-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WirAtXq5flE0u/K8SRqz3dg77zqZsiEZDYacLEHh/OtXMNz+HJAa0G6bOdITsQa1 oid0fQCEWs+UNsv4ryJvTw== 0000950123-97-002522.txt : 19970327 0000950123-97-002522.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950123-97-002522 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOREA FUND INC CENTRAL INDEX KEY: 0000748691 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133226146 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-22595 FILM NUMBER: 97564122 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-04058 FILM NUMBER: 97564123 BUSINESS ADDRESS: STREET 1: 345 PARK AVE STREET 2: C/O SCUDDER STEVENS & CLARK INC CITY: NEW YORK STATE: NY ZIP: 10154 BUSINESS PHONE: 6173305464 N-2/A 1 REVISED AMENDMENT: KOREA FUND 1 As filed with the Securities and Exchange Commission on March 25, 1997 1933 ACT FILE NO. 333-22595 1940 ACT FILE NO. 811-4058
================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ Form N-2 Registration Statement Under The Securities Act of 1933 [X] Pre-Effective Amendment No. 1 [ ] Post-Effective Amendment No. [ ] and/or Registration Statement Under The Investment Company Act of 1940 [X] Amendment No. 19 ------------------------ THE KOREA FUND, INC. (Exact Name of Registrant as Specified in Charter) c/o Scudder, Stevens & Clark, Inc. 345 Park Avenue New York, New York 10154 (Address of Principal Executive Offices (Number, Street, City, State, Zip Code)) Registrant's Telephone Number, including Area Code: (212) 326-6200 ------------------------ JURIS PADEGS, CHAIRMAN OF THE BOARD PAMELA A. MCGRATH, TREASURER C/O SCUDDER, STEVENS & CLARK, INC. 345 PARK AVENUE NEW YORK, NEW YORK 10154 (NAME AND ADDRESS (NUMBER, STREET, CITY, STATE, ZIP CODE) OF AGENTS FOR SERVICE) ------------------------ With copies to: MEREDITH M. BROWN THOMAS A. DECAPO DEBEVOISE & PLIMPTON SKADDEN, ARPS, SLATE, 875 THIRD AVENUE MEAGHER & FLOM LLP NEW YORK, NEW YORK 10022 ONE BEACON STREET BOSTON, MASSACHUSETTS 02108
------------------------ APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the effective date of this registration statement. If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. [X] CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION BEING REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(2) - -------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share..................... 12,429,083 Shares $12.30 $152,877,720.90 $46,326.58 ==================================================================================================
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933. Based on a discount from the average of the high and low sales prices for the Fund's Common Stock reported on the New York Stock Exchange Composite Tape on February 26, 1997. (2) Previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 THE KOREA FUND, INC. FORM N-2 CROSS-REFERENCE SHEET PART A: THE PROSPECTUS
FORM N-2 ITEM NUMBER PROSPECTUS/SAI CAPTION - -------------------------------------------------------- ----------------------------------- 1. Outside Front Cover................................. Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Page............ Cover Page of Prospectus 3. Fee Table and Synopsis.............................. Prospectus Summary; Fee Table 4. Financial Highlights................................ Financial Highlights 5. Plan of Distribution................................ Cover Page; Prospectus Summary; The Offer 6. Selling Shareholders................................ Not Applicable 7. Use of Proceeds..................................... Use of Proceeds 8. General Description of the Registrant............... Cover Page of Prospectus; Prospectus Summary; The Fund; The Offer; Risk Factors and Special Considerations; Investment Objective and Policies; Investment Restrictions; Common Stock 9. Management.......................................... Investment Advisers; Portfolio Transactions and Brokerage; Custodian; Dividend Paying Agent, Transfer Agent and Registrar; Common Stock 10. Capital Stock, Long-Term Debt, and Other Securities............................................ Common Stock; Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan; Taxation 11. Defaults and Arrears on Senior Securities........... Not Applicable 12. Legal Proceedings................................... Not Applicable 13. Table of Contents of the Statement of Additional Information......................................... Table of Contents of Statement of Additional Information PART B: STATEMENT OF ADDITIONAL INFORMATION 14. Cover Page.......................................... Cover Page of SAI 15. Table of Contents................................... Cover Page of SAI 16. General Information and History..................... Not Applicable 17. Investment Objective and Policies................... Investment Objective and Policies; Investment Restrictions 18. Management.......................................... Directors and Officers 19. Control Persons and Principal Holders of Securities............................................ Common Stock 20. Investment Advisory and Other Services.............. Investment Advisers; Custodian; Dividend Paying Agent, Transfer Agent and Registrar; Experts 21. Brokerage Allocation and Other Practices............ Portfolio Transactions and Brokerage 22. Tax Status.......................................... Taxation 23. Financial Statements................................ Financial Statements
PART C Information required to be included in Part C is set forth under the appropriate item, so numbered in Part C to this Registration Statement. 3 PROSPECTUS 12,429,083 SHARES LOGO THE KOREA FUND, INC. 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 March 31, 1997 (the "Record Date") rights (the "Rights") entitling the holders thereof to subscribe for an aggregate of 12,429,083 shares (the "Shares") of the Fund's Common Stock at the rate of one share of Common Stock for each three 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 "Offer"). Each Record Date Shareholder is being issued one Right for each 1.01 shares of Common Stock owned on the Record Date, rounded to the nearest whole Right. 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 $ . THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL 18, 1997 UNLESS EXTENDED AS DESCRIBED HEREIN. The Fund is a non-diversified, closed-end management investment company, commenced operations in 1984 and, as of March 21, 1997, had net assets of $474,223,913. 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 and that may be deemed to involve speculative risks. SEE "INVESTMENT OBJECTIVE AND POLICIES," "RISK FACTORS AND SPECIAL CONSIDERATIONS" AND ANNEX A, "THE REPUBLIC OF KOREA." 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 February 28, 1997. The net asset value per share of Common Stock at the close of business on February 28, 1997 and March 21, 1997 was $13.87 and $12.62, respectively, and the last sale price of the Common Stock on the NYSE Composite Tape on those dates was $15.25 and $14.125, 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 $ $ $ - --------------------------------------------------------------------------------------------------------------------------- Total $ $ $ ===========================================================================================================================
(1) The Fund has agreed to pay Smith Barney Inc. (the "Dealer Manager") and other broker-dealers included in the selling group to be formed and managed by the Dealer Manager ("Selling Group Members") fees equal to 2.50% of the Subscription Price for Shares either issued upon exercise of the Rights as a result of their soliciting efforts or purchased from the Dealer Manager for sale to the public. Certain other broker-dealers that have executed and delivered a Soliciting Dealer Agreement and have solicited the exercise of Rights will receive fees for their soliciting efforts of up to .50% of the Subscription Price, subject generally to a maximum fee based upon the number of shares of Common Stock held by each such broker-dealer through the Depository Trust Company on the Record Date. The Fund will pay the Dealer Manager a fee for financial advisory and marketing services in connection with the Offer equal to 1.00% of the aggregate Subscription Price. The Fund has agreed to indemnify the Dealer Manager against certain liabilities under the U.S. Securities Act of 1933, as amended. See "The Offer -- Distribution Arrangements." The total sales load shown in the table assumes that the exercise of all Rights was solicited by Selling Group Members. (2) Before deduction of expenses incurred by the Fund, estimated at $757,113, including up to an aggregate of $25,000 to be paid to the Dealer Manager in reimbursement of its expenses. ------------------ Prior to the Expiration Date, the Dealer Manager may offer Shares of Common Stock, including Shares acquired through the purchase and exercise of Rights, at prices it sets from time to time. Because the Dealer Manager will determine the price, it may realize profits or losses independent of any fees referred to under "The Offer -- Distribution Arrangements." ------------------ This Prospectus sets forth concisely information about the Fund that a prospective investor ought to know before investing. Investors are advised to read this Prospectus and to retain it for future reference. A Statement of Additional Information, dated , 1997 (the "SAI"), containing additional information about the Fund, has been filed with the Securities and Exchange Commission (the "Commission") and is incorporated by reference in its entirety into this Prospectus. A copy of the SAI may be obtained without charge by calling the Fund's Information Agent, Georgeson & Company Inc., toll free at (800) 223-2064 or collect at (212) 509-6240. The table of contents of the SAI is on page 49 of this Prospectus. ------------------ SMITH BARNEY INC. The date of this Prospectus is , 1997. 4 In this Prospectus, unless otherwise specified, all references to "billion" are to one thousand million, to "trillion" are to one thousand billion, to "Dollars," "US$" or "$" are to United States Dollars and to "Won" or "W" are to Korean Won. On March 21, 1997, the daily weighted average exchange rate as published by the Korea Finance Clearings Institute was Won 883.50 = $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 Annex A, "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 Commission also maintains a Web site (http://www.sec.gov) containing reports and other information regarding the Fund that have been filed electronically with the Commission. 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 of which this Prospectus and the Statement of Additional Information (the "SAI") incorporated herein by reference constitute a part. 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 5 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)............................... 3.5% 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, 1996). Management Fees.................................................................... .99% Other expenses..................................................................... .29% ----- Total Annual Fund Operating Expenses....................................... 1.28% =====
