANDS
OF WON OF DOLLARS OF WON OF DOLLARS OF WON OF DOLLARS
1983 2 20,800 26,147 102 431,769 542,764 452,569 568,911
1984 13 81,190 98,127 107 397,672 480,628 478,862 578,755
1985 10 33,860 38,036 60 259,528 291,539 293,388 329,575
1986 12 33,360 38,728 110 797,705 926,056 864,425 1,003,512
1987 40 197,714 249,544 178 1,654,950 2,088,792 1,852,664 2,338,336
1988 98 554,115 809,991 298 6,720,644 9,824,067 7,274,759 10,634,058
1989 119 1,962,236 2,887,340 274 11,124,538 16,369,244 13,086,774 19,256,583
1990 33 315,709 440,688 169 2,581,808 3,603,864 2,897,517 4,044,552
1991 22 506,894 666,264 136 2,180,164 2,865,620 2,687,058 2,531,885
1992 19 318,001 403,350 133 1,711,188 2,170,457 2,029,189 2,573,806
1993 35 355,619 440,068 171 2,788,862 3,451,135 3,144,481 3,891,203
1994
(1) 5 77,935 96,514 57 1,342,173 1,662,134 1,420,108 1,758,648
(1) During the period from January 1 to April 30, 1994.
Source: STOCK, July 1994, Korea Stock Exchange.
BOND MARKET
</TABLE>
Most corporate bonds which are issued domestically are issued through
public offerings which are underwritten by securities companies, banks,
investment and finance companies, merchant banks and certain other licensed
financial institutions. The majority of corporate bonds are guaranteed by
banks and other financial institutions, although an increasing number of
corporate bonds are issued without such guarantees. Since maturities are
relatively short (about half of all new issues of bonds tend to be for
under four years), a significant portion of new issues is required to
refund maturing bonds.
Levels of new issue activity in the corporate bond market are given in
the following table.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR NUMBER OF IN IN
ISSUES MILLIONS THOUSANDS
OF WON OF DOLLARS
1984 872 1,804,063 2,180,400
1985 1,096 3,176,744 3,568,719
1986 900 2,728,871 3,167,949
1987 1,019 3,189,617 4,693,374
1988 1,063 4,244,320 6,204,239
1989 1,217 6,959,035 10,239,898
1990 1,776 11,083,555 15,471,182
1991 2,797 12,740,679 16,746,423
1992 2,382 11,137,260 14,126,908
1993 2,680 15,598,264 19,302,393
1994 through June 30 1,402 10,540,060 13,085,115
Source: STOCK, July 1994, Korea Stock Exchange.
</TABLE>
Bonds are also issued by the public sector in the name of, or
guaranteed by, the MOF, The Bank of Korea or institutions owned by the
Korean government. Some of these are tax-exempt and not all of them are
listed on the KSE. The Bank of Korea has issued large volumes of Monetary
Stabilization Bonds (which have maturities of less than one year)
principally to absorb excess liquidity in the economy. Monetary
Stabilization Bonds accounted for more than 40% of all domestic bond
issues, public and corporate, at December 31, 1993. Generally, public
bonds yield less than corporate bonds and are held mainly by
institutions.
PRIVATIZATIONS
[As part of its program for the development of the securities markets,
the Korean government has sold portions of certain government-owned
corporations to the public. These sales were intended to increase the
participation of low and middle-income investors in the Korean securities
markets. Participation was encouraged through government-provided
discounts and loans. The sale by the Korean government of a portion of its
interest in POSCO and KEPCO in 1988 and 1989, respectively, constituted the
first public offerings under this program. The Korea Exchange Bank, which
is owned by the Korean government, recently sold its newly issued shares to
the public. [The Korean government recently announced that it is
considering the sale of additional government-owned corporations although
any such sale would be subject to a number of factors and there can be no
assurance that such sale will occur.]
THE SECONDARY MARKETS
The listing of securities is regulated by the Securities Listing
Regulation of the KSE, which classifies the four types of securities which
may be listed as equity securities, warrants to subscribe for new shares,
beneficial certificates and debt securities. A listing application and
initial listing fee (except for the listing of certain bonds) must be
submitted to the KSE, which determines whether an applicant is eligible for
listing. The KSE is empowered to de-list securities.
EQUITY MARKET
Equity securities transactions may only be effected on the KSE through
securities companies acting as brokers or principals that are members of
the KSE. As of July 31, 1994, there were 32 member firms of the KSE.
Currently all 32 members of the KSE are licensed in all three categories.
Financial intermediaries including banks, short-term finance companies and
merchant banking corporations are not eligible for membership on the KSE.
However, they may engage in underwriting to a limited extent upon obtaining
a license from the MOF. Currently, foreign securities companies may
establish representative offices in Korea upon the approval of the MOF but
their participation in the securities business is prohibited. In addition,
twelve foreign securities firms have established branch offices in Korea to
engage in brokerage business or other securities business depending upon
the respective terms of MOF approval.
[Information regarding individual securities, including bid and asked
quotations, trading volume, price-earnings ratios, earnings and yields, and
the composite stock price index and stock price indices by sector, is
available through a network of computer terminals located in offices of
securities companies in Korea.] There is a small over-the-counter market,
which is not open to foreign investors.
The equity securities listed on the KSE are divided into two sections
within which the equity securities are traded. The following table shows
the number of listed companies, their market value and average daily
trading volume for each of the two sections of the KSE.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF MARKET VALUE AVERAGE DAILY TRADING VOLUME/VALUE
AT PERIOD END
LISTED IN BILLION IN MILLIONS IN THOUSANDS IN MILLIONS IN THOUSANDS
COMPANIES OF WON OF DOLLARS OF SHARES OF WON OF DOLLARS
YEAR FIRST SECOND FIRST SECOND FIRST SECOND FIRST SECOND FIRST SECOND FIRST SECOND
SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION
1984 255 81 4,495 839 5,433 1,014 13,378 1,469 9,858 784 11,914 948
1985 250 92 5,570 1,012 6,257 1,137 14,908 4,017 10,895 1,420 12,340 1,595
1986 262 93 8,525 1,597 9,897 1,854 24,422(1 7,336(1) 28,093 4,777 32,613 5,546
)
1987 280 109 21,611 4,597 27,276 5,802 14,359(1 5,994(1) 57,740 12,444 72,876 15,706
)
1988 303 199 49,246 15,964 71,986 23,335 7,627 2,740 - 43,685 226,104 63,858
154,67
8
1989 372 254 66,928 28,547 98,481 42,006 8,896 2,861 223,10 57,864 328,287 85,144
4
1990 443 226 68,511 10,505 95,632 14,664 8,608 2,259 148,78 34,903 207,690 48,270
9
1991 484 202 67,704 5,412 88,991 7,113 12,153 1,868 195,15 19,105 256,516 25,111
8
1992 483 205 78,081 6,630 99,031 8,409 20,776 3,251 281,83 26,412 357,475 33,500
4
1993
1994(2
)
(1) Figures for 1986 and 1987 are before consolidation of shares was implemented. See Note (1) from prior table.
(2) Through May 31, 1994.
Source: SECURITIES MARKET, Korea Securities Dealers Association.
</TABLE>
The main difference between the two sections is that margin
transactions are permitted only in the first trading section (with the
exception of securities issued by a securities company which acts as a
broker for the transaction concerned). A newly listed equity security must
be traded in the second trading section for at least one year after its
initial listing. Additional listing criteria must be met in order for an
equity security to be traded in the first trading section. As of December
31, 1993, the securities of 483 companies listed on the KSE were traded in
the first trading section. An equity security trading in the first trading
section that fails to maintain certain criteria will be reassigned to the
second trading section.
For initial listing on the KSE, equity securities must meet certain
requirements, including: (i) corporate existence for at least five years;
(ii) paid-in capital of at least 3 billion; at least 300,000 outstanding
shares and stockholders' equity of at least 5 billion; (iii) average
annual sales revenue for the last three accounting periods of at least 15
billion and sales revenue for the most recent accounting period of at least
20 billion; (iv) the provision of a favorable auditor's opinion (whether
qualified or not) on the company's financial statements for the last three
accounting periods; (v) at least 30% of the outstanding shares, including
at least 30% of all voting shares, must have been publicly offered for
subscription or sale within six months prior to the listing application
date; (vi) a debt to equity ratio of less than 150% of the average for the
same industry sector; (vii) shares issued by way of rights or bonus issues
(including stock dividends) during the past year must not exceed a
specified percentage, and, with certain exceptions, the stockholding ratio
must not have been changed during the one year prior to the listing
application date; and (viii) the asset value per share and the earnings
value per share (as defined in the KSE regulations) must exceed 150% and
100% of its par value, respectively.
The listing criteria a company must meet for its equity securities to
be traded on the first trading section of the KSE include the following:
(i) paid-in capital of at least 5 billion as of the end of the most recent
accounting period; (ii) after-tax net profit for each of the last three
accounting periods must have been at least 10% of paid-in capital, or,
alternatively, the ratio of stated capital plus reserves to stated capital
as of the end of each such accounting period must have been at least 250%;
(iii) debt to equity ratio for each of the last three accounting periods
must be no greater than the average for the same industry section; (iv)
liquidity ratio for each of the last three accounting periods must have
equalled or exceeded the average for the same industry sector; (v) a
dividend of at least 5% of the par value per share must have been declared
and paid to each stockholder holding voting shares of less than 1% of the
issued and outstanding shares in respect of at least two out of the last
three accounting periods; (vi) the provision of a favorable auditor's
opinion (whether qualified or not) on the company's financial statements
for the last three accounting periods; (vii) at least 40% of the
outstanding shares, excluding those held by the Korean government or
certain foreign investors ("Government and Foreign Owned Shares"), must be
held by certain institutional investors and a minimum number (400 to 500
depending on the amount of the paid-in capital) of stockholders, each
holding less than 1% of the company's issued and outstanding shares; (viii)
monthly average trading volume on the KSE for the accounting period in
which listing in the first trading section is to take place must be at
least 1% of the company's shares, excluding Government and Foreign Owned
Shares, if any; (ix) with the exception of the Korean government holding
shares of certain designated companies, no stockholder may own more than
51% of the company's outstanding shares; and (x) the company's shares must
have been listed for at least one year in the second trading section.
Listed companies are required to submit both semi-annual and annual
reports to the KSE and the KSEC. Upon the occurrence of certain events
such as the revocation of a license for the main line of business, the
suspension of a bank account or conditions for corporate
dissolution, direct disclosure of such event must be made by listed
companies to the public investors through the broadcasting facilities
located in the KSE. Within two days after certain less material events
such as a change of business objectives, the filing of a significant
lawsuit against the company or the notification of a tax investigation,
disclosure must be made to the KSE, which will be disseminated to the
public.
An over-the-counter market for non-listed securities was established in
April 1987 as a mechanism for smaller companies that are unable to meet the
KSE listing requirements to gain access to the securities markets. As of
May 31, 1994, 220 Korean companies were registered on the over-the-counter
market. This market is not open to foreign investors.
Purchases and sales of shares may be completed fully in cash or by
means of a margin transaction. As of July 31, 1994, the margin requirement
is the amount equivalent to 40% of the total value of the stocks purchased
on margin or sold short. Only shares in the first trading section of the
KSE, with certain exceptions, may be purchased or sold by means of a margin
transaction. The margin requirements are varied from time to time by the
KSE. According to statistics prepared by the KSE, margin transactions in
1992 and 1993 amounted to 31.2% and 19.5%, respectively, of total trading
volume by number of shares, and 36.2% and 24.0%, respectively, of the
trading volume of those shares eligible for margin transactions. Foreign
investors, including the Fund, are not permitted to engage in margin
transactions, as discussed under "Regulation of Foreign Investment."
The KSE may require deposits in cash or substituted securities to be
paid in advance of settlement, in varying amounts depending on the type of
investor. Currently, the required deposit in cash or substitute securities
from certain institutional investors is 20% of the consideration payable.
The figure for non-institutional investors is 40%. A foreign investor may
be treated as an institutional investor in respect of the foregoing deposit
requirement upon designation as such by the KSE. The Fund will apply for
such designation with the KSE. [The Fund has entered into custody account
arrangements with the Custodian, Subcustodian and the Fund's brokers,
whereby funds required to be deposited would be deposited, at a nominal
interest rate, with the Subcustodian on irrevocable instructions to pay
them to the broker on settlement day against the delivery of the relevant
securities.] Short selling of equity securities is permitted on the KSE,
but may not be effected by foreign investors including the Fund under the
KSEC Rules.
MARKET CAPITALIZATION AND TRADING VOLUME
The Korean securities markets, while relatively small as compared to
the securities markets of the United States, Japan and certain European
countries, have, with the exception of 1990 and 1991, been generally
characterized by gradual and consistent growth. The development of the
Korean securities markets may be attributed to, among other things, the
Korean government's extensive involvement in the private sector, including
the securities markets. From 1982 to 1989, market capitalization of equity
securities listed on the KSE increased substantially from approximately 3.0
trillion to a record high of approximately 95.5 trillion at December 31,
1989. During 1990 and 1991, however, market capitalization did not
continue such growth, and the total market capitalization of equity
securities listed on the KSE decreased 17.2% to approximately 79.0
trillion at December 31, 1990 and decreased 7.5% to approximately 73.1
trillion at December 31, 1991. Since the beginning of 1992 and the opening
of the Korean securities markets to foreign investment, market
capitalization has generally increased, and as of June 30, 1994 was 128.4
trillion.
Large groups of related companies referred to as "chaebol" are engaged
in a wide range of businesses and play a significant role in the Korean
economy. As of September 30, 1993, the 30 largest chaebol groups accounted
for [42]% of the total market capitalization on the KSE. The Korean
government has requested the chaebol companies to reduce their
shareholdings both within and outside of the chaebol group. The Korean
government's policy is to encourage the growth of smaller and medium-sized
companies.
Total trading volume of equity securities listed on the KSE has
fluctuated widely, but also has, with the exception of 1990 and 1991,
generally increased from 1982 through 1993. In 1993, total trading volume
was approximately 169.9 trillion, which represented an increase of 87.5%
from total trading volume of 90.6 trillion in 1992. Trading activity in
equity securities is concentrated in relatively few securities. In 1993,
the 30 most actively traded equity securities listed on the KSE accounted
for 28.8% of total trading volume.
The number of companies listed, the corresponding aggregate market
value at the end of the periods indicated and the average daily trading
volume for those periods are set out in the following table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF MARKET VALUE AT AVERAGE DAILY TRADING VOLUME/VALUE
PERIOD END
YEAR LISTED IN BILLIONS IN MILLIONS IN THOUSANDS IN MILLIONS IN THOUSANDS
COMPANIES OF WON OF DOLLARS OF SHARES OF WON OF DOLLARS
1984 336 5,148 6,222 14,847 10,642 12,862
1985 342 6,570 7,380 18,925 12,315 13,834
1986 355 11,994 13,923 3,402(1) 32,870 38,159
1987 389 26,172 33,033 5,6701(1) 70,185 88,584
1988 502 64,544 94,349 10,367 198,364 289,963
1989 626 95,477 140,490 11,757 280,967 413,430
1990 669 79,020 110,302 10,866 183,692 256,411
1991 686 73,118 96,107 14,021 214,263 281,629
1992 688 84,712 107,448 24,028 308,246 390,977
1993 693 112,665 139,420 35,130 574,048 710,368
1994(2) 692 128,362 159,357 34,720 734,748 912,164
(1) Equivalent to the trading volume after consolidation of shares. From 1986 to 1987, shares were consolidated at
the ratio of 10 to 1 or 5 to 1 to improve the efficiency of trading. The actual trading volumes, before consolidation of
shares was completed, were 31,755 and 20,353 in 1986 and 1987, respectively.
(2) As of June 30, 1994 and during the period from January 1 to June 30, 1994, as the case may be.
Source: MONTHLY REVIEW, July 1994, Securities Supervisory Board.
</TABLE>
The total trading volume of equity securities in 1993 was approximately
10.4 trillion representing an increase of 46% from the 1992 level of 7.1
trillion. In 1992, the total trading volume increased 73% from the 1991
level to 4.1 trillion. Trading activity, however, is concentrated in a
limited number of companies within a small number of industries. The 30
most actively traded domestic equity securities accounted for 28.8% of
total trading volume of domestic equity securities for the year ended
December 31, 1993. The following table illustrates the trading volume and
price/earnings ratio of the 30 most actively traded equity securities on
the KSE for the year ended December 31, 1993.
<TABLE>
<CAPTION>
COMPANY ANNUAL TRADING VOLUME ADJUSTED YEAR-END
(WON MILLIONS) PRICE/EARNINGS RATIO
<S> <C> <C>
Daewoo Heavy Ind. 3,244,470
Korea Electric Power Corporation 3,207,740
Pohang Iron & Steel Co., Ltd. 2,821,601
Hyundai Motor 2,438,805
Daewoo Corporation 2,389,966
Samsung Electronics Co., Ltd. 2,311,690
Daewoo Securities Co., Ltd. 2,194,911
Dongsuh Securities Co., Ltd. 2,067,358
The Korea Commercial Bank of Korea 2,052,412
Daishin Securities Co., Ltd. 1,950,169
Lucky Securities Co., Ltd. 1,924,933
Goldstar Co., Ltd. 1,750,126
Daewoo Electronics 1,709,620
Bank of Seoul 1,675,062
Saeil Heavy Ind. 1,484,378
Hyundai Engineering & Const. 1,428,796
Sammi Steel 1,420,201
Cho Hung Bank 1,293,306
Asia Motor 1,268,295
Coryo Securities Corporation 1,113,835
Lucky 1,033,161
SsangYong Motor 997,929
Poong San 956,434
Sammi 942,677
Korea First Bank 921,436
Hanbo Steel & General Const. 920,446
I.C.C. Corp. 866,229
Hanil Bank 850,113
Kia Motors Corporation 810,011
Daelim Industrial 805,225
Total 48,851,335
Source: FACT BOOK, 1994, Korea Stock Exchange.
</TABLE>
[The following table sets forth the number of listed companies, market
capitalization and trading volume of domestic equity securities in Korea
through May 31, 1994 and other selected countries for year-end 1993.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NUMBER OF LISTED NUMBER OF MARKET EQUITY TRADING
EQUITY ISSUES LISTED COMPANIES CAPITALIZATION VOLUME ON THE
(WON BILLIONS) EXCHANGE
(WON BILLIONS)
1984 455 336 5,148.5 3,118.2
1985 414 342 6,570.4 3,620.6
1986 485 355 11,994.2 9,598.1
1987 603 389 26,172.2 20,493.9
1988 970 502 64,543.7 58,120.6
1989 1,284 626 95,476.8 81,199.6
1990 1,115 669 79,019.7 53,454.5
1991 1,013 686 73,117.8 62,564.9
1992 1,014 688 84,712.0 90,624.4
1993 1,045 693 112,665.3 169,918.1
1994(1) 919 692 128,361.7 106,786.8
(1) January through June 30, 1994.
Source: STOCK, July 1994, Korea Stock Exchange.]
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF MARKET ANNUAL TRADING
LISTED CAPITALIZATION VALUE
COMPANIES DECEMBER 31, U.S.$ BILLION
U.S.$ BILLIONS
EXCHANGE LOCAL INDEX 1983 1992 1983 1992 1983 1992
Hong Kong Hang Seng n/a 413 17 172 5,116 90,611
India FE Bombay Index 3,118 6,700 7 65 2,377 20,597
Indonesia JSE Composite 19 155 0.1 12 11 3,903
Korea KOSPI 328 688 4 107 2,260 116,101
Malaysia KLSE Composite 204 366 23 94 3,398 21,730
Pakistan SBP Index 327 628 1 8 n/a 980
Philippines Manila Com/Ind 208 170 1 14 483 3,104
Index
PRC n/a - 53 - 18 - 13,363
Singapore DBS 50 118 163 16 49 5,588 14,084
Sri Lanka CSE All Shares - 190 - 1 - 114
Taiwan TSE 119 256 8 101 9,081 240,667
Thailand SET 88 305 1 58 381 72,060
</TABLE>
SOURCES: Emerging Stock Markets Factbook 1993: International Finance
Corp.
