-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, CibjOT7cn7LVyh0u5FaCHyosggS3oIc+97R75Fr58olXrfSrFluWwNB2OY2/gb7E jRXlF7mh9v0kURQf5OhAXQ== 0000950123-95-001656.txt : 19950606 0000950123-95-001656.hdr.sgml : 19950606 ACCESSION NUMBER: 0000950123-95-001656 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950605 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: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-58941 FILM NUMBER: 95544979 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 497 1 THE KOREA FUND, INC. 1 PROSPECTUS 7,386,102 SHARES [KOREA FUND THE KOREA FUND, INC. LOGO] COMMON STOCK --------------------------- The Korea Fund, Inc. (the "Fund") is issuing to its shareholders of record (the "Record Date Shareholders") as of the close of business on June 5, 1995 (the "Record Date") rights (the "Rights") entitling the holders thereof to subscribe for an aggregate of 7,386,102 shares (the "Shares") of the Fund's Common Stock at the rate of one share of Common Stock for each four Rights held and entitling such Record Date Shareholders to subscribe, subject to certain limitations and subject to allotment, for any Shares not acquired by exercise of primary subscription Rights (the foregoing being referred to hereinafter as the "Offer"). No fractional Rights will be issued. The Rights are transferable and are expected to be listed for trading on the New York Stock Exchange ("NYSE"). The Shares are expected to be listed for trading on the NYSE, Pacific Stock Exchange ("PSE") and Osaka Stock Exchange ("OSE"). See "The Offer." THE SUBSCRIPTION PRICE PER SHARE (the "Subscription Price") will be $15.50. THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE 21, 1995 UNLESS EXTENDED AS DESCRIBED HEREIN. The Fund is a non-diversified, closed-end management investment company, commenced operations in 1984 and, as of May 22, 1995, had net assets of $573,114,427. The Fund's investment objective is to seek long-term capital appreciation through investment in securities, primarily equity securities, of Korean companies. It is the policy of the Fund normally to invest at least 80% of the Fund's net assets in securities listed on the Korea Stock Exchange (the "Stock Exchange"). No assurance can be given that the Fund's investment objective will be realized. Investment in Korea involves certain considerations, such as restrictions on foreign investment and repatriation of capital, fluctuations of currency exchange rates, and political and economic risks, that are not normally involved in investments in the United States. See "Investment Objective and Policies" and "Risk Factors and Special Considerations." Scudder, Stevens & Clark, Inc. (the "Manager") manages the Fund. Daewoo Capital Management Co., Ltd. (the "Korean Adviser") acts as Korean adviser. The address of the Fund is 345 Park Avenue, New York, New York 10154, and its telephone number is (212) 326-6200. All questions relating to the Offer should be directed to the Information Agent, Georgeson & Company Inc., toll free at (800) 223-2064 or call collect at (212) 509-6240. --------------------------- The Fund's currently outstanding shares of Common Stock are, and the Shares offered hereby will be, listed on the NYSE and the PSE under the symbol "KF" and on the OSE under the symbol "8676." The Rights will trade on the NYSE under the symbol "KF-RT". The Fund announced the Offer after the close of trading on the NYSE on April 28, 1995. The net asset value per share of Common Stock at the close of business on April 28, 1995 and June 2, 1995 was $20.58 and $20.25, respectively, and the last sale price of the Common Stock on the NYSE Composite Tape on those dates was $21.625 and $22.625, respectively. --------------------------- As a result of the terms of the Offer, Record Date Shareholders who do not fully exercise their Rights should expect that they will, upon the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. An immediate substantial dilution of the aggregate net asset value of the shares of Common Stock owned by Record Date Shareholders who do not fully exercise their Rights is likely to be experienced as a result of the Offer. SEE "THE OFFER" AND "RISK FACTORS AND SPECIAL CONSIDERATIONS." --------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Subscription Proceeds to Price Sales Load(1) Fund(2) - ----------------------------------------------------------------------------------------------------------- Per Share................................... $15.50 $0.5425 $14.9575 - ----------------------------------------------------------------------------------------------------------- Total....................................... $114,484,581 $4,006,960 $110,477,621 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) In connection with the Offer, Lehman Brothers Inc. (the "Dealer Manager") and other broker-dealers soliciting the exercise of Rights will receive soliciting fees equal to 2.50% of the Subscription Price per Share. The Fund has also agreed to pay the Dealer Manager a fee for financial advisory services in connection with the Offer equal to 1.00% of the aggregate Subscription Price, and has agreed to indemnify the Dealer Manager against certain liabilities under the U.S. Securities Act of 1933, as amended. (2) Before deduction of expenses incurred by the Fund, estimated at $860,000, including up to an aggregate of $50,000 to be paid to the Dealer Manager in reimbursement of its expenses. --------------------------- Prior to the Expiration Date, the Dealer Manager may offer Shares of Common Stock, including Shares acquired through the purchase and exercise of Rights, at prices it sets from time to time. Each price when set will not exceed the greater of the last sale or current asked price of the Common Stock on the NYSE plus commissions, and an offering price set in any calendar day will not be increased more than once during that day. Because the Dealer Manager will determine the price, it may realize profits or losses independent of any fees referred to under "The Offer -- Distribution Arrangements." --------------------------- This Prospectus sets forth concisely information about the Fund that a prospective investor ought to know before investing. Investors are advised to read this Prospectus and to retain it for future reference. --------------------------- The date of this Prospectus is June 5, 1995. 2 In this Prospectus, unless otherwise specified, all references to "billion" are to one thousand million, to "trillion" are to one thousand billion, to "Dollars," "US$" or "$" are to United States Dollars and to "Won" or "W" are to Korean Won. On May 22, 1995, the market average exchange rate as published by the Korea Telecommunications and Clearings Institute was Won 760.70 = $1.00. No representation can be made as to whether the Won or Dollar amounts in this Prospectus could have been or could be converted into Dollars or Won, as the case may be, at such rates, at any other rates or at all. See "The Republic of Korea -- Foreign Exchange" for information regarding the rates of exchange between the Won and the Dollar for the five years prior to the date of this Prospectus. Reference should be made to "Risk Factors and Special Considerations -- Currency Fluctuations" for a better understanding of the effect of the fluctuation of the exchange rate between the Won and the Dollar on the Fund and the significance, in Dollar terms, of amounts set forth in this Prospectus in Won and of amounts in comparison based on, or computed by reference to, such currency. Unless otherwise indicated, Dollar equivalent information in Won for a period is based on the average of the daily exchange rates for the days in the period, and Dollar information for Won as of a specified date is based on the exchange rate for that date, as contained in International Financial Statistics, International Monetary Fund. Certain numbers in this Prospectus have been rounded for ease of presentation. Since most calculations have been made on unrounded figures, the sum of the component figures in many of the tables presented may not precisely equal the totals shown. AVAILABLE INFORMATION The Fund is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the United States Securities and Exchange Commission (the "Commission"). Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the Commission's regional offices at 7 World Trade Center, New York, New York 10048 and 14th Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Fund's shares of Common Stock are listed on the stock exchanges referred to on the cover page of this Prospectus, and reports and other information concerning the Fund can be inspected at such exchanges. A Registration Statement on Form N-2 relating to the Shares has been filed by the Fund with the Commission. This Prospectus does not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Fund and the Shares offered hereby, reference is made to the Registration Statement. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission. --------------------------- IN CONNECTION WITH THIS OFFERING, THE DEALER MANAGER MAY EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE RIGHTS AND THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, ANY OTHER EXCHANGES ON WHICH THE COMMON STOCK AND/OR THE RIGHTS HAVE BEEN ADMITTED TO TRADING PRIVILEGES, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 3 EXPENSE INFORMATION The following table sets forth certain fees and expenses of the Fund. SHAREHOLDER TRANSACTION EXPENSES: Sales Load (as a percentage of offering price)(1)(2)............................... 3.50% Dividend Reinvestment and Cash Purchase Plan Fees.................................. (3)
ANNUAL FUND OPERATING EXPENSES: Expenses paid by the Fund before it distributes its net investment income, expressed as a percentage of the Fund's net assets (based on estimated expenses for the fiscal year ending June 30, 1995). Management Fees.................................................................... 1.01% Other expenses..................................................................... .31% ----- Total Annual Fund Operating Expenses....................................... 1.32% =====
EXAMPLE:(4)
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- Based on the level of total Fund operating expenses listed above, the total expenses relating to a $1,000 investment in the Fund at the end of each period, assuming a 5% annual return, are listed below........ $ 48 $75 $ 105 $188
- --------------- (1) The Dealer Manager and the other broker-dealers soliciting the exercise of Rights will receive soliciting fees equal to 2.50% of the Subscription Price per Share. The Fund also has agreed to pay the Dealer Manager a fee for financial advisory services in connection with the Offer equal to 1.00% of the aggregate Subscription Price. These fees will be borne by all of the Fund's shareholders, including those shareholders who do not exercise their Rights. (2) Does not include expenses of the Fund incurred in connection with the Offer, estimated at $860,000. (3) There is no charge to participants for reinvesting dividends and capital gains distributions (the Plan Agent's fees are paid by the Fund). Participants are charged a $0.75 service fee for each voluntary cash investment and a pro rata share of brokerage commissions on all open market purchases. (4) The Example assumes reinvestment of all dividends and distributions at net asset value, reflects all recurring and non-recurring fees including the Sales Load and other expenses of the Fund incurred in connection with the Offer, assumes that the percentage amounts listed under "Annual Fund Operating Expenses" remain the same each year, and assumes that all of the Rights are exercised. The purpose of the foregoing table and example is to assist Rights holders in understanding the various costs and expenses that an investor in the Fund bears, directly or indirectly. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR RETURN. ACTUAL FUND EXPENSES AND RETURN VARY FROM YEAR TO YEAR AND MAY BE HIGHER OR LOWER THAN THOSE SHOWN. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in the Fund's Dividend Reinvestment and Cash Purchase Plan may receive shares issued at a price or value different from net asset value. See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan." The figure provided under "Other Expenses" is based upon estimated amounts for the current fiscal year. For more complete descriptions of certain of the Fund's costs and expenses, see "Investment Advisers." 3 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information included elsewhere in this Prospectus. Investors should carefully consider information set forth under the heading "Risk Factors and Special Considerations." THE OFFER The Korea Fund, Inc. (the "Fund") is issuing to its shareholders of record (the "Record Date Shareholders") as of the close of business on June 5, 1995 (the "Record Date") transferable rights (the "Rights") to subscribe for an aggregate of 7,386,102 shares of Common Stock (the "Shares") of the Fund. Each Record Date Shareholder is being issued one Right for each full share of Common Stock owned on the Record Date. For purposes of determining the number of Shares a Record Date Shareholder may acquire pursuant to the Offer (as defined below), broker-dealers whose Shares are held of record by Cede & Co. ("Cede"), nominee for The Depository Trust Company ("DTC"), or by any other depository or nominee will be deemed to be the holders of the Rights that are issued to Cede or such other depository or nominee on their behalf. The Rights entitle the Record Date Shareholder to acquire at the Subscription Price (as hereinafter defined) one Share for each four Rights held. No fractional Rights will be issued. Any Record Date Shareholder who is issued fewer than four Rights may subscribe, at the Subscription Price, for one full Share during the Subscription Period, which commences on the date of this Prospectus and ends at 5:00 p.m. New York City time, on June 21, 1995 unless extended by the Fund (the "Expiration Date"). The Rights are evidenced by subscription certificates ("Subscription Certificates") which will be mailed to Record Date Shareholders (except as discussed below under "Foreign Restrictions"). A Record Date Shareholder's right to acquire during the Subscription Period at the Subscription Price one Share for each four Rights held is hereinafter referred to as the "Primary Subscription." Holders of Rights acquired during the Subscription Period ("Rights Holders") may also purchase Shares in the Primary Subscription. All Rights may be exercised immediately upon receipt and until 5:00 p.m., New York City time, on the Expiration Date. (Record Date Shareholders and Rights Holders purchasing Shares in the Primary Subscription are hereinafter referred to as "Exercising Rights Holders.") As a result of the terms of the Offer, Record Date Shareholders who do not fully exercise their Rights should expect that they will, upon the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. An immediate substantial dilution of the aggregate net asset value of the shares of Common Stock owned by Record Date Shareholders who do not fully exercise their Rights is likely to be experienced as a result of the Offer. See "Risk Factors and Special Considerations -- Special Considerations." OVER-SUBSCRIPTION PRIVILEGE Any Record Date Shareholder who fully exercises all Rights issued to him (other than those Rights which cannot be exercised because they represent the right to acquire less than one Share) is entitled to subscribe for Shares which were not otherwise subscribed for by others on Primary Subscription (the "Over- Subscription Privilege" and, together with the Primary Subscription, the "Offer"). Shares acquired pursuant to the Over-Subscription Privilege are subject to allotment, which is more fully discussed under "The Offer -- Over-Subscription Privilege." SUBSCRIPTION PRICE The Subscription Price per Share (the "Subscription Price") is $15.50. SOLICITING FEES The Fund has agreed to pay broker-dealers, including Lehman Brothers Inc. (the "Dealer Manager"), fees for their soliciting efforts equal to 2.5% of the Subscription Price per Share. See "The Offer -- Distribution Arrangements." 4 5 INFORMATION AGENT The Information Agent for the Offer is: Georgeson & Company Inc. Wall Street Plaza New York, New York 10005 Toll Free: (800) 223-2064 or Call Collect: (212) 509-6240 IMPORTANT DATES TO REMEMBER
EVENT DATE ----------------------------------------- -------------------------------- Record Date June 5, 1995 Subscription Period June 5, 1995 -- June 21, 1995 Expiration Date June 21, 1995 (unless extended) Subscription Certificates and Payment for Shares Due June 21, 1995 Notices of Guaranteed Delivery Due June 21, 1995 Subscription Certificates and Payment Due Pursuant to Notice of Guaranteed Delivery June 26, 1995 Confirmation Date July 3, 1995
EXERCISING RIGHTS Rights will be evidenced by Subscription Certificates (see Appendix B) and may be exercised by completing a Subscription Certificate and delivering it, together with payment, either by means of a notice of guaranteed delivery or a check, to State Street Bank and Trust Company, Boston, Massachusetts (the "Subscription Agent"). Exercising Rights Holders will have no right to rescind a purchase after the Subscription Agent has received payment, either by means of a notice of guaranteed delivery or a check. See "The Offer -- Exercise of Rights" and "The Offer -- Payment for Shares." SALE OF RIGHTS The Rights are transferable until the Expiration Date. The Rights are expected to be listed for trading on the New York Stock Exchange (the "NYSE"), and the Shares are expected to be listed for trading on the NYSE, the Pacific Stock Exchange (the "PSE") and the Osaka Stock Exchange (the "OSE"). The Fund has used its best efforts to ensure that an adequate trading market for the Rights will exist, although no assurance can be given that a market for the Rights will develop. Trading in the Rights on the NYSE may be conducted until the close of trading on the NYSE on the last Business Day (as defined below) prior to the Expiration Date. The Fund expects that a market for the Rights will develop and that the value of the Rights, if any, will be reflected by the market price. Rights may be sold by individual holders or may be submitted to the Subscription Agent for sale by the Dealer Manager. Any Rights to be submitted by the Subscription Agent to the Dealer Manager for sale must be received by the Subscription Agent at or prior to 5:00 p.m., New York City time, on June 19, 1995, two Business Days prior to the Expiration Date, due to normal settlement procedures. Trading of the Rights on the NYSE will be conducted on a when-issued basis commencing on June 6, 1995 and thereafter on a regular way basis from June 7, 1995 until and including the last Business Day prior to the Expiration Date. If the Subscription Agent receives Rights for sale in a timely manner, the Dealer Manager will use its best efforts to sell the Rights on the NYSE. The Dealer Manager will also attempt to sell any Rights submitted to it by the Subscription Agent that a Record Date Shareholder is unable to exercise because such Rights represent the right to subscribe for less than one Share. Any 5 6 commissions will be paid by the selling Record Date Shareholder. Neither the Fund nor the Subscription Agent nor the Dealer Manager will be responsible if Rights cannot be sold and none of them has guaranteed any minimum sale price for the Rights. For purposes of this Prospectus, a "Business Day" shall mean any day on which trading is conducted on the NYSE. Record Date Shareholders are urged to obtain a recent trading price for the Rights on the NYSE from their broker, bank, financial adviser or the financial press. Exercising Rights Holders' inquiries should be directed to the Information Agent. FOREIGN RESTRICTIONS Subscription Certificates will not be mailed to Record Date Shareholders whose record addresses are outside the United States (for these purposes the United States includes its territories and possessions and the District of Columbia) (such shareholders being referred to hereinafter as "Foreign Record Date Shareholders"). The Rights to which such Subscription Certificates relate will be held by the Subscription Agent for such Foreign Record Date Shareholders' accounts until instructions are received to exercise, sell or transfer the Rights. If no instructions have been received by 12:00 noon, New York City time, two Business Days prior to the Expiration Date, the Rights of those Foreign Record Date Shareholders will be transferred by the Subscription Agent to the Dealer Manager who will use its best efforts to sell the Rights on the NYSE. The net proceeds from the sale of those Rights by the Dealer Manager will be remitted to the Foreign Record Date Shareholders. USE OF PROCEEDS The net proceeds of the Offer will be invested in accordance with the policies set forth under "Investment Objective and Policies." The Board of Directors of the Fund has determined that it would be in the best interests of the Fund and its shareholders to increase the assets of the Fund available for investment so that the Fund will be in a better position to take advantage of investment opportunities that the Fund anticipates in Korea. In addition, the Offer affords existing shareholders the opportunity to purchase additional shares of the Fund's Common Stock at a price that may be below market value and/or net asset value without incurring any transaction costs. See "The Offer -- Purpose of the Offer" and "Foreign Investment and Exchange Controls in Korea -- The Fund's License." INFORMATION REGARDING THE FUND The Fund is a non-diversified, closed-end management investment company designed to facilitate international diversification for U.S. and other investors who desire to participate in the Korean economy. The investment objective of the Fund is to seek long-term capital appreciation through investment in securities, primarily equity securities, of Korean companies. It is the policy of the Fund normally to invest at least 80% of its net assets in securities listed on the Korea Stock Exchange (the "Stock Exchange"). The Fund's investment objective is subject to certain investment policies and restrictions described under "Investment Objective and Policies" and "Investment Restrictions." INFORMATION REGARDING THE MANAGER AND THE KOREAN ADVISER Scudder, Stevens & Clark, Inc. (the "Manager"), a leading global investment manager, acts as investment adviser to and manager of the Fund. As of December 31, 1994, the Manager and its affiliates had over $90 billion under their supervision, of which more than $22 billion was invested in non-U.S. securities. Daewoo Capital Management Co., Ltd., an investment advisory subsidiary of Daewoo Securities Co., Ltd., ("Daewoo Securities") acts as Korean adviser to the Manager (the "Korean Adviser"). Daewoo Securities is the largest Korean securities firm, based on paid-in equity and total revenues in 1994. See "Investment Advisers." Under the Investment Advisory and Management Agreement between the Manager and the Fund, the Manager receives 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, 1.00% of such net 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 6 7 $750,000,000. A portion of these fees are paid by the Manager to the Korean Adviser. See "Investment Advisers." INFORMATION REGARDING THE CUSTODIAN Brown Brothers Harriman & Co. acts as custodian for the Fund. The Seoul branch of Citibank, N.A. acts as Subcustodian. See "Custodian." RISK FACTORS AND SPECIAL CONSIDERATIONS Dilution. An immediate substantial dilution of the aggregate net asset value of the shares of Common Stock owned by Record Date Shareholders who do not fully exercise their Rights is likely to be experienced as a result of the Offer because the Subscription Price is likely to be less than the Fund's then-net asset value per share, and the number of shares outstanding after the Offer is likely to increase in a greater percentage than the increase in the size of the Fund's assets. In addition, as a result of the terms of the Offer, Record Date Shareholders who do not fully exercise their Rights should expect that they will, at the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. Although it is not possible to state precisely the amount of such a decrease in value, because it is not known at this time what the net asset value per share will be at the Expiration Date, such dilution could be substantial. For example, assuming that all Rights are exercised and that the Subscription Price of $15.50 is 23.5% below the Fund's net asset value of $20.25 per share on June 2, 1995, the Fund's net asset value per share would be reduced by approximately $1.08 per share. Unrealized Appreciation. As of May 22, 1995, there was approximately $266 million of net unrealized appreciation in the Fund's net assets of approximately $573 million; if realized and distributed, or deemed distributed, such gains would, in general, be taxable to shareholders, including holders at that time of Shares acquired upon the exercise of the Rights. As of May 22, 1995, the Fund had approximately $4.3 million of undistributed net investment income (all of which represents realized short-term capital gains) with respect to its fiscal year ending June 30, 1995, which the Fund expects to distribute to shareholders of record after the end of such fiscal year (including holders at that time of Shares acquired upon exercise of the Rights). As of May 22, 1995, the Fund also had approximately $12 million of undistributed net realized long-term capital gains, which the Fund expects to distribute to such shareholders. Such distributions will, in general, be taxable to such shareholders. See "Taxation -- United States Federal Income Taxes -- General," "-- Distributions" and "-- Non-U.S. Shareholders." Investments in Korea. Investing in securities of Korean companies and of the Government (the "Government") of the Republic of Korea ("Korea," or the "Republic") involves certain considerations not typically associated with investing in securities of United States companies or the United States government, including (1) restrictions imposed by the Government on foreign investment, which may limit investment opportunities available to the Fund, (2) restrictions on, and costs associated with, currency conversions and the repatriation of the Fund's principal, income and gains, (3) fluctuations in the rate of exchange between the Won and the Dollar, (4) potential price volatility and lesser liquidity of the Korean securities markets, due in part to their relatively small size and to competition from alternative investment opportunities in Korea, (5) governmental involvement in and influence on the private sector and (6) political and economic risks. In addition, Korean accounting, auditing and financial reporting standards are not equivalent to United States standards. Therefore, certain material disclosures (including disclosures as to off-balance sheet financing) may not be made and less information may be available with respect to investments in Korea than in the United States. Supervision by governmental agencies and self-regulatory organizations with respect to the securities industry in Korea differs from, and in some respects is less than, such supervision in the United States. The Fund's transaction costs are higher than the transaction costs for the typical investment company investing in U.S. securities. See "Risk Factors and Special Considerations." The Government has exercised and continues to exercise substantial influence over many aspects of the private sector. The Government from time to time has informally influenced the payment of dividends and the prices of certain products, encouraged companies to invest or to concentrate in particular industries, induced mergers between stronger and weaker companies in industries suffering from excess capacity, controlled access 7 8 to credit on favorable terms, encouraged institutional investment in Korean equity securities, and induced private companies to publicly offer their securities. Such actions by the Government in the future could have a significant effect on the market prices and dividend yields of Korean equity securities. Although 45 years have passed since the Korean War (1950-1953), military tension and political confrontation still characterize relations between North Korea and the Republic. Large armies remain deployed on both sides of the demilitarized zone. The United States still maintains a substantial military force in Korea to reinforce its commitment to the Republic's security. Some communication has occurred in recent years through intermittent North-South talks and the more recent U.S. dialogue with North Korea, but the hostility and extremist character of the North Korean regime continue to hobble contacts. In signing an agreement with the United States on October 22, 1994 for provision of light water nuclear power reactors, North Korea seemed prepared to address international concern that it was developing nuclear weapons. Its subsequent denial of a key understanding of the agreement, however, has renewed doubts and rekindled anxiety that it will violate its obligations to the International Atomic Energy Agency. While not imminent, unification of North Korea and the Republic has become a foreseeable contingency and source of considerable discussion. Given the disparities between the economies of the North and South, unification could entail substantial costs and dislocations to the economy of the Republic. Non-Diversified Status. The Fund is classified as a "non-diversified" investment company under the U.S. Investment Company Act of 1940, as amended (the "1940 Act"), which means that the Fund is not limited by the 1940 Act as to the percentage of its assets that may be invested in the securities of a single issuer. As a non-diversified investment company, the Fund may invest in a smaller number of issuers, and, as a result, may be subject to greater risk with respect to portfolio securities. Discount from Net Asset Value. While the Fund's shares have generally traded at a premium in relation to net asset value, continued development of alternatives to the Fund as a vehicle for investment in Korean securities by United States investors may reduce or eliminate (or change to a discount) this premium. The premium has generally been declining in recent years. See "Market and Net Asset Value Information" and "Net Asset Value." Charter Provisions. Certain anti-takeover provisions will make a change in the Fund's business or management more difficult without the approval of the Fund's Board of Directors and may have the effect of depriving shareholders of an opportunity to sell their shares at a premium above the prevailing market price. See "Common Stock -- Special Voting Provisions." 8 9 FINANCIAL HIGHLIGHTS The following information includes selected data for a share of the Fund's Common Stock outstanding throughout each period, based on the monthly average of shares outstanding during the period, and other performance information derived from the Fund's financial statements and market price data and has been audited by Coopers & Lybrand L.L.P., independent accountants. This information should be read in conjunction with the Financial Statements and Notes thereto that appear elsewhere in this Prospectus.
SIX MONTHS ENDED FOR THE FISCAL YEARS ENDED JUNE 30, DEC. 31, ----------------------------------------------------------------------------------- 1994 1994 1993 1992 1991 1990 1989 1988(B) 1987(B) -------- ------ ------- ------- ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE Net Asset Value, Beginning of Period...................... $18.66 $11.40 $ 10.75 $ 10.27 $ 14.45 $ 16.84 $ 13.97 $ 11.13 $ 7.46 -------- ------ ------- ------- ------- ------- ------- ------- ------- Net Investment Income (Loss).................... (.10) (.03) .02 .08 .09 .04 .04 .11 .29 Net Realized and Unrealized Gain (Loss) on Investments and Won Related Transactions.............. 2.24 7.13 .86 .78 (2.13) (1.99) 4.65 3.64 3.42 -------- ------ ------- ------- ------- ------- ------- ------- ------- Total From Investment Operations.................. 2.14 7.10 .88 .86 (2.04) (1.95) 4.69 3.75 3.71 -------- ------ ------- ------- ------- ------- ------- ------- ------- Less Distributions From: Net Investment Income....... -- (.01) (.04) (.06) -- (.08) (.11) (.29) (.01) Net Realized Gains on Investment Transactions... (.15) -- (.20) (.34) (2.20) (1.88) (1.74) (.68) (.03) -------- ------ ------- ------- ------- ------- ------- ------- ------- Total Distributions........... (.15) (.01) (.24) (.40) (2.20) (1.96) (1.85) (.97) (.04) -------- ------ ------- ------- ------- ------- ------- ------- ------- Antidilution Resulting from Offering of Fourth Tranche (Fiscal 1994), Third Tranche (Fiscal 1990) and Second Tranche (Fiscal 1986) and Reinvestment of Dividends for Shares at Market Value....................... -- .22 .01 .02 .06 1.55 .03 .06 -- -------- ------ ------- ------- ------- ------- ------- ------- ------- Underwriting Expenditures and Offering Costs.............. -- (.05) -- -- -- (.03) -- -- -- -------- ------ ------- ------- ------- ------- ------- ------- ------- Net Asset Value, End of Period...................... $20.65 $18.66 $ 11.40 $ 10.75 $ 10.27 $ 14.45 $ 16.84 $ 13.97 $ 11.13 ====== ====== ======= ======= ======= ======= ======= ======= ======= Market Value, End of Period ............................ $22.75 $22.00 $ 15.00 $ 11.38 $ 14.13 $ 22.13 $ 31.63 $ 23.58 $ 23.38 ====== ====== ======= ======= ======= ======= ======= ======= ======= TOTAL RETURN (%) Per Share Market Value (%).... 4.03* 46.74 34.54 (17.01) (23.57) (26.23) 48.15 5.46 110.89 Per Share Net Asset Value (%)(a)...................... 11.32* 63.77 8.20 7.87 (14.91) (9.52) 33.21 31.17 49.77 RATIOS AND SUPPLEMENTAL DATA Net Assets, End of Period ($ millions)................... 610 550 258 241 228 303 323 265 210 Ratio of Operating Expenses to Average Net Assets (%)...... 1.31+ 1.37 1.52 1.52 1.47 1.44 1.54 1.53 1.47 Ratio of Net Investment Income (Loss) to Average Net Assets (%)......................... (.50)*(c) (.18) .15 .70 .83 .21 .24 .92 3.25 Portfolio Turnover Rate (%)... 11.0+ 14.3 14.3 18.2 19.2 17.9 15.1 19.7 4.4 FOR THE PERIOD AUG. 29, 1984 (COMMENCEMENT OF OPERATIONS) TO 1986(B) JUNE 30, 1985 ------- ----------------- PER SHARE OPERATING PERFORMANCE Net Asset Value, Beginning of Period...................... $ 3.83 $ 3.72 ------- ------ Net Investment Income (Loss).................... .12 .18 Net Realized and Unrealized Gain (Loss) on Investments and Won Related Transactions.............. 2.99 (.06) ------- ------ Total From Investment Operations.................. 3.11 .12 ------- ------ Less Distributions From: Net Investment Income....... (.28) -- Net Realized Gains on Investment Transactions... -- -- ------- ------ Total Distributions........... (.28) -- ------- ------ Antidilution Resulting from Offering of Fourth Tranche (Fiscal 1994), Third Tranche (Fiscal 1990) and Second Tranche (Fiscal 1986) and Reinvestment of Dividends for Shares at Market Value....................... .83 -- ------- ------ Underwriting Expenditures and Offering Costs.............. (.03) (.01) ------- ------ Net Asset Value, End of Period...................... $ 7.46 $ 3.83 ======= ============= Market Value, End of Period ............................ $ 11.13 $ 4.92 ======= ============= TOTAL RETURN (%) Per Share Market Value (%).... 139.51 23.00* Per Share Net Asset Value (%)(a)...................... 105.97 3.00* RATIOS AND SUPPLEMENTAL DATA Net Assets, End of Period ($ millions)................... 141 58 Ratio of Operating Expenses to Average Net Assets (%)...... 1.88 2.00+ Ratio of Net Investment Income (Loss) to Average Net Assets (%)......................... 2.37 5.63+ Portfolio Turnover Rate (%)... 6.8 --
- --------------- * Not annualized. + Annualized. (a) Total return based on per share net asset value reflects the effects of changes in net asset value on the performance of the Fund during each period, and assumes 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 value due to differences between the market price of the stock and the net asset value of the Fund during each period. (b) All per share and share outstanding amounts through the fiscal year ended June 30, 1988 have been restated to reflect the 200% stock dividend paid on October 11, 1988. (c) The ratio for the six months ended December 31, 1994 has not been annualized; the Fund believes an annualized ratio would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. 9 10 MARKET AND NET ASSET VALUE INFORMATION The Fund's outstanding Common Stock is, and the Shares will be, listed on the NYSE, the PSE and the OSE. The Fund's shares commenced trading on the NYSE on August 22, 1984, the PSE on April 22, 1987 and the OSE on December 20, 1991. The following table shows for the periods indicated (1) the high and low sales prices for transactions in the Fund's shares on the NYSE Composite Tape, (2) the net asset value as determined on the date closest to each quotation and (3) the discount or premium to net asset value (expressed as a percentage) represented by the quotation.
HIGH SALES NET ASSET PREMIUM LOW SALES NET ASSET PREMIUM PERIOD PRICE VALUE (DISCOUNT) PRICE VALUE (DISCOUNT) - -------------------------- ---------- --------- ---------- --------- --------- ---------- July 1 - Sept. 30, 1992... 12 7/8 10.31 24.9% 9 3/8 8.87 5.7% Oct. 1 - Dec. 31, 1992.... 15 3/8 10.60 45.1% 11 3/4 9.63 22.0% Jan. 1 - March 31, 1993... 15 3/8 11.29 36.2% 12 1/8 10.37 16.9% April 1 - June 30, 1993... 16 1/4 11.36 43.0% 12 3/4 10.66 19.6% July 1 - Sep. 30, 1993.... 15 7/8 11.60 36.9% 12 3/8 10.64 16.3% Oct. 1 - Dec. 31, 1993.... 26 1/4 16.64 57.8% 14 11.43 22.5% Jan. 1 - March 31, 1994... 26 7/8 20.35 32.1% 18 7/8 17.53 7.7% April 1 - June 30, 1994... 24 19.03 26.1% 18 7/8 16.83 12.2% July 1 - Sep. 30, 1994.... 27 5/8 21.12 30.8% 20 7/8 18.92 10.3% Oct. 1 - Dec. 31, 1994.... 26 3/4 21.91 22.1% 19 7/8 20.69 (3.9%) Jan. 1 - March 31, 1995... 22 5/8 20.53 10.2% 19 1/8 19.25 (0.6%) April 1 - May 31, 1995.... 22 7/8 20.99 9.0% 20 5/8 19.64 5.0%
Although historically shares of other closed-end investment companies have frequently traded at a discount from net asset value, the Fund's shares have generally traded at a premium to its net asset value, although this premium has been declining in recent years. On August 22, 1984, the first day of trading in the Fund's shares, the shares closed at a premium over net asset value per share of 16.5%. The Fund's premium reached a high of 159.0% on August 10, 1987. The Fund's shares traded at a discount to net asset value (of 0.87%) for the first time on March 26, 1992. The continued development of other alternatives to the Fund as a vehicle for investment in Korean securities by United States investors has been a primary factor in reducing the premium and may be expected to reduce future premiums or contribute to a discount. See "Risk Factors and Special Considerations -- Korean Investment Restrictions." On June 2, 1995, the last price of the Fund's shares on the NYSE Composite Tape was $22.625, which represented a premium of 11.7% above the net asset value per share of $20.25. THE FUND The Fund, incorporated in Maryland in May 1984, is a non-diversified, closed-end management investment company registered under the 1940 Act. The Fund commenced operations in August 1984, and has had four previous public offerings totalling approximately $265 million in aggregate price to the public. As of May 22, 1995, the Fund's aggregate net asset value was $573,114,427. The Fund's investment objective is to seek long-term capital appreciation through investment in securities, primarily equity securities, of Korean companies. The Fund's policy is to invest at least 80% of its net assets in securities listed on the Stock Exchange. As of May 22, 1995, 98.9% of the Fund's net assets were invested in securities listed on the Stock Exchange. The Fund is designed to facilitate international diversification by United States and other investors who desire to participate in the Korean economy. Because it invests primarily in the Korean securities markets, and due to the risks inherent in international investments generally, the Fund should be considered only as a vehicle for international diversification and not as a complete investment program. The Fund's Manager is Scudder, Stevens & Clark, Inc., a United States investment counsel firm. The Manager is a leading global investment manager that has been active in international investment for over 40 years. Daewoo Capital Management Co., Ltd., a subsidiary of Daewoo Securities, acts as Korean Adviser to the Manager. 10 11 THE OFFER TERMS OF THE OFFER The Fund is issuing Rights to subscribe for the Shares to Record Date Shareholders. Each Record Date Shareholder is being issued one transferable Right for each share of Common Stock owned on the Record Date. For purposes of determining the maximum number of Shares an Exercising Rights Holder may acquire pursuant to the Offer, broker-dealers whose Shares are held of record by Cede or by any other depository or nominee will be deemed to be the holders of the Rights that are issued to Cede or such other depository or nominee on their behalf. No fractional Rights will be issued. The Rights entitle the holders thereof to acquire at the Subscription Price one Share for each four Rights held. Any Record Date Shareholder who is issued fewer than four Rights may subscribe, at the Subscription Price, for one full Share. The Rights are evidenced by Subscription Certificates which will be mailed to Record Date Shareholders, except that Subscription Certificates will not be mailed to Foreign Record Date Shareholders. The Rights to which such Subscription Certificates relate will be held by the Subscription Agent for such Foreign Record Date Shareholders' accounts until instructions are received to exercise, sell or transfer the Rights. If no instructions have been received by 12:00 noon, New York City time, two Business Days prior to the Expiration Date, the Rights of those Foreign Record Date Shareholders will be transferred by the Subscription Agent to the Dealer Manager, who will use its best efforts to sell the Rights on the NYSE. The net proceeds from the sale of those Rights by the Dealer Manager will be remitted to the Foreign Record Date Shareholders. See "Sale of Rights -- Sales through Subscription Agent and Dealer Manager." Completed Subscription Certificates may be delivered to the Subscription Agent at any time during the Subscription Period, which commences on the date of this Prospectus and ends at 5:00 p.m., New York City time, on June 21, 1995, the Expiration Date (unless extended by the Fund). Parties that purchase Rights prior to the Expiration Date ("Rights Holders") may also purchase Shares in the Primary Subscription. All Rights may be exercised immediately upon receipt and until 5:00 p.m. on the Expiration Date. Any Record Date Shareholder who fully exercises all Rights initially issued to him (other than those Rights which cannot be exercised because they represent the right to acquire less than one Share) is entitled to subscribe for Shares which were not otherwise subscribed for by Exercising Rights Holders on the Primary Subscription. Record Date Shareholders, such as broker-dealers, banks, and other professional intermediaries, who hold shares on behalf of clients, may participate in the Over-Subscription Privilege for a client if the client fully exercises all Rights attributable to him. Shares acquired pursuant to the Over-Subscription Privilege may be subject to allotment, which is more fully discussed below under "Over-Subscription Privilege." Rights will be evidenced by Subscription Certificates (see Appendix B) and may be exercised by completing a Subscription Certificate and delivering it, together with payment, either by means of a notice of guaranteed delivery or a check, to the Subscription Agent. The method by which Rights may be exercised and Shares paid for is set forth below in "Exercise of Rights" and "Payment for Shares." An Exercising Rights Holder will have no right to rescind a purchase after the Subscription Agent has received payment, either by means of a notice of guaranteed delivery or a check. See "Payment for Shares" below. Shares issued pursuant to an exercise of Rights will be listed on the NYSE, PSE and OSE. The Rights are transferable until the Expiration Date and will be admitted for trading on the NYSE. Assuming a market exists for the Rights, the Rights may be purchased and sold through usual brokerage channels, or delivered on or before June 19, 1995, to the Subscription Agent for sale through the Dealer Manager. The Fund has used its best efforts to ensure that an adequate trading market for the Rights will exist, although no assurance can be given that a market for the Rights will develop. Trading in the Rights on the NYSE may be conducted until and including the close of trading on the last NYSE trading day prior to the Expiration Date. The method by which Rights may be transferred is set forth below in "Sale of Rights." The underlying Shares will also be admitted for trading on the NYSE, PSE and OSE. Since fractional Shares will not be issued, Record Date Shareholders who receive fewer than four Rights will be entitled to purchase one Share. Record Date Shareholders who, after exercising their Rights, are left with fewer than four Rights, 11 12 will be unable to exercise such Rights and will not be entitled to receive any cash, from the Fund, in lieu of such remaining Rights. However, the Subscription Agent will automatically request the Dealer Manager to attempt to sell the number of Rights which a Record Date Shareholder is unable to exercise for such reason after return of a completed and fully exercised Subscription Certificate to the Subscription Agent on or before June 19, 1995, and the Subscription Agent will remit the proceeds of any such sale, net of commissions, to the Record Date Shareholder. The distribution to Record Date Shareholders of transferable Rights which themselves may have intrinsic value will also afford non-participating Record Date Shareholders the potential of receiving a cash payment upon sale of such Rights, which may be viewed as compensation for the possible dilution of their interest in the Fund. PURPOSE OF THE OFFER The Board of Directors of the Fund has determined that it would be in the best interests of the Fund and its shareholders to increase the assets of the Fund available for investment so that the Fund will be in a better position to take advantage of investment opportunities in Korea. The Fund anticipates that a number of Korean companies in which the Fund currently owns shares will conduct rights offerings in which the Fund may be able to participate. In addition, on December 1, 1994, the Korean government increased the limit on share ownership by foreign investors in most Korean corporations by two percent to 12%. The Minister of Finance and Economy has announced that this limit will be increased to 15% effective July 1, 1995. The Fund believes that the proceeds of the Offer will permit it to take advantage of the new investment opportunities that the Fund anticipates in Korea without having to sell existing portfolio holdings, which would, in general, cause gains recognized by the Fund on appreciated positions to become taxable to shareholders. In addition, the Offer affords existing shareholders the opportunity to purchase additional shares of the Fund's Common Stock at a price that may be below market value and/or net asset value without incurring any transaction costs. The Manager and the Korean Adviser will benefit from the Offer because their fees are based on the average daily net assets of the Fund. It is not possible to state precisely the amount of additional compensation the Manager and the Korean Adviser will receive as a result of the Offer because it is not known how many Shares will be subscribed for and because the proceeds of the Offer will be invested in additional portfolio securities which will fluctuate in value. However, in the event that all the Rights are exercised in full and net proceeds of the Offer are $109,617,621, the Manager and the Korean Adviser would receive additional annual advisory fees (net, in the case of the Manager, of the Korean Adviser's fee, which is paid by the Manager) of $781,026 and $260,342, respectively, based on the amount of such proceeds. Three of the Fund's nine Directors who voted to authorize the Offer are "interested persons" of the Fund as that term is defined in the 1940 Act. These three Directors could benefit indirectly from the Offer because of their affiliations with the Manager or the Korean Adviser. See "Investment Advisers" and "Directors and Officers." The Fund may, in the future and at its discretion, choose to make additional rights offerings from time to time for a number of shares and on terms which may or may not be similar to the Offer. Any such future rights offering will be made in accordance with the 1940 Act. OVER-SUBSCRIPTION PRIVILEGE Shares not subscribed for by Exercising Rights Holders will be offered, by means of the Over-Subscription Privilege, to the Record Date Shareholders who have exercised all exercisable Rights issued to them and who wish to acquire more than the number of Shares for which the Rights issued to them are exercisable. Record Date Shareholders, such as broker-dealers, banks, and other professional intermediaries, who hold shares on behalf of clients, may participate in the Over-Subscription Privilege for a client if the client fully exercises all Rights attributable to him. Record Date Shareholders should indicate on their Subscription Certificates how many Shares they are willing to acquire pursuant to the Over-Subscription Privilege. If sufficient Shares remain, all over-subscriptions will be honored in full. If subscriptions for Shares pursuant to the Over-Subscription Privilege exceed the Shares available, the available Shares will be allocated among those who over-subscribe based on the number of Rights originally issued to them by the Fund. The percentage of remaining Shares each over-subscribing Record Date 12 13 Shareholder may acquire may be rounded up or down to result in delivery of whole Shares. The allocation process may involve a series of allocations in order to assure that the total number of Shares available for over-subscription is distributed on a pro rata basis. The Fund will not offer or sell any Shares which are not subscribed for pursuant to the Primary Subscription or the Over-Subscription Privilege. THE SUBSCRIPTION PRICE The Subscription Price for the Shares to be issued pursuant to the Rights will be $15.50. The Fund does not have the right to withdraw the Offer after the Rights have been distributed. The Fund announced the Offer after the close of trading on the NYSE on April 28, 1995. The net asset value per share of Common Stock at the close of business on April 28, 1995 and on June 2, 1995 was $20.58 and $20.25, respectively, and the last reported sale price of a share of the Fund's Common Stock on the NYSE Composite Tape on those dates was $21.625 and $22.625, respectively. The Subscription Price of $15.50 is approximately a 23.5% discount to the Fund's net asset value per share on June 2, 1995. Information about the Fund's net asset value may be obtained by calling the Information Agent at (800) 223-2064 (toll free) or (212) 509-6240 (collect). EXPIRATION OF THE OFFER The Offer will expire at 5:00 p.m., New York City time, on June 21, 1995, the Expiration Date (unless extended by the Fund). Rights will expire on the Expiration Date and thereafter may not be exercised. SUBSCRIPTION AGENT The Subscription Agent, State Street Bank and Trust Company, will receive for its administrative, processing, invoicing and other services as Subscription Agent a fee estimated to be $84,000, including reimbursement for all out-of-pocket expenses related to the Offer. The Subscription Agent is also the Fund's dividend paying agent, transfer agent and registrar with respect to the Shares, and Plan Agent under the Fund's Dividend Reinvestment and Cash Purchase Plan. Questions regarding the Subscription Certificates should be directed to State Street Bank and Trust Company, Corporate Reorganization Department, P.O. Box 9061, Boston, Massachusetts 02206-8200 (telephone (800) 426-3004). Shareholders may also consult their brokers or nominees. Signed Subscription Certificates (see Appendix B) should be sent to State Street Bank and Trust Company, by one of the methods described below: (1) BY MAIL: P.O. Box 9061 Boston, MA 02205-8686 (2) BY HAND: 225 Franklin St. Concourse Level Boston, MA 02110 or 61 Broadway Concourse Level New York, NY 10006 (3) BY OVERNIGHT COURIER: c/o Boston Financial Data Services, Inc. Corporate Stock Transfer Department Two Heritage Drive North Quincy, MA 02171 (4) BY FACSIMILE (TELECOPIER): (617) 774-4519, with the original Subscription Certificate to be sent by mail, hand or overnight courier. Confirm facsimile by telephone to (617) 774-4511.