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........ $ 13 $41 $ 70 $155
- --------------- (1) The Fund has agreed to pay the Dealer Manager and each Selling Group Member fees equal to 2.50% of the Subscription Price for each Share either issued upon exercise of the Rights as a result of their soliciting efforts or purchased from the Dealer Manager for sale to the Public. Certain other broker-dealers that have executed and delivered a Soliciting Dealer Agreement and have solicited the exercise of Rights will receive fees for their soliciting efforts of up to .50% of the Subscription Price, subject generally to a maximum fee based upon the number of shares of Common Stock held by each such broker-dealer through the Depository Trust Company on the Record Date. The Fund will pay the Dealer Manager a fee for financial advisory and marketing 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. The total sales load shown in the table assumes that the exercise of all Rights was solicited by Selling Group Members. See "The Offer--Distribution Arrangements." (2) Does not include expenses of the Fund incurred in connection with the Offer, estimated at $ . (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 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information included elsewhere in this Prospectus and in the Statement of Additional Information ("SAI") which is incorporated herein by reference. 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 October 31, 1997 (the "Record Date") transferable rights (the "Rights") to subscribe for an aggregate of shares of Common Stock (the "Shares") of the Fund. Each Record Date Shareholder is being issued one Right for each 1.01 shares of Common Stock owned on the Record Date, rounded to the nearest whole Right. No fractional Rights will be issued. 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 three Rights held. Any Record Date Shareholder who is issued fewer than three 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 April 18, 1997 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 three 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 $ . 4 7 SOLICITING FEES The Fund has agreed to pay Smith Barney Inc. (the "Dealer Manager") and other broker-dealers included in the selling group to be formed and managed by the Dealer Manager ("Selling Group Members") fees equal to 2.50% of the Subscription Price for Shares either issued upon exercise of the Rights as a result of their soliciting efforts or purchased from the Dealer Manager for sale to the Public. Certain other broker-dealers that have executed and delivered a Soliciting Dealer Agreement and have solicited the exercise of Rights will receive fees for their soliciting efforts of up to .50% of the Subscription Price, subject generally to a maximum fee based upon the number of shares of Common Stock held by each such broker-dealer through DTC on the Record Date. See "The Offer -- Distribution Arrangements." 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 March 31, 1997 Subscription Period March 31, 1997 -- April 18, 1997 Expiration Date April 18, 1997 (unless extended) Subscription Certificates and Payment for Shares Due April 18, 1997 Notices of Guaranteed Delivery Due April 18, 1997 Subscription Certificates and Payment Due Pursuant to Notice of Guaranteed Delivery April 23, 1997 Confirmation Date May 2, 1997
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, 5 8 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 or to the Dealer Manager. Any Rights to be submitted by the Subscription Agent to the Dealer Manager for purchase or sale must be received by the Subscription Agent at or prior to 5:00 p.m., New York City time, on April 16, 1997, 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 April 1, 1997 and thereafter on a regular way basis from April 3, 1997 until and including the last Business Day prior to the Expiration Date. If the Subscription Agent receives Rights for sale in a timely manner, it will either sell the Rights to the Dealer Manager or the Dealer Manager will use its best efforts to sell the Rights on the NYSE. The Dealer Manager will also either purchase or 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 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. RECORD DATE SHAREHOLDERS WITH NON-U.S. ADDRESSES 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 "Non-U.S. Record Date Shareholders"). Non-U.S. Record Date Shareholders will, however, receive written notice of the Offer. The Rights to which such Subscription Certificates relate will be held by the Subscription Agent for such Non-U.S. 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, on April 16, 1997, two Business Days prior to the Expiration Date, the Rights of those Non-U.S. Record Date Shareholders will be transferred by the Subscription Agent to the Dealer Manager, who will either purchase the Rights or use its best efforts to sell the Rights on the NYSE. The net proceeds from the sale of those Rights by or to the Dealer Manager will be remitted to the Non-U.S. 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 to permit it to take advantage of investment opportunities that the Fund anticipates in Korea, including rights offerings by Korean issuers, securities that the Fund believes are attractively valued and initial public offerings by Korean issuers, without having to sell existing portfolio holdings which would, in general, cause gains realized by the Fund in 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 the transaction costs associated with open-market purchases. 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 6 9 investment objective is subject to certain investment policies and restrictions described under "Investment Objective and Policies" in this Prospectus and "Investment Restrictions" in the SAI. 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, 1996, the Manager and its affiliates had over $115 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 1996. 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 $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 $ is % below the Fund's net asset value of $ per share on , 1997, the Fund's net asset value per share would be reduced by approximately $ per share. 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) political and economic risks, including the potential for military conflict with North Korea, (2) 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, (3) governmental involvement in and influence on the economy and the private sector, (4) restrictions imposed by the Government on foreign investment, which may limit investment opportunities available to the Fund, (5) fluctuations in the rate of exchange between the Won and the Dollar, (6) restrictions on, and costs associated with, currency conversions and the repatriation of the Fund's principal, income and gains and (7) Korean taxes. 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 7 10 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 exercises 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 to credit on favorable terms, encouraged institutional investment in Korean equity securities, induced private companies to publicly offer their securities and induced banks to make loans to certain companies. Such actions by the Government in the future could have a significant effect on the market prices and dividend yields of Korean equity securities. Relations between the Republic and North Korea have been tense over much of the Republic's history. 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. Negotiations to ease tensions and resolve the political division of the Korean peninsula have been carried on from time to time; there also have been efforts from time to time to increase economic, cultural and humanitarian contacts between North Korea and Korea. Tensions rose with evidence that North Korea was reprocessing plutonium, apparently as part of a weapons program, and remained unwilling to meet with the Republic in seeking a reduction of military confrontation, as mutually agreed in 1992. After a period of crisis, the U.S., with the Republic's concurrence, concluded "framework agreement" with North Korea in October 1994 under which the Republic, Japan and the U.S. are to supply North Korea with two light-water nuclear power plants and to normalize relations with Pyongyang in return for North Korea's agreement to dismantle its plutonium reprocessing program and to adhere to the Nuclear Non-Proliferation Treaty. However, North-South negotiations to ease military confrontation, also called for in the "framework agreement," have remained blocked by North Korea's persistence in trying to deal directly with the U.S. rather than South Korea on this critical question. Severe food shortages, a declining gross domestic product and a difficult leadership transition after the death of Kim II Sung have contributed to difficult relations with North Korea. In mid-1995, the Republic proposed to North Korea to deliver free rice to improve the climate for a dialogue. Tensions increased, however, following the discovery in September 1996 of a North Korean submarine off the coast of Korea and following the defection in February 1997 of Hwang Jang Yop, a senior North Korean government official who has sought asylum in 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 individual 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. See "Market and Net Asset Value Information" and "Foreign Investment and Exchange Controls in Korea -- Further Opening of the Korean Securities Markets" in this Prospectus and "Net Asset Value" in the SAI. 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 11 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 which appear in the SAI.