GOVERNMENT INVOLVEMENT IN THE PRIVATE SECTOR
The Korean government has historically exercised and continues to
exercise substantial influence over many aspects of the private sector
including the securities markets, often viewing equity financing as a means
of achieving broader policy goals such as the diffusion of majority
shareholder control in large companies. The Korean government from time to
time has influenced the payment of dividends and the prices of certain
products, encouraged companies to invest in or to concentrate in particular
industries, induced mergers between companies in industries suffering from
excess capacity and induced private companies to publicly offer their
securities. The KSE has also sought to minimize excessive price volatility
through various steps, including the imposition of limitations on daily
price movements of securities.
During 1990, the Securities Market Stabilization Fund ("Stabilization
Fund"), a fund operated by its contributors which include substantially all
of the KSE-listed companies and Korean securities companies, as well as
Korean banks, insurance companies, and certain other institutional
investors, was established by the securities industry with government
cooperation in order to stabilize the market primarily through the purchase
and sale of securities. The Stabilization Fund was initially established
for a three-year period, which has been extended for an additional three
years. In August 1992, the MOF asked the Stabilization Fund, together with
banks, insurance companies and pension funds, to purchase an additional
3.9 trillion worth of stocks in the succeeding twelve months. As of
September 30, 1993, the Stabilization Fund owned securities listed on the
KSE with a value of approximately 4.5 trillion (approximately U.S.$5.564
billion) and held cash reserves of approximately 0.7 trillion
(approximately, U.S.$0.865 billion), constituting, in the aggregate,
approximately 4.92% of the total listed equity market capitalization as of
that date. As of __________, 1994, the Stabilization Fund held cash
reserves of approximately 0.8 trillion and owned Korean securities with a
value of approximately 4.92 trillion, constituting, in the aggregate,
approximately 3.7% of the total listed equity market capitalization of
______ trillion as of that date. The liquidation of the Stabilization
Fund's portfolio could exert significant downward pressure on the market
prices of KSE-listed equity securities in which the Fund may invest.
On August 24, 1992, the Korean government announced a series of
measures designed to stabilize the securities market. These included
measures intended to channel additional funds from various financial
institutions into investment in KSE-listed securities. The sources for
such investment were to include trust account deposits held by commercial
banks, premiums paid to insurance companies, pension funds and mutual funds
and additional contributions made to the Stabilization Fund.
Another measure was to authorize securities "buy-back funds" to be
established as open-ended unit investment trusts with a limited life of
five years. Each such trust is managed by one of the three largest Korean
securities investment trust management companies. The stated objective of
the trusts is to invest in shares of the listed blue-chip companies.
However, it is expected that each trust will invest in the shares of
companies holding units of such trust. Such trusts are generally
restricted from investing in excess of 20% of their total assets in any
class of shares of a company. The redemption rights of unit holders are
subject to certain restrictions for a period of three years following
subscription for the relevant units.
Other measures announced included tax incentives for small investors
and regular government oversight to ensure that financial institutions are
not net sellers of shares. Indirect measures have included from time to
time urging institutional investors to act as net buyers to support a
"soft" market.
In January and February 1994, the Government announced a number of
measures intended to stabilize the securities market. Significant measures
include, among others, increasing the number of new listings on the KSE,
strengthening the guarantee deposit requirement for a purchase of stocks on
the KSE; lowering the interest rate on deposits with securities companies;
permitting short sales; lowering the ceiling on shares of a single company
which may be held by a securities investment trust; and raising the
securities transaction tax rate for sales effected on the KSE.
MARKET DATA
Market performance of the KSE is measured by a composite index and
several additional indices based on the first and second trading sections
of the KSE, industry sectors and the capitalization of individual stocks.
The Korea Composite Stock Price Index ("Index") is the major measure of
changes in the aggregate market value of all common stocks listed on the
KSE. Under the current weighted market value method of computing the
Index, the market price of each listed common stock is multiplied by the
number of shares listed and then aggregated. Prior to 1983, the Index was
determined through a simple average method of computation.
The Index generally increased through the 1980s but has generally
decreased from its high annual close in 1989. During 1992, the Index
fluctuated widely reaching a high point of 691.48 on February 8 and a low
point of 459.07 on August 21. On December 31, 1992, the Index closed at
678.44, an 11.1% increase from year-end 1991. On December 31, 1993 and
June 30, 1994, the Index closed at 866.18 and 933.36, respectively. At
July 31, 1994 the Index was at 927.97. See "The Securities Markets of
Korea - Recent Market and Economic Developments."
The following table illustrates the market performance of the KSE as
measured by the Index from 1984 through 1994, together with the associated
dividend yield and price-to-earnings ratios for listed securities as of the
end of the periods indicated.
KOREA COMPOSITE STOCK PRICE INDEX1
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
AVERAGE
YEAR HIGH LOW PERIOD DIVIDEND YIELD(2)(3) PRICE/EARNINGS
END RATIO(2)(3)
1984 142.46 114.37 142.46 5.7 4.5
1985 163.37 131.40 163.37 6.0 5 .2
1986 279.67 153.85 272.61 4.8 7.6
1987 525.11 264.82 525.11 2.9 10.9
1988 922.56 527.89 907.20 2.6 11.2
1989 1,007.77 844.75 909.72 2.3 13.9
1990 928.82 566.27 696.22 2.6 12.8
1991 763.10 586.51 610.92 2.9 11.2
1992 691.48 459.07 678.44 2.5 10.9
1993 874.10 605.93 866.18 1.9 12.7
1994 through June 30 974.26 855.37 933.36
(1) The Index covers all common stocks listed on the KSE with a base date of January 4, 1980 and a base index of
100. In 1983 the method of computing the Index was changed from a price-weighted method to a market value
method.
(2) Korean companies normally report earnings only on an annual basis. As a result, the earnings used to calculate
price/earnings ratios may not be comparable to those customarily used in the United States. The figures do not
include companies that recorded losses in the previous years.
(3) Dividend Yield is derived from a simple average method by dividing the sum of dividends per share for
KSE-listed issues paying dividends during the period by the sum of closing per share prices of such issues.
Price/Earnings Ratio, as published by the KSE, is derived from a simple average method by dividing the sum of
closing prices for KSE-listed stocks by the sum of the earnings per share of the individual issues. Price/earnings
ratios calculated pursuant to a weighted market value method (the customary method utilized in the United States)
could indicate significantly higher ratios.
Source: STOCK, July 1994, Korea Stock Exchange.
</TABLE>
As at the close of business on ____________, 1994, the Index stood at
________. The high for 1994 was _______ recorded on __________, 1994 and
the low for 1994 was ________ recorded on ___________, 1994.
Shares are quoted "ex-dividend" on the first trading day of the
relevant company's accounting period. Since the calendar year is the
accounting period for a large majority of all listed companies, this may
account for the drop (if any) in the Index between its closing level at the
end of one calendar year and its opening level at the beginning of the
following calendar year.
Movements in individual company share prices are confined to fixed
limits around the previous day's closing price. Such restrictions limit
the maximum movement in the Index on any day. As a result, the quoted
closing price of a listed security, if such closing price has been fixed by
the limit, may not necessarily represent the price at which persons are
willing to buy and to sell such security in the absence of such a
limit.
Movements in individual company share prices are confined to fixed
limits around the previous day's closing price as set forth below.
<TABLE>
<CAPTION>
<S> <C>
PREVIOUS DAY'S CLOSING PRICE FLUCTUATION
LIMIT
(WON) (WON)
Less than 3,000 100
3,000 to less than 5,000 200
5,000 to less than 7,000 300
7,000 to less than 10,000 400
10,000 to less than 15,000 600
15,000 to less than 20,000 800
20,000 to less than 30,000 1,000
30,000 to less than 40,000 1,300
40,000 to less than 50,000 1,600
50,000 to less than 70,000 2,000
70,000 to less than 100,000 2,500
100,000 to less than 150,000 3,000
150,000 to less than 200,000 4,000
200,000 to less than 300,000 6,000
300,000 to less than 400,000 8,000
400,000 to less than 500,000 10,000
500,000 or more 12,000
Note: The fluctuation limits are different for designated administered issues.
</TABLE>
The aggregate market capitalization of all equity securities of the 693
companies listed on the KSE as of December 31, 1993 was approximately 112.7
trillion (approximately U.S.$139.4 billion). Market capitalization, along
with trading volume, is concentrated in a limited number of companies
within a small number of industries. As of December 31, 1993, the 30
largest companies by market capitalization represented approximately 47.1%
of the total market capitalization of Korean equity securities. The
following table illustrates the 30 largest companies on the KSE by market
capitalization on December 31, 1993.
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET CAPITALIZATION
AT DECEMBER 31, 1993
COMPANY (WON BILLIONS) (U.S.$MIL.)
Korea Electric Power Corporation
13,3 16,486.3
22.6
Pohang Iron & Steel Co., Ltd.
5,00 6,190.5
2.5
Samsung Electronics Co., Ltd.
3,42 4,242.7
8.5
Hyundai Motor
2,15 2,672.1
9.3
Goldstar Co., Ltd.
1,92 2,383.5
6.1
Daewoo Securities Co., Ltd.
1,69 2,103.2
9.6
Korea First Bank
1,56 1,930.5
0.0
Daewoo Corporation
1,55 1,923.7
4.5
Kia Motors Corporation
1,53 1,902.5
7.4
Korea Mobile Telecommunication
1,44 1,789.3
5.9
Yukong Ltd.
1,44 1,784.5
2.0
Shinhan Bank
1,40 1,736.8
3.5
Hanil Bank
1,37 1,698.8
2.8
Cho Hung Bank
1,35 1,673.1
2.0
Lucky Securities Co., Ltd.
1,30 1,618.7
8.1
Daewoo Heavy Industry
1,29 1,606.1
7.9
Lucky
1,22 1,516.7
5.6
Hyundai Engineering & Construction
1,20 1,496.8
9.6
Bank of Seoul
1,20 1,491.3
5.1
The Korea Commercial Bank of Korea
1,118 1,383.5
.0
Daishin Securities Co., Ltd.
1,113 1,377.4
.1
Dongsuh Securities Co., Ltd.
1,112 1,376.7
.5
SsangYong Refinery
985. 1,219.5
5
Daewoo Electronics
951. 1,178.0
9
Samsung Electron Devices
949. 1,175.4
8
SsangYong Cement Industry
822. 1,017.2
0
The Korea Long Term Credit Bank
815. 1,008.9
3
Dong-A Construction Ind.
804. 996.0
9
Korean Air
783. 969.8
7
SsangYong Investment & Securities Co., Ltd.
728. 901.4
5
Total
55,6 68,850.9
38.2
Note: (1) Under its articles of
incorporation, each of KEPCO and POSCO provides for a 1% ceiling on the acquisition by a single foreign investor
of its common shares.
Source: FACTBOOK, 1994, Korea Stock Exchange.
</TABLE>
The following table sets forth the market value, as of June 30, 1994,
of companies listed on the KSE by industry category, as classified by the
KSE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INDUSTRIES NUMBER OF AGGREGATE PERCENT OF
COMPANIES MARKET VALUE TOTAL VALUE
IN BILLIONS
OF WON
Fishing
3 52.0 0.0
Mining
3 91.6 0.0
Foods and Beverages
47 2,73 2.1
8.9
Textiles and Wearing Apparel
61 4,55 3.5
0.0
Luggage, Handbags, Saddlery, Harness and Footwear
15 444. 0.3
3
Wood and Wood Products
4 292. 0.2
0
Paper and Paper Products
25 1,21 0.9
6.7
Publishing, Printing, Reproduction of Recorded Media
2 57.7 0.0
Chemicals and Chemical Products
104 11,33 8.8
0.0
Non-metallic Minerals
25 3,31 2.5
5.6
Basic Metal Industries
37 10,3 8.0
59.0
Fabricated Metal Products, Machinery and Equipment
151 26,9 21.0
93.7
Other Manufactured Products
10 380. 0.2
0
Electricity and Gas
2 16,3 12.7
98.5
Construction
46 8,31 6.4
5.2
Wholesale Trade
43 5,25 4.0
5.5
Retail Trade
6 1,118 0.8
.2
Hotels and Restaurants
1 225. 0.1
1
Transport and Storage
15 2,00 1.5
2.9
Communication
2 2,97 2.3
8.4
Financial Institutions
77 28,3 22.0
33.9
Insurance
12 1,90 1.4
5.9
Recreational and Cultural Services
1 6.6 0.0
Total
692 128, 100.0
361.
7
Source: STOCK, July 1994, Korea Stock Exchange.
</TABLE>
THE DEBT MARKET
The Korean listed bond market is less developed than the market for
listed equity securities. The Korean bond market is comprised of corporate
bonds issued by Korean corporations and public bonds including government
bonds, municipal bonds issued by city governments and special bonds issued
by government-run corporations. The majority of corporate bonds are
guaranteed by banking institutions. As of June 30, 1994, the total amount
of listed corporate bonds and listed public bonds was 53.0 trillion and
41.3 trillion, respectively.
The listing requirements for corporate bonds include, but are not
limited to: (i) the capital stock of the issuer must equal or exceed 500
million; (ii) the total face value amount issued must equal or exceed 300
million; (iii) less than one year has passed since issuance; (iv) a total
unredeemed amount of at least 300 million at par value; (v) the issuer
must be a listed or registered company; and (vi) the bonds must be offered
publicly. The following table illustrates the total Won amount of all bond
issues listed on the KSE for 1988 through 1993 and for 1994 through June
30.
OUTSTANDING BOND ISSUES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
LISTED PUBLIC BONDS LISTED CORPORATE BONDS TOTAL LISTED BONDS
YEAR IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS
OF WON OF DOLLARS OF WON OF DOLLARS OF WON OF DOLLARS
1988 22,159 32,391 11,521 16,841 33,680 49,233
1989 28,095 41,340 15,395 22,653 43,490 63,994
1990 29,049 40,549 22,068 30,804 51,117 71,353
1991 32,250 42,390 29,241 38,435 61,491 80,824
1992 32,447 41,156 32,697 41,473 65,143 82,627
1993 41,359 51,181 37,574 46,497 78,932 97,676
As of June 30, 1994 52,978 65,770 41,296 51,268 94,274 117,038
Source: STOCK, July 1994, Korea Stock Exchange.
</TABLE>
Statistics are not regularly compiled with respect to unlisted public
bonds, although there is a significant volume outstanding.
Until June 24, 1988, brokerage commissions were charged at a fixed rate
of 0.3% for transactions in bonds. Since that date, brokerage commissions
on transactions in debt securities may be negotiated up to a maximum of
0.3%. A further amendment to the regulations in June 1991 permits the KSE
to alter the maximum commission rate from time to time. No transaction tax
is levied on bond sales. Bonds may not be purchased on margin or sold
short. For bonds, over-the-counter trading constitutes a substantially
larger part of the overall bond trading market than trading on the KSE. In
1993, the value of bonds traded on the KSE was 5.5 billion, while the value
of bonds traded in the over-the-counter market was 127,231.9 billion. The
value of bonds traded on the KSE is set forth in the following table. The
table does not include over-the-counter trading.
TRADING VALUE OF BONDS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PUBLIC SECTOR BONDS CORPORATE SECTOR BONDS TOTAL BONDS
YEAR IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS
OF WON OF DOLLARS OF WON OF DOLLARS OF WON OF DOLLARS
1988 7,001 10,234 1,545 2,258 8,545 12,491
1989 4,378 6,442 771 1,134 5,149 7,577
1990 2,455 3,427 795 1,110 3,250 4,537
1991 1,394 1,832 704 925 2,098 2,758
1992 453 575 152 193 605 767
1993 4 5 2 2 6 7
1994 through June 30 22 27 228 283 250 310
Source: STOCK, July 1994, Korea Stock Exchange.
</TABLE>
The number of bonds issues and the volume of issues outstanding have
both increased. However, the total trading volume during 1993 decreased
sharply to 5.5 billion, about 1% of that of the previous year, while the
volume in the over-the-counter market recorded an increase of 76% in its
annual rate.
Set forth below is information indicating the average annual yields for
various categories of bonds outstanding during the periods indicated.
YIELDS ON BONDS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
GOVERNMENT SPECIFIC LAWS BONDS CORPORATE BONDS
BONDS
YEAR COMPOUND DISCOUNT COMPOUND COUPON GUARANTEED NON
BONDS BONDS BONDS BONDS GUARANTEED
(%) (%) (%) (%) (%) (%)
1988 13.02 15.61 14.62 14.54 14.49 14.59
1989 14.39 15.92 15.40 15.41 15.23 15.29
1990 15.27 16.19 16.00 16.34 16.40 16.41
1991 16.70 18.47 18.26 18.37 18.84 18.73
1992 16.56 16.93 17.20 17.20 17.13 18.07
1993 - 13.69 - - 14.07 -
1994(1) - - - - - -
</TABLE>
(1) During the period from January 1 to June 30, 1994.
Source: STOCK, July 1994, Korea Stock Exchange.
OPTIONS AND FUTURES
Currently, the Korean securities markets do not provide mechanisms for
the purchase and sale of options and futures contracts. The KSE has
announced that stock index futures will be introduced in January 1996;
however such futures will not initially be available to foreigners.
TRADING, SETTLEMENT AND ENTRUSTMENT DEPOSIT PROCEDURES
The KSE is open Monday through Friday for trading between 9:40 a.m. -
11:40 a.m. and 1:20 p.m. -3:20 p.m. It is also open on Saturday mornings.
The KSE has established a daily price change limitation schedule for shares
traded on the KSE based on the previous day's closing price. See "The
Secondary Markets - Equity Market - Market Data." The KSE may suspend
trading in the securities of an individual company in certain
circumstances. Share transactions are effected through accounts with one
of the 32 securities companies which act as brokers, but which may also buy
and sell as principals.
Currently, certain institutional investors, including the Fund, are
required to make a 20% entrustment guarantee deposit in cash or substitute
securities with their Korean broker prior to executing any trades. The
Fund has entered into custody account arrangements with the Subcustodian
and the Fund's brokers, whereby monies required to be advanced as the
entrustment guarantee deposit will deposited, at a nominal interest rate,
with the Fund's brokers in accounts maintained by them at the Subcustodian
on instructions to pay the broker on settlement day against the delivery of
the relevant securities. To the extent that the Fund makes deposits with
its brokers in advance of delivery of securities, the Fund will be exposed
to the risk of the broker's insolvency prior to settlement. Although this
risk can not be eliminated, the Manager will monitor broker
creditworthiness. A broker's insolvency could, nonetheless, cause the Fund
to lose some or all of the entrustment deposit.
All orders are transmitted directly and individually to the floor or
the Stock Market Automated Trading System ("SMATS") of the KSE via the
computerized order-routing system. In cases where the ordered issues are
designated for computerized trading, the system transmits the orders
automatically to the SMATS. Almost all of the transactions on the KSE are
executed by the SMATS, except a small number of issues designated as issues
subject to manual matching. As of the end of 1993, SMATS encompassed 895
stock issues, accounting for 97.0% of the total trading volume. When a
member firm inputs an order in the order-routing terminal located at its
offices, the order, via the order-routing system, is fed directly into and
recorded in the files of the SMATS by issue, price, and time of order.
Then the order is matched automatically under the auction principle.
In the case of manually handled issues, however, the order-routing
system generates printouts on its system printer located at the member
booth on the floor of the KSE. Thereafter, floor representatives of a
member firm submit the order slips to the KSE clerk in the post who is in
charge of matching the issues concerned, who will match the best bid and
offers according to the auction principle.
Opening prices are determined by all bids and offers received during
the first five minutes of the trading session. The KSE has established
procedures for block sales of shares.
All securities transactions on the KSE are settled and cleared through
the Korea Securities Depository, a clearing and settlement agent of the
KSE. Transactions are classified either as regular way transactions, for
which settlement is due on the second business day following the day of
contract, or as cash transactions which are due on the day of contract.
Shares and beneficial certificates are traded as regular way transactions,
while bonds may be traded either as regular way or cash transactions. The
delivery and receipt of securities may be cleared by a book-entry clearing
system of the Korea Securities Depository. In 1993, the total volume
cleared was 5.53 billion shares, of which 5.394 billion were settled by way
of book-entry deliveries.
TRANSACTION COSTS
Regulations of the KSE have established certain maximum brokerage
commission rates for all transactions effected on the KSE. The rates
currently provide for a commission of up to 0.6% for equity securities and
up to 0.3% for bonds and beneficial certificates. Each individual broker
may determine brokerage commissions within the established ranges. Each
broker is required to report its commission rate schedule and any deviation
therefrom to the KSE seven days prior to its application. Practically,
there is generally no deviation in commission rate schedules among Korean
brokers. The same commission rates are, in practice, applied to all trades
in the same volume range. In addition, a securities transaction tax is
levied on the seller for most transactions at a rate of 0.35% of the value
of shares sold on the KSE and 0.5% of the value of the shares sold off the
KSE. From July 1, 1994, a special agricultural and fishery tax is levied
on the seller for most transactions at a rate of 0.15% of the value of
shares sold on the KSE. For detailed information, see "Korean
Taxation."
