-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FG0hEtSNAuAlbsW0D5JhWjAPmzWzqkLDsEPWHQCi3zbdYvW8fRCco19/zsXjDJ95 3lzfLoAeqUjcwXSuuBFjjg== 0000748691-96-000006.txt : 19960904 0000748691-96-000006.hdr.sgml : 19960904 ACCESSION NUMBER: 0000748691-96-000006 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960903 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOREA FUND INC CENTRAL INDEX KEY: 0000748691 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133226146 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04058 FILM NUMBER: 96625180 BUSINESS ADDRESS: STREET 1: 345 PARK AVE STREET 2: C/O SCUDDER STEVENS & CLARK INC CITY: NEW YORK STATE: NY ZIP: 10154 BUSINESS PHONE: 6173305464 N-30D 1 ANNUAL REPORT - THE KOREA FUND, INC. THE KOREA FUND, INC. Annual Report June 30, 1996 A closed-end investment company seeking long-term appreciation of capital through investment in Korean securities. The Korea Fund, Inc. Investment objective and policies o long-term capital appreciation through investment in Korean securities Investment characteristics o investments in a broad spectrum of Korean industries o closed-end investment company o first United States investment company authorized to invest in Korean securities o a vehicle for international diversification through participation in the Korean economy General Information Executive offices The Korea Fund, Inc. 345 Park Avenue New York, NY 10154 Telephone: For Fund Information: 1-800-349-4281 Transfer agent, registrar and dividend reinvestment plan agent For account information: 1-800-426-5523 State Street Bank and Trust Company P.O. Box 8200 Boston, MA 02266-8200 Custodian Brown Brothers Harriman & Co. Subcustodian-Citibank, N.A.--Seoul office Legal counsel Debevoise & Plimpton Independent Accountants Coopers & Lybrand L.L.P. New York Stock Exchange Symbol -- KF Contents In Brief 3 Letter to Shareholders 3 Other Information 6 Investment Summary 7 Portfolio Summary 8 Investment Performance 9 Investment Portfolio 11 Financial Statements 20 Financial Highlights 23 Notes to Financial Statements 24 Report of Independent Accountants 27 Tax Information 28 Dividend Reinvestment and Cash Purchase Plan 29 Officers and Directors 31 Comparisons between changes in the Fund's net asset value per share and changes in the Korea Stock Exchange Index should be considered in light of the Fund's investment policy and objective, the characteristics and quality of the Fund's investments, the size of the Fund, and variations in the won/dollar exchange rate. This report is sent to the shareholders of The Korea Fund, Inc. for their information. 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. 2 In Brief o The Korean stock market fell over the 12 months ended June 30, 1996, as revelations of government corruption and concern over the direction of the economy combined to sour the investment climate. In addition, the Korean won fell over the period, further decreasing returns to U.S. dollar-based investors. In this environment, the Korea Fund provided a total return of negative 5.09%. o The Fund continued to focus sharply on those companies we feel are positioned to perform well under a variety of economic conditions; the Fund's top ten holdings represented approximately 53% of the portfolio on June 30. o We believe the recent sharp decline in stock prices was unmerited and remain bullish on Korean stocks over the medium to long term. The economy is growing at an annual rate of 7% -- modest by Korean standards but well above most other world economies. The trade outlook stands to improve, the rate of Korean inflation appears to have stabilized at a manageable level, and the interest rate outlook is positive. Letter to Shareholders Dear Shareholders: The Korean stock market fell over the twelve months ended June 30, 1996. The KOSPI went from its June 30, 1995, level of 894.41 to 823.53 at the end of the period, a decline of 7.92%. Revelations of government corruption and concern over the direction of the economy combined to sour the investment climate. In addition, the Korean won fell over the period, further decreasing returns to U.S. dollar-based investors. In this environment, the Korea Fund provided a total return of -5.09%, reflecting a decline in the Fund's net asset value from $19.89 to $18.52 and the reinvestment of $0.36 per share in capital gain and $0.06 in dividend distributions. The Fund's publicly traded shares ended the period at $21.13, up from $19.63 a year ago, contributing to a total return of 9.73%. The Fund's NYSE price -- a barometer of market interest -- represented a 14.1% premium over NAV as of June 30. Investment Environment At the beginning of the fiscal period, Korea was characterized by a hospitable investment environment, which included stable inflation levels and declining interest rates. Economic growth was healthy, spurred by strong exports and capital spending, and the Korean stock market was on an upward trajectory. As last summer progressed, however, corporate investment in facilities tapered off, while slow global growth began to impact Korea's export-driven economy. Market sentiment shifted in the direction of companies oriented towards domestic consumers and infrastructure investment. The market was drained of any remaining upward momentum by the news last fall that two former Korean presidents had been implicated in illegal slush fund operations. Perhaps more important over the long term, the investigation and arrest of Messrs. Roh and Chun demonstrated the government's willingness to deal with such illicit activity. Moreover, recent reforms with respect to financial disclosure should promote the separation of business and politics in Korea, furthering the country's attractiveness as an investment arena. Additional factors weighing on the market entering 1996 were North Korea's deteriorating economy and a decline 3 in the Japanese yen that promised to make Korean exporters less competitive in world markets. Stocks received a boost in the wake of April's parliamentary elections, as the incumbent party promulgated reforms designed to promote expanded foreign participation in Korea's equity markets. However, after a brief rally, stocks in the aggregate returned to their pre-election levels, falling by more than 20% as uncertainty over the direction of the economy predominated. An expanding trade deficit, a move up in interest rates, and a dimming outlook for corporate earnings contributed to concern. On the trade front, the dismal supply/demand outlook worldwide for semiconductors in particular cast a pall over market sentiment, as 18% of Korean exports are related to that industry. Reflecting this negativity, stock trading on the Korean exchange has recently been running at one-half the volume attained during the April rally. Portfolio Strategy The Fund continued over the fiscal period to utilize intensive fundamental research to identify well-managed companies with promising long-term growth prospects. We focus sharply on those companies we feel are positioned to perform well under a variety of economic conditions, and the Fund's top ten holdings represent approximately 53% of the portfolio. We generally take a buy and hold approach, especially with respect to these "core" portfolio holdings. This philosophy aside, we have trimmed our long-standing position in Samsung Electronics, a flagship Korean company, from roughly 17% of the portfolio on June 30, 1995, to approximately 6% at the end of the period. Samsung has the largest share of memory chips in the world and derives 80% of its income from semiconductors. While we still like Samsung's prospects over the long term, export-oriented companies in general and semiconductor manufacturers in particular are facing a difficult environment. In general, the Fund is moving away from semiconductor companies and other export-based groups. Instead, we are focusing more heavily on consumer-based sectors and other domestically oriented industries, such as banking, food, pharmaceuticals, and securities/brokerage, in view of slowing exports. Recent additions to the Fund include Tongyang Nylon (textiles), Tae Young Corp. (construction), and Dongwon Industries (food processing). The Fund's fixed-income position, which had been at around 5% as 1996 began, has been reduced to the 2% range as we took advantage of earlier bond market strength and falling interest rates to take some profits. Outlook We believe the recent sharp decline in stock prices was unmerited and remain bullish on Korean stocks over the medium to long term. For starters, the underpinnings to a healthy economy remain in place. The economy is growing at an annual rate of 7% -- modest by Korean standards but hardly recessionary and well above most other world economies. Also, the trade outlook stands to improve, as purchases by Korean industry of U.S. and Japanese manufacturing equipment have slowed and global growth has picked up. The rate of Korean inflation appears to have stabilized at a manageable level of 5 - 5 1/2%, giving interest rates much room to decline. The rate on the benchmark three-year bond is approximately 12%, high by global standards. Moreover, the interest rate outlook is enhanced by two factors. First, the opening of Korea's bond market to international investors should foster greater stability -- a key concern in a market where rates have traversed a 20 percentage point span over the last decade. Second, Korea's impending Organization for Economic Cooperation and Development "OECD" membership should result in an improved credit standing and a lower rate structure. Lower interest rates would translate directly into improved corporate results. 