(2_FIDELITY_LOGOS)FIDELITY ADVISOR
(REGISTERED TRADEMARK)
KOREA FUND, INC.
ANNUAL REPORT
SEPTEMBER 30, 1998
CONTENTS
PRESIDENT'S MESSAGE 3 Ned Johnson on investing strategies.
FUND TALK 4 The manager's review of fund
performance, strategy and outlook.
INVESTMENT CHANGES 7 A summary of major shifts in the fund's
investments over the past six months.
INVESTMENTS 8 A complete list of the fund's investments
with their market values.
FINANCIAL STATEMENTS 12 Statements of assets and liabilities,
operations, and changes in net assets,
as well as financial highlights.
NOTES 16 Notes to the financial statements.
REPORT OF INDEPENDENT 20 The auditors' opinion.
ACCOUNTANTS
DIVIDENDS AND DISTRIBUTIONS 21 Dividend reinvestment and
cash purchase plan.
OTHER FUND INFORMATION 23 Changes and updates.
NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(C) OF THE
INVESTMENT COMPANY ACT OF 1940
THAT FROM TIME TO TIME THE FUND MAY PURCHASE AT MARKET PRICES SHARES
OF ITS COMMON STOCK IN THE
OPEN MARKET.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL
INFORMATION OF THE SHAREHOLDERS OF THE FUND. IT IS NOT A PROSPECTUS,
CIRCULAR OR REPRESENTATION
INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR OF
ANY SECURITIES MENTIONED
IN THE REPORT.
PRESIDENT'S MESSAGE
(photo_of_Edward_C_Johnson_3d)
DEAR STOCKHOLDER:
The stock and bond markets continued to be influenced by competing
factors as the third quarter of 1998 ended. On the one hand, low
inflation, low unemployment and moderate growth in the U.S. economy
provided a foundation for positive returns. But growing concerns about
U.S. corporate earnings, combined with fears about the health of the
economies and financial markets in Japan, Russia and many emerging
markets, led to a continuation of the volatility that has marked most
of the year.
While it's impossible to predict the future direction of the markets
with any degree of certainty, there are certain basic principles that
can help investors plan for their future needs.
First, investors are encouraged to take a long-term view of their
portfolios. If you can afford to leave your money invested through the
inevitable up and down cycles of the financial markets, you will
greatly reduce your vulnerability to any single decline. We know from
experience, for example, that stock prices have gone up over longer
periods of time, have significantly outperformed other types of
investments and have stayed ahead of inflation.
Second, you can further manage your investing risk through
diversification. A stock mutual fund, for instance, is already
diversified, because it invests in many different companies. You can
increase your diversification further by investing in a number of
different stock funds, or in such other investment categories as
bonds. If you have a short investment time horizon, you might want to
consider moving some of your investment into a money market fund,
which seeks income and a stable share price by investing in
high-quality, short-term investments. Of course, it's important to
remember that there is no assurance that a money market fund will
achieve its goal of maintaining a stable net asset value of $1.00 per
share, and that these types of funds are neither insured nor
guaranteed by any agency of the U.S. government.
Finally, no matter what your time horizon or portfolio diversity, it
makes good sense to follow a regular investment plan, investing a
certain amount of money in a fund at the same time each month or
quarter and periodically reviewing your overall portfolio. By doing
so, you won't get caught up in the excitement of a rapidly rising
market, nor will you buy all your shares at market highs. While this
strategy - known as dollar cost averaging - won't assure a profit or
protect you from a loss in a declining market, it should help you
lower the average cost of your purchases.
Remember to contact your investment professional if you need help with
your investments.
Best regards,
Edward C. Johnson 3d
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Hokeun Chung, Portfolio Manager of Fidelity Advisor
Korea Fund, Inc.
Q. HOW DID THE FUND PERFORM, HOKEUN?
A. For the 12-month period that ended September 30, 1998, the fund had
a total return of -49.45%, based on net asset value. For comparison,
the Korea Stock Exchange Composite Price Index (KOSPI) returned
- -67.84% over the same period. In terms of the fund's market value
return - which represents gains or losses in the fund's share price -
the fund returned -50.00% during the period.
Q. WHAT PRIMARY FACTORS INFLUENCED THE FUND'S PERFORMANCE DURING THE
PERIOD?
A. It's been a volatile and difficult period for the South Korean
economy. South Korea continued to struggle through much of the period
with currency problems and the threat of defaulting on its foreign
debt obligations. Toward the end of 1997, the International Monetary
Fund, or IMF, stepped in and restructured the country's debt. The
market rallied at the beginning of 1998 after the IMF agreement,
spurring hopes that South Korea's bankruptcy problems were behind it.
During the second and third quarters of 1998, however, the market
again suffered in the wake of declining export volumes, ongoing
corporate bankruptcies and negative investor sentiment toward Asia and
emerging markets.
Q. IN THE LAST REPORT YOU TALKED ABOUT ECONOMIC REFORMS IN KOREA AND
THE IMPACT OF THE IMF AGREEMENT. ARE THESE REFORMS HAVING ANY POSITIVE
EFFECT?
A. It is premature to say. Toward the end of last year, the economic
situation in South Korea was very precarious. Since the IMF stepped
in, the government in Seoul has made currency stabilization a priority
and converted the majority of its short-term debt to long-term. Prior
to the IMF agreement, approximately 70% of the country's total debt
was short-term; after the restructuring, it represented approximately
30% of outstanding debt obligations. The government also expressed its
commitment to stimulate economic growth by lowering interest rates.
While not directly related to economic reforms, Korea also experienced
a substantial increase in its trade account surplus. Primarily due to
low imports, foreign reserves increased from approximately $20 billion
at the beginning of the period to roughly $46 billion - a near
record-high level. While these positive developments have eliminated
the near-term possibility of government default and the currency has
stabilized, they are not an absolute cure. The government has
subsequently removed currency fluctuation limitations. Most of the
improvement in the trade account surplus was due to lower imports. The
economy has not seen an increase in exports. In addition, there is
cause to be concerned about bankruptcies, the health of individual
companies and the impact of the economic crisis in Asia.
Q. WIDESPREAD CORPORATE BANKRUPTCIES HAVE PLAGUED THE SOUTH KOREAN
ECONOMY FOR SOME TIME NOW. WHAT IS THE CURRENT ENVIRONMENT?
A. In general, Korean corporations still have huge debt levels and the
number of bankruptcies continued to rise until about two months ago.
The level of bankruptcies started to decline as the government put
more money into the economy, borrowing restrictions became more
lenient and interest rates were lowered. However, high corporate debt
levels remain a problem with many banks, financial institutions and
other corporations. As a result, while there are some positive signs,
I have positioned the fund defensively and focused on companies with
low debt levels and solid balance sheets.
Q. A REVIEW OF THE FUND'S HOLDINGS INDICATES THAT YOU HAVE NOT MADE
MANY CHANGES TO THE TOP POSITIONS. IN ADDITION, OVER 40% OF THE FUND'S
ASSETS REMAIN IN THE TOP FIVE HOLDINGS. WHAT IS YOUR REASON FOR THIS?
A. There are a couple of reasons for this strategy. First, given the
extreme bearish sentiment in Korea, I took a very cautious, bottom-up
approach to my stock picking. My research led me to a small number of
companies that had attractive balance sheets and solid business
prospects. Companies such as Pohang Iron & Steel, Samsung Fire &
Marine, Suheung Capsule and Medison are examples of companies that
remained in the top holdings because they met these criteria. The
total number of holdings in the fund was further limited because the
Korean economy is very dependent upon exports to support earnings,
which is why I focused on companies with solid international business
and growing export results. Second, in the wake of widespread
bankruptcies, I wanted to minimize the fund's exposure to the broader
Korean stock market decline, so I concentrated on a small number of
companies with positive business fundamentals.
Q. WERE THERE ANY BRIGHT SPOTS IN THIS UNCERTAIN ECONOMIC BACKDROP?
WHAT STOCKS WERE THE MAIN DETRACTORS FROM PERFORMANCE?
A. The fund's second-largest holding - Medison - performed well for
the fund. The company is considered a world-class technology leader in
the ultrasound medical equipment market. Medison generates
approximately 70% of its revenues from exports and is a non-commodity
related business, a plus given that in this uncertain economic
environment commodities were one of the hardest hit sectors in Korea.
While the fund was underweighted in its holdings of Korea Electric
Power relative to the KOSPI index, the stock performed well during the
period. The company was viewed as a safe haven for many investors
because it is government-owned with no chance of bankruptcy. I took
advantage of some price weakness during the past six months to
increase the fund's holdings in this stock. On the other hand, the
fund's position in Lg Electronics hurt performance because the
company's U.S. subsidiary, Zenith, was on the verge of bankruptcy,
causing concern about the impact on Lg Electronic's business. In
general, the steep decline in the value of the Korean currency - the
won - hurt profits for the majority of Korean companies.
Q. WHAT'S YOUR OUTLOOK, HOKEUN?
A. I'm still very cautious about the Korean market. While the
government is more aware of the problems the economy is facing and the
possibility of government debt default has been greatly reduced this
year, it may still take a while for government reforms to have an
impact. Concerns about the level of bankruptcies and corporate debt
also linger. In this uncertain environment, my focus will be to
minimize risks to the fund by investing in companies with stable cash
flows, the best earnings outlooks and solid business fundamentals.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.
HOKEUN CHUNG ON THE KOREAN
MARKET'S RELATIONSHIP TO THE
YEN/DOLLAR EXCHANGE RATES:
"The Korean financial market is very
sensitive to yen/dollar exchange
rates because Korea is primarily
an export-driven economy, and its
companies compete directly with
Japanese firms for business and
market share. A strong yen equals a
strong Korean economy because it
makes Korean products cheaper
than comparable Japanese
products, giving Korean exporters
price advantages. Seoul recently
removed currency fluctuation
limitations - allowing the won
to fluctuate freely. As a result, the
yen weakened against the won and
other major currencies during the
second and third quarters of this
year. While we may begin to see the
benefits of a free-floating exchange
rate over the long term, this change
recently has created a difficult
environment for Korean products
and put further pressures on the
Korean stock market."
FUND FACTS
GOAL: to achieve long-term
capital appreciation through
investments in equity and debt
securities of Korean issuers
FUND NUMBER: 603
TRADING SYMBOL: FAK
START DATE: October 31, 1994
SIZE: as of September 30, 1998,
more than $22 million
MANAGER: Hokeun Chung, since
1996; joined Fidelity in 1994
(checkmark)
INVESTMENT CHANGES
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TOP TEN STOCKS AS OF SEPTEMBER 30, 1998
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS IN THESE STOCKS
6 MONTHS AGO
Korea Electric Power Corp. 11.7 7.0
Medison Co. Ltd. 9.4 6.2
Samsung Electronics Co. Ltd. 7.8 9.5
Suheung Capsule Co. Ltd. 7.1 6.2
Samsung Fire & Marine Insurance 6.3 9.5
Pohang Iron & Steel Co. Ltd. 5.2 4.2
Youngone Corp. 4.7 6.1
Dae Duck Electronics Co. Ltd. 4.5 2.9
S1 Corp. 4.1 3.8
Sindoricoh Co. Ltd. 4.0 3.2
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TOP TEN MARKET SECTORS AS OF SEPTEMBER 30, 1998
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS IN THESE MARKET SECTORS
6 MONTHS AGO
TECHNOLOGY 20.4 23.3
HEALTH 17.9 14.1
UTILITIES 14.2 9.2
FINANCE 11.2 15.0
BASIC INDUSTRIES 11.2 10.3
DURABLES 7.2 12.3
NONDURABLES 4.7 2.6
SERVICES 4.1 3.8
INDUSTRIAL MACHINERY & EQUIPMENT 1.7 1.3
ENERGY 1.1 1.5
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INVESTMENTS SEPTEMBER 30, 1998
Showing Percentage of Total Value of Investment in Securities
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COMMON STOCKS - 96.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.8%
SHIP BUILDING & REPAIR - 0.8%
Hyundai Heavy Industries Co. Ltd. 12,000 $ 179,471
BASIC INDUSTRIES - 11.2%
CHEMICALS & PLASTICS - 5.6%
Honam Petrochemical Corp. 15,000 85,961
Korea Fine Chemical Co. Ltd. 1,500 34,514
Lg Chemical Ltd. 80,000 518,281
Rifa Industrial Co. 30,000 199,101
Youl Chon Chemical Co. 22,000 463,491
1,301,348
IRON & STEEL - 5.2%
Pohang Iron & Steel Co. Ltd. 30,245 1,198,817
PAPER & FOREST PRODUCTS - 0.4%
Hansol Paper Co. Ltd. 20,000 89,448
TOTAL BASIC INDUSTRIES 2,589,613
CONSTRUCTION & REAL ESTATE - 0.6%
BUILDING MATERIALS - 0.6%
Hankuk Glass Industry Co. Ltd. 10,000 136,617
DURABLES - 7.2%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Hyundai Motor Co. Ltd. 2,000 17,473
CONSUMER ELECTRONICS - 2.4%
Lg Electronics, Inc. 50,000 408,053
Saehan Precision Co. Ltd. 12,500 137,516
545,569
TEXTILES & APPAREL - 4.7%
Youngone Corp. 47,000 1,096,638
TOTAL DURABLES 1,659,680
ENERGY - 1.1%
OIL & GAS - 1.1%
Ssangyong Oil Refining 30,000 252,382
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - 11.2%
BANKS - 1.9%
Hana Bank 43,747 $ 158,851
Housing & Commercial Bank 20,000 50,045
Kookmin Bank 65,009 157,994
Shinhan Bank (a) 35,000 81,287
448,177
CREDIT & OTHER FINANCE - 0.8%
Samsung Securities Co. Ltd. 36,032 180,063
INSURANCE - 6.3%
Samsung Fire & Marine Insurance 7,500 1,456,048
SECURITIES INDUSTRY - 2.2%
Daewoo Securities Co. Ltd. (a) 30,000 130,505
Dongwon Securities Co. Ltd. 30,000 113,464
Shin Young Securities Co. 50,000 276,829
520,798
TOTAL FINANCE 2,605,086
HEALTH - 17.9%
DRUGS & PHARMACEUTICALS - 7.9%
Korea Green Cross Corp. 8,347 183,655
Suheung Capsule Co. Ltd. 123,350 1,640,822
1,824,477
MEDICAL EQUIPMENT & SUPPLIES - 10.0%
Medison Co. Ltd. 220,000 2,182,993
Medison Co. Ltd. rights 10/29/98 (a) 20,009 56,254
Shinhung Co. Ltd. 10,000 82,330
2,321,577
TOTAL HEALTH 4,146,054
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
Daewoo Heavy Industries Ltd. 70,000 236,815
Han Kuk Carbon Co. 7,000 157,037
393,852
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 0.5%
LODGING & GAMING - 0.5%
Hotel Shilla Co. (a) 30,000 $ 115,621
NONDURABLES - 4.7%
FOODS - 4.7%
Cheil Jedang Corp. 22,250 382,365
Nong Shim Co. Ltd. 18,000 711,846
1,094,211
RETAIL & WHOLESALE - 0.3%
GENERAL MERCHANDISE STORES - 0.3%
Shinsegae Department Store 10,000 82,330
SERVICES - 4.1%
S1 Corp. 8,218 951,355
TECHNOLOGY - 20.4%
COMMUNICATIONS EQUIPMENT - 4.0%
Sindoricoh Co. Ltd. 40,000 918,928
ELECTRONICS - 16.4%
Dae Duck Electronics Co. Ltd. 18,080 1,053,014
Hyundai Electronics Industries Co. Ltd. (a) 20,000 385,403
Mirae Corp. 251,321 343,347
Samsung Display Devices Co. 9,000 210,318
Samsung Display Devices Co. rights 10/12/98 (a) 1,207 8,245
Samsung Electronics Co. Ltd. 66,045 1,804,572
3,804,899
TOTAL TECHNOLOGY 4,723,827
TRANSPORTATION - 0.4%
AIR TRANSPORTATION - 0.4%
Dongyang Express Corp. 5,500 18,835
Korean Air (a) 30,000 80,892
99,727
UTILITIES - 14.2%
CELLULAR - 2.5%
SK Telecom Ltd. 1,236 579,940
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
ELECTRIC UTILITY - 11.7%
Korea Electric Power Corp. 195,000 $ 2,706,088
TOTAL UTILITIES 3,286,028
TOTAL COMMON STOCKS 22,315,854
(Cost $34,701,009)
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CASH EQUIVALENTS - 3.7%
Taxable Central Cash Fund (b) 852,417 852,417
(Cost $852,417)
TOTAL INVESTMENT IN SECURITIES - 100% $ 23,168,271
(Cost $35,553,426)
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 5.36%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
INCOME TAX INFORMATION
At September 30, 1998, the aggregate cost of investment securities for
income tax purposes was $36,540,077. Net unrealized depreciation
aggregated $13,371,806, of which $2,527,728 related to appreciated
investment securities and $15,899,534 related to depreciated
investment securities.
At September 30, 1998, the fund had a capital loss carryforward of
approximately $17,677,000 of which $3,725,000, $2,506,000 and
$11,446,000 will expire on September 30, 2004, 2005, and 2006,
respectively.
The fund intends to elect to defer to its fiscal year ending September
30, 1999 approximately $19,783,000 of losses recognized during the
period November 1, 1997 to September 30, 1998.
FINANCIAL STATEMENTS
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STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (COST $35,553,426) - SEE $ 23,168,271
ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 52,687
DIVIDENDS RECEIVABLE 991
INTEREST RECEIVABLE 3,638
DEFERRED ORGANIZATION EXPENSES 33,778
TOTAL ASSETS 23,259,365
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 144,048
PAYABLE FOR INVESTMENTS PURCHASED 149,861
ACCRUED MANAGEMENT FEE 18,968
OTHER PAYABLES AND ACCRUED EXPENSES 31,781
TOTAL LIABILITIES 344,658
NET ASSETS $ 22,914,707
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 73,746,641
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON (38,446,975)
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS (12,384,959)
AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES
NET ASSETS, FOR 6,243,381 SHARES OUTSTANDING $ 22,914,707
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER $3.67
SHARE ($22,914,707 (DIVIDED BY) 6,243,381 SHARES)
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STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998
INVESTMENT INCOME $ 257,475
DIVIDENDS
INTEREST 76,629
334,104
LESS FOREIGN TAXES WITHHELD (42,760)
TOTAL INCOME 291,344
EXPENSES
MANAGEMENT FEE $ 267,339
TRANSFER AGENT FEES 11,210
ADMINISTRATION FEES AND EXPENSES 53,502
DIRECTOR'S COMPENSATION 55,168
CUSTODIAN FEES AND EXPENSES 67,644
AUDIT 77,334
LEGAL 12,572
AMORTIZATION OF ORGANIZATION EXPENSES 31,500
MISCELLANEOUS 46,591
TOTAL EXPENSES BEFORE REDUCTIONS 622,860
EXPENSE REDUCTIONS (4,638) 618,222
NET INVESTMENT INCOME (LOSS) (326,878)
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES (24,672,783)
FOREIGN CURRENCY TRANSACTIONS (31,345) (24,704,128)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 2,633,594
ASSETS AND LIABILITIES IN FOREIGN CURRENCIES 68 2,633,662
NET GAIN (LOSS) (22,070,466)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ (22,397,344)
FROM OPERATIONS
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STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS $ (326,878) $ (318,430)
NET INVESTMENT INCOME (LOSS)
NET REALIZED GAIN (LOSS) (24,704,128) (7,744,899)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 2,633,662 (7,532,400)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING (22,397,344) (15,595,729)
FROM OPERATIONS
SHARE TRANSACTIONS
COMMON STOCKS ISSUED THROUGH RIGHTS OFFERING NET OF SALES - 13,726,456
LOAD AND OFFERING EXPENSES
TOTAL INCREASE (DECREASE) IN NET ASSETS (22,397,344) (1,869,273)
NET ASSETS
BEGINNING OF PERIOD 45,312,051 47,181,324
END OF PERIOD $ 22,914,707 $ 45,312,051
OTHER INFORMATION - 1,836,288
SHARES SOLD
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FINANCIAL HIGHLIGHTS
YEARS ENDED SEPTEMBER 30, OCTOBER 31, 1994
(COMMENCEMENT
OF OPERATIONS) TO
SEPTEMBER 30,
1998 1997 1996 1995
SELECTED PER-SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.26 $ 10.71 $ 12.62 $ 14.10
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME (LOSS) F (.05) (.06) (.08) (.02)
NET REALIZED AND UNREALIZED GAIN (LOSS) (3.54) (3.14) (1.83) (1.30)
TOTAL FROM INVESTMENT OPERATIONS (3.59) (3.20) (1.91) (1.32)
DILUTION RESULTING FROM COMMON STOCK - (.19) - -
ISSUED THROUGH RIGHTS OFFERING
OFFERING EXPENSES - (.06) - (.16)
NET ASSET VALUE, END OF PERIOD $ 3.67 $ 7.26 $ 10.71 $ 12.62
MARKET VALUE, END OF PERIOD $ 3.438 $ 6.875 $ 10.500 $ 11.125
TOTAL RETURN B, C (50.00)% (31.23)% D (5.62)% (25.83)% D
MARKET VALUE H
NET ASSET VALUE E, G (49.45)% (28.08)% (15.13)% (10.50)%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 22,915 $ 45,312 $ 47,181 $ 55,603
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.32% 1.88% 1.80% 1.88% A
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.30% I 1.88% 1.79% I 1.88% A
AFTER EXPENSE REDUCTIONS
RATIO OF NET INVESTMENT INCOME (LOSS) TO (1.22)% (.64)% (.68)% (.19)% A
AVERAGE NET ASSETS
PORTFOLIO TURNOVER RATE 65% 51% 28% 25% A
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A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D TOTAL MARKET VALUE RETURN INCLUDES THE EFFECT OF THE SALES LOAD PAID
IN CONNECTION WITH THE INITIAL PUBLIC OFFERING AND RIGHTS OFFERING.
E TOTAL RETURN BASED ON NET ASSET VALUE REFLECTS THE EFFECT OF CHANGES
IN THE NET ASSET VALUE ON THE PERFORMANCE OF THE FUND, AND ASSUMES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS, IF ANY, WERE REINVESTED.
THIS PERCENTAGE IS NOT AN INDICATION OF THE PERFORMANCE OF
SHAREHOLDER'S INVESTMENT IN THE FUND BASED ON THE MARKET VALUE DUE TO
DIFFERENCES BETWEEN THE MARKET PRICE OF THE STOCK AND THE NET ASSET
VALUE OF THE FUND.
F NET INVESTMENT INCOME (LOSS) PER SHARE HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
G TOTAL NET ASSET VALUE RETURN DOES NOT INCLUDE THE EFFECT OF DILUTION
OR SALES LOAD.
H TOTAL RETURN BASED ON MARKET VALUE REFLECTS THE EFFECT OF CHANGES IN
THE FUND'S MARKET VALUE AND ASSUMES DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS, IF ANY, WERE REINVESTED.
I FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES
(SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the year ended September 30, 1998
1. SIGNIFICANT ACCOUNTING
POLICIES.
Fidelity Advisor Korea Fund, Inc. (the fund), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended
(the 1940 Act), as a non-diversified closed-end management investment
company.
There are 100,000,000 shares of $.001 par value common stock
authorized. The Board of Directors of the fund may, in the first
calendar quarter of each year and, under certain circumstances,
conduct a tender offer to repurchase a maximum of ten percent of the
fund's outstanding shares of common stock at a price equal to the net
asset value per share at the time of repurchase.
In January 1997, the fund completed a rights offering, including the
exercise of an over-allotment option, resulting in the issuance of an
additional 1,836,288 shares of common stock. Each shareholder was
issued one right for each share of the fund's common stock held as of
November 15, 1996, the record date. For every three rights issued,
shareholders were entitled to purchase one new share of the fund's
common stock at a subscription price of $7.96 per share.
The financial statements have been prepared in conformity with
generally accepted accounting principles which permit management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price in the principal market in which such securities
are normally traded. If trading or events occurring in other markets
after the close of the principal market in which securities are traded
are expected to materially affect the value of those securities, then
they are valued at their fair value taking this trading or these
events into account. Fair value is determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Securities for which quotations are not readily
available are valued primarily using dealer-supplied valuations or at
their fair value. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent disposition of foreign currencies, the difference between
the amount of net investment income accrued and the U.S. dollar amount
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FOREIGN CURRENCY TRANSLATION - CONTINUED
actually received, and gains and losses between trade date and
settlement on purchases and sales of securities. The effects of
changes in foreign currency exchange rates on investments in
securities are included with the net realized and unrealized gain or
loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
U.S. federal income taxes to the extent that it distributes
substantially all of its taxable income for its fiscal year. The fund
may be subject to foreign taxes on income, which are accrued based
upon the fund's understanding of the tax rules and regulations that
exist in the markets in which it invests. The fund accrues such taxes
as applicable. The schedule of investments includes information
regarding income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income is accrued as earned. Investment
income is recorded net of foreign taxes withheld where recovery of
such taxes is uncertain.
EXPENSES. The fund incurred organization expenses in connection with
its initial issuance of shares. The organization expenses of $157,276
are being amortized on a straight-line basis for a five-year period
beginning at the commencement of operations of the fund.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date.
Pursuant to the fund's Dividend Reinvestment and Cash Purchase Plan
(the Plan), shareholders may elect to have all distributions
automatically reinvested in fund shares. Shareholders who do not
participate in the Plan will receive all distributions in cash paid by
check in U.S. dollars. 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. If the
net asset value is less than 95% of the market price on the valuation
date, then 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 date, the next
preceding trading date. If the net asset value exceeds the market
price of the fund shares at such time, the Plan Agent will purchase
shares of stock valued at market price on the valuation date.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
1. SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
DISTRIBUTIONS TO SHAREHOLDERS -
CONTINUED
distribution reclassifications, are primarily due to differing
treatments for foreign currency transactions, net operating losses,
capital loss carryforwards and losses deferred due to wash sales and
excise tax regulations.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Accumulated undistributed net realized gain (loss) on investments and
foreign currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable
income or gain remaining at fiscal year end is distributed in the
following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
The fund invests in new securities offered by some foreign companies
by making applications in the public offerings. The full or a portion
of the issue price is paid at the time of the application and recorded
as application money for new issues. Upon allotment, this amount plus
the remaining amount of issue price is recorded as cost of
investments.
2. OPERATING POLICIES.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission(the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc., an
affiliate of FMR. The Cash Fund is an open-end money market fund
available only to investment companies and other accounts managed by
FMR and its affiliates. The Cash Fund seeks preservation of capital,
liquidity, and current income by investing in U.S. Treasury securities
and repurchase agreements for these securities. Income distributions
from the Cash Fund are declared daily and paid monthly from net
interest income. Income distributions earned by the fund are recorded
as interest income in the accompanying financial statements.
3. PURCHASES AND SALES
OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $17,664,297 and $16,854,347, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a fee
that is computed daily at an annual rate of 1.00% of the fund's
average net assets.
ADVISER FEE. FMR and the fund entered into an investment advisory
agreement with Fidelity International Investment Advisors (FIIA), an
affiliate of FMR, pursuant to which FIIA is responsible for the
management of the fund's portfolio in accordance with the fund's
investment policies and for making decisions to buy or sell
securities. FMR pays FIIA a portion of its management fee.
SUB-ADVISER FEE. FIIA, on behalf of the fund, has entered into a
sub-advisory agreement with Fidelity Investments Japan Limited (FIJ),
an affiliate of FMR, to provide advisory services concerning fund
assets invested in Japanese and other securities. FIIA pays FIJ a
portion of its fee based on the assets managed by FIJ.
ADMINISTRATIVE FEE. Fidelity Service Company, Inc. (FSC), a division
of FMR Corp., has entered into a Fund Management Agreement with the
fund to provide, or arrange to provide, administrative services to the
fund including maintaining the fund's accounting records. As the
fund's administrative manager, FSC receives a monthly fee at an annual
rate of .20% of the fund's average net assets.
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses. For the period, the fund's expenses
were reduced by $4,638 under this arrangement.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Fidelity Advisor Korea
Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Fidelity Advisor Korea Fund Inc. at September 30, 1998, and the
results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements
and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fidelity Advisor Korea
Fund, Inc.'s management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at
September 30, 1998, by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 6, 1998
DIVIDENDS AND DISTRIBUTIONS
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The fund intends to distribute annually to shareholders substantially
all of its net investment income from dividends and interest earnings
and expects to distribute any net realized capital gains at least
annually. Pursuant to the Dividend Reinvestment and Cash Purchase Plan
(the "Plan"), adopted by the fund, shareholders 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
all distributions in cash paid by check in U.S. dollars mailed
directly to the shareholder by the Plan Agent. Shareholders who would
like additional information regarding the Plan or wish to have
distributions automatically reinvested should notify the fund, c/o the
Plan Agent for Fidelity Advisor Korea Fund, Inc., at Two Heritage
Drive, Quincy, Massachusetts 02171.
The Plan Agent will serve 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, as shareholders may have elected,
non-participants 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 or, if the net asset value is less
than 95% of the market price on the valuation date, then new 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, then the next preceding trading
day. If the net asset value exceeds the market price of fund shares at
such time, or if the fund should declare a 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, with the cash in respect of such dividend
or distribution, for the participant's account on, or shortly after,
the payment date.
Participants in the Plan have the option of making additional 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 of each year. Any voluntary cash
payments received more than thirty days prior to such date will be
returned by the Plan Agent, and interest will not be paid on any
uninvested cash payments. 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 as 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 forty-eight 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 the 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 non-certificated form in the name of the
participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan. In the case of shareholders such as
banks, brokers or nominees, which hold shares for others who are the
beneficial owners, the Plan Agent will administer the Plan on the
basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the
shareholder's name and held for the account of beneficial owners who
are participating in the Plan.
There is no charge to participants for reinvesting dividends or
capital gains distributions. The Plan Agent's fees for the handling of
the reinvestment of dividends and 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's account will be charged a prorata
share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of
dividends or 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 reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable on such dividends
and distributions.
If your shares are held in your own name and you wish to receive all
dividends and capital gain distributions in cash rather than in
shares, you may withdraw from the Plan without penalty at any time by
contacting the Plan Agent. If your shares are held in nominee name,
you should be able to withdraw from the Plan without penalty at any
time by sending written notice to your nominee. If you withdraw, you
will receive a share certificate for all full shares or, if you wish,
the Plan Agent will sell your shares and send you the proceeds, after
the deduction of brokerage commissions. The Plan Agent will convert
any fractional shares to cash at the then-current market price and
send you a check for the proceeds. Please note that, if you
participate in the Plan through a brokerage account, you may not be
able to continue as a participant if you transfer those shares to
another broker. Contact your broker or nominee or the Plan Agent to
see what is the best arrangement for you to participate in the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the fund reserves the right to amend or terminate the
Plan as applied to any voluntary cash payment made and any dividend or
distribution paid subsequent to notice of the change 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 Plan
Agent by at least 30 days written notice to all participants in the
Plan. All correspondence concerning the Plan should be directed c/o
the Plan Agent for Fidelity Advisor Korea Fund, Inc., at Two Heritage
Drive, Quincy, Massachusetts 02171.
OTHER FUND INFORMATION
All of the stock of FMR is owned by FMR Corp., its parent organized in
1972. The voting common stock of FMR Corp. is divided into two
classes. Class B is held predominantly by members of the Edward C.
Johnson 3d family and is entitled to 49% of the vote on any matter
acted upon by the voting common stock. Class A is held predominantly
by non-Johnson family member employees of FMR Corp. and its affiliates
and is entitled to 51% of the vote on any such matter. The Johnson
family group and all other Class B shareholders have entered into a
shareholders' voting agreement under which all Class B shares will be
voted in accordance with the majority vote of Class B shares. Under
the Investment Company Act of 1940 (1940 Act), control of a company is
presumed where one individual or group of individuals owns more than
25% of the voting stock of that company. Therefore, through their
ownership of voting common stock and the execution of the
shareholders' voting agreement, members of the Johnson family may be
deemed, under the 1940 Act, to form a controlling group with respect
to FMR Corp.
RIGHTS OFFERING. In January 1997, the fund completed a rights offering
to holders of the fund's common stock. The primary rights offering was
oversubscribed and, pursuant to the terms of the offering, the Board
of Directors of the fund determined to exercise the offering's
over-allotment option. Through the primary rights offering and the
exercise of the over-allotment option, a total of 1,836,288 new shares
were acquired by holders of the fund's common stock.
FOREIGN OWNERSHIP LIMIT CHANGE. Korean law that previously restricted
foreign ownership of Korean stocks has been significantly amended to
eliminate all investment limits on foreign portfolio investments other
than on certain public- interest corporations, notably Korea Electric
Power Corp. and other defense-related or similar national interest
corporations.
CUSTODIAN. The Chase Manhattan Bank, N.A., 1211 Avenue of the
Americas, New York 10036, is custodian of the assets of the fund. The
custodian is responsible for the safekeeping of the fund's assets and
the appointment of the subcustodian banks and clearing agencies. The
custodian takes no part in determining the investment policies of the
fund or in deciding which securities are purchased or sold by the
fund. However, the fund may invest in obligations of the custodian and
may purchase securities from or sell securities to the custodian. The
Bank of New York and The Chase Manhattan Bank, each headquartered in
New York, also may serve as a special purpose custodian of certain
assets of the fund in connection with pooled repurchase agreement
transactions.
ADDRESS
Fidelity Advisor Korea Fund, Inc.
82 Devonshire Street
Boston, MA
1-800-426-5523
INVESTMENT MANAGER
Fidelity Management &
Research Company
Boston, MA
INVESTMENT ADVISER
Fidelity International
Investment Advisors
Pembroke, Bermuda
SUB-ADVISER
Fidelity Investments Japan Limited
Tokyo, Japan
DIRECTORS AND OFFICERS
Edward C. Johnson 3d,
Director and President
Robert C. Pozen, Director and
Senior Vice President
Helmert Frans van den Hoven, Director
Edward H. Malone, Director
Bertram H. Witham, Jr., Director
David L. Yunich, Director
Robert Auld, Vice President
Eric D. Roiter, Secretary
Richard A. Silver, Treasurer
Gregory T. Merz, Assistant Secretary
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
State Street Bank and Trust Company
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
LEGAL COUNSEL
Rogers & Wells
New York, NY
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Boston, MA
(registered trademark)