SECURITIES FINANCING
The Korea Securities Finance Corporation (the "KSFC"), which was
established in 1955 to facilitate financing in the securities markets, is
the only institution authorized to engage in business specializing in
securities financing in Korea. The KSFC provides loans to underwriting
groups and securities collateral loans to the public. In March 1986 the
KSFC suspended credit extension for margin transactions as one measure to
stabilize the securities markets. Korean securities companies may extend
credit for margin transactions and provide for their clients subscription
loans, purchase loans and securities collateral financing by using their
own resources or by borrowing from the KSFC.
The margin requirement as set by the KSE is 40% of the total of the
sale or purchase order value of the securities. The margin requirements
are varied by the KSE depending upon market conditions. Foreign investors,
including the Fund, are not permitted to engage in margin transactions or
enjoy the benefit of other loans or financing.
REGULATION
The MOF establishes the basic policies governing the overall operation
of the Korean securities markets. Although the KSEC is authorized to
regulate and make decisions on all major issues relating to the securities
markets pursuant to the SEA, all decisions of the KSEC must be reported to
the MOF. The MOF may repeal any decision of the KSEC or suspend its
enforcement. The KSEC is composed of nine commissioners, one of whom is
appointed as chairman by the President. The day-to-day management and
implementation of the policies of the KSEC are conducted by the Securities
Board.
The SEA was originally enacted in 1962 and amended fundamentally in
1976, 1982, 1987 and 1991 to broaden the scope and improve the
effectiveness of official supervision of the securities markets. The 1987
amendment generally improved the regulatory and disclosure requirements
under the SEA, established a more effective system for the transfer of
securities through the use of a book-entry system without the need for
physical delivery of securities certificates, and provided a statutory
basis for futures trading on the KSE. As amended, the SEA introduced
restrictions on insider trading, required that specified information be
made available by listed companies to investors and established rules
regarding margin trading, proxy solicitation and takeover bids. In
addition, the 1987 amendments strengthened control over insider
trading and contained extensive new provisions which, for the first time,
regulated the investment advisory business. The 1991 amendments introduced
stricter restrictions on insider trading and supplemented the existing
disclosure system. The SEA and regulations promulgated thereunder
currently require the initial registration of companies and the filing of
separate registration statements for both initial and subsequent issues of
securities and provide for the administration and supervision of securities
companies, investment advisory companies, listed companies, and other
securities-related institutions, including foreign securities firms
conducting business in Korea and domestic securities companies conducting
business abroad.
The SEA was amended most recently in January 1994, generally with
effect from April 1, 1994, in order to de-regulate the securities markets
by lifting the 10% individual limit on the acquisition of shares of a
listed company (with effect from January 1, 1997) and permitting listed
companies to hold their own shares subject to certain limitations, to
improve the central depository system and securities dispute conciliation
committee, to strengthen the reporting requirements imposed on shareholders
holding 5% or more of the shares of a listed company and to extend to
holders of non-voting shares the right to request the issuer to purchase
their shares under certain circumstances, including at the time of a merger
or business transfer. The amendments also provide detailed provisions for
securities index futures transactions. The KSE has announced that stock
index futures will be introduced in January 1996.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The names of the directors and principal officers of the Fund are set
forth below, together with their positions and their principal occupations
during the past five years and, in the case of the directors, their
positions with certain other international organizations and publicly held
companies.
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND AND OTHER AFFILIATIONS
*Edward C. Johnson 3d Director and President Chairman, Chief Executive
Officer and a
^ FMR Corp. Director of FMR Corp.; Director and
^ 82 Devonshire Street Chairman of the Board and of the
Executive
^ Mail Stop F5A Committee of FMR; Chairman and a Director
Boston, MA 02109 of FMR Texas Inc. (1989), Fidelity
Management & Research (U.K.) Inc., and Fidelity Management & Research (Far
East) Inc.; Director or Trustee and President of all other registered
management investment companies ^ advised by FMR, Chairman of
Fidelity International Limited; Chairman of all other ^
Funds in the Fidelity Group of International Funds.
*J. Gary Burkhead Director and Senior President of FMR; and President
and ^ a
^ Fidelity Investments Vice President Director of FMR
Texas Inc. (1989), Fidelity
^ 82 Devonshire Street Management & Research (U.K.) Inc.
and
^ Mail Stop E14G Fidelity Management & Research (Far East)
Boston, MA 02109 Inc.; Director or Trustee and Senior Vice
President of all other registered management investment companies managed
by FMR.
Helmert Frans ^ van den Hoven Director Former
Member, Supervisory Board, Royal
Marevista 35 Dutch ^ Petroleum Company; former
^ 2202 BX Noordwijk Aan Zee Chairman, Supervisory Board
ABN/Amro
The Netherlands Bank (1992-1994) and of Unilever N.V.
(1975-1984); ^ Member, Supervisory Boards,
Hunter Douglass and Vendex International;
^ Director of a number of other funds in the Fidelity Group
of International Funds; Director of Fidelity Advisor Emerging Asia Fund,
Inc.
Bertram High Witham, Jr. Director Chairman and Director, Villager
Companies;
89 Fox Hill Road Director, System Control Technology, Bill
Stamford, CT 06903 Glass Ministries ; Trustee , Fidelity North
Carolina Management Fund; former
Treasurer, IBM Co. (1973-1978); Director of Fidelity Advisor Emerging Asia
Fund, Inc.
David L. Yunich Director Director and Consultant, W.R. Grace &
^ W.R. Grace & Company Company (1977-present); Director,
New
^ 1114 Avenue of the Americas York Racing Association
(1977-present);
New York, NY 10036 former Director, Prudential Insurance
Company of America (1955-1991); Director,
River Bank America (1964-present); former Director, NYNEX
Corporation (1970-1990); Trustee, Saratoga Performing Arts Center, Boy
Scouts of America, and Carnegie Hall; former President, Vice Chairman and
Director, R.H. Macy & Company (1955-1978), Director of Fidelity Advisor
Emerging Asia Fund, Inc.
William Ebsworth Vice President Chief Investment Officer, Fidelity
Investments
^ Fidelity Investments (Hong Kong) (Hong Kong)
(1991-present); Director,
7B Nicholson Tower ^ Fidelity Investments Management (Hong
^ Tower 4 Kong) Ltd.; Research Director, Fidelity
^ 109 Repulse Bay Road Investments ^ ( Hong Kong)
(1990-1991); Fund
Hong Kong Manager, Fidelity Investments (Boston and Tokyo)
(1986-1990); Vice President of Fidelity Advisor Emerging Asia Fund, Inc.
^ Billy W. Wilder Vice President ^ Director of
Research, Fidelity Management &
Fidelity Management & Research (Far East) (1992-present); Director
Research (Far East) of Research and General Manager, Schroder
Shiroyama JT Mori Building Securities (Japan), Ltd. (1988-1992);
Senior
19th Floor Analyst, Schroder Securities (Japan), Ltd.
4-3-1 Toronomon Minatu-ku (1986-1988); Manager, Impedance Analysis
Tokyo 105 Japan Equipment Marketing, Yokogawa-Hewlett-Packard, Ltd.
(1979-1986).
Arthur S. Loring Secretary Senior Vice President and General Counsel of
^ Fidelity Investments FMR; Vice President - Legal of FMR
^ 82 Devonshire Stree t Corp.; Vice President and Clerk of
Fidelity
^ Mail Stop F5C Distributors Corporation; Secretary of all
Boston, MA 02109 other registered management investment companies
managed by FMR.
Gary L. French Treasurer Treasurer of all other registered management
^ Fidelity Investments investment companies managed by FMR;
^ 82 Devonshire Street Senior Vice President, Fund
Accounting,
Mail Stop D8 Fidelity Accounting & Custody Services Co.
Boston, MA 02109 ^ (1991); Vice President, Fund Accounting,
Fidelity Accounting & Custody Services Co. (1990); Senior Vice President,
Chief Financial and Operations Officer, Huntington Advisers, Inc.
(1985-1990).
Stuart E. Fross Assistant Secretary An employee of FMR Corp. ^
(1990-present) ;
^ Fidelity Investments Associate, Dechert Price & Rhoads
(law firm)
^ 82 Devonshire Street (1987-1990) ; Assistant Secretary of
^ Fidelity
^ Mail Stop F5H Advisor Emerging Asia Fund, Inc.
Boston, MA 02109
John Costello Assistant Treasurer Assistant Treasurer of all other
registered
^ Fidelity Investments management investment companies managed
^ 82 Devonshire Street by FMR and an employee of FMR ^ Co.
Mail Stop D8
Boston, MA 02109
Leonard M. Rush Assistant Treasurer An employee of FMR ^ Co.
Fidelity Investments
82 Devonshire Street
Mail Stop ^ D8
Boston, MA 02109
____________________
* Director who is an "interested person" of the Fund within the meaning of
the 1940 Act.
Directors who are not "interested persons" (as defined in the 1940 Act) of
the Investment Manager, the Investment Adviser or the Sub-Adviser will be
paid a fee of $7,000 per year, plus up to $1,500 for every meeting of the
Board attended and $1,000 as an annual committee meeting fee. All
directors will be reimbursed for travel and out-of-pocket expenses incurred
in connection with meetings of the Board of Directors.
The officers of the Fund conduct and supervise the daily business
operations of the Fund, while the directors, in addition to their functions
set forth elsewhere under "Management of the Fund," review such actions and
decide on general policy.
The Fund also has an Audit Committee composed currently of Messrs. ^
van den Hoven, Witham and Yunich.
^ In addition, at the Fund's first annual stockholders meeting, the
Board of Directors will be ^ classified into three classes, each
^ with a term of three years with only one class of directors
standing for election in any year. ^ Such classification may prevent
replacement of a majority of the directors for up to a two-year period
while the classification is in effect. Commencing on the date of the
annual meeting of stockholders in the year 2000, the Board of Directors
will no longer be divided into classes and each director will stand for
election at such meeting and at each annual meeting of stockholders held
thereafter.
The Articles of Incorporation and By-Laws of the Fund provide that the
Fund will indemnify its directors and officers and will indemnify employees
or agents of the Fund against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Fund to the fullest extent permitted by law. Under
Maryland law, a corporation may indemnify any director or officer made a
party to any proceeding by reason of service in that capacity unless it is
established that (1) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (A) was committed
in bad faith or (B) was the result of active and deliberate dishonesty; (2)
the director or officer actually received an improper personal benefit in
money, property or services; or (3) in the case of any criminal proceeding,
the director or officer had reasonable cause to believe that the act or
omission was unlawful. In addition, the Fund's Articles of Incorporation,
^ provide that the Fund's directors and officers will not be liable
to shareholders for money damages, except in limited instances. Under
Maryland law, a corporation may restrict or limit the liability of
directors or officers to the corporation or its stockholders for money
damages, except to the extent that (1) it is proved that the person
actually received an improper benefit or profit in money, property, or
services, or (2) a judgment or other final adjudication adverse to the
person is entered in a proceeding based on a finding in the proceeding that
the person's action, or failure to act, was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated
in the proceeding. However, nothing in the Articles of Incorporation, ^
or By-Laws of the Fund protects or indemnifies a director, officer,
employee or agent against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
The Fund's Articles of Incorporation and By-Laws provide that the Fund's
Board of Directors has the sole power to adopt, alter or repeal the Fund's
By-Laws.
INVESTMENT MANAGER, INVESTMENT ADVISER AND SUB-ADVISER
The Investment Manager is Fidelity Management & Research Company.
Pursuant to a management agreement (the "Management Agreement") between the
Fund and the Investment Manager, the Investment Manager will supervise the
Fund's investment program. The Investment Manager will consult with the
Investment Adviser and the Sub-Adviser on a regular basis regarding the
Investment Adviser's and the Sub-Adviser's decisions concerning the
purchase, sale or holding of particular securities. In addition to the
foregoing, the Investment Manager will monitor the performance of the
Fund's outside service providers, including the Fund's administrator,
transfer agent and custodian. The Investment Manager will pay the
reasonable salaries and expenses of such of the Fund's officers and
employees and any fees and expenses of such of the Fund's directors who are
directors, officers or employees of the Investment Manager, except that the
Fund may bear travel expenses or an appropriate portion thereof of
directors and officers of the Fund who are directors, officers or employees
of the Investment Manager to the extent that such expenses relate to
attendance at meetings of the Board of Directors or any committees thereof.
Pursuant to an investment advisory agreement (the "Advisory Agreement")
among the Investment Manager, the Investment Adviser and the Fund, the
Investment Adviser is responsible on a day-to-day basis for investing the
Fund's portfolio in accordance with its investment objective, policies and
limitations. The Investment Adviser has discretion over investment
decisions for the Fund and, in that connection, will place purchase and
sale orders for the Fund's portfolio securities. The Advisory Agreement
authorizes delegation of these responsibilities to the Sub-Adviser.
Pursuant to a Sub-Advisory Agreement (the "Sub-Advisory Agreement"), the
Investment Adviser has delegated certain of its
responsibilities for the day-to-day management of the Fund to Fidelity
Investments Japan Limited (the "Sub-Adviser") which will manage the Fund's
portfolio through its Tokyo office. Edward Bang will be primarily
responsible for the day-to-day management of the Fund's portfolio. Mr.
Bang will work with a team of professionals in Japan in managing the Fund's
portfolio. ^ Edward S.J. Bang has served as a Korean analyst for
various Fidelity funds since September 1993. He currently oversees
approximately U.S.$290 million of Korean equities for such funds. Mr. Bang
joined Fidelity Investments in August 1991, after graduating from the
Wharton School, University of Pennsylvania. Mr. Bang was initially a
senior analyst covering four sectors in the Japanese stock market. In
September 1993, he was assigned to cover the Korean stock market. Prior to
studying at Wharton and joining Fidelity Investments, Mr. Bang worked at
The Boston Company's Institutional Investors Group, managing pension
portfolios in the U.S. stock market. In addition, the Investment
Adviser will make available research and statistical data to the Fund. The
Investment Adviser and the Sub-Adviser will pay the reasonable salaries and
expenses of such of the Fund's officers and employees and any fees and
expenses of such of the Fund's directors who are directors, officers or
employees of the Investment Adviser or the Sub-Adviser, except that the
Fund may bear travel expenses or an appropriate portion thereof of
directors and officers of the Fund who are directors, officers or employees
of the Investment Adviser or the Sub-Adviser to the extent that such
expenses relate to attendance at meetings of the Board of Directors or any
committees thereof.
INVESTMENT MANAGER. Fidelity Management & Research Company will act as
Investment Manager of the Fund. The Fidelity investment management
organization was established in 1946. Today, the Fidelity organization is
the largest mutual fund company in the United States, and is known as an
innovative provider of high quality financial services to individuals and
institutions. In addition to its mutual fund business, the Fidelity
organization operates one of the leading discount brokerage firms in the
United States, Fidelity Brokerage Services, Inc. As of December 31, 1993,
the Investment Manager and its affiliates had over $270 billion under
management, of which more than $33 billion was invested in non-U.S.
securities (including over $13 billion in Asian securities , over $____
billion in Korean securities and over $5 billion managed from Asian
offices). The Fidelity organization employs over 375 investment
professionals worldwide. The Investment Manager also manages the Fidelity
Advisor Emerging Asia Fund, Inc., a closed-end investment company.
The Investment Manager, together with the Investment Adviser, the
Sub-Adviser and its other affiliates, has extensive research capabilities
within the Asian region, and maintains offices in Hong Kong, Singapore and
Tokyo which are staffed by [28] investment professionals. The Sub-Adviser,
through its Tokyo office researches and screens for investment potential in
Korean Issuers through management contacts and on-site visits. In 1993,
Fidelity conducted 179 company visits in Korea and contacted 38 Korean
companies.
FMR Corp. is the ultimate parent company of the Investment Manager.
Through ownership of voting common stock, members of the Edward C. Johnson
3d^ family form a controlling group with respect to FMR Corp. Changes may
occur in the Johnson family ^ group, through death or disability, which
would result in changes in each individual family member's holding of FMR
Corp.^ stock. Such changes could result in one or more family members
becoming holders of over 25% of such stock. FMR Corp. has received an
opinion of special counsel that changes in the composition of the Johnson
family group under these circumstances would not result in the termination
of the Fund's management or distribution contracts and, accordingly, would
not require a shareholder vote to continue operation under those
contracts.
The Investment Manager's main offices are located at 82 Devonshire Street,
Boston, Massachusetts 02109.
INVESTMENT ADVISER. Fidelity International Investment Advisors, the
Fund's Investment Adviser and an affiliate of the Investment Manager, has
delegated certain of its responsibilities for providing
discretionary portfolio management services to the Sub-Adviser. The
Investment Adviser may, however, elect to manage the portfolios directly
through the Investment Adviser's office in Hong Kong. The Investment
Adviser is an investment adviser registered under the Investment Advisers
Act of 1940 and was organized in 1983 under the laws of Bermuda. The
Investment Adviser primarily provides investment advisory services to
non-U.S. and U.S. investment companies and institutional investors
investing throughout the world. The Investment Adviser is a 98% owned
subsidiary of Fidelity International Limited ("FIL"). The Investment
Adviser's and FIL's main offices are located at Pembroke Hall, 42 Crow
Lane, Pembroke, Bermuda.
FIL is a Bermuda company formed in 1968 which primarily provides
investment advisory services to non-U.S. investment companies and
institutional investors investing in securities of issuers throughout the
world. ^ More than 25% of the voting stock of FIL is owned directly
or indirectly by Edward C. Johnson 3d and trusts for the benefits of
Johnson family members.
SUB-ADVISER. Fidelity Investments Japan Limited ("FIJ"), the Sub-Adviser,
will, acting upon delegation by the Investment Adviser, provide advisory
services concerning the Fund's assets invested in Korean and other
securities and will be primarily responsible for the day-to-day management
of the Fund's portfolio. The Sub-Adviser is an affiliate of the Investment
Manager and the Investment Adviser and is registered as an investment
adviser under the Investment Advisers Act of 1940. The Sub-Adviser was
formed ^ on November 17, 1986 under the laws of Japan and its main
offices are located at 19th Floor, Shiroyama JT Mori Building, 4-3-1
Toronomon Minatu-ku, Tokyo 105, Japan. It is a wholly-owned subsidiary of
FIL.
COMPENSATION AND EXPENSES
As compensation for its services, the Investment Manager will receive from
the Fund a monthly fee at an annual rate of 1.00% of the Fund's average
daily net assets. The Investment Adviser will receive from the Investment
Manager 60% of the fees paid by the Fund to the Investment Manager. The
Sub-Adviser will receive from the Investment Adviser a fee equal to 50% of
the fee paid to the Investment Adviser with respect to any assets managed
by the Sub-Adviser on a discretionary basis and 30% of the fee paid to the
Investment Adviser with respect to any assets managed by the Sub-Adviser on
a non-discretionary basis. Currently, the Sub-Adviser has been delegated
full discretion to manage the entire portfolio.
Except for the expenses borne by the Investment Manager, the Investment
Adviser or the Sub-Adviser pursuant to the Management Agreement, the
Advisory Agreement and the Sub-Advisory Agreement, the Fund will pay or
cause to be paid all of its expenses including, among other things:
organizational and offering expenses (which will include out-of-pocket
expenses, but not overhead or employee costs, of the Investment Manager,
the Investment Adviser and the Sub-Adviser); expenses for legal, accounting
and auditing services; taxes and governmental fees; dues and expenses
incurred in connection with membership in investment company organizations;
fees and expenses incurred in connection with listing the Fund's shares on
any stock exchange; costs of printing and distributing shareholder reports,
proxy materials, prospectuses, stock certificates and distributions of
dividends; charges of the Fund's custodians, sub-custodians, registrars,
transfer agents, dividend disbursing agents and dividend reinvestment plan
agents; payment for portfolio pricing services to a pricing agent, if any;
registration and filing fees of the SEC; expenses of registering or
qualifying securities of the Fund for sale in the various states; freight
and other charges in connection with the shipment of the Fund's portfolio
securities; fees and expenses of non-interested directors; costs of
shareholders' meetings; insurance; interest; brokerage costs; and
litigation and other extraordinary or nonrecurring expenses.