DELIVERY BY METHODS OTHER THAN THOSE STATED ABOVE WILL NOT CONSTITUTE GOOD DELIVERY. 13 14 INFORMATION AGENT Any questions or requests for assistance may be directed to the Information Agent at its telephone number and address listed below: Georgeson & Company Inc. Wall Street Plaza New York, New York 10005 Toll Free: (800) 223-2064 or Call Collect: (212) 509-6240 The Information Agent will receive a fee estimated to be $22,500, and reimbursement for all out-of-pocket expenses related to the Offer. SALES OF RIGHTS Sales through Subscription Agent and Dealer Manager. Record Date Shareholders who do not wish to exercise any or all of their Rights may instruct the Subscription Agent to sell any unexercised Rights through the Dealer Manager. Subscription Certificates representing the Rights to be sold by the Dealer Manager must be received by the Subscription Agent prior to 5:00 p.m., New York City time, on June 19, 1995. Upon the timely receipt by the Subscription Agent of appropriate instruction to sell Rights, the Subscription Agent will request the Dealer Manager to use its best efforts to complete the sale and the Subscription Agent will remit the proceeds of the sale, net of commissions, to the Record Date Shareholders. If the Rights can be sold, sales of such Rights will be deemed to have been effected at the weighted-average price received by the Dealer Manager on the day such Rights are sold. The selling Record Date Shareholder will pay all brokerage commissions incurred by the Dealer Manager. The Dealer Manager will also attempt to sell all Rights which remain unclaimed as a result of Subscription Certificates being returned by the postal authorities to the Subscription Agent as undeliverable as of the fourth Business Day prior to the Expiration Date. Such sales will be made net of commissions on behalf of the non-claiming Record Date Shareholders. The Subscription Agent will hold the proceeds from those sales for the benefit of such non-claiming Record Date Shareholder until such proceeds are either claimed or escheat. There can be no assurance that the Dealer Manager will be able to complete the sale of any such Rights and neither the Fund nor the Subscription Agent nor the Dealer Manager has guaranteed any minimum sales price for the Rights. All such Rights will be sold at the market price, if any, on the NYSE. Other Transfers. The Rights evidenced by a Subscription Certificate may be transferred in whole by endorsing the Subscription Certificate for transfer in accordance with the instructions accompanying the Subscription Certificate. A portion of the Rights evidenced by a single Subscription Certificate (but not fractional Rights) may be transferred by delivering to the Subscription Agent a Subscription Certificate properly endorsed for transfer, with instructions to register such portion of the Rights evidenced thereby in the name of the transferee and to issue a new Subscription Certificate to the transferee evidencing such transferred Rights. In such event, a new Subscription Certificate evidencing the balance of the Rights will be issued to the Record Date Shareholder or, if the Record Date Shareholder so instructs, to an additional transferee. Record Date Shareholders wishing to transfer all or a portion of their Rights should allow at least five Business Days prior to the Expiration Date for (i) the transfer instructions to be received and processed by the Subscription Agent; (ii) a new Subscription Certificate to be issued and transmitted to the transferee or transferees with respect to transferred Rights, and to the transferor with respect to retained Rights, if any; and (iii) the Rights evidenced by such new Subscription Certificate to be exercised or sold by the recipients thereof. Neither the Fund nor the Subscription Agent nor the Dealer Manager shall have any liability to a transferee or transferor of Rights if Subscription Certificates are not received in time for exercise or sale prior to the Expiration Date. 14 15 Except for the fees charged by the Subscription Agent and Dealer Manager (which will be paid by the Fund), all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the purchase, sale or exercise of Rights will be for the account of the transferor of the Rights, and none of such commissions, fees or expenses will be paid by the Fund, the Subscription Agent or the Dealer Manager. The Fund anticipates that the Rights will be eligible for transfer through, and that the exercise of the Primary Subscription (but not the Over-Subscription Privilege) may be effected through, the facilities of DTC (Rights exercised through DTC are referred to as "DTC Exercised Rights"). The holder of a DTC Exercised Right who was a Record Date Shareholder may exercise the Over-Subscription Privilege in respect of such DTC Exercised Right by properly executing and delivering to the Subscription Agent, at or prior to 5:00 p.m., New York City time, on the Expiration Date, a DTC Participant Over-Subscription Form (see Appendix D), together with payment of the Subscription Price for the number of Shares for which the Over-Subscription Privilege is to be exercised. Copies of the DTC Participant Over-Subscription Form may be obtained from the Subscription Agent. EXERCISE OF RIGHTS Rights may be exercised by filling in and signing the reverse side of the Subscription Certificate which accompanies this Prospectus and mailing it in the envelope provided, or otherwise delivering the completed and signed Subscription Certificate to the Subscription Agent, together with payment for the Shares as described below under "Payment of Shares." Completed Subscription Certificates must be received by the Subscription Agent prior to 5:00 p.m., New York City time, on the Expiration Date (unless payment is effected by means of a notice of guaranteed delivery as described below under "Payment of Shares") at the offices of the Subscription Agent at the address set forth above. Rights may also be exercised through an Exercising Rights Holder's broker, who may charge a fee in connection with such exercise. Nominees who hold shares of Common Stock for the account of others, such as brokers, trustees or depositaries for securities, should notify the respective beneficial owners of such shares of Common Stock as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Subscription Agent with the proper payment. In addition, beneficial owners of Common Stock or Rights held through such a nominee should contact the nominee and request the nominee to effect transactions in accordance with the beneficial owner's instructions. A Record Date Shareholder who is issued fewer than four Rights may subscribe, at the Subscription Price, for one full Share. Fractional Shares will not be issued, and Record Date Shareholders who, upon exercising their Rights, are left with fewer than four Rights will not be able to exercise such remaining Rights. However, the Dealer Manager will automatically attempt to sell the number of Rights which a Record Date Shareholder is unable to exercise for this reason after the return of a completed and signed Subscription Certificate received by the Subscription Agent on or before June 19, 1995 and the Subscription Agent will remit the proceeds of such sale net of commissions to such Record Date Shareholder. EXERCISE OF THE OVER-SUBSCRIPTION PRIVILEGE Record Date Shareholders who fully exercise all Rights held by them on the Expiration Date may participate in the Over-Subscription Privilege by indicating on their Subscription Certificate the number of Shares they are willing to acquire pursuant thereto. There is no limit on the number of Shares for which Record Date Shareholders may seek to subscribe pursuant to the Over-Subscription Privilege. If sufficient Shares remain after the Primary Subscription, all over-subscriptions will be honored in full; otherwise the number of Shares issued to each Record Date Shareholder participating in the Over-Subscription Privilege will be allocated as described above under "Over-Subscription Privilege." Banks, brokers and other nominee holders of Rights will be required to certify to the Fund, before any Over-Subscription Privilege may be exercised as to any particular beneficial owner, as to (i) the aggregate number of Rights exercised pursuant to the Primary Subscription, (ii) the number of Shares subscribed for 15 16 pursuant to the Over-Subscription Privilege by such beneficial owner, and (iii) that such beneficial owner's Primary Subscription was exercised in full. PAYMENT FOR SHARES Exercising Rights Holders who acquire Shares on Primary Subscription and Record Date Shareholders who acquire Shares pursuant to the Over-Subscription Privilege may choose between the following methods of payment: (1) An Exercising Rights Holder can send the Subscription Certificate together with payment for the Shares acquired on Primary Subscription and any additional Shares subscribed for pursuant to the Over-Subscription Privilege (for Record Date Shareholders) to the Subscription Agent. Subscriptions will be accepted when payment, together with the executed Subscription Certificate, is received by the Subscription Agent; such payment and Subscription Certificates are to be received by the Subscription Agent no later than 5:00 p.m., New York City time, on the Expiration Date. The Subscription Agent will deposit all checks received by it for the purchase of Shares into a segregated interest-bearing account of the Fund (the interest from which will belong to the Fund) pending proration and distribution of Shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, MUST BE PAYABLE TO THE KOREA FUND, INC. AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. (2) Alternatively, a subscription will be accepted by the Subscription Agent if, prior to 5:00 p.m., New York City time, on the Expiration Date, the Subscription Agent has received a notice of guaranteed delivery (see Appendix C) by facsimile (telecopy) or otherwise from a bank, a trust company, or a NYSE member guaranteeing delivery of (i) payment of the full Subscription Price for the Shares subscribed for on Primary Subscription and any additional Shares subscribed for pursuant to the Over-Subscription Privilege (for Record Date Shareholders), and (ii) a properly completed and executed Subscription Certificate. The Subscription Agent will not honor a notice of guaranteed delivery unless a properly completed and executed Subscription Certificate and full payment for the Shares is received by the Subscription Agent by the close of business on the third Business Day after the Expiration Date (the "Protect Period"). Within five Business Days following the Protect Period (the "Confirmation Date"), the Subscription Agent will send to each Exercising Rights Holder (or, if the shares are held by Cede or any other depository or nominee, to Cede or such other depository or nominee), the share certificates representing the Shares purchased pursuant to the Primary Subscription (and, if applicable, the Over-Subscription Privilege), along with a letter explaining the allocation of Shares pursuant to the Over-Subscription Privilege. Any excess payment to be refunded by the Fund to a Record Date Shareholder who is not allocated the full amount of Shares subscribed for pursuant to the Over-Subscription Privilege will be mailed by the Subscription Agent. An Exercising Rights Holder will have no right to rescind a purchase after the Subscription Agent has received payment, either by means of a notice of guaranteed delivery or a check. Nominees who hold shares of Common Stock for the account of others, such as brokers, trustees or depositories for securities, should notify the respective beneficial owners of such Shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the nominee should complete the Subscription Certificate and submit it to the Subscription Agent with the proper payment. In addition, beneficial owners of Common Stock or Rights held through such a nominee should contact the nominee and request the nominee to effect transactions in accordance with the beneficial owner's instructions. DELIVERY OF SHARE CERTIFICATES Certificates representing Shares purchased pursuant to the Primary Subscription will be delivered to Exercising Rights Holders as soon as practicable after the corresponding Rights have been validly exercised 16 17 and full payment for such Shares has been received and cleared. Certificates representing Shares purchased pursuant to the Over-Subscription Privilege will be delivered to Record Date Shareholders as soon as practicable after the Expiration Date and all allocations have been effected. Shares purchased by participants in the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan") will be held by the Plan Agent in uncertificated form. See "Dividends and Distributions; Dividend Reimbursement and Cash Purchase Plan." DISTRIBUTION ARRANGEMENTS The Dealer Manager is Lehman Brothers Inc., 3 World Financial Center, New York, New York 10285. Under the terms and subject to the conditions contained in a Dealer Manager Agreement dated the date of this Prospectus, the Dealer Manager provides marketing assistance and financial advisory services in connection with the Offer and will solicit the exercise of Rights by Record Date Shareholders. The Fund has agreed to pay the Dealer Manager a fee equal to 1.00% of the aggregate subscription price for the Shares (which, if all Shares are subscribed for, will result in a fee of $1,144,846) for its marketing and financial advisory services, including advice with respect to the advisability, timing, size and Subscription Price of the Offer and the coordination of soliciting efforts among soliciting dealers, the Subscription Agent and the Information Agent. The Fund also has agreed to pay broker-dealers, including the Dealer Manager, fees for their soliciting efforts (the "Soliciting Fees") equal to 2.50% of the Subscription Price per Share. The Soliciting Fees will be paid either directly to a broker-dealer designated on the applicable portion of the Subscription Certificate, which may be the Dealer Manager, or directly to the Dealer Manager on all undesignated exercises of Rights. In addition, the Fund will indemnify the Dealer Manager with respect to certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Dealer Manager Agreement also provides that in rendering the services contemplated by the Dealer Manager Agreement, the Dealer Manager will not be subject to any liability to the Fund except in instances involving the Dealer Manager's gross negligence or willful misconduct, or for any act or omission on the part of any broker-dealer (other than the Dealer Manager or any of its affiliates) or any other person. Under applicable law, during the Subscription Period, the Dealer Manager may bid for and purchase Rights for certain purposes. Those purchases would be subject to certain price and volume limitations when the Common Stock is being stabilized by the Dealer Manager or when the Dealer Manager owns the Rights without an offsetting short position in the Common Stock. Those limitations provide, among other things, that subject to certain exceptions, not more than one bid to purchase Rights may be maintained in any one market at the same price at the same time and that the initial bid for or purchase of Rights may not be made at a price higher than the highest current independent bid price on the NYSE. Any bid price may not be increased, subject to certain exceptions, unless the Dealer Manager has not purchased any Rights for a full Business Day or the independent bid price for those Rights on the NYSE has exceeded the bid price for a full Business Day. From the date of this Prospectus, the Dealer Manager may offer and sell shares of Common Stock at prices it sets from time to time, which prices may be higher or lower than the Subscription Price. Prior to the Expiration Date, each of those prices when set will not exceed the higher of the last sale price or current asked price of the Common Stock on the NYSE, plus, in each case, an amount equal to an exchange commission, and any offering price set on any calendar day will not be increased more than once during that day. Any offering by the Dealer Manager may include Shares acquired or to be acquired through the exercise of the Rights. As a result of those offerings, the Dealer Manager may realize profits or losses independent of its financial advisory fee and any Soliciting Fees it receives. U.S. FEDERAL INCOME TAX CONSEQUENCES; KOREAN TAX CONSEQUENCES The U.S. Federal income tax consequences to Record Date Shareholders and Rights Holders with respect to the Offer will be as follows: 1. The distribution of Rights to Record Date Shareholders will not result in taxable income nor will Record Date Shareholders or Rights Holders realize taxable income as a result of the exercise of the Rights. 17 18 2. The basis of a Right received by a Record Date Shareholder who exercises or sells the Right will be zero if the fair market value of the Right immediately after issuance is less than 15% of the fair market value of the Common Stock with regard to which the Right is issued (unless the Record Date Shareholder elects to allocate the basis of the Common Stock between the Right and the Common Stock based upon their respective fair market values immediately after the Right is issued). If the fair market value immediately after issuance of a Right received by a Record Date Shareholder who exercises or sells the Right is 15% or more of the fair market value of the Common Stock with regard to which it is issued, the basis of the Right will be a portion of the basis of the Common Stock, based upon the respective fair market values of the Right and the Common Stock immediately after the Right is issued. In the case of a Record Date Shareholder who receives a Right and who allows the Right to expire, the basis of the Right will be zero. In the case of a Rights Holder who purchases a Right in the market, the basis of the Right will be the purchase price for the Right. 3. The holding period of a Right received by a Record Date Shareholder includes the holding period of the Common Stock. 4. Any gain or loss on the sale of a Right will be treated as a capital gain or loss if the Right is a capital asset in the hands of the seller. Such a capital gain or loss will be long- or short-term, depending on how long the Right has been held, in accordance with paragraph 3 above. If a Right is allowed to expire, there will be no loss realized unless the Right was acquired by purchase, in which case there will be a loss equal to the basis of the Right. 5. If a Right is exercised by the Record Date Shareholder or Rights Holder, the basis of the Common Stock received will include the basis of the Right (see paragraph 2 above) and the amount paid upon exercise of the Right. 6. If a Right is exercised, the holding period of the Common Stock acquired begins on the date the Right is exercised. 7. Gain recognized by a non-U.S. shareholder on the sale of a Right will be taxed in the same manner as gain recognized on the sale of Common Stock. See "Taxation -- United States Federal Income Taxes -- Non-U.S. Shareholders." Proceeds from the sale of a Right may be subject to withholding of U.S. taxes at the rate of 31% unless the seller's certified U.S. taxpayer identification number (or certificate regarding foreign status) is on file with the Subscription Agent and the seller is not otherwise subject to U.S. backup withholding. The 31% withholding tax is not an additional tax. Any amount withheld may be credited against the seller's U.S. Federal income tax liability. The foregoing is only a summary of the applicable U.S. Federal income tax law and does not include any state, local or non-U.S. tax consequences with respect to the Offer. Investors should consult their tax advisers regarding specific questions as to U.S. Federal, state, local and non-U.S. taxes. Under Korean law: 1. The issuance of the Rights by the Fund is not a taxable event and will not result in the imposition of any Korean tax on either the Fund or its shareholders. 2. The exercise of the Rights by the Record Date Shareholders or Rights Holders and the purchase of additional shares of the Fund's Common Stock as a result thereof are not taxable events and will not result in the imposition of any Korean tax on either the Fund or its shareholders. 3. Any gain on the sale of a Right will not result in the imposition of any Korean tax on a shareholder not domiciled in Korea. 18 19 NOTICE OF NET ASSET VALUE DECLINE The Fund has, as required by the Commission's registration form, undertaken to suspend the Offer until it amends this Prospectus if, subsequent to the effective date of the Fund's Registration Statement, the Fund's net asset value declines more than 10% from its net asset value as of that date. USE OF PROCEEDS The net proceeds of the Offer, assuming that all of the Rights are exercised, are estimated at approximately $109,617,621 after deducting expenses payable by the Fund of approximately $860,000. There can be no assurance that all of the Rights will be exercised. The net proceeds of the Offer will be used by the Fund for investment in accordance with its investment objective and policies. See "Investment Objective and Policies." The Fund expects that it will invest the proceeds (as was done with the proceeds of the Fund's previous offerings) in a manner designed to avoid disruption of trading on the Stock Exchange by investing in Korean securities over such period of time and in such amounts as are intended to minimize market impact. The Manager currently expects that investment of the proceeds should be substantially completed within six months of the closing of the Offer. Pending investment, the proceeds will be temporarily invested in short-term debt securities of the type described under "Investment Objective and Policies." INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to seek long-term capital appreciation through investment in securities, primarily equity securities, of Korean companies. This objective is a fundamental policy and may not be changed without the approval of the Minister of Finance and Economy and the approval of a majority of the Fund's outstanding voting securities. As used in this Prospectus, a "majority of the Fund's outstanding voting securities" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. While current income from dividends and interest may be a consideration in selecting portfolio securities, it is not an objective of the Fund. It is the policy of the Fund normally to invest at least 80% of its net assets in securities listed on the Stock Exchange. As of May 22, 1995, 98.9% of the Fund's net assets were invested in securities listed on the Stock Exchange. It is expected that the balance of the Fund's net assets normally will be invested (subject to any applicable investment restrictions under the Fund's license and Korean law) in debt securities of the Government and Korean corporations and in recognized Korean money market instruments. See "Foreign Investment and Exchange Controls in Korea." For purposes of the Fund's investment policy, equity securities include common and preferred stock (including convertible preferred stock), bonds, notes and debentures convertible into common and preferred stock, stock purchase warrants and rights, equity interests in trusts, partnerships, joint ventures, or similar enterprises and depositary receipts. At present, not all of these types of securities are available for investment in Korea. To the extent permitted by applicable law, and if a market for such investments develops, the Fund reserves the right to invest in any of the above listed equity securities, and may use its assets to enter into foreign currency exchange contracts, currency and stock index futures contracts, covered call options, repurchase agreements, delayed delivery transactions and futures contracts. For further information concerning the other types of investments the Fund may make, see Appendix A. Pending investment in Korean securities, the Fund will invest the net proceeds of the Offer in Dollar-denominated money market instruments of United States issuers. These instruments will generally consist of: short-term (less than 12 months to maturity) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities; finance company and corporate commercial paper; short-term corporate obligations; obligations (including certificates of deposit and banker's acceptances) of U.S. banks (including foreign branches of such banks) and savings and loan associations; and repurchase agreements (agreements under which the seller agrees at the time of sale to repurchase the security at an agreed time and price). The Fund may invest its assets in a broad spectrum of Korean industries, including, as conditions warrant from time to time, automobiles, cement, chemicals, construction, electrical equipment, electronics, finance, 19 20 food and beverage, international trading, machinery, shipbuilding, steel and textiles. In selecting industries and companies for investment, the Manager considers overall growth prospects, competitive position in export markets, technology, research and development, productivity, labor costs, raw material costs and sources, profit margins, return on investment, capital resources, government regulation, management and other factors. The Fund has invested principally in securities of established companies, although investments may be made, to the extent permitted by Korean law, in securities of new or little-known companies. To the extent permitted by law, the Fund may also invest in stocks of securities-related businesses listed on the Stock Exchange. For defensive purposes, the Fund may vary from its investment policy. During periods in which, in the opinion of the Manager, changes in Korean market conditions, or other economic conditions or Korean political conditions warrant, the Fund may reduce its position in equity securities and, subject to any applicable restrictions under Korean law (which currently limit the amount of Government and corporate bonds that the Fund may acquire up to 10% of the Fund's net asset value), increase its position in debt securities or in short-term indebtedness or hold cash. The Fund may also at any time invest funds as reserves for dividends and other distributions for shareholders in Dollar-denominated money market instruments such as those described above. However, once invested in Won-denominated securities, the Fund's investment principal may not be converted into Dollar-denominated securities except for payment of expenses in excess of Fund income or in connection with the termination of the Fund. See "Foreign Investment and Exchange Controls in Korea -- The Fund's License." Although the Fund is a non-diversified company under the 1940 Act, it is subject to portfolio diversification requirements that are contained (i) in its investment restriction pertaining to concentration, which generally prevents it from purchasing a security that would result in more than 25% of the Fund's net assets being invested in a single industry; (ii) in the Fund's license and under Korean law, under which the Fund may not buy generally more than 5% of a class of an issuer's stock listed on the Stock Exchange and may not acquire Stock Exchange-listed, underwritten or publicly offered Government and corporate bonds (including those held through repurchase agreements, convertible bonds and bonds with warrants) in excess of 10% of its net asset value; and (iii) in the diversification requirements applicable to regulated investment companies under the U.S. Internal Revenue Code of 1986, as amended (the "Code"). See "Investment Restrictions," "Foreign Investment and Exchange Controls in Korea" and "Taxation -- United States Federal Income Taxes." The Fund is also subject to the Securities and Exchange Commission of Korea ("KSEC") rule providing generally that no more than 12% of the total number of shares of stock of any class of an issuer listed on the Stock Exchange may be held by all foreign investors in the aggregate. The Minister of Finance and Economy has announced, however, that the Government will raise that ceiling for foreign investment in shares of a class of an issuer listed on the Stock Exchange from 12% to 15% effective July 1, 1995. The Fund, as a non-diversified company under the 1940 Act, is permitted to hold a relatively greater concentration in securities of particular companies. This flexibility reduces diversification of risk and could result in greater fluctuation in the Fund's net asset value. However, it also reflects the composition of the Korean securities markets, in that securities of relatively few companies account for a greater share of the total capitalization of such markets than is the case in the United States. The Fund intends to purchase and hold securities for long-term capital appreciation and does not expect to trade in securities for short-term gain. The Fund has undertaken with the Minister of Finance and Economy that the Fund's portfolio turnover rate during any year will not exceed 40%. The 40% limit will be applied on a year by year basis by references to sales or purchases of portfolio securities during the whole of the Fund's fiscal year, which ends June 30th. Subject to this 40% limit, the Fund will adjust its portfolio as it deems advisable in view of prevailing or anticipated market conditions. A higher rate of portfolio turnover generally involves correspondingly greater brokerage commission expenses than a lower rate, which expenses must be borne by the Fund and its shareholders. The Fund's annualized portfolio turnover rate for the six months ended December 31, 1994 was 11%. The portfolio turnover rate is calculated by dividing the lesser of sales or purchases of portfolio securities by the average monthly value of the Fund's portfolio securities. For purposes of this calculation, portfolio securities exclude all securities having a maturity when purchased of one year or less. 20 21 Consistent with provisions of the 1940 Act and any administrative exemptions that may be granted by the Commission, the Fund may invest in the securities of other investment companies that invest in Korean securities. Absent special relief from the Commission, the Fund may invest up to 10% of its assets in the aggregate in shares of other investment companies and up to 5% of its assets in any one investment company, as long as that investment does not represent more than 3% of the voting stock of the acquired investment company. As a shareholder in any investment company, the Fund will bear its ratable share of such company's expenses, and will remain subject to payment of the Fund's advisory and administrative fees with respect to assets so invested. INVESTMENT RESTRICTIONS The following seven restrictions are fundamental policies, which cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities. If a percentage restriction on investment or use of assets set forth below is adhered to at the time a transaction is effected, later changes in percentage resulting from changing values will not be considered a violation. The Fund may not: 1. Purchase securities on margin, except such short-term credits as may be necessary for clearance of transactions. 2. Make short sales of securities or maintain a short position. 3. Issue senior securities, borrow money or pledge its assets, except that the Fund may borrow from a bank for temporary or emergency purposes in amounts not exceeding 5% (taken at the lower of cost or current value) of its total assets (not including the amount borrowed), and may also pledge its assets to secure such borrowings. 4. Purchase any security (other than obligations of the U.S. government, its agencies or instrumentalities or of the Government, its agencies or instrumentalities) if as a result more than 25% of the Fund's total assets (taken at current value) would be invested in a single industry; provided, however, that acquisition of securities of Korean issuers shall not be deemed a purchase if effected upon exercise of rights issued by such issuers and providing for an exercise price less than the market price of such securities at the time of exercise. 5. Buy or sell commodities or commodity contracts or real estate or interests in real estate, although it may purchase and sell securities which are secured by real estate or commodities and securities of companies which invest or deal in real estate or commodities. 6. Make loans, except through repurchase agreements (repurchase agreements with a maturity of longer than seven days together with securities which are not readily marketable being limited to 10% of the Fund's total assets) to the extent permitted under applicable law. 7. Act as underwriter except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under applicable securities laws. The following three additional restrictions are not fundamental policies of the Fund and may be changed by the Board of Directors. The Fund may not: i. Purchase any security if as a result the Fund would then hold more than 5% of any class of securities of an issuer (taking all common stock issues of an issuer as a single class, all preferred stock issues as a single class, and all debt issues as a single class) or more than 5% of the outstanding voting securities of an issuer, unless permitted by regulations applicable to investments by foreigners or otherwise permitted by the Minister of Finance and Economy or the KSEC. ii. Make investments for the purpose of exercising control or management. iii. Participate on a joint and several basis in any trading account in securities. 21 22 In addition to the restrictions described above, the Fund is subject to additional restrictions imposed by the Fund's license, by Korean law and by the Code's requirements for qualification as a regulated investment company. Notwithstanding a change in the Fund's fundamental and other policies, the Fund will continue to be subject to restrictions in the Fund's license and Korean law. For discussions of Korean law restricting the Fund's investments and of the Fund's license, see "Foreign Investment and Exchange Controls in Korea -- Foreign Investment Restrictions," and "-- The Fund's License." For a discussion of the Code requirements, see "Taxation -- United States Federal Income Taxes." Should any investment restriction imposed by the Fund's license, by Korean law or by the Code be removed or liberalized, the Fund reserves the right to invest accordingly, without shareholder approval, except to the extent that such investment conflicts with the Fund's investment objective or Investment Restrictions Nos. 1-7 above. The Fund will notify shareholders of a change in any such restriction to the extent that the Manager believes that such a change will result in a material change in the Fund's investment strategy. As a means of earning income for periods as short as overnight, the Fund may enter into repurchase agreements in the United States with any member bank of the Federal Reserve System and any broker-dealer that is recognized as a reporting government securities dealer whose creditworthiness has been determined by the Manager to be of sufficiently high quality. In addition, the Fund is permitted under Korean law to enter into repurchase agreements with Korean banks and broker-dealers. If market conditions warrant, the Fund may, subject to the approval of its Board of Directors, enter into such arrangements in Korea. RISK FACTORS AND SPECIAL CONSIDERATIONS The Fund is a closed-end investment company designed for long-term investment, and investors should not consider it a trading vehicle. See "Investment Objective and Policies." Historically, shares of closed-end investment companies have frequently traded at a discount from net asset value, but have also traded at premiums. See "Market and Net Asset Value Information." Regulatory authorities in Korea adopted regulations in 1991 that since January 1992 have made it possible for non-Koreans to invest, subject to certain limits, in Korean equity securities listed on the Stock Exchange. These regulations have encouraged the formation of other investment vehicles similar to the Fund. This and other similar developments have affected and may further affect the trading price of the Fund's shares. Investing in securities of Korean companies and of the Government involves certain considerations not typically associated with investing in securities of United States companies or the United States government, including (1) restrictions imposed by the Government on foreign investment, which may limit investment opportunities available to the Fund, (2) restrictions on, and costs associated with, currency conversions and on the repatriation of principal, income or gains, (3) fluctuations in the rate of exchange between the Won and the Dollar, (4) potential price volatility and lesser liquidity of the Korean securities markets, due in part to their relatively small size and to competition from alternative investment opportunities in Korea, (5) governmental involvement in and influence on the private sector, (6) political and economic risks and (7) Korean withholding taxes. In addition, Korean accounting, auditing and financial reporting standards are not equivalent to United States standards and, therefore, less information may be available with respect to investments in Korea than in the United States. Supervision by governmental agencies and self-regulatory organizations with respect to the securities industry in Korea differs from, and in some respects is less than, such supervision in the United States. Accordingly, the Fund's investment in Korean securities should be considered more speculative than investments in securities of U.S. companies. The Fund operates under a license granted by the Minister of Finance and Economy under which it enjoys certain advantages over most other foreign investors but is also subject to certain limitations which are more restrictive than those applicable to other foreign investors. The Minister of Finance and Economy may, when it deems it to be in the public interest, modify the Fund's license or revoke such license in accordance with its terms in the event of non-compliance by the Fund with one or more of the conditions of the license or as a result of a material violation by the Fund of applicable Korean law. See "Foreign Investment and Exchange Controls in Korea -- The Fund's License." 22 23 SPECIAL CONSIDERATIONS Dilution. An immediate substantial dilution of the aggregate net asset value of the shares owned by Record Date Shareholders who do not fully exercise their Rights is likely to be experienced as a result of the Offer because the Subscription Price is likely to be less than the Fund's then-net asset value per share, and the number of shares outstanding after the Offer is likely to increase in a greater percentage than the increase in the size of the Fund's assets. In addition, as a result of the terms of the Offer, Record Date Shareholders who do not fully exercise their Rights should expect that they will, at the completion of the Offer, own a smaller proportional interest in the Fund than would otherwise be the case. Although it is not possible to state precisely the amount of such a decrease in value, because it is not known at this time what the net asset value per share will be at the Expiration Date, such dilution could be substantial. For example, assuming that all Rights are exercised and that the Subscription Price of $15.50 is 23.5% below the Fund's net asset value of $20.25 per share on June 2, 1995, the Fund's net asset value per share would be reduced by approximately $1.08 per share. The distribution to Record Date Shareholders of transferable Rights which themselves may have intrinsic value will afford non-participating Record Date Shareholders the potential of receiving a cash payment upon sale of such Rights, which may be viewed as compensation for the possible dilution of their interest in the Fund. No assurance can be given, however, that a market for the Rights will develop or as to the value, if any, that such Rights will have. Unrealized Appreciation. As of May 22, 1995, there was approximately $266 million of net unrealized appreciation in the Fund's net assets of approximately $573 million; if realized and distributed, or deemed distributed, such gains would, in general, be taxable to shareholders, including holders at that time of Shares acquired upon exercise of the Rights. As of May 22, 1995, the Fund had approximately $4.3 million of undistributed net investment income (all of which represents realized short-term capital gains) with respect to its fiscal year ending June 30, 1995, which the Fund expects to distribute to shareholders of record after the end of such fiscal year (including holders at that time of Shares acquired upon exercise of the Rights). As of May 22, 1995, the Fund also had approximately $12 million of undistributed net realized long-term capital gains, which the Fund expects to distribute to such shareholders. Such distributions will, in general, be taxable to such shareholders. See "Taxation -- United States Federal Income Taxes -- General," "-- Distributions" and "-- Non-U.S. Shareholders." KOREAN INVESTMENT RESTRICTIONS Investments by foreign investors in Korean stocks listed on the Stock Exchange are generally subject to certain limitations, including a limit on the percentage of shares of any class of equity security of an issuer held by a particular foreign investor to 3% (which is increased to 5% for the Fund pursuant to its license) and a limit on the percentage of shares of any class of equity security of an issuer that may be acquired by all foreign investors as a group, generally, to 12% or a higher or lower percentage which may be prescribed for specific companies from time to time. The Government has announced that it will raise this amount to 15% commencing July 1, 1995. Additionally, certain companies in industries designated by the Minister of Finance and Economy may further restrict, in their articles of incorporation, foreign ownership of their shares. In general, foreigners are not allowed to acquire equity securities of Korean companies that are not listed on the Stock Exchange (unless otherwise approved pursuant to the Foreign Capital Inducement Act (the "FCIA") or certain sections of the Foreign Exchange Management Act ("FEMA")), nor are they allowed to invest in bonds issued by the Government in Korea or corporate bonds issued in Korea except for certain convertible bonds and certain government bonds. Under its license to invest in Korea, however, the Fund may acquire bonds listed on the Stock Exchange, underwritten bonds or publicly offered bonds in an amount up to 10% of the Fund's net asset value. See "Foreign Investment and Exchange Controls in Korea." These limitations may preclude the Fund from making certain desired investments, including making further purchases of securities of some of the companies from time to time represented in its portfolio, and may limit the size of investments that may be made. Furthermore, these limitations, as well as purchasing programs by other foreign investors, could substantially increase the prices of portfolio securities to the Fund above the prices that would be paid by Korean investors, or that might be paid by foreign investors if these limitations were relaxed or eliminated, for such securities. The same factors could lengthen the time required to invest all of the proceeds from the Offer in Korean securities. 