SIX MONTHS ENDED FOR THE FISCAL YEARS ENDED JUNE 30, DECEMBER 31, --------------------------------------------------------------------------- 1996 1996 1995 1994 1993 1992 1991 1990 ------------ ------ ------ ------ ------ ------- ------- ------- PER SHARE OPERATING PERFORMANCE Net Asset Value, Beginning of Period...................... $ 18.52 $19.89 $18.66 $11.40 $10.75 $ 10.27 $ 14.45 $ 16.84 ------ ------ ------ ------ ------- ------- ------- ------ Income From Investment Operations(a): Net Investment Income (Loss).................... (.04) .02 (.02) (.03) .02 .08 .09 .04 Net Realized and Unrealized Gain (Loss) on Investment Transactions.............. (4.34) (.97) 2.42(b) 7.13 .86 .78 (2.13) (1.99) ------ ------ ------ ------ ------- ------- ------- ------ Total From Investment Operations................ (4.38) (0.95) 2.40 7.10 .88 .86 (2.04) (1.95) ------ ------ ------ ------ ------- ------- ------- ------ Less Distributions: From Net Investment Income.................... -- (.02) -- (.01) (.04) (.06) -- (.08) In Excess of Net Investment Income...................... -- (.04) -- -- -- -- -- -- From Net Realized Gains on Investment Transactions..... (.60) (.36) (.15) -- (.20) (.34) (2.20) (1.88) ------ ------ ------ ------ ------- ------- ------- ------ Total Distributions......... (.60) (.42) (.15) (.01) (.24) (.40) (2.20) (1.96) ------ ------ ------ ------ ------- ------- ------- ------ Antidilution (Dilution) Resulting from the Rights Offering (1995), Fourth Tranche (1994) and Third Tranche (1990); and Reinvestment of Distributions for Shares at Market Value................ .01 -- (1.02) .22 .01 .02 .06 1.55 ------ ------ ------ ------ ------- ------- ------- ------ Underwriting Expenditures and Offering Costs........ -- -- -- (.05) -- -- -- (.03) ------ ------ ------ ------ ------- ------- ------- ------ Net Asset Value, End of Period...................... $ 13.55 $18.52 $19.89 $18.66 $11.40 $ 10.75 $ 10.27 $ 14.45 ====== ====== ====== ====== ======= ======= ======= ====== Market Value, End of Period... $ 14.88 $21.13 $19.63 $22.00 $15.00 $ 11.38 $ 14.13 $ 22.13 ====== ====== ====== ====== ======= ======= ======= ====== TOTAL RETURN Per Share Market Value (%).... (24.27)** 9.73 (5.43) 46.74 34.54 (17.01) (23.57) (26.23) Per Share Net Asset Value (%)(c)...................... (27.17)** (5.09) 13.00 63.77 8.20 7.87 (14.91) (9.52) RATIOS AND SUPPLEMENTAL DATA Net Assets, End of Period ($ millions)................... 509 689 735 550 258 241 228 303 Ratio of Operating Expenses to Average Net Assets (%)...... 1.32* 1.28 1.32 1.37 1.52 1.52 1.47 1.44 Ratio of Net Investment Income (Loss) to Average Net Assets (%)(d)...................... (.23)** .10 (.10) (.18) .15 .70 .83 .21 Portfolio Turnover Rate (%)... 7.1* 32.6 10.5 14.3 14.3 18.2 19.2 17.9 Average Commission Rate Paid(e)..................... $ .0853 $.1254 $ -- $ -- $ -- $ -- $ -- $ -- 1989 1988(1) 1987(1) ------ ------ ------- PER SHARE OPERATING PERFORMANCE Net Asset Value, Beginning of Period...................... $13.97 $11.13 $ 7.46 ------ ------ Income From Investment Operations(a): Net Investment Income (Loss).................... .04 .11 .29 Net Realized and Unrealized Gain (Loss) on Investment Transactions.............. 4.65 3.64 3.42 ------ ------ Total From Investment Operations................ 4.69 3.75 3.71 ------ ------ Less Distributions: From Net Investment Income.................... (.11) (.29) (.01) In Excess of Net Investment Income...................... -- -- -- From Net Realized Gains on Investment Transactions..... (1.74) (.68) (.03) ------ ------ Total Distributions......... (1.85) (.97) (.04) ------ ------ Antidilution (Dilution) Resulting from the Rights Offering (1995), Fourth Tranche (1994) and Third Tranche (1990); and Reinvestment of Distributions for Shares at Market Value................ .03 .06 -- ------ ------ Underwriting Expenditures and Offering Costs........ -- -- -- ------ ------ Net Asset Value, End of Period...................... $16.84 $13.97 $11.13 ====== ====== Market Value, End of Period... $31.63 $23.58 $23.38 ====== ====== TOTAL RETURN Per Share Market Value (%).... 48.15 5.46 110.89 Per Share Net Asset Value (%)(c)...................... 33.21 31.17 49.77 RATIOS AND SUPPLEMENTAL DATA Net Assets, End of Period ($ millions)................... 323 265 210 Ratio of Operating Expenses to Average Net Assets (%)...... 1.54 1.53 1.47 Ratio of Net Investment Income (Loss) to Average Net Assets (%)(d)...................... .24 .92 3.25 Portfolio Turnover Rate (%)... 15.1 19.7 4.4 Average Commission Rate Paid(e)..................... $ -- $ -- $ --
- --------------- * Annualized. ** Not annualized (a) Based on monthly average of shares outstanding during each period. (b) Due to the timing and magnitude of the rights offering, the amount reported herein is not proportional to the aggregate value reported in the Statements of Changes in Net Assets. (c) Total investment returns reflect changes in net asset value per share during each period and assume that dividends and capital gains distributions, if any, were reinvested. These percentages are not an indication of the performance of a shareholder's Investment in the Fund based on market price. (d) The ratio for the six months ended December 31, 1996 has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. (e) Average commission rate paid per share of common and preferred stocks in calculated for fiscal years ending on or after June 30, 1996. (f) All per share and share outstanding amounts for the fiscal years ended June 30, 1988 and June 30, 1987 have been restated to reflect the 200% stock dividend paid on October 11, 1988. 9 12 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) - -------------------------- ---------- --------- ---------- --------- --------- ---------- Oct. 1 -- Dec. 31, 1994... $ 26.750 $ 21.91 22.1% $19.875 $ 20.69 (3.9%) Jan. 1 -- March 31, 1995.................... $ 22.625 $ 20.53 10.2% $19.125 $ 19.25 (0.6%) April 1 -- June 30, 1995.................... $ 23.000 $ 20.25 13.6% $18.625 $ 19.94 (6.6%) July 1 -- Sep. 30, 1995... $ 23.000 $ 22.63 1.6% $19.625 $ 19.77 (0.7%) Oct. 1 -- Dec. 31, 1995... $ 23.500 $ 22.46 4.6% $20.000 $ 20.26 (1.3%) Jan. 1 -- May 30, 1996.... $ 23.500 $ 20.56 14.3% $20.875 $ 19.84 5.2% April 1 -- June 30, 1996.................... $ 24.000 $ 22.14 8.4% $21.000 $ 18.50 13.5% July 1 -- Sep. 30, 1996... $ 21.625 $ 18.85 14.7% $17.875 $ 16.23 10.1% Oct. 1 -- Dec. 31, 1996... $ 19.125 $ 17.16 11.5% $14.500 $ 13.32 8.9%
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. The continued development of alternatives to the Fund as a vehicle for investment in Korean securities by United States investors, as well as the continued opening of the Korean securities markets to direct investment by foreigners, have reduced the premium over time and may reduce future premiums or contribute to a discount. 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. On March 21, 1997, the last price of the Fund's shares on the NYSE Composite Tape was $14.125, which represented a premium of 11.9% above the net asset value per share of $12.62. 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 five previous public offerings totaling approximately $375 million in aggregate price to the public. As of March 21, 1997, the Fund's aggregate net assets were $474,223,913. 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 March 21, 1997, 94.34% 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. 11 13 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 1.01 shares of Common Stock owned on the Record Date, rounded to the nearest whole Right. No fractional Rights will be issued. 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. The Rights entitle the holders thereof to acquire at the Subscription Price one Share for each three Rights held. Any Record Date Shareholder who is issued fewer than three 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. Foreign Record Date Shareholders will, however, receive written notice of the Offer. 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, on April 18, 1997, 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 either purchase the Rights or use its best efforts to sell the Rights on the NYSE. The net proceeds from the sale of those Rights by or to 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 State Street Bank and Trust Company (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 April 18, 1997, 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 that cannot be exercised because they represent the right to acquire less than one Share) is entitled to subscribe for Shares that 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 at or before 5:00 p.m., New York City time, on April 16, 1997, to the Subscription Agent for sale through or to 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 be admitted for trading on the NYSE, PSE and 11 14 OSE. Since fractional Shares will not be issued, Record Date Shareholders who receive fewer than three Rights will be entitled to purchase one Share. Record Date Shareholders who, after exercising their Rights, are left with fewer than three Rights, 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 either to purchase or 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 at or before 5:00 p.m., New York City time, on April 16, 1997, and the Subscription Agent will remit the proceeds, 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 the Offer is in the best interests of the Fund and its shareholders because it represents an opportunity to increase the assets of the Fund available for investment, thereby enabling the Fund to take advantage more fully of existing and future 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 October 1, 1996, the Korean government increased the limit on share ownership by foreign investors in most Korean corporations to 20%; this limit is scheduled to be increased by an additional 3% in each of 1997, 1998 and 1999. The Fund believes that the proceeds of the Offer will benefit shareholders by permitting it to take advantage of these and other 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 the transaction costs associated with open-market purchases. The proceeds of the Offer will also enable the Fund to participate in initial public offerings by Korean issuers. See "Foreign Investment and Exchange Controls in Korea -- The Fund's License." In deciding to approve the Offer, the Fund's Board of Directors considered a number of factors in addition to the foregoing, including the Fund's belief that current valuation levels of certain Korean equity securities have created attractive investment opportunities; the possibility that the Offer could result in a modest decrease in the Fund's expense ratio as a result of certain economies of scale; and the fact that issuing transferable Rights could broaden the Fund's shareholder base, thus improving liquidity. There can be no assurance, however, that these benefits will be realized. The Board of Directors also considered the expenses of the Offer, the likely dilutive effect on non-exercising shareholders, the size of the Offer in relation to the number of shares outstanding and the likelihood that a market for the Rights will develop. 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 $ , 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 $ and $ , 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" in this Prospectus and "Directors and Officers" in the SAI. 12 15 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 brokerdealers, 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 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 (except to the extent that individual Record Date Shareholders request fewer shares pursuant to the Over-Subscription Privilege than would otherwise be their pro rata allocation.) The Fund will not offer or sell any Shares that 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 $ . 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 February 28, 1997. The net asset value per share of Common Stock at the close of business on February 28, 1997 and on , 1997 was $13.87 and $ , 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 $15.25 and $ , respectively. The Subscription Price of $ is approximately a % discount to the Fund's net asset value per share on , 1997. 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 April 18, 1997, 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 $74,000, and 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 02205-8606 (telephone (800) 426-5523). Shareholders may also consult their brokers 13 16 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: Corporate Reorganization Department P.O. Box 9061 Boston, MA 02205-8686 (2) BY HAND: Bank of Boston c/o Boston EquiServe Corporate Reorganization 55 Broadway -- 3rd Floor New York, NY 10006 (3) BY OVERNIGHT COURIER: State Street Bank and Trust Corporate Reorganization c/o Boston EquiServe 70 Campunelli Drive Braintree, MA 02184 (4) BY FACSIMILE (TELECOPIER): (617) 794-6333, with the original Subscription Certificate to be sent by mail, hand or overnight courier. Confirm facsimile by telephone to (617) 794-6388.