DURATION AND TERMINATION; NON-EXCLUSIVE SERVICES
Unless earlier terminated as described below, each of the Management
Agreement, the Advisory Agreement and the Sub-Advisory Agreement will
remain in effect until , 1996 and from year to year
thereafter if approved annually (i) by a majority of the non-interested
directors of the Fund and (ii) by the Board of Directors of the Fund or by
a majority of the outstanding voting securities of the Fund. The
Management Agreement may be terminated upon 60 days' written notice without
penalty by the Fund's Board of Directors or by vote of a majority of the
outstanding voting securities of the Fund or by the Investment Manager and
will terminate in the event it is assigned (as defined in the 1940 Act).
The Advisory Agreement may be terminated upon 60 days' written notice
without penalty by the Fund's Board of Directors or by vote of a majority
of the outstanding voting securities of the Fund or by the Investment
Manager and will terminate in the event it is assigned (as defined in the
1940 Act). The Sub-Advisory Agreement may be terminated upon 60 days
written notice without penalty by the Fund's Board of Directors or by vote
of a majority of the outstanding voting securities of the Fund or by the
Investment Adviser or the Sub-Adviser and will terminate in the event it is
assigned (as defined in the 1940 Act).
The services of the Investment Manager, the Investment Adviser and the
Sub-Adviser are not deemed to be exclusive, and nothing in the relevant
service agreements will prevent any of them or their affiliates from
providing similar services to other investment companies and other clients
(whether or not their investment objectives and policies are similar to
those of the Fund) or from engaging in other activities.
ADMINISTRATION
Fidelity Service Co. ("Service"), a division of FMR Corp., will serve as
the Fund's administrator pursuant to an agreement with the Fund (the
"Administration Agreement"). As compensation for its services, Service
will receive from the Fund monthly fees at an annual rate of .20% of the
Fund's average daily net assets. Service is located at 82 Devonshire
Street, Boston, MA 02109.
Service performs various administrative services, including providing the
Fund with the services of persons to perform administrative and clerical
functions, maintenance of the Fund's books and records, pricing and
securities lending services, preparation of various filings, reports,
statements and returns filed with government authorities, and preparation
of financial information for the Fund's proxy statements and semiannual and
annual reports to shareholders.
PORTFOLIO TRANSACTIONS
The Fund has no obligation to deal with any brokers or dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Fund's Board of Directors, the Investment Adviser has
delegated to the Sub-Adviser primary responsibility for the Fund's
portfolio decisions and the placing of the Fund's portfolio transactions.
All orders for the purchase or sale of portfolio securities will be placed
on behalf of the Fund by the Sub-Adviser pursuant to authority contained in
the Sub-Advisory Agreement or by the Investment Adviser pursuant to
authority contained in the Investment Advisory Agreement . The
Investment Adviser and the Sub-Adviser also will be responsible for the
placement of transaction orders for other investment companies and accounts
for which either of them or their affiliates act as investment adviser. In
selecting broker-dealers, subject to applicable limitations of the federal
securities laws, the Investment Adviser and the Sub-Adviser will consider
various relevant factors, including, but not limited to the size and type
of the transaction; the nature and character of the markets for the
security to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the broker-dealer firm; the
broker-dealer's execution services rendered on a continuing basis; the
reasonableness of any commissions and arrangements for payment of Fund
expenses. The Fund anticipates that its portfolio transactions
involving securities of companies domiciled in Korea will be conducted
primarily on the KSE and in foreign OTC transactions. Commissions for
foreign investments traded on ^ the KSE will generally be higher
than for U.S. investments and may not be subject to negotiation.
The Fund may execute portfolio transactions with broker-dealers who
provide research and execution services to the Fund or other accounts over
which the Investment Adviser, the Sub-Adviser or their affiliates exercise
investment discretion. Such services may include advice concerning the
value of securities; the advisability of investing in, purchasing, or
selling securities; the availability of securities or the purchasers or
sellers of securities; furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy,
and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement).
The selection of such broker-dealers generally is made by the Investment
Adviser (to the extent possible consistent with execution considerations)
in accordance with a ranking of broker-dealers determined periodically by
the Sub-Adviser's investment staff based upon its assessment of the quality
of research and execution services provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the Fund may be useful to the Investment Adviser or the
Sub-Adviser in rendering investment management services to the Fund or
their other clients, and conversely, such information provided by
broker-dealers who have executed transaction orders on behalf of other
Investment Adviser or Sub-Adviser clients may be useful to the Investment
Adviser or Sub-Adviser in carrying out their obligations to the Fund. The
receipt of such research will not reduce the Investment Adviser's or the
Sub-Adviser's normal independent research activities; however, it will
enable the Investment Adviser and the Sub-Adviser to avoid the additional
expenses that could be incurred if the Investment Adviser and the
Sub-Adviser tried to develop comparable information through their own
efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and execution services. In order to cause
the Fund to pay such higher commissions, the Investment Adviser or the
Sub-Adviser must determine in good faith that such commissions are
reasonable in relation to the value of the brokerage and research services
provided by such executing broker-dealers, viewed in terms of a particular
transaction or the Investment Adviser's or the Sub-Adviser's overall
responsibilities to the Fund and their other clients. In reaching this
determination, the Investment Adviser and the Sub-Adviser will not attempt
to place a specific dollar value on the brokerage and research services
provided, or to determine what portion of the compensation should be
related to those services.
The Investment Adviser and the Sub-Adviser are authorized to use research
services provided by and to place portfolio transactions with brokerage
firms that have provided assistance in the distribution of shares of the
Fund or shares of other Fidelity funds to the extent permitted by law. The
Investment Adviser and the Sub-Adviser may use research services provided
by and place agency transactions with Fidelity Brokerage Services, Inc.
("FBSI") and Fidelity Brokerage Services, Ltd. ("FBSL"), subsidiaries of
FMR Corp., if the commissions are fair, reasonable, and comparable to
commissions charged by non-affiliated, qualified brokerage firms for
similar services.
The Investment Adviser and the Sub-Adviser may allocate brokerage
transactions to the Fund's custodians, acting as a broker-dealer, or the
other broker-dealers who have entered into arrangements with the
Investment Manager, the Investment Adviser or the Sub-Adviser under which
the broker-dealer allocates a portion of the commissions paid by the Fund
toward payment of the Fund's expenses, such as transfer agency fees or
custodian fees. The transaction quality must, however, be comparable to
those of other qualified broker-dealers and the commissions comparable
to those of other broker-dealers, when the broker-dealer will allocate a
portion of the commissions paid to payment of the Fund's expenses.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members of
national securities exchanges from executing exchange transactions for
accounts which they or their affiliates manage, except if certain
requirements are satisfied. Pursuant to such requirements, the Board of
Directors has authorized FBSI to effect Fund portfolio transactions on
national securities exchanges in accordance with approved procedures and
applicable SEC rules.
The Board of Directors periodically will review the Investment Adviser's
and the Sub-Adviser's performance of their responsibilities in connection
with the placement of portfolio transactions on behalf of the Fund and
review the commissions paid by the Fund over representative periods of time
to determine if they are reasonable in relation to the benefits to the
Fund.
The Investment Adviser may, in its sole discretion and without a
shareholder vote, terminate its delegation to the Sub-Adviser of some or
all of its responsibilities with respect to portfolio transactions. If
this were to occur the Investment Adviser would perform these
responsibilities directly under the Investment Advisory Agreemen t in
the manner described herein.
From time to time the Board of Directors will review whether the recapture
for the benefit of the Fund of some portion of the brokerage commissions or
similar fees paid by the Fund on portfolio transactions is legally
permissible and advisable. The Fund seeks to recapture soliciting
broker-dealer fees on the tender of portfolio securities, but at present no
other recapture arrangements are in effect. The Board of Directors intends
to continue to review whether recapture opportunities are available and are
legally permissible and, if so, to determine in the exercise of their
business judgment, whether it would be advisable for the Fund to seek such
recapture.
Investment decisions for the Fund are made independently from those for
other funds and accounts advised or managed by the Investment Adviser or
the Sub-Adviser. When two or more funds or accounts managed by the
Investment Adviser or the Sub-Adviser are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts are allocated
in accordance with a formula considered by the Investment Adviser or the
Sub-Adviser to be equitable to each fund. In some cases this system could
adversely affect the size of the position obtained for or disposed of by
the Fund and could have a detrimental effect on the price or value of a
security as far as the Fund is concerned. In other cases, however, the
ability of the Fund to participate in volume transactions will produce
better executions and prices for the Fund. In addition, because of
different investment objectives, a particular security may be purchased for
one or more funds or accounts when one or more funds or accounts are
selling the same security. It is the current opinion of the Board of
Directors that the desirability of retaining FIIA and FIJ as Investment
Adviser and Sub-Adviser, respectively, to the Fund outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
It is expected that the annual portfolio turnover rate of the Fund will
not exceed [150%]. The portfolio turnover rate is calculated by dividing
the lesser of sales or purchases of portfolio securities by the average
monthly value of the Fund's portfolio securities. For purposes of this
calculation, portfolio securities exclude all securities having a maturity
when purchased of one year or less.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN
The Fund intends to distribute annually to shareholders substantially all
of its net investment income, and to distribute any net realized capital
gains at least annually. Net investment income for this purpose is income
other than net realized long- and short-term capital gains net of expenses.
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
shareholders whose shares of Common Stock are registered in their own names
may elect to have all distributions automatically reinvested by State
Street Bank and Trust Company (the "Plan Agent") in Fund shares pursuant to
the Plan. Shareholders who do not elect to participate in the Plan will
receive distributions in cash paid by check in dollars mailed directly to
the shareholder by State Street Bank and Trust Company, as dividend paying
agent. In the case of shareholders, such as banks, brokers or nominees,
that hold shares for others who are beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from
time to time by the shareholders as representing the total amount
registered in such shareholders' names and held for the account of
beneficial owners that have not elected to receive distributions in cash.
Investors that own shares registered in the name of a bank, broker or other
nominee should consult with such nominee as to participation in the Plan
through such nominee, and may be required to have their shares registered
in their own names in order to participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the directors of the Fund declare an income dividend or a capital
gains distribution payable either in the Fund's Common Stock or in cash,
nonparticipants in the Plan will receive cash and participants in the Plan
will receive Common Stock, to be issued by the Fund or purchased by the
Plan Agent in the open market, as provided below. If the market price per
share on the valuation date equals or exceeds net asset value per share on
that date, the Fund will issue new shares to participants at net asset
value; provided, however, if the net asset value is less than 95% of the
market price on the valuation date, then such shares will be issued at 95%
of the market price. The valuation date will be the dividend or
distribution payment date or, if that date is not a New York Stock Exchange
trading day, the next preceding trading day. If net asset value exceeds
the market price of Fund shares at such time, or if the Fund should declare
an income dividend or capital gains distribution payable only in cash, the
Plan Agent will, as agent for the participants, buy Fund shares in the open
market, on the New York Stock Exchange or elsewhere, for the participants'
accounts on, or shortly after, the payment date. If, before the Plan Agent
has completed its purchases, the market price exceeds the net asset value
of a Fund share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the distribution had been paid in
shares issued by the Fund on the dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the Plan
provides that if the Plan Agent is unable to invest the full dividend
amount in open-market purchases during the purchase period or if the market
discount shifts to a market premium during the purchase period, the Plan
Agent will cease making open-market purchases and will receive the
uninvested portion of the dividend amount in newly issued shares at the
close of business on the last purchase date.
Participants have the option of making additional cash payments to the
Plan Agent, annually, in any amount from $100 to $3,000, for investment in
the Fund's Common Stock. The Plan Agent will use all such funds received
from participants to purchase Fund shares in the open market on or about
February 15. Any voluntary cash payment received more than 30 days prior
to this date will be returned by the Plan Agent, and interest will not be
paid on any invested cash payment. To avoid unnecessary cash
accumulations, and also to allow ample time for receipt and processing by
the Plan Agent, it is suggested that participants send in voluntary cash
payments to be received by the Plan Agent approximately ten days before an
applicable purchase date specified above. A participant may withdraw a
voluntary cash payment by written notice, if the notice is received by the
Plan Agent not less than 48 hours before such payment is to be invested.
The Plan Agent maintains all shareholder accounts in the Plan and
furnishes written confirmations of all transactions in an account,
including information needed by shareholders for personal and tax records.
Shares in the account of each Plan participant will be held by the Plan
Agent in the name of the participant, and each shareholder's proxy will
include those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions or voluntary cash payments. The Plan Agent's fees for
the reinvestment of dividends and capital gains distributions and voluntary
cash payments will be paid by the Fund. There will be no brokerage charges
with respect to shares issued directly by the Fund as a result of dividends
or capital gains distributions payable either in stock or in cash.
However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases
in connection with the reinvestment of dividends and capital gains
distributions and voluntary cash payments made by the participant.
Brokerage charges for purchasing small amounts of stock for individual
accounts through the Plan are expected to be less than the usual brokerage
charges for such transactions, because the Plan Agent will be purchasing
stock for all participants in blocks and prorating the lower commission
thus attainable.
The receipt of dividends and distributions under the Plan will not relieve
participants of any income tax which may be payable on such dividends or
distributions. See "Taxation."
Experience under the Plan may indicate that changes in the Plan are
desirable. Accordingly, the Fund and the Plan Agent reserve the right to
terminate the Plan as applied to any voluntary cash payments made and any
dividend or distribution paid subsequent to notice of the termination sent
to members of the Plan at least 30 days before the record date for such
dividend or distribution. The Plan also may be amended by the Fund or the
Plan Agent, but (except when necessary or appropriate to comply with
applicable law, rules or policies of a regulatory authority) only by at
least 30 days' written notice to participants in the Plan. All
correspondence concerning the Plan should be directed to the Plan Agent at
Two Heritage Drive, Quincy, Massachusetts 02171.
TAXATION
U.S. FEDERAL INCOME TAXES
The Fund intends to elect to qualify as a regulated investment company
under the Code. To so qualify the Fund must, among other things: (a)
derive at least 90% of its gross income from dividends, interest, payment
with respect to securities loans, gains from the sale or other disposition
of stock or securities and gains from the sale or other disposition of
foreign currencies, or other income (including gains from options, futures
contracts and forward contracts) derived with respect to the Fund's
business of investing in stocks, securities or currencies; (b) derive less
than 30% of its gross income from the sale or other disposition of the
following assets held for less than three months - (i) stock and
securities, (ii) options, futures and forward contracts (other than
options, futures and forward contracts on foreign currencies), and (iii)
foreign currencies (and options, futures and forward contracts on foreign
currencies) which are not directly related to the Fund's principal business
of investing in stocks and securities (or options and futures with respect
to stock or securities); and (c) diversify its holdings so that, at the end
of each quarter, (i) at least 50% of the value of the Fund's total assets
is represented by cash and cash items, U.S. Government securities,
securities of other regulated investment companies, and other securities,
with such other securities limited in respect of any one issuer to an
amount not greater in value than 5% of the Fund's total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of the Fund's total assets is invested in
the securities (other than U.S. Government securities or securities of
other regulated investment companies) of any one issuer or of any two or
more issuers that the Fund controls and that are determined to be engaged
in the same business or similar or related businesses.
As a regulated investment company, the Fund will not be subject to U.S.
federal income tax on its investment company taxable income that it
distributes to its shareholders, provided that at least 90% of its
investment company taxable income for the taxable year is distributed to
its shareholders; however, the Fund will be subject to tax on its income
and gains to the extent that it does not distribute to its shareholders an
amount equal to such income and gains. See "Passive Foreign Investment
Companies" below. Investment company taxable income includes dividends,
interest and net short-term capital gains in excess of net long-term
capital losses, but does not include net long-term capital gains in excess
of net short-term capital losses. The Fund intends to distribute annually
to its shareholders substantially all of its investment company taxable
income. If necessary, the Fund may borrow money temporarily or liquidate
assets to make such distributions. Dividend distributions of investment
company taxable income (including distributions from short-term capital
gains) are taxable to a U.S. shareholder as ordinary income to the extent
of the Fund's current and accumulated earnings and profits, whether paid in
cash or in shares. Since the Fund will not invest in the stock of domestic
corporations, distributions to corporate shareholders of the Fund will not
be entitled to the deduction for dividends received by corporations. If
the Fund fails to satisfy the 90% distribution requirement or fails to
qualify as a regulated investment company in any taxable year, it will be
subject to tax in such year on all of its taxable income, whether or not
the Fund makes any distributions to its shareholders.
As a regulated investment company, the Fund also will not be subject to
U.S. federal income tax on its net long-term capital gains, if any, that it
distributes to its shareholders. If the Fund retains for reinvestment or
otherwise an amount of such net long-term capital gains, it will be subject
to a tax of up to 35% of the amount retained. The Board of Directors of
the Fund will determine at least once a year whether to distribute any net
long-term capital gains in excess of net short-term capital losses and
capital loss carryovers from prior years. The Fund expects to designate
amounts retained as undistributed capital gains in a notice to its
shareholders who, if subject to U.S. federal income taxation on long-term
capital gains, (a) will be required to include in income for U.S. federal
income tax purposes, as long-term capital gains, their proportionate shares
of the undistributed amount, and (b) will be entitled to credit against
their U.S. federal income tax liabilities their proportionate shares of the
tax paid by the Fund on the undistributed amount and to claim refunds to
the extent that their credits exceed their liabilities. For U.S. federal
income tax purposes, the basis of shares owned by a shareholder of the Fund
will be increased by an amount equal to 65% of the amount of undistributed
capital gains included in the shareholder's income. Distributions of net
long-term capital gains, if any, by the Fund are taxable to its
shareholders as long-term capital gains whether paid in cash or in shares
and regardless of how long the shareholder has held the Fund's shares.
Such distributions of net long-term capital gains are not eligible for the
dividends received deduction. Under the Code, net long-term capital gains
will be taxed at a rate no greater than 28% for individuals and 35% for
corporations. Shareholders will be notified annually as to the U.S.
federal income tax status of their dividends and distributions.
Shareholders receiving dividends or distributions in the form of
additional shares pursuant to the Plan should be treated for U.S. 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
equal to such amount.
If the net asset value of shares is reduced below a shareholder's cost as
a result of a distribution by the Fund, the distribution will be taxable
even if it, in effect, represents a return of invested capital. Investors
considering buying shares just prior to a dividend or capital gain
distribution payment date should be aware that, although the price of
shares purchased at that time may reflect the amount of the forthcoming
distribution, those who purchase just prior to the record date for a
distribution will receive a distribution which will be taxable to them.
The amount of capital gains realized and distributed (which from an
investment standpoint may represent a partial return of capital rather than
income) in any given year will be the result of investment performance,
among other things, and can be expected to vary from year to year.
If the Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of
the later of (a) the date such stock became ex-dividend with respect to
such dividends (i.e., the date on which a buyer of the stock would not be
entitled to receive the declared, but unpaid, dividends) or (b) the date
the Fund acquired such stock. Accordingly, in order to satisfy its income
distribution requirements, the Fund may be required to pay dividends based
on anticipated earnings, and shareholders may receive dividends in an
earlier year than would otherwise be the case.
Under the Code, the Fund may be subject to a 4% excise tax on a portion of
its undistributed income. To avoid the tax, the Fund must distribute
annually at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year and at least 98% of its
capital gain net income for the 12-month period ending, as a general rule,
on October 31 of the calendar year. For this purpose, any income or gain
retained by the Fund that is subject to corporate income tax will be
treated as having been distributed at year-end. In addition, the minimum
amounts that must be distributed in any year to avoid the excise tax will
be increased or decreased to reflect any under-distribution or
over-distribution, as the case may be, in the previous year. For a
distribution to qualify under the foregoing test, the distribution
generally must be declared and paid during the year. Any dividend declared
by the Fund in October, November or December ^ of any year and
payable to shareholders of record on a specified date in such a month shall
be deemed to have been received by each shareholder on December 31 of such
year and to have been paid by the Fund not later than December 31 of such
year, provided that such dividend is actually paid by the Fund during
January of the following year.