23 24 As of May 22, 1995, 64.6% of the Fund's investment portfolio consisted of securities that have reached the aggregate foreign investment limit. The diversification of the Fund's portfolio as a result of these limitations may involve investments in securities of companies that may be smaller or less well-known than certain of the issuers now represented in the Fund's portfolio. Such companies often do not have extensive operating histories that generate significant information for investors. As a result, market prices for these companies tend to be more volatile than for the more established companies. Until 1991, the Fund was the only investment fund publicly offered to United States investors for investing in Korean securities and one of only a few vehicles available for investment by foreigners in Korea. The Government's adoption in 1991 of regulations permitting direct equity investment since January 1992 by non-Koreans has encouraged other non-Korean investors (including new investment funds) to take an increasingly active role in the Korean capital markets and it is anticipated that other alternatives to the Fund as a vehicle for investment in Korean securities by foreign investors will continue to develop. Increased competition may reduce or eliminate (or change to a discount) the premium relative to their net asset value at which the Fund's shares have generally traded. The premium has declined in recent years. Such competition may also adversely impact the Fund's ability to make investments in light of the foreign holding limitations described above, and may cause the Fund to pay a premium for investments that would not be paid by Korean investors. The ability of foreign investors to invest in Korea may, however, result in broadened investor interest in, and greater liquidity of, the Korean securities markets. The Fund has undertaken with the Minister of Finance and Economy that the Fund's portfolio turnover rate during any year will not exceed 40%. Although the Fund's portfolio turnover rate to date has been substantially below this limit, the limit could constrain the Manager's ability to redeploy the Fund's assets if, for example, there were to occur an event or events such as (i) a major decline in the value of the Fund's portfolio securities or (ii) a major disruption in the Korean securities markets caused by adverse changes in the political or economic climate. See "Investment Objective and Policies." CURRENCY CONVERSION AND REPATRIATION Conversion of Won into Dollars or other foreign currencies, transfer of funds from Korea to foreign countries and repatriation of foreign capital invested in Korea are subject to certain regulatory approvals pursuant to foreign exchange management laws and regulations. Such conversions and transfers of funds often entail significant transaction costs. The repatriation by foreign investors of principal, income or gains that arise from holding and disposing of Korean equity securities that are traded on the Stock Exchange is subject to regulations issued by the Minister of Finance and Economy. Such repatriation is generally permitted to foreign investors that have obtained an approval from their designated bank for each repatriation. Unlike other foreign investors, however, the Fund is, in general, currently permitted, with the approval of its designated bank, to repatriate only income and gains. The repatriation of principal by the Fund is restricted by the Fund's license from the Minister of Finance and Economy. With respect to the repatriation of income and gains, the Fund expects to obtain the requisite approvals from its Subcustodian, which is the Fund's designated bank. There can be no assurance, however, that such approvals will be obtained. If, because of restrictions on conversion or because of repatriation problems, the Fund were unable to distribute substantially all of its net investment income (including short-term capital gains) and long-term capital gains within applicable time periods, the Fund could be subject to U.S. Federal income and excise taxes which would not otherwise be incurred and may cease to qualify for the favorable tax treatment afforded to regulated investment companies under the Code, in which case it would become subject to U.S. Federal income tax on all of its income and gains. See "Taxation -- United States Federal Income Taxes." 24 25 CURRENCY FLUCTUATIONS The market value of the Fund's Korean securities is generally determined in Won, and substantially all of its income will be received or realized in Won. The Fund will be required, however, to compute its net asset value and income, and to distribute its income, in Dollars. The computations of the Fund's income will be made as such income is received by the Fund using the currency exchange rate in effect at such time. The distribution of such income in Dollars, however, will occur on a date after such determination. Accordingly, any reduction in the value of the Won relative to the Dollar during the time period between the Fund's receipt of income in Won and its conversion of such income into Dollars may require the Fund to liquidate additional securities in order to make required distributions. Likewise, if the value of the Won falls relative to the Dollar during the time period between the Fund's incurrence of expenses in Dollars and the corresponding payment of such expenses, the amount of Won required to be converted into Dollars to pay such expenses could be greater than if such expenses originally had been incurred in Won. Reductions in the Won relative to the Dollar will also adversely impact the Fund's net asset value. Although the Fund may enter into forward currency exchange contracts and may (subject to receipt of requisite regulatory approvals) purchase and sell options on currencies in an effort to protect the Fund's portfolio holdings against currency fluctuation risks, the Fund does not intend fully or partially to hedge, on an ongoing basis, its portfolio holdings in such a manner. THE KOREAN SECURITIES MARKETS The Korean securities markets are still relatively small in comparison to the United States, Japanese and major European securities markets. In addition, market capitalization and trading volume in Korea are concentrated in a limited number of companies within a small number of industries. As a result, the Korean securities markets are subject to greater price volatility and lesser liquidity than is usual in the United States, Japanese and major European securities markets. Because of these liquidity limitations, it may be more difficult for the Fund to purchase and sell portfolio investments than would be the case in the United States. Accordingly, in periods of rising market prices, the Fund may be unable to participate fully in such price increases to the extent that it is unable to acquire desired portfolio positions quickly; conversely, the Fund's inability to dispose fully and promptly of positions in declining markets will cause its net asset value to decline as the value of unsold positions is determined by reference to lower prices. The Korean securities markets have in the past been influenced by large investors trading significant blocks of securities, and by the relative attractiveness of alternative investment vehicles such as real estate and the unofficial money market lending to business borrowers. Stock Exchange rules confine daily movements in individual company share prices to fixed limits around the previous day's closing price, so that the quoted closing price of a security (if fixed by such a limit) may not necessarily represent the price at which persons are willing to buy and to sell the security in the absence of such a limit. These actions could have a significant effect on the market prices and dividend yields of equity securities. In 1990 certain institutional investors, Korean securities companies and substantially all of the companies listed on the Stock Exchange formed the Korea Securities Market Stabilization Fund (the "Stabilization Fund") for the purpose of stabilizing the securities markets through the purchase and sale of securities. The Stabilization Fund's securities holdings, cash balances and trading activities are not publicly disclosed. A significant sale of its holdings could exert significant downward pressure on the prices of Korean securities. See "The Korean Securities Market -- The Korea Securities Stabilization Fund." GOVERNMENT INVOLVEMENT IN THE PRIVATE SECTOR The Government has exercised and continues to exercise substantial influence over many aspects of the private sector by legislation, regulation and suasion. The Government from time to time has informally influenced the payment of dividends and the prices of certain products, encouraged companies to invest or to concentrate in particular industries, induced mergers between stronger and weaker companies in industries suffering from excess capacity, controlled access to credit on favorable terms, encouraged institutional investment in Korean equity securities, and induced private companies to publicly offer their securities. Such 25 26 actions by the Government in the future could have a significant effect on the market prices and dividend yields of Korean equity securities. POLITICAL AND ECONOMIC FACTORS Although 45 years have passed since North Korea's attack on the Republic and the bitterness of the Korean War (1950-1953), military tension and political confrontation still characterize relations between North Korea and the Republic. Large armies remain deployed on both sides of the demilitarized zone. The United States still maintains a substantial military force in Korea to reinforce its commitment to the Republic's security. Some helpful change has occurred in recent years through U.N. membership for both Koreas as well as Chinese and Russian diplomatic relations with the Republic. Intermittent North-South talks have also taken place and the United States has begun a dialogue with North Korea which may eventually lead to normalization of relations. However, hostility and the extremist character of the North Korean regime continue to hobble contacts. The major source of recent tension with North Korea has been international concern that North Korea has violated its obligations to the International Atomic Energy Agency and begun a nuclear weapons program. The tension was eased when North Korea signed an agreement with the United States on October 22, 1994 to provide North Korea with light water nuclear power reactors to replace the more dangerous nuclear plants then being constructed or envisaged. North Korea's subsequent denial of a key understanding of the agreement, however, has renewed doubts and rekindled anxiety that it will not meet its obligations under the Nuclear Non-Proliferation Treaty. While not imminent, unification of North Korea and the Republic has become a foreseeable contingency and source of considerable discussion. Given the disparities between the economies of the North and South, unification could entail substantial costs and dislocations to the economy of the Republic. These could be offset by lowered tensions and some economic benefits, such as lower labor costs for the Republic. The domestic situation in the Republic has been relatively stable in contrast to the turbulence following the assassination of President Park Chung Hee in 1979 and the military-dominated regime that succeeded him. Responding to widespread popular unrest in 1987, the authorities permitted a genuinely democratic election in which Roh Tae Woo was elected President. Despite his military background, Roh Tae Woo's administration was marked with internal liberalization, a more serious search for reduced tensions with North Korea, and successful efforts to improve relations with North Korea's allies. Except for sporadic outbursts, radical activism waned and both presidential and parliamentary elections have proceeded freely. Almost immediately on taking office in 1993 as the first civilian President in recent years, Kim Young Sam carried out substantial economic reforms along with further political liberalization. New changes in Government policy may result from three key elections to be held during successive years beginning in 1995. The economy's real gross national product ("GNP") grew substantially in the 1980's with, until the late 1980's, moderate inflation. During the years 1989-1994, real GNP increased at annual rates of 6.9%, 9.6%, 9.1%, 5.0%, 5.8% and 8.2%, respectively. The consumer price index ("CPI") rose during the same six years at annual rates of 5.7%, 8.6%, 9.3%, 6.2%, 4.8% and 6.2%, respectively. With its lack of natural resources and with exports constituting a large proportion of GNP, the Korean economy is significantly affected by changes in commodity prices (particularly oil), changes in protectionist sentiment among its trading partners and exchange rate movements. Because Korea relied heavily on foreign capital to finance its earlier development, its gross foreign debt rose rapidly and by December 31, 1985 amounted to $46.8 billion, one of the largest among the developing nations. With the growth in Korea's export surplus, the total external debt was reduced substantially in the next four years. At the end of 1989, the total external debt amounted to $29.4 billion. This figure increased, however, by $2.3 billion in 1990, by $7.4 billion in 1991, by $3.7 billion in 1992, by $1.3 billion in 1993 and by $10.1 billion in the first eleven months of 1994. With the growth in foreign exchange reserves and in overseas investment, the country's net external debt position declined from $35.5 billion at the end of 1985 to $6.4 billion at the end of 1990. Korea's net external debt position increased to $11.9 billion at the end of 1991, then decreased to $11.1 billion at the end of 1992 and to $8.0 billion at the end of 1993. Korea's net external debt position increased to $10.4 billion at the end of November 1994. Since 1990 Korea has had a negative trade balance, reflecting, among other things, 26 27 inflation and higher wages and other costs in Korea, Korea's strong needs for capital goods and other imports, and weakness in the Japanese economy and in the United States economy up to 1992. The increase in Korea's wages and other costs that has accompanied the growth in the Korean economy has meant that many other countries now have manufacturing costs that are lower than those in Korea, and Korean industry has been seeking to produce more technologically advanced goods to enable the continued growth of Korean exports. Korean companies tend to be substantially more leveraged than U.S. and European companies. The high degree of leverage increases the risk of business failures should adverse business conditions develop. POSSIBLE CHANGE OF CONTROL OF FUND AS A RESULT OF THE OFFER The Offer could result in a change of control of the Fund, if existing shareholders do not exercise their Rights. The 1940 Act provides that a person that beneficially owns 25% of the voting securities of an investment company is presumed to control such company. Currently, to the Fund's knowledge, no person beneficially owns 25% of the Fund's Common Stock, its only class of voting securities. Because the Rights are transferable, and because there is an Over-Subscription Privilege, it is possible that either an existing shareholder of the Fund or a person not currently a shareholder could own 25% or more of the Fund's Common Stock upon completion of the Offer and thus have presumptive control of the Fund. Control of the Fund could enable a person to exercise substantial influence over the management of the Fund and its investment decisions. NON-DIVERSIFIED STATUS The Fund is classified as a "non-diversified" investment company under the 1940 Act, which means that the Fund is not limited by the 1940 Act as to the percentage of its assets that may be invested in the securities of a single issuer. As a non-diversified investment company, the Fund may invest in a smaller number of issuers, and, as a result, may be subject to greater risk with respect to its portfolio securities. However, the Fund has complied and intends to continue to comply with the diversification requirements imposed by the Code for regulated investment companies. See "Taxation -- United States Federal Income Taxes." TRANSACTION COSTS The Fund's transaction costs are higher than the transaction costs for the typical investment company investing in U.S. securities. In addition to incurring transaction costs associated with converting currency to and from Won and Dollars, the Fund incurs brokerage costs on its portfolio transactions at commission rates that are generally uniform and higher than in the United States. Moreover, whenever it sells equity securities outside the Stock Exchange, the Fund is subject to a securities transaction tax of 0.5% of the sales price for such securities. See "Portfolio Transactions and Brokerage." DISCOUNT FROM NET ASSET VALUE The shares of the Fund may trade at a discount from net asset value. This is characteristic of shares of a closed-end fund and is a risk separate and distinct from the risk of a decline in the net asset value as a result of a fund's investment activities. In some cases, however, shares of closed-end funds may trade at a premium. The Fund's shares have traded in the market above, at and below net asset value since the commencement of the Fund's operations. The Fund's shares have generally traded at a premium to net asset value, although the premium has been gradually declining in recent years. See "Market and Net Asset Value Information." WITHHOLDING TAXES The Fund will be subject to Korean income taxes, including withholding taxes. The withholding taxes imposed on the Fund could change in the event of changes in Korean or United States tax laws or changes in the terms of, or the Minister of Finance and Economy's interpretation of, the United States-Korea income tax treaty or changes in relevant facts. See "Taxation -- Korean Taxes." The Fund expects to be eligible to elect, and will notify shareholders if it so elects, to "pass-through" to the Fund's shareholders the amount of such taxes paid by the Fund. If the Fund makes such an election, shareholders will be required to include in income their proportionate shares of such amounts and may be entitled to claim a credit or deduction for all or a 27 28 portion of such amounts. See "Taxation" -- United States Federal Income Taxes" for a discussion of the rules and limitations applicable to the treatment of foreign income taxes under the U.S. Federal income tax laws. INVESTMENT ADVISERS GENERAL The Fund's advisory structure reflects a bi-national United States-Korean arrangement for providing investment advice and management to pursue the Fund's investment objective of long-term capital appreciation through investing in Korean securities. The Fund's Manager is Scudder, Stevens & Clark, Inc., a United States investment counsel firm. The Korean Adviser is Daewoo Capital Management Co., Ltd., a Korean firm which is a subsidiary of the largest Korean securities firm, Daewoo Securities. The Fund may retain the services of advisers or consultants with respect to Korean securities markets in addition to the Korean Adviser when the Board of Directors determines it to be appropriate. THE INVESTMENT MANAGER Scudder, Stevens & Clark, Inc., an investment counsel firm whose address is 345 Park Avenue, New York, New York 10154, acts as investment adviser to and manager and administrator for the Fund. The Manager is a leading global investment manager with offices throughout the United States and subsidiaries in London and Tokyo. The Manager was established in 1919 as a partnership and was restructured as a Delaware corporation in 1985. The principal source of the Manager's income is professional fees received from providing continuing investment advice. The Manager provides investment counsel for many individuals and institutions, including insurance companies, colleges, industrial corporations, and financial and banking organizations. The Manager has been active in international investment for over 40 years and in emerging markets investment for over 20 years. As of December 31, 1994, the Manager and its affiliates had in excess of $90 billion in assets under their supervision, more than $22 billion of which was invested in non-U.S. securities. As of that date, the Manager's clients included nine closed-end United States investment companies with assets aggregating over $1.5 billion, and more than 50 open-end United States investment company portfolios with assets aggregating over $36 billion. The Manager's investment company clients, in addition to the Fund, include: - The Argentina Fund, Inc., which commenced operations in 1991 and invests primarily in equity securities of Argentine companies. - The Brazil Fund, Inc., which commenced operations in 1988 and invests primarily in equity securities of Brazilian companies. - The First Iberian Fund, Inc., which commenced operations in 1988 and invests primarily in equity securities of Spanish and Portuguese companies. - The Japan Fund, Inc., which commenced operations in 1962 and invests primarily in securities of Japanese companies. - The Latin America Dollar Income Fund, Inc., which commenced operations in 1992 and invests primarily in Dollar-denominated debt securities of Latin American issuers. - Scudder Latin America Fund, which commenced operations in 1992 and invests in securities of Latin American issuers. - Scudder New Asia Fund, Inc., which commenced operations in 1987 and invests primarily in equity securities of Asian companies. - Scudder New Europe Fund, Inc., which commenced operations in 1990 and invests primarily in securities of European companies. - Scudder World Income Opportunities Fund, Inc., which commenced operations in 1994 and invests primarily in income securities issued by corporate and sovereign entities throughout the world. - Scudder International Fund, which was initially incorporated in Canada in 1953 and invests primarily in foreign equity securities. 28 29 - Scudder Pacific Opportunities Fund, which commenced operations in 1992 and invests in equity securities of Pacific Basin companies, excluding Japan. The Manager has also recently sponsored and begun advising Scudder Global Opportunities Funds -- Greater Korea Fund, a new open-end investment company organized in Luxembourg (the "Luxembourg Fund"), which invests in Korean securities with an investment objective similar to the Fund's, but without the benefit of the Fund's license from the Minister of Finance and Economy. The Manager also provides investment advisory services to the mutual funds with assets aggregating over $11 billion that comprise the AARP Investment Program from Scudder. With respect to this Program, the Manager manages a total of eight investment company portfolios pursuing a variety of investment objectives, including money market returns, growth, income, and tax-free income. The Manager also manages accounts for several large pension plans. The Fund is managed by a team of investment professionals who each play an important part in the Fund's management process. Team members work together to develop investment strategies and select securities for the Fund's portfolio. They are supported by the Manager's large staff of economists, research analysts, traders and other investment specialists who work in the Manager's offices across the United States and abroad. The Manager believes its team approach will benefit Fund investors by bringing together many disciplines and leveraging the Manager's extensive resources. Nicholas Bratt, a Managing Director of the Manager with over 20 years of international investing experience, leads the Fund's portfolio management team and sets the Fund's general investment strategies. Mr. Bratt has had these responsibilities since the Fund commenced operations in 1984. John J. Lee has been responsible for the day-to-day management of the Fund's portfolio since 1991. Mr. Lee, a Vice President of the Manager, served as a Korean specialist for KPMG Peat Marwick for seven years prior to joining the Manager in 1991. In addition to his portfolio management responsibilities for the Fund, Mr. Lee serves as a Korean equity analyst in the Manager's International Department for a number of client accounts. The Manager maintains a large research department, which conducts continuous studies of the factors that affect the position of various industries, companies and individual securities. In managing the Fund, the Manager utilizes reports, statistics and other investment information from a wide variety of sources, including the Korean Adviser and other brokers and dealers who may execute portfolio transactions for the Fund and for clients of the Manager or the Korean Adviser. Investment decisions, however, are based primarily on investigations and critical analyses by its own research specialists and portfolio managers, as well as investigations that may include visiting companies, touring facilities, and interviewing suppliers and customers. Certain investments may be appropriate for the Fund and also for other clients advised by the Manager, including the Luxembourg Fund. Investment decisions for the Fund and the Manager's other clients are made with a view to achieving their respective investment objectives and after consideration of such factors as their current holdings, availability of cash for investment and the size of their investments generally. Frequently a particular security may be bought or sold for only one client or in different amounts and at different times for more than one but less than all clients. Likewise, a particular security may be bought for one or more clients when one or more other clients are selling the security. In addition, purchases or sales of the same security may be made for two or more clients on the same day. In such event, such transactions will be allocated among the clients in a manner believed by the Manager to be equitable to each. In some cases, this procedure could have an adverse effect on the price or amount of the securities purchased or sold by the Fund. Purchase and sale orders for the Fund may be combined with those of other clients of the Manager in the interest of the most favorable net results to the Fund. KSEC regulations generally limit the percentage of any class of shares listed on the Stock Exchange that may be held by all foreign investors as a group to 12% (to be increased to 15% effective July 1, 1995). Accordingly, purchases for other non-Korean clients of the Manager, including the Luxembourg Fund, may limit the amount of such class available for purchase by the Fund. See "Risk Factors and Special Considerations -- Korean Investment Restrictions." 29 30 INVESTMENT ADVISORY, MANAGEMENT AND ADMINISTRATION AGREEMENT On October 13, 1994, the Fund's shareholders approved a new Investment Advisory, Management and Administration Agreement (the "Agreement") with the Manager. Under the Agreement, the Manager makes investment decisions, prepares and makes available research and statistical data and supervises the acquisition and disposition of securities by the Fund, all in accordance with the Fund's investment objective and policies and in accordance with guidelines and directions from the Fund's Board of Directors. The Manager assists the Fund as it may reasonably request in the conduct of the Fund's business, subject to the direction and control of the Fund's Board of Directors. The Manager maintains or causes to be maintained for the Fund all books and records required to be maintained under the 1940 Act to the extent such books and records are not maintained or furnished by the Fund's custodian or other agents, and furnishes or causes to be furnished all required reports or other information under Korean securities laws, supplies the Fund with office space in New York and furnishes clerical services in the United States related to research, statistical and investment work. The Manager renders to the Fund administrative services such as preparing reports to, and meeting materials for, the Fund's Board of Directors and reports and notices to shareholders, preparing and making filings with the Commission and other regulatory and self-regulatory organizations including preliminary and definitive proxy materials and post-effective amendments to the Fund's registration statement, providing assistance in certain accounting and tax matters and investor public relations, monitoring the valuation of portfolio securities, calculation of net asset value and calculation and payment of distributions to shareholders, and overseeing arrangements with the Fund's Custodian, including the maintenance of books and records of the Fund. The Manager also pays the reasonable salaries, fees and expenses of the Fund's officers and employees and any fees and expenses of the Fund's directors who are directors, officers or employees of the Manager, except that the Fund bears travel expenses (or an appropriate portion of those expenses) of directors and officers of the Fund who are directors, officers or employees of the Manager to the extent that such expenses relate to attendance at meetings of the Board of Directors or any committees of or advisers to the Board. Under the Agreement, the Manager may render similar services to others. Under the Agreement the Fund pays or causes to be paid all of its other expenses, including, among other things, the following: organization and certain offering expenses (including out-of-pocket expenses but not overhead or employee costs of the Manager or of any one or more organizations retained by the Fund or by the Manager as a Korean adviser of the Fund; legal expenses; auditing and accounting expenses; telephone, telex, facsimile, postage and other communications expenses; taxes and governmental fees; stock exchange listing fees; fees, dues and expenses incurred in connection with membership in investment company trade organizations; fees and expenses of the Fund's custodians, subcustodians, transfer agents and registrars; payment for portfolio pricing or valuation services to pricing agents, accountants, bankers and other specialists, if any; expenses of preparing share certificates and other expenses in connection with the issuance, offering, distribution, sale or underwriting of securities issued by the Fund; expenses relating to investor and public relations; expenses of registering or qualifying securities of the Fund for sale; freight, insurance and other charges in connection with the shipment of the Fund's portfolio securities; brokerage commissions or other costs of acquiring or disposing of any portfolio securities of the Fund; expenses of preparing and distributing reports, notices and dividends to shareholders; expenses of the Dividend Reinvestment and Cash Purchase Plan (except for brokerage expenses paid by participants in such Plan); costs of stationery; any litigation expenses; and costs of shareholders' and other meetings. For its services, the Manager receives a monthly fee, payable in Dollars, at an annual rate of 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, 1.00% of such net 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. This fee is higher than advisory fees paid by most other investment companies, primarily because of the Fund's objective of investing in Korean securities, the additional time and expense required of the Manager in pursuing such objective and the need to enable the Manager to compensate the Korean Adviser for its services. The Manager pays the Korean Adviser a monthly fee at an annual rate of 0.2875% of the Fund's month-end net assets up to and including $50,000,000, 0.275% on the next $50,000,000, 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. See "The 30 31 Korean Adviser." The Manager may retain the services of others, in addition to the Korean Adviser, but at no additional cost to the Fund in connection with its services to the Fund. During the fiscal years ended June 30, 1992, 1993 and 1994, the fees paid to the Manager under the prior Agreement amounted to $2,646,895, $2,543,469 and $4,507,935, respectively. Under the Investment Advisory and Management Agreement between the Fund and the Manager that was in effect prior to October 14, 1994, the Fund agreed to pay the Manager a monthly fee equal to an annual rate of 1.15% of the first $50,000,000 of month-end net assets of the Fund, 1.10% of such net assets in excess of $50,000,000 up to and including $100,000,000, and 1.00% of the excess over $100,000,000. Under the Agreement, the Manager is permitted to provide investment advisory services to other clients, including clients which may invest in Korean securities and, in providing such services, may use information furnished by the Korean Adviser and others. Conversely, information furnished by others to the Manager in providing services to other clients may be useful to the Manager in providing services to the Fund. The Agreement by its terms will remain in effect for a period of two years from October 14, 1994, and will continue in effect from year to year thereafter if such continuance is specifically approved, at least annually, by a vote of a majority of the members of the Board of Directors who are not interested persons of the Manager, the Korean Adviser or the Fund, cast in person at a meeting called for the purpose of voting on such approval, and by the affirmative vote of either a majority of the Board of Directors or holders of a majority of the Fund's outstanding voting securities. The Agreement may be terminated at any time without payment of penalty by the Board of Directors, by vote of holders of a majority of the outstanding voting securities of the Fund, or by the Manager on 60 days' written notice. The Agreement automatically terminates in the event of its assignment (as defined under the 1940 Act), but does not terminate upon assignment to a corporate successor to all or substantially all of the Manager's business, or a wholly-owned subsidiary of such corporate successor, provided that such assignment does not result in a change of actual control or management of the Manager's business. The Fund's license to invest in Korean securities provides that, should the Manager's services be terminated for any reason, the Fund must appoint a subsequent manager, subject to approval by the Minister of Finance and Economy, within 120 days following such termination. The license provides that such approval will not unreasonably be withheld, but that the Minister of Finance and Economy will revoke the license if the Minister shall have determined that the Fund has not sought in good faith to appoint a successor manager reasonably acceptable to the Minister. In the event such license is terminated, the Board of Directors will consider appropriate actions, including termination of the Fund and liquidation of its assets. The Agreement provides that the Manager is not liable for any act or omission, error of judgment or mistake of law or for any loss suffered by the Fund in connection with matters to which the Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Manager in the performance of its duties or from reckless disregard by the Manager of its obligations and duties under the Agreement. THE KOREAN ADVISER Daewoo Capital Management Co., Ltd., whose address is 34-3 Youido-dong, Yongdung po-gu, Seoul, Korea, an investment adviser registered under the Investment Advisers Act of 1940, acts as Korean Adviser to the Manager pursuant to a Research and Advisory Agreement (the "Research Agreement") with the Manager. The Korean Adviser has been in the business of providing investment advisory services since it was organized in February 1988 under the laws of the Republic. The Korean Adviser is a subsidiary of Daewoo Securities, Daewoo Securities Building, 34-3 Youido-dong, Yongdung po-gu, Seoul, Korea, the largest Korean securities firm in terms of paid-in capital and revenues in 1994 and an underwriter in the Fund's previous public offerings. The Korean Adviser acts as Korean adviser to four investment companies organized outside the United States to invest in Korean securities. Daewoo Securities is affiliated with Daewoo Corporation, a conglomerate headquartered in Seoul, Korea. As of May 23, 1995, Daewoo Corporation and certain affiliates of Daewoo Corporation own approximately 13.17% of Daewoo Securities. Orders for the purchase and sale of securities for the Fund's portfolio may be placed with Daewoo Securities as well as with other Korean brokers. 31 32 See "Portfolio Transactions and Brokerage." See "Directors and Officers" for information as to officers of the Fund who are officers of the Korean Adviser. Under the terms of the Research Agreement, the Korean Adviser provides such information, investment recommendations, advice and assistance as the Manager may, from time to time, reasonably request. The Korean Adviser may, under the terms of the Research Agreement, render similar services to others, including other investment companies. However, the Korean Adviser is required by the Research Agreement to maintain a separate staff which prepares and makes specific investment recommendations to the Manager. This information will be evaluated by the Manager's research department and portfolio managers in light of their own expertise and information from other sources, in determining investment decisions for the Fund. See "Portfolio Transactions and Brokerage." For its services, the Korean Adviser receives from the Manager a monthly fee at the annual rate of 0.2875% of the Fund's month-end net assets up to and including $50,000,000, 0.275% of such assets on the next $50,000,000, 0.250% 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. The Korean Adviser has agreed to pay fees and expenses of any officer or director of the Fund affiliated with it, except that the Fund bears travel expenses of one director, officer or employee of the Korean Adviser or any of its affiliates who is not a resident in the United States to the extent that such expenses relate to attendance as a Fund director at meetings of the Board of Directors in the United States and also bears the travel expenses of any other director, officer or employee of the Korean Adviser or of any of its affiliates who is a resident in the United States to the extent such expenses relate to his attendance as a Fund director at meetings of the Board of Directors held outside of the United States. For the fiscal years ended June 30, 1992, 1993 and 1994, the aggregate fees incurred by the Manager for the services of the Korean Adviser under the Research Agreement amounted to $661,724, $635,867 and $1,126,976, respectively. The Research Agreement provides that the Korean Adviser will not be liable for any act or omission in the course of, connected with or arising out of any services rendered under the Research Agreement except by reason of willful misfeasance, bad faith or gross negligence on the part of the Korean Adviser in the performance of its duties or from reckless disregard by the Korean Adviser of its obligations and duties under the Research Agreement. Because the Korean Adviser is a Korean corporation having substantially all of its assets outside of the United States, it may be difficult for United States investors to effect service of process upon the Korean Adviser within the United States or to realize judgments of courts of the United States based upon civil liabilities of the Korean Adviser under the federal securities laws and other laws of the United States. There is substantial doubt as to the enforceability in Korea of such civil remedies and criminal penalties as are afforded by the federal securities laws in the United States. Under the Research Agreement, the Manager has agreed to further the development of the Korean Adviser's ability to provide services under the Research Agreement. The Manager has also agreed not to furnish, without the consent of the Korean Adviser, to persons other than the Manager's personnel and the Fund's directors and other representatives any tangible research material prepared by the Korean Adviser that is not publicly available and that has been marked confidential. The Research Agreement by its terms will remain in effect for a period of two years from October 14, 1994, and will continue in effect from year to year thereafter if such continuance is specifically approved at least annually by the affirmative vote of a majority of the members of the Board of Directors who are not interested persons of the Fund, the Manager or the Korean Adviser, cast in person at a meeting called for the purpose of voting on such approval, and by the affirmative vote of either a majority of the Board of Directors or the holders of a majority of the outstanding voting securities. The Research Agreement may be terminated at any time without payment of penalty by the Fund or the Korean Adviser on 60 days' written notice. The Research Agreement automatically terminates in the event of the termination of the Fund's Agreement with the Manager or in the event the Research Agreement is assigned (as defined under the 1940 Act), but shall not terminate upon assignment to a corporate successor to all or substantially all of the Korean Adviser's 32 33 business, or a wholly-owned subsidiary of such corporate successor, provided that such assignment does not result in a change of actual control or management of the Korean Adviser's business. The Fund's license to invest in Korean securities provides that, should the Korean Adviser's services under the Research Agreement be terminated for any reason, the Manager is required to appoint a subsequent Korean adviser, subject to approval by the Minister of Finance and Economy, within 120 days following such termination. The license provides that such approval will not unreasonably be withheld, but that the Minister of Finance and Economy will revoke the license if the Minister shall have determined that the Manager has not sought in good faith to appoint a successor Korean adviser reasonably acceptable to the Minister. In the event the Fund's license is terminated, the Board of Directors will consider appropriate actions, including termination of the Fund and liquidation of its assets. FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN KOREA Although the Government has allowed direct foreign investment in Korean securities by foreigners who intended to or could participate in the management of an invested enterprise under the FCIA and the FEMA and indirect foreign investment in Korean securities such as through the Fund, the Korean securities markets were until relatively recently closed to other direct investment by foreign investors. In December 1991, the Minister of Finance and Economy issued regulations, which became effective January 3, 1992, that permitted direct investment by foreign investors in Korean stocks listed on the Stock Exchange. Such investment, however, is still subject to significant limitations under regulations issued by the Minister of Finance and Economy and the KSEC. FOREIGN INVESTMENT RESTRICTIONS Since January 3, 1992, foreigners have been permitted to invest in all shares listed on the Stock Exchange, subject to certain ceilings on foreign shareholdings and procedural limitations. With certain limited exceptions, foreign investors are only permitted to trade such shares on the Stock Exchange itself. Foreign investors currently are prohibited from engaging in margin transactions. In addition, a foreign investor is subject to certain specific registration and reporting requirements, custody requirements and requirements prescribing the use of certain types of entities as authorized standing proxies to exercise shareholder's rights, to place orders to sell or purchase shares or to take other related actions that it does not undertake directly. In general, foreigners are not allowed to acquire equity securities of Korean companies that are not listed on the Stock Exchange (unless otherwise approved pursuant to the FCIA or the FEMA), nor are they allowed to invest in bonds issued in Korea by the Government or corporate bonds issued in Korea. Under its license to invest in Korea, however, the Fund may acquire Stock Exchange-listed, underwritten or publicly offered bonds (including bonds held through repurchase agreements, convertible bonds and bonds with warrants) in an amount up to 10% of the Fund's net asset value (subject to the limitation that during any one month the Fund may not trade bonds listed on the Stock Exchange outside the Stock Exchange in excess of 30% of the total amount of bonds traded by the Fund during that month (except for trading repurchase agreements)). Current regulations generally limit the percentage of any class of shares of a listed issuer in which a single foreign investor and all foreign investors in the aggregate may acquire beneficial ownership to 3% and 12%, respectively. The KSEC, however, may increase or decrease these percentages if it deems necessary for the public interest, protection of investors or industrial policy. The Government has announced that it will raise the limit on aggregate foreign investment to 15% commencing July 1, 1995. Currently, the KSEC has authorized several exceptional ceilings as follows: (1) subject to prior report to the Governor of the Securities Supervisory Board by a company whose shares are held by foreign investors under the FCIA or the FEMA, (x) in which the percentage of such foreign shareholding is less than 50%, a ceiling equal to the sum of (a) the current percentage of foreign shareholding under the FCIA or the FEMA and (b) a percentage (up to 12%) requested by such company (provided that in this case the ceiling may not equal or exceed 50%) or (y) in which the percentage of foreign shareholding is 50% or more, a ceiling equal to the percentage requested by such company may be established; (2) an 8% ceiling (according to the Government's recent announcement to be increased to 10% commencing July 1, 1995) on the acquisition of shares by foreigners in 33 34 the aggregate has been established for certain corporations designated by the Minister of Finance and Economy (currently, only Korea Electric Power Corporation ("KEPCO") and Pohang Iron & Steel Co., Ltd. ("POSCO") are subject to this lower ceiling); and (3) the 5% ceiling on the acquisition of a class of shares by the Fund. These ceilings may be exceeded, however, as a result of acquiring (i) shares obtained pursuant to the FCIA or the FEMA, (ii) shares held by a depositary which issues depositary receipts evidencing an interest in such shares, (iii) shares listed on the Stock Exchange acquired as a result of conversion of, or exercise of warrants or withdrawal rights under or attached to, equity-related securities issued overseas by Korean companies (collectively, "Converted Shares"), or (iv) shares arising from the exercise of shareholder's rights and other rights and shares obtained by way of gift, inheritance or bequest; provided that the number of shares exceeding the 3% limit or, in the case of the Fund, the 5% limit (except in the cases of (i) and (ii) above) must be sold within three months from the date of acquisition. The Government has announced that commencing July 1, 1995, Converted Shares will not be included in the calculation of the limit on aggregate foreign investment, upon election by the relevant share issuing company not to include such Converted Shares in the determination of such limit. In calculating these ceilings, all foreign shareholdings (other than those owned by certain foreigners treated as Korean