DELIVERY BY METHODS OTHER THAN THOSE STATED ABOVE WILL NOT CONSTITUTE GOOD DELIVERY. 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 $58,000, 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 or to the Dealer Manager. Subscription Certificates representing the Rights to be sold by or to the Dealer Manager must be received by the Subscription Agent prior to 5:00 p.m., New York City time, on April 16, 1997. Upon the timely receipt by the Subscription Agent of appropriate instruction to sell Rights, the Subscription Agent will request the Dealer Manager either to purchase the Rights or use its best efforts to sell the rights and the Subscription Agent will remit the proceeds, net of commissions, to the Record Date Shareholders. Rights may be sold through or to the Dealer Manager on the NYSE or otherwise. 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 sale price of any Rights sold to the Dealer 14 17 Manager will be based on the then current market price for the Rights, less amounts comparable to the usual and customary brokerage fees. The selling Record Date Shareholder will pay all brokerage commissions incurred by the Dealer Manager. The Dealer Manager will also either purchase or attempt to sell all Rights that 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 purchases or 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 purchase or 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. 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, 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. 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 15 18 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 depositories 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 three Rights may subscribe, at the Subscription Price, for one Share. Fractional Shares will not be issued, and Record Date Shareholders who, upon exercising their Rights, are left with fewer than three Rights will not be able to exercise such remaining Rights. However, the Dealer Manager will automatically either purchase or 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 at or before 5:00 p.m., New York City time, April 16, 1997 and the Subscription Agent will remit the proceeds, 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 OverSubscription 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 pursuant to the OverSubscription 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 in the 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 may send the Subscription Certificate together with payment for the Shares acquired in the 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. 16 19 (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. 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 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 Reinvestment and Cash Purchase Plan." DISTRIBUTION ARRANGEMENTS The Dealer Manager is Smith Barney Inc., 388 Greenwich Street, New York, New York 10013. 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. In addition, the Dealer Manager has agreed with the Fund to assemble and manage the Selling Group Members to (a) solicit the exercise of Rights and (b) sell to the public Shares purchased by the Dealer Manager from the Fund as a result of the purchase and exercise of Rights by the Dealer Manager. 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 $ ) 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 has also agreed to reimburse the Dealer Manager for its marketing expenses in connection with the Offer up to an aggregate of $25,000. Pursuant to the Dealer Manager Agreement, the Fund has agreed to pay fees equal to 2.50% of the Subscription Price to the Dealer Manager and each Selling Group Member for each Share issued upon the exercise of Rights as a result of the Dealer Manager's or Selling Group Member's soliciting efforts or purchased by the Dealer Manager for sale to the public by the Dealer Manager or such Selling Group Member, and to the Dealer Manager for each Share either issued upon the exercise of Rights but for which no dealer designation was made on the related Subscription Certificate or for which no other securities dealer is receiving soliciting fees due to the maximum fee which is payable to a securities dealer who is not a Selling Group Member. 17 20 The Fund has also agreed that, with respect to Rights exercised not as a result of the selling or soliciting activities of the Selling Group Members, the Fund will pay a Soliciting Dealer Fee equal to .50% of the Subscription Price to each securities dealer who is not a Selling Group Member but who is a member of the National Association of Securities Dealers and who has executed and delivered a Soliciting Dealer Agreement and solicited the exercise of Rights, subject generally to a maximum fee based upon the number of shares of Common Stock held by such dealer through DTC on the Record Date. 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. 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. 2. If the fair market value of the Right received by a Record Date Shareholder immediately after issuance is less than 15% of the fair market value of the Common Stock with regard to which the Right is issued, the basis of the Right will be zero (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 is 15% or more of the fair market value of the Common Stock with regard to which it is issued, a portion of the basis of the Common Stock will be allocated to the Right, based upon the respective fair market values of the Right and the Common Stock immediately after the Right is issued. However, in the case of a Record Date Shareholder who receives a Right and who allows the Right to expire, no portion of the basis of the Common Stock held by the Record Date Shareholder will be allocated to the Right, and 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" in the SAI. 18 21 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 or the seller is otherwise exempt from such 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. See "Taxation" in this Prospectus and in the SAI for a discussion of the tax treatment of the Fund and its shareholders. 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 $ after deducting expenses payable by the Fund of approximately $757,113. 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 March 21, 1997, 94.34% 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 19 22 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 "Certain Investment Practices" in the SAI. 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, 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. Under the Fund's license, the Fund may purchase shares in initial public offerings on the same basis as Korean domestic institutional investors. 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 assets), 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 7% 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 20% of its net assets and unlisted shares registered with the Korean Securities Dealers Association for trading on the over-the-counter market in an amount of up to 25% of the Fund's net assets or up to 5% of the Fund's net assets in any class of such shares; and (iii) in the diversification requirements applicable to regulated 20 23 investment companies under the U.S. Internal Revenue Code of 1986, as amended (the "Code"). See "Foreign Investment and Exchange Controls in Korea" in this Prospectus and "Investment Restrictions" and "Taxation -- United States Federal Income Taxes" in the SAI. The Fund is also subject to the Securities and Exchange Commission of Korea ("KSEC") rule that currently provides generally that no more than 20% 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. This percentage is scheduled to be increased, and then eliminated, over the next four years. See "Foreign Investment and Exchange Controls in Korea -- Further Opening of the Korean Securities Market." 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 portfolio turnover rate for the twelve months ended December 31, 1996 was 34.2%. 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. 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. For information regarding certain investment restrictions applicable to the Fund, see "Investment Restrictions" in the SAI. For information about certain transactions involving futures contracts, forward contracts, repurchase agreements and similar instruments that the Fund may enter into, see "Certain Investment Practices" in the SAI. 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) political and economic risks, including the potential for military conflict with North Korea, (2) potential price volatility and lesser liquidity of the Korean securities markets, due in part to their relatively 21 24 small size and to competition from alternative investment opportunities in Korea, (3) governmental involvement in and influence on the economy and the private sector, (4) restrictions imposed by the Government on foreign investment, which may limit investment opportunities available to the Fund, (5) fluctuations in the rate of exchange between the Won and the Dollar, (6) restrictions on, and costs associated with, currency conversions and on the repatriation of principal, income or gains and (7) Korean taxes. Additional considerations when investing in securities of Korean companies and of the Government include the risk of nationalization or expropriation of assets or confiscatory taxation, delays in settlement and the risk that it may be more difficult to obtain or enforce a judgment in a court outside the United States. 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 noncompliance 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." POLITICAL AND ECONOMIC RISKS The value of the Fund's assets may be adversely affected by political, economic or social instability in Korea. Following World War II, the Korean peninsula was partitioned. The demilitarized zone at the boundary between Korea and North Korea was established after the Korean War of 1950-1953 and is supervised by United Nations forces. The United States maintains a military force in Korea to help deter the ongoing military threat from North Korean forces. The situation remains a source of tension, although negotiations to ease tensions and resolve the political division of the Korean peninsula have been carried on from time to time. There also have been efforts from time to time to increase economic, cultural and humanitarian contacts between North Korea and Korea. There can be no assurance that such negotiations or efforts will continue to occur or will result in an easing of tensions between the two nations. Tensions rose with evidence that North Korea was reprocessing plutonium, apparently as part of a weapons program, and remained unwilling to meet with the Republic in seeking a reduction of military confrontation, as mutually agreed in 1992. After a period of crisis, the U.S., with the Republic's concurrence, concluded a "framework agreement" with North Korea in October 1994 under which the Republic, Japan and the U.S. are to supply North Korea with two light-water nuclear power plants and to progressively normalize relations with Pyongyang in return for North Korea's agreement to dismantle its plutonium reprocessing program and to adhere to the Nuclear Non-Proliferation Treaty. However, North-South negotiations to ease military confrontation, also called for in the "framework agreement," have remained blocked by North Korea's persistence in trying to deal directly with the U.S. rather than South Korea on this critical question. Severe food problems, a declining gross domestic product and a difficult leadership transition after the death of Kim II Sung have contributed to difficult relations with North Korea. Tension between Korea and North Korea increased following the September 1996 discovery of a North Korean submarine off the coast of Korea and the February 1997 defection of Hwang Jang Yop, a senior North Korean government official who has sought asylum in South Korea. No assurance can be given that the level of tension will not increase or change abruptly as a result of future events, including political developments in the dispute concerning North Korea's nuclear program (such as any moves to impose trade sanctions against North Korea, further increasing political tensions and the risk of military conflict) or developments related to proposed meetings between Korea and North Korea. See Annex A, "The Republic of Korea." 