The Fund will maintain accounts and calculate income by reference to the
U.S. dollar for U.S. federal income tax purposes. If the Fund's dividends
exceed its taxable income in any year, which is sometimes the result of
currency related losses, all or a portion of the Fund's dividends may be a
return of capital to shareholders for tax purposes. Furthermore, exchange
control regulations may restrict the ability of the Fund to repatriate
investment income or the proceeds of sales of securities. These
restrictions and limitations may limit the Fund's ability to make
sufficient distributions to satisfy the 90% distribution requirement and
avoid the 4% excise tax.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by the
Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund, defer Fund losses, and affect
the determination of whether capital gains and losses are characterized as
long-term or short-term capital gains or losses. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. These provisions also may require the Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if
they were closed out) which may cause the Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to
satisfy the 90% and 98% distribution requirements for avoiding income and
excise taxes.
The Fund may make investments that accrue income that is not matched by a
current receipt of cash by the Fund, such as investments in certain
obligations having original issue discount (i.e., an amount equal to the
excess of the stated redemption price of the security at maturity over its
issue price), or market discount (i.e., an amount equal to the excess of
the stated redemption price of the security at maturity over its basis
immediately after it was acquired) if the Fund elects to accrue market
discount on a current basis. In addition, income may continue to accrue
for federal income tax purposes with respect to a non-performing
investment. Any of the foregoing income would be treated as income earned
by the Fund and therefore would be subject to the distribution requirements
of the Code. Because such income may not be matched by a concurrent
receipt of cash to the Fund, the Fund may be required to dispose of other
securities to be able to make distributions to its investors. See the
discussion of distribution requirements above. The extent to which the
Fund may liquidate securities at a gain may be limited by the 30%
limitation discussed above.
Upon the sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending upon the amount realized and the
shareholder's basis in the shares. Such gain or loss will be treated as a
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term if the shareholder's holding period for the
shares is more than 12 months and otherwise will be short-term. Any loss
realized on a sale or exchange will be disallowed to the extent that the
shares disposed of are replaced (including replacement through the
reinvesting of dividends and capital gains distributions in the Fund)
within a period of 61 days beginning 30 days before and ending 30 days
after the disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on the sale of Fund shares held by the
shareholder for six months or less will be treated for federal income tax
purposes as a long-term capital loss to the extent of any distributions of
long-term capital gains received by the shareholder with respect to such
shares.
An amount received by a shareholder from the Fund in exchange for shares
of the Fund (pursuant to a repurchase of shares in a tender offer or
otherwise) generally will be treated as a payment in exchange for the
shares tendered, which may result in taxable gain or loss as described
above. However, if the amount received by a shareholder exceeds the fair
market value of the shares tendered, or if a shareholder does not tender
all of the shares of the Fund owned or deemed to be owned by the
shareholder, all or a portion of the amount received may be treated as a
dividend taxable as ordinary income or as a return of capital. In
addition, if a tender offer is made, shareholders who do not tender their
shares could be deemed, under certain circumstances, to have received a
taxable distribution as a result of their increased proportionate interest
in the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i)
the shareholder fails to furnish the Fund with the shareholder's correct
taxpayer identification number (ii) the IRS notifies the Fund that the
shareholder has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (iii) when
required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding. Redemption proceeds may be subject to
withholding under the circumstances described in (i) above. Backup
withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be
credited against such shareholder's federal income tax liability.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund intends to make investments which may, for federal income tax
purposes, constitute investments in shares of foreign corporations. If the
Fund purchases shares in certain foreign passive investment entities
described in the Code as passive foreign investment companies ("PFIC"), the
Fund will be subject to U.S. federal income tax on a portion of any "excess
distribution" (the Fund's ratable share of distributions in any year that
exceeds 125% of the average annual distribution received by the Fund in the
three preceding years or the Fund's holding period, if shorter, and any
gain from the disposition of such shares), even if such income is
distributed as a taxable dividend by the Fund to its shareholders.
Additional charges in the nature of interest may be imposed on the Fund in
respect of deferred taxes arising from such "excess distributions." If the
Fund were to invest in a PFIC and elect to treat the PFIC as a "qualified
electing fund" under the Code (and if the PFIC were to comply with certain
reporting requirements), in lieu of the foregoing requirements the Fund
would be required to include in income each year its pro rata share of the
PFIC's ordinary earnings and net realized capital gains, whether or not
such amounts were actually distributed to the Fund. Such amounts would be
subject to the 90% and calendar year distribution requirements described
above.
Legislation pending in the U.S. Congress would unify and, in certain
cases, modify the anti-deferral rules contained in various provisions of
the Code, including the provisions dealing with PFICs, related to the
taxation of U.S. shareholders of foreign corporations. In the case of a
passive foreign company, as defined in the proposed legislation ("PFC"),
having "marketable stock," the proposed legislation would require U.S.
shareholders, such as the Fund, owning less than 25% of a PFC that is not
U.S.-controlled to mark-to-market the PFC stock annually, unless the
shareholders elected to include in income currently their proportionate
shares of the PFC's income and gain. Otherwise, U.S. shareholders would be
treated substantially the same as under current law. Special rules
applicable to mutual funds would classify as "marketable stock" all stock
in PFCs held by the Fund. It is unclear if or when the proposed
legislation will become law and if it is enacted, the form it will take.
Moreover, on April 1, 1992, proposed regulations of the IRS were published
providing a mark-to-market election for regulated investment companies that
would have effects similar to the proposed legislation. These regulations
would be effective for taxable years ending after promulgation of the
regulations as final regulations. The IRS subsequently issued a notice
indicating that final regulations will provide that regulated investment
companies may elect the mark-to-market election for tax years ending after
March 31, 1992 and before April 1, 1993. Whether and to what extent the
notice will apply to taxable years of the Fund is unclear.
FOREIGN TAX CREDITS
The Fund may be subject to certain taxes, including withholding taxes,
imposed by Korea or foreign countries with respect to its income and
capital gains. If the Fund qualifies as a regulated investment company, if
certain distribution requirements are satisfied and if more than 50% of the
value of the Fund's total assets at the close of any taxable year consists
of stock or securities of foreign corporations, which for this purpose may
include obligations of foreign governmental issuers, the Fund may elect,
for U.S. federal income tax purposes, to treat any foreign country's income
or withholding taxes paid by the Fund that can be treated as income taxes
under the U.S. income tax principles, as paid by its shareholders. The
Fund expects to qualify for and make this election. For any year that the
Fund makes such an election, each shareholder will be required to include
in its income an amount equal to its allocable share of such income taxes
paid by the Fund to a foreign country's government and shareholders will be
entitled, subject to certain limitations, to credit their portions of these
amounts against their U.S. federal income tax due, if any, or to deduct
their portions from their U.S. taxable income, if any. No deductions for
foreign taxes paid by the Fund may be claimed, however, by non-corporate
shareholders (including certain foreign shareholders described below) who
do not itemize deductions. Shareholders that are exempt from tax under
Section 501(a) of the Code, such as pension plans, generally will derive no
benefit from the Fund's election. However, such shareholders should not be
disadvantaged either because the amount of additional income they are
deemed to receive equal to their allocable share of such foreign countries'
income taxes paid by the Fund generally will not be subject to U.S. federal
income tax.
The amount of foreign taxes that may be credited against a shareholder's
U.S. federal income tax liability will generally be limited, however, to an
amount equal to the shareholder's U.S. federal income tax rate multiplied
by its foreign source taxable income. For this purpose, the Fund generally
expects that the capital gains it distributes, whether as dividends or
capital gains distributions, will not be treated as foreign source taxable
income. In addition, this limitation must be applied separately to certain
categories of foreign source income, one of which is foreign source
"passive income." For this purpose, foreign source "passive income"
includes dividends, interest, capital gains and certain foreign currency
gains. As a consequence, certain shareholders may not be able to claim a
foreign tax credit for the full amount of their proportionate share of
foreign taxes paid by the Fund. Each shareholder will be notified within
60 days after the close of the Fund's taxable year whether, pursuant to the
election described above, the foreign taxes paid by the Fund will be
treated as paid by its shareholders for that year and, if so, such
notification will designate (i) such shareholder's portion of the foreign
taxes paid to such country and (ii) the portion of the Fund's dividends and
distributions that represents income derived from sources within such
country.
FOREIGN SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a foreign
investor depends, in part, on whether the shareholder's income from the
Fund is "effectively connected" with a United States trade or business
carried on by the shareholder.
If the foreign investor is not a resident alien and the income from the
Fund is not effectively connected with a United States trade or business
carried on by the foreign investor, distributions of net investment income
and net realized short-term capital gains will be subject to a 30% (or
lower treaty rate) United States withholding tax. Furthermore, such
foreign investors may be subject to an increased United States tax on their
income resulting from the Fund's election (described above) to
"pass-through" amounts of foreign taxes paid by the Fund, but will not be
able to claim a credit or deduction in the United States with respect to
the foreign taxes treated as having been paid by them. Distributions of
net realized long-term capital gains, amounts retained by the Fund which
are designated as undistributed capital gains, and gains realized upon the
sale of shares of the Fund will not be subject to United States tax unless
a foreign investor who is a nonresident alien individual is physically
present in the United States for more than 182 days during the taxable year
and, in the case of a gain realized upon the sale of Fund shares, unless
(i) such gain is attributable to an office or fixed place of business in
the United States or (ii) such nonresident alien individual has a tax home
in the United States and such gain is not attributable to an office or
fixed place of business located outside the United States. However, a
determination by the Fund not to distribute long-term capital gains may
reduce a foreign investor's overall return from an investment in the Fund,
since the Fund will incur a United States federal tax liability with
respect to retained long-term capital gains, thereby reducing the amount of
cash held by the Fund that is available for distribution, and the foreign
investor may not be able to claim a credit or deduction with respect to
such taxes. In the case of a foreign investor who is a nonresident alien
individual, the Fund may be required to withhold U.S. federal income tax at
a rate of 31%, unless the foreign investor files an appropriate form
certifying under penalty of perjury as to his nonresident alien status.
If a foreign investor is a resident alien or if dividends or distributions
from the Fund are effectively connected with a United States trade or
business carried on by the foreign investor, dividends of net investment
income, distributions of net short-term and long-term capital gains,
amounts retained by the Fund that are designated as undistributed capital
gains and any gains realized upon the sale of shares of the Fund will be
subject to United States income tax at the rates applicable to United
States citizens or domestic corporations. If the income from the Fund is
effectively connected with a United States trade or business carried on by
a foreign investor that is a corporation, then such foreign investor also
may be subject to the 30% branch profits tax.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
in this section. Shareholders may be required to provide appropriate
documentation to establish their entitlement to the benefits of such a
treaty. Foreign investors are advised to consult their own tax advisers
with respect to (a) whether their income from the Fund is or is not
effectively connected with a United States trade or business carried on by
them (b) whether they may claim the benefits of an applicable tax treaty
and (c) any other tax consequences to them of an investment in the Fund.
OTHER TAXATION
Distributions also may be subject to state, local and foreign taxes
depending on each shareholder's particular position.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY
INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL
NATURE OF TAX CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT HIS OWN
TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO HIM OF
PARTICIPATION IN THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF STATE,
LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL OR OTHER TAX LAWS.
Ordinary income and capital gain dividends may also be subject to state
and local taxes.
KOREAN TAXES
^ The following ^ description of certain Korean tax
matters relating to the Fund and its shareholders ^ represents the
^ opinion of Shin & Kim, Korean counsel to the Fund.
^
Under current Korean law, ^ payments to ^ non-residents of Korea
(such as the Fund) by Korean corporations ^ in respect of
income are subject to ^ Korean withholding tax and capital
gains derived by non-residents of Korea (such as the Fund) with
respect to stock and securities of Korean corporations are subject to
withholding tax, unless exempted by relevant laws or tax treaties. More
specifically, dividends and interest will be subject to withholding tax at
the rate of 26.875% and capital gains (without deduction for capital
losses) will be subject to withholding tax equal to the lower of (i) 10.75%
of the gross sales proceeds, or (ii) if satisfactory evidence of
acquisition cost is produced, 26.875% of the difference between the gross
sales proceeds and the acquisition cost of the stock or security sold
(excluding any transaction charges, commissions, fees or taxes paid at the
time of acquisition).
The applicable withholding tax rate under the United States-Korea
Income Tax Treaty presently in effect (the "Treaty"), is generally 15%
( plus a resident tax of 7.5% of ^ such amount, or a total ^
of 16.125%) on dividends ^ paid to the Fund ^ by Korean
corporations ^, and generally ^ 12% (plus a resident tax of
7.5% of ^ such amount, or a total ^ of 12.9%) on interest paid to
the Fund ^ by Korean ^ corporations. Under the Treaty, no
withholding tax will be applicable to capital gains ^ realized
by the Fund ^ .
The reduced tax rate and exemption under the provisions of the ^
Treaty will not apply to the dividend, interest and capital gain
income derived by the Fund from Korean corporations ^ if both (i)
the Fund is ^, by reason of the existence of special measures under
United States federal income tax ^ law with respect to those types
of income ^ , subject to United States federal income tax
in an amount substantially less than the United Stated federal income
tax generally imposed on corporate profits ^ (Article 17(a) of the
Treaty) , and (ii) at least 25% of the Fund's outstanding shares are
^ held of record or otherwise determined to be owned, directly or
indirectly, by one or more persons who are not individual residents of the
United States ^ (Article 17(b) of the Treaty).
Questions have recently been raised as to whether the United States
regulated investment company provisions contained in the Code constitute
"special measures" for purposes of Article 17(a) of the Treaty. Regardless
of the resolution of these questions, under Article 17(b) of the Treaty,
the Fund will qualify for the benefits of the Treaty so long as less than
25% of the Fund's outstanding shares are determined to be held other than
by individual residents of the United States.
^ Shin & Kim ^ have given their opinion that the Treaty presently
applies to the Fund ^ if and so long as the Fund operates as
described in this Prospectus. The Fund has received written confirmation
from the Minister of Finance of Korea that, so long as all of the issued
shares of the Fund are listed on one or more publicly acknowledged stock
exchanges in the United States only and they are traded on such exchanges
as product open to investment by the general public, the Fund will be
entitled to the benefits of the Treaty because Article 17(b) of the Treaty
will not apply. The Fund will list the Fund's shares on the NYSE. In
order to qualify for the benefits of the Treaty, the Fund will not apply to
list the Fund's shares on any stock exchange outside the United States.
Notwithstanding the foregoing, the Tax Exemption and Reduction
Control Law ^(the "TERCL") exempts interest on bonds denominated in a
non-Korean currency from Korean income and corporation taxes. The
residents' tax referred to above is ^ therefore
eliminated ^ with respect to such investments. The TERCL tax
exemptions ^ expire on December 31, ^ 1998.
^ Under present Korean law, the Korean Inheritance and Gift Tax will
not apply to any testate ^ , intestate or inter-vivos
transfer of ^ shares of the Fund ^ to the ^ extent the
deceased or the donee, as the case may be, is not domiciled in
Korea. Korean stamp duty will not apply to transfers of Korean
securities, nor to the Fund's portfolio securities transactions.
A securities transaction tax is payable on the transfer by the Fund of
shares and certain other equities (throughout this paragraph,
collectively, "shares") issued by a Korean company at the rate of ^
0.35% of the sale price of the shares (except in certain
circumstances in which case no tax is charged, and where the shares are
traded outside the KSE, in which case the tax is payable at the rate of
0.5% of the sale price) unless (i) the shares are listed on a foreign
stock exchange and the sales are executed on such exchange; or (ii) those
sales are executed between non-residents without a permanent establishment
in Korea, the non-resident transferor did not own 10% or more of the total
issued and outstanding shares of the issuer of such shares at any time
during the five years before the year within which the transfer occurs, and
the non-resident transferor does not sell such shares through a securities
company in Korea (which latter condition cannot be fulfilled under current
KSEC regulations which require all sales of Korean securities off the KSE
to be through a Korean securities company). Effective from July 1, 1994,
the Korean government introduced an additional agricultural and fishery
special tax on securities transactions on the KSE which is equal to 0.15%
of the sale price of the shares and which will remain effective for a
period of ten years thereafter. The transferor of the shares pays the
securities transaction tax. ^ When the transfer is made through a
securities company only, such securities company will make the withholding.
Where the transfer is effected by a non-resident individual or a
non-resident corporation without a permanent establishment in Korea
otherwise than through the Korea Securities Depository ^ or a
securities company, the transferee is required to withhold the ^ ^
securities transaction tax ^.
This tax treatment could change in the event of changes in Korean
^ or United States tax laws, changes in the terms of, or the Minister of
Finance's interpretation of, the Treaty, or changes in relevant facts.
NOTICES
Shareholders will be notified annually by the Fund of the dividends,
distributions and deemed distributions made by the Fund to its
shareholders. Furthermore, shareholders will be sent, if appropriate,
various written notices after the close of the Fund's taxable year
regarding certain dividends, distributions and deemed distributions that
were paid (or that were treated as having been paid) by the Fund to its
shareholders during the preceding taxable year.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS
CONCERNING FOREIGN, FEDERAL, STATE AND LOCAL TAX MATTERS, AND WITH RESPECT
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE FUND.
NET ASSET VALUE
Net asset value will be determined daily by dividing the value of the net
assets of the Fund (the value of its assets less its liabilities including
borrowings, exclusive of capital stock and surplus) by the total number of
shares of Common Stock outstanding. Portfolio securities will be valued by
various methods depending on the primary market or exchange on which they
trade. Most equity securities for which the primary market is the United
States will be valued at the last sale price or, if no sale has occurred,
at the closing bid price. Equity securities for which the primary market
is outside the United States will be valued using the official closing
price or the last sale price in the principal market where they are traded.
If the last sale price (on the local exchange) is unavailable, the last
evaluated quote or last bid price normally will be used. Shares listed
on the KSE which are traded by foreign investors in foreign OTC
transactions will be valued at prices at which it is expected such shares
may be sold, as determined by or under the direction of a committee
appointed by the Board of Directors, provided that the committee determines
that such valuations are accurate; otherwise such KSE shares will be valued
using the procedures for listed securities. Short-term securities will
be valued either at amortized cost or at original cost plus accrued
interest, both of which approximate current value. Convertible securities
and fixed-income securities will be valued primarily by a pricing service
that uses a vendor security valuation matrix which incorporates both
dealer-supplied valuations and electronic data processing techniques. This
two-fold approach is believed to more accurately reflect fair value because
it takes into account appropriate factors such as institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics, and other market data, without exclusive
reliance upon quoted, exchange, or over-the-counter prices. Use of pricing
services has been approved by the Board of Directors.
Securities and other assets for which there is no readily available market
will be valued in good faith by a committee appointed by the Board of
Directors. The procedures set forth above need not be used to determine
the value of the securities owned by the Fund if, in the opinion of a
committee appointed by the Board of Directors, some other method (e.g.,
closing over-the-counter bid prices in the case of debt instruments traded
on an exchange) would more accurately reflect the fair market value of such
securities.
Generally, the valuation of foreign and domestic equity securities, as
well as corporate bonds, U.S. government securities, money market
instruments, and repurchase agreements, will be substantially completed
each day at the close of the NYSE. The values of any such securities held
by the Fund are determined as of such time for the purpose of computing the
Fund's net asset value. Foreign security prices are furnished by
independent brokers or quotation services which express the value of
securities in their local currency. Fidelity Service Company gathers all
exchange rates daily at the close of the NYSE using the last quoted price
on the local currency and then translates the value of foreign securities
from their local currency into U.S. dollars. Any changes in the value of
forward contracts due to exchange rate fluctuations and days to maturity
are included in the calculation of net asset value. If an extraordinary
event that is expected to materially affect the value of a portfolio
security occurs after the close of an exchange on which that security is
traded, then the security will be valued as determined in good faith by a
committee appointed by the Board of Directors.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock ($.001 par value). The Common Stock, when issued, will be fully paid
and nonassessable. All shares of Common Stock are equal as to dividends,
distributions and voting privileges. There are no conversion, preemptive
or other subscription rights. In the event of liquidation, each share of
Common Stock is entitled to its proportion of the Fund's assets after
payment of all debts and expenses and any preferential
liquidating distributions to holders of any preferred stock issued by the
Fund . There are no cumulative voting rights for the election of
directors. Prior to the ^ Offering , the Investment Manager will own
100% of the outstanding shares of Common Stock of the Fund and,
consequently, will be a controlling person of the Fund until the shares
offered hereby are issued and sold.
The Fund's Board of Directors has the authority to classify and reclassify
any authorized but unissued shares of capital stock and to establish the
rights and preferences of such unclassified shares. The Fund has no
present intention of offering additional shares of its Common Stock ^
except in connection with any future rights offering and the Plan. See
"Future Rights Offering" and "Dividends and Distributions: Dividend
Reinvestment and Cash Purchase Plan." Other offerings of its Common
Stock, if made, will require approval of the Fund's Board of Directors.