4 Korea remains well-positioned for long-term growth, with a central location amongst such economic giants as Japan, Russia, and China, a highly educated workforce, and important economic reforms in place. The opening of Korea's economy should over time spawn new global competitors that will present attractive investment opportunities. In addition, while Korea is no longer an "emerging" market in the usual sense of the word, its stock market capitalization as a percent of GDP is smaller than those of its Asian peers, giving an indication of the future potential for Korean equities. In our view, the recent weakness in the Korean stock market has created some opportunities to buy strong companies at more favorable prices, and we will look for chances to do so going forward. The Korea Fund continues to provide a vehicle for investors seeking access to one of the most dynamic economies in the world, and we believe the Fund is well-positioned to benefit from the many positive developments taking place in Korea and the region. Thank you for your investment and do not hesitate to call with any questions or comments. Sincerely, /s/Nicholas Bratt /s/Juris Padegs Nicholas Bratt Juris Padegs President Chairman of the Board 5 Other Information Investment Manager The investment manager and administrator of The Korea Fund, Inc. (the "Fund") is Scudder, Stevens & Clark, Inc. ("Scudder"), one of the most experienced investment management and investment counsel firms in the United States. Established in 1919, the firm provides investment counsel for individuals, investment companies and institutions. Scudder has offices throughout the United States and subsidiaries in London and Tokyo. In addition to the Fund, Scudder also manages the assets of six other closed-end investment companies which invest in foreign securities and are traded on the New York Stock Exchange: The Argentina Fund, The Brazil Fund, The Latin America Dollar Income Fund, Scudder New Asia Fund, Scudder New Europe Fund, and Scudder World Income Opportunities Fund. Korean Adviser Daewoo Capital Management Co., Ltd., registered under the U.S. Investment Advisers Act of 1940, acts as Korean adviser to Scudder, Stevens & Clark, Inc., the Fund's investment manager. Daewoo Capital Management Co., Ltd. is a subsidiary of Daewoo Securities Co., Ltd., the largest Korean securities firm, and an affiliate of Daewoo Research Institute. Daewoo Capital Management Co., Ltd. provides investment advice, research, and assistance to Scudder. The Daewoo staff makes specific investment recommendations, which are then evaluated by Scudder's research department and portfolio managers in light of their own expertise and information from other sources in making investment decisions for the Fund. A Team Approach to Investing The Korea Fund, Inc. is managed by a team of Scudder investment professionals who each play an important role in the Fund's management process. Team members work together to develop investment strategies and select securities for the Fund. They are supported by Scudder's large staff of economists, research analysts, traders, and other investment specialists who work in Scudder's offices across the United States and abroad. We believe our team approach benefits Fund investors by bringing together many disciplines and leveraging Scudder's extensive resources. Lead Portfolio Manager John J. Lee has set Fund investment strategy and overseen its daily operation since 1991, the year he joined Scudder's global equity area. Nicholas Bratt, Portfolio Manager, has been a member of the Portfolio team since 1984 and has over 20 years of experience in worldwide investing. Mr. Bratt, who has been at Scudder since 1976, is the Director of Scudder's Global Equity Department. Dividend Reinvestment and Cash Purchase Plan The Fund's Dividend Reinvestment and Cash Purchase Plan offers you a convenient way to have your dividends and capital gain distributions reinvested in shares of the Fund. We believe this Plan is attractive for shareholders. Its features are more fully described on page 29. Net Asset Value The Fund's NAV is published every Monday in The Wall Street Journal under the heading "Closed End Funds." The Fund's NAV is also published in The New York Times and Barron's. As a service to overseas shareholders, the Fund's NAV is listed daily in The Financial Times ("FT"). For your information, the NAV of the Fund and other Scudder closed-end funds can be found in the "FT Managed Funds Service" section under the heading "Other Offshore Funds" below the Scudder, Stevens & Clark, Inc. banner. 6 THE KOREA FUND, INC. PERFORMANCE UPDATE as of June 30, 1996 - ---------------------------------------------------------------- HISTORICAL INFORMATION LIFE OF FUND - ---------------------------------------------------------------- Total Return (%) - -------------------------------------------------------------------------------- Market Value Net Asset Value (a) --------------- ----------------------- Cumulative Average Cumulative Average Annual Annual -------------------------- --------------------------- Current Quarter 0.60 - -6.65 - One Year 9.73 9.73 -5.09 -5.09 Three Year 52.27 15.05 75.65 20.66 Five Year 70.03 11.20 105.02 15.44 Ten Year 215.89 12.19 313.06 15.24 Index (c) - ------------------------ Cumulative Average Annual - ------------------------ -4.99 - -7.92 -7.92 9.97 3.22 36.06 6.35 238.40 12.96 - ----------------------------------------------------------------- RETURNS AND PER SHARE INFORMATION - ----------------------------------------------------------------- A chart in the form of a bar graph appears here, illustrating the Fund Total Return (%) and Index Total Return (%) with the exact data points listed in the table below. YEARLY PERIODS ENDED JUNE 30 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ------------------------------------------------------------------------------- NET ASSET VALUE (b)............... $11.13 $13.97 $16.84 $14.45 $10.27 $10.75 $11.40 $18.66 $19.89 $18.52 INCOME DIVIDENDS.. $ .01 $ .29 $ .11 $ .08 $ - $ .06 $ .04 $ .01 $ - $ .06 CAPITAL GAINS DISTRIBUTIONS..... $ .03 $ .68 $ 1.74 $ 1.88 $ 2.20 $ .34 $ .20 $ - $ .15 $ .36 FUND TOTAL RETURN (%)........ 49.77 31.17 33.21 -9.52 -14.91 7.87 8.20 63.77 13.00 -5.09
(a) Total investment returns reflect changes in net asset value per share during each period and assumes that dividends and capital gains distributions, if any, were reinvested. These percentages are not an indication of the performance of a shareholder's investment in the Fund based on market price. (b) Net asset value per share through 1988 has bee adjusted for a 200% stock dividend paid in October 1988. (c) Korea Stock Price Index ("KOSPI") PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE OF THE FUND. 7 PORTFOLIO SUMMARY as of June 30, 1996 - --------------------------------------------------------------------------- DIVERSIFICATION - --------------------------------------------------------------------------- Common Stocks 88% Convertible Bonds 7% Preferred Stocks 3% Corporate Bonds 2% - -------------------------------------- 100% - -------------------------------------- A graph in the form of a pie chart appears here, illustrating the exact data points in the above table. - -------------------------------------------------------------------------- SECTORS Sector breakdown of the Fund's equity securities - -------------------------------------------------------------------------- Communications 22% Financial 21% Technology 11% Durables 8% Manufacturing 7% Construction 6% Consumer Staples 6% Consumer Discretionary 4% Health 4% Other 11% - --------------------------------------------- 100% - --------------------------------------------- A graph in the form of a pie chart appears here, illustrating the exact data points in the above table. - -------------------------------------------------------------------------- 10 LARGEST EQUITY HOLDINGS (53% OF PORTFOLIO) - -------------------------------------------------------------------------- 1. KOREA MOBILE TELECOM Mobile telecommunication company 2. SAMSUNG FIRE & MARINE INSURANCE CO. Insurance company 3. SAMSUNG ELECTRONICS CO., Ltd. Major electronics manufacturer 4. SAMSUNG DISPLAY DEVICES Leading manufacturer of CRT and picture tubes 5. KOREA LONG TERM CREDIT BANK Major commercial bank 6. HYUNDAI MOTOR SERVICES CO., LTD. Auto parts and services 7. KOREA ELECTRIC POWER CO. Electric utility 8. KEUM KANG CO., LTD. Construction company and manufacturer of building materials 9. HANSOL PAPER MANUFACTURING CO., LTD. Korea's largest paper manufacturer 10. SHINSEGAE Major department store chain 8 The Korea Fund, Inc. Investment Performance KOREA FUND INVESTMENT PERFORMANCE History (in terms of N.Y.S.E. Value) of a $10,000 Investment in Fund Shares vs. the S&P 500 Index* The Korea Fund, Inc. Investment Performance - -------------------------------------------------------------------------------- LINE CHART OMITTED CHART TITLE: KOREA FUND INVESTMENT PERFORMANCE History (in terms of N.Y.S.E. Value) of a $10,000 Investment in Fund Shares vs. the S&P 500 Index* CHART PERIOD: (8/84 - 6/96) CHART DATA:
-------------------------------------------------------------------------------------------------------------- TOTAL SHARE CAPITAL GAINS DISTRIBUTION SHARE VALUE OF INITIAL S&P TOTAL VALUE ($92,999) REINVESTED ($80,738) INVESTMENT ($52,813) RETURN ($59,211) -------------------------------------------------------------------------------------------------------------- 10942 10942 10942 10000 11983 11983 11983 9972 11875 11875 11875 10159 11458 11458 11458 11095 12292 12292 12292 11906 11787 11250 11250 11422 15393 14692 14692 13395 20632 19692 19692 15286 29440 27817 27817 16186 32537 30709 30625 15054 30103 28411 28333 15905 56221 53061 52917 19304 62087 58597 58438 20265 67523 63039 62396 21689 51016 47628 45938 16801 73921 69011 66563 17755 65476 61127 58958 18925 59075 54750 50000 18993 80516 74621 65625 19608 108121 100205 88125 21000 97003 89900 79063 22837 133542 123540 105000 25283 111177 102850 85938 25801 73983 68442 57188 25017 71557 66198 55313 26571 44506 41173 30625 22930 48402 44777 31250 24976 56630 52389 36563 28611 54694 50598 35313 28520 57251 52736 36250 30052 50380 46407 31563 32576 47387 43650 29688 31761 45392 41813 28438 32345 49876 45787 30625 33368 57001 52328 35000 35054 52421 48123 32188 36585 61073 56066 37500 36763 59037 54197 36250 37711 97766 89706 60000 38587 78417 71951 48125 37122 89619 82230 55000 37277 107003 98181 65313 39097 93227 85541 56875 39091 87592 80371 53438 42897 84754 73790 49063 46995 96871 84340 55313 50730 96850 84082 55000 53785 92448 80261 52500 56670 92999 80738 52813 59211
9 The Korea Fund, Inc. Investment Performance - -------------------------------------------------------------------------------- LINE CHART OMITTED CHART TITLE: KOREA FUND INVESTMENT PERFORMANCE (Cont'd) History (in terms of Net Asset Value) of a $10,000 Investment in Fund Shares* CHART PERIOD: (8/84 - 6/96) CHART DATA: ------------------------------------------------------------------------------- TOTAL NET ASSET CAPITAL GAINS DISTRIBUTIONS NET ASSET VALUE OF INITIAL VALUE ($92,365) REINVESTED ($80,416) INVESTMENT ($53,468) ------------------------------------------------------------------------------- 10000 10000 10000 10072 10072 10072 10269 10269 10269 10197 10197 10197 10305 10305 10305 10083 9624 9624 12599 12025 12025 16796 16030 16030 21224 20054 20054 23020 21726 21667 23315 22004 21944 31873 30082 30000 31788 30001 29919 31515 29422 29122 33685 31447 30332 38620 36055 34776 41695 38926 37545 40580 37609 34346 52539 48693 42823 62236 57679 50726 55541 51474 45269 65403 60505 51425 64511 59679 49866 60372 55851 46667 50252 46489 38844 42973 39754 29570 46216 42755 29839 45050 41676 29086 42760 39558 27608 45385 41806 28737 45269 41699 28360 54323 50039 34032 46127 42489 28898 42992 39467 26398 46494 42683 28548 46844 43004 28763 49909 45817 30645 50128 46018 30780 72887 66877 44731 74814 68646 45914 81735 74996 50161 94468 86679 57661 90991 83489 55511 91123 83610 55591 92364 80416 53468 104044 90585 59409 94862 82356 53871 93916 81535 53333 87667 76110 49785 The data set forth in these graphs should not be construed as an indication of the record of a shareholder's investment in the Fund based on market prices; nor should it be construed as a representation of the future performance of the Fund's net asset value. * The Korea Fund, Inc. performance charts make the following key assumptions: 1. The data have been adjusted to reflect a 200% stock dividend paid in October 1988. 2. Investment income and capital gains reinvested at the greater of the following on the valuation date: (a) Net asset value per share or (b) 95% of the mean market price per share. 3. No adjustments have been made for U.S. income taxes. Korean taxes are reflected. 4. Initial $10,000 investment was made at initial public offering price and at initial net asset value price. The Standard & Poor's 500 Stock Index is a widely followed, unmanaged index of 500 industrial, transportation, utility and financial companies widely regarded as representative of the equity market in general. 10 [LOGO]The Korea Fund, Inc. Investment Portfolio as of June 30, 1996
========================================================================================================== Principal Market Amount(e) Value($) - ---------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 0.3% U.S. $1,812,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 6/28/96 at 5.45%, to be repurchased at $1,812,823 on 7/1/96, collateralized by a $1,817,000 U.S. Treasury Note, 6.125%, 5/15/98 (Cost $1,812,000) ........... 1,812,000 ---------- - ---------------------------------------------------------------------------------------------------------- CORPORATE BONDS 2.2% METALS & MINERALS 10,000,000,000 Korea Tungsten Exchange Bond, Zero Coupon with 36.03% bonus interest at maturity, 11/11/98 (c)(f) (Cost $13,852,941) ................ 13,120,027 ---------- - ---------------------------------------------------------------------------------------------------------- CONVERTIBLE BONDS 6.4% CONSUMER STAPLES 1.8% Alcohol & Tobacco 0.7% 3,000,000,000 Jinro Ltd., 2% with 14.36% bonus interest at maturity, 9/30/98 (Leading producer of Soju, a distilled spirit) (c)(f) ....................... 3,987,242 ---------- Food & Beverage 0.5% 800,000,000 Crown Confectionery Co., 3% with 16.28% bonus interest at maturity, 12/31/97 (Major producer.... 1,008,289 of snacks) (c)(f) 2,000,000,000 Haitai Confectionery Co., 1% with 12.69% bonus interest at maturity, 6/30/98 (Major producer of snacks) (c)(f) ................................ 2,256,888 --------- 3,265,177 ---------- Textiles 0.6% U.S.$ 1,000,000 Kolon Industries, Inc., 0.25%, 12/31/04 (Leading manufacturer of nylon, polyester yarn and fabrics) ..................................... 507,500 2,400,000,000 Kukje Corp., 12% with 4.62% bonus interest at maturity, 12/31/97 (Shoe manufacturer) (c)(f) .... 3,085,109 ---------- 3,592,609 ---------- HEALTH 0.7% Pharmaceuticals 3,000,000,000 Korea Green Cross Corp., 1% with 11.88% bonus interest at maturity, 12/31/97 (Leading ethical drug producer) (c)(f) ................... 3,545,833 ---------- 400,000,000 Yuhan Corp., 5.5% with 25.41% bonus interest at maturity, 12/31/97 (Pharmaceutical company) (c)(f) .................................. 558,481 ---------- 4,104,314 ----------
The accompanying notes are an integral part of the financial statements. 11 [LOGO]The Korea Fund, Inc. Investment Portfolio (continued)
=========================================================================================================== Principal Market Amount(e) Value($) - ----------------------------------------------------------------------------------------------------------- MANUFACTURING 0.8% Containers & Paper 4,000,000,000 Hansol Paper Manufacturing Co., Ltd., 3% with 28.24% bonus interest at maturity, 12/31/99 (Korea's largest paper manufacturer) (c)(f) ....... 4,688,666 ---------- ENERGY 1.0% Oil & Gas Production 2,000,000,000 Yukong, Ltd., 2% with 8.15% bonus interest at maturity, 12/31/97 (Korea's largest oil refiner) (c)(f) ................................... 2,318,739 3,000,000,000 Yukong, Ltd., 1% with 13.92% bonus interest at maturity, 12/31/98 (c)(f) ......................... 3,263,747 ---------- 5,582,486 ---------- METALS & MINERALS 0.4% Steel & Metals 1,000,000,000 Kangwon Industry, 6% with 19.52% bonus interest at maturity, 6/30/97 (Steel company) (c)(f) ....... 1,414,095 500,000,000 Sammi Steel, 4% with 20.57% bonus interest at maturity, 12/31/97 (Specialty steel company) (c)(f) .................. 660,673 ---------- 2,074,768 ---------- CONSTRUCTION 0.2% Miscellaneous 1,000,000,000 Sungwon Construction, 5% with 21.11% bonus interest at maturity, 12/31/97 (Construction company) (c)(f) ..................... 1,343,259 ---------- UTILITIES 1.5% Electric Utilities 5,000,000,000 Korea Electric Power Co., 1% with 9.98% bonus interest at maturity, 12/31/97 (Electric utility) (c)(f) ......................... 5,815,125 2,300,000,000 Korea Electric Power Co., Zero Coupon with 30.5% bonus interest at maturity, 12/31/98 (c)(f) ....... 2,775,824 ---------- 8,590,949 ---------- TOTAL CONVERTIBLE BONDS (Cost $41,504,920) .......... 37,229,470 ---------- - ----------------------------------------------------------------------------------------------------------- PREFERRED STOCKS 3.4% Shares ------ CONSUMER DISCRETIONARY 0.1% Apparel & Shoes 10,700 BYC (Leading maker of under garments) (c) ........... 567,184 ---------- CONSUMER STAPLES 0.7% Alcohol & Tobacco 0.1% 5,800 Jinro, Ltd. ......................................... 53,982 46,165 Oriental Brewery Co., Ltd. (Korea's largest brewery) (g) ..................... 682,914 ---------- 736,896 ----------
The accompanying notes are an integral part of the financial statements. 12
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- Food & Beverage 0.3% 70,690 Cheil Food and Chemical Co., Ltd. (Korea's leading sugar refiner and major integrated food processor) .................................. 1,838,707 ---------- Package Goods/Cosmetics 0.1% 56,070 Pacific Corp. (Leading cosmetics producer) .......... 435,455 ---------- Textiles 0.2% 133,230 Kolon Industries, Inc. .............................. 1,220,290 38,165 Kolon Industries, Inc. Rights (c)(g) ................ 159,962 ---------- 1,380,252 ---------- HEALTH 0.1% Pharmaceuticals 6,700 Korea Green Cross Corp. ............................. 260,170 4,700 Shin Poong Pharmaceutical Co., Ltd. (Specialized drug producer) (c) ................... 77,638 ---------- 337,808 ---------- FINANCIAL 1.0% Insurance 0.5% 6,175 Samsung Fire & Marine Insurance Co. (Insurance company) (d) ........................... 2,428,285 ---------- Other Financial Companies 0.5% 87,310 Shin Young Securities (Securities company) .......... 870,732 252,000 Ssangyong Investment & Securities (Securities company) ............................. 2,336,095 ---------- 3,206,827 ---------- DURABLES 0.4% Automobiles 0.3% 99,130 Mando Machinery Corp. (Major auto parts manufacturer) .................. 1,906,346 ---------- Tires 0.1% 74,650 Korea Kumho Co. (Korea's largest tire manufacturer) (g) ........................... 346,011 ---------- MANUFACTURING 0.2% Chemicals 3,700 Han Wha Corp., Ltd. (Leading producer of explosives and chemicals) ........................ 28,279 70,475 Oriental Chemical Industries Co., Ltd. (Manufacturer of specialty chemicals) ............ 1,033,842 ---------- 1,062,121 ---------- TECHNOLOGY 0.4% Electronic Components/ Distributors 9,918 Samsung Display Devices (Leading manufacturer of CRT and picture tubes) ........................ 402,246 37,039 Samsung Electronics Co., Ltd. (Major electronics manufacturer) (d) ............................... 1,602,466 11,162 Samsung Electronics Co., Ltd. (New) (b)(d)(g) ....... 449,053 ---------- 2,453,765 ----------
The accompanying notes are an integral part of the financial statements. 13 [LOGO] The Korea Fund, Inc. Investment Portfolio (continued)
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- ENERGY 0.0% Oil Companies 1,174 Ssangyong Oil Refining Co. (Major oil refiner)(c) ............................ 12,385 ---------- CONSTRUCTION 0.5% Building Materials 0.2% 50,000 Ssangyong Cement Industrial Co., Ltd. (Major cement producer) ........................... 607,125 27,000 Sung Shin Cement Co., Ltd. (Major cement company) ............................ 352,811 ---------- 959,936 ---------- Miscellaneous 0.3% 95,000 Hyundai Engineering & Construction Co. (Leading general contractor) ...................... 2,049,433 ---------- TRANSPORTATION 0.0% Airlines 20,520 Korean Airlines Co., Ltd. (Airline) ................. 252,959 ---------- TOTAL PREFERRED STOCKS (Cost $21,382,560) ........... 19,974,370 ---------- - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS 87.7% CONSUMER DISCRETIONARY 4.0% Apparel & Shoes 0.5% 52,083 Shin Won (Major apparel manufacturer) ............... 1,592,281 30,000 Ssang Bang Wool Co. (Leading underwear manufacturer) ................. 1,427,515 ---------- 3,019,796 ---------- Department & Chain Stores 3.3% 182,591 Hwa Sung Industries (Department store) .............. 4,794,364 152,443 Shinsegae (Major department store chain) ............ 10,335,756 16,571 Shinsegae (New) (b)(g) .............................. 1,031,602 174,599 Taegu Department Store (Department store) ........... 3,379,197 ---------- 19,540,919 ---------- Hotels & Casinos 0.2% 100,000 Hotel Shilla Co. (Luxury hotel and resort operator) ........................................ 1,183,432 ---------- CONSUMER STAPLES 3.5% Alcohol & Tobacco 0.1% 19,000 Jinro, Ltd. ......................................... 405,202 6,009 Jinro, Ltd. (New) (b)(g) ............................ 120,002 ---------- 525,204 ---------- Food & Beverage 2.5% 123,854 Cheil Food and Chemical Co., Ltd. ................... 8,092,039 120,000 Dongwon Industries Company (Leading deep-sea fishing and processing company) .................. 2,337,278 32,271 Nhong Shim Co. (Manufacturer of instant noodles and snacks) ...................................... 1,209,367 48,000 Pulmuone Co., Ltd. (Food producer) .................. 2,633,136 ---------- 14,271,820 ----------
The accompanying notes are an integral part of the financial statements. 14
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- Textiles 0.9% 20,356 Cheil Industries (Leading woolen yarn and fabric manufacturer) ............................. 356,330 30,000 Choongnam Spinning Co., Ltd. (Korea's leading manufacturer of cotton yarn) (g) ................. 447,485 33,500 Hankook Synthetics (Textile manufacturer) (g) ....... 2,155,695 6,700 Hankook Synthetics Rights (c)(g) .................... 60,293 3,040 Taekwang Industrial Co., Ltd. (Major producer of acrylic fiber) ................ 1,723,866 29,600 Tongyang Nylon (Korea's largest producer of nylon filament yarn) ......................... 773,570 ---------- 5,517,239 ---------- HEALTH 3.2% Pharmaceuticals 72,632 Chong Kun Dang Co., Ltd. (Pharmaceutical company) ......................... 2,954,690 11,011 Daewoong Pharmaceutical Co. (Pharmaceutical company) ......................... 471,008 159,500 Dong-A Pharmaceutical (Pharmaceutical company) ...... 4,089,744 11,068 Korea Green Cross Corp. ............................. 1,185,662 126,621 Yuhan Corporation ................................... 7,648,458 27,565 Yuhan Corporation (New) (Common 1) (b)(g) ........... 1,444,172 15,418 Yuhan Corporation (New) (Common 2) (b)(g) ........... 802,071 ---------- 18,595,805 ---------- COMMUNICATIONS 21.2% Cellular Telephone 100,702 Korea Mobile Telecom (Mobile telecommunication company) (d) ............ 123,940,923 ---------- FINANCIAL 19.3% Banks 7.4% 260,650 Cheju Bank (Regional bank) .......................... 3,309,535 3,381 Daegu Bank (Regional bank) (New) (b) ................ 47,097 134,691 Kookmin Bank (Major commercial bank) ................ 2,490,588 428,454 Korea Exchange Bank (Major commercial bank) ......... 4,912,010 200,000 Korea First Bank (Major commercial bank) (g) ........ 1,651,874 385,000 Korea Housing Bank (Major commercial bank) (New) (b) ................. 8,970,044 584,315 Korea Long Term Credit Bank (Major commercial bank) ........................... 15,126,498 365,585 Shin Han Bank (Major commercial bank) ............... 6,669,943 ---------- 43,177,589 ---------- Insurance 10.4% 45,356 Daehan Fire & Marine Insurance Co., Ltd. (Insurance company) ............................... 1,889,833 44,656 Hyundai Fire and Marine Insurance (Insurance company) ............................... 3,082,761
The accompanying notes are an integral part of the financial statements. 15 [LOGO] The Korea Fund, Inc. Investment Portfolio (continued)
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- 49,912 LG Insurance Co. (Insurance company) ................ 5,076,114 68,967 Samsung Fire & Marine Insurance Co. (d) ............. 50,657,418 ---------- 60,706,126 ---------- Other Financial Companies 1.5% 14,638 Boo Kook Securities (Securities company) ............ 180,449 178,224 Hyundai Securities (Securities company) (g) ......... 4,130,438 14,578 Hyundai Securities Rights (c) (g) ................... 55,710 50,000 LG Securities Co., Ltd. (Securities company) (g) ......................... 899,901 145,000 Shinyoung Securities (Securities company) ........... 3,038,708 27,081 Ssangyong Investment & Securities Co. (Securities company) ............................. 487,405 ---------- 8,792,611 ---------- SERVICE INDUSTRIES 1.2% Miscellaneous Commercial Services 243,132 Samsung Co., Ltd. (Trading company) ................. 5,185,138 44,589 Samsung Co., Ltd. (New) (b)(c)(g) ................... 874,094 45,003 Sunkyong Ltd. (Trading company) ..................... 926,467 ---------- 6,985,699 ---------- DURABLES 7.2% Automobiles 5.1% 116,209 Hyundai Motor Co., Ltd. (Korea's largest auto manufacturer) .............. 4,383,624 423,380 Hyundai Motor Services Co., Ltd. (Auto parts and services) ........................ 14,926,859 113,341 Mando Machinery Corp. (Major auto parts manufacturer) .................. 5,588,808 35,000 Samlip Industries (Auto parts manufacturer) ......... 1,208,087 90,000 Yoosung Enterprise (Leading manufacturer of engine parts) ................................... 3,827,663 ---------- 29,935,041 ---------- Leasing Companies 0.3% 93,000 Korea Development Leasing Co. (Largest leasing company in Korea) ............... 2,120,932 ---------- Telecommunications Equipment 0.1% 5,050 LG Information & Communication (Electronic telephone manufacturer) (New) (b)(c)(g) .......... 539,450 ---------- Tires 1.7% 163,416 Hankook Tire Manufacturing Co., Ltd. (Major tire manufacturer) ........................ 7,453,640 42,995 Hankook Tire Manufacturing Co., Ltd. (New) (Common 1) (b)(g) .......................... 1,844,460 11,569 Hankook Tire Manufacturing Co., Ltd. (New) (Common 2) (b) (g) ............................... 477,763 ---------- 9,775,863 ----------
The accompanying notes are an integral part of the financial statements. 16
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- MANUFACTURING 5.5% Chemicals 2.2% 85,550 Hanwha Co. (Producer of explosives and petrochemicals) .................................. 1,402,632 37,540 Korea Chemical Co. (Paint company) .................. 3,864,140 150,009 LG Chemical Ltd. (Korea's largest integrated chemical company) ................................ 2,367,006 70,000 Namhae Chemical Co. (Chemical producer) ............. 3,607,002 50,047 Oriental Chemical Industries Co., Ltd. .............. 1,758,308 4,755 Oriental Chemical Industries Co., Ltd. (New) (b)(g) . 161,196 ---------- 13,160,284 ---------- Containers & Paper 2.5% 100,000 Asia Paper Manufacturing Co. (Specialized maker of cardboard used for packaging) .................... 3,821,499 50,000 Dae Young Packaging Co. (New) (Leading producer of corrugated board base and boxes) (g) ............. 1,183,432 115,762 Hansol Paper Manufacturing Co., Ltd. ................ 4,338,221 145,807 Hansol Paper Manufacturing Co., Ltd. (New) (Common 1) (b) (g) ......................... 4,529,507 20,000 Korea Export Packaging Co. (Producer of corrugated boards) (g) ........................... 468,442 15,000 Shin Poong Paper Manufacturing Co., Ltd. (Leading manufacturer of white duplex paperboard) ......... 526,997 ---------- 14,868,098 ---------- Diversified Manufacturing 0.1% 22,339 Samsung Heavy Industries Co., Ltd. (New) (Machinery manufacturer) (b)(g) ............ 316,689 ---------- Electrical Products 0.7% 114,086 Kyungwon Century Co., Ltd. (Major manufacturer of heating and cooling equipment) ................ 3,881,624 ---------- TECHNOLOGY 10.3% Electronic Components/ Distributors 9.9% 213,685 Samsung Display Devices ............................. 15,304,609 15,445 Samsung Display Devices (New) (b) (g) ............... 1,047,183 236,962 Samsung Electromechanics Co., Ltd. (Major electronics parts company) ................ 8,500,486 59,318 Samsung Electromechanics Co., Ltd. (New) (b) ........ 1,945,092 235,218 Samsung Electronics Co., Ltd. ....................... 19,746,490 143,723 Samsung Electronics Co., Ltd. (New) (b) ............. 11,427,679 ---------- 57,971,539 ---------- Electronic Data Processing 0.4% 70,000 Trigem Computer Inc. (Major personal computer manufacturer) ........... 2,373,028 ----------
The accompanying notes are an integral part of the financial statements. 17 [LOGO] The Korea Fund, Inc. Investment Portfolio (continued)
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- ENERGY 0.7% Oil & Gas Production 25,243 Ssangyong Oil Refining Co. .......................... 585,020 119,731 Yukong, Ltd. ........................................ 3,512,819 ---------- 4,097,839 ---------- METALS & MINERALS 2.2% Coal Mining 0.3% 30,000 Dongwon Company Ltd. (Thermal coal mining) (g) ...... 1,834,320 ---------- Steel & Metals 1.9% 120,000 Inchon Iron & Steel Co. (Steel producer) ............ 3,402,367 70,857 Inchon Iron & Steel Co. (New) (b)(g) ................ 1,843,051 72,313 Kia Steel Co., Ltd. (Specialty steel company) (New) (b)(g) ............ 384,207 68,200 Pohang Iron & Steel Co., Ltd. (Leading steel producer)(d) ....................... 5,605,902 ---------- 11,235,527 ---------- CONSTRUCTION 5.4% Building Materials 3.0% 10,000 Asia Cement Manufacturing Co. (Major producer of cement) ........................ 368,590 24,000 Hanil Cement Manufacturing Co., Ltd. (Cement manufacturing company) .................... 1,242,604 224,337 Keum Kang Co., Ltd. (Construction company and manufacturer of building materials) ............... 14,269,957 58,915 Ssangyong Cement Industrial Co., Ltd. ............... 1,408,963 ---------- 17,290,114 ---------- Homebuilding 0.3% 50,000 Chong Gu Housing & Construction Co. (Apartment building construction company) .................... 1,140,286 46,300 Keang Nam Enterprises (Apartment and urban renewal construction company) ..................... 499,414 ---------- 1,639,700 ---------- Miscellaneous 2.1% 52,875 Dong Ah Construction Industries Co., Ltd. (Leading construction company) .................... 1,812,038 149,904 Hyundai Engineering & Construction Co. .............. 6,227,521 30,870 Kumho Construction and Engineering (Engineering and construction company) ......................... 308,243 120,150 LG Construction Co. (Major real estate developer and construction company) ......................... 2,636,428 1,234 Sungwon Construction Co. ............................ 23,731 240 Sungwon Construction Co. (New) (b)(g) ............... 3,935 20,000 Tae Young Corp. (Construction company) .............. 1,407,791 ---------- 12,419,687 ---------- TRANSPORTATION 1.7% Airlines 0.6% 148,416 Korean Airlines Co., Ltd. ........................... 3,457,917 ----------
The accompanying notes are an integral part of the financial statements. 18
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- Marine Transportation 0.1% 27,930 Hyundai Merchant & Marine Co. (Marine transportation company) .......................... 502,685 1,146 Korea Line Corp. (Marine transportation company) .................. 19,072 ----------- 521,757 ----------- Trucking 1.0% 162,216 Korea Express Co., Ltd. (General freight transport company) .............. 5,899,127 ----------- UTILITIES 2.3% Electric Utilities 1.0% 110,900 Korea Electric Power Co. ........................... 3,827,909 91,000 Korea Electric Power Co. (ADR) ..................... 2,206,750 ----------- 6,034,659 ----------- Natural Gas Distribution 1.3% 12,900 Daehan City Gas Co. (Gas utility) .................. 1,176,775 37,600 Daesung Industrial (Natural gas distributor) ....... 2,363,905 23,686 Daesung Industrial (New) (b)(g) .................... 1,343,141 24,940 Samchully (Producer and distributor of anthracite and natural gas) ..................... 1,936,908 4,689 Samchully (New) (Common 1) (b)(g) .................. 335,259 1,875 Samchully (New) (Common 2) (b)(g) .................. 125,509 ----------- 7,281,497 ----------- TOTAL COMMON STOCKS (Cost $243,977,644) ............ 512,911,855 ----------- - ----------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO - 100.0% (Cost $322,530,065) (a) ......................... 585,047,722 =========== (a) The cost for federal income tax purposes was $323,133,356. At June 30, 1996, net unrealized appreciation for all securities based on tax cost was $261,914,366. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over tax cost of $282,963,094 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over market value of $21,048,728. (b) New shares issued during 1996, eligible for a pro rata share of 1996 dividends (Note A). (c) Securities valued in good faith by the Valuation Committee of the Board of Directors. The cost of these securities at June 30, 1996 was $56,623,037 (Note A). (d) Equity securities that have met the foreign-ownership limitation valued at a premium in good faith by the Valuation Committee of the Board of Directors. The cost of these securities at June 30, 1996 was $12,709,134 (Note A). (e) Principal amount stated in Korean won unless otherwise noted. CHF Swiss Francs. U.S.$ United States Dollar. (f) Bonus interest represents the amount available to be paid to the holder at maturity in lieu of conversion. (g) Non-income producing.
The accompanying notes are an integral part of the financial statements. 19 [LOGO] The Korea Fund, Inc. Financial Statements =========================================================================================
- ----------------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1996 - ----------------------------------------------------------------------------------------- ASSETS Investments, at market (identified cost $322,530,065) (Note A) .............. $585,047,722 Cash: U.S. dollars ............................................................. 927 Won at market (identified cost $105,662,409) (Note A) .................... 103,288,732 Receivables: Investments sold ......................................................... 1,344,901 Dividends and interest ................................................... 761,486 Other assets ................................................................ 3,747 ------------ Total assets .......................................................... 690,447,515 LIABILITIES Payables: Investments purchased .................................................... $671,454 Accrued management fee (Note C) .......................................... 570,194 Other accrued expenses and payables (Note C) ............................. 518,281 -------- Total liabilities ..................................................... 1,759,929 ------------ Net assets, at market value ................................................. $688,687,586 ============ NET ASSETS Net assets consist of: Net unrealized appreciation (depreciation) on: Investments ........................................................... $262,517,657 Won ................................................................... (2,373,677) Won related transactions .............................................. (5,496) Accumulated net realized gain ............................................ 21,487,638 Common stock ............................................................. 371,885 Additional paid-in capital ............................................... 406,689,579 ------------ Net assets, at market value ................................................. $688,687,586 ============ NET ASSET VALUE per share ($688,687,586 [divided by sign] 37,188,528 shares of common stock issued and outstanding, 50,000,000 shares authorized, $.01 par value) ............................................... $ 18.52 ============ The accompanying notes are an integral part of the financial statements. - -----------------------------------------------------------------------------------------
20 ================================================================================================ - ------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 1996 - ------------------------------------------------------------------------------------------------ INVESTMENT INCOME Income: Interest (net of withholding taxes of $370,894) (Note A) ..... $ 4,663,894 Dividends (net of withholding taxes of $1,224,537) (Note A) .. 5,842,031 ------------ 10,505,925 ------------ Expenses: Management fee (Note C) ...................................... $ 7,516,289 Custodian and accounting fees (Note C) ....................... 1,523,660 Directors' fees and expenses (Note C) ........................ 123,343 Legal ........................................................ 157,144 Auditing ..................................................... 107,002 Reports to shareholders ...................................... 92,762 Services to shareholders ..................................... 78,223 Other ........................................................ 169,408 9,767,831 ----------- ------------ Net investment income .......................................... 738,094 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS Net realized gain (loss) during the period on: Investments .................................................. 24,364,471 Won related transactions ..................................... (200,223) 24,164,248 ----------- Net unrealized depreciation during the period on: Investments .................................................. (58,463,815) Won .......................................................... (2,415,407) Won related transactions ..................................... (27,316) (60,906,538) ----------- ------------ Net loss on investment transactions ............................ (36,742,290) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $(36,004,196) ------------ The accompanying notes are an integral part of the financial statements. - ------------------------------------------------------------------------------------------------
21 [LOGO] The Korea Fund, Inc. Financial Statements (continued) ====================================================================================================== - ------------------------------------------------------------------------------------------------------ STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30, -------------------- 1996 1995 INCREASE (DECREASE) IN NET ASSETS - ------------------------------------------------------------------------------------------------------- Operations: Net investment income (loss) (Note A) ...................................$ 738,094 $ (615,149) Net realized gain from investment transactions (Note A) ................. 24,164,248 13,445,142 Net unrealized appreciation (depreciation) on investment transactions during the period (Note A) ......................................... (60,906,538) 64,721,917 ------------ ------------ Net increase (decrease) in net assets resulting from operations ........... (36,004,196) 77,551,910 ------------ ------------ Distributions to shareholders: From net investment income ($.02 per share) ............................. (738,094) -- ------------ ------------ In excess of net investment income ($.04 per share) ..................... (1,489,524) -- ------------ ------------ From net realized gains on investment transactions ($.36 and $.15 per share, respectively) ............................. (13,231,733) (4,359,655) ------------ ------------ Fund share transactions: Net proceeds of shares issued in connection with the Fund's rights offering, net of broker and dealer manager fees of $4,006,960 and expenditures and offering costs of $860,000 ................ -- 109,617,621 ------------ ------------ Reinvestment of distributions ..................................... 5,604,398 1,798,229 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS ......................................... (45,859,149) 184,608,105 Net assets at beginning of period ......................................... 734,546,735 549,938,630 ------------ ------------ NET ASSETS AT END OF PERIOD ...............................................$688,687,586 $734,546,735 ============ ============ OTHER INFORMATION INCREASE IN FUND SHARES Shares outstanding at beginning of period ................................. 36,930,508 29,474,985 Shares issued in connection with the Fund's rights offering ............. -- 7,386,102 Shares issued to shareholders in reinvestment of distributions .......... 258,020 69,421 ------------ ------------ Shares outstanding at end of period ....................................... 37,188,528 36,930,508 ============ ============ The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------------------------------
22 [LOGO] The Korea Fund, Inc. Financial Highlights =============================================================================================================
- ------------------------------------------------------------------------------------------------------------- THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS AND MARKET PRICE DATA. - -------------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30, ---------------------------------------------- 1992 1993 1995(d) 1996 1994 - -------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period................... $19.89 $18.66 $11.40 $10.75 $ 10.27 ------ ------ ------ ------ ------- Income from investment operations (a): Net investment income (loss)........................ .02 (.02) (.03) .02 .08 Net realized and unrealized gain (loss) on investment transactions......................... (.97) 2.42(b) 7.13 .86 .78 ------ ------ ------ ------ ------- Total from investment operations (0.95) 2.40 7.10 .88 .86 ------ ------ ------ ------ ------- Less distributions: From net investment income.......................... (.02) -- (.01) (.04) (.06) In excess of net investment income.................. (.04) -- -- -- -- From net realized gains on investment transactions.. (.36) (.15) -- (.20) (.34) ------ ------ ------ ------ ------- Total distributions.................................... (.42) (.15) (.01) (.24) (.40) ------ ------ ------ ------ ------- Antidilution (dilution) resulting from the rights offering (1995), fourth tranche (1994), and reinvestment of distributions for shares at market value......... -- (1.02) .22 .01 .02 ------ ------ ------ ------ ------- Underwriting expenditures and offering costs........... -- -- (.05) -- -- ------ ------ ------ ------ ------- Net asset value, end of period......................... $18.52 $19.89 $18.66 $11.40 $ 10.75 ====== ====== ====== ====== ======= Market value, end of period............................ $21.13 $19.63 $22.00 $15.00 $ 11.38 ====== ====== ====== ====== ======= TOTAL RETURN Per share market value (%)............................. 9.73 (5.43) 46.74 34.54 (17.01) Per share net asset value (%) (c)...................... (5.09) 13.00 63.77 8.20 7.87 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions)................. 689 735 550 258 241 Ratio of operating expenses to average net assets (%)..................................... 1.28 1.32 1.37 1.52 1.52 Ratio of net investment income (loss) to average net assets (%) (d)......................... .10 (.10) (.18) .15 .70 Portfolio turnover rate (%)............................ 32.6 10.5 14.3 14.3 18.2 Average commission rate paid (e)....................... $.1254 $ -- $ -- $ -- $ -- - ---------- (a) Based on monthly average of shares outstanding during each period. (b) Due to the timing and magnitude of the rights offering, the amount reported herein is not proportional to the aggregate value reported in the Statements of Changes in Net Assets. (c) Total investment returns reflect changes in net asset value per share during each period and assume that dividends and capital gains distributions, if any, were reinvested. These percentages are not an indication of the performance of a shareholder's investment in the Fund based on market price. (d) Certain amounts have been reclassified to conform with fiscal 1996 presentations. (e) Average commission rate paid per share of common and preferred stocks is calculated for fiscal years ending on or after June 30, 1996. - -------------------------------------------------------------------------------------------------------------
23 [LOGO] The Korea Fund, Inc. Notes To Financial Statements =============================================================================== A. SIGNIFICANT ACCOUNTING POLICIES ------------------------------- The Korea Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a non-diversified, closed-end management investment company. The Fund's financial statements are prepared in accordance with generally accepted accounting principles which require the use of management estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements. SECURITY VALUATION. Portfolio securities which are traded on the Korean, U.S., or foreign stock exchanges are valued at the most recent sale price reported on the exchange on which the security is traded most extensively. If no sale occurred, the security is then valued at the calculated mean between the most recent bid and asked quotations. If there are no such bid and asked quotations, the most recent bid quotation is used. Short-term investments having a maturity of sixty days or less are valued at amortized cost. All other securities are valued at fair value as determined in good faith by the Valuation Committee of the Board of Directors including certain securities valued in good faith by the Valuation Committee amounting to $52,188,713 or 7.6% of the Fund's net assets at June 30, 1996, and certain investments in Korean equity securities that have met the limit for aggregate foreign ownership and for which premiums to the local stock exchange prices are offered by prospective foreign investors. The aggregate premium ($51,600,746) over the local share price ($133,083,301) for these securities valued by the Valuation Committee was approximately 7.5% of the Fund's net assets at June 30, 1996. Their values have been estimated by the Board of Directors in the absence of readily ascertainable market values or other market factors, respectively. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the difference could be material. At June 30, 1996, 25.7% of the Fund's net assets were invested in Korea Mobile Telecom and Samsung Fire & Marine Insurance Co. DIVIDEND INCOME. Korean-based corporations have generally adopted calendar year-ends, and their corporate actions are normally approved by their boards of directors and shareholders in the first quarter of each calendar year. Accordingly, dividend income from Korean equity investments is earned and received by the Fund primarily in the first calendar quarter of each year. As a result, the Fund, which has a June 30 year end, receives substantially less dividend income in the first half of its year than in the second half of such year. INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code which are applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. The Fund, accordingly, paid no federal income taxes and no federal income tax provision was required. Under the United States-Korea Income Tax Treaty, as presently in effect, the government of Korea imposes a nonrecoverable withholding tax and resident tax aggregating 16.125% on dividends and 12.9% on interest paid to the Fund by Korean issuers. Effective January 1, 1996, withholding taxes on dividends and interest were increased to 16.5% and 13.2%, respectively. Under the United States-Korea Income Tax Treaty, there is no Korean withholding tax on realized capital gains. DISTRIBUTION OF INCOME AND GAINS. Distribution of net investment income is made annually. It is expected that net realized gains from investment transactions during any particular year in excess of available capital loss carryforwards which, if not distributed, would be taxable to the Fund, will be distributed to shareholders. An additional distribution may be made to the extent necessary to avoid the payment of a four percent federal excise tax. 24 ================================================================================ The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from generally accepted accounting principles. These differences relate primarily to foreign denominated investments and certain securities sold at a loss. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund. The Fund uses the identified cost method for determining realized gain or loss on investments for both financial and federal income tax reporting purposes. FOREIGN CURRENCY TRANSLATIONS. The books and records of the Fund are maintained in U.S. dollars. Foreign currency transactions are translated into U.S. dollars on the following basis: (i) market value of investment securities, other assets and liabilities at the daily rates of exchange, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing on the respective dates of such transactions. The Fund does not isolate that portion of gains and losses on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains and losses from investments. Net realized gain (loss) from won related transactions includes net currency gains and losses between trade and settlement dates on securities transactions, gains and losses arising from the sales of won and gains and losses between the ex and payment dates on dividends, interest, and foreign withholding taxes. At June 30, 1996 the exchange rate for Korean won was U.S. $0.001233 to W 1. SUBSCRIPTIONS FOR NEW SHARES. As part of their annual corporate action matters, certain Korean companies offer rights to their shareholders to subscribe to new shares which are eligible for a portion of the dividends paid on existing shares in the year of subscription. The Fund follows a policy of subscribing to new share offerings by Korean companies. OTHER. Investment security transactions are accounted for on a trade-date basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. All original issue and acquisition discounts are accreted for both tax and financial reporting purposes. Certain amounts have been reclassified in the fiscal 1995 statement of changes in net assets and financial highlights to conform with fiscal 1996 presentation. Certain amounts with respect to bonus interest reported in the Fund's statements of operations and changes in net assets for the six months ended December 31, 1995 have been reclassified in the aforementioned statements for the year ended June 30, 1996. B. PURCHASES AND SALES OF SECURITIES --------------------------------- For the year ended June 30, 1996, purchases and sales of investment securities (excluding short-term investments) aggregated $244,667,165 and $224,953,333, respectively. C. RELATED PARTIES --------------- Under the Management Agreement the Fund agrees to pay the Manager a monthly fee at an annual rate equal to 1.15% of the Fund's month-end net assets up to and including $50,000,000, 1.10% of such net assets on the next $50,000,000, 1% of such assets on the next $250,000,000, 0.95% of such net assets on the next $400,000,000, and 0.90% of such net assets in excess of $750,000,000. For the year ended June 30, 1996, the fee pursuant to such agreements 25 [LOGO] The Korea Fund, Inc. Notes To Financial Statements (continued) =============================================================================== amounted to $7,516,289 which was equivalent to an annual effective rate of 0.99% of the Fund's average month-end net assets. Under the Advisory Agreement, the Manager pays the Korean Adviser a monthly fee, equal to an annual rate of 0.2875% of the first $50,000,000 of the Fund's month-end net assets, 0.275% of such net assets on the next $50,000,000, and 0.25% of such net assets on the next $250,000,000, 0.2375% of such net assets on the next $400,000,000, and 0.225% of such net assets in excess of $750,000,000. For the year ended June 30, 1996, brokerage commissions on investment transactions amounting to $295,613 were paid by the Fund to Daewoo Securities Co., Ltd., the parent company of the Korean Adviser. Effective August 21, 1995, Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, assumed responsibility for determining the daily net asset value per share and maintaining the portfolio and general accounting records of the Fund. For the year ended June 30, 1996, the amount charged to the Fund by SFAC aggregated $343,236, of which $66,854 is unpaid at June 30, 1996. The Fund pays each Director not affiliated with the Manager or the Korean Adviser $6,000 annually plus specified amounts for attended board and committee meetings. For the year ended June 30, 1996, Directors' fees and expenses amounted to $123,343. D. FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN KOREA ------------------------------------------------- The Foreign Exchange Management Act, the Presidential Decree relating to such Act and the regulations of the Minister of Finance and Economy issued thereunder impose certain limitations and controls which generally affect foreign investors in Korea. The Fund has obtained from the Minister of Finance and Economy a license to invest in Korean securities and to repatriate income received from dividends and interest earned on, and net realized capital gain from, its investments in Korean securities and, upon termination of the Fund or for payment of expenses in excess of income, to repatriate investment principal. The Minister of Finance and Economy may, when it deems it to be in the public interest, modify the Fund's license to invest in Korean securities or, according to the terms of the license, revoke it in the event of the Fund's noncompliance with conditions of the license or a material violation of Korean law. The Minister of Finance and Economy or the Securities and Exchange Commission of Korea ("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 Foreign Exchange Management Act, the Minister of Finance and Economy has the power, 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 radical change in the international or domestic economic situation. The Fund could be adversely affected by delays in, or the refusal to grant, any required governmental approval for such transactions. Under current regulations of the Minister of Finance and the KSEC, foreigners are subject to certain restrictions with respect to investing in equity securities of Korean companies listed on the Korea Stock Exchange. Until April 1, 1996, total foreign investment was limited generally to 15% of each class of a company's outstanding shares, while a single foreign investor could only invest up to 3% of each class of outstanding shares. At April 1, 1996, the limits were increased from 15% to 18% and 3% to 4%, respectively. Pursuant to its license, however, the Fund may invest in shares representing 5% of each class in general. 26 [LOGO]The Korea Fund, Inc. Report Of Independent Accountants =============================================================================== TO THE BOARD OF DIRECTORS AND THE SHAREHOLDERS OF The Korea Fund, Inc.: We have audited the accompanying statement of assets and liabilities of The Korea Fund, Inc. including the investment portfolio, as of June 30, 1996, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of June 30, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of The Korea Fund, Inc. as of June 30, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended in conformity with generally accepted accounting principles. Boston, Massachusetts COOPERS & LYBRAND L.L.P. August 16, 1996 27 [LOGO] The Korea Fund, Inc. Tax Information =============================================================================== Pursuant to section 852 of the Internal Revenue Code, the Fund designates $24,836,787 as capital gain dividend for its fiscal year ended June 30, 1996. Due to the nature of its investments, the Fund pays foreign taxes to the Republic of Korea throughout the year. As in prior years, the Fund intends to make an election under Section 853 of the Internal Revenue Code. This election will allow shareholders to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. Additionally, shareholders will be required to report their proportionate share of such taxes paid as gross income (in addition to other amounts of reportable distributions paid by the Fund). The Fund paid taxes to the Republic of Korea of $.04 per share during the taxable year ended June 30, 1996. Pursuant to an election made by the Fund under Section 853 of the Internal Revenue Code, shareholders may treat their proportionate share of such taxes as having been paid by them. During the same year, the Fund recognized $.06 per share of foreign source income, all of which was derived from the Republic of Korea. Please consult a tax advisor if you have questions about federal or state income tax laws, or on how to prepare your tax returns. If you have specific questions about your Korea Fund account, please call 800-426-5523. 28 Dividend Reinvestment and Cash Purchase Plan The Plan The Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan") offers you an automatic way to reinvest your dividends and capital gains distributions in shares of the Fund. The Plan also provides for cash investments in Fund shares of $100 to $3,000 semiannually through State Street Bank and Trust Company, the Plan Agent. Automatic Participation Each shareholder of record is automatically a participant in the Plan unless the shareholder has instructed the Plan Agent in writing otherwise. Such a notice must be received by the Plan Agent not less than 10 days prior to the record date for a dividend or distribution in order to be effective with respect to that dividend or distribution. A notice which is not received by that time will be effective only with respect to subsequent dividends and distributions. Shareholders who do not participate in the Plan will receive all distributions in cash paid by check in dollars mailed directly to the shareholder by State Street Bank and Trust Company, as dividend paying agent. Shares Held by a Nominee If your shares are held in the name of a brokerage firm, bank, or other nominee as the shareholder of record, please consult your nominee (or any successor nominee) to determine whether it is participating in the Plan on your behalf. Many nominees are generally authorized to receive cash dividends unless they are specifically instructed by a client to reinvest. If you would like your nominee to participate in the Plan on your behalf, you should give your nominee instructions to that effect as soon as possible. Pricing of Dividends and Distributions If the market price per share on the payment date for the dividend or distribution (the "Valuation Date") equals or exceeds net asset value per share on that date, the Fund will issue new shares to participants at the greater of the following on the Valuation Date: (a) net asset value, or (b) 95% of the mean 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 Fund shares at such time, participants in the Plan are considered to have elected to receive shares of stock from the Fund, valued at market price, on the Valuation Date. In either case, for Federal income tax purposes, the shareholder receives a distribution equal to the market value on Valuation Date of new shares issued. State and local taxes may also apply. If the Fund should declare an income dividend or net 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' account on, or shortly after, the payment date. Voluntary Cash Purchases Participants in the Plan have the option of making additional cash payments to the Plan Agent, semiannually, in any amount from $100 to $3,000, for investment in the Fund's shares. The Plan Agent will use all such monies received from participants to purchase Fund shares in the open market on or about February 15 and August 15. Any voluntary cash payments received more than 30 days prior to these dates 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 February 15, or August 15, as the case may be. 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. 29 Participant Plan Accounts The Plan Agent maintains all participant accounts in the Plan and furnishes written confirmation of all transactions in the account, including information needed by participants 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 participant will be able to vote those shares purchased pursuant to the Plan at a shareholder meeting or by proxy. No Service Fee to Reinvest There is no service fee charged to participants for reinvesting dividends or distributions from net realized capital gains. The Plan Agent's fees for the handling of the reinvestment of dividends and capital gains distributions will be paid by the Fund. There will be no brokerage commissions 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, participants 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 any dividends or capital gains distributions payable only in cash. Costs for Cash Purchases With respect to purchases of Fund shares from voluntary cash payments, the Plan Agent will charge $0.75 for each such purchase for a participant. Each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases of Fund shares in connection with 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 pro-rating the lower commission thus attainable. Amendment or Termination The Fund and the Plan Agent each reserve the right to terminate the Plan. Notice of the termination will be sent to the participants of the Plan at least 30 days before the record date for a 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 giving at least 30 days' written notice to participants in the Plan. A participant may terminate his account under the Plan by written notice to the Plan Agent. If the written notice is received 10 days before the record day of any distribution, it will be effective immediately. If received after that date, it will be effective as soon as possible after the reinvestment of the dividend or distribution. If a participant elects to sell his shares before the Plan is terminated, the Plan Agent will deduct a $2.50 fee plus brokerage commissions from the sale transaction. Plan Agent Address and Telephone Number You may obtain more detailed information by requesting a copy of the Plan from the Plan Agent. All correspondence (including notifications) should be directed to: The Korea Fund Dividend Reinvestment and Cash Purchase Plan, c/o State Street Bank and Trust Company, P.O. Box 8209, Boston, MA 02266-8209, 1-800-426-5523. 30 Officers and Directors JURIS PADEGS* Chairman of the Board and Director CHANG-HEE KIM Vice Chairman of the Board and Director NICHOLAS BRATT* President and Director WILLIAM H. GLEYSTEEN, JR. Director ROBERT W. LEAR Director DR. SANG C. LEE Director TAI HO LEE Director DR. WILSON NOLEN Director HUGH T. PATRICK Director SIDNEY M. ROBBINS Emeritus Founding Director JERARD K. HARTMAN* Vice President KUN-HO HWANG Vice President YOUNG H. KIM Vice President JOHN J. LEE* Vice President DAVID S. LEE* Vice President DONG WOOK PARK Vice President THOMAS F. McDONOUGH* Secretary and Assistant Treasurer PAMELA A. McGRATH* Treasurer EDWARD J. O'CONNELL* Vice President and Assistant Treasurer KATHRYN L. QUIRK* Vice President and Assistant Secretary COLEEN DOWNS DINNEEN* Assistant Secretary * Scudder, Stevens & Clark, Inc. 31 -----END PRIVACY-ENHANCED MESSAGE-----