22 25 The heightened tensions between the Republic and North Korea have from time to time depressed new foreign investment in the Republic and the availability of foreign financing for Korean companies. The uncertainty surrounding the situation may adversely affect the economic climate in the Republic. The tensions between the Republic and North Korea also may adversely affect the prices of the Fund's portfolio securities and the Fund's share price. In addition, agricultural and economic woes have not stopped North Korea from strengthening its military forces along the demilitarized zone. Military action or the risk of military action or the economic collapse of North Korea could have a material adverse effect on Korea for a significant period of time, and consequently, on the ability of the Fund to achieve its investment objectives. The domestic political situation in the Republic has been relatively stable in recent years, in contrast to the turbulence associated with 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. Since taking office in 1993 as the first civilian President in recent years, Kim Young Sam has emphasized political reform and the deregulation and internationalization of the Korean economy. However, President Kim's administration has faced serious tests as the Republic's economy deteriorated during 1996. The balance of trade was negatively affected by decreases in prices of major export products and increases in imported goods from Japan due to the weak Japanese Yen. Recent Government initiatives to amend labor laws to make it easier to lay off workers and curb wage growth have led to worker unrest, including a major walkout in December 1996 and January 1997. In January 1997, Hanbo Steel Co., Ltd. ("Hanbo Steel"), the flagship company of Hanbo Group, a chaebol, or large group of related companies, defaulted in the payment of maturing bills, which forced it to commence reorganization proceedings. The commencement of such reorganization proceedings has led to investigations into and imprisonment of certain presidents of bank lenders, who are alleged to have taken bribes from Hanbo Steel, and prominent politicians in Korea who are alleged to have influenced banks' decisions to lend large sums of money to Hanbo Steel. Hanbo Steel's default has also increased financial difficulties of many of its suppliers and subcontractors, prompting the Government to take emergency measures to protect them and the financial institutions adversely affected by the reorganization proceedings and to stem further deterioration of the economy. In March 1997, Sammi Group, another chaebol, announced that its key affiliates Sammi Steel Co. ("Sammi Steel") and Sammi Corp. had commenced reorganization proceedings after Sammi Steel failed to make a 1.1 billion won debt payment. Sammi Steel's default has put increased pressure on Korea's troubled banking sector. With its lack of natural resources and with exports constituting a large proportion of GNP, the Korean economy is significantly affected by changes in commodity prices (particularly oil), changes in protectionist sentiment among its trading partners and exchange rate movements. The rapid economic development of Korea has in the past led to large foreign borrowings. 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. Korean accounting, auditing and financial reporting standards and practices are not equivalent to those in the United States. Therefore, certain material disclosures (including disclosures as to off-balance sheet financing loan guarantees) may not be made, and less information may be available with respect to investments in Korea than with respect to those in the United States. 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 23 26 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. Many companies traded on Korean securities markets are smaller, newer and less seasoned than companies traded on United States securities markets. Investments in smaller companies involve greater risk than are customarily associated with investments in larger companies. Smaller companies may have limited product lines, markets or financial or managerial resources and may be more susceptible to losses and risks of bankruptcy. 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. GOVERNMENT INVOLVEMENT IN THE PRIVATE SECTOR The Government exercises 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, induced private companies to publicly offer their securities, and induced banks to make loans to certain companies. Such actions by the Government in the future could have a significant effect on the market prices and dividend yields of Korean equity securities. KOREAN INVESTMENT RESTRICTIONS Investments by foreign investors in Korean stocks listed on the Stock Exchange are generally subject to certain limitations, including a 5% limit on the shares of any class of equity security of an issuer held by a particular foreign investor (which is increased to 7% 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 in the aggregate, generally 20% or a higher or lower percentage which may be prescribed for specific companies from time to time. 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 (the "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 20% of the Fund's net assets and unlisted shares registered with the Korea Securities Dealers Association for trading on the over-the-counter market in an amount of up to 25% of the Fund's net assets or up to 5% of the Fund's net assets in any class of such shares. 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 24 27 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. As of March 21, 1997, 41.75% of the Fund's investment portfolio consisted of securities that have reached the aggregate foreign investment limit. As of March 21, 1997, 26.3% of the market capitalization of the Stock Exchange 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. 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 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. 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 made a report to their designated foreign exchange bank for each repatriation. Unlike other foreign investors, however, the Fund is, in general, currently permitted, with the report to its designated foreign exchange 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. 25 28 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 might 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" in the SAI. 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 a greater proportion of its assets 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, which generally limit investments in any one issuer to 25% of the Fund's total assets. See "Taxation -- United States Federal Income Taxes" in the SAI. 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" in the SAI. 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. See "Market and Net Asset Value Information." KOREAN TAXES The Fund will be subject to Korean 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 Taxation." 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 withholding 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 portion of such amounts. See "Taxation" -- United States Federal Income Taxes" in the SAI for a discussion of the rules and limitations applicable to the treatment of foreign income taxes under the U.S. Federal income tax laws. SPECIAL CONSIDERATIONS RELATING TO THE OFFER 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 26 29 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 $ is % below the Fund's net asset value of $ per share on , 1997, the Fund's net asset value per share would be reduced by approximately $ 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 the 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 March 21, 1997, there was approximately $66.8 million of net unrealized appreciation in the Fund's net assets of approximately $474.2 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. See "Taxation -- United States Federal Income Taxes -- General," "-- Distributions" and "-- Non-U.S. Shareholders" in the SAI. Prior Rights Offering. The Fund conducted a rights offering in 1995 which was fully subscribed and resulted in net proceeds to the Fund of approximately $110 million. As a result of the 1995 rights offering, the Fund enjoyed a .04% decrease in its expense ratio. 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, 1996, the Manager and its affiliates had in excess of $115 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 nearly $2 billion, and more than 50 open-end United States investment 27 30 company portfolios with assets aggregating over $38 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 Korea Bond Fund, Inc., which commenced operations in 1996 and invests primarily in debt securities of Korean issuers. - 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. - Scudder Pacific Opportunities Fund, which commenced operations in 1992 and invests in equity securities of Pacific Basin companies, excluding Japan. The Manager also advises Scudder Global Opportunities Funds -- Greater Korea Fund, an 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 $13 billion that comprise the AARP Investment Program from Scudder. With respect to this Program, the Manager manages a total of 15 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. Lead portfolio manager John J. Lee has set Fund investment strategy and overseen its daily operations since 1991, the year he joined the Manager's global equity area. Nicholas Bratt, Portfolio Manager, has been a member of the portfolio team since 1984 and has over 20 years of experience in worldwide investing. 28 31 Mr. Bratt, who has been at the Manager since 1976, is the Director of the Manager's Global Equity Department. In managing the Fund, the Manager utilizes reports, statistics and other investment information from a wider variety of sources, including the Korean Adviser and other brokers and dealers who may execute portfolio transactions for the Fund and clients of the Manager. Investment decisions, however, are based primarily on investigations and critical analyses by its own research specialists and portfolio managers. 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 20%. 