Any additional offering will be subject to the requirements of the 1940 Act
that shares of Common Stock may not be sold at a price below the then
current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders
or with the consent of a majority of the Fund's outstanding Common Stock.
SPECIAL VOTING PROVISIONS
The Fund presently has provisions in its Articles of Incorporation and
By-Laws which may have the effect of limiting the ability of other entities
or persons to acquire control of the Fund, to cause it to engage in certain
transactions, or to modify its structure.
Under these provisions, a director may be removed from office only for
cause by vote of at least 75% of the shares of capital stock entitled to be
voted on the matter. Also conversion of the Fund from a closed-end to an
open-end investment company requires approval of 75% of the entire Board of
Directors and the affirmative vote of holders of at least 75% of the Common
Stock outstanding unless it is approved by a vote of 75% of the Continuing
Directors (as defined below), in which event such conversion requires the
approval of the holders of a majority of the outstanding Common Stock. A
"Continuing Director" is any member of the Board of Directors of the Fund
who is not a person or affiliate of a person who enters or proposes to
enter into a Business Combination (as defined below) with the Fund (an
"Interested Party") and who has been a member of the Board of Directors for
a period of at least 12 months, or has been a member of the Board of
Directors since April 1, 1994 , or is a successor of a Continuing
Director who is unaffiliated with an Interested Party and is recommended to
succeed a Continuing Director by a majority of the Continuing Directors
then on the Board of Directors of the Fund.
In addition, at the Fund's first annual stockholders meeting, the Board of
Directors will be classified into three classes, each with a term of three
years with only one class of directors standing for election in any year.
Commencing on the date of the annual meeting of stockholders in the year
^ 2000 ^ , the Board of Directors will no longer be divided
into classes and each director will stand for election at such meeting and
at each annual meeting of stockholders held thereafter. Such
classification may prevent replacement of a majority of the directors for
up to a two-year period while the classification is in effect.
Additionally, the affirmative vote of 75% of the entire Board of Directors
and the holders of at least (i) 75% of the Common Stock and (ii) in the
case of a Business Combination (as defined below), 66% of the Common Stock
other than Common Stock held by an Interested Party who is (or whose
affiliate is) a party to a Business Combination (as defined below) or an
affiliate or associate of the Interested Party, are required to authorize
any of the following transactions:
(i) merger, consolidation or statutory share exchange of the Fund with or
into any other person;
(ii) issuance or transfer by the Fund (in one or a series of transactions
in any 12 month period) of any securities of the Fund to any person or
entity for cash, securities or other property (or combination thereof)
having an aggregate fair market value of $1,000,000 or more, excluding
issuances or transfers of debt securities of the Fund, sales of securities
of the Fund in connection with a public offering, issuances of securities
of the Fund pursuant to a dividend reinvestment plan adopted by the Fund
and issuances of securities of the Fund upon the exercise of any stock
subscription rights distributed by the Fund and portfolio transactions
effected by the Fund in the ordinary course of its business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund (in one or a series of transactions in any 12 month
period) to or with any person or entity of any assets of the Fund having an
aggregate fair market value of $1,000,000 or more except for portfolio
transactions (including pledges of portfolio securities in connection with
borrowings) effected by the Fund in the ordinary course of its business
(transactions within clauses (i), (ii) and (iii) above being known
individually as a "Business Combination");
(iv) the voluntary liquidation or dissolution of the Fund, or an amendment
to the Fund's Articles of Incorporation, to terminate the Fund's existence;
or
(v) unless the 1940 Act or federal law requires a lesser vote, any
stockholder proposal as to specific investment decisions made or to be made
with respect to the Fund's assets as to which stockholder approval is
required under federal or Maryland law.
However, the stockholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v)
above) if they are approved by a vote of 75% of the Continuing Directors.
In that case, if Maryland law requires stockholder approval, the
affirmative vote of a majority of the votes entitled to be cast thereon
shall be required.
Reference is made to the Articles of Incorporation and By-Laws of the
Fund, on file with the Commission, for the full text of these provisions.
See "Further Information."
ANNUAL TENDER OFFERS AND SHARE REPURCHASES
In recognition of the possibility that the Fund's Shares might trade at a
discount to net asset value, the Board of Directors of the Fund has
determined that it would be in the best interests of the shareholders of
the Fund to take action to attempt to reduce or eliminate a market value
discount from net asset value. To that end, the Board of Directors of the
Fund has determined that annual tender offers for shares of its Common
Stock may help reduce any market discount that may develop. In this
connection, during the first calendar quarter of each calendar year
commencing in ^ 1998 , the Board of Directors of the Fund has
committed to conduct a tender offer for shares of its Common Stock on an
annual basis under certain circumstances. During the fourth quarter of the
previous calendar year, the Board of Directors will fix in advance a period
of 12 consecutive calendar weeks beginning during such fourth calendar
quarter and ending in the immediately following first quarter for the
purpose of calculating the average trading price of the Fund's Common
Stock. In the event that the average of the closing prices of the Common
Stock of the Fund for the last trading day in each week during such 12-week
period, on the principal securities exchange where listed, is below the
initial offering price of $15.00 per share and represents a discount of 10%
or more from the average net asset value of the Fund as determined on the
same days in the same period, a tender offer for up to 10% of the then
outstanding shares of Common Stock of the Fund will be conducted during
such first calendar quarter, subject to certain conditions described below.
In addition, the Board of Directors may consider from time to time open
market repurchases of the Fund's Common Stock or converting the Fund into
an open-end investment company.
Subject to the Fund's investment restrictions with respect to borrowings,
the Fund may incur debt to finance tender offers and/or repurchases. See
"Investment Restrictions." Interest on any such borrowings will reduce the
Fund's net investment income, and any such borrowings are subject to
special considerations.
No assurance can be given that annual tender offers or repurchases of
shares of its Common Stock will reduce or eliminate any market discount
from net asset value of the Fund's Common Stock. The Fund anticipates that
the market price of its Common Stock will from time to time vary from net
asset value. The market price of the Fund's Common Stock will, among other
things, be determined by the relative demand for and supply of shares of
its Common Stock in the market, the Fund's investment performance, the
Fund's dividends and yield and investor perception of the Fund's overall
attractiveness as an investment as compared with other investment
alternatives. Nevertheless, the fact that the Fund's Common Stock may be
subject to tender offers at net asset value from time to time may reduce
the spread between market price and net asset value that might otherwise
exist. In the opinion of the Investment Manager, sellers may be less
inclined to accept a significant discount if they have a reasonable
expectation of being able to recover net asset value in conjunction with an
annual tender offer.
Although the Board of Directors believes that tender offers and
repurchases of shares of Common Stock generally would have a favorable
effect on the market price of the Fund's Common Stock, the repurchase of
shares of Common Stock by the Fund will decrease the total assets of the
Fund and, therefore, have the effect of increasing the Fund's expense
ratio. Because of the nature of the Fund's investment objective and
policies and the Fund's portfolio, the Investment Manager does not
anticipate that tender offers and repurchases should have a materially
adverse effect on the Fund's investment performance and does not anticipate
any material difficulty in disposing of sufficient portfolio securities in
order to consummate tender offers and repurchases.
Although the Board of Directors has committed to annual tender offers
under the circumstances set forth above, it is the Board of Directors'
announced policy, which may be changed by the Board of Directors, that the
Fund cannot accept tenders or effect repurchases if (1) such transactions,
if consummated, would (a) result in the delisting of the Fund's Common
Stock from the NYSE (the NYSE having advised the Fund that it would
consider delisting if the aggregate market value of the Fund's outstanding
shares is less than $5,000,000, the number of publicly held shares of
Common Stock falls below 600,000 or the number of round-lot holders falls
below 1,200) or (b) impair the Fund's status as a regulated investment
company under the Code (which would make the Fund subject to U.S. Federal
income taxes on all of its income and gains in addition to the taxation of
shareholders who receive distributions from the Fund); (2) the amount of
shares of Common Stock tendered would require liquidation of such a
substantial portion of the Fund's securities that the Fund would not be
able to liquidate portfolio securities in an orderly manner in light of the
existing market conditions and such liquidation would have an adverse
effect on the net asset value of the Fund to the detriment of non-tendering
shareholders; (3) there is any (a) in the Board of Directors' judgment,
material legal action or proceeding instituted or threatened challenging
such transactions or otherwise materially adversely affecting the Fund, (b)
suspension of or limitation on prices for trading securities generally on
the NYSE or other national securities exchange(s), or the NASDAQ National
Market System, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by banks in the United States or
New York State, (d) limitation affecting the Fund or the issuers of its
portfolio securities imposed by Federal or state authorities on the
extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or
indirectly involving the United States, or (f) in the Board of Directors'
judgment, other event or condition which would have a material adverse
effect on the Fund or its shareholders if Shares were repurchased; or (4)
the Board of Directors determines that effecting any such transaction would
constitute a breach of their fiduciary duty owed to the Fund or its
shareholders. The Board of Directors may modify these conditions in light
of experience.
Any tender offer made by the Fund for its shares of Common Stock will be
at a price equal to the net asset value of the Common Stock on a date
subsequent to the Fund's receipt of all tenders. During the pendency of
any tender offer by the Fund, the Fund will calculate daily the net asset
value of the Common Stock and will establish procedures which will be
specified in the tender offer documents, to enable shareholders to
ascertain readily such net asset value. Each offer will be made and
shareholders notified in accordance with the requirements of the Securities
Exchange Act of 1934 and the 1940 Act, either by publication or mailing or
both. Each offering document will contain such information as is
prescribed by such laws and the rules and regulations promulgated
thereunder, including information for shareholders to consider in deciding
whether to tender shares of Common Stock and detailed instructions on how
to tender such shares of Common Stock. When a tender offer is authorized
to be made by the Fund's Board of Directors, a shareholder wishing to
accept the offer will be required to tender all (but not less than all) of
the shares of Common Stock owned by such shareholder (or attributed to him
for U.S. federal income tax purposes under Section 318 of the Code) unless
the Fund has received a ruling from the Internal Revenue Service, or an
opinion satisfactory to it, that a tender of less than all of a
shareholder's shares of Common Stock will not cause certain adverse tax
consequences with respect to non-tendering shareholders. There can be no
assurance that the Fund will receive such a ruling or opinion.
A shareholder who sells all of his shares of Common Stock (including
shares attributed to him for U.S. Federal income tax purposes under Section
318 of the Code) pursuant to a tender offer or open-market repurchase by
the Fund will realize a taxable gain or loss, treated as described in
"Taxation - U.S. Federal Income Taxes." A shareholder who sells less than
all of his shares of Common Stock (including shares so attributed) may be
treated as receiving a dividend from the Fund in the amount of some or all
of the proceeds of sale; in that event, the amount of proceeds not treated
as a dividend would be a return of capital, reducing the shareholder's
basis in his shares of Common Stock (including the shares sold pursuant to
the tender offer or repurchase) and a gain (treated as a capital gain for a
shareholder owning the shares as a capital asset) to the extent of any
amount in excess of such basis. Also, in the case of open-market
repurchases, it is possible that shareholders who do not have their shares
of Common Stock repurchased would be treated as having received a dividend
distribution as a result of their proportionate increase in the ownership
of the Fund.
The Fund will not specify a record date for the tender offer which will
not permit a shareholder of record on the effective date of the tender
offer to tender its shares of Common Stock. The Fund will purchase all
shares of Common Stock tendered in accordance with the terms of the offer
unless it determines to accept none of them (based upon one of the
conditions set forth above), or unless more shares are tendered than the
Fund is required to purchase, in which case the Fund will purchase the
shares tendered on a pro rata basis. Each person tendering shares of
Common Stock will pay to the Fund a reasonable service charge, currently
anticipated to be $25.00, but subject to change, to help defray certain
costs, including the processing of tender forms, effecting payment, postage
and handling. It is the position of the staff of the Commission that such
service charge may not be deducted from the proceeds of the purchase. The
Fund's transfer agent will receive the fee as an offset to these costs.
The Fund expects that the cost to the Fund of effecting a tender offer will
exceed the aggregate of all service charges received from those who tender
their shares of Common Stock. Such excess costs associated with the tender
will be charged against capital. Tendered shares of Common Stock that have
been accepted and purchased by the Fund will be recorded and reported as an
offset to shareholders' equity and accordingly will reduce the Fund's total
assets.
In order to finance share repurchases, the Fund currently anticipates that
it will liquidate a portion of its investments. Although the Fund has no
current intention to incur debt in order to finance share repurchases, it
is permitted to borrow to finance such repurchases. If the Fund does
borrow to finance share repurchases, this would have the effect of
leveraging on the Fund.
If the Fund must liquidate portfolio securities in order to purchase
shares of Common Stock tendered, the Fund may realize gains and losses.
Such gains may be realized on securities held for less than three months.
Because the Fund, as a regulated investment company under the Code, may not
derive 30% or more of its gross income from the sale or disposition of
stocks and securities held less than three months, such gains would reduce
the ability of the Fund to sell other securities held for less than three
months that the Fund may wish to sell in the ordinary course of its
portfolio management, which may adversely affect the Fund's yield. See
"Taxation - U.S. Federal Income Taxes." The portfolio turnover rate of the
Fund may or may not be affected by the Fund's repurchases of Shares
pursuant to a tender offer.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Chase Manhattan Bank, N.A. [address] will act as custodian for the
Fund's assets. ^ The Hong Kong and Shanghai Banking Corporation,
Seoul Branch will serve as the Fund's ^ sub-custodian for
its assets held in Korea . State Street Bank and Trust Company will act
as the transfer agent, dividend paying agent and registrar for the Fund's
Common Stock.
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement (the "Underwriting Agreement"), the Fund has agreed to sell to
each of the U.S. Underwriters named below (the "U.S. Underwriters"), and
each of the U.S. Underwriters, for whom Baring Securities, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as the
representatives (the "U.S. Representatives") have severally agreed to
purchase the respective number of shares of Common Stock set forth opposite
its name below:
NUMBER OF
U.S. UNDERWRITERS SHARES
Baring Securities Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Total
Subject to the terms and conditions set forth in the International
Underwriting Agreement (the "International Underwriting Agreement"), and
concurrently with the sale of Shares of Common Stock to the U.S.
Underwriters, the Fund has agreed to sell to each of the International
Underwriters named below (the "International Underwriters" and together
with the U.S. Underwriters, the "Underwriters"), for whom Baring Brothers &
Co., Limited and Donaldson, Lufkin & Jenrette Securities Corporation are
acting as representatives (the "International Representatives" and together
with the U.S. Representatives, the "Representatives"), have severally
agreed to purchase the respective numbers of shares of Common Stock set
forth opposite its name below:
NUMBER OF
INTERNATIONAL UNDERWRITERS SHARES
Baring Brothers & Co., Limited
Donaldson, Lufkin & Jenrette Securities Corporation
Total
The U.S. Underwriting Agreement and the International Underwriting
Agreement (collectively, the "Underwriting Agreements") provide that if any
of the foregoing shares are purchased by the U.S. Underwriters pursuant to
the U.S. Underwriting Agreement or by the International Underwriters
pursuant to the International Underwriting Agreement, all the shares of
Common Stock agreed to be purchased by the U.S. Underwriters or the
International Underwriters, as the case may be, pursuant to their
respective Underwriting Agreements must be so purchased, and that the
obligations of the U.S. Underwriters or the International Underwriters
thereunder are subject to approval of certain legal matters by counsel and
to various other conditions. The offering price, underwriting discounts
and commissions for the U.S. Offering and the International Offering are
identical. The closing of each Offering is a condition to the closing of
each other Offering.
The Representatives have advised the Fund that they propose to offer the
shares of Common Stock directly to the public at the public offering price
set forth on the cover page of this Prospectus except that the price will
be reduced to $ for purchases in single transactions (as defined
below) of between and shares, inclusive, to $ for purchases
in single transactions of between and shares, inclusive, and to
$ for purchases in single transactions of or more shares of
Common Stock, subject to the following. Purchasers who agree to purchase
shares of Common Stock at the reduced price will be restricted from
selling, assigning or otherwise transferring or contracting to sell, assign
or otherwise transfer those shares for a period of 90 days after the
closing of the offering. There is no restriction on the number of shares
that may be purchased subject to the transfer restriction, except that the
Fund will comply, with respect to non-restricted shares, with the
distribution requirements of the NYSE. The certificates evidencing shares
of Common Stock purchased at the reduced price will contain a legend
stating the transfer restriction. Investors must pay for any shares of
Common Stock purchased in the initial public offering on or before
. The sales loads of $. ,$. ,$. and $. are
equal to %, %, % and %, respectively, of the initial
public offering price.
The Representatives have also advised the Fund that they propose to offer
shares of Common Stock to certain dealers (who may include Underwriters) at
the initial offering price per share set forth above less a concession not
to exceed $ per share ($ per share for purchases in single
transactions (as defined below) of between _____ and _____ shares,
inclusive, $_____ per share for purchases in single transactions of _____
and _____ shares, inclusive and $_____ per share for purchases in single
transactions of _____ or more shares of Common Stock). Such dealers
may reallow a concession not to exceed $ per share of Common Stock to
other dealers. After the initial public offering, the public offering
price, the concession to selected dealers and the reallowance to other
dealers may be changed by the Representatives.
The term "single transaction," as used in this Prospectus, refers to a
single purchase by an individual or to concurrent purchases, which in the
aggregate are at least equal to the prescribed amounts, by an individual,
his parents, spouse, siblings and children purchasing shares for his or
their own account and to single transactions by a trustee, money manager,
or other fiduciary purchasing shares for one or more trust estates, one or
more fiduciary accounts and/or his own account. The term "single
transaction" also includes purchases by any "company," as that term is
defined in the 1940 Act, its directors, senior executive officers and
controlling shareholders; provided, however, that it does not include
purchases by any such company which has not been in existence for at least
six months or which has no purpose other than the purchase of shares of the
Fund or shares of other registered investment companies at a discount; and
provided further, that it does not include purchases by any group of
individuals whose sole organizational nexus is that the participants
therein are credit cardholders of a company, policyholders of an insurance
company or noninvestment advisory customers of a bank.
^
The Fund has granted the U.S. Underwriters options, exercisable by the
U.S. Representatives, to purchase up to an aggregate of
additional shares of Common Stock at the initial public offering price,
less the underwriting discounts and commissions set forth on the cover page
hereof. Such options, which expire 45 days after the date of this
Prospectus, may be exercised one or more times solely to cover
over-allotments. To the extent that the U.S. Representatives exercise such
options, each of the U.S. Underwriters will be obligated, subject to
certain conditions, to purchase approximately the same percentage of the
option shares that the number of shares of Common Stock to be purchased
initially by that U.S. Underwriter bears to the total number of shares to
be purchased initially by the U.S. Underwriters.
The U.S. Underwriters and the International Underwriters have entered into
an Agreement Between U.S. Underwriters and International Underwriters.
Pursuant to this Agreement, each U.S. Underwriter has agreed that, as part
of the distribution of the _______ shares (plus any of the _____ shares to
cover over-allotments) of Common Stock offered in the U.S. Offering, (a) it
is not purchasing any of such shares for the account of anyone other than a
U.S. or Canadian Person and (b) it has not offered or sold, and will not
offer, sell, resell or deliver, directly or indirectly, any of such shares
or distribute any prospectus relating to the U.S. Offering to any person
other than a U.S. or Canadian Person; and each International Underwriter
has agreed that, as part of the distribution of the _____ shares of Common
Stock offered in the International Offering, (a) it is not purchasing any
of such shares for the account of any U.S. or Canadian Person and (b) it
has not offered or sold, and will not offer, sell, resell or deliver,
directly or indirectly, any of such shares or distribute any prospectus
relating to the International Offering to any U.S. or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreements and the
Agreement Between U.S. Underwriters and International Underwriters,
including (i) certain purchases and sales between the U.S. Underwriters and
the International Underwriters, (ii) certain offers, sales, resales,
deliveries or distributions to or through investment advisors or other
persons exercising investment discretion, (iii) purchases, offers or sales
by a U.S. Underwriter who is also acting as an International Underwriter,
or by an International Underwriter who is also acting as a U.S. Underwriter
and (iv) other transactions specifically approved by the U.S. Underwriters
and the International Underwriters. As used herein, "U.S. or Canadian
Person" means any individual who is resident in the United States or
Canada, or any corporation, pension, profit-sharing or other trust or other
entity organized under or governed by the laws of the Untied States or
Canada or of any political subdivision thereof (other than a foreign branch
of any U.S. or Canadian Person), and includes any U.S. or Canadian branch
of a person other than a U.S. or Canadian Person. "United States" means
the Untied States of America (including the District of Columbia) and its
territories, its possessions and all areas subject to its jurisdiction.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of shares as may be mutually
agreed. The price of any Shares so sold shall be the public offering price
as then in effect for the Shares of Common Stock being sold by the U.S.
Underwriters and the International Underwriters, less an amount not greater
than the selling concession allocable to such Shares. To the extent that
there are sales between the U.S. Underwriters and the International
Underwriters pursuant to the Agreement Between U.S. Underwriters and
International Underwriters, the number of Shares initially available for
sale by the U.S. Underwriters or by the International Underwriters may be
more or less than the amount specified on the cover page of this
Prospectus.
Each U.S. Underwriter and International Underwriter has represented and
agreed that (i) it has not offered or sold, and will not offer or sell, in
the United Kingdom, by means of any document, any Shares other than to
persons whose ordinary business it is to buy or sell shares or
debentures,whether as principal or agent (except under circumstances which
do not constitute an offer to the public within the meaning of the
Companies Act 1985 of Great Britain); (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Shares in, from or
otherwise involving the ^ United Kingdom, and (iii) it has
only issued or passed on, and will only issue or pass on to any person in
the ^ United Kingdom, any document received by it in
connection with the issue of the Common Stock if that person is of a kind
described in Article 9(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1988.
Purchasers of the Shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country
of purchase in addition to the offering price set forth on the cover page
hereof.
Prior to the offering, there has been no public market for the Fund's
Common Stock. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the
public market subsequent to the offering at or above the initial public
offering price.
In each of the Underwriting Agreements, the Investment Manager, the
Investment Adviser and the Sub-Adviser have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments that the Underwriters may be
required to make in respect thereof.
The ^ Fund's Common Stock has been approved for listing on
the ^ NYSE upon notice of issuance under the symbol "FAK" .
In order to satisfy one of the requirements for listing of the Common Stock
on the NYSE, the U.S. Underwriters have undertaken to distribute the shares
of Common Stock in a manner which complies with NYSE distribution criteria
(including to sell lots of 100 or more non-restricted shares of Common
Stock to a minimum of 2,000 beneficial holders ^ worldwide) .
The Fund anticipates that certain of the Underwriters may, from time to
time act as brokers or dealers in connection with the execution of
portfolio transactions after they have ceased to be Underwriters and,
subject to certain restrictions, may from time to time act as brokers or
dealers while they are Underwriters.
The Fund has agreed to pay the Underwriters $_______ as partial
reimbursement of expenses incurred in connection with the Offering.
EXPERTS
The financial statement of the Fund included in this Prospectus has been
so included in reliance on the report of Price Waterhouse, 160 Federal
Street, Boston, Massachusetts 02110, the Fund's independent accountants,
given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the ^ Shares offered hereby will be passed
on for the Fund by Rogers & Wells, New York, New York and certain legal
matters will be passed upon for the Underwriters by Simpson Thacher &
Bartlett (a partnership which includes professional corporations). Counsel
for the Fund and the Underwriters will rely, as to matters of Maryland law,
on Piper & Marbury, Baltimore, Maryland. With respect to all matters of
Korean law, counsel for the Fund and counsel for the Underwriters will rely
on Shin & Kim, Seoul, Korea.
FURTHER INFORMATION
Further information concerning these securities and their issuer may be
found in the Registration Statement of which this Prospectus constitutes a
part on file with the Commission. Current holdings and recent
investment strategies will be described in the Fund's financial reports,
which are sent to shareholders twice a year.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
Fidelity Advisor Korea Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of
Fidelity Advisor Korea Fund, Inc. (the "Fund") at in conformity
with generally accepted accounting principles. This financial statement is
the responsibility of the Fund's management; our responsibility is to
express an opinion on this financial statement based on our audit. We
conducted our audit of this financial statement in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse
Boston, Massachusetts
, 1994
FIDELITY ADVISOR KOREA FUND, INC. (NOTE 1)
STATEMENT OF ASSETS AND LIABILITIES
, 1994
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash $
Deferred organization expenses (Note 2)
Total Assets $
Liabilities:
Accrued organization expenses (Note 2) $
Commitments (Notes 2 and 3)
Net Assets (7,093 shares of $.001 par value shares of common stock $
issued and outstanding; 100,000,000 shares authorized)
Net asset value per share $
</TABLE>
NOTES TO FINANCIAL STATEMENT
NOTE 1
Fidelity Advisor Korea Fund, Inc. (the "Fund") was incorporated as a
Maryland corporation on May 25, 1994 and has had no operations to date
other than matters relating to its organization and registration as a
non-diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended, and the sale and issuance to
Fidelity Management & Research Company (the "Investment Manager") of
shares of its common stock for an aggregate purchase price of $ .
The books and records of the Fund will be maintained in U.S. dollars.
NOTE 2
Organization expenses relating to the Fund incurred and to be incurred by
the Investment Manager will be reimbursed by the Fund. Such expenses,
estimated at $ , will be deferred and amortized on a straight-line
basis for a five-year period beginning at the commencement of operations of
the Fund. Offering costs, estimated at $ , will be paid from the
proceeds of the offering and charged to capital at the time of the issuance
of such shares.
NOTE 3
The Fund will enter into a management agreement with the Investment
Manager, pursuant to which the Investment Manager will, among other things,
supervise the Fund's investment program and monitor the performance of the
Fund's service providers.
The Investment Manager will enter into an investment advisory agreement
with Fidelity International Investment Advisors (the "Investment Adviser"),
an affiliate of the Investment Manager, pursuant to which the Investment
Adviser is responsible for the management of the Fund's portfolio in
accordance with the Fund's investment policies and for making decisions to
buy, sell, or hold particular securities.
Pursuant to a Sub-Advisory Agreement, the Investment Adviser has delegated
certain of its responsibilities for the day-to-day management of the
Fund to Fidelity Investments Japan Limited (the "Sub-Adviser"), which will
manage the Fund's portfolio through its Tokyo office.
Fidelity Service Co., a division of FMR Corp., the parent company of the
Investment Manager, will serve as the Fund's administrator pursuant to the
terms of an Administration Agreement. The Fund will pay Fidelity Service
Co. a monthly fee at an annual rate of .20% of the Fund's average daily net
assets for its services.
The Fund will pay the Investment Manager a monthly fee for its management
services at an annual rate of 1.00% of the Fund's average daily net assets.
The Investment Manager will pay the Investment Adviser a monthly fee for
its advisory services equal to 60% of the fees paid by the Fund to the
Investment Manager. The Investment Adviser will pay the Sub-Adviser a fee
equal to 50% of the fee paid to the Investment Adviser with respect to
assets managed by the Sub-Adviser on a discretionary basis and 30% of the
fee paid to the Investment Adviser with respect to assets managed by the
Sub-Adviser on a non-discretionary basis.
Certain officers and/or directors of the Fund are officers and/or
directors of the Investment Manager, the Investment Adviser, or the
Sub-Adviser.
APPENDIX A
GENERAL CHARACTERISTICS AND RISKS OF DERIVATIVES
THE FOLLOWING INVESTMENT PRACTICES IN WHICH THE FUND IS AUTHORIZED TO
ENGAGE ARE GENERALLY NOT CURRENTLY PERMITTED UNDER KOREAN LAWS OR
REGULATIONS.
A detailed discussion of Derivatives (as defined below) that may be used
by the Investment Adviser or the Sub-Adviser on behalf of the Fund follows
below. The Fund will not be obligated, however, to use any Derivatives and
makes no representation as to the availability of these techniques at this
time or at any time in the future. "Derivatives," as used in this Appendix
A, refers to interest rate, currency or stock index futures contracts,
currency forward contracts and currency swaps, the purchase and sale (or
writing) of exchange listed and over-the-counter ("OTC") put and call
options on debt and equity securities, currencies, interest rate, currency
or stock index futures and fixed income and stock indices and other
financial instruments, entering into various interest rate transactions
such as swaps, caps, floors, collars, entering into equity swaps, caps,
floors or trading in other types of derivatives.
The Fund's ability to pursue certain of these strategies may be limited by
the U.S. Commodity Exchange Act, as amended, applicable regulations of the
Commodity Futures Trading Commission ("CFTC") thereunder and the federal
income tax requirements applicable to regulated investment companies which
are not operated as commodity pools.
PUT AND CALL OPTIONS ON SECURITIES AND INDICES
The Fund may purchase and sell put and call options on debt and equity
securities and indices based upon the prices of debt or equity securities
or other market or economic factors that may affect securities of Korean
Issuers, such as commodity price levels or rates of inflation. A put
option on a security gives the purchaser of the option the right to sell
and the writer the obligation to buy the underlying security at the
exercise price during the option period. The Fund may also purchase and
sell options on indices based upon the prices of debt or equity securities
("index options"). Index options are similar to options on securities
except that, rather than taking or making delivery of securities underlying
the option at a specified price upon exercise, an index option gives the
holder the right to receive cash upon exercise of the option if the level
of the index upon which the option is based is greater, in the case of a
call, or less in the case of a put, than the exercise price of the option.
The purchase of a put option on a security would be designed to protect
against a substantial decline in the market value of a security held by the
Fund. A call option on a security gives the purchaser of the option the
right to buy and the writer the obligation to sell the underlying security
at the exercise price during the option period. The purchase of a call
option on a security would be intended to protect the Fund against an
increase in the price of a security that it intended to purchase in the
future. In the case of either put or call options that it has purchased,
if the option expires without being sold or exercised, the Fund will
experience a loss in the amount of the option premium plus any related
commissions. When the Fund sells put and call options, it receives a
premium as the seller of the option. The premium that the Fund receives
for writing the option will serve as a partial hedge, in the amount of the
option premium, against changes in value of the securities in its
portfolio. During the term of the option, however, a covered call seller
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price of the option if the value of
the underlying security increases, but has retained the risk of loss should
the price of the underlying security decline. Conversely, a secured put
seller retains the risk of loss should the market value of the underlying
security decline below the exercise price of the option, less the premium
received on the sale of the option. The Fund is authorized to purchase and
sell exchange listed options and over-the-counter options ("OTC Options")
which are privately negotiated with the counterparty to such contract.
Listed options are issued by the Options Clearing Corporation ("OCC"),
which guarantees the performance of the obligations of the parties to such
options.
All such call options sold (written) by the Fund will be "covered" as long
as the call is outstanding (i.e., the Fund will own the instrument subject
to the call or other securities or assets acceptable under applicable
segregation and coverage rules). All such put options sold (written) by
the Fund will be secured by segregated assets consisting of cash or liquid
high grade debt securities having a value not less than the exercise price.
The Fund's ability to close out its position as a purchaser or seller of
an exchange listed put or call option is dependent upon the existence of a
liquid secondary market. Among the possible reasons for the absence of a
liquid secondary market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by
an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or the OCC to handle current
trading volume; or (vi) a decision by one or more exchanges to discontinue
the trading of options (or a particular class or series of options), in
which event the secondary market on that exchange (or in that class or
series of options) would cease to exist, although outstanding options on
that exchange that had been listed by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with
their terms. OTC Options are purchased from or sold to dealers, financial
institutions or other counterparties which have entered into direct
agreements with the Fund. With OTC Options, such variables as expiration
date, exercise price and premium will be agreed upon between the Fund and
the counterparty, without the intermediation of a third party such as the
OCC. If the counterparty fails to make or take delivery of the securities
underlying an option it has written, or otherwise settle the transaction in
accordance with the terms of that option as written, the Fund would lose
the premium paid for the option as well as any anticipated benefit of the
transaction. The Fund must rely on the credit quality of the counterparty
rather than the guarantee of the OCC. OTC Options with foreign brokers in
Korea subject the Fund to the credit of such brokers which may be weak,
making such options speculative.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
CHARACTERISTICS. The Fund may purchase and sell futures contracts on
interest rates and indices of debt and equity securities or other financial
indicators and purchase and sell (write) put and call options on such
futures contracts traded on recognized domestic exchanges as a hedge
against anticipated interest rate changes or movements in equity markets.
The sale of a futures contract creates an obligation by the Fund, as
seller, to deliver the specific type of financial instrument called for in
the contract at a specified future time for a specified price. Options on
futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for
the premium paid to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a
put).
MARGIN REQUIREMENTS. At the time a futures contract is purchased or sold,
the Fund must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin that the Fund will pay
may range from approximately 1% to approximately 5% of the value of the
instruments underlying the contract. In certain circumstances, however,
such as during periods of high volatility, the Fund may be required by an
exchange to increase the level of its initial margin payment.
Additionally, initial margin requirements may be increased in the future
pursuant to regulatory action. An outstanding futures contract is valued
daily and the payment in cash of "variation margin" may be required, a
process known as "marking to the market." Transactions in listed options
and futures are usually settled by entering into an offsetting transaction,
and are subject to the risk that the position may not be able to be closed
if no offsetting transaction can be arranged.
LIMITATIONS ON USE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.
The Fund's use of futures contracts and options on futures contracts will
in all cases be consistent with applicable regulatory requirements and in
particular, the rules and regulations of the CFTC.
The Fund may enter into futures contracts or options thereon for purposes
other than bona fide hedging if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open contracts and options
would not exceed 5% of the liquidation value of the Fund's portfolio;
provided, further, that in the case of an option that is in-the-money at
the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. Also, when required, a segregated account
of cash or cash equivalents will be maintained and marked to market in an
amount equal to the market value of the contract. The Investment Adviser
and the Sub-Adviser may be required to comply with such different standards
as may be established from time to time by CFTC (or Korean regulators)
rules and regulations with respect to the purchase and sale of futures
contracts and options thereon.
CURRENCY TRANSACTIONS
The Fund may deal in forward currency contracts and other currency
transactions such as futures contracts, options, options on futures
contracts and swaps for any purpose consistent with its investment
objective. Currency transactions include currency forward contracts,
exchange listed currency futures contracts, exchange listed and OTC options
on currencies and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which
is described below. The Fund may enter into currency transactions with
counterparties that are determined to be creditworthy by the Investment
Manager.
The following discussion summarizes some, but not all, of the possible
currency management strategies involving forward contracts, options on
currencies and futures on currencies that could be used by the Fund.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or
the receipt of income from them. Position hedging is entering into a
currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency.
The Fund may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in
value relative to other currencies to which the Fund has or in which the
fund expects to have portfolio exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of portfolio
securities, the Fund may also engage in proxy hedging. Proxy hedging is
often used when the currency to which the Fund's portfolio is exposed is
difficult to hedge or to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency whose changes in value
are generally considered to be well correlated with a currency or
currencies in which some or all of the Fund's portfolio securities are or
are expected to be denominated, and to buy dollars. Currency transactions
can result in losses to the Fund if the currency being hedged fluctuates in
value to a degree or in a direction that is not anticipated. Further, the
risk exists that the perceived linkage between various currencies may not
be present or may not be present during the particular time that the Fund
is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below. The Fund may enter into forward contracts to shift its
investment exposure from one currency into another currency that is
expected to perform better relative to the U.S. dollar. ^ For
example, if the Fund held investments denominated in or otherwise exposed
to the Japanese Yen, the Fund could enter into forward contracts to sell
Japanese Yen and purchase Hong Kong Dollars. ^ This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased, much as if the Fund had sold a security
denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from
a decline in the hedged currency, but will cause the Fund to assume the
risk of fluctuations in the value of the currency it purchases.
Successful use of forward currency contracts will depend on the Investment
Adviser and the Sub-Adviser's skill in analyzing and predicting currency
values. Forward contracts may substantially change the Fund's investment
exposure to changes in currency exchange rates, and could result in losses
to the Fund if currencies do not perform as the Sub-Adviser anticipates.
For example, if a currency's value rose at a time when the Investment
Adviser and the Sub-Adviser had hedged the Fund by selling that currency in
exchange for dollars, the Fund would be unable to participate in the
currency's appreciation. If the Investment Adviser or the Sub-Adviser
hedges currency exposure through proxy hedges, the Fund could realize
currency losses from the hedge and the security position at the same time
if the two currencies do not move in tandem. Similarly, if the Investment
Adviser or the Sub-Adviser increases the Fund's exposure to a foreign
currency, and that currency's value declines, the Fund will realize a loss.
There is no assurance that the Investment Adviser's or the Sub-Adviser's
use of forward currency contracts will be advantageous to the Fund, or that
they will hedge at an appropriate time.
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy,
purchases and sales of currency and related instruments can be adversely
affected by government exchange controls, limitations or restrictions on
repatriation of currency, and manipulations or exchange restrictions
imposed by governments. These forms of governmental actions can result in
losses to the Fund if it is unable to deliver or receive currency or monies
in settlement of obligations and could also cause hedges it has entered
into to be rendered useless, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures generally.
Further, settlement of a currency futures contract for the purchase of most
currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish
and close out positions on these options is subject to the maintenance of a
liquid market that may not always be available. Currency exchange rates
may fluctuate based on factors extrinsic to that country's economy.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps and may purchase or sell
interest rate caps and floors. The Fund would enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to manage the duration of its
portfolio or to protect against any increase in the price of the securities
the Fund anticipates purchasing at a later date or for any other purpose
consistent with its objective.
The Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging
its assets or liabilities, and will usually enter into interest rate swaps
on a net basis, i.e., the two payments are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments on the payment date. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing
standardized swap documentation. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps.
EQUITY SWAPS AND RELATED TRANSACTIONS
The Fund may enter into equity swaps and may purchase or sell equity caps
and floors. The Fund would enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, or to protect against any increase in the price of the
securities the Fund anticipates purchasing at a later date or for any other
purpose consistent with its objective.
The Fund may enter into equity swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging
its assets or liabilities, and will usually enter in equity swaps on a net
basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments on the payment date. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing
standardized swap documentation. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps. Certain equity
swaps, caps and floors will be considered illiquid. In such instances,
investment in such equity swaps, caps and floors will be governed by the
Fund's policy on investment in illiquid securities and such securities will
be included in the 35% limit on investment in illiquid securities by the
Fund. See "Risk Factors and Special Considerations - Thinly Traded Markets
and Illiquid Investments" and "Investment Objective and Policies - Other
Investments."
RISKS OF DERIVATIVES
The use of Derivatives involves special risks, including possible default
by the other party to the transaction, illiquidity and, to the extent the
Investment Adviser's or the Sub-Adviser's view as to certain market
movements is incorrect, the risk that the use of Derivatives could result
in losses greater than if such investment strategies had not been used.
The use of currency transactions could result in the Fund's incurring
losses as a result of the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency.
The use of options and futures transactions entails certain special risks.
In particular, the variable degree of correlation between price movements
in the related portfolio position of the Fund could create the possibility
that losses on the hedging instrument are greater than gains in the value
of the Fund's position. In addition, futures and options markets could be
illiquid in some circumstances and certain over-the-counter options could
have no markets. As a result, in certain markets, the Fund might not be
able to close out a position without incurring substantial losses.
Although the Fund's use of futures and options transactions for hedging
purposes should tend to minimize the risk of loss due to a decline in the
value of the hedged position at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of
the position. Finally, the daily variation margin requirements for futures
contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is united to the cost of
the initial premium and transaction costs. Losses resulting from
Derivatives will reduce the Fund's net asset value, and possibly income,
and the losses can be greater than if the Derivatives had not been used.
When conducted outside the United States, the use of Derivatives may not
be regulated as rigorously as in the United States, may not involve a
clearing mechanism and related guarantees, and will be subject to the risk
of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of positions taken
as part of non-U.S. Hedging also could be adversely affected by: (1) other
complex foreign political, legal and economic factors; (2) lesser
availability of data on which to make trading decisions in the United
States; (3) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United
States; (4) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States; and (5) lower
trading volume and liquidity.
SEGREGATION AND COVER REQUIREMENTS
Many of the Derivatives which may be used by the Fund are subject to
segregation and coverage requirements established by either the CFTC or the
SEC, with the result that, if the Fund does not hold the instrument
underlying the futures contract or option or another offsetting position,
the Fund may be required to segregate on an ongoing basis with its
custodian, cash, U.S. government securities, or other liquid high grade
debt obligations in an amount at least equal to the Fund's obligations with
respect to such instruments. Such amounts will fluctuate as the market
value of the obligations increases or decreases. The segregation
requirement can result in the Fund maintaining positions it would otherwise
liquidate and consequently segregating assets with respect thereto at a
time when it might be disadvantageous to do so. In addition, with respect
to futures contracts purchased by the Fund, the Fund will also be subject
to the segregation requirements with respect to the value of the
instruments underlying the futures contract.
OTHER LIMITATIONS
The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See "Taxation" in the Prospectus.
APPENDIX B
DEBT RATINGS
A description of the rating policies of Moody's and S&P with respect to
bonds and debentures appears below.
MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality
and carry the smallest degree of investment risk. Interest payments are
protected by a large or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment qualities
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, I.E., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance and other terms of the contract over any long period of time
may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks
in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the
issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATE BOND RATINGS
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to repay
principal and pay interest.
AA - Bonds rated AA also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from AAA
issues only in small degree.
A - Bonds rated A have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay
principal and pay interest for bonds in this category than for higher rated
categories.
BB-B-CCC-CC-C - Bonds rated BB, B, CCC and CC, and C are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CI - Bonds rated CI are income bonds on which no interest is being
paid.
D - Bonds rated D are in default. The D category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such
payments will be made during such grace period. The D rating is also used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The ratings set forth above may be modified by the addition of a plus
or minus to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
Prime-1 - Issuers (or related supporting institutions) rated Prime-1
have a superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by many of
the following characteristics: leading market positions in well-established
industries, high rates of return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample asset
protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range
of financial markets and assured sources of alternate liquidity.
Prime-2 - Issuers (or related supporting institutions) rated Prime-2
have a strong ability for repayment of senior short-term debt obligations.
This will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while sound,
will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
Prime-3 - Issuers (or related supporting institutions) rated Prime-3
have an acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.
Not Prime - Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365
days. Ratings are graded into several categories, ranging from "A-1" for
the highest quality obligations to "D" for the lowest. The four categories
are as follows:
A-1 - This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+) sign
designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 - Issues carrying this designation have adequate capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B - Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE FUND'S INVESTMENT MANAGER OR INVESTMENT
ADVISER OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS
WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS
WILL BE SUPPLEMENTED OR AMENDED ACCORDINGLY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED THEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
________________________
TABLE OF CONTENTS
PAGE
Prospectus Summary3
Summary of Expenses ^ 19
The Fund ^ 20
Investment in Korea ^ 20
Future Rights Offering ^ 29
Use of Proceeds ^ 21
Investment Objective and Policies ^ 21
Additional Investment Activities ^ 26
Investment Restrictions ^ 28
The Republic of Korea ^ 46
The Securities Markets of Korea ^ 66
Risk Factors and Special Considerations ^ 31
Management of the Fund ^ 88
Portfolio Transactions ^ 94
Dividends and Distributions; Dividend Reinvestment
and Cash Purchase Plan ^ 96
Taxation ^ 97
Net Asset Value ^ 104
Description of Capital Stock ^ 105
Annual Tender Offers and Share Repurchases ^ 106
Custodian, Transfer Agent, Dividend
Paying Agent and Registrar ^ 108
Underwriting ^ 109
Experts ^ 111
Legal Matters ^ 112
Further Information ^ 112
Report of Independent Accountants ^ 113
Statement of Assets and Liabilities ^ 114
Appendix A: General Characteristics and
Risks of DerivativesA-1
Appendix B: Debt RatingsB-1
UNTIL , 1994, ALL DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
FIDELITY ADVISOR
KOREA FUND, INC.
COMMON STOCK
_____________
PROSPECTUS
_____________
BARING SECURITIES, INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1994
PROSPECTUS(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
User-defined Box 2
, 1994SUBJECT TO COMPLETION, DATED ^ SEPTEMBER
15, 1994
Shares
FIDELITY ADVISOR
KOREA FUND, INC.
[LOGO]COMMON STOCK
Fidelity Advisor Korea Fund, Inc. (the "Fund") is a newly organized,
non-diversified, closed-end management investment company. The Fund's
investment objective is long-term capital appreciation. The Fund seeks to
achieve its objective by investing primarily in equity and debt securities
of Korean Issuers (as defined in this Prospectus). Under normal market
conditions, the Fund will invest at least 65% of its total assets in such
securities. The Fund's investment manager and investment adviser currently
anticipate that, once fully invested, at least 80% of the Fund's net assets
will be invested in equity securities of Korean Issuers. There can be no
assurance that the Fund's investment objective will be achieved. Up to 35%
of the Fund's total assets may be invested in equity and deb t
securities of Asian Issuers (as defined in the Prospectus) other than
Korean Issuers. Due to the risks inherent in international investments
generally, the Fund should be considered as a vehicle for investing a
portion of an investor's assets in foreign securities markets and not as a
complete investment program. INVESTMENT IN KOREAN SECURITIES INVOLVES
RISKS THAT ARE NOT NORMALLY INVOLVED IN INVESTMENTS IN SECURITIES OF U.S.
COMPANIES. IN ADDITION, ALTHOUGH THE FUND CURRENTLY INTENDS TO INVEST
PRINCIPALLY IN EQUITY SECURITIES, IT MAY INVEST WITHOUT LIMITATION
IN HIGH RISK, HIGH YIELD DEBT INSTRUMENTS THAT ARE LOW RATED OR
UNRATED AND ARE PREDOMINANTLY SPECULATIVE. INVESTMENT IN THE FUND
SHOULD BE CONSIDERED SPECULATIVE. SEE "INVESTMENT OBJECTIVE AND POLICIES"
AND "RISK FACTORS AND SPECIAL CONSIDERATIONS."
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE SHARES
(AS DEFINED IN THIS PROSPECTUS ). THE ^ FUND'S COMMON STOCK
HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE ^
UPON NOTICE OF ISSUANCE UNDER THE SYMBOL "FAK." SHARES OF
CLOSED-END INVESTMENT COMPANIES HAVE IN THE PAST FREQUENTLY TRADED AT
DISCOUNTS FROM THEIR NET ASSET VALUES. THE RISK OF LOSS ASSOCIATED WITH
THIS CHARACTERISTIC OF CLOSED-END INVESTMENT COMPANIES MAY BE GREATER FOR
INVESTORS PURCHASING SHARES IN THE OFFERING AND EXPECTING TO SELL THE
SHARES SOON AFTER THE COMPLETION THEREOF. THERE IS NO RESTRICTION ON THE
NUMBER OF SHARES THAT MAY BE PURCHASED SUBJECT TO THE TRANSFER RESTRICTION
DESCRIBED IN THE FOOTNOTES TO THE TABLE BELOW, EXCEPT THAT THE FUND WILL
COMPLY, WITH RESPECT TO NON-RESTRICTED SHARES, WITH THE DISTRIBUTION
REQUIREMENTS OF THE NEW YORK STOCK EXCHANGE. SEE "UNDERWRITING." TO THE
EXTENT INVESTORS WHO ARE SUBJECT TO THE TRANSFER RESTRICTION SELL THEIR
SHARES ONCE THE TRANSFER RESTRICTION IS NO LONGER APPLICABLE, THE MARKET
PRICE OF THE FUND'S COMMON STOCK COULD BE ADVERSELY AFFECTED. IN ADDITION,
THE TRANSFER RESTRICTION WILL REDUCE THE NUMBER OF SHARES AVAILABLE FOR
SALE IN THE SECONDARY MARKET DURING THE 90-DAY RESTRICTION PERIOD.
This Prospectus sets forth concisely information about the Fund that a
prospective investor should know before purchasing Shares. Investors are
advised to read this Prospectus and retain it for future reference.
(CONTINUED ON FOLLOWING PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PRICE SALES LOAD PROCEEDS
TO PUBLIC(1) (1)(2) TO FUND(3)
Per Share $15.00 $ $
Total(4) $ $ $
(FOOTNOTES ON FOLLOWING PAGE)
The Shares are offered by the several International Underwriters subject
to prior sale, when, as and if delivered to and accepted by them, subject
to approval of certain legal matters by counsel for the International
Underwriters and certain other conditions, including the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It
is expected that delivery of the share certificates will be made in New
York, New York on or about , 1994.
________________________
BARING BROTHERS & CO., LIMITEDDONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there by any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
IN CONNECTION WITH THIS OFFERING, THE INTERNATIONAL UNDERWRITERS AND THE
U.S. UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR
MAINTAIN THE MARKET PRICE OF THE SHARES AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKETS OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
(CONTINUED FROM PREVIOUS PAGE)
Of the shares of the Fund's Common Stock offered (the "Shares"),
Shares are being offered by the U.S. Underwriters in the United States and
Canada (the "U.S. Offering") and Shares are being offered by the
International Underwriters outside the United States and Canada (the
"International Offering" and together with the U.S. Offering, the
"Offering"), subject to transfer between the U.S. Underwriters and the
International Underwriters (collectively, the "Underwriters"). The initial
public offering price and sales load per Share are the same for both the
U.S. Offering and the International Offering.
In order to raise additional capital to take advantage of additional
investment opportunities expected to occur if and when Korea relaxes
certain of its investment restrictions currently imposed on foreign
investors, the Fund currently intends, subject to the approval by its Board
of Directors, to make a rights offering to its shareholders at the time
such investment restrictions are relaxed. See "Future Rights Offering."
Fidelity Management & Research Company will serve as investment manager to
the Fund. Fidelity International Investment Advisors will serve as the
Fund's investment adviser. Pursuant to a Sub-Advisory Agreement, Fidelity
International Investment Advisors has delegated certain of its
responsibilities for day-to-day management of the Fund to Fidelity
Investments Japan Limited which will manage the Fund's portfolio through
its Tokyo office.
The address of the Fund is 82 Devonshire Street, Boston, Massachusetts
02109. The Fund's telephone number is (800) ^ 426-5523 ^ .
________________________
(NOTES FROM PRIOR PAGE)
(1) THE "PRICE TO PUBLIC" AND "SALES LOAD" PER SHARE WILL BE REDUCED TO $
AND $ , RESPECTIVELY, FOR PURCHASES IN SINGLE TRANSACTIONS (AS
DEFINED HEREIN UNDER "UNDERWRITING") OF BETWEEN AND ^
SHARES , INCLUSIVE, TO $ AND $ , RESPECTIVELY, FOR PURCHASES
IN SINGLE TRANSACTIONS OF BETWEEN AND ^ SHARES ,
INCLUSIVE, AND TO $ AND $ , RESPECTIVELY, FOR PURCHASES IN
SINGLE TRANSACTIONS OF OR MORE ^ SHARES , SUBJECT TO
THE FOLLOWING SENTENCE. PURCHASERS WHO AGREE TO PURCHASE SHARES OF COMMON
STOCK AT THE REDUCED PRICE WILL BE RESTRICTED FROM TRANSFERRING SUCH
^ SHARES FOR A PERIOD OF 90 DAYS AFTER THE CLOSING OF THE
OFFERING.
(2) THE FUND, THE INVESTMENT MANAGER, THE INVESTMENT ADVISER AND THE
SUB-ADVISER HAVE AGREED TO INDEMNIFY THE SEVERAL UNDERWRITERS AGAINST
CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF
1933.
(3) BEFORE DEDUCTING EXPENSES PAYABLE BY THE FUND, ESTIMATED AT $
, WHICH INCLUDE $ TO BE PAID TO THE UNDERWRITERS IN PARTIAL
REIMBURSEMENT OF THEIR EXPENSES.
(4) THE FUND HAS GRANTED THE U.S. UNDERWRITERS OPTIONS, EXERCISABLE ONE OR
MORE TIMES WITHIN 45 DAYS AFTER THE DATE OF THIS PROSPECTUS, TO PURCHASE UP
TO AN AGGREGATE OF ADDITIONAL SHARES OF COMMON STOCK AT THE
PRICE TO PUBLIC LESS SALES LOAD SOLELY TO COVER OVER-ALLOTMENTS, IF ANY.
IF ALL OF SUCH SHARES ARE PURCHASED, THE TOTAL PRICE TO PUBLIC, SALES LOAD
AND PROCEEDS TO FUND WILL BE $ , $ AND $ ,
RESPECTIVELY, ASSUMING NO REDUCTION AS DESCRIBED IN (1) ABOVE. SEE
"UNDERWRITING."
________________________
Unless otherwise specified, references in this Prospectus to "dollars,"
^"U.S.$, " or "$" are to U.S. dollars and references to "Won" or ""
are to Korean Won. On , the market average exchange rate
of the Won to the U.S. dollar, as published by the Korea Financial
Telecommunications and Clearings Institute (the "Market Average Exchange
Rate"), was = $1.00. Unless otherwise indicated, the U.S.
dollar equivalent of information in Korean Won as of a date or for a period
is as of such date or for the end of such period and is based on The Bank
of Korea concentration base rate, if pre-March 1990, or the Market Average
Exchange Rate, ^ from March 1990 ^ . No representation
is made that the Won or dollar amounts in this Prospectus could have been
or could be converted into Won or dollars, as the case may be, at any
particular rate or at all. See "Risk Factors - Exchange Rate Fluctuations"
and "The Republic of Korea" for additional information on the historical
rate of exchange between the dollar and Won.
Certain numbers in this Prospectus have been rounded for ease of
presentation, and, as a result, may not total precisely.
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE FUND'S INVESTMENT MANAGER OR INVESTMENT
ADVISER OR ANY INTERNATIONAL UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL
CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED,
THIS PROSPECTUS WILL BE SUPPLEMENTED OR AMENDED ACCORDINGLY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED THEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
________________________
TABLE OF CONTENTS
PAGE
Prospectus Summary3
Summary of Expenses ^ 19
The Fund ^ 20
Investment in Korea ^ 20
Future Rights Offering ^ 29
Use of Proceeds ^ 21
Investment Objective and Policies ^ 21
Additional Investment Activities ^ 26
Investment Restrictions ^ 28
The Republic of Korea ^ 46
The Securities Markets of Korea ^ 66
Risk Factors and Special Considerations ^ 31
Management of the Fund ^ 88
Portfolio Transactions ^ 94
Dividends and Distributions; Dividend Reinvestment
and Cash Purchase Plan ^ 96
Taxation ^ 97
Net Asset Value ^ 104
Description of Capital Stock ^ 105
Annual Tender Offers and Share Repurchases ^ 106
Custodian, Transfer Agent, Dividend
Paying Agent and Registrar ^ 108
Underwriting ^ 109
Experts ^ 111
Legal Matters ^ 112
Further Information ^ 112
Report of Independent Accountants ^ 113
Statement of Assets and Liabilities ^ 114
Appendix A: General Characteristics and
Risks of DerivativesA-1
Appendix B: Debt RatingsB-1
UNTIL , 1994, ALL DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
FIDELITY ADVISOR
KOREA FUND, INC.
COMMON STOCK
_____________
PROSPECTUS
_____________
BARING BROTHERS & CO., LIMITED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1994
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
- - Report of Independent Accountants
- - Statement of Assets and Liabilities dated ___________, 1994
(2) Exhibits
(a) - Articles of Incorporation* **
(b) - By-Laws* **
(c) - Not applicable
(d) - Specimen certificate for Common Stock, par value $.001 per share**
(e) - Dividend Reinvestment and Cash Purchase Plan**
(f) - Not applicable
(g) (1) - Form of Management Agreement with the Investment Manager**
(2) - Form of Advisory Agreement with the Investment Adviser**
(3) - Form of Sub-Advisory Agreement with Sub-Adviser**
(h) (1) - Form of U.S. Underwriting Agreement**
(2) - Form of International Underwriting Agreement
(3) - Form of Master Agreement Among Underwriters**
(4) - Form of Master Selected Dealer Agreement**
(5) - Form of Agreement Among International Underwriters**
(6) - Form of International Selling Agreement**
(7) - Form of Agreement between U.S. Underwriters and International
Underwriters**
(i) - Not applicable
(j) - Form of U.S. Custodian Agreement**
(k) (1) - Form of Agreement for Stock Transfer Services**
(2) - Form of Administration Agreement**
(l) (1) - Opinion and Consent of Rogers & Wells**
(2) - Opinion and Consent of Piper & Marbury**
(3) - Opinion and Consent of Shin & Kim**
(m) - Not applicable
(n) - Consent of Independent Accountants**
(o) - Not applicable
(p) - Form of Investment Letter**
(q) - Not applicable
(3) Other Exhibit
- - Power of Attorney of Edward C. Johnson 3d**
______________
* Filed herewith
** To be filed by Amendment.
*** Previously Filed.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement.
U.S. Securities and Exchange Commission registration fees $
New York Stock Exchange listing fee
Printing (other than stock certificates)
Engraving and printing stock certificates
Fees and expenses of qualification under state securities laws
(excluding fees of counsel)
Auditing and accounting fees
Legal fees and expenses
NASD fee
Miscellaneous
Total $
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of the effective date of the Registration Statement:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
Common Stock, $.001 par value one
ITEM 29. INDEMNIFICATION
Section 2-418 of the General Corporation Law of the State of Maryland,
Article SEVENTH of the Fund's Articles of Incorporation, Article VII of the
Fund's By-Laws, the Investment Management Agreement, the Underwriting
Agreement and the Investment Advisory Agreement provide for
indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors,
officers and controlling persons of the Fund, pursuant to the foregoing
provisions or otherwise, the Fund has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Fund of expenses incurred or paid by a director,
officer or controlling person of the Fund in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Fund will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER AND
INVESTMENT ADVISER
The description of the business of Fidelity Management & Research Company
("FMR"), Fidelity International Investment Advisors ("FIIA") and Fidelity
Investments Japan Limited ("FIJ") is set forth under the caption
"Management of the Fund" in the Prospectus forming part of this
Registration Statement.
The information as to the directors and officers of FMR, FIIA and FIJ is
set forth in their respective Form ADVs filed with the Securities and
Exchange Commission (File No. 801-7884), (File No. 801-21347) and (File
No. 801-________), each as amended as of the date hereof is incorporated
herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Fidelity Advisor Korea Fund, Inc.
82 Devonshire Street, Boston, Massachusetts 02109
(Fund's Articles of Incorporation and By-Laws)
Fidelity Management & Research Company
82 Devonshire Street, Boston, Massachusetts 02109
(with respect to its services as Investment Manager)
Fidelity International Investment Advisors
Pembroke Hall, 42 Crow Lane, Pembroke, Bermuda
(with respect to its service as Investment Adviser)
Fidelity Investments Japan Limited
19th Floor, Shiroyama JT Mori Building, 4-3-1
Toronomon Minatu-ku, Tokyo 105, Japan
(with respect to its services as Sub-Adviser)
Fidelity International Limited
Pembroke Hall, 42 Crow Lane, Pembroke, Bermuda
(with respect to its services as Fund Manager)
The Chase Manhattan Bank, N.A.
[Address]
(with respect to its services as Custodian for the Fund's U.S. assets)
State Street Bank and Trust Company
Two Heritage Drive, Quincy, Massachusetts 02171
(with respect to its services as Transfer Agent)
ITEM 32. MANAGEMENT SERVICES
Not applicable
ITEM 33. UNDERTAKINGS
(a) The Fund undertakes to suspend offering its shares until it amends its
prospectus contained herein if (1) subsequent to the effective date of its
registration statement, the net asset value per share declines more than 10
percent from its net asset value per share as of the effective date of this
registration statement or (2) the net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
(b) The Fund hereby undertakes that :
^
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Fund under Rule 497(h) under the Securities
Act of 1933 shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
New York, the State of New York on the ^15 day of ^
September , 1994.
FIDELITY ADVISOR KOREA FUND, INC.
By:/s/ Edward C. Johnson 3d
Edward C. Johnson 3d, President
Chairman of the Board
^
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
(SIGNATURE) (TITLE) (DATE)
/s/ Edward C. Johnson 3d Director and President ^ September 15, 1994
Edward C. Johnson 3d
/s/ J. Gary Burkhead Director and Senior Vice President ^ September 15, 1994
J. Gary Burkhead (Principal Executive Officer)
/s/ Gary L. French Treasurer (Principal Financial and ^ September 15, 1994
Gary L. French Accounting Officer)
/s/ H.F. Van den Hoven Director ^ September 15, 1994
H.F. Van den Hoven
/s/ David Yunich Director ^ September 15, 1994
David Yunich
/s/ Bertram Witham Director ^ September 15, 1994
Bertram Witham
</TABLE>
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