nationals) must be counted regardless of whether the shares were purchased through the Stock Exchange, or whether they are newly issued shares or outstanding shares. Newly issued shares (including Converted Shares) are calculated as of the date of their listing on the Stock Exchange. When applying a ceiling with respect to acquisitions by a single foreign investor, each entity (including individuals, corporations, foreign government agencies, and foreign funds, unit trusts and partnerships) is entitled to a separate 3% limitation. However, all branches in Korea of any foreign investor as a group are entitled to their own 3% limitation separate from that of their head office. When calculating these ceilings, shares purchased are deemed to be acquired at the time of placing the relevant order and shares sold are deemed to be disposed of at the time of execution. A foreigner who has acquired shares in excess of any ceiling described above may not exercise its voting rights with respect to the shares exceeding such limit, and the KSEC may take necessary corrective action with regard to such foreigner pursuant to the Securities and Exchange Act of Korea (the "Act"). The Governor of the Securities Supervisory Board of Korea may, in his discretion, disclose the numbers of shares of a class available for investment by a single foreign investor and foreign investors in the aggregate, and provide a list of shares that have reached or exceeded the ceiling on acquisition by foreign investors in the aggregate. Currently, the Governor discloses this list every morning on which trading occurs. As of May 22, 1995, 64.6% of the Fund's investment portfolio consisted of securities that have reached the aggregate foreign investment limit. The Act generally imposes a 10% beneficial ownership limitation on the total outstanding voting shares of a listed company that may be held by any one individual or entity, including Korean nationals, without the approval of the KSEC. Such 10% beneficial ownership limitation under the Act is scheduled to be repealed effective January 1, 1997, except that certain designated public corporations may, by their articles of incorporation, continue to impose such a limit at a level not exceeding 3%. Under the Act, such designated public corporations are also generally authorized to adopt provisions in their articles of incorporation restricting or prohibiting foreign ownership of such companies' shares. At present, KEPCO and POSCO have adopted a provision in each of their articles of incorporation restricting ownership of their shares by a single investor (including Korean nationals) to 1% of each class of their shares. Both KEPCO and POSCO are significant within their respective industries in terms of size and quality of their earnings and assets. The KSEC rules also provide that a company may not issue convertible bonds, bonds with warrants or depositary receipts outside of Korea if the sum of (i) shares to be acquired by foreigners by the exercise of the conversion rights, warrants or withdrawal rights for underlying shares under the proposed issue and under any previously issued bonds, warrants or depositary receipts and (ii) shares held by foreigners in excess of the applicable ceiling (generally 12%) on aggregate foreign investment (except any such excess held under the FCIA), in the aggregate, exceed or would exceed 15% (or such greater percentage as may in exceptional circumstances be permitted by the KSEC) of the issued capital of the issuer at the date of issue of the relevant securities. In addition, the Foreign Exchange Management Regulations currently provide that the percentage of the 34 35 outstanding shares of a company (including shares which would be outstanding as a result of the conversion of convertible bonds and the exercise of warrants attached to bonds or withdrawal rights attached to depositary receipts) that may be held by non-residents or foreigners, unless provided otherwise in any other relevant laws and regulations (including those of the KSEC), is limited to 50%. A foreign investor who intends to acquire shares must designate a single bank in Korea and open Won and foreign currency accounts, exclusively for investment in shares (respectively, "Won Account" and "Foreign Currency Account"). No approval is required for remittance into Korea and deposit of foreign currency funds in the Foreign Currency Account. With the confirmation of the designated bank, foreign currency funds may be transferred to a Won account held with a broker (i.e., securities company) only at the time Won funds are necessary for the purchase of shares (i.e., payment of the deposit money at the time of placing an order, and the remainder of the purchase price outstanding at the time of settlement). Funds in the Foreign Currency Account may be remitted abroad without any governmental approval. Dividends on shares of Korean companies are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any such shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any such shares held by a non-resident of Korea must be deposited either in a Won account with the investor's securities company or its Won Account. Funds in the investor's Won Account may be transferred to its Foreign Currency Account or withdrawn for local living expenses (subject to a certain limitations), in each case subject to approval of the investor's designated bank. In addition, funds in the Won Account may be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of pre-emptive rights. As of March 20, 1995, certain designated securities companies are allowed to open foreign currency accounts and Won accounts with banks exclusively for accommodating foreign investors' stock investments in Korea. Through such accounts, these designated securities companies may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors without such investors having to open their own accounts with banks. From July 1, 1994, foreign investors are allowed to invest in (i) Stock Exchange listed non-guaranteed convertible bonds issued by listed small- and medium-sized companies and (ii) low interest rate public bonds designated from time to time by the KSEC, subject to certain ceilings and procedural limitations. THE FUND'S LICENSE Under the Fund's license to invest in Korean securities, the Minister of Finance and Economy has imposed certain restrictions on the Fund which provide, among other things, that the Fund may not (1) purchase any equity security of a Korean issuer if, as a result of such purchase, the Fund would then own more than 5% of the outstanding shares of any class of stock of an issuer, unless permitted by regulations applicable to investments by foreigners or otherwise permitted by the KSEC; or (2) make investments in Korean securities for the purpose of exercising control or management of the issuer. The Fund may acquire Stock Exchange-listed, underwritten or publicly offered Government and corporate bonds (including bonds held through repurchase agreements, convertible bonds and bonds with warrants) in amounts not in excess of 10% of its net asset value. In addition, although the Fund may repatriate income received from dividends and interest earned on, and net realized capital gains from, its investments in Korean securities, it may not repatriate principal except to the extent that Fund expenses exceed Fund income or in the event of termination of the Fund. Before any repatriation, the Fund is required to obtain approval from its designated bank in order to confirm that the amount being remitted is consistent with the Fund's license. The Fund currently obtains such approvals from the Subcustodian, which is the Fund's designated bank. Were the Minister of Finance and Economy to revoke or modify the license issued to the Fund or suspend foreign exchange transactions generally, the Fund's shareholders could be adversely affected because of an inability to repatriate funds. If for any reason the Fund were unable to distribute substantially all of its net investment income (including short-term capital gains) and long-term capital gains within applicable time periods, the Fund could be subject to U.S. Federal income and excise taxes which would not otherwise be incurred and may cease to qualify for the 35 36 favorable tax treatment afforded to regulated investment companies under the Code, in which case it would become subject to U.S. Federal income tax on all of its income and gains. See "Taxation -- United States Federal Income Taxes." The Fund's license to invest in Korean securities is also subject to the condition that if the services of the Manager or the Korean Adviser are terminated, the appointment of a successor is to be approved by the Minister of Finance and Economy. See "Investment Advisers." Under a further condition, the Fund, the Manager and the Korean Adviser are required to furnish to the Minister of Finance and Economy and the KSEC information reasonably requested by the Minister of Finance and Economy or the KSEC relating to the Fund's operations or for the purpose of determining whether the Fund has complied with the conditions of the license and with Korean securities laws. 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 noncompliance by the Fund with one or more conditions attached to the license or a material violation by the Fund of applicable Korean law. In addition, the Minister of Finance and Economy or the KSEC may issue orders imposing additional restrictions when deemed in the public interest, for the protection of investors or in the interest of maintaining an orderly securities market. The Minister of Finance and Economy has the authority, with prior public notice of scope and duration, to suspend all foreign exchange transactions when emergency measures are deemed necessary in case of a radical change in the international or domestic economic situation. To date, the Minister of Finance and Economy has not exercised this authority. FURTHER OPENING OF THE KOREAN SECURITIES MARKET In December 1994, the Minister of Finance and Economy announced a three-phase plan to be implemented during the period from 1995 to 1999 to liberalize foreign exchange transactions, including further opening of the securities markets to foreign investors. In the plan, the Government announced its intention to gradually raise the ceilings on investments by foreign investors in companies listed on the Stock Exchange. The plan provides for the further opening of the debt securities market step-by-step, by way of indirect investment in debt securities through Korean investment trusts and investment in long-term non-guaranteed bonds, together with issuance in Korea of Won-denominated or foreign-currency-denominated debt securities by foreign entities. The plan also provides for the easing of requirements for the establishment of Korean branches of foreign securities companies and for further opening of the securities industry to foreign participants. The plan also provides for Korean investors to be permitted more opportunities to invest directly and indirectly in foreign securities. THE KOREAN SECURITIES MARKETS BACKGROUND AND DEVELOPMENT The development of the Korean securities market has been substantially influenced by Government policy. Primarily as a result of this influence, the number of listed companies on, and the market capitalization of, the Stock Exchange increased significantly during the 1970's, 1980's and early 1990's. The Government is expected to continue to encourage qualifying companies to proceed with initial public offerings, although the number of such offerings has declined in recent years and, since March 1990, the Government has lessened its encouragement of new listings due to the general price decline on the Stock Exchange. A large amount of public equity financing, together with other related factors, could have a considerable impact on the market prices of listed Korean equity securities. THE STOCK EXCHANGE The Stock Exchange, established in 1956, is the only stock exchange in Korea and has its only trading floor in Seoul. Both equity and debt securities are traded on the Stock Exchange, although equity securities 36 37 account for most of the Stock Exchange's trading activity. Although the Stock Exchange market capitalization and trading volume have increased substantially over the past ten years, it is still small relative to Japanese, United States and major European exchanges. The aggregate market value of equity securities was approximately 131 trillion Won (approximately $167 billion) at February 28, 1995, and average daily trading value was approximately 556 billion Won (approximately $704 million) for the two months ended February 28, 1995. For smaller companies that are unable to meet the Stock Exchange's listing requirements, an over-the-counter market was established in April 1987 for nonlisted securities. At the end of December 1994, the securities of 310 companies were registered on this over-the-counter market and the market capitalization was 7,958.024 million Won. At the end of February 1995, the securities of 312 companies were registered on the over-the-counter market and the market capitalization was 8,418.879 million Won. This market is small and unsophisticated by U.S. standards. To further its plan to develop the over-the-counter market, the KSEC has adopted various regulations designed to promote the trading of shares of small- and medium-sized companies on the over-the-counter market. Equity Market The number of companies listed on the Stock Exchange, the corresponding aggregate market value at the end of the periods indicated and the average daily trading volume for those periods are set out in the following table:
MARKET VALUE AT PERIOD END AVERAGE DAILY TRADING VOLUME ---------------------- -------------------------------------- NUMBER OF IN IN IN IN IN LISTED BILLIONS MILLIONS THOUSANDS MILLIONS THOUSANDS YEAR COMPANIES OF WON OF DOLLARS OF SHARES OF WON OF DOLLARS - -------------------------------- --------- -------- ----------- --------- --------- ------------ 1985............................ 342 6,570 7,381 18,925 12,315 14,154 1986............................ 355 11,994 13,924 3,402(1) 32,870 37,291 1987............................ 389 26,172 33,033 5,670(1) 70,185 85,324 1988............................ 502 64,544 94,348 10,367 198,364 271,185 1989............................ 626 95,477 140,490 11,757 280,967 418,442 1990............................ 669 79,020 110,301 10,866 183,692 259,540 1991............................ 686 73,118 96,106 14,022 214,263 292,170 1992............................ 688 84,712 107,448 24,028 308,246 394,858 1993............................ 693 112,665 139,420 35,130 574,000 715,113 1994............................ 699 151,217 191,729 36,862 776,257 966,167 1995(2)......................... 699 131,179 166,899 27,556 556,175 703,473
- --------------- (1) Equivalent to the trading volume after the consolidation of shares. From 1986 to 1987, shares were consolidated at the ratio of 10 to 1 or 5 to 1 to improve the efficiency of trading. The actual trading volumes, before consolidation of shares was completed, were 31,755 and 20,353 in 1986 and 1987 respectively. (2) As of the end of February 1995 and during the period from January 1, 1995 to February 28, 1995, as the case may be. Source: Stock, Korea Stock Exchange. 37 38 Equity securities listed on the Stock Exchange are divided into two sections. The following table shows the number of listed companies and the average daily trading volume for each of the two sections of the Stock Exchange:
AVERAGE DAILY TRADING VOLUME --------------------------------------------------------- NUMBER OF LISTED COMPANIES IN THOUSANDS IN MILLIONS IN THOUSANDS OF SHARES OF WON OF DOLLARS ----------------- ----------------- ----------------- ----------------- FIRST SECOND FIRST SECOND FIRST SECOND FIRST SECOND YEAR SECTION SECTION SECTION SECTION SECTION SECTION SECTION SECTION - ----------------------------- ------- ------- ------- ------- ------- ------- ------- ------- 1989......................... 372 254 8,896 2,861 223,104 57,864 332,267 86,176 1990......................... 443 226 8,608 2,259 148,789 34,903 210,225 49,315 1991......................... 483 203 12,127 1,895 194,944 19,319 265,827 26,343 1992......................... 483 205 20,769 3,259 281,788 26,458 360,966 33,892 1993......................... 482 211 28,568 6,562 497,280 76,768 619,533 95,640 1994......................... 460 239 30,047 6,815 673,555 102,702 839,143 127,950 1995(1)...................... 459 240 20,851 6,705 446,346 109,829 555,543 136,698
- --------------- (1) As of the end of February 1995 and during the period from January 1, 1995 to February 28, 1995, as the case may be. Source: Stock, Korea Stock Exchange. For original listing on the Stock Exchange, a company must meet certain requirements relating to size, history of operations, financial condition and percentage of voting shares held or to be held by the public. Upon original listing, a company's securities are traded on the second section of the Stock Exchange. To be eligible for listing on the first section of the Stock Exchange, a company must have been listed on the second section for at least one year and must meet more stringent tests than those for original listing. Purchases and sales of shares may be completed fully in cash or by means of a margin transaction. Foreign investors, including the Fund, are currently prohibited from engaging in margin transactions. At present, the margin requirement is the amount equivalent to 40% of the total value of the stocks purchased on margin or sold short. Only shares in the first section of the Stock Exchange, except for the shares of a securities company which acts as a broker, are eligible for margin transactions, and the margin requirements are varied from time to time by the KSEC. According to statistics prepared by the Securities Supervisory Board, margin transactions in 1994 amounted to 15.2% of total trading volume by number of shares, and 19.0% of the trading volume of those shares eligible for margin transactions. The Korea Composite Stock Price Index (the "KOSPI"), a broadly based indicator of share price, was created in 1972. After several years of volatility, the KOSPI was reset by the Stock Exchange in 1979. Movements in stock prices for the last 10 years, as shown by the KOSPI (January 4, 1980 = 100), are set out in the table below, together with the associated dividend yield and price-to-earnings ratios for listed securities as of the end of the periods indicated. The dividend yield figures include cash actually paid, are based on dividend paying companies only and are not weighted by the aggregate market value of such companies. 38 39
AVERAGE STOCK PRICES ------------------------------------ ------------------- DIVIDEND YIELD(1) PRICE/EARNINGS YEAR HIGH LOW ----------------- RATIO(2) ---------------------------------- -------- ------ (% OF MARKET -------------- VALUE AT 12/31) 1985.............................. 163.37 131.40 6.0 5.2 1986.............................. 279.67 153.85 4.8 7.6 1987.............................. 525.11 264.82 2.9 10.9 1988.............................. 922.56 527.89 2.6 11.2 1989.............................. 1,007.77 844.75 2.3 13.9 1990.............................. 928.82 566.27 2.6 12.8 1991.............................. 763.10 586.51 2.9 11.2 1992.............................. 691.48 459.07 2.5 10.9 1993.............................. 874.10 605.93 1.9 12.7 1994.............................. 1,138.75 855.37 1.4 16.2 1995(3)........................... 1,013.57 885.69 1.2 18.9
- --------------- (1) The dividend yield calculated on the basis of a weighted average for all listed companies was 4.9%, 3.5%, 2.1%, 1.4%, 1.2%, 1.5%, 1.8%, 1.9%, 1.4% and 1.2% respectively, for the years ended December 31, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993 and 1994. The figures include only companies that paid dividends in the previous fiscal year. (2) Korean companies normally report earnings only on an annual basis. As a result, the earnings used to calculate price-to-earnings ratios may not be comparable to those customarily used in the United States. The figures do not include companies that recorded losses in the previous year. (3) January 1 through February 28, 1995. Source: Stock, Korea Stock Exchange. After recording steady gains during most of the mid-1980's, the KOSPI rose sharply during the first half of 1986, from 163.27 to 274.20 in July, when the Government, concerned by the increasingly speculative nature of stock market trading, introduced measures that caused a decline through most of October, although the KOSPI recovered to close the year at 272.61. The KOSPI continued to increase during 1987 and 1988, closing 1988 at 907.20. The increase in the KOSPI reflected Korea's rapid economic growth, growing current account surplus, growth in savings, and the orderly election of Roh Tae Woo to succeed Chun Doo Hwan as President of the Republic. The KOSPI rose to a high of 1007.77 on April 1, 1989, but then underwent a period of prolonged weakness, reaching a subsequent low of 459.07 on August 21, 1992. Subsequently, the KOSPI exhibited a volatile but generally rising pattern, reflecting, on the one hand, such negative factors as the trade deficit and inflation and the August 1993 announcement (which caused a record one-day loss of 7.5% in the KOSPI) of required disclosure of real names in financial transactions and, on the other hand, such positive factors as the opening of the Korean stock market to foreign investors, the depreciation of the Won (which tended to help the price competitiveness of Korean goods in world markets), low oil prices, improved labor-management relations, Government measures to support the stock market and somewhat lower interest rates. The KOSPI reached an all-time high of 1,138.7 on November 8, 1994, but has since trended down. It closed on May 22, 1995 at 864.13. From 1983 to 1994, the dividend yield on the KOSPI declined from 8.3% to 1.4%. The substantial decline in the dividend yield is attributable to the generally higher level in the market prices of securities listed on the Stock Exchange and the common corporate practice of establishing dividend rates based on the par value of shares and with reference to fixed deposit interest rates, which have been declining since 1981. In addition to the KOSPI, stock price indexes for the first and second sections and for small-, medium-and large-sized companies are published. In general, stock prices on the second section are more volatile than those on the first section and stock prices of small- and medium-sized companies are more volatile than those of large companies. 39 40 Movements in individual company share prices of any category of shares on one day are confined to 6% of the previous day's closing price of such shares, rounded down as set forth below:
ROUNDED DOWN TO PREVIOUS DAY'S CLOSING PRICE (WON) (WON) --------------------------------------------------------------------- ---------------- Less than 10,000..................................................... 10 10,000 to less than 100,000.......................................... 100 100,000 to less than 500,000......................................... 500 500,000 or more...................................................... 1,000
Such restrictions limit the maximum movement in the KOSPI on any day. As a result, the quoted closing price of a listed security, if such closing price has been fixed by the limit, may not necessarily represent the price at which persons are willing to buy and to sell such security in the absence of such a limit. The following table shows the 30 largest companies listed on the Stock Exchange, ranked by market capitalization as of December 31, 1994. As of that date, these companies represented 49% of the total market capitalization of all the companies listed on the Stock Exchange.
IN BILLIONS IN MILLIONS COMPANY OF WON OF DOLLARS --------------------------------------------------------------- ----------- ----------- Korea Electric Power Corporation............................... 16,777 21,272 Samsung Electronics Co., Ltd. ................................. 6,716 8,515 Pohang Iron & Steel Co., Ltd. ................................. 6,007 7,617 Daewoo Heavy Industries, Inc. ................................. 4,389 5,565 LG Electronics, Inc. .......................................... 2,742 3,476 Korea Mobile Telecommunication Corp. .......................... 2,327 2,950 Hyundai Motor Company.......................................... 2,047 2,596 Shinhan Bank................................................... 2,012 2,552 Yukong Limited................................................. 1,952 2,475 Cho Hung Bank.................................................. 1,909 2,420 Samsung Heavy Industries Co., Ltd. ............................ 1,854 2,351 LG Chemical.................................................... 1,839 2,332 Hyundai Engineering & Construction Co., Ltd. .................. 1,778 2,254 Hanil Bank..................................................... 1,696 2,151 Daewoo Securities Co., Ltd. ................................... 1,643 2,083 Daewoo Corporation............................................. 1,562 1,980 Ssangyong Oil Refining Co., Ltd. .............................. 1,537 1,949 DACOM Corporation.............................................. 1,531 1,941 Korea First Bank............................................... 1,430 1,813 The Commercial Bank of Korea, Ltd. ............................ 1,339 1,698 Korea Exchange Bank............................................ 1,295 1,642 Korean Air Lines Co., Ltd. .................................... 1,239 1,571 Kookmin Bank................................................... 1,235 1,566 Bank of Seoul.................................................. 1,219 1,546 Kia Motors Corporation......................................... 1,186 1,503 SsangYong Cement Ind. Co., Ltd. ............................... 1,035 1,313 LG Securities Co., Ltd. ....................................... 1,022 1,296 Korea Long Term Credit Bank.................................... 1,022 1,295 Daewoo Electronics Co., Ltd. .................................. 956 1,212 Dong Ah Construction Industries Co., Ltd. ..................... 866 1,098
- --------------- Source: Fact Book, 1994 Facts and Figures, Korea Stock Exchange. 40 41 The following table shows the volume of trading during the year ended December 31, 1994 for the 30 most actively traded companies on the Stock Exchange. The trading in shares of these companies accounted for 32.3% of all shares traded during 1994.
NO. OF SHARES IN BILLIONS IN MILLIONS COMPANY (000) OF WON OF DOLLARS ------------------------------------------------- ------------- ----------- ----------- The Commercial Bank of Korea, Ltd. .............. 247,024 1,980 2,464 LG Electronics, Inc. ............................ 233,607 6,247 7,775 Daewoo Heavy Industries, Ltd. ................... 200,578 2,834 3,527 Korea Electric Power Corporation................. 191,369 5,683 7,073 Cho Hung Bank.................................... 187,305 2,100 2,614 Daewoo Corporation............................... 176,496 2,831 3,524 Bank of Seoul.................................... 172,517 1,371 1,706 Korea First Bank................................. 139,095 1,677 2,087 Saeil Heavy Industries Co., Ltd. ................ 138,306 1,174 1,461 LG Chemical...................................... 131,652 2,545 3,168 Hanwha Chemical.................................. 130,253 1,805 2,247 Hyundai Engineering & Construction Co., Ltd. .... 120,067 4,751 5,913 Pohang Iron & Steel Co., Ltd. ................... 117,953 8,085 10,063 Daewoo Electronics Co., Ltd. .................... 108,376 1,475 1,836 Shinhan Bank..................................... 102,763 1,792 2,230 Yukong Limited................................... 100,715 4,044 5,033 Hanil Bank....................................... 99,626 1,036 1,289 Kohap Inc........................................ 93,197 1,106 1,377 Hyundai Motor Company............................ 89,419 3,611 4,494 Kukje Corporation................................ 82,585 721 897 Samsung Electronics Co., Ltd. ................... 77,416 7,117 8,859 Sammi Steel Co., Ltd. ........................... 76,833 700 871 SsangYong Oil Refining Co., Ltd. ................ 72,106 1,614 2,009 SsangYong Cement Ind. Co., Ltd. ................. 69,971 1,956 2,435 Kumho Construction & Engineering................. 64,818 760 946 Honam Petrochemical Corp......................... 64,210 833 1,037 Daelim Industrial Co., Ltd. ..................... 61,614 1,202 1,496 Korean Air Lines Co., Ltd. ...................... 59,723 1,514 1,885 Asia Motors Co., Ltd. ........................... 58,679 954 1,187 Sammi Corporation................................ 57,294 375 467
- --------------- Source: Stock, Korea Stock Exchange. Since 1980, the Government has reduced its interest in all listed companies to less than 1.8%. With Government ownership down, institutional holders, including banks and insurance companies, owned 28.8% of listed shares at December 31, 1994. On that date, shareholders who individually owned 10,000 shares or more represented 1.7% of the total number of shareholders and owned 81.2% of the total number of shares outstanding. (The number of shares and shareholders of KEPCO and POSCO are not included.) The Stock Exchange has announced that it will open a stock index futures market on the Stock Exchange floor in January 1996, and that it will open a stock index futures option market in early 1997. Bond Market The market in Korea for listed bonds is less developed than the market for listed equity securities. The official Korean bond market was established in 1968 pursuant to the Capital Market Promotion Act. In 1972, Korean corporations began raising funds through underwritten public debt offerings. In line with the sharp annual increases in the number of corporate bonds issued, the volume of issues outstanding has also shown large increases. In addition, the Government and other public bodies have had increasing recourse to the bond 41 42 market with both listed and unlisted bond volumes showing substantial growth. Volumes of outstanding bond issues since 1987 are given in the following table. OUTSTANDING LISTED BOND ISSUES AS OF DECEMBER 31
LISTED PUBLIC BONDS LISTED CORPORATE BONDS TOTAL LISTED BONDS --------------------------- --------------------------- --------------------------- IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS YEAR OF WON OF DOLLARS OF WON OF DOLLARS OF WON OF DOLLARS - ------------------------ ----------- ----------- ----------- ----------- ----------- ----------- 1987.................... 15,034 18,975 9,973 12,587 25,007 31,562 1988.................... 22,159 32,391 11,521 16,841 33,680 49,233 1989.................... 28,095 41,340 15,395 22,653 43,490 63,994 1990.................... 29,049 40,549 22,068 30,804 51,117 71,353 1991.................... 32,250 42,390 29,241 38,435 61,491 80,824 1992.................... 32,447 41,155 32,697 41,473 65,143 82,627 1993.................... 41,359 51,181 37,574 46,496 78,933 97,677 1994.................... 56,621 71,790 45,876 59,167 102,497 129,957 1995(1)................. 55,322 70,385 46,641 59,340 101,964 129,725
- --------------- (1) As of February 28, 1995. Source: Stock, Korea Stock Exchange. Statistics are not regularly compiled with respect to unlisted public bonds, although the volume outstanding is significant. The secondary market in bonds listed on the Stock Exchange is relatively inactive compared to the secondary market for equity securities listed on the Stock Exchange. Details of trading value are given in the table below. TRADING VALUE OF BONDS
PUBLIC SECTOR BONDS CORPORATE SECTOR BONDS TOTAL BONDS --------------------------- --------------------------- --------------------------- IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS IN BILLIONS IN MILLIONS YEAR OF WON OF DOLLARS OF WON OF DOLLARS OF WON OF DOLLARS - ------------------------ ----------- ----------- ----------- ----------- ----------- ----------- 1987.................... 5,327 6,476 1,912 2,324 7,239 8,800 1988.................... 7,001 9,571 1,545 2,112 8,546 11,683 1989.................... 4,378 6,520 771 1,148 5,149 7,668 1990.................... 2,455 3,469 795 1,123 3,250 4,592 1991.................... 1,394 1,901 704 960 2,098 2,861 1992.................... 453 580 152 195 605 775 1993.................... 4 5 2 2 6 7 1994.................... 24 30 1,145 1,424 1,169 1,455 1995(1)................. 0 0 141 178 141 178
- --------------- (1) January 1 through February 28, 1995. Source: Stock, Korea Stock Exchange. The table does not include over-the-counter trading. For bonds, over-the-counter trading constitutes a substantially larger part of the overall bond trading market than trading on the Stock Exchange. THE KOREA SECURITIES MARKET STABILIZATION FUND In 1990, substantially all of the companies listed on the Stock Exchange, certain institutional investors (including banks and insurance companies) and Korean securities companies that are members of the Stock Exchange contributed capital to the Stabilization Fund for the purpose of stabilizing the securities market 42 43 through the purchase and sale of securities. The Stabilization Fund's securities holdings, cash balances and trading activities are not publicly disclosed. A liquidation of the securities held by the Stabilization Fund could exert significant downward pressure on the market price of shares listed on the Stock Exchange. MARKET REGULATION The Minister of Finance and Economy establishes the basic policies governing the overall operation of the Korean securities market. The official Korean securities markets are principally regulated by the KSEC under the Act. The Act is based on the United States securities laws and imposes restrictions on insider trading, requires specified information to be made available to investors and establishes rules regarding margin trading, proxy solicitation and take-over bids, and also regulates the investment advisory business. Although the KSEC is authorized to regulate and make decisions on all major issues relating to the securities markets pursuant to the Act, all decisions of the KSEC must be reported to the Minister of Finance and Economy. The Minister of Finance and Economy may repeal any decision of the KSEC or suspend its enforcement. The day-to-day management and implementation of the policies of the KSEC are conducted by the Securities Supervisory Board. The Act was amended fundamentally in 1976, 1983, 1987 and December 1991 to broaden the scope and improve the effectiveness of official supervision of the securities markets. As amended, the Act imposes restrictions on insider trading, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation and take-over bids. The Act was most recently amended effective January 1994 in order to, among other things, deregulate the securities markets by lifting (effective January 1, 1997) the 10% beneficial ownership limitation on the acquisition of shares of a listed company by an individual Korean national. The January 1994 amendment also permits listed companies to hold their own shares, improves the central depository system and securities dispute conciliation committee, strengthens the reporting requirements imposed on shareholders holding 5% or more of the issued and outstanding shares of a listed company, and expands the scope of dissenting shareholders entitled to request the issuer to purchase their shares under certain circumstances, including at the time of merger or business transfer, to include holders of non-voting shares. The Stock Exchange has announced that a stock index futures market will be introduced in January 1996, and that a stock index futures option market will be introduced in early 1997. Companies listed on the Stock Exchange are required to file audited annual and reviewed semi-annual reports with the KSEC and the Stock Exchange. Certain material events, including the revocation of a business license, the suspension of a bank account, a corporate dissolution or a change in capitalization, must be disclosed by listed companies on the date they occur to the public through the facilities of the Stock Exchange. Certain less material events, including a change of business objective, the filing of a major lawsuit against the company and notification of a tax investigation, must be disclosed within two days to the Stock Exchange, which will disclose them, on the company's behalf, to the public. In Korea, with requisite approvals from governmental authorities, banks, merchant banks and short-term finance companies as well as securities companies are allowed to engage in underwriting. Generally, securities companies are allowed to perform all kinds of securities business while banks, merchant banks and short-term finance companies are allowed to engage only in the underwriting business with respect to debt securities. 43 44 THE REPUBLIC OF KOREA GENERAL INFORMATION General The Republic, founded on August 15, 1948, consists of the portion of the Korean peninsula which lies generally to the south of the 38th parallel. The Republic has a land area of about 38,000 square miles, of which approximately one-fourth is arable. The Republic has a population of approximately 45 million, with a literacy rate estimated to be over 90%. The capital, Seoul, with a population of about eleven million, is less than 40 miles south of the demilitarized zone separating the Republic from North Korea. Politics and Foreign Relations The country was under Japanese rule from 1910 until 1945 when, following the Japanese surrender at the end of World War II, United States forces occupied southern Korea and Soviet forces established a presence in the northern half of the Korean peninsula. The 1948 elections in the south created the Republic of Korea, and in the same year the United Nations General Assembly declared the Republic to be the only legal government in the Korean peninsula. The Korean War of 1950-1953 began with the invasion by communist forces from the North and, following a military stalemate between the forces of North Korea and the Republic, reinforced by Chinese and U.S. forces, respectively, ended with an armistice establishing a demilitarized zone in the vicinity of the 38th parallel, which became the boundary between the Republic and North Korea. In recent years, the Government has emphasized economic growth, responsible fiscal and monetary policies, and improvement in relations with former communist bloc countries. The Government also has taken steps to liberalize political conditions in the Republic, supported by continued public support for such reforms. Relations between the Republic and North Korea remain tense, despite growing contacts between the two. North Korea maintains a regular military force estimated at more than 1,000,000, the majority of which is concentrated near the northern border of the demilitarized zone. The Republic maintains a state of military preparedness along the southern border of the demilitarized zone. The Republic has a national conscription system and a regular military force of approximately 600,000. In addition to the regular forces, there are substantial reserves. The United States currently maintains military forces of approximately 40,000 in the Republic. In the early 1990's, the Republic established diplomatic relations with both China and Russia; both Koreas were admitted to the United Nations; and some progress was made in North Korea's efforts to normalize its relations with the United States and Japan. In December 1991, the Republic and North Korea signed an "Agreement of Reconciliation, Non-Aggression and Exchange and Cooperation" designed to encourage peaceful co-existence and normalization of ties with their respective allies. Almost immediately, however, tension mounted over evidence that North Korea was engaged in a nuclear weapons program in violation of the 1991 agreement with the Republic as well as obligations under the Nuclear Non-Proliferation Treaty, which it had finally ratified after long delays. Tensions rose along with the threat of international sanctions, but the sense of crisis eased with an abrupt shift by North Korea's leader, Kim Il Sung, shortly before his death. This permitted the United States and North Korea to sign an agreement on October 22, 1994 providing Korea with light water nuclear power reactors to replace the more dangerous nuclear plants then being constructed or envisaged. The United States also agreed to full normalization of relations with North Korea if the agreement were successfully implemented. Nevertheless, North Korea's subsequent denial of a key understanding, namely, that the new reactors would be of South Korean origin, has renewed international doubts and rekindled anxiety that North Korea will not carry out its obligations under the Nuclear Non-Proliferation Treaty. Tension and confrontation still dominate North-South relations. While not imminent, unification of North Korea and the Republic has become a foreseeable contingency and source of considerable discussion. Given the disparities between the economies of the North and South, 44 45 unification could entail substantial costs and dislocations to the economy of the Republic. These could be offset by lowered tensions and some economic benefits, such as lower labor costs for the Republic. Government Organization Governmental authority in the Republic is highly centralized and is concentrated in a strong presidency. The Constitution provides for the direct election of the President by popular vote. The President is the chief of state and head of the Republic's government. Under the present Constitution, the term of office of the President is five years and he may not be re-elected. The President has the right to veto new legislation and to take emergency measures in case of natural disaster, serious fiscal or economic crisis, state of war or similar condition. The President is required to notify the National Assembly promptly of any such emergency measures taken, and to seek its concurrence, failing which the emergency measures are automatically invalidated. Legislative power is vested in the National Assembly. Three-quarters of the members of the National Assembly are elected by popular vote for a term of four years. The remaining seats are distributed proportionately among parties winning five seats or more in the direct election. The National Assembly enacts laws and approves treaties and the national budget. Most legislation is drafted by the executive branch, which then submits bills to the National Assembly for enactment. THE ECONOMY Economic Policy and the Five-Year Plans Industry and commerce in the Republic are predominantly privately owned and operated. The Government, however, has been heavily involved in establishing economic policy objectives and implementing such policies with a view toward maintaining national security, encouraging industrial development and improving living standards. Economic, financial and business priorities can be influenced by the Government through its control of business-related approvals and licenses and through the allocation of credit. Such Government influence has gradually diminished through deregulation and market self-regulation, in keeping with the Republic's economic liberalization policy. The Minister of Finance and Economy is primarily responsible for formulating economic policies, including the Five-Year Economic and Social Development Plans which have guided economic policy since 1962. The Minister of Finance and Economy exercises overall direction of the economy by means of economic policies in cooperation with the various Ministries. The Minister of Finance and Economy also implements fiscal, financial and monetary policies. To encourage particular industries, the Government uses such measures as financial assistance and tax incentives. A five-year economic plan prepared by the Kim Young Sam administration covers the years 1993 through 1997. Included in the plan are proposals to reduce regulations on business activity, reform the financial system, liberalize interest rates, increase emphasis on research and development and add emphasis on the training and upgrading of labor force skills. The 30 largest business groups of related companies in terms of total consolidated assets, commonly referred to as "chaebol" -- the four largest of which are Hyundai, Samsung, Daewoo and LG -- are engaged in a wide range of businesses and play a significant role in the Korean economy. Each chaebol company is prohibited from holding shares of companies within its group and outside the group in excess of 25% of its net asset value. Also, each chaebol company must reduce the amount of guarantees provided for the benefit of companies within the same group to 200% of its shareholders equity by the end of March 1996. The Bank of Korea limits the total loans by Korean commercial banks to Korean companies that are members of a chaebol. A chaebol is permitted to select up to three "core" companies (or, in certain cases, up to five such companies) to which those limits would not apply. The Government's policy is to encourage the growth of smaller and medium-sized companies. In March 1995, the Government filed an application to become a member of the Organization for Economic Cooperation and Development. 45 46 Selected Economic Data The following table sets forth selected economic data relating to the Republic for the indicated periods.
1989 1990 1991 1992 1993 1994(3) ------- ------- ------- ------- ------- ------- Gross national product at current market prices (billion Won)...... 147,942 178,262 214,240 238,705 265,518 302,867 Government budget surplus (billion Won)............................. 444 755 (1,707) (689) 235 1,728 Growth in gross national product at current prices (percentage change).......................... 12.6 20.5 20.2 11.4 11.2 14.1 Growth in real gross national product (percentage change)...... 6.9 9.6 9.1 5.0 5.6 8.2 Producer price index (percentage change).......................... 1.5 4.2 4.7 2.2 1.5 2.8 Consumer price index (percentage change).......................... 5.7 8.6 9.3 6.2 4.8 6.2 Wages (percentage change)(1)....... 21.1 18.8 17.5 15.2 12.2 12.7 Unemployment rate (percent)........ 2.6 2.4 2.3 2.4 2.8 2.4 Industrial production (percentage change).......................... 3.2 8.8 9.6 5.8 4.4 11.1 Exports (billion Dollars)(2)....... 62.4 65.0 71.9 76.6 82.2 96.0 Imports (billion Dollars)(2)....... 61.5 69.8 81.5 81.8 83.8 102.4 Trade balance (billion Dollars)(2)...................... 0.9 (4.8) (9.7) (5.1) (1.6) (6.3) Current balance (billion Dollars)......................... 5.1 (2.2) (8.7) (4.5) 0.4 (4.8)
- --------------- (1) Monthly earnings of regular employees of all industries. (2) Calculated on the basis of customs clearing date. (3) Preliminary. Source: Monthly Statistics of Korea, National Statistical Office; Monthly Bulletin, The Bank of Korea. Gross National Product In the year ended December 31, 1994, the Republic's GNP was approximately $377 billion. During the past two decades, the average annual increase in real GNP has been approximately 8.0%. Over the four decades since the end of the Korean War, the Republic has made significant progress towards the transformation of its economy from one characterized by agricultural production and the export of raw materials to that of a modern industrial state. During the 1980's, the Korean economy was characterized by extremely high growth with several years registering growth close to or above 12% and, until late in the decade, relatively low inflation. In the past five years, growth has moderated, in part in reaction to the extremely high growth rates of the late 1980's. In 1992 and 1993, Korea experienced a growth recession, the sharpest downturn since 1980. A recovery began in mid-1993 and continued into 1994, when real growth reached 8.2% In accordance with Government policies to encourage industrialization, the relative importance of the primary industries in the Republic's economy has continued to decline. During the period from 1989 through 1994, the share of GNP of the primary industries (agriculture, forestry and fishery industries) declined from 9.0% in 1989 to 7.0% in 1994. The share of GNP of the secondary industries (manufacturing, mining, and construction) declined from 42.4% to 41.6% over the same period. The tertiary industries, which include public utilities, transportation, communications, trade and financial and other services, increased their relative share of GNP from 41.1% to 44.0% in this period. 46 47 Prices, Wages and Employment Inflation, as measured by the CPI, rose to 7.1% in 1988, after five years of increases of 3.5% per year or less. Inflation eased to 5.7% in 1989, but rose to 8.6% in 1990 and 9.3% in 1991. The rate of increase slowed to 6.2% in 1992 and was 4.8% in 1993 and 6.2% in 1994. The increase in inflation after 1987 was due in large part to rising labor costs. Until laws relaxing constraints on the formation of labor unions and the staging of strikes were passed in 1986 and 1987, labor unrest was rare in Korea. Shortly after the passage of these laws, however, widespread labor unrest erupted and the Korean work force won significant wage concessions to compensate for increases in productivity achieved during the 1980's. Labor disputes in Korea have decreased since 1990. Since 1987, wages have increased sharply. Monthly wages in all industries rose 21.1% in 1989, 18.8% in 1990, 17.5% in 1991, 15.2% in 1992, 12.2% in 1993 and 12.7% in 1994. These wage increases can be compared with increases in productivity of 12.7% in 1990, 13.8% in 1991, 10.4% in 1992, 8.1% in 1993 and 9.2% for the first three quarters of 1994. Energy Korea has no domestic oil or gas production and is heavily dependent on imported oil to meet its energy requirements. Demand for petroleum products in the Republic has continued to grow, however, reflecting in part a rapid growth in the number of cars and trucks and a shift from coal to petroleum products for cooking and heating. The performance of the Korean economy is therefore broadly affected by the price of oil, resulting in high inflation when world oil prices have risen sharply. Any significant long-term increase in the price of oil may increase inflationary pressures in the Korean economy and adversely affect the Republic's balance of trade. THE FINANCIAL SECTOR Korea's commercial banks have a high level of non-performing assets, reflecting in part the high leverage typical of Korean companies and the decline in several Korean industries, notably shipping and overseas construction during the 1980's. The Bank of Korea selectively extends concessional loans (at 3% annual interest) to commercial banks burdened by such non-performing loans. In addition to officially regulated financial institutions described above, there has been an unofficial money market or "curb" market, which consists of individual brokers and professional money lenders who make or arrange loans to business borrowers. The curb market is significantly less important now than it was several years ago. The increase in interest rates on officially regulated markets, the increase in number of lending institutions, and increased price stability, as well as steps taken by the Government, have contributed to the substantial decline of the curb market. In August 1993, President Kim Young Sam issued an emergency presidential decree requiring the use of real names in financial transactions. Effective from that date, financial institutions must confirm, whenever they enter into financial transactions with their clients, that those clients are using their real names. By October 12, 1993, all financial assets previously held in accounts registered under names other than those of the actual owners with financial institutions were to be reregistered under the owners' real names. On the day following the issuance of such decree, the KOSPI, the major measure of changes in stock values on the Stock Exchange, declined 4.46% to 693.57. However, by August 20, 1993, the KOSPI had increased to close at 729.86. In addition, the law to introduce the real-name system for real estate transactions was legislated and will become effective starting July 1, 1995. The main purpose of the law is to discourage real estate speculation and to prevent property taxes from rising out of control. The new law bans the current practice of borrowing names for property registration, thereby avoiding taxes. MONETARY POLICY The Monetary Board, the supreme policy-making arm of the Bank of Korea, has the responsibility for formulating and implementing monetary policy. It also regulates the activities of banking institutions and the 47 48 Bank of Korea. The Government does, however, exert considerable influence on monetary policy. The Minister of Finance and Economy is empowered to request reconsideration of resolutions adopted by the Monetary Board and if such a request is rejected by the Monetary Board, the President has the authority to make the final decision. Monetary policy is implemented by influencing the reserve positions of banking institutions, principally through changes in the terms and conditions of rediscounts, open market operations and changes in reserve requirement ratios. The Bank of Korea may also set or alter maximum interest rates on deposits and loans and, in periods of extreme monetary expansion, directly control the volume and nature of bank credit. In practice, the Bank of Korea's power to set interest rates and impose direct credit controls has proven to be the most effective means of implementing monetary policy. The Bank of Korea recently has reduced the extent of such direct intervention, in line with the Government's deregulation of interest rates. In November 1994, the Government announced a plan to further reduce the employment of direct intervention as a means of implementing its monetary policy, in order to encourage the liberalization of financial institutions' activities. Interest rates of banks and non-bank financial institutions have been largely determined by monetary authorities, bank rates by the Monetary Board and others by the Minister of Finance and Economy. In November 1994, the Government announced a plan for deregulation of interest rates, which accelerates the Government's 1991 plan to reduce the use of direct intervention as a means of implementing monetary policy. In accordance with the 1991 plan, at the end of 1993, all restrictions on interest rates for loans, (other than Bank of Korea-supported policy loans), long-term (not less than two years) deposits, certain short-term money market instruments, short-term (less than two years) corporate and financial debt, monetary stabilization bonds and public bonds were lifted. The 1994 plan provides that in 1995 interest rates will be liberalized for other short-term money market instruments and Bank of Korea-supported policy loans, in 1996 interest rates will be liberalized for all deposits other than demand deposits, and beginning in 1997 limitations on interest rates for demand deposits gradually will be lifted. FOREIGN TRADE AND BALANCE OF PAYMENTS Foreign Trade Foreign trade is vital to the economy of the Republic, which lacks natural resources and must rely on extensive trading activity as a basis for growth. Virtually all domestic requirements for petroleum, wood and rubber are imported, as are the Republic's requirements for coal and iron ore. In addition, much of the capital equipment that built up Korea's manufacturing base has been imported. As a result, the Republic has typically had a trade deficit. With rapid growth of exports, however, the trade deficits lessened and in 1986, a substantial trade surplus of $3,131 million was achieved. The trade surplus increased in 1987 and 1988, but fell sharply in 1989. Deficits have been recorded since then: $4,828 million in 1990, $9,655 million in 1991, $5,144 million in 1992, $1,564 million in 1993 and $6,335 million in 1994. The decline in the trade balance resulted from a combination of factors. The growth in exports slowed as Korean exports became less competitive, due in large part to the appreciation of the value of the Won and higher wage costs. At the same time, the growth in imports accelerated as a result of increased consumer demand and increased demand for capital goods, as well as from an increase in oil prices in late 1990 as a result of the Persian Gulf crisis. Korea's balance of trade would continue to be adversely affected if, among other things, Korea's trading partners increased barriers against imports, prices for essential natural resources imported by the Republic were to increase, or economic slowdowns in the economies of the United States, Japan and the other principal markets for Korean exports were to occur. The Republic's largest trading partners are the United States and Japan. In 1994, the United States accounted for approximately 21.4% of Korea's total exports and approximately 21.1% of Korea's total imports, while Japan accounted for approximately 14.1% of Korea's total exports and approximately 21.1% of Korea's total imports. Trade with China has increased in recent years, as diplomatic relations between the two nations have improved. In 1994, China accounted for 6.5% of Korea's exports and 5.3% of Korea's total imports. Over 90% of Korea's exports are manufactured goods, machinery and transportation equipment. The bulk of imports are commodities such as oil and iron ore, although imports of consumer durables have grown in 48 49 recent years following the lowering of customs tariffs on many items as part of an import liberalization program that began in 1984. From 1979 until the Gulf war, world oil and commodity prices had risen more slowly than inflation rates, and several of Korea's major imports (including oil, iron ore and coal) experienced price weakness. The following table summarizes the Republic's balance of trade from 1989 to 1994:
EXPORTS PERCENTAGE PERCENTAGE BALANCE AS % OF CHANGE CHANGE EXPORTS(1) IMPORTS(1) OF TRADE(1) IMPORTS EXPORTS IMPORTS ---------- ---------- ----------- ------------- ---------- ---------- (IN MILLIONS OF DOLLARS) 1989............................ 62,377 61,465 912 101.5 2.8 18.6 1990............................ 65,016 69,844 (4,828) 93.1 4.2 13.6 1991............................ 71,870 81,525 (9,655) 88.2 10.5 16.7 1992............................ 76,632 81,775 (5,144) 93.7 6.6 0.3 1993............................ 82,236 83,800 (1,564) 98.1 7.3 2.5 1994............................ 96,013 102,348 (6,335) 93.8 16.8 22.1 Annual 89 through 94............ -- -- -- -- 7.7 10.6
- --------------- (1) Calculated on the basis of customs clearing date. Source: Monthly Bulletin, The Bank of Korea. Balance of Payments The following table sets forth certain information with respect to the Republic's balance of payments for the periods indicated. BALANCE OF PAYMENTS
1989 1990 1991 1992 1993 1994 ------ ------ ------ ------ ------ ------- (IN MILLIONS OF DOLLARS) Current Balance........................................... 5,055 (2,179) (8,728) (4,529) 385 (4,778) Trade Balance........................................... 4,597 (2,004) (6,980) (2,146) 1,860 (3,082) Exports(1).............................................. 61,409 63,124 69,582 75,169 80,950 93,676 Imports(1).............................................. 56,812 65,127 76,561 77,315 79,090 96,758 Invisible Trade Balance................................. 211 (451) (1,596) (2,614) (1,967) (2,295) Unrequited Transfer (net)............................... 247 275 (152) 232 491 599 Long-Term Capital(2)...................................... (3,363) 548 4,186 7,232 8,900 6,133 Loans and Investment.................................... (1,105) 33 3,091 5,160 8,707 7,407 Others (net)............................................ (2,258) 514 1,095 2,072 192 (1,274) Basic Balance............................................. 1,692 (1,632) (4,542) 2,704 9,284 1,355 Short-Term Capital........................................ 60 3,334 41 1,110 (2,021) 2,951 Errors and Omissions...................................... 701 (1,976) 760 1,084 (721) (1,504) Overall Balance........................................... 2,453 (274) (3,741) 4,898 6,542 2,802 Financial Account(3)...................................... (2,453) 274 3,741 (4,898) (6,542) (2,802) Liabilities............................................. 966 1,487 8,430 1,947 674 8,353 Assets(4)............................................... (3,419) (1,213) (4,689) (6,816) (7,216) (11,156)
- --------------- (1) The entries are derived from trade statistics and valued on an FOB basis. (2) The distinction between long-term and short-term capital is based on the original maturity of one year. (3) Includes borrowings from the International Monetary Fund, syndicated bank loans and short-term finance from foreign commercial banks. (4) Figures in parentheses indicate increases. Source: Monthly Bulletin, The Bank of Korea. 49 50 Public Finance The Minister of Finance and Economy is responsible for the preparation of the national budget. The Republic's fiscal year commences on January 1, and the budget must be submitted to the National Assembly for its approval prior to the commencement of the fiscal year. The fiscal budget of the Government consists of a General Account and Special Accounts. Revenues in the General Account include national taxes, stamp duties and profits from government monopolies. Expenditures include those for general administration, national defense, community service, education, health, social security services, certain annuities and pensions, and local finance which comprises the transfer of tax revenues to local governments. Special Accounts are set up to aggregate the accounts of certain functions of the Government to achieve more effective budgetary control and administration. They include Government activities of a business nature, such as communications, grain administration and government procurement. The following table sets out Government revenues and expenditures, excluding Special Accounts, for the periods indicated: CONSOLIDATED CENTRAL GOVERNMENT REVENUES AND EXPENDITURES
1987 1988 1989 1990 1991 1992 1993(P) 1994(P) ------ ------ ------ ------ ------ ------ ------- ---------- (IN BILLIONS OF WON) Revenues Internal Taxes....... 10,012 12,545 15,211 19,134 24,030 30,099 34,178 38,462 Customs Duties....... 2,697 2,573 2,099 2,775 3,435 3,153 2,886 3,449 Defense Surtax....... 2,366 2,978 3,615 4,575 1,463 330 269 80 Traffic Tax.......... -- -- -- -- -- -- -- 2,449 Education Surtax..... 411 512 423 521 816 943 999 1,205 Monopoly Profits..... 904 874 75 -- -- -- -- -- Special Agricultural and Fishery Tax.... -- -- -- -- -- -- -- 186 Government Enterprise Receipts........... 285 332 408 591 810 1,042 902 1,079 Other................ 2,487 4,134 7,017 6,493 8,775 10,699 13,894 7,601 ------ ------ ------ ------ ------ ------ ------- ---------- Total......... 19,162 23,948 28,848 34,538 39,329 46,267 53,128 54,510 ====== ====== ====== ====== ====== ====== ======== =========== Expenditures General Expenses..... 10,009 11,242 14,704 18,973 22,320 23,683 26,951 31,118 National Defense..... 4,794 5,572 6,147 6,854 8,012 8,771 9,308 10,056 Fixed Capital Formation.......... 1,392 1,541 2,033 2,401 2,049 2,821 2,889 2,547 Other................ 1,294 2,969 5,484 5,609 8,617 11,686 13,721 9,053 ------ ------ ------ ------ ------ ------ ------- ---------- Total......... 17,488 21,323 28,367 33,837 40,997 46,980 52,870 52,774 ====== ====== ====== ====== ====== ====== ======== =========== Net Lending............ 0.5 (73) 37 (54) 38 (5) 23 6 Budget Surplus......... 1,674 2,698 444 755 (1,707) (689) 235 1,730
- --------------- (P) Preliminary. Source: Monthly Bulletin, The Bank of Korea. External Debt Rapid development in the Republic's economy has in the past necessitated large foreign borrowings. In 1985, with total external debt of $46.8 billion, the Republic was the world's fourth largest debtor. Toward the end of the 1980's, however, domestic savings, generated largely by growing trade surpluses, were large enough not only to finance domestic investment but also to pay down foreign debt and to finance Korean lending and 50 51 investment abroad. With the disappearance of the trade surplus starting in 1990, the net outflow of capital ceased and Korea is once again a net capital importer. Inflows of private capital, however, have largely taken the place of foreign government lending. As of November 1994, total external debt was $54.2 billion. The Republic's net external debt declined from $22.4 billion at the end of 1987 to $10.4 billion at the end of November 1994. FOREIGN EXCHANGE Beginning in March 1990, exchange rates for the Won have been closely linked to the rates calculated by averaging the daily exchange rates used for interbank transactions settled through the Korea Telecommunications and Clearings Institute (the "KTCI"), weighted by trading volume. This rate is known as the market average exchange rate and is published daily by the KTCI. The Government has enlarged the scope of the discretionary power of foreign exchange banks to determine their own exchange rates with reference to the market average exchange rate. The Government recently announced that it would decide whether to introduce a free-floating exchange rate system during 1996 and 1997 after considering trends in the international monetary system. The following table shows market average exchange rates at the dates indicated below.
EXCHANGE RATE ------------------- (IN WON PER DOLLAR) March 31, 1990....................................................... 702.1 June 30, 1990........................................................ 716.0 September 30, 1990................................................... 712.9 December 31, 1990.................................................... 716.4 March 31, 1991....................................................... 724.7 June 30, 1991........................................................ 723.1 September 30, 1991................................................... 741.5 December 31, 1991.................................................... 760.8 March 31, 1992....................................................... 775.1 June 30, 1992........................................................ 790.2 September 30, 1992................................................... 786.6 December 31, 1992.................................................... 788.4 March 31, 1993....................................................... 794.0 June 30, 1993........................................................ 803.7 September 30, 1993................................................... 808.8 December 31, 1993.................................................... 808.1 March 31, 1994....................................................... 806.5 June 30, 1994........................................................ 805.5 September 30, 1994................................................... 789.9 December 31, 1994.................................................... 788.7 March 31, 1995....................................................... 772.1
- --------------- Source: International Financial Statistics, International Monetary Fund; Monthly Bulletin, The Bank of Korea. 51 52 DIRECTORS AND OFFICERS The names of the individuals who serve as directors and officers of the Fund are set forth below, together with their positions and their principal occupations during at least the past five years and, in the case of the directors, their ages and their positions with certain other international organizations and publicly-held companies.
POSITION(S) WITH PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS REGISTRANT DURING PAST FIVE YEARS - ---------------------------- ---------------------- ------------------------------------------ Juris Padegs*(1)............ Chairman of the Board Managing Director of Scudder, Stevens & Age 63 and Director Clark, Inc.; serves on the Boards of an additional 27 funds managed by Scudder, Stevens & Clark, Inc. Chang-Hee Kim*.............. Vice Chairman of the President and Chief Executive Officer, Daewoo Securities Co., Ltd. Board and Director Daewoo Securities Co., Ltd. 34-3 Youido-dong (1984-present). Yongdung po-gu Seoul, Korea 150-010 Age 58 Nicholas Bratt*(1).......... President and Director Managing Director of Scudder, Stevens & Age 46 Clark, Inc.; serves on the Boards of an additional 13 funds managed by Scudder, Stevens & Clark, Inc. William H. Gleysteen, Director President, The Japan Society, Inc. (1989- Jr. ...................... present); Vice President of Studies, The Japan Society Council on Foreign Relations (1987-1989); 333 East 47th Street United States Ambassador to Korea New York, NY 10017 (1978-1981). Age 69 Robert W. Lear.............. Director Executive-in-Residence, Visiting 429 Silvermine Road Professor, Columbia University Graduate New Canaan, CT 06840 School of Business; Director or Trustee, Age 78 Equitable Capital Partners Enhancement Yield Funds, Welsh, Carson, Anderson & Stowe (venture capital company), and WICAT Systems, Inc. (learning systems company). Sang C. Lee................. Director Chairman, International Corporate 352 Stanwich Rd. Ventures, Inc. (1992-present); President Greenwich, CT 06830 and Chief Executive Officer, Spectron Age 54 Corp. of America, Ltd., Chairman of the Board, Markwood, Inc., Hub City, Inc. and Brocker Manufacturing, Inc. (portfolio companies of PITCAIRN GROUP L.P.) (1989-1992); President, Scovill Fasteners, Inc. (1987-1989); Vice President, First City Capital Corporation and Executive Vice President, Scovill, Inc. (1986-1987).
- --------------- * Directors considered by the Fund and its Counsel to be persons who are "interested persons" as defined in the 1940 Act, of the Fund, the Manager or the Korean Adviser.
52 53
POSITION(S) WITH PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS REGISTRANT DURING PAST FIVE YEARS - ---------------------------- ---------------------- ------------------------------------------ Tai Ho Lee.................. Director Chairman, Imjung Research Institute (1992- 301 World Villa T Present); President and Chief Executive 999 Bangbrae-Dong Officer, Hanjin Investment & Securities Seocho-Gu Co., Ltd. (1990-1991); Chairman, Daewoo Seoul, Korea Capital Management Co., Ltd. (1988-1990); Age 72 Chairman, Daewoo Securities Co., Ltd. (1983-1988); Chairman and President, Daewoo Research Institute (1984-1989). Wilson Nolen................ Director Consultant (1989-present); Director, 1120 Fifth Avenue Ecohealth, Inc., biotechnology company. New York, NY 10128 Age 68 Sidney M. Robbins........... Director Professor Emeritus of Finance, Adelphi 50 Overlook Road University; Chase Manhattan Professor Ossining, NY 10562 Emeritus of Financial Institutions, Age 83 Columbia University Graduate School of Business; Visiting Professor of Finance, University of Hawaii; Director or Trustee of various Oppenheimer Funds and The Malaysia Fund, Inc.; and Member, Board of Advisors Olympus Private Placement Fund L.P. Jerard K. Hartman(1)........ Vice President Managing Director of Scudder, Stevens & Clark, Inc. David S. Lee(2)............. Vice President Managing Director of Scudder, Stevens & Clark, Inc.; serves on the boards of an additional 29 funds managed by Scudder, Stevens & Clark, Inc. Kun-Ho Hwang................ Vice President Director, Planning Department of Daewoo Daewoo Securities Co., Ltd. Securities Co., Ltd. (1990-present); 34-3 Youido-dong General Manager, International Finance Yongdung po-gu Department, Daewoo Securities Co., Ltd. Seoul, Korea (1989-1991). John J. Lee(1).............. Vice President Vice President of Scudder, Stevens & Clark, Inc.; Korean Specialist, KPMG Peat Marwick (1985-1991). Dong Wook Park.............. Vice President General Manager, International Department Daewoo Securities Co., Ltd. of Daewoo Capital Management 34-3 Youido-dong (1988-present); Manager, Deputy General Yongdung po-gu Manager, Daewoo Research Institute Seoul, Korea (1984-1988). H. Jin Kim.................. Vice President President, Daewoo Securities (America) Daewoo Securities Inc. (America) Inc. One World Trade Center New York, NY 10048 Pamela A. McGrath(2)........ Treasurer Principal of Scudder, Stevens & Clark, Inc.
53 54
POSITION(S) WITH PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS REGISTRANT DURING PAST FIVE YEARS - ---------------------------- ---------------------- ------------------------------------------ Kathryn L. Quirk(1)......... Vice President and Managing Director of Scudder, Stevens & Assistant Secretary Clark, Inc. Edward J. O'Connell(1)...... Vice President and Principal of Scudder, Stevens & Clark, Assistant Treasurer Inc. Thomas F. McDonough(2)...... Secretary and Principal of Scudder, Stevens & Clark, Assistant Treasurer Inc. Coleen Downs Dinneen(2)..... Assistant Secretary Vice President of Scudder, Stevens & Clark, Inc.
- --------------- (1) Address: 345 Park Avenue, New York, NY 10154 (2) Address: Two International Place, Boston, MA 02110 The amount of shares in the Fund owned by the Fund's directors and officers as a group is less than one percent of the Fund's outstanding stock. The Fund's Board of Directors has an Executive Committee which may exercise the powers of the Board to conduct the current and ordinary business of the Fund while the Board is not in session. Currently, Messrs. Bratt and Padegs are members of the Executive Committee. Scudder is a Delaware corporation. Daniel Pierce, Two International Place, Boston, Massachusetts, is the Chairman of the Board of Scudder. Edmond D. Villani, 345 Park Avenue, New York, New York, is the President of Scudder. Stephen R. Beckwith, 345 Park Avenue, New York, New York, Lynn S. Birdsong, 345 Park Avenue, New York, New York, Nicholas Bratt, 345 Park Avenue, New York, New York, Linda C. Coughlin, 345 Park Avenue, New York, New York, Margaret D. Hadzima, Two International Place, Boston, Massachusetts, Jerard K. Hartman, 345 Park Avenue, New York, New York, Richard A. Holt, Two Prudential Plaza, 180 North Stetson, Suite 5400, Chicago, Illinois, Dudley H. Ladd, Two International Place, Boston, Massachusetts, Douglas M. Loudon, 345 Park Avenue, New York, New York, John T. Packard, 101 California Street, San Francisco, California, Juris Padegs, 345 Park Avenue, New York, New York, and Cornelia M. Small, 345 Park Avenue, New York, New York, are the other members of the Board of Directors of Scudder. The principal occupation of each of the above named individuals is serving as a Managing Director of Scudder. All the outstanding voting and nonvoting securities of the Manager are held of record by Stephen R. Beckwith, Juris Padegs, Daniel Pierce and Edmond D. Villani as representatives of the beneficial owners of such securities pursuant to a Security Holders Agreement, under which such representatives have the right to reallocate shares among the beneficial owners from time to time, at net book value in cash transactions. All Managing Directors of the Manager own voting and nonvoting stock; all Principals own nonvoting stock. The officers of the Fund will conduct and supervise the daily business operations of the Fund, while the directors, in addition to their functions set forth under "Investment Advisers," will review such actions and decide on general policy. The Fund pays each of its directors who is not an affiliated person of the Manager or the Korean Adviser, in addition to certain out-of-pocket expenses, an annual fee of $4,500, plus $750 for each Board of Directors or audit committee meeting, and for each meeting held for the purpose of considering arrangements between the Fund and the Manager and between the Manager and the Korean Adviser, and $250 for each other committee meeting attended. For the fiscal year ended June 30, 1994, the aggregate amount for fees and expenses paid to such directors amounted to $113,882. Effective October 1, 1994, 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 six months ended December 31, 1994, directors' fees and expenses amounted to $82,451. 54 55 The following Compensation Table provides, in tabular form, the following data: Column (1): All directors who receive compensation from the Fund. Column (2): Aggregate compensation received by a director from the Fund. Columns (3) and (4): Pension or retirement benefits accrued or proposed to be paid by the Fund. The Fund does not pay its directors such benefits. Column (5): Total compensation received by a director from the Fund, plus compensation received from all funds for which a director serves in the Scudder fund complex. The total number of funds from which a director receives such compensation is also provided. COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 1994
TOTAL COMPENSATION AGGREGATE FROM COMPENSATION PENSION OR RETIREMENT ESTIMATED ANNUAL FUND NAME OF PERSON, FROM BENEFITS ACCRUED AS BENEFITS UPON AND FUND COMPLEX POSITION FUND PART OF FUND EXPENSES RETIREMENT PAID TO DIRECTOR - --------------------------- -------------- ---------------------- ---------------- ------------------ William H. Gleysteen, Jr. $ 11,125 -- -- $110,213 Director (12 funds) Robert W. Lear $ 11,125 -- -- $ 62,875 Director (10 funds) Sang C. Lee $ 11,125 -- -- $ 11,125 Director (1 fund) Tai Ho Lee $ 10,375 -- -- $ 10,375 Director (1 fund) Dr. Wilson Nolen $ 11,125 -- -- $132,023 Director (15 funds) Sidney M. Robbins $ 11,125 -- -- $ 11,125 Director (1 fund)
Although the Fund is a Maryland corporation, certain of its directors and officers are residents of Korea, and substantially all of the assets of such persons may be located outside of the United States. As a result, it may be difficult for United States investors to effect service of process upon such directors or officers within the United States or to realize judgments of courts of the United States based upon civil liabilities of such directors or officers under the federal securities laws and other laws of the United States. There is substantial doubt as to the enforceability in Korea of such civil remedies and criminal penalties as are afforded by the federal securities laws in the United States. No extradition treaty currently is in effect between the United States and Korea which would subject the Fund's directors and officers to enforcement of the criminal penalties of the federal securities laws. The By-Laws of the Fund provide that the Fund will indemnify directors, officers, employees or agents of the Fund against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Fund to the full extent permitted by law. However, nothing in the Articles of Incorporation or the By-Laws of the Fund protects or indemnifies a director, officer, employee or agent against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. According to filings with the SEC on Schedule 13G on March 28, 1995, BEA Associates, 153 East 53rd Street, New York, New York, reported (and disclaimed) beneficial ownership of 3,431,303 shares (11.6% of the Fund's outstanding stock) held in discretionary accounts managed by BEA Associates. To the best of the Fund's knowledge, as of April 30, 1995 no other person owned beneficially more than 5% of the Fund's outstanding shares. NET ASSET VALUE The net asset value of shares of the Fund is determined no less frequently than weekly, on the last business day of each month, and at such other times as the Board of Directors may determine, by dividing the 55 56 value of the total assets of the Fund, less all liabilities, by the total number of shares of Common Stock outstanding. An exchange-traded equity security is valued at its most recent sale price. Lacking any sales, the security is valued at the calculated mean between the most recent bid quotation and the most recent asked quotation (the "Calculated Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid quotation. An equity security which is traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") system is valued at its most recent sale price. Lacking any sales, the security is valued at the high or "inside" bid quotation. The value of an equity security not quoted on the NASDAQ System, but traded in another over-the-counter market, is its most recent sale price. Lacking any sales, the security is valued at the Calculated Mean. Lacking a Calculated Mean, the security is valued at the most recent bid quotation. Debt securities, other than short-term securities, are valued at prices supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied valuations and electronic data processing techniques. Short-term securities with remaining maturities of sixty days or less are valued by the amortized cost method, which the Board of Directors believes approximates market value. If it is not possible to value a particular debt security pursuant to these valuation methods, the value of such security is the most recent bid quotation supplied by a bona fide marketmaker. If it is not possible to value a particular debt security pursuant to the above methods, the Manager may calculate the price of that debt security taking into account such factors as the Manager deems appropriate. This valuation method may not be used with respect to a particular security for longer than ten consecutive trading days, or for securities with an aggregate value that exceeds 5% of the Fund's net assets on a particular valuation date. An exchange traded options contract on securities, currencies, futures and other financial instruments is valued at its most recent sale price on such exchange. Lacking any sales, the options contract is valued at the Calculated Mean. Lacking any Calculated Mean, the options contract is valued at the most recent bid quotation in the case of a purchased options contract, or the most recent asked quotation in the case of a written options contract. An options contract on securities, currencies and other financial instruments traded over-the-counter is valued at the most recent bid quotation in the case of a purchased options contract and at the most recent asked quotation in the case of a written options contract. Futures contracts are valued at the most recent settlement price. Foreign currency exchange forward contracts are valued at the value of the underlying currency at the prevailing currency exchange rate. If a security is traded on more than one exchange, or upon one or more exchanges and in the over-the-counter market, quotations are taken from the market in which the security is traded most extensively. If, in the opinion of the Fund's valuation committee (the "Valuation Committee"), the value of a portfolio asset as determined in accordance with these procedures does not represent the fair market value of the portfolio asset, the value of the portfolio asset is taken to be an amount which, in the opinion of the Valuation Committee, represents fair market value on the basis of all available information. The value of other portfolio holdings owned by the Fund is determined in a manner which, in the discretion of the Valuation Committee, most fairly reflects fair market value of the property on the valuation date. Following the valuations of securities or other portfolio assets in terms of the currency in which the market quotation used is expressed ("Local Currency"), the value of these portfolio assets is calculated in terms of Dollars by converting the Local Currency into Dollars at the prevailing currency exchange rate on the valuation date. The Fund currently values the securities in its portfolio that are already at or over the limit for aggregate foreign ownership on the basis of prices on the Stock Exchange, unless quotations are regularly available as to the prices offered by prospective foreign purchasers in the over-the-counter market to existing foreign holders of such shares. See "Market and Net Asset Value Information" for information as to the relationship between the market price and net asset value per share of Common Stock. Under the Fund's Articles of Incorporation, the Fund cannot become an open-end investment company without the approval of (i) the Minister of Finance and Economy and (ii) holders of two-thirds of the Fund's outstanding shares. 56 57 DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN The Fund intends to distribute to shareholders, at least annually, substantially all of its net investment income and expects to distribute at least annually any net long-term capital gains in excess of net short-term capital losses (including any capital loss carryover). Net investment income includes dividends, interest and any net short-term capital gains in excess of net long-term capital losses (including any capital loss carryover), net of expenses. See "Taxation -- United States Federal Income Taxes." As of May 22, 1995, there was approximately $266 million of net unrealized appreciation in the Fund's net assets of approximately $573 million; if realized and distributed, or deemed distributed, such gains would, in general, be taxable to shareholders, including holders at that time of Shares acquired upon exercise of the Rights. As of May 22, 1995, the Fund had approximately $4.3 million of undistributed net investment income (all of which represents realized short-term capital gains) with respect to its fiscal year ending June 30, 1995, which the Fund expects to distribute to shareholders of record after the end of such fiscal year (including holders at that time of Shares acquired upon exercise of the Rights). As of May 22, 1995, the Fund also had approximately $12 million of undistributed net realized long-term capital gains, which the Fund expects to distribute to such shareholders. Such distributions will, in general, be taxable to such shareholders. See "Taxation -- United States Federal Income Taxes -- General," "-- Distributions" and "-- Non-U.S. Shareholders." Pursuant to the Plan, each shareholder will be deemed to have elected, unless State Street Bank and Trust Company, the Plan Agent, is otherwise instructed in writing, to have all distributions, net of any applicable U.S. withholding tax, automatically reinvested by State Street Bank and Trust Company, the Plan Agent, in Fund shares pursuant to the Plan. Shareholders who elect not to participate in the Plan will receive all distributions, net of any applicable U.S. withholding tax, in cash paid by check in Dollars mailed directly to the shareholder by State Street Bank and Trust Company, as dividend paying agent. Participants in the Plan may terminate their accounts under the Plan by written notice to the Plan Agent. If such notice is received by the Plan Agent not less than ten days prior to any dividend or distribution record date, the termination will be effective immediately; otherwise such termination will be effective on the first trading day after the payment date of such dividend or distribution. 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 to participate in the Plan. A beneficial owner of shares registered in the name of a bank, broker or other nominee should consult with such nominee as to participation in the Plan through such nominee. The Plan Agent serves as agent for the shareholders in administering the Plan. If the directors of the Fund declare an income dividend or a capital gains distribution payable either in the Fund's Common Stock or in cash, 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. If the market price per share on the valuation date equals or exceeds net asset value per share on that date, the Fund will issue new shares to participants at net asset value; provided, however, if the net asset value is less than 95% of the market price on the valuation date, then the Fund will issue new shares to participants at 95% of the market price. The valuation date will be the dividend or distribution payment date or, if that date is not a NYSE trading day, the next preceding trading day. If net asset value exceeds the market price of Fund shares at such time, participants in the Plan will be deemed to have elected to receive shares of stock from the Fund, valued at market price on the valuation date. Participants reinvesting distributions in additional shares should be treated for U.S. Federal income tax purposes as receiving a distribution in an amount equal to the fair market value, determined as of the distribution date, of the shares received (regardless of the net asset value of the shares on the distribution date), and should have a cost basis in such shares equal to such fair market value. If the Fund should declare an income dividend or capital gains distribution payable only in cash, the Plan Agent will, as agent for the 57 58 participants, buy Fund shares in the open market, on the NYSE or elsewhere, for the participants' account on, or shortly after, the payment date. Participants in the Plan have the option of making additional cash payments to the Plan Agent, semi-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 and August 15. Any voluntary cash payments received more than thirty 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. The Plan Agent maintains all shareholder accounts in the Plan and furnishes written confirmation 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. 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 capital gains distributions will be paid by the Fund. There will be no brokerage charges with respect to shares issued directly by the Fund as a result of dividends or capital gains distributions payable either in stock or in cash. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with voluntary cash payments made by the participant or reinvestment of any dividends or capital gains distributions payable only in cash. With respect to purchases from voluntary cash payments, the Plan Agent will charge $0.75 for each such purchase for a participant, plus a pro rata share of the brokerage commissions. Brokerage charges for purchasing small amounts of stock for individual accounts through the Plan are expected to be less than the usual brokerage charges for such transactions, because the Plan Agent will be purchasing stock for all participants in blocks and prorating the lower commission thus attainable. The receipt of dividends and distributions under the Plan will not relieve participants of any income tax (including withholding tax) which may be payable on such dividends or distributions. See "Taxation -- United States Federal Income Taxes." Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund and the Plan Agent reserve the right to terminate the Plan as applied to any voluntary cash payments made and any dividend or distribution paid subsequent to notice of the termination sent to the members of the Plan, in the case of a dividend or distribution, at least 30 days before the record date for such dividend or distribution. The Plan also may be amended by the Fund or the Plan Agent, but (except when necessary or appropriate to comply with applicable laws, rules or policies of a regulatory authority) only by at least 30 days' written notice to participants in the Plan. Additional information about the Plan may be obtained from the Plan Agent, State Street Bank and Trust Company, P.O. Box 8200, Boston, MA 02266-8200, telephone number (617) 328-5000 ext. 6406. TAXATION For a discussion of the U.S. Federal income tax consequences and the Korean tax consequences to Record Date Shareholders and Rights Holders with respect to the Offer, see "The Offer -- U.S. Federal Income Tax Consequences; Korean Tax Consequences" above. UNITED STATES FEDERAL INCOME TAXES THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS A SUMMARY INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT HIS OWN TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF BEING A 58 59 SHAREHOLDER OF THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES THEREIN. General The Fund has qualified and intends to continue to qualify to be treated as a regulated investment company under the Code for each taxable year, although no assurance can be given as to meeting the tests for such status. To qualify as a regulated investment company, the Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to stock or securities loans, gains from the sale or other disposition of stock or securities, and certain other related income, including, generally, gains from options, futures and forward contracts and foreign currency gains (under regulations which may be promulgated, foreign currency gains which are not directly related to the Fund's principal business of investing in stocks or securities may not be treated as qualifying income for this purpose); (b) derive in each taxable year less than 30% of its gross income from the sale or other disposition of stock, securities, options, futures, forward contracts and foreign currencies, held less than three months (excluding, for this purpose, gains from foreign currencies (and options, futures and forward contracts on foreign currencies) that are directly related to the Fund's principal business of investing in stocks or securities or options or futures thereon); and (c) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund's assets is represented by cash, U.S. government securities, securities of other regulated investment companies, and other securities, with such other securities of any one issuer qualifying, for purposes of this calculation, only if the Fund's investment is limited to an amount not greater than 5% of the value of the Fund's total assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. government securities or the securities of other regulated investment companies) or of any two or more issuers that the Fund controls and that are determined to be engaged in the same, similar or related businesses. Corporations owned or controlled by the Government will be treated as separate issuers for this purpose, except that a debt obligation of such a corporation may be treated as issued by the Government if the obligation is backed by the full faith and credit of the Government. Proposed legislation would eliminate the 30% requirement; it is unclear whether, and in what form, such legislation might be enacted. As a regulated investment company, the Fund will not be subject to U.S. Federal income tax on its income and capital gains, if any, that it distributes to its shareholders, provided it distributes each taxable year at least 90% of its "investment company taxable income," calculated without the deduction for dividends paid, as determined for U.S. Federal income tax purposes ("net investment income"). Net investment income includes dividends, interest, net short-term capital gains in excess of any net long-term capital losses and any capital loss carryovers from prior years, net of expenses, and, net gain or loss on debt securities and futures contracts on debt securities, to the extent attributable to fluctuations in currency exchange rates, and net gain or loss on foreign currencies and foreign currency forward contracts. Dividend income derived by a regulated investment company from its investments is required to be taken into account for U.S. Federal income tax purposes as of the ex-dividend date (rather than the payment date, which generally is later). Accordingly, the Fund, in order to satisfy its distribution requirements, may be required to make distributions based on earnings that have been accrued but not yet received. Interest income from discount on indebtedness held by the Fund will also give rise to such accrued earnings. The Fund intends to distribute to its shareholders each year all of its net investment income as computed for U.S. Federal income tax purposes. Korean exchange control or other regulations, which may restrict repatriation of investment income, capital or the proceeds of securities sales by foreign investors such as the Fund, may limit the Fund's ability to make sufficient distributions to satisfy the 90% distribution requirement and the calendar year distribution requirement described below. See "Risk Factors and Special Considerations -- Currency Conversion and Repatriation" and "Other Taxation." The Board of Directors will determine each year whether to distribute any net long-term capital gains in excess of any net short-term capital losses (including in such losses any capital loss carryovers from prior 59 60 years) as computed for U.S. Federal income tax purposes. The Fund presently expects to distribute such excess to its shareholders each year. To the extent that the Fund retains any part of such excess for investment, it will be subject to U.S. Federal income tax on the amount retained at the then current rate, which currently is 35%. If any such amount is retained, the Fund expects to designate such amount as undistributed capital gains in a notice to its shareholders who (i) if subject to U.S. Federal income tax on long-term capital gains, will be required to include in income for such tax purposes, as long-term capital gains, their proportionate shares of such undistributed amount, and (ii) will be entitled to credit their proportionate shares of taxes paid by the Fund on such undistributed amount against their U.S. Federal income tax liabilities and to claim refunds to the extent such proportionate shares of the tax exceed such liabilities. For U.S. Federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by 65% of the amount of undistributed capital gains included in the shareholder's gross income. The Fund will be subject to a non-deductible U.S. Federal 4% excise tax on amounts not distributed (and not treated as having been distributed) on a timely basis in accordance with a calendar year distribution requirement. To avoid application of the excise tax, the Fund intends to make its distributions in accordance with such requirement. Exchange control or other regulations referred to above, however, could limit the Fund's ability to satisfy such requirement. Distributions Dividend distributions paid out of the Fund's net investment income (including short-term capital gains) will be taxable to a U.S. shareholder as ordinary income, whether received in cash or reinvested in shares. Dividends paid by the Fund will not qualify for the deduction (currently 70%) for dividends received by corporations because the Fund's income is not expected to consist of dividends paid by U.S. corporations. Distributions of net long-term capital gains (i.e., capital gains from securities held for more than one year), if any, are taxable as long-term capital gains, whether received in cash or reinvested in shares, regardless of how long the shareholder has held the Fund's shares and are not eligible for the dividends-received deduction. Dividends of net investment income and distributions of net long-term capital gains paid by the Fund that (i) are declared in October, November or December, (ii) are payable to holders of record as of a date in such a month, and (iii) are paid during the following January, will be treated by shareholders as if received on December 31 of the calendar year in which declared. Shareholders subject to U.S. Federal alternative minimum tax will be required to include distributions from the Fund in alternative minimum taxable income. The Fund has adopted a Dividend Reinvestment and Cash Purchase Plan. Shareholders are deemed to have elected to participate in the Plan unless the Plan Agent is otherwise instructed in writing. Participants in the Plan will receive dividend and capital gain distributions in shares of the Fund, rather than in cash, if the Fund's Board of Directors declares that payment may be made in shares of the Fund or in cash. The Fund contemplates that distributions will ordinarily be payable in shares or cash. See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan." Shareholders reinvesting distributions in additional shares through participation in the Plan should be treated for U.S. Federal income tax purposes as receiving a distribution in an amount equal to the fair market value, determined as of the distribution date, of the shares received (whether the fair market value is less than or greater than the net asset value of the shares on the distribution date), and should have a cost basis in such shares equal to such fair market value. If the fair market value of a shareholder's shares is reduced below the shareholder's cost for such shares as a result of a distribution by the Fund, such distribution will be taxable for U.S. Federal income tax purposes even though from an economic viewpoint it may represent a return of invested capital. Investors should, therefore, consider the tax implications of buying shares in the Fund prior to a distribution since the price of shares purchased at that time may reflect the amount of the forthcoming distribution and the distribution will nevertheless be taxable to the purchasing shareholder. As of May 22, 1995, there was approximately $266 million of net unrealized appreciation in the Fund's net assets of approximately $573 million; if realized and distributed, or deemed distributed, such gains would, in general, be taxable to shareholders, including holders at that time of Shares acquired upon exercise of the Rights. As of May 22, 1995, the Fund had 60 61 approximately $4.3 million of undistributed net investment income (all of which represents realized short-term capital gains) with respect to its fiscal year ending June 30, 1995, which the Fund expects to distribute to shareholders of record after the end of such fiscal year (including holders at that time of Shares acquired upon exercise of the Rights). As of May 22, 1995, the Fund also had approximately $12 million of undistributed net realized long-term capital gains, which the Fund expects to distribute to such shareholders. Such distributions will, in general, be taxable to such shareholders. See "General" and "Non-U.S. Shareholders." Shareholders will be notified as to the U.S. Federal income tax status of any dividends, distributions and deemed distributions made by the Fund to its shareholders. Sale of Shares Upon the sale or exchange of shares of the Fund, a U.S. shareholder will realize a taxable gain or loss. Such gain or loss will be a capital gain or loss if the shares are capital assets in the shareholder's hands, and will be long-term or short-term depending upon whether the shareholder has held the shares for more than one year. Under current U.S. Federal income tax law, the maximum rate for long-term capital gains for individuals is 28% and short-term capital gains are taxed at the same rate as ordinary income. Any loss realized on a sale or exchange of Fund shares will be disallowed to the extent that the shares disposed of are replaced, including, for example, pursuant to the Plan, within a 61-day period beginning 30 days before and ending 30 days after the date the shares are disposed of. In such a case, a U.S. shareholder will adjust the basis of the shares acquired to reflect the disallowed loss. Any loss realized by a U.S. shareholder on a disposition of Fund shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net long-term capital gains received by the shareholder (and any amounts retained by the Fund which were designated as undistributed capital gains) with respect to such shares. Non-U.S. Income Taxes The Fund will be subject to Korean income taxes, including withholding taxes, described below under "Korean Taxes." So long as more than 50% in value of the Fund's total assets at the close of any taxable year in which it is a regulated investment company consists of stocks or securities of non-U.S. corporations, the Fund may elect to treat any such non-U.S. income taxes paid by it during such year (to the extent that such taxes are treated as income taxes under U.S. Federal tax principles) as paid by its shareholders. The Fund has qualified and expects to continue to qualify for this election annually. The Fund will notify shareholders in writing each year if it makes the election and of the amount of non-U.S. income taxes, if any, to be treated as paid by the shareholders and the amount to be treated by them as income from non-U.S. sources. If the Fund makes the election, shareholders will be required to include in income their proportionate shares of the amount of non-U.S. income taxes paid by the Fund for purposes of computing their U.S. income tax. U.S. shareholders will be entitled to claim either a credit (subject to the limitations discussed below) or, if they itemize their deductions, a deduction for their shares of the non-U.S. income taxes in computing their U.S. Federal income tax liability. (For the treatment of non-U.S. shareholders, see "Non-U.S. Shareholders" below.) No deduction will be permitted for such income taxes in computing the alternative minimum tax imposed on individuals. Shareholders that are exempt from tax under Section 501(a) of the Code, such as pension plans, generally will derive no benefit from the Fund's election to pass through the Fund's non-U.S. income taxes to its shareholders. However, such shareholders should not ordinarily be disadvantaged because the amount of additional income they are deemed to receive generally will not be subject to U.S. Federal income tax. Korean taxes imposed on dividends and interest qualify as income taxes that the Fund may elect to treat as having been paid by its shareholders, and the Fund believes that the Korean capital gains tax, if imposed on the Fund by Korea at some future date, should qualify for such treatment, but the Korean Securities Transaction Tax is not such an income tax. See "Korean Taxes." 61 62 Generally, a credit for non-U.S. income taxes is subject to the limitation that it may not exceed the shareholder's U.S. Federal income tax (determined without regard to the availability of the credit) attributable to his or her total non-U.S. source taxable income. For this purpose, the portion of distributions paid by the Fund from its non-U.S. source income will be treated as non-U.S. source income. The Fund's gains from the sale of securities will generally be treated as derived from U.S. sources, unless the Korean capital gains tax were to be imposed on such gains, in which case the Fund would expect to elect to treat such gains as derived from a non-U.S. source. Additionally, certain currency fluctuation gains and losses, including fluctuation gains from foreign currency denominated debt securities, receivables and payables, will be treated as derived from U.S. sources. The limitation on the foreign tax credit is applied separately to non-U.S. source "passive income," such as the portion of dividends received from the Fund which qualifies as non-U.S. source income. In addition, the foreign tax credit is allowed to offset only 90% of the alternative minimum tax imposed on corporations and individuals. Because of these limitations, shareholders may be unable to claim a credit for the full amount of their proportionate shares of the non-U.S. income taxes paid by the Fund. The foregoing is only a general description of the treatment of non-U.S. income taxes under the U.S. Federal income tax laws. Because the availability of a credit or deduction depends on the particular circumstances of each shareholder, shareholders are advised to consult their own tax advisers. Backup Withholding The Fund may be required to withhold for U.S. Federal income taxes 31% of all distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Corporate shareholders and other shareholders specified in the Code are exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. Federal income tax liability. Non-U.S. Shareholders U.S. Federal income taxation of a shareholder who, under the Code, is a non-resident alien individual, a foreign trust or estate, foreign corporation, or foreign partnership ("non-U.S. shareholder") depends on whether the income from the Fund is "effectively connected" with a U.S. trade or business carried on by such shareholder. Ordinarily, income from the Fund will not be treated as so "effectively connected." If the income from the Fund is not treated as "effectively connected" with a U.S. trade or business carried on by the non-U.S. shareholder, dividends of net investment income (which includes short-term capital gains), whether received in cash or reinvested in shares, will be subject to a U.S. Federal income tax of 30% (or lower treaty rate), which tax is generally withheld from such dividends. See the definition of "net investment income" at "General" above. Furthermore, such non-U.S. shareholders may be subject to U.S. Federal income tax at the rate of 30% (or lower treaty rate) on their income resulting from the Fund's election (described above) to "pass through" the amount of non-U.S. taxes paid by the Fund, but may not be able to claim a credit or deduction with respect to the non-U.S. income taxes treated as having been paid by them. A non-U.S. shareholder whose income is not treated as "effectively connected" with a U.S. trade or business generally will not be subject to U.S. Federal income taxation on distributions of net long-term capital gains, amounts retained by the Fund which are designated as undistributed capital gains and any gain realized upon the sale of Fund shares. The Fund will incur a U.S. Federal income tax liability with respect to amounts retained by it that are designated as undistributed capital gains. The non-U.S. shareholder may claim a credit with respect to such taxes paid by the Fund and may claim a refund where such taxes exceed such shareholder's U.S. Federal income tax liabilities, but must file a tax return to do so. In addition, if the non-U.S. shareholder is treated as a non-resident alien individual but is physically present in the United States for more than 182 days during the taxable year, then in certain circumstances such distributions of net long-term capital gains, amounts retained by the Fund which are designated as undistributed capital gains, and gain from the sale of Fund shares will be subject to a U.S. Federal income tax of 30% (or lower treaty rate). In the case of a non-U.S. shareholder who is a non-resident alien individual, the Fund may be required to withhold U.S. 62 63 Federal income tax at a rate of 31% of distributions (including distributions of net long-term capital gains) unless IRS Form W-8 is provided. See "Backup Withholding." If the income from the Fund is "effectively connected" with a U.S. trade or business carried on by a non-U.S. shareholder, then distributions of net investment income (which includes short-term capital gains), whether received in cash or reinvested in shares, net long-term capital gains and amounts otherwise includible in income, such as amounts retained by the Fund which are designated as undistributed capital gains, and any gains realized upon the sale of shares of the Fund, will be subject to U.S. Federal income tax at the graduated rates applicable to U.S. taxpayers. Non-U.S. shareholders that are corporations may also be subject to the branch profits tax. Transfers of shares of the Fund by gift by a non-U.S. shareholder will generally not be subject to U.S. Federal gift tax, but the value of shares of the Fund held by such a shareholder at death will be includible in the shareholder's gross estate for U.S. Federal estate tax purposes. The income tax and estate tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Non-U.S. shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in shares of the Fund. Foreign Exchange-Related Transactions; Hedging Transactions Debt securities denominated in foreign currencies (and, in some circumstances, futures, options, forwards and other similar financial instruments based on foreign currencies) held by the Fund, and gains or losses attributable to fluctuations in exchange rates that occur between the time the Fund accrues income or expense denominated in a foreign currency and the time the Fund actually collects such income or pays such expense, will be subject to special rules for determining, among other things, the character and timing of income, deductions, gain, and loss attributable to foreign exchange gain or loss. In general, these rules operate to treat as ordinary income or loss (to be taken into account in computing net investment income) the portion of a gain or loss so attributable. In addition, the hedging transactions which may be undertaken by the Fund may result in "straddles" for U.S. Federal income tax purposes. The straddle rules may affect the character and timing of income, deduction, gain or loss recognized by the Fund. Certain hedging transactions may increase the amount of short-term capital gain realized by the Fund, which is taxed as ordinary income when distributed to shareholders. These rules may also require the acceleration of the recognition of income or gain by the Fund before the Fund receives the cash required to make distributions to shareholders. All of these rules may affect the timing and amount of distributions to shareholders. The gross income and diversification requirements applicable to regulated investment companies, described above, may limit the extent to which the Fund will be able to engage in transactions in options, futures and forward currency exchange contracts. Other Taxation If the Fund purchases shares in certain foreign investment entities, called "passive foreign investment companies," the Fund may be subject to U.S. Federal income tax on a portion of any "excess distribution" or gain from the disposition of such shares even if such income or gain is distributed as a taxable dividend by the Fund to its shareholders. Additional charges in the nature of interest may be imposed on the Fund in respect of deferred taxes arising from such distributions or gains. Proposed regulations would generally allow the Fund to elect to mark to market annually all of the stock of passive foreign investments companies held by the Fund. Gain recognized pursuant to such election is generally treated as ordinary income subject to the distribution requirements discussed above. It is unclear, however, whether and in what form such regulations might be promulgated in final form. If the Fund were to invest in a passive foreign investment company which the Fund elected to treat as a "qualified electing fund" under the Code, in lieu of the foregoing requirements, the Fund would ordinarily be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund, even if not distributed to the Fund, and such amounts would be subject to the 90% and calendar year distribution requirements described above. Proposed legislation would revise the 63 64 passive foreign investment company rules in various respects; it is unclear whether and in what form, such legislation might be enacted. Distributions from the Fund may be subject to additional U.S. Federal, state, local and non-U.S. taxes depending on each shareholder's particular situation. Shareholders should consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Fund and of the possible impact of changes in applicable tax laws. If the Fund did not qualify as a regulated investment company for any taxable year, (i) it would be subject to U.S. Federal income tax at regular corporate rates on its taxable income (which would be computed without deduction for distributions paid to shareholders) and to certain state and local taxes, (ii) its distributions to shareholders out of its current or accumulated earnings and profits would be taxable to shareholders as ordinary dividend income (even if derived from long-term capital gains) and subject to withholding in the case of non-U.S. shareholders and (iii) non-U.S. income taxes, and U.S. Federal income taxes paid by the Fund on any undistributed long-term capital gains, would not "pass through" to shareholders. In addition, if the Fund failed to qualify for taxation as a regulated investment company for a period greater than one taxable year, the Fund would be required to recognize any net built-in gains (the excess of aggregate gains over aggregate losses that would have been realized if it had been liquidated) if it were to qualify as a regulated investment company in a later taxable year. KOREAN TAXES The following description of certain Korean tax matters relating to the Fund and its shareholders represents the opinion of Shin & Kim, Korean counsel to the Fund. Under current Korean law, payments to non-residents of Korea (such as the Fund) by Korean corporations in respect of income are subject to Korean withholding tax, and capital gains derived by non-residents of Korea (such as the Fund) with respect to stock and securities of Korean corporations are subject to Korean withholding tax, unless exempted by relevant laws or tax treaties. More specifically, dividends and interest are subject to withholding tax at the rate of 26.875% and capital gains (without deduction for capital losses) are subject to withholding tax at a rate equal to the lower of (i) 10.75% of the gross sales proceeds, or (ii) if satisfactory evidence of acquisition cost is produced, 26.875% of the difference between the gross sales proceeds and the acquisition cost of the stock or security sold (excluding any transaction charges, commissions, fees or taxes paid at the time of acquisition). The applicable withholding tax rate under the United States-Korea income tax treaty, as presently in effect (the "Treaty"), generally is 15% (plus a resident tax of 7.5% of such amount, or a total of 16.125%) on dividends paid to the Fund by Korean issuers, and generally 12% (plus a resident tax of 7.5% of such amount, or a total of 12.9%) on interest paid to the Fund by Korean issuers. Under the Treaty, as presently in effect, no withholding tax will be applicable to capital gains realized by the Fund. The reduced tax rate and exemption under the provisions of the Treaty will not apply to the dividend, interest and capital gain income derived by the Fund from Korean corporations if both (i) the Fund is, by reason of the existence of special measures under United States Federal income tax law with respect to those types of income, subject to United States Federal income tax in an amount substantially less than the United States Federal income tax generally imposed on corporate profits (Article 17(a) of the Treaty), and (ii) at least 25% of the Fund's outstanding shares are held of record or otherwise determined to be owned, directly or indirectly, by one or more persons who are not individual residents of the United States (Article 17(b) of the Treaty). Questions have been raised as to whether the United States regulated investment company provisions contained in the Code constitute "special measures" for purposes of Article 17(a) of the Treaty. Regardless of the resolution of these questions, under Article 17(b) of the Treaty, the Fund will qualify for the benefits of the Treaty so long as less than 25% of the Fund's outstanding shares are determined to be held other than by individual residents of the United States. In 1993, the Fund received written confirmation from the Minister of Finance and Economy that, so long as the number of shares allocated to the underwriters of countries other than the United States is less than 64 65 25% of the total number of publicly offered shares (aggregating the total number of shares allocated to underwriters by the Fund in all of its public offerings), the Fund will continue to be entitled to the benefits of the Treaty (as it has been until now), because Article 17(b) of the Treaty does not apply. Recently, the Fund has received written confirmation from the Minister of Finance and Economy that if and so long as the number of shares which have been underwritten by underwriters which are outside of the country of residence of the Fund throughout this Fund's four prior public offerings is less than 25% of the total number of shares which have been publicly offered, the current offering takes place in the form of a capital increase through an issue of rights to subscribe for new shares to be offered to its existing shareholders, and the certificates which evidence the right to subscribe for newly issued shares are listed only on stock exchanges within the United States, the applicability of the Treaty to the Fund will continue to be acknowledged. The Fund has satisfied the foregoing requirements with respect to all of its outstanding shares publicly offered. In order to continue to qualify for the benefits of the Treaty, the Fund will proceed with this offering in a manner so as to satisfy the remaining requirements and intends to satisfy all of these requirements in all future public offerings of its shares (if any). Notwithstanding the foregoing, the Tax Exemption and Reduction Control Law (the "TERCL") exempts interest on bonds denominated in a non-Korean currency from Korean income and corporation taxes. The residents' tax referred to above is therefore eliminated with respect to such investments. The TERCL tax exemptions will expire on December 31, 1998. Under present Korean law, no Korean tax will be payable on gain realized upon a sale of shares of the Fund, or upon the receipt of distributions from the Fund, if the seller, or recipient of the distributions, as the case may be, is not domiciled in Korea and the Korean Inheritance and Gift Tax will not apply to any testate, intestate or inter-vivos transfer of shares of the Fund to the extent the deceased or the donee, as the case may be, is not domiciled in Korea; Korean stamp duty will not apply to transfers of Fund shares, nor to the Fund's portfolio securities transactions. The Korean Securities Transaction Tax will not apply to the sale of securities made through the Stock Exchange by the Fund. However, sales of Korean shares and certain other equity securities made outside of the Stock Exchange will be subject to the Korean Securities Transaction Tax. See "Portfolio Transactions and Brokerage." This tax treatment could change in the event of changes in Korean or United States tax laws, changes in the terms of, or the Minister of Finance and Economy's interpretation of, the Treaty, or changes in relevant facts. PORTFOLIO TRANSACTIONS AND BROKERAGE To the maximum extent feasible, the Manager places orders for portfolio transactions through its affiliate, Scudder Investor Services, Inc. (the "Distributor"), a corporation registered as a broker/dealer and a wholly owned subsidiary of the Manager, which in turn places orders on behalf of the Fund with issuers, underwriters or other brokers and dealers. The Distributor does not receive any commission, fees or other remuneration from the Fund for this service. Allocation of brokerage will be supervised by the Manager. The primary objective of the Manager in placing orders for the purchase and sale of securities for the Fund's portfolio is to obtain the most favorable net results taking into account such factors as price, commission, size of order, difficulty of execution and skill required of the broker/dealer. Orders for agency transactions may be placed with Daewoo Securities, among other Korean brokers, when consistent with the above-stated policy and with Rule 17e-1 under the 1940 Act. The Manager seeks to evaluate the overall reasonableness of brokerage commissions paid (to the extent applicable) through the familiarity of the Distributor with commissions charged on comparable transactions, as well as by comparing commissions paid by the Fund to reported commissions paid by others. The Manager reviews, on a routine basis, commission rates and execution and settlement services performed by its brokers, and makes comparisons based on these factors among the Fund's brokers and with other brokers. When it can be done consistently with the policy of obtaining the most favorable net results, it is the Manager's practice to place such orders with brokers and dealers who supply market quotations to the Fund or 65 66 its agents for portfolio evaluation purposes, or who supply research, market and statistical information to the Fund or the Manager. The term "research, market and statistical information" includes advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities, and furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. The Manager is not authorized when placing portfolio transactions for the Fund to pay a brokerage commission or transaction cost in excess of that which another broker might have charged for executing the same transaction on account of the receipt of research, market or statistical information, although it may do so in seeking to obtain the most favorable net results with respect to a particular transaction. The Manager will not place orders with brokers or dealers on the basis that the broker or dealer has or has not sold shares of the Fund. Except for implementing the policy stated above, there is no intention to place portfolio transactions with particular brokers or dealers or groups thereof. Although certain research, market and statistical information from brokers and dealers can be useful to the Fund and to the Manager, it is the opinion of the management of the Fund that such information is only supplementary to the Manager's own research effort, since the information must still be analyzed, weighed and reviewed by the Manager's staff. Such information may be useful to the Manager in providing services to clients other than the Fund, and not all such information will be used by the Manager in connection with the Fund. Conversely, such information provided to the Manager by brokers and dealers through whom other clients of the Manager effect securities transactions may be useful to the Manager in providing services to the Fund. During the fiscal year ended June 30, 1994, the Fund paid total brokerage commissions of $603,866, of which $603,866 (100% of the total commission paid) resulted from orders placed with brokers and dealers who provided supplementary research, market and statistical information to the Fund or to the Manager. Daewoo Securities, with respect to portfolio transactions for the Fund, was paid $134,564, which amounted to 22.3% of total brokerage commissions paid. The aggregate amount of brokerage transactions was $219,346,542 for the fiscal year. The aggregate amount of brokerage transactions subject to brokerage commissions was $135,583,081 (61.8% of all brokerage transactions). The aggregate dollar amount of transactions subject to brokerage commissions that were effected through Daewoo Securities was $31,418,176 (23.2% of the aggregate dollar amount of transactions subject to brokerage commissions). During the fiscal years ended June 30, 1992 and 1993, the Fund paid total brokerage commissions of $316,155 and $263,779, respectively. During the same periods, the Fund paid Daewoo Securities with respect to portfolio transactions brokerage commissions of $82,901 and $49,238, respectively, which represented 26.2% and 18.7%, respectively, of the total commissions paid for each respective period. Brokerage commissions on equity securities may be negotiated up to a permitted maximum percentage of the sales value of the transaction. The Stock Exchange is permitted to alter the maximum commission rate from time to time. The rates currently provide for a maximum commission of 0.6% for equity securities and 0.3% for bonds. Each broker is required to report its commission rate schedule and any deviation therefrom to the KSEC at least seven days before its effectiveness. As a result of this practice, there generally is no deviation in commission rates schedules among Korean brokers and, in practice, securities companies currently collect brokerage commissions of up to 0.5% of the sales value for equity securities. A Securities Transaction Tax equal to 0.5% (in the case of transactions outside the Stock Exchange) or 0.35% (in the case of transactions on the Stock Exchange) of the sales proceeds is imposed upon a seller of Korean equity securities in most cases. In addition, a special agricultural and fishery tax equal to 0.15% of the sales proceeds is imposed in the case of transactions on the Stock Exchange. The Fund currently is not required to pay such taxes with respect to its sales on the Stock Exchange. It is, however, required to pay the Securities Transaction Tax with respect to any sales it makes outside of the Stock Exchange. COMMON STOCK Shares of the Fund, when issued against payment therefor, will be fully paid and non-assessable. All shares are equal as to earnings, assets and voting privileges. There are no conversion, pre-emptive or other subscription rights. In the event of liquidation, each share of Common Stock is entitled to its proportion of the 66 67 Fund's assets after debts and expenses. See "Risk Factors and Special Considerations -- Currency Conversion and Repatriation," above, for a description of possible restrictions on repatriation. There are no cumulative voting rights for the election of directors. Set forth below is information with respect to the Common Stock as of June 2, 1995:
AMOUNT HELD BY FUND AMOUNT OUTSTANDING AMOUNT AUTHORIZED OR FOR ITS ACCOUNT (EXCLUSIVE OF FUND HOLDINGS) - ----------------- ------------------- ---------------------------- 50,000,000 shares 0 29,544,406
The Fund has no present intention of offering additional shares, other than pursuant to the Offer, except that additional shares may be issued under the Plan. See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan." Other offerings of its shares, if made, will require approval of the Fund's Board of Directors. Any additional offering will be subject to the requirements of the 1940 Act that shares may not be sold at a price below the then-current net asset value (exclusive of underwriting discounts and commissions) except in connection with an offering to existing shareholders or with the consent of a majority of the Fund's outstanding shares. SPECIAL VOTING PROVISIONS The Fund has provisions in its Articles of Incorporation and By-Laws that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund, to cause it to engage in certain transactions or to modify its structure, such as by turning it into an open-end investment company. The Board of Directors is divided into three classes. At the annual meeting of shareholders each year, the term of one class will expire and directors will be elected to serve in that class for terms of three years. This provision could delay for up to two years the replacement of a majority of the Board of Directors. No director may be removed without cause by shareholders of the Fund. The vote of the holders of two-thirds of the shares of the Fund is required to authorize any of the following transactions: (i) merger or consolidation of the Fund with or into any other corporation, or the sale of substantially all of the Fund's assets to any other corporation; (ii) the dissolution of the Fund; (iii) any shareholder proposal as to specified investment decisions made or to be made with respect to the Fund's assets; and (iv) any amendment to the Fund's Articles of Incorporation to make the Fund's Common Stock a "redeemable security" (i.e., to cause the Fund to become an open-end investment company). Reference is made to the Articles of Incorporation and By-Laws of the Fund, on file with the Commission, for the full text of these provisions. See "Further Information." These provisions could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The provisions in the Articles of Incorporation were approved by the Fund's shareholders at the Fund's annual meeting in 1988. The Board of Directors has determined that the foregoing voting requirements, which are generally greater than the minimum requirements under Maryland law and the 1940 Act, are in the best interests of shareholders generally, and that the advantages obtained from better assuring stability and continuity in corporate leadership outweigh any possible disadvantages of the provisions. DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR State Street Bank and Trust Company, P.O. Box 8200, Boston, Massachusetts 02206-8200, is the Fund's dividend paying agent, transfer agent and registrar for the Fund's Common Stock. 67 68 CUSTODIAN Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, is Custodian for the Fund. The Fund's portfolio securities, when invested in securities of Korean issuers and other Won-denominated securities, and cash and cash equivalents, when held in Korea, are held at the Seoul branch of Citibank, N.A., acting as Subcustodian and one of the Fund's standing proxies in Korea. OFFICIAL DOCUMENTS All of the documents, except Korean company annual reports, referred to herein as the source of statistical information are public official documents of the Republic of Korea, its Ministries, the Bank of Korea, the KSEC or the Stock Exchange. EXPERTS The financial statements and financial highlights of the Fund as of December 31, 1994 and for the six months then ended and as of June 30, 1994 and for the year then ended, included in this Prospectus have been included herein in reliance on the report of Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109, independent accountants, given on the authority of that firm as experts in accounting and auditing. VALIDITY OF THE SHARES The validity of the Shares offered hereby will be passed on for the Fund by Debevoise & Plimpton, New York, New York and for the Dealer Manager by Sullivan & Cromwell, New York, New York. Matters of Korean law will be passed on for the Fund and for the Dealer Manager by Shin & Kim, Seoul, Korea. FURTHER INFORMATION Further information concerning the Fund and the Fund's Common Stock may be found in the Registration Statement of which this Prospectus constitutes a part, which is on file with the Commission. 68 69 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 statements of assets and liabilities of The Korea Fund, Inc. including the investment portfolios, as of December 31, 1994 and June 30, 1994, and the related statements of operations for the six months ended December 31, 1994 and for the year ended June 30, 1994, the statements of changes in net assets for the six months ended December 31, 1994 and for each of the two years in the period ended June 30, 1994, and the financial highlights for the six months ended December 31, 1994 and for each of the five years in the period ended June 30, 1994. 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 December 31, 1994 and June 30, 1994 by correspondence with the custodian. 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 December 31, 1994 and June 30, 1994, the results of its operations for the six months ended December 31, 1994 and for the year ended June 30, 1994, the changes in its net assets for the six months ended December 31, 1994 and for each of the two years in the period ended June 30, 1994, and the financial highlights for the six months ended December 31, 1994 and for each of the five years in the period ended June 30, 1994 in conformity with generally accepted accounting principles. As explained in Note A, the financial statements at December 31, 1994 include securities valued at $52,087,740 (8.5% of net assets) and equity securities valued at a premium of $26,656,775 (4.4% of net assets) over local stock exchange prices; the financial statements at June 30, 1994 include convertible debt securities valued at $35,362,426 (6.4% of net assets) and equity securities valued at a premium of $36,466,846 (6.6% of net assets) over local stock exchange prices; all whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values or other market factors, respectively. We have reviewed the procedures used by the Board of Directors in arriving at their estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the difference could be material. Boston, Massachusetts COOPERS & LYBRAND L.L.P. February 14, 1995 F-1 70 THE KOREA FUND, INC. INVESTMENT PORTFOLIO AS OF DECEMBER 31, 1994
PRINCIPAL MARKET AMOUNT(E) VALUE($) --------------- ------------ COMMERCIAL PAPER 0.2% CIT Group Holdings Inc., 1/3/95 (Cost $1,450,512)............ US$1,451,000 1,450,512 ------------ CONVERTIBLE BONDS 6.8% CONSUMER DISCRETIONARY 0.9% APPAREL & SHOES Shinwon, 6%, 12/31/96 (Major apparel manufacturer)(c)..... 2,000,000,000 5,461,626 ------------ CONSUMER STAPLES 0.8% FOOD & BEVERAGE 0.7% Crown Confectionery Co., 3%, 12/31/97 (Major producer of snacks)(c).............................................. 800,000,000 1,417,530 Haitai Confectionery Co., 1%, 6/30/98 (Major producer of snacks)(c).............................................. 2,000,000,000 2,643,055 ------------ 4,060,585 ------------ TEXTILES 0.1% Kolon Industries, Inc., 0.25%, 12/31/04 (Leading manufacturer of nylon, polyester yarn and fabrics)...... US$2,000,000 890,000 ------------ HEALTH 1.3% PHARMACEUTICALS 1.3% Korean Green Cross Corp., 1%, 12/31/97 (Pharmaceutical company)(c)............................................. 3,000,000,000 4,569,081 Kukje Corp. #40, 12%, 12/31/97 (Pharmaceutical company)(c)............................................. 2,400,000,000 2,541,216 Yuhan Corporation, 5.5%, 12/31/97 (Pharmaceutical company)(c)............................................. 400,000,000 532,395 ------------ 7,642,692 ------------ DURABLES 0.4% TIRES Kumho Co., 4%, 12/31/97 (Korea's largest tire manufacturer)(c)........................................ 2,000,000,000 2,317,361 ------------ MANUFACTURING 1.8% CONTAINERS & PAPER Hansol Paper Manufacturing Co., Ltd., 3%, 12/31/99 (Paper manufacturer)(c)........................................ 4,000,000,000 4,584,681 Hansol Paper Manufacturing Co., Ltd., 1%, 12/31/99(c)..... 2,500,000,000 2,865,426 Sepong, 7%, 12/31/96 (Paper manufacturer)(c).............. 1,000,000,000 3,783,756 ------------ 11,233,863 ------------ TECHNOLOGY 0.2% ELECTRIC COMPONENTS/DISTRIBUTORS Anam Electronics, 5.5% 12/31/96 (Major consumer electronics company)(c)................................. 500,000,000 668,412 Anam Electronics, 6%, 12/31/96 (c)........................ 250,000,000 210,409 Samsung Electromechanics Co., Ltd., 0.25% 12/31/00 (Major electronics parts company).............................. CHF 500,000 270,992 ------------ 1,149,813 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-2 71
PRINCIPAL MARKET AMOUNT(E) VALUE($) --------------- ------------ ENERGY 0.8% OIL & GAS PRODUCTION Yukong, Ltd., 1%, 12/31/98 (Korea's largest oil refiner)(c)............................................. 3,000,000,000 3,839,016 Yukong, Ltd., 2%, 12/31/97(c)............................. 2,000,000,000 1,016,720 ------------ 4,855,736 ------------ METALS AND MINERALS 0.3% STEEL & METALS Kangwon Industry, 6%, 6/30/97 (Steel company)(c).......... 1,000,000,000 724,120 Sammi Steel, 4%, 12/31/97 (Specialty steel company)(c).... 500,000,000 963,614 ------------ 1,687,734 ------------ CONSTRUCTION 0.3% MISCELLANEOUS Sungwon Construction, 5%, 12/31/97 (Construction company)(c)............................................. 1,000,000,000 1,747,057 ------------ Total Convertible Bonds (Cost $38,948,910).............. 41,046,467 ------------
SHARES --------------- PREFERRED STOCKS 2.7% CONSUMER STAPLES 0.3% ALCOHOL & TOBACCO Oriental Brewery Co., Ltd. (Korea's largest brewery)...... 1,110 14,339 ------------ FOOD & BEVERAGE Cheil Food and Chemical Co., Ltd. (Korea's largest sugar refiner and major integrated food processor)............ 38,690 1,161,288 Haitai Confectionery Co................................... 52,280 536,307 ------------ 1,697,595 ------------ FINANCIAL 0.7% INSURANCE 0.2% Samsung Fire and Marine Insurance (Insurance company)(d)............................................. 6,175 998,511 ------------ OTHER FINANCIAL COMPANIES 0.5% Boo Kook Securities (Securities company).................. 100,000 1,342,452 Boram Securities (Securities company)..................... 100,000 1,228,470 Dongsuh Securities (Securities company)................... 50,000 633,232 Lucky Securities (Securities company)..................... 3,200 53,090 ------------ 3,257,244 ------------ DURABLES 1.1% AUTOMOBILES Hyundai Motor Services Co., Ltd. (Auto parts and services)............................................... 96,779 2,978,381 Hyundai Motor Services Co., Ltd. (New)(b)................. 9,677 297,810 Kumho Co. ................................................ 388,000 3,194,022 ------------ 6,470,213 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-3 72
MARKET SHARES VALUE($) --------------- ------------ MANUFACTURING 0.0% CHEMICALS Oriental Chemical Industries Co., Ltd. (Manufacturer of specialty chemicals).................................... 19,375 368,066 ------------ TECHNOLOGY 0.5% ELECTRONIC COMPONENTS/DISTRIBUTORS Samsung Electron Devices (Korea's largest manufacturer of CRT and picture tubes).................................. 8,198 358,195 Samsung Electronics Co., Ltd. (Major electronics company)(d)............................................. 30,920 2,543,930 ------------ 2,902,125 ------------ ENERGY 0.0% OIL COMPANIES Ssangyong Oil Refining Co. (Major oil refiner)............ 1,174 35,089 ------------ CONSTRUCTION 0.1% HOMEBUILDING Kumho Construction and Engineering (Engineering and construction company)................................... 45,540 392,188 ------------ Total Preferred Stocks (Cost $16,756,797)............... 16,135,370 ------------ COMMON STOCKS 90.3% CONSUMER DISCRETIONARY 5.2% APPAREL & SHOES 0.8% Ssang Bang Wool Co. (Leading underwear manufacturer)...... 93,345 4,716,902 ------------ DEPARTMENT & CHAIN STORES 4.4% Hwa Sung Industries (Department store).................... 165,730 10,494,554 Shinsegae (Major department store chain).................. 114,577 11,826,273 Taegu Department Store (Department store)................. 110,343 4,388,007 ------------ 26,708,834 ------------ CONSUMER STAPLES 6.2% ALCOHOL & TOBACCO 0.5% Oriental Brewery Co., Ltd................................. 114,991 2,898,076 ------------ FOOD & BEVERAGE 4.7% Cheil Food and Chemical Co., Ltd.......................... 282,098 18,685,063 Haitai Confectionery Co................................... 9,000 182,371 Lotte Chilsung Beverage Co. (Korea's largest producer of non-alcoholic beverages)................................ 25,000 4,527,609 Nhong Shim Co. (Manufacturer of instant noodles and snacks)................................................. 32,271 1,438,626 Tongyang Confectionery (Major producer of snacks)......... 70,531 2,974,522 Tongyang Confectionery (New)(b)........................... 16,927 718,154 ------------ 28,526,345 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-4 73
MARKET SHARES VALUE($) --------------- ------------ TEXTILES 1.0% Cheil Industries (Korea's largest woolen yarn and fabric manufacturer)........................................... 70,000 2,189,716 Cheil Industries (New)(b)................................. 9,739 303,419 Sam Yang Co., Ltd. (Korea's largest manufacturer of polyester staple fiber)................................. 30,000 1,253,799 Taekwang Industrial Co., Ltd. (Major producer of acrylic fiber).................................................. 3,040 1,828,774 Tongyang Nylon (Korea's largest producer of nylon filament yarn)................................................... 16,500 585,106 ------------ 6,160,814 ------------ HEALTH 3.0% PHARMACEUTICALS Chong Kun Dang Co., Ltd. (Pharmaceutical company)......... 69,173 3,898,428 Daewoong Pharmaceutical Co. (Pharmaceutical company)...... 20,000 1,415,907 Yuhan Corporation......................................... 137,548 12,716,570 ------------ 18,030,905 ------------ COMMUNICATIONS 11.9% CELLULAR TELEPHONE Korea Mobile Telecom (Mobile telecommunication company)(d)............................................. 100,702 71,776,957 ------------ FINANCIAL 12.4% BANKS 5.6% Cheju Bank (Regional bank)................................ 140,180 2,378,941 Cheju Bank (New)(b)(c).................................... 99,848 1,694,482 Hanil Bank (Major commercial bank)........................ 200,000 2,608,916 Hanil Bank (New)(b)....................................... 42,929 538,244 Korea Exchange Bank (Major commercial bank)............... 60,000 813,070 Korea First Bank (Major commercial bank).................. 36,000 501,520 Korea Long Term Credit Bank (Major commercial bank)....... 524,725 16,281,361 Korea Long Term Credit Bank (New)(b)...................... 112,696 3,411,138 Shin Han Bank (Major commercial bank)..................... 242,000 5,976,444 ------------ 34,204,116 ------------ INSURANCE 4.9% Daehan Fire and Marine Insurance (Insurance company)...... 63,380 2,030,793 Daehan Fire and Marine Insurance (New)(b)(c).............. 21,996 704,786 Hyundai Fire and Marine Insurance (Insurance company)..... 68,000 3,522,290 Hyundai Fire and Marine Insurance (New)(b)(c)............. 26,656 1,380,738 Lucky Insurance (Insurance company)....................... 49,912 2,654,894 Samsung Fire and Marine Insurance (d)..................... 67,867 19,081,147 ------------ 29,374,648 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-5 74
MARKET SHARES VALUE($) --------------- ------------ OTHER FINANCIAL COMPANIES 1.9% Boo Kook Securities....................................... 2,000 39,007 Boo Kook Securities (New)(b)(c)........................... 14,834 289,316 Dong Ah Securities (Securities company)................... 188,752 3,179,333 Hanyang Securities (Securities company)................... 120,000 1,854,103 Hanyang Securities (New)(b)(c)............................ 17,191 265,616 Hyundai Securities (Securities company)................... 40,800 1,085,106 Samsung Securities (Securities company)................... 8,510 366,439 Shinyoung Securities (Securities company)................. 40,000 1,200,608 Ssangyong Investments and Securities (Securities company)................................................ 123,600 3,240,274 Ssangyong Investments and Securities (New)(b)............. 12,373 296,162 ------------ 11,815,964 ------------ SERVICE INDUSTRIES 2.3% MISCELLANEOUS COMMERCIAL SERVICES Samsung Co., Ltd. (Trading company)....................... 227,863 9,032,563 Samsung Co., Ltd. (New)(b)................................ 22,179 862,329 Sunkyong Ltd. (Trading company)........................... 153,000 3,875,380 ------------ 13,770,272 ------------ DURABLES 10.3% AUTOMOBILES 9.7% Hankook Tire Manufacturer Co., Ltd. (Major tire manufacturer)........................................... 169,216 16,180,101 Hyundai Motor Co., Ltd. (Korea's largest auto manufacturer)........................................... 116,209 5,931,133 Hyundai Motor Services Co., Ltd........................... 332,545 16,762,020 Hyundai Motor Services Co., Ltd. (New)(b)(c).............. 91,228 4,598,372 Mando Machinery Co. (Major auto parts manufacturer)....... 113,341 7,535,971 Samlip Industries (Auto parts manufacturer)............... 35,000 1,945,922 Yoosung Enterprise (Leading manufacturer of engine parts).................................................. 90,000 5,596,505 ------------ 58,550,024 ------------ LEASING COMPANIES 0.6% Korea Development Leasing Co. (Largest leasing company in Korea).................................................. 93,000 4,004,559 ------------ MANUFACTURING 6.5% CHEMICALS 2.1% Korea Chemical Co. (Paint company)........................ 37,540 4,659,220 Lucky, Ltd. (Korea's largest integrated chemical company)................................................ 217,056 6,322,553 Lucky, Ltd. (New)(b)...................................... 12,797 363,035 Oriental Chemical Industries Co., Ltd..................... 44,322 1,599,768 Oriental Chemical Industries Co., Ltd. (New)(b)........... 3,078 109,149 ------------ 13,053,725 ------------ CONTAINERS & PAPER 1.9% Hansol Paper Manufacturing Co., Ltd....................... 177,438 9,550,551 Hansol Paper Manufacturing Co., Ltd. (New)(b)............. 33,274 1,744,504 ------------ 11,295,055 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-6 75
MARKET SHARES VALUE($) --------------- ------------ DIVERSIFIED MANUFACTURING 1.7% Hyundai Precision Industry Co. (Leading transport container manufacturer and machinery producer).......... 22,579 689,151 Samsung Heavy Industries Co., Ltd. (Machinery manufacturer)........................................... 194,890 8,095,735 Samsung Heavy Industries Co., Ltd. (New)(b)............... 35,349 1,432,584 ------------ 10,217,470 ------------ ELECTRICAL PRODUCTS 0.8% Kyungwon Century Co., Ltd. (Major manufacturer of heating and cooling equipment).................................. 77,000 3,257,092 Kyungwon Century Co., Ltd. (New)(b)....................... 37,086 1,362,074 ------------ 4,619,166 ------------ MISCELLANEOUS 0.0% Goldstar Industrial Systems Co. (New)(b).................. 1,030 43,699 ------------ TECHNOLOGY 16.4% ELECTRONIC COMPONENTS/DISTRIBUTORS 15.9% Goldstar Co. (GDR) (Major electronics manufacturer)....... 109,643 1,672,056 Samsung Electromechanics Co., Ltd......................... 149,751 7,491,343 Samsung Electromechanics Co., Ltd. (New)(b)(c)............ 65,346 3,268,955 Samsung Electromechanics Co., Ltd. (New)(b)............... 17,322 844,601 Samsung Electron Devices.................................. 78,471 6,260,984 Samsung Electron Devices Co., Ltd. (New)(b)............... 9,896 751,976 Samsung Electronics Co., Ltd.(d).......................... 491,655 72,621,229 Samsung Electronics Co., Ltd. (New)(b)(d)................. 21,652 3,154,156 ------------ 96,065,300 ------------ ELECTRONIC DATA PROCESSING 0.3% Trigem Computer Inc. (Major personal computer manufacturer)........................................... 50,000 1,899,696 ------------ MISCELLANEOUS 0.2% Youngchang Akki Co., Ltd. (Korea's largest and the world's second largest manufacturer of pianos).................. 19,840 1,206,079 ------------ ENERGY 2.3% OIL & GAS PRODUCTION Samchully (Producer and distributor of anthracite and gas).................................................... 24,940 1,936,198 Ssangyong Oil Refining Co................................. 131,757 4,522,055 Yukong, Ltd............................................... 151,389 7,017,271 Yukong, Ltd. (New)(b)..................................... 9,110 415,350 ------------ 13,890,874 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-7 76
MARKET SHARES VALUE($) --------------- ------------
METALS AND MINERALS 3.3% STEEL & METALS Dongkuk Steel Mill Co. (Steel company).................... 32,000 952,381 Dongkuk Steel Mill Co. (New)(b)........................... 22,940 656,591 Hankook Core Co. (Steel company).......................... 54,732 1,524,954 Inchon Iron & Steel (Steel company)....................... 165,000 7,209,347 Kia Steel Co., Ltd. (Specialty steel company)............. 249,440 3,348,612 Pohang Iron & Steel Co. (Korea's largest steel producer)(d)............................................ 61,000 6,200,585 ------------ 19,892,470 ------------ CONSTRUCTION 8.5% BUILDING MATERIALS 6.1% Hanil Cement Manufacturer (Cement manufacturing company)................................................ 24,000 1,793,313 Keum Kang Co., Ltd. (Construction company and manufacturer of building materials).................................. 244,337 21,970,526 Keum Kang Development Co.................................. 58,010 1,395,884 Ssangyong Cement Industrial Co., Ltd. (Major cement company)................................................ 197,307 7,546,443 Sung Shin Cement Co., Ltd. (Major cement company)......... 63,000 2,872,340 Tong Yang Cement Co., Ltd. (Major cement company)......... 34,000 1,248,734 Tong Yang Cement Co., Ltd. Warrants (expire 8/18/96)(f)... 200 145,000 ------------ 36,972,240 ------------ MISCELLANEOUS 2.4% Daeho Construction (Construction company)................. 91,913 3,724,944 Han Shin Construction (Construction company).............. 121,660 1,648,635 Han Shin Construction (New)(b)............................ 16,850 230,471 Kumho Construction and Engineering........................ 103,435 1,716,057 Lucky Development (New)(b)................................ 5,958 141,857 Samsung Construction Co. (Engineering and construction company)................................................ 21,388 820,740 Samsung Construction Co. (New)(b)......................... 8,228 299,067 Sungwon Construction...................................... 132,450 5,720,042 ------------ 14,301,813 ------------ TRANSPORTATION 0.8% AIRLINES 0.3% Korean Airlines Co., Ltd. (Airline)....................... 51,827 1,647,489 Korean Airlines Co., Ltd. (New)(b)........................ 6,565 199,544 ------------ 1,847,033 ------------ MARINE TRANSPORTATION 0.4% Korea Line Corp. (New) (Maritime transportation company)(b)............................................. 80,000 2,360,689 ------------ TRUCKING 0.1% Korea Express Co., Ltd. (General freight transport company)................................................ 13,670 657,877 Korea Express Co., Ltd. (New)(b).......................... 3,555 167,035 ------------ 824,912 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-8 77
MARKET SHARES VALUE($) --------------- ------------ UTILITIES 1.2% ELECTRIC UTILITIES 0.8% Korea Electric Power Co. (Electric Utility)............... 130,900 4,509,220 ------------ NATURAL GAS DISTRIBUTION 0.4% Daesung Industrial (Natural gas distributor).............. 37,600 2,523,810 ------------ Total Common Stocks (Cost $231,010,062)................. 546,061,667 ------------ TOTAL INVESTMENT PORTFOLIO 100.0% (Cost $288,166,281)(a)....... 604,694,016 ==========
(a) The cost for federal income tax purposes was $288,166,281. At December 31, 1994, net unrealized appreciation for all securities based on tax cost was $316,527,735. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over tax cost of $335,318,466 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over market value of $18,790,731. (b) New shares issued during 1994, eligible for a pro rata share of 1994 dividends (Note A). (c) Securities valued in good faith by the Valuation Committee of the Board of Directors. The cost of these securities at December 31, 1994 was $44,526,040 (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 December 31, 1994 was $20,962,878 (Note A). (e) Principal amount stated in Korean won unless otherwise noted. CHF Swiss Francs. (f) Non-income producing. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-9 78 THE KOREA FUND, INC. STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1994 ASSETS Investments, at market (identified cost $288,166,281)(Note A)..... $604,694,016 Cash: U.S. dollars.................................................... 582 Won at market (identified cost $9,695,806)(Note A).............. 9,734,575 Dividend and interest receivable.................................. 1,248,654 Other assets...................................................... 3,747 ------------ Total assets............................................ 615,681,574 LIABILITIES Payables: Subscription rights purchased (Note A).......................... $4,331,159 Dividend payable................................................ 295,404 Accrued management fee (Note C)................................. 507,852 Other accrued expenses (Note C)................................. 554,360 ---------- Total liabilities....................................... 5,688,775 ------------ Net assets, at market value....................................... $609,992,799 =========== NET ASSETS Net assets consist of: Accumulated net investment loss................................. $ (3,082,635) Accumulated net realized gain................................... 5,059,579 Net unrealized appreciation on: Investments.................................................. 316,527,735 Won.......................................................... 38,769 Won related transactions..................................... 3,122 Common stock.................................................... 295,404 Additional paid-in capital...................................... 291,150,825 ------------ Net assets, at market value....................................... $609,992,799 =========== NET ASSET VALUE per share ($609,992,799 / 29,540,356 shares of common stock issued and outstanding, 50,000,000 shares authorized, $.01 par value)..................................... $20.65
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-10 79 THE KOREA FUND, INC. STATEMENT OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 1994 INVESTMENT INCOME Income: Dividends (net of withholding taxes of $7,004) (Note A)......... $ 52,086 Interest (net of withholding taxes of $84,808) (Note A)......... 970,644 ----------- 1,022,730 Expenses: Management fee (Note C)......................................... $ 3,196,290 Directors' fees and expenses (Note C)........................... 82,451 Custodian fees.................................................. 587,538 Legal........................................................... 67,168 Services to shareholders........................................ 29,312 Reports to shareholders......................................... 57,136 Auditing........................................................ 43,925 Other........................................................... 41,545 4,105,365 ----------- ----------- Net investment loss............................................... (3,082,635) ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS Net realized gain during the period on: Investments.................................................. 5,413,557 Won related transactions..................................... 117,992 5,531,549 ----------- Net unrealized appreciation during the period on: Investments.................................................. 60,234,906 Won.......................................................... 9,042 Won related transactions..................................... 2,574 60,246,522 ----------- ----------- Net gain on investment transactions............................. 65,778,071 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $62,695,436 ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-11 80 THE KOREA FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1994 1994 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS Operations: Net investment loss........................................... $ (3,082,635) $ (749,702) Net realized gain from investment transactions................ 5,531,549 5,972,730 Net unrealized appreciation on investment transactions during the period................................................. 60,246,522 179,703,180 ------------ ------------ Net increase in net assets resulting from operations............ 62,695,436 184,926,208 ------------ ------------ Distributions to shareholders from: Net investment income ($.01 per share)........................ -- (325,166) ------------ ------------ Net realized gains from investment transactions ($.15 per share)..................................................... (4,359,655) -- ------------ ------------ Fund share transactions: Net proceeds of shares issued in connection with the Fund's fourth tranche offering, net of underwriting commissions of $5,750,000 and expenditures and offering costs of $1,618,000................................................. -- 107,631,989 ------------ ------------ Reinvestment of distributions................................. 1,718,388 106,509 ------------ ------------ INCREASE IN NET ASSETS.......................................... 60,054,169 292,339,540 Net assets at beginning of period............................... 549,938,630 257,599,090 ------------ ------------ NET ASSETS AT END OF PERIOD (including accumulated net investment loss of ($3,082,635) at December 31, 1994)......... $609,992,799 $549,938,630 =========== =========== OTHER INFORMATION INCREASE IN FUND SHARES Shares outstanding at beginning of period....................... 29,474,985 22,604,432 Shares issued in connection with the Fund's fourth tranche offering................................................... -- 6,865,671 Shares issued to shareholders in reinvestment of distributions.............................................. 65,371 4,882 ------------ ------------ Shares outstanding at end of period............................. 29,540,356 29,474,985 =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-12 81 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, SIX MONTHS ENDED --------------------------------------------- DECEMBER 31, 1994 1994 1993 1992 1991 1990 ----------------- ------ ------ ------- ------- ------- Net asset value, beginning of period........ $ 18.66 $11.40 $10.75 $ 10.27 $ 14.45 $ 16.84 ------- ------ ------ ------- ------- ------- Income from investment operations: (a) Net investment income (loss).............. (.10) (.03) .02 .08 .09 .04 Net realized and unrealized gain (loss) on investment transactions................. 2.24 7.13 .86 .78 (2.13) (1.99) ------- ------ ------ ------- ------- ------- Total from investment operations............ 2.14 7.10 .88 .86 (2.04) (1.95) ------- ------ ------ ------- ------- ------- Less distributions from: Net investment income..................... -- (.01) (.04) (.06) -- (.08) ------- ------ ------ ------- ------- ------- Net realized gains on investment transactions............................ (.15) -- (.20) (.34) (2.20) (1.88) ------- ------ ------ ------- ------- ------- Total distributions......................... (.15) (.01) (.24) (.40) (2.20) (1.96) ------- ------ ------ ------- ------- ------- Antidilution resulting from offering of fourth tranche (1994), third tranche (1990), and reinvestment of distributions for shares at market value................ -- .22 .01 .02 .06 1.55 ------- ------ ------ ------- ------- ------- Underwriting expenditures and offering costs..................................... -- (.05) -- -- -- (.03) ------- ------ ------ ------- ------- ------- Net asset value, end of period.............. $ 20.65 $18.66 $11.40 $ 10.75 $ 10.27 $ 14.45 ================== ====== ====== ======== ======== ======== Market value, end of period................. $ 22.75 $22.00 $15.00 $ 11.38 $ 14.13 $ 22.13 ================== ====== ====== ======== ======== ======== TOTAL RETURN Per share market value (%)................ 4.03* 46.74 34.54 (17.01) (23.57) (26.23) Per share net asset value (%)(b).......... 11.32* 63.77 8.20 7.87 (14.91) (9.52) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions).... 610 550 258 241 228 303 Ratio of operating expenses to average net assets (%).............................. 1.31** 1.37 1.52 1.52 1.47 1.44 Ratio of net investment income (loss) to average net assets (%).................. (.50)(c)* (.18) .15 .70 .83 .21 Portfolio turnover rate (%)............... 11.0** 14.3 14.3 18.2 19.2 17.9
- --------------- * Not annualized ** Annualized (a) Based on monthly average of shares outstanding during each period. (b) Total return based on per share net asset value reflects the effects of changes in net asset value on the performance of the Fund during each period, and assumes 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 value due to differences between the market price of the stock and the net asset value of the Fund during each period. (c) The ratio for the six months ended December 31, 1994 has not been annualized; the Fund believes an annualized ratio would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. F-13 82 THE KOREA FUND, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 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 policies described below are followed consistently by the Fund in the preparation of its financial statements in conformity with generally accepted accounting principles. 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 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 ($26,656,775) over the local share price ($149,719,740) for these securities valued by the Valuation Committee was approximately 4.4% of the Fund's net assets at December 31, 1994. Securities valued in good faith by the Valuation Committee amounted to $52,087,740 or 8.5% of the Fund's net assets at December 31, 1994. 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. 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. 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. 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. F-14 83 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 December 31, 1994 the exchange rate for Korean won was U.S. $.001266 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 discounts are accreted for both tax and financial reporting purposes. B. PURCHASES AND SALES OF SECURITIES For the six months ended December 31, 1994, purchases and sales of investment securities (excluding short-term investments) aggregated $37,361,128 and $33,589,971, respectively. C. RELATED PARTIES On October 13, 1994, the Fund's shareholders approved a new Investment Advisory, Management and Administration Agreement (the "Management Agreement") with Scudder, Stevens & Clark, Inc. (the "Manager"). 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, 1.00% 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. Under the Investment Advisory and Management Agreement (the "Agreement") between the Fund and the Manager which was in effect prior to October 14, 1994, the Fund agreed to pay the Manager a monthly fee equal to an annual rate of 1.15% of the first $50,000,000 of month-end net assets of the Fund, 1.10% of such net assets in excess of $50,000,000 up to and including $100,000,000, and 1.00% of the excess over $100,000,000. For the six months ended December 31, 1994, the fee pursuant to such agreements amounted to $3,196,290 which was equivalent to an annual effective rate of 1.02% of the Fund's average month-end net assets. On October 13, 1994, the Fund's shareholders approved a new Research and Advisory Agreement (the "Advisory Agreement") with Daewoo Capital Management Co., Ltd. (the "Korean Adviser"), whereby the Korean Adviser provides such investment advice, research and assistance as the Manager may from time to time reasonably request. 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 F-15 84 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. Under the Research and Advisory Agreement which was in effect prior to October 14, 1994, the Manager agreed to pay 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 in excess of $50,000,000 up to and including $100,000,000, and 0.25% of the excess over $100,000,000. For the six months ended December 31, 1994, brokerage commissions on investment transactions amounting to $51,198 were paid by the Fund to Daewoo Securities Co., Ltd., the parent company of the Korean Adviser. The Fund pays each Director not affiliated with the Manager or the Korean Adviser $4,500 annually plus specified amounts for attended board and committee meetings. Effective October 1, 1994, 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 six months ended December 31, 1994, Directors' fees and expenses amounted to $82,451. 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 Economy 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 December 1, 1994, total foreign investment was limited generally to 10% of each class of a company's outstanding shares. Effective December 1, 1994, the general limit was increased from 10% to 12%. A single foreign investor may only invest up to 3% of each class of outstanding shares. Pursuant to its license, however, the Fund may invest in shares representing 5% of each class in general. E. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (000 OMITTED)
NET INCREASE (DECREASE) NET GAIN (LOSS) IN NET ASSETS INVESTMENT NET INVESTMENT ON INVESTMENT RESULTING INCOME* INCOME (LOSS) TRANSACTIONS FROM OPERATIONS QUARTER ENDED -------------- --------------- ---------------- ---------------- - ------------------- PER PER PER PER FISCAL 1995 TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE - ------------------- ------ ----- ------- ----- -------- ----- -------- ----- September 30, 1994 $ 625 $.02 $(1,311) $(.04) $ 87,443 $2.97 $ 86,131 $2.93 December 31, 1994 398 .01 (1,772) (.06) (21,665) (.73) (23,436) (.79) ------ ----- ------- ----- -------- ----- -------- ----- Totals $1,023 $.03 $(3,083) $(.10) $ 65,778 $2.24 $ 62,695 $2.14 ====== ==== ======= ===== ======== ===== ======== =====
F-16 85
PER PER PER PER FISCAL 1994 TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE - ------------------- ------ ----- ------- ----- -------- ----- -------- ----- September 30, 1993 $ 52 $ -- $ (878) $(.04) $ 2,205 $ .09 $ 1,327 $ .05 December 31, 1993 341 .02 (995) (.04) 124,881 4.82 123,886 4.78 March 31, 1994 4,432 .17 2,556 .10 10,248 .40 12,804 .50 June 30, 1994 231 -- (1,433) (.05) 48,342 1.82 46,909 1.77 ------ ----- ------- ----- -------- ----- -------- ----- Totals $5,056 $.19 $ (750) $(.03) $185,676 $7.13 $184,926 $7.10 ====== ==== ======= ===== ======== ===== ======== =====
- --------------- * Net of Korean taxes withheld. F-17 86 THE KOREA FUND, INC. INVESTMENT PORTFOLIO AS OF JUNE 30, 1994
PRINCIPAL MARKET AMOUNT(E) VALUE($) --------------- ------------ COMMERCIAL PAPER 0.2% Cargill Inc., 4.35%, 7/1/94 (Cost $820,000).................. US$820,000 820,000 ------------ CONVERTIBLE BONDS 6.9% CONSUMER DISCRETIONARY 0.6% APPAREL & SHOES Shinwon, 6%, 12/31/96 (Major apparel manufacturer)(c)..... 2,000,000,000 3,406,331 ------------ CONSUMER STAPLES 0.4% FOOD & BEVERAGE 0.2% Crown Confectionery Co., 3%, 12/31/97 (Major producer of snacks)(c).............................................. 800,000,000 993,172 ------------ TEXTILES 0.2% Kolon Industries, Inc., 0.25%, 12/31/04 (Leading manufacturer of nylon, polyester, yarn and fabrics)..... US$2,000,000 1,200,000 ------------
HEALTH 1.0% PHARMACEUTICALS Choongwae Pharmaceutical Corp., 3%, 12/31/97 (Leading maker of prescription and over-the-counter drugs)(c).... 1,000,000,000 1,231,636 Korean Green Cross Corp., 1%, 12/31/97 (Pharmaceutical company)(c)............................................. 3,000,000,000 3,708,359 Yuhan Corporation, 5.5%, 12/31/97 (Pharmaceutical company)(c)............................................. 400,000,000 496,586 ------------ 5,436,581 ------------ DURABLES 0.5% AUTOMOBILES Kumho Co., 4%, 12/31/97 (Korea's largest tire manufacturer)(c)........................................ 2,000,000,000 2,482,930 ------------ MANUFACTURING 2.0% CONTAINERS & PAPER Hansol Paper Manufacturing Co., Ltd., 3%, 12/31/99 (Paper manufacturer)(c)........................................ 5,000,000,000 6,391,434 Hansol Paper Manufacturing Co., Ltd., 1%, 12/31/99(c)..... 2,500,000,000 3,128,181 Sepoong, 7%, 12/31/96 (Paper manufacturer)(c)............. 1,000,000,000 1,401,366 ------------ 10,920,981 ------------ TECHNOLOGY 0.3% ELECTRONIC COMPONENTS/DISTRIBUTORS Anam Electronics, 5.5%, 12/31/96 (Major consumer electronics company)(c)................................. 500,000,000 659,901 Anam Electronics, 6%, 12/31/96 (c)........................ 250,000,000 338,351 Samsung Electromechanics Co., Ltd., 0.25%, 12/31/00 (Major electronics parts company).............................. CHF 500,000 362,170 ------------ 1,360,422 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-18 87
PRINCIPAL MARKET AMOUNT(E) VALUE($) --------------- ------------ ENERGY 0.5% OIL & GAS PRODUCTION Yukong, Ltd., 2%, 12/31/97 (Korea's largest oil refinery)(c)............................................ 2,000,000,000 2,482,930 ------------ METALS AND MINERALS 0.6% STEEL & METALS Hangkook Core Co., 3%, 12/31/97 (Korea's largest steel maker)(c)............................................... 850,000,000 1,055,245 Kangwon Industry, 6%, 6/30/97 (Steel company)(c).......... 1,000,000,000 1,241,465 Sammi Steel, 4%, 12/31/97 (Specialty steel company)(c).... 1,000,000,000 1,254,624 ------------ 3,551,334 ------------ CONSTRUCTION 1.0% HOMEBUILDING 0.3% Daeho Construction, 6%, 11/18/96 (Construction company)(c)............................................. 1,040,000,000 1,365,148 ------------ MISCELLANEOUS 0.7% Sungwon Construction, 4%, 12/31/97 (Construction company)(c)............................................. 2,000,000,000 2,482,930 Sungwon Construction, 5%, 12/31/97(c)..................... 1,000,000,000 1,241,837 ------------ 3,724,767 ------------ TOTAL CONVERTIBLE BONDS (COST $37,599,269).............. 36,924,596 ------------
SHARES --------------- PREFERRED STOCKS 3.4% CONSUMER STAPLES 0.4% FOOD & BEVERAGE Cheil Food and Chemical Co., Ltd. (Korea's largest sugar refiner and major integrated food processor)............ 38,690 1,724,359 Haitai Confectionery Co. (Major producer of snacks)....... 39,280 599,806 ------------ 2,324,165 ------------ FINANCIAL 1.2% INSURANCE 0.3% Samsung Fire and Marine Insurance (Insurance company)(d)............................................. 6,175 1,650,116 ------------ OTHER FINANCIAL COMPANIES 0.9% Boo Kook Securities (Securities company).................. 102,000 1,988,082 Boram Securities (Securities company)..................... 100,000 1,700,807 Hanyang Securities (Securities company)................... 70,000 1,155,804 ------------ 4,844,693 ------------ DURABLES 0.9% AUTOMOBILES Hyundai Motor Services Co., Ltd. (Auto parts and services)............................................... 96,779 4,938,072 ------------ MANUFACTURING 0.1% CHEMICALS Oriental Chemical Industries Co., Ltd. (Manufacturer of specialty chemicals).................................... 19,375 418,529 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-19 88
MARKET SHARES VALUE($) --------------- ------------ TECHNOLOGY 0.8% DIVERSE ELECTRONIC PRODUCTS 0.6% Samsung Electronics Co., Ltd. (Major electronics company)(d)............................................. 30,920 3,427,802 ------------ ELECTRONIC COMPONENTS/DISTRIBUTORS 0.2% Samsung Electron Devices (Korea's largest manufacturer of CRT and picture tubes).................................. 8,198 748,048 ------------
ENERGY 0.0% OIL COMPANIES Ssangyong Oil Refining Co. (Major oil refiner)............ 1,174 29,441 ------------ TOTAL PREFERRED STOCKS (COST $13,246,849)............... 18,380,866 ------------ COMMON STOCKS 89.5% CONSUMER DISCRETIONARY 4.8% APPAREL & SHOES 0.9% Ssang Bang Wool Co. (Leading underwear manufacturer)...... 133,445 5,003,152 ------------ DEPARTMENT & CHAIN STORES 3.9% Hwa Sung Industries (Department store).................... 165,730 7,077,731 Shinsegae (Major department store chain).................. 114,577 10,085,052 Taegu Department Store (Department store)................. 105,600 3,644,544 ------------ 20,807,327 ------------ CONSUMER STAPLES 6.9% ALCOHOL & TOBACCO 0.5% Oriental Brewery Co., Ltd. (Korea's largest brewer)....... 114,991 2,855,146 ------------ FOOD & BEVERAGE 4.5% Cheil Food and Chemical Co., Ltd.......................... 282,098 16,600,180 Haitai Confectionery Co................................... 2,000 35,506 Lotte Chilsung Beverage Co. (Korea's largest producer of non-alcoholic beverages)................................ 40,000 3,520,795 Nhong Shim Co. (Manufacturer of instant noodles and snacks)................................................. 24,032 1,020,353 Nhong Shim Co. (New)(b)................................... 8,239 349,812 Tongyang Confectionery (Major producer of snacks)......... 70,531 2,320,387 ------------ 23,847,033 ------------ TEXTILES 1.9% Cheil Industries (Korea's largest woolen yarn and fabric manufacturer)........................................... 70,000 2,650,528 Cheil Industries (New)(b)................................. 9,739 362,719 Choongnam Spinning Co., Ltd. (Korea's largest manufacturer of cotton yarn)......................................... 100,000 2,036,002 Sam Yang Co., Ltd. (Korea's largest manufacturer of polyester staple fiber)................................. 50,000 1,849,783 Sunkyong Industrial (Major producer of polyester products)............................................... 50,000 1,415,270 Taekwang Industrial Co., Ltd. (Major producer of acrylic fiber).................................................. 3,040 1,678,699 Tongyang Nylon (Korea's largest producer of nylon filament yarn)................................................... 16,500 456,797 ------------ 10,449,798 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-20 89
MARKET SHARES VALUE($) --------------- ------------ HEALTH 2.0% PHARMACEUTICALS Chong Kun Dang Co., Ltd. (Pharmaceutical company)......... 69,056 3,309,201 Il-Dong Pharmaceutical Co. (Pharmaceutical company)....... 50,027 1,447,088 Yuhan Corporation......................................... 137,548 5,669,266 ------------ 10,425,555 ------------ COMMUNICATIONS 11.1% CELLULAR TELEPHONE Korea Mobile Telecom (Korea's largest mobile telecommunication company)(d)........................... 100,702 59,578,579 ------------ FINANCIAL 13.4% BANKS 5.7% Cheju Bank (Regional bank)................................ 140,180 2,401,594 Hanil Bank (Major commercial bank)........................ 200,000 2,656,735 Korea First Bank (Major commercial bank).................. 120,000 1,772,812 Korea Long Term Credit Bank (Major commercial bank)....... 524,725 15,829,693 Korea Long Term Credit Bank (New)(b)...................... 112,696 3,217,887 Shin Han Bank (Major commercial bank)..................... 242,000 4,656,735 ------------ 30,535,456 ------------ INSURANCE 5.6% Daehan Fire and Marine Insurance (Insurance company)...... 43,380 1,642,570 Hyundai Fire and Marine Insurance (Insurance company)..... 70,000 3,884,544 Lucky Insurance (Insurance company)....................... 49,912 3,346,056 Samsung Fire and Marine Insurance (d)..................... 67,867 21,120,413 ------------ 29,993,583 ------------ OTHER FINANCIAL COMPANIES 2.1% Dong Ah Securities (Securities company)................... 188,752 3,397,770 Hanyang Securities (Securities company)................... 100,000 1,738,051 Hyundai Securities (Securities company)................... 40,800 1,170,056 Shinyoung Securities (Securities company)................. 40,000 1,157,045 Ssangyong Investments and Securities (Securities company)................................................ 123,600 3,559,926 ------------ 11,022,848 ------------ SERVICE INDUSTRIES 3.0% MISCELLANEOUS COMMERCIAL SERVICES Samsung Co., Ltd. (Trading company)....................... 227,863 10,664,724 Samsung Co., Ltd. (New)(b)................................ 22,179 1,038,049 Sunkyong Ltd. (Trading company)........................... 150,000 4,599,628 ------------ 16,302,401 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-21 90
MARKET SHARES VALUE($) --------------- ------------
DURABLES 10.5% AUTOMOBILES 9.6% Hankook Tire Manufacturer Co., Ltd. (Major tire manufacturer)........................................... 169,216 13,864,998 Hyundai Motor Co., Ltd. (Korea's largest auto manufacturer)........................................... 116,209 5,741,922 Hyundai Motor Services Co., Ltd........................... 332,545 19,568,756 Mando Machinery Co. (Major auto parts manufacturer)....... 113,341 5,670,568 Samlip Industries (Auto parts manufacturer)............... 35,000 1,581,626 Yoosung Enterprise (Leading manufacturer of engine parts).................................................. 90,000 4,882,682 ------------ 51,310,552 ------------ LEASING COMPANIES 0.7% Korea Development Leasing Co. (Largest leasing company in Korea).................................................. 93,000 3,636,872 ------------ TELECOMMUNICATIONS EQUIPMENT 0.2% Daeryung Industries, Inc. (Telecommunications equipment manufacturer)........................................... 37,000 1,272,377 ------------ MANUFACTURING 7.2% CHEMICAL 1.9% Korea Chemical Co. (Paint company)........................ 37,540 3,728,367 Lucky, Ltd. (Korea's largest integrated chemical company)................................................ 217,056 4,877,360 Oriental Chemical Industries Co., Ltd..................... 44,322 1,315,079 Oriental Chemical Industries Co., Ltd. (New)(b)........... 3,078 82,156 ------------ 10,002,962 ------------ CONTAINERS & PAPER 1.7% Hansol Paper Manufacturing Co., Ltd. ..................... 177,438 8,745,234 Shinpoong Paper Manufacturing Co., Ltd. (Paper Manufacturer)........................................... 8,500 521,291 ------------ 9,266,525 ------------ DIVERSIFIED MANUFACTURING 2.8% Hyundai Precision Industry Co. (Leading transport container manufacturer and machinery producer)(f)....... 22,579 636,305 Samsung Heavy Industries Co., Ltd. (Shipbuilding and machinery manufacturer)................................. 284,890 14,147,238 ------------ 14,783,543 ------------ ELECTRICAL PRODUCTS 0.6% Kyungwon Century Co., Ltd. (Major manufacturer of heating and cooling equipment).................................. 97,000 3,359,777 ------------ WHOLESALE DISTRIBUTORS 0.2% Haein (Distributor of heavy construction machinery)....... 21,631 1,063,423 ------------ TECHNOLOGY 15.5% COMPUTER SOFTWARE 0.2% Trigem Computer Inc. (Major P.C. manufacturer)............ 50,000 1,173,184 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-22 91
MARKET SHARES VALUE($) --------------- ------------
ELECTRONIC COMPONENTS/DISTRIBUTORS 14.9% Samsung Electromechanics Co., Ltd......................... 149,751 7,752,473 Samsung Electromechanics Co., Ltd. (New)(b)............... 17,322 832,230 Samsung Electron Devices.................................. 78,471 8,280,615 Samsung Electronics Co., Ltd. (Major electronics company)(d)(f).......................................... 491,655 62,407,530 ------------ 79,272,848 ------------ MISCELLANEOUS 0.4% Youngchang Akki Co., Ltd. (Korea's largest and the world's second largest manufacturer of pianos).................. 50,000 2,222,222 ------------ ENERGY 2.2% OIL & GAS PRODUCTION Samchully (Producer and distributor of anthracite and gas).................................................... 24,940 1,257,063 Ssangyong Oil Refining Co................................. 131,757 3,418,648 Yukong, Ltd............................................... 151,389 6,427,689 Yukong, Ltd. (New)(b)..................................... 9,110 363,043 ------------ 11,466,443 ------------ METALS AND MINERALS 3.3% STEEL & METALS Dongkuk Steel Mill Co. (Steel company).................... 32,000 1,128,243 Inchon Iron & Steel (Steel company)....................... 165,000 7,108,007 Kia Steel Co. Ltd. (Specialty steel manufacturer)......... 226,440 2,839,285 Pohang Iron & Steel Co. (Korea's leading steel producer)(d)............................................ 61,000 6,496,443 ------------ 17,571,978 ------------ CONSTRUCTION 7.5% BUILDING MATERIALS 6.5% Hanil Cement Manufacturer (Cement manufacturing company)................................................ 24,000 1,480,819 Keum Kang Co. Ltd. (Construction company and manufacturer of building materials).................................. 244,337 21,233,507 Keum Kang Development Co.................................. 58,010 1,080,261 Ssangyong Cement Industrial Co., Ltd. (Major cement company)................................................ 197,307 6,368,693 Sung Shin Cement Co., Ltd. (Major cement company)......... 63,000 2,737,430 Tong Yang Cement (Warrants expire 8/18/96)(f)............. 200 575,000 Tong Yang Cement Co., Ltd. (Major cement company)......... 34,000 1,321,167 ------------ 34,796,877 ------------ HOMEBUILDING 0.2% Kumho Construction and Engineering (Engineering and construction company)................................... 70,400 1,075,009 ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-23 92
MARKET SHARES VALUE($) --------------- ------------ MISCELLANEOUS 0.8% Han Shin Construction (Construction company).............. 121,660 1,525,470 Han Shin Construction (New)(b)............................ 16,850 188,268 Lucky Development (Major real estate developer and construction company)................................... 64,032 1,558,072 Samsung Construction Co. (Engineering and construction company)................................................ 21,388 894,818 ------------ 4,166,628 ------------ TRANSPORTATION 0.8% AIRLINES 0.3% Korean Airlines Co., Ltd. (Airline)....................... 51,827 1,499,155 ------------ MARINE TRANSPORTATION 0.4% Korea Line Corp. (New)(b) (Maritime transportation company)................................................ 80,000 2,055,866 ------------ TRUCKING 0.1% Korea Express Co., Ltd. (General freight transport company)................................................ 13,670 633,012 ------------ UTILITIES 1.3% ELECTRIC UTILITIES 1.0% Korea Electric Power Co. (Electric Utility)(f)............ 160,900 5,353,346 ------------ NATURAL GAS DISTRIBUTION 0.3% Daesung Industrial (Natural gas distributor).............. 37,600 1,750,466 ------------ TOTAL COMMON STOCKS (Cost $226,720,458)................. 478,553,943 ------------ TOTAL INVESTMENT PORTFOLIO 100.0% (Cost $278,386,576)(a)....... 534,679,405 ==========
(a) The cost for federal income tax purposes was $278,386,576. At June 30, 1994, net unrealized appreciation for all securities based on tax cost was $256,292,829. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over tax cost of $269,207,574 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over market value of $12,914,745. (b) New shares issued during 1994, eligible for a pro rata share of 1994 dividends (Note A). (c) Convertible debt securities valued in good faith by the Valuation Committee of the Board of Directors. The cost of these securities at June 30, 1994 was $35,234,045 (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, 1994 was $19,326,686 (Note A). (e) Principal amount stated in Korean Won unless otherwise noted. CHF Swiss Francs. (f) Non-income producing. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-24 93 THE KOREA FUND, INC. STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1994 ASSETS Investments, at market (identified cost $278,386,576) (Note A)..... $534,679,405 Cash: U.S. dollars..................................................... 594 Won at market (identified cost $16,292,109) (Note A)............. 16,321,836 Dividend and interest receivable................................... 520,944 Other assets....................................................... 3,747 ------------ Total assets............................................. 551,526,526 LIABILITIES Payables: Subscription rights purchased (Note A)........................... $726,909 Accrued management fee (Note C).................................. 468,789 Other accrued expenses (Note C).................................. 392,198 -------- Total liabilities........................................ 1,587,896 ------------ Net assets, at market value........................................ $549,938,630 =========== NET ASSETS Net assets consist of: Accumulated net realized gain (Note E)........................... $ 3,887,685 Net unrealized appreciation on: Investments................................................... 256,292,829 Won........................................................... 29,727 Won related transactions...................................... 548 Common stock..................................................... 294,750 Additional paid-in capital (Note E).............................. 289,433,091 ------------ Net assets, at market value........................................ $549,938,630 =========== Net asset value per share ($549,938,630 / 29,474,985 shares of common stock issued and outstanding, 50,000,000 shares authorized, $.01 par value).................................................. $18.66
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-25 94 THE KOREA FUND, INC. STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 1994 INVESTMENT INCOME Income: Dividends (net of withholding taxes of $813,313) (Note A)....................................................... $ 4,083,467 Interest (net of withholding taxes of $61,054) (Note A).... 972,177 ------------ 5,055,644 Expenses: Management fee (Note C).................................... $ 4,507,935 Directors' fees and expenses (Note C)...................... 113,882 Custodian fees............................................. 816,802 Legal...................................................... 69,438 Services to shareholders................................... 52,665 Reports to shareholders.................................... 106,554 Auditing................................................... 76,589 Other...................................................... 61,481 5,805,346 ------------ ------------ Net investment loss........................................... (749,702) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS Net realized gain (loss) during the period on: Investments................................................ 6,028,966 Won related transactions................................... (56,236) 5,972,730 ------------ Net unrealized appreciation during the period on: Investments................................................ 179,668,926 Won........................................................ 31,575 Won related transactions................................... 2,679 179,703,180 ------------ ------------ Net gain on investment transactions........................... 185,675,910 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $184,926,208 ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-26 95 THE KOREA FUND, INC. STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED JUNE 30, ----------------------------- 1994 1993 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS Operations: Net investment income (loss).................................. $ (749,702) $ 351,525 Net realized gain (loss) from investment transactions......... 5,972,730 (1,475,139) Net unrealized appreciation on investment transactions during the period................................................. 179,703,180 20,762,568 ------------ ------------ Net increase in net assets resulting from operations............ 184,926,208 19,638,954 ------------ ------------ Distributions to shareholders from: Net investment income ($.01 and $.04 per share, respectively).............................................. (325,166) (913,967) ------------ ------------ Net realized gains from investment transactions ($.20 per share)..................................................... -- (4,455,588) ------------ ------------ Fund share transactions: Net proceeds of shares issued in connection with the Fund's fourth tranche offering, net of underwriting commissions of $5,750,000 and expenditures and offering costs of $1,618,000................................................. 107,631,989 -- ------------ ------------ Reinvestment of distributions................................. 106,509 1,874,357 ------------ ------------ INCREASE IN NET ASSETS.......................................... 292,339,540 16,143,756 Net assets at beginning of period............................... 257,599,090 241,455,334 ------------ ------------ NET ASSETS AT END OF PERIOD (including undistributed net investment income of $1,858,971 at June 30, 1993)............. $549,938,630 $257,599,090 =========== =========== OTHER INFORMATION INCREASE IN FUND SHARES Shares outstanding at beginning of period....................... 22,604,432 22,450,639 Shares issued in connection with the Fund's fourth tranche offering................................................... 6,865,671 -- Shares issued to shareholders in reinvestment of distributions.............................................. 4,882 153,793 ------------ ------------ Shares outstanding at end of period............................. 29,474,985 22,604,432 =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. F-27 96 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, ------------------------------------------------- 1994 1993 1992 1991 1990 ------ ------ ------- ------- ------- Net asset value, beginning of period.................... $11.40 $10.75 $ 10.27 $ 14.45 $ 16.84 ------ ------ ------- ------- ------- Income from investment operations: (a) Net investment income (loss).......................... (.03) .02 .08 .09 .04 Net realized and unrealized gain (loss) on investment transactions........................................ 7.13 .86 .78 (2.13) (1.99) ------ ------ ------- ------- ------- Total from investment operations........................ 7.10 .88 .86 (2.04) (1.95) ------ ------ ------- ------- ------- Less distributions from: Net investment income................................. (.01) (.04) (.06) -- (.08) ------ ------ ------- ------- ------- Net realized gains on investment transactions......... -- (.20) (.34) (2.20) (1.88) ------ ------ ------- ------- ------- Total distributions..................................... (.01) (.24) (.40) (2.20) (1.96) ------ ------ ------- ------- ------- Antidilution resulting from offering of fourth tranche (1994), third tranche (1990), and reinvestment of distributions for shares at market value.............. .22 .01 .02 .06 1.55 ------ ------ ------- ------- ------- Underwriting expenditures and offering costs............ (.05) -- -- -- (.03) ------ ------ ------- ------- ------- Net asset value, end of period.......................... $18.66 $11.40 $ 10.75 $ 10.27 $ 14.45 ====== ====== ======== ======== ======== Market value, end of period............................. $22.00 $15.00 $ 11.38 $ 14.13 $ 22.13 ====== ====== ======== ======== ======== TOTAL RETURN Per share market value (%)............................ 46.74 34.54 (17.01) (23.57) (26.23) Per share net asset value (%)(b)...................... 63.77 8.20 7.87 (14.91) (9.52) RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions)................ 550 258 241 228 303 Ratio of operating expenses to average net assets (%)................................................. 1.37 1.52 1.52 1.47 1.44 Ratio of net investment income (loss) to average net assets (%).......................................... (.18) .15 .70 .83 .21 Portfolio turnover rate (%)........................... 14.3 14.3 18.2 19.2 17.9
- --------------- (a) Based on monthly average of shares outstanding during each period. (b) Total return based on per share net asset value reflects the effects of changes in net asset value on the performance of the Fund during each period, and assumes 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 value due to differences between the market price of the stock and the net asset value of the Fund during each period. F-28 97 THE KOREA FUND, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1994 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 policies described below are followed consistently by the Fund in the preparation of its financial statements in conformity with generally accepted accounting principles. 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. All other securities are valued at fair value as determined in good faith by the Valuation Committee of the Board of Directors including 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 ($36,466,846) over the local share price ($118,214,037) for these securities valued by the Valuation Committee was approximately 6.6% of the Fund's net assets at June 30, 1994. Convertible debt securities valued in good faith by the Valuation Committee amounted to $35,362,426 or 6.4% of the Fund's net assets at June 30, 1994. 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. 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. 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. 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 net investment loss for the year ended June 30, 1994, is not available as a carryforward by the Fund and therefore has been charged to additional paid-in capital. The Fund uses the identified cost method for determining realized gain or loss on investments for both financial and federal income tax reporting purposes. F-29 98 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, 1994 the exchange rate for Korean won was U.S. $.001241 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 discounts are accreted for both tax and financial reporting purposes. B. PURCHASES AND SALES OF SECURITIES For the year ended June 30, 1994, purchases and sales of investment securities (excluding short-term investments) aggregated $173,201,434 and $56,975,424, respectively. C. RELATED PARTIES Under the Fund's Investment Advisory and Management Agreement with Scudder, Stevens & Clark, Inc. (the "Manager"), the Fund agrees to pay the Manager a fee equal to an annual rate of 1.15% of the first $50,000,000 of month-end net assets of the Fund, 1.10% of such net assets in excess of $50,000,000 up to and including $100,000,000, and 1.00% of the excess over $100,000,000, payable monthly. For the year ended June 30, 1994, the fee pursuant to such agreement amounted to $4,507,935, which was equivalent to an annual effective rate of 1.06% of the Fund's average month-end net assets. The Manager has a Research and Advisory Agreement (the "Research Agreement") with Daewoo Capital Management Co., Ltd. (the "Korean Adviser"), whereby the Korean Adviser provides such investment advice, research and assistance as the Manager may from time to time reasonably request. Under the Research 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 in excess of $50,000,000 up to and including $100,000,000, and 0.25% of the excess over $100,000,000. For the year ended June 30, 1994, brokerage commissions on investment transactions amounting to $134,564 were paid by the Fund to Daewoo Securities Co., Ltd., the parent company of the Korean Adviser. The Fund pays each Director not affiliated with the Manager or the Korean Adviser $4,500 annually plus specified amounts for attended board and committee meetings. For the year ended June 30, 1994, Directors' fees and expenses amounted to $113,882. 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 F-30 99 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 Economy 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. In general, total foreign investment is limited to 10% of each class of a company's outstanding shares, while a single foreign investor may only invest up to 3% of each class of outstanding shares. Pursuant to its license, however, the Fund may invest in shares representing 5% of each class in general. E. RECLASSIFICATION OF CAPITAL ACCOUNTS As required, effective July 1, 1993, the Fund has adopted the provisions of Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies" ("SOP"). In implementing the SOP, the Fund has reclassified $1,549,517 to decrease undistributed net investment income and $1,715,886 to decrease accumulated net realized loss with a net decrease of $166,369 to additional paid-in capital. These reclassifications, which have no impact on the net asset value of the Fund, are primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax regulations versus generally accepted accounting principles. The statement of changes in net assets and financial highlights for prior periods have not been restated to reflect this change in presentation. F. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (000 OMITTED)
NET INCREASE (DECREASE) NET GAIN (LOSS) IN NET ASSETS INVESTMENT NET INVESTMENT ON INVESTMENT RESULTING INCOME* INCOME (LOSS) TRANSACTIONS FROM OPERATIONS QUARTER ENDED -------------- --------------- ---------------- ---------------- - ------------------- PER PER PER PER FISCAL 1994 TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE - ------------------- ------ ----- ------- ----- -------- ----- -------- ----- September 30, 1993 $ 52 $ -- $ (878) $(.04) $ 2,205 $ .09 $ 1,327 $ .05 December 31, 1993 341 .02 (995) (.04) 124,881 4.82 123,886 4.78 March 31, 1994 4,432 .17 2,556 .10 10,248 .40 12,804 .50 June 30, 1994 231 -- (1,433) (.05) 48,342 1.82 46,909 1.77 ------ ----- ------- ----- -------- ----- -------- ----- Totals $5,056 $.19 $ (750) $(.03) $185,676 $7.13 $184,926 $7.10 ====== ==== ======= ===== ======== ===== ======== =====
F-31 100
PER PER PER PER FISCAL 1993 TOTAL SHARE TOTAL SHARE TOTAL SHARE TOTAL SHARE - ------------------- ------ ----- ------- ----- -------- ----- -------- ----- September 30, 1992 $ 101 $ -- $ (748) $(.03) $(14,868) $(.66) $(15,616) $(.69) December 31, 1992 29 -- (922) (.04) 18,545 .83 17,623 .79 March 31, 1993 3,875 .17 1,193 .05 2,759 .12 3,952 .17 June 30, 1993 26 .01 829 .04 12,851 .57 13,680 .61 ------ ----- ------- ----- -------- ----- -------- ----- Totals $4,031 $.18 $ 352 $ .02 $ 19,287 $ .86 $ 19,639 $ .88 ====== ==== ======= ===== ======== ===== ======== =====
- --------------- * Net of Korean taxes withheld. F-32 101 APPENDIX A CERTAIN OTHER INVESTMENTS The Fund reserves the right to invest the portion of its assets not invested in equity securities of Korean issuers in debt securities of such issuers or in foreign currency exchange contracts, covered call options, futures contracts and repurchase agreements, in each case to the extent that a market for such investments exists in Korea and to the extent that such investments are permissible for the Fund under Korean and other applicable law. See "Foreign Investment and Exchange Controls in Korea." In addition, the Fund reserves the right to lend portfolio securities, to borrow, and to purchase and sell securities on a delayed delivery basis, if permitted by Korean law. Certain provisions of the Code, however, may limit the extent to which the Fund may enter into forward contracts, options and futures, and may also affect the character and timing of income, gain or loss recognized by the Fund from such transactions. See "Taxation -- United States Federal Income Taxes." FORWARD CONTRACTS AND OPTIONS ON CURRENCIES In order to hedge against currency exchange rate risks, the Fund may enter into forward currency exchange contracts and may purchase and sell options on currencies in U.S. or foreign markets. It is not the intention of the Fund, however, to fully or partially hedge the Fund's portfolio holdings against currency risks on an on-going basis. A forward currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market between currency traders (usually large commercial banks). The Fund may either accept or make delivery of the currency specified at the maturity of a forward contract or, prior to maturity, enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with the currency trader which is a party to the original forward contract. A put option can give the Fund the right to sell a currency at the exercise price on or before the expiration of the option. A call option can give the purchaser of the option the right to purchase a currency at the exercise price on or before the expiration of the option. The Fund may enter into forward currency exchange contracts and options in several circumstances. For example, when the Fund enters into a contract for the purchase or sale of a security denominated in Won, or when the Fund anticipates the receipt in Won of dividends or interest payments on a security that it holds, the Fund may desire to "lock in" the Dollar price of the security or the Dollar equivalent of such dividend or interest payment, as the case may be. In addition, when the Manager believes that the Won may suffer a substantial decline against the Dollar, it may enter into a forward contract to sell, for a fixed amount of Dollars, the amount of Won approximating the value of some or all of the Fund's portfolio securities denominated in Won. Under the FEMA, the only forward contracts the Fund is permitted to enter into relate to the Won and the Dollar; options contracts on Won currency or Won-denominated assets are not permitted without approval from the Minister of Finance and Economy. The Fund is permitted to enter into forward contracts with any foreign exchange bank in Korea in respect of the aggregate amount of the Fund's Won-denominated assets in Korea whether in the form of securities or cash. The Fund does not intend to enter into forward currency exchange contracts and options on a regular basis, and will not do so if, as a result, the Fund will have more than 20% of the value of its total assets committed to the completion of such contracts and options. The Fund also will not enter into such forward contracts and options or maintain a net exposure to such contracts and options where the completion of the contracts and options would obligate the Fund to deliver an amount of Won in excess of the value of the Fund's portfolio securities or other assets denominated in Won. Further, the Fund generally will not enter into a forward contract or option with a term of greater than one year. While the Fund may enter into forward currency exchange contracts and options to reduce currency exchange rate risks, changes in currency prices may result in a poorer overall performance for the Fund than if A-1 102 it had not engaged in any such transactions. Moreover, there may be an imperfect correlation between the Fund's portfolio holdings of securities denominated in Won and forward contracts and options entered into by the Fund. Such imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to risk of exchange loss. Further, the Fund's successful use of forward contracts and options to reduce currency exchange rate risks will be subject to the Manager's ability to predict correctly movements of exchange rates. No assurance can be given that the Manager's judgment in this respect will be correct. The Manager's current expectation is to utilize forward currency exchange contracts and options from time to time as, in its opinion, currency exchange market conditions make it appropriate to do so. It is not the intention of the Manager, however, to fully or partially hedge the Fund's portfolio holdings against currency risks on an ongoing basis. COVERED CALL OPTIONS Although not currently permissible under Korean regulations, the Fund reserves the right to write covered call options on securities to the extent that such activity becomes permissible for the Fund. A "covered" call option means that, so long as the Fund is obligated as the writer of the option, it will own (a) the underlying securities subject to the option, or (b) securities convertible or exchangeable without the payment of any consideration into the securities subject to the option. As a matter of policy, the value of the underlying securities on which options will be written at any one time will not exceed 25% of the total assets of the Fund. In addition, as a matter of policy, the Fund will neither purchase or write put options on securities nor purchase call options on securities except in connection with closing purchase transactions. The Fund will receive a premium from writing call options, which increases the Fund's return on the underlying security in the event the option expires unexercised or is closed out at a profit. By writing a call, the Fund will limit its opportunity to profit from an increase in the market value of the underlying security above the exercise price of the option for as long as the Fund's obligation as writer of the option continues. Thus, in some periods the Fund will receive less total return and in other periods greater total return from writing covered call options than it would have received from its underlying securities had it not written call options. REPURCHASE AGREEMENTS Repurchase agreements are contracts under which the seller of a security agrees at the time of sale to repurchase the security at an agreed upon price and date. Such resale price reflects an agreed upon interest rate effective for the period the security is held by the purchaser and is unrelated to the interest rate on the instrument. Repurchase agreements can be viewed as loans that are collateralized by the underlying security. Repurchase agreements may involve risks in the event of insolvency or other default by the seller, including possible delays and liquidation expenses or restrictions on the Fund's ability to dispose of the underlying security, declines in its value and loss of interest. The Manager intends to monitor the seller's compliance with its obligation to maintain the value of the securities subject to the repurchase agreement at not less than their repurchase price, and also to review the creditworthiness of the Fund's counterparties in such transactions. BORROWING The Fund may borrow for temporary purposes, such as to obtain amounts necessary to make distributions for qualification as a regulated investment company under the Code or to avoid imposition of an excise tax under U.S. Federal income tax laws or to pay the Fund's expenses outside Korea, as well as for clearing transactions. Such temporary borrowings shall not exceed, at any time, 5% of the value of the Fund's total assets. Borrowings by the Fund increase exposure to capital risk and are subject to interest costs. LENDING OF PORTFOLIO SECURITIES To defray operating expenses, the Fund may generate income by lending securities in its portfolio, to the extent permitted by Korean law, representing up to 25% of its total assets, taken at market value, to securities firms and financial institutions, provided that each loan is secured continuously by collateral in the form of cash or U.S. government securities adjusted daily to have a market value at least equal to the current market A-2 103 value of the securities loaned. Such loans are terminable at any time, and the Fund will receive payments representing the amount of any interest or dividends paid on the loaned securities. In addition, it is anticipated that the Fund may share with the borrower some of the income received on the collateral for the loan or the Fund will be paid a premium for the loan. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. In determining whether the Fund will lend securities, the Manager will consider all relevant factors and circumstances, including the creditworthiness of the borrower. Such transactions are currently prohibited under Korean law. DELAYED DELIVERY TRANSACTIONS Although currently prohibited from doing so under Korean regulations, the Fund may purchase and sell securities on a delayed delivery basis should such activity become lawful in the future as a result of application by the Fund or otherwise. Purchases or sales on a delayed delivery basis involve the purchase (or sale) of securities at an agreed-upon price on a specified future date. In such transactions, delivery of the securities occurs beyond the normal settlement periods, but no payment or delivery is made by, and no interest accrues to, the Fund prior to the actual delivery or payment by the other party to the transaction. Due to fluctuations in the value of securities purchased or sold on a delayed delivery basis, the returns obtained on such securities may be higher or lower than the returns available in the market on the dates when the investments are actually delivered to the buyers. The Fund will establish a segregated account consisting of cash, U.S. government securities or other high-grade debt obligations in an amount equal to the amount of its delayed delivery commitments. FUTURES CONTRACTS Futures contracts are standardized contracts for the future delivery of a currency, security or index at a future date for an agreed-upon price. Currently, no futures markets exist in Korea. The Stock Exchange has announced that in 1996 it will open a stock index futures market and that in 1997 it will open a stock index futures option market, both on the Stock Exchange floor. Should such markets develop and if the Fund is permitted to participate in such markets, as a result of applicable regulations, application by the Fund or otherwise, the Fund may invest accordingly; provided that the Fund will not enter into futures contracts if more than 20% of the value of the Fund's total assets would be committed to the completion of such contracts or if doing so would violate restrictions imposed by the Code. Futures contract positions are typically liquidated by entering into an offsetting transaction on an exchange. If an offsetting contract is not entered into prior to the maturity of a contract, the parties must take or make delivery of the underlying commodity against payment of the agreed-upon price, except in the case of certain futures contracts, including foreign currency and stock index contracts, which generally are settled by payments of cash. Commodity futures exchanges generally impose daily limits on permitted fluctuations in the price of the futures contracts traded thereon. Consequently, in a period of widely fluctuating prices, it may be difficult for the Fund to liquidate a position. The Fund will enter into a futures contract only if in the Manager's view a liquid market exists for such contracts. There can, however, be no assurance that the Fund will be able to close out a contract in a particular case in a timely manner or at all, in which case the Fund may suffer a loss. While the Fund may enter into futures contracts for hedging purposes, changes in prices may result in a poorer overall performance for the Fund than if it had not engaged in any such transaction. In the case of stock index futures contracts, there may be an imperfect correlation between the Fund's portfolio holdings of securities denominated in Won and futures contracts entered into by the Fund. This imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to risk of losses. The Fund does not intend to enter into futures contracts to protect the value of its portfolio securities on a regular basis. The Fund also will not enter into such futures contracts or maintain a net exposure to such contracts where the consummation of the contracts would obligate the Fund to deliver an amount of currency A-3 104 in excess of the value of the Fund's portfolio securities or other assets denominated in that currency. Further, the Fund generally will not enter into a futures contract with a term of greater than one year. At present the Fund is prohibited by the U.S. Commodity Exchange Act from purchasing or selling Korean stock index futures contracts. The Fund reserves the right to purchase and sell such contracts should such activities become lawful in the future, as a result of an application by the Fund or otherwise. If permitted to trade in stock index futures, the Fund may sell stock index futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of equity securities in its portfolio that might otherwise result. When the Fund is not fully invested in stocks and anticipates a significant market advance, it may purchase stock index futures to gain rapid market exposure that may in part or entirely offset increases in the cost of the stocks that it intends to purchase. In a substantial majority of these transactions, the Fund will purchase such securities upon termination of the futures position but, under unusual market conditions, a futures position may be terminated without the corresponding purchase of stocks. No assurance can be given that the Manager will be able to make successful use of stock index futures, if permitted to trade in them. A-4 105 APPENDIX B [Form of Subscription Certificate] THE KOREA FUND, INC. SUBSCRIPTION CERTIFICATE FOR COMMON SHARES VOID IF NOT EXERCISED AT OR BEFORE 5:00 P.M., (NEW YORK CITY TIME) ON JUNE 21, 1995, THE EXPIRATION DATE THIS SUBSCRIPTION CERTIFICATE IS TRANSFERABLE RIGHTS AND MAY BE DIVIDED AT THE OFFICE OF THE SUBSCRIPTION AGENT EXPIRATION DATE: JUNE 21, 1995 SUBSCRIPTION PRICE: U.S.$15.50 PER COMMON SHARE THIS SUBSCRIPTION CERTIFICATE MAY BE USED TO SUBSCRIBE FOR SHARES OR MAY BE ASSIGNED OR CUSIP 500634 11 8 SOLD. FULL INSTRUCTIONS APPEAR ON THE BACK OF THIS SUBSCRIPTION CERTIFICATE. THE REGISTERED OWNER OF THIS SUBSCRIPTION CERTIFICATE, NAMED BELOW, OR ASSIGNEE, IS ENTITLED TO THE NUMBER OF RIGHTS TO SUBSCRIBE FOR COMMON STOCK, $0.01 PAR VALUE, OF THE KOREA FUND, INC. (THE "FUND") SHOWN ABOVE, IN THE RATIO OF ONE SHARE OF COMMON STOCK FOR EACH FOUR RIGHTS, PURSUANT TO THE PRIMARY SUBSCRIPTION AND UPON THE TERMS AND CONDITIONS AND AT THE PRICE FOR EACH SHARE OF COMMON STOCK SPECIFIED IN THE PROSPECTUS DATED JUNE 5, 1995 RELATING THERETO. IF YOU SUBSCRIBE FOR FEWER THAN ALL THE SHARES REPRESENTED BY THIS SUBSCRIPTION CERTIFICATE, THE SUBSCRIPTION AGENT WILL ISSUE A NEW SUBSCRIPTION CERTIFICATE REPRESENTING THE BALANCE OF THE UNEXERCISED RIGHTS, PROVIDED THAT THE SUBSCRIPTION AGENT HAS RECEIVED YOUR SUBSCRIPTION CERTIFICATE AND PAYMENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON JUNE 14, 1995. NO NEW SUBSCRIPTION CERTIFICATE WILL BE ISSUED AFTER SUCH DATE. IMPORTANT: COMPLETE APPROPRIATE FORM ON REVERSE. DATE: JUNE 5, 1995 THE KOREA FUND, INC. CHAIRMAN OF THE BOARD COUNTERSIGNED: STATE STREET BANK & TRUST COMPANY (BOSTON, MASSACHUSETTS) SUBSCRIPTION AGENT BY: AUTHORIZED SIGNATURE REGISTERED OWNER: CONTROL NUMBER B-1 106 PLEASE FILL IN ALL APPLICABLE INFORMATION EXPIRATION DATE: JUNE 21, 1995 TO: STATE STREET BANK AND TRUST COMPANY ATTENTION: CORPORATE REORGANIZATION DEPARTMENT By Mail: By Facsimile: P.O. Box 9061 (617) 774-4519, Boston, MA 02205-8686 With the original Subscription Certificate to be sent by mail, hand or overnight courier. Confirm facsimile by telephone to (617) 774-4511 By Overnight Courier: By Hand: c/o Boston Financial Data Services, Inc. 225 Franklin Street 61 Broadway Corporate Stock Transfer Department Concourse Level or Concourse Level Two Heritage Drive Boston, MA 02110 New York, NY 10006 North Quincy, MA 02171
A. PRIMARY SUBSCRIPTION divided by 4 = X $15.50 = $ (1) ----------------- ---------------- ----------------- ------------ (RIGHTS (NO. OF SHARES) (SUBSCRIPTION EXERCISED) PRICE) B. OVER-SUBSCRIPTION X $15.50 = $ (2) PRIVILEGE ---------------- ----------------- ------------ (NO. OF SHARES) (SUBSCRIPTION PRICE) C. AMOUNT OF CHECK ENCLOSED = $ (OR AMOUNT IN NOTICE OF ------------ GUARANTEED DELIVERY), PAYABLE TO THE KOREA FUND, INC. D. SELL ANY REMAINING RIGHTS / / E. SELL ALL OF MY RIGHTS / / (1) IF YOU FULLY EXERCISE YOUR RIGHTS, THE SUBSCRIPTION AGENT WILL REQUEST THAT THE DEALER MANAGER ATTEMPT TO SELL ANY RIGHTS YOU ARE UNABLE TO EXERCISE BECAUSE SUCH RIGHTS REPRESENT THE RIGHT TO SUBSCRIBE FOR LESS THAN ONE SHARE. (2) THE OVER-SUBSCRIPTION PRIVILEGE CAN BE EXERCISED ONLY BY A RECORD DATE SHAREHOLDER, AS DESCRIBED IN THE PROSPECTUS, AND ONLY IF THE RIGHTS ISSUED TO HIM ARE EXERCISED TO THE FULLEST EXTENT POSSIBLE. F. NAME OF SOLICITING DEALER: / / LEHMAN BROTHERS INC. / / OTHER: -------------------------
- -------------------------------------------------------------------------------- SECTION 1. TO SUBSCRIBE: I HEREBY IRREVOCABLY SUBSCRIBE FOR THE FACE AMOUNT OF COMMON STOCK INDICATED AS THE TOTAL OF A AND B HEREON UPON THE TERMS AND CONDITIONS SPECIFIED IN THE PROSPECTUS RELATED HERETO, RECEIPT OF WHICH IS ACKNOWLEDGED. I HEREBY AGREE THAT IF I FAIL TO PAY FOR THE SHARES OF COMMON STOCK FOR WHICH I HAVE SUBSCRIBED, THE FUND MAY EXERCISE ANY OF THE REMEDIES SET FORTH IN THE PROSPECTUS. TO SELL: IF I HAVE CHECKED EITHER THE BOX ON LINE D OR THE BOX ON LINE E, I AUTHORIZE THE SALE OF RIGHTS BY THE DEALER MANAGER ACCORDING TO THE PROCEDURES DESCRIBED IN THE PROSPECTUS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGNATURE OF SUBSCRIBER(S) - -------------------------------------------------------------------------------- ADDRESS FOR DELIVERY OF SHARES IF PERMANENT CHANGE OF ADDRESS, CHECK HERE / / PLEASE GIVE YOUR TELEPHONE NUMBER ( ) ------------------------------ TAX I.D. NUMBER OR SOCIAL SECURITY NUMBER: ------------------------------ - -------------------------------------------------------------------------------- SECTION 2. TO TRANSFER RIGHTS (EXCEPT PURSUANT TO D AND E ABOVE). FOR VALUE RECEIVED, OF THE RIGHTS REPRESENTED BY THE SUBSCRIPTION CERTIFICATE ARE ASSIGNED TO: - ------------------------------------------------------- (PRINT FULL NAME OF ASSIGNEE) - ------------------------------------------------------- (PRINT FULL ADDRESS) - ------------------------------------------------------- SIGNATURE(S) OF ASSIGNOR(S) IMPORTANT: THE SIGNATURE(S) MUST CORRESPOND IN EVERY PARTICULAR, WITHOUT ALTERATION, WITH THE NAME(S) AS PRINTED ON YOUR SUBSCRIPTION CERTIFICATE. YOUR SIGNATURE MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION WHICH IS A PARTICIPANT IN A RECOGNIZED SECURITIES GUARANTEE PROGRAM. SIGNATURE ----------------------------------------------------------------- GUARANTEED (NAME OF BANK OR FIRM) BY ----------------------------------------------------------------- (SIGNATURE OF OFFICER AND TITLE)
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION NUMBER (OR CERTIFICATE REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT AND THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING. B-2 107 APPENDIX C [FORM OF NOTICE OF GUARANTEED DELIVERY] NOTICE OF GUARANTEED DELIVERY FOR SHARES OF COMMON STOCK OF THE KOREA FUND, INC. SUBSCRIBED FOR UNDER THE PRIMARY SUBSCRIPTION AND THE OVER-SUBSCRIPTION PRIVILEGE As set forth in the Prospectus under "The Offer -- Payment for Shares," this form or one substantially equivalent hereto may be used as a means of effecting subscription and payment for all Shares of the Fund's Common Stock. Such form may be delivered by hand or sent by facsimile transmission, or overnight courier or mail to the Subscription Agent. The Subscription Agent is: STATE STREET BANK AND TRUST COMPANY Attention: Corporate Reorganization Department By Mail: By Facsimile: P.O. Box 9061 (617) 774-4519, Boston, MA 02205-8686 with the original Subscription Certificate to be sent by mail, hand or overnight courier. Confirm facsimile by telephone to (617) 774-4511 By Overnight Courier: By Hand: c/o Boston Financial Data Services, 225 Franklin 61 Broadway Inc. Street or Concourse Level Corporate Stock Transfer Department Concourse Level New York, NY 10006 Two Heritage Drive Boston, MA 02110 North Quincy, MA 02171
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A TELECOPY FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY. The New York Stock Exchange member firm or bank or trust company which completes this form must communicate the guarantee and the number of Shares subscribed for (under both the Primary Subscription and the Over-Subscription Privilege) to the Subscription Agent, and must deliver this Notice of Guaranteed Delivery of Payment, guaranteeing delivery of (a) payment in full for all subscribed Shares and (b) a properly completed and signed copy of the Subscription Certificate to the Subscription Agent prior to 5:00 p.m., New York City time, on the Expiration Date (unless extended). Failure to do so will result in a forfeiture of the Rights. C-1 108 GUARANTEE The undersigned, a member firm of the New York Stock Exchange or a bank or trust company having an office or correspondent in the United States, guarantees delivery to the Subscription Agent by the close of business on June 26, 1995, of (a) a properly completed and executed Subscription Certificate, and (b) payment of the full Subscription Price for Shares subscribed for on Primary Subscription and any additional Shares subscribed for pursuant to the Over-Subscription Privilege, as subscription for such Shares is indicated herein or in the Subscription Certificate. BROKER ASSIGNED CONTROL # THE KOREA FUND, INC. 1. Primary Number of Rights to be Number of Shares on Primary Payment to be made in Subscription exercised Subscription requested for connection with Primary which you are guaranteeing Subscription delivery of Rights and payment ----------------------- Rights ----------------------- Shares $ ---------------------------- (Rights divided by four) 2. Over-Subscription Number of Shares on Over- Payment to be made in Privilege Subscription Privilege connection with requested for which you are Over-Subscription Privilege guaranteeing payment ----------------------- Shares $ ---------------------------- 3. Totals Total number of Rights to be $ ---------------------------- delivered Total Payment ----------------------- Rights
Method of delivery (circle one) A. Through DTC B. Direct to State Street Bank and Trust Company, as Subscription Agent. Please assign a unique control number for each guarantee submitted. This number needs to be referenced on any direct delivery of Rights or any delivery through DTC. In addition, please note that if you are guaranteeing for Over-Subscription Privilege Shares and are a DTC participant, you must also execute and forward to State Street Bank and Trust Company a DTC Participant Over-Subscription Form. - ------------------------------------------- ------------------------------------------- Name of Firm Authorized Signature - ------------------------------------------- ------------------------------------------- DTC Participant Number Title - ------------------------------------------- ------------------------------------------- Address Name (Please Type or Print) - ------------------------------------------- ------------------------------------------- Zip Code Phone Number - ------------------------------------------- ------------------------------------------- Contact Name Date
C-2 109 APPENDIX D [FORM OF DTC PARTICIPANT OVER-SUBSCRIPTION FORM] THE KOREA FUND, INC. RIGHTS OFFERING DTC PARTICIPANT OVER-SUBSCRIPTION FORM THIS FORM IS TO BE USED ONLY BY THE DEPOSITORY TRUST COMPANY PARTICIPANTS TO EXERCISE THE OVER-SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH THE PRIMARY SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE FACILITIES OF THE DEPOSITORY TRUST COMPANY. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY THE DELIVERY OF THE SUBSCRIPTION CERTIFICATES. ------------------------ THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE FUND'S PROSPECTUS DATED JUNE 5, 1995 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE FUND'S INFORMATION AGENT. ------------------------ VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00 P.M., NEW YORK TIME, ON JUNE 21, 1995 UNLESS EXTENDED BY THE FUND (THE "EXPIRATION DATE"). ------------------------ 1. The undersigned hereby certifies to the Fund and the Subscription Agent that it is a participant in The Depository Trust Company ("DTC") and that it has either (i) exercised the Primary Subscription in respect of Rights and delivered such exercised Rights to the Subscription Agent by means of transfer to the DTC account of the Subscription Agent or (ii) delivered to the Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise of the Primary Subscription and will deliver the Rights called for in such Notice of Guaranteed Delivery to the Subscription Agent by means of transfer to such DTC account of the Subscription Agent. The undersigned hereby certifies to the Fund and the Subscription Agent that it owned Shares of Common Stock on the Record Date. 2. The undersigned hereby exercises the Over-Subscription Privilege to purchase, to the extent available, shares of Common Stock and certifies to the Fund and the Subscription Agent that such Over-Subscription Privilege is being exercised for the account or accounts of persons (which may include the undersigned) on whose behalf all Primary Subscription Rights have been exercised. 3. The undersigned understands that payment of the Subscription Price of $15.50 per share for each share of Common Stock subscribed for pursuant to the Over-Subscription Privilege must be received by the Subscription Agent at or before 5:00 p.m. New York City time on the Expiration Date (unless such date is extended by the Fund) and represents that such payment, in the aggregate amount of $ either (check appropriate box): / / has been or is being delivered to the Subscription Agent pursuant to the Notice of Guaranteed Delivery referred to above (Broker-Assigned Control # ); / / is being delivered to the Subscription Agent herewith; or / / had been delivered separately to the Subscription Agent. D-1 110 4. The undersigned understands that in the event it is not allocated the full amount of Shares oversubscribed for above, any excess payment to be refunded by the Fund will be mailed to it by the Subscription Agent as provided in the Prospectus. - -------------------------------------- Primary Subscription Confirmation Number - -------------------------------------- DTC Participant Number - -------------------------------------- Name of DTC Participant By: - -------------------------------------- Name: Title: Contact Name: - -------------------------------------- Phone Number: - -------------------------------------------------------------------------------- Dated: - --------------------------------------, 1995 PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE POSITION OF PRIMARY RIGHTS OWNED, THE NUMBER OF PRIMARY SHARES SUBSCRIBED AND THE NUMBER OF OVERSUBSCRIPTION SHARES, IF APPLICABLE, REQUESTED BY EACH SUCH OWNER. D-2 111 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE MANAGER OR THE DEALER MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. TABLE OF CONTENTS
Page ---- AVAILABLE INFORMATION...................... 2 EXPENSE INFORMATION........................ 3 PROSPECTUS SUMMARY......................... 4 FINANCIAL HIGHLIGHTS....................... 9 MARKET AND NET ASSET VALUE INFORMATION..... 10 THE FUND................................... 10 THE OFFER.................................. 11 USE OF PROCEEDS............................ 19 INVESTMENT OBJECTIVE AND POLICIES.......... 19 INVESTMENT RESTRICTIONS.................... 21 RISK FACTORS AND SPECIAL CONSIDERATIONS.... 22 INVESTMENT ADVISERS........................ 28 FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN KOREA.................................... 33 THE KOREAN SECURITIES MARKETS.............. 36 THE REPUBLIC OF KOREA...................... 44 DIRECTORS AND OFFICERS..................... 52 NET ASSET VALUE............................ 55 DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN...... 57 TAXATION................................... 58 PORTFOLIO TRANSACTIONS AND BROKERAGE....... 65 COMMON STOCK............................... 66 DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR................................ 67 CUSTODIAN.................................. 68 OFFICIAL DOCUMENTS......................... 68 EXPERTS.................................... 68 VALIDITY OF THE SHARES..................... 68 FURTHER INFORMATION........................ 68 FINANCIAL STATEMENTS....................... F-1 CERTAIN OTHER INVESTMENTS.................. A-1 FORM OF SUBSCRIPTION CERTIFICATE........... B-1 FORM OF NOTICE OF GUARANTEED DELIVERY...... C-1 FORM OF DTC PARTICIPANT OVER-SUBSCRIPTION FORM..................................... D-1
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ THE KOREA FUND, INC. 7,386,102 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE FOR SUCH SHARES [KOREA FUND LOGO] --------------------------- PROSPECTUS --------------------------- June 5, 1995 - ------------------------------------------------------ - ------------------------------------------------------ -----END PRIVACY-ENHANCED MESSAGE-----