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." INVESTMENT ADVISORY, MANAGEMENT AND ADMINISTRATION AGREEMENT On October 13, 1994, the Fund's shareholders approved the Fund's 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 is required to maintain or cause 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 is required to furnish or cause to be furnished all required reports or other information under Korean securities laws. The Manager also 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 29 32 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, 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 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, 1994, 1995 and 1996, the fees paid to the Manager amounted to $4,507,935, $6,260,081 and $7,516,289, respectively. 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 from year to year 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 (or such longer period as may be required under the Regulations). 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 successor 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. 30 33 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 1996 and an underwriter in four of the Fund's previous public offerings. The Korean Adviser acts as Korean adviser to 14 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 December 31, 1996, Daewoo Corporation and certain affiliates of Daewoo Corporation owned approximately 12.97% 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. See "Portfolio Transactions and Brokerage" in the SAI. See "Directors and Officers" in the SAI 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" in the SAI. 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, 1994, 1995 and 1996, the aggregate fees incurred by the Manager for the services of the Korean Adviser amounted to $1,126,983, $1,565,020 and $1,879,072, 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 31 34 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 from year to year 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 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 (other than direct 32 35 investment in non-guaranteed listed convertible bonds and non-guaranteed listed corporate bonds issued by small and medium-sized companies, and acquisition in the primary market of public bonds with low interest rates compared with international interest rates). 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 assets (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 and bonds which are not listed on the Stock Exchange)). 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 5% and 20%, 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 its intention to further increase the aggregate foreign ownership limit by 3% in each of 1997, 1998 and 1999, and in 2000 to consider whether it will abolish such limit. No assurance can be given, however, as to whether or when any additional increase will be implemented and, if and when implemented, to what levels such limits will be raised. 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 20%) requested by such company 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) a 15% ceiling on the acquisition of shares by foreigners in 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); (3) the 7% ceiling on the acquisition of a class of shares by the Fund; and (4) subject to prior report to the Governor of the Securities Supervisory Board of Korea (the "Governor") upon election by a company that has issued shares to foreigners in connection with its issuance of equity-related securities overseas, a ceiling equal to the sum of (a) the current percentage of such shares held by foreigners and (b) a percentage (up to 20%) requested by such company. 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 5% limit or, in the case of the Fund, the 7% limit (except in the cases of (i) and (ii) above) must be sold within three months from the date of acquisition. In calculating these ceilings, all foreign shareholdings (other than those owned by 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 5% limitation. However, all branches in Korea of any foreign investor as a group are entitled to their own 5% 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 may, in his discretion, disclose the numbers of shares of a class available for investment by a single 33 36 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 March 21, 1997, 41.75% of the Fund's investment portfolio consisted of securities that have reached the aggregate foreign investment limit. As of March 21, 1997, 26.3% of the aggregate market capitalization of the Stock Exchange 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 April 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, (ii) shares to be acquired by foreigners as a result of exercising applicable conversion rights attached to certain eligible domestic convertible bonds issued by small and medium-sized companies, (iii) shares held by foreigners in excess of the applicable ceiling (generally 20%) on aggregate foreign investment (except any such excess held under the FCIA), and (iv) the Converted Shares which have not been included in the calculation of the aggregate foreign ownership limit by reason of application by the relevant company not to include such Converted Shares in the determination of such ceiling and the report to the KSEC thereof in the aggregate, exceed or would exceed 15% of the issued capital of the issuer at the date of issue of the relevant securities plus the shares referred to in (i) above. However, in the case of banks, the number of the Converted Shares may not exceed 30% of the issued capital of such banks plus the aggregate foreign ownership of the shares, except where (i) the depositary receipts represent the non-voting shares or (ii) certain measures, including, but not limited to, the formation of a voting council, are taken in order to direct the depositary as to the voting of the shares held by the depositary. In addition, the Foreign Exchange Management Regulations currently provide that the percentage of the outstanding shares of a company (including shares which would be outstanding as a result of the conversion of convertible bonds and the exercise of warrants attached to bonds or withdrawal rights attached to depositary receipts) that may be held by non-residents or foreigners, unless provided otherwise in any other relevant laws and regulations (including those of the KSEC), is limited to 50%. 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 report to the designated foreign exchange 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 with a report to the investor's designated foreign exchange bank. In addition, funds in the Won Account may be used for future 34 37 investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights. 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. Since July 1, 1994, foreign investors have been permitted 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. Beginning May 1, 1996, foreign investors were permitted to invest in warrants representing the right to subscribe for shares of a listed company, subject to certain aggregate foreign investment and trading limitations. On May 3, 1996, a stock index futures market was opened on the Stock Exchange. Foreign investors have been allowed to invest in this market subject to certain individual ownership and aggregate foreign investment limitations. Since January 3, 1997, foreign investors have been permitted to invest in non-guaranteed corporate bonds issued by small and medium-sized companies that are listed on the Stock Exchange or registered with the Korea Securities Dealers Association for trading on the over-the-counter market. 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 7% 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; (2) make investments in Korean securities for the purpose of exercising control or management of the issuer; or (3) acquire any unlisted shares registered with the Korea Securities Dealers Association for trading on the over-the-counter market, if as a result of such acquisition, more than 25% of the Fund's net assets (determined at market value as of the purchase date) would be invested in such shares in the aggregate or up to 5% of the Fund's net assets (determined at market value as of the purchase date) would be invested in any class of such shares. The Fund may purchase shares in initial public offerings on the same basis as Korean domestic institutional investors. The Fund may also 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 20% of its net assets. 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 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" in the SAI. 35 38 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 1996, Korea officially became the 19th member nation of the Organization for Economic Cooperation and Development ("OECD"). Before officially joining the OECD, the Government had announced a number of steps to further liberalize the Korean securities market, consistent with its desire to become an OECD member. Some of the steps are: permitting, during 1997, foreigners to acquire non-guaranteed bonds issued by small and medium-sized companies; permitting, during 1998, foreigners to acquire non-guaranteed convertible bonds issued by companies other than small and medium-sized companies; further expanding, during 1998 and 1999, the opening of the Korean debt securities market to foreigners, particularly with respect to non-guaranteed long-term bonds; full liberalization of the scope of foreign investment in Korean debt securities about the time that the differences between domestic and international interest rates become less than 2%, or, alternatively, certain macroeconomic measures indicate stability in the Korean economy (e.g., inflation rate falls to 3% or lower); increasing the aggregate foreign ownership limit for equity securities generally by 3% in each of 1997, 1998 and 1999, and abolishing such limit in 2000; and increasing the ownership limit by a single foreigner up to 10% in 2000. THE KOREAN SECURITIES MARKETS 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 the Stock Exchange market capitalization and trading volume have increased substantially over the past ten years except for 1990, 1991, 1995 and 1996, it is still small relative to Japanese, United States and major European exchanges. The aggregate market value of equity securities was approximately 117.4 trillion Won (approximately $139.1 billion) at December 31, 1996, and average daily trading value was approximately 486.8 billion Won (approximately $605.2 million) for 1996. 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 1995, the securities of 340 companies were registered on the over-the-counter market. 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. 36 39 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 - -------------------------------- --------- -------- ----------- --------- --------- ------------ 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 35,130 574,048 715,113 1994............................ 699 151,217 191,729 36,862 776,257 966,167 1995............................ 721 141,151 182,201 26,104 487,234 631,730 1996............................ 760 117,370 139,031 26,571 486,834 605,176
- --------------- Source: Stock, Korea Stock Exchange. 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 - ----------------------------- ------- ------- ------- ------- ------- ------- ------- ------- 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......................... 467 254 20,554 5,576 412,123 75,639 534,343 98,071 1996......................... 469 291 19,564 7,008 372,520 114,314 463,094 142,102
- --------------- 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. 37 40 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.
AVERAGE STOCK PRICES ------------------------------------ ------------------- DIVIDEND YIELD(1) PRICE/EARNINGS YEAR HIGH LOW ----------------- RATIO(2) ---------------------------------- -------- ------ (% OF MARKET -------------- VALUE AT 12/31) 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 10.8 1993.............................. 874.10 605.93 1.9 12.7 1994.............................. 1,138.75 855.37 1.4 16.2 1995.............................. 1,016.77 847.09 1.4 16.4 1996.............................. 986.84 651.22 1.5 17.8
- --------------- (1) The dividend yield calculated on the basis of a weighted average for all listed companies was 2.1%, 1.4%, 1.2%, 1.5%, 1.8%, 1.9%, 1.4%, 1.2%, 1.1% and 1.5 %, respectively, for the years ended December 31, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996. 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. 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 experienced a downward trend. It closed on March 24, 1997 at 617.26. From 1987 to 1996, the dividend yield on the KOSPI declined from 2.9% to 1.5%. 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. 38 41 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. Movements in individual company share prices of any category of shares on one day are confined to 8% 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, 1996. As of that date, these companies represented 46% 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............................. 15,440,259 18,290 Samsung Electronics Co., Ltd. ............................... 4,592,777 5,440 Pohang Iron & Steel Co., Ltd. ............................... 3,427,416 4,060 Korea Mobile Telecommunications Corp. ....................... 2,660,972 3,152 Daewoo Heavy Industries Ltd. ................................ 1,904,261 2,256 Shinhan Bank................................................. 1,416,800 1,678 DACOM Corporation............................................ 1,402,080 1,661 LG Semicon................................................... 1,393,200 1,650 Samsung Display Devices Co., Ltd. ........................... 1,345,766 1,594 Korea Export Bank............................................ 1,262,250 1,495 Hyundai Electronics.......................................... 1,258,000 1,490 Kia Motors Corporation....................................... 1,247,868 1,478 Chohung Bank................................................. 1,228,167 1,455 Yukong Limited............................................... 1,181,971 1,400 Halla Climate................................................ 1,156,703 1,370 Kookmin Bank................................................. 1,142,009 1,353 Hyundai Engineering & Construction Co., Ltd. ................ 1,123,723 1,331 Hyundai Motor Co., Ltd. ..................................... 1,068,841 1,266 Ssangyon Oil Refining........................................ 1,050,232 1,244 LG Electronics Inc. ......................................... 1,043,229 1,236 Hanil Bank................................................... 962,800 1,140 The Commercial Bank of Korea, Ltd. .......................... 938,400 1,112 LG Information & Communications, Ltd. ....................... 855,880 1,014 Samsung Fire & Marine Insurance Co., Ltd. ................... 780,300 924 Dong Ah Construction......................................... 750,498 889 Daewoo Corporation........................................... 729,473 864 Korea First Bank............................................. 701,920 831 Seoul Bank................................................... 697,000 826 Samsung...................................................... 688,095 815 LG Chemical Ltd. ............................................ 686,461 813
- --------------- (1) 844.2 Exchange Rate 12/31/96 Source: Stock, Jan. 1997, Korea Stock Exchange. 39 42 The following table shows the volume of trading during the year ended December 31, 1996 for the 30 most actively traded companies on the Stock Exchange. The trading in shares of these companies accounted for 20.6% of all shares traded during 1996.
NO. OF SHARES IN BILLIONS IN MILLIONS COMPANY (000) OF WON OF DOLLARS(1) ----------------------------------------------- ------------- ----------- ------------- Seoul Bank 112,054 872 835 Daewoo Heavy Industries Ltd.................... 95,835 845 802 The Commercial Bank of Korea, Ltd.............. 91,168 730 908 Korea First Bank............................... 79,181 525 683 LG Electronics, Inc............................ 72,200 1,437 1,788 Sammi Steel Co................................. 67,054 309 385 Daewoo Corporation............................. 66,488 561 597 Korea Exchange Bank............................ 65,618 645 802 Korea Electric Power Corporation............... 53,906 1,924 2,288 Kookmin Bank................................... 59,828 946 1,178 Kun Young Construction......................... 38,057 305 380 Cho Hun Bank................................... 54,947 498 510 Hanil Bank..................................... 53,665 455 588 Han Hwa Chemical............................... 47,695 474 538 Kukje.......................................... 47,155 288 350 Shinhan Bank................................... 46,856 742 972 Daewoo Telecom................................. 46,758 520 546 Samsung........................................ 41,954 781 946 Kunho Construction & Engineering............... 41,799 370 468 Samsung Electronics Co., Ltd................... 41,020 3,837 4,521 Chungbuk Bank.................................. 38,037 294 388 Daewoo Electronics Co., Ltd.................... 37,800 283 352 Daewoo Securities Co., Ltd..................... 37,127 707 878 Dong Sun....................................... 36,430 202 751 Midope......................................... 35,395 359 580 Ssangyung Motor................................ 38,138 298 370 Housing & Com'l Bank........................... 38,044 721 896 LG Chemical.................................... 32,004 425 528 Dongsuh Securities Co. Ltd..................... 32,940 390 485 Sapoong........................................ 32,230 425 529
- --------------- (1) Based on average exchange rate in 1996 of Won 804.45 = US$1.00. Source: Fact Book, 1996 Facts and Figures, Korea Stock Exchange. Since 1980, the Government and the public bodies have reduced their interest in all listed companies, except for KEPCO and POSCO. The Government and the public bodies owned, in aggregate, 8.03% of listed shares at December 31, 1995. With Government ownership down, institutional holders, including banks and insurance companies, owned 26.8% of listed shares at December 31, 1995. On that date, shareholders who individually owned 10,000 shares or more represented 2.06% of the total number of shareholders and owned 85.44% of the total number of shares outstanding. On May 3, 1996, the Stock Exchange opened a stock index futures market on the Stock Exchange floor. The Stock Exchange has announced 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 40 43 large increases. In addition, the Government and other public bodies have had increasing recourse to the bond market with both listed and unlisted bond volumes showing substantial growth. Volumes of outstanding bond issues since 1989 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 - ------------------------ ----------- ----------- ----------- ----------- ----------- ----------- 1989.................... 28,095 41,341 15,395 22,654 43,491 63,994 1990.................... 29,049 40,549 22,068 30,804 51,117 71,353 1991.................... 32,250 42,389 29,241 38,435 61,491 80,824 1992.................... 32,447 41,155 32,697 41,472 65,143 82,627 1993.................... 41,359 51,181 37,574 46,496 78,933 97,677 1994.................... 56,621 71,790 45,876 58,167 102,497 129,957 1995.................... 69,542 89,766 56,456 72,874 125,998 162,641 1996.................... 102,419 121,321 73,120 86,615 175,540 207,937
- --------------- 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 - ------------------------ ----------- ----------- ----------- ----------- ----------- ----------- 1989.................... 4,378 6,520 771 1,149 5,149 7,668 1990.................... 2,455 3,469 795 1,124 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.................... 254 329 1,176 1,525 1,430 1,854 1996.................... 192 227 1,186 1,405 1,378 1,714
- --------------- 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 May 1990, the Government established a Securities Market Stabilization Fund (the "Stabilization Fund") which was designed to stabilize the market prices of securities listed on the Stock Exchange. Financial contributors to the capital of the Stabilization Fund were requested and obtained from companies listed on the Stock Exchange and from domestic securities companies engaged in trading securities listed on the Stock Exchange. As of December 31, 1995, the aggregate value of listed shares held by the Stabilization Fund was approximately Won 4.1 trillion (US$5.3 billion), representing approximately 2.9% of the Stock Exchange's 41 44 total market capitalization at that date. The Stabilization Fund was initially established for a three year-period, which was extended for an additional three years to May 1996. On April 30, 1996, the contributors to the Stabilization Fund adopted a resolution to liquidate the Stabilization Fund on May 3, 1996. Such resolution provided that upon the liquidation of the Stabilization Fund, its cash and liquid assets, amounting to approximately Won 1.3 trillion, would be distributed to its members by August 1996, while the listed shares held by the Stabilization Fund, with an aggregate market value of Won 4.1 trillion, would be deposited with the Korea Securities Depository and thereafter distributed to its members at the rate 20% per annum beginning in May 1998. This schedule for distribution of listed shares is subject to amendment in accordance with market conditions. In a slight departure from the foregoing schedule, the first distribution of cash, in the amount of Won 922 billion, was made by the Stabilization Fund to its members in September 1996. The remaining cash held by the Stabilization Fund is scheduled to be distributed in February 1997. 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 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 opened a stock index futures market on May 3, 1996, and has announced 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. 42 45 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" in the SAI. 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 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 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. 43 46 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" in the SAI. 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. For a discussion of certain other U.S. tax matters applicable to the Fund and its shareholders, see "Taxation" in the SAI. Shareholders should consult their tax advisers concerning their own particular situations, including the potential application of state, local and non-U.S. taxes to their ownership of shares of the Fund. U.S. TAXATION 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. 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. Such distributions will, in general, be taxable to shareholders. Shareholders not subject to tax on their income will not be required to pay tax on amounts distributed to them. The Fund will inform shareholders of the amount and nature of distributions made by the Fund. 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 years) as computed for U.S. Federal income tax purposes. The Fund presently expects to distribute such excess to its shareholders each year. 44 47 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%, although proposed legislation would make it 50% for many corporations) 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. As of March 21, 1997, there was approximately $66.8 million of net unrealized appreciation in the Fund's net assets of approximately $474.2 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. See "Taxation -- United States Federal Income Taxes -- General," "-- Distributions" and "-- Non-U.S. Shareholders" in the SAI. 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. See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan." 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. 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 Korean withholding taxes imposed on dividends and interest. If the Fund makes such an election, shareholders will be required to include in income their proportionate shares of such amount. U.S. shareholders may be entitled to claim a credit or deduction for all or a portion of such amount. However, non-U.S. shareholders will not ordinarily be able to claim a credit or deduction with respect to such amount. See "Taxation -- Non-U.S. Income Taxes" and " -- Non-U.S. Shareholders" in the SAI. The Fund may be required to withhold for U.S. Federal income tax purposes 31% of all distributions payable to shareholders (not otherwise exempt from such withholding) 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. KOREAN TAXATION 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 27.5% and capital gains (without deduction for capital losses) are subject to withholding tax at a rate equal to the lower of (i) 11% of the gross sales proceeds, or (ii) if satisfactory evidence of acquisition cost is produced, 27.5% of the difference between the gross sales 45 48 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 10% of such amount, or a total of 16.5%) on dividends paid to the Fund by Korean issuers, and generally 12% (plus a resident tax of 10% of such amount, or a total of 13.2%) 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 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. At the time of the Fund's last rights offering in 1995, the Fund 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 the Fund's four prior public offerings was less than 25% of the total number of shares which have been publicly offered, the 1995 offering took 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 evidenced the right to subscribe for newly issued shares were listed only on stock exchanges within the United States, the applicability of the Treaty to the Fund would 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 46 49 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. 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, preemptive or other subscription rights. In the event of liquidation, each share of Common Stock is entitled to its proportion of the Fund's assets after 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 February 7, 1997:
AMOUNT HELD BY FUND OR FOR AMOUNT OUTSTANDING ITS (EXCLUSIVE OF FUND AMOUNT AUTHORIZED ACCOUNT HOLDINGS) - ---------------------- -------------- ------------------ 50,000,000 shares..... 0 37,570,917
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 47 50 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. 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, 1996 and for the six months then ended and as of June 30, 1996 and for the year then ended, included in the SAI have been included therein 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 Skadden, Arps, Slate, Meagher & Flom LLP, Boston, Massachusetts. 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. 48 51 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE ----- Investment Restrictions............................................................... 2 Certain Investment Practices.......................................................... 3 Directors and Officers................................................................ 7 Net Asset Value....................................................................... 10 Taxation.............................................................................. 11 Portfolio Transactions and Brokerage.................................................. 17 Financial Statements.................................................................. F-1 Report of Independent Accountants..................................................... F-35
49 52 ANNEX A THE REPUBLIC OF KOREA GENERAL INFORMATION General The Republic was founded in 1948 following elections held in southern Korea. The Republic has since controlled and administered the portion of the Korean peninsula that lies generally to the south of the 38th parallel. The Korean War of 1950-1953 began with the invasion by communist forces from the North and, following a military stalemate, resulted in an armistice establishing a demilitarized zone in the vicinity of the 38th parallel, which became the boundary between the Republic and North Korea. The armistice agreement continues to be supervised by United Nations forces. The Republic has a land area of about 38,000 square miles, approximately one-fourth of which is arable. The Republic has a population of approximately 45 million and has a literacy rate of over 90%. The capital, Seoul, with a population of about 11 million, is approximately 40 miles south of the demilitarized zone separating the Republic from North Korea. Politics and Foreign Relations The early years of the Republic were dominated by the successive presidencies of Dr. Rhee Syngman, who was first elected in 1948 and re-elected in 1952, 1956 and 1960. President Rhee resigned shortly after his 1960 re-election, partly in response to pressure from student-led demonstrations. In 1961, a group of military leaders headed by Park Chung Hee assumed power. A civilian government was subsequently established, and Mr. Park was formally elected President in October 1963. President Park served until 1979 when he was assassinated following a period of increasing strife between the Government and its critics. Martial law was declared and an interim government was formed under Prime Minister Choi Kyu Hah, who became the next President. After clashes between the Government and its critics, President Choi resigned and was succeeded in August 1980 by General Chun Doo Hwan, who had taken power within the Korean army. Under the leadership of President Chun, a new Constitution, providing for indirect election of the President and for certain democratic reforms, was approved in a national referendum and shortly thereafter, in early 1981, President Chun was re-elected and inaugurated as President. In 1987, following public demonstrations against the prospect of choosing President Chun's successor through indirect elections in an electoral college, the Constitution was revised to permit direct election of the President. In December 1987, Roh Tae Woo was elected President by a narrow plurality, after the opposition parties led by Kim Young Sam and Kim Dae Joong failed to unite behind a single candidate. In February 1990, members of two opposition political parties, including the party led by Kim Young Sam, merged into the ruling Democratic Liberal Party led by President Roh. In December 1992, Kim Young Sam was elected President as the candidate of the Democratic Liberal Party. This election of a civilian and former opposition party leader as President ended the controversy concerning the legitimacy of the political regime. Since his inauguration, President Kim has emphasized political reform and the deregulation and internationalization of the Korean economy. In late 1995 and early 1996, respectively, former Presidents Roh and Chun were charged with accepting bribes from businessmen associated with certain Korean companies in exchange for favorable treatment. These former Presidents were also charged with sedition relating to the events surrounding the clashes between the Government and its critics described above, which included a confrontation in 1980 between the Korean army and civilian protesters in Kwangju, Republic of Korea. In August 1996, former Presidents Roh and Chun were sentenced to severe criminal penalties and fines for the charges in trial court proceedings, and have since appealed the decision. Although these events have raised concerns over the stability of the Korean economy, there has been no significant political or social unrest. In response to these events, the Government A-1 53 has affirmed its commitment to uncover any unlawful practices relating to these events, as well as to continue its anti-corruption reforms generally and the deregulation of the Korean economy toward a more efficient market economy. Relations between the Republic and North Korea have been tense over most of the Republic's history. North Korea maintains a regular military force estimated at more than 1,000,000 troops, the majority of which are 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 consisting of approximately 655,000 troops. In addition to the regular forces, there are reserves of almost 3.2 million troops. The United States currently maintains military forces of approximately 37,000 troops in the Republic. Sporadic contacts between the Republic and North Korea have taken place in recent years. On December 13, 1991, the Prime Ministers of the Republic and North Korea signed an "Agreement on Reconciliation, Nonaggression and Exchange and Cooperation" in which the two sides agreed, among other things, to take further steps toward conciliation and economic cooperation. Not long after it was put into effect, however, major disputes developed, first over interpretation, and then over mounting evidence that North Korea was reprocessing plutonium, apparently as part of a weapons program, in violation of the Nuclear Non-Proliferation Treaty to which it was a signatory. Tension built to crisis proportions in 1994, but was relieved by a "framework agreement" negotiated by the U.S. and North Korea with the Republic's concurrence. In return for North Korea's dismantling its plutonium reprocessing program, the Republic, Japan and the U.S. agreed to supply North Korea with two modern light-water nuclear power plants. The agreement also called for eventual normalization of U.S.-North Korea relations and North-South negotiations to ease military confrontation. Direct trade between the Republic and North Korea, although still relatively small, has expanded in recent years, along with minor amounts of South Korean investment in the North. Annual direct trading volume totaled US$229 million in 1994 and US$299 million in 1995. In mid-1995, the Republic proposed to North Korea to deliver free rice to improve the climate for a dialogue. This proposal led to an agreement to supply the North with 150,000 tons of rice free of charge without any preconditions. Most disturbing to the Republic, however, North Korea has been unwilling to engage in tension-reducing discussions with the Republic, pressing instead for bilateral talks with the U.S. North Korea's recalcitrance has been intensified by domestic strains, particularly severe food shortages, a declining gross domestic product and a difficult leadership transition after the death of Kim II Sung. Tension between the two Koreas again increased following the September 1996 discovery of a North Korean submarine off the Republic's northeastern coast and the February 1997 defection of Hwang Jang Yop, a Secretary of the North Korean Workers Party who has sought asylum in South Korea. The Republic maintains diplomatic relations with most nations of the world. The Republic's strongest ties are with the United States, and include a mutual defense treaty and several agreements designed to promote the Republic's economy. The Republic's relationship with Japan, now its largest trading partner after the United States, is also increasingly important. China is also growing in importance as a trading partner with 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 A-2 54 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. It is hoped that such Government influence will gradually diminish 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 early 1998. 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 was required to 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 the 10 largest chaebol. Each of the 10 largest 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 December 1996, the Government became a member of the Organization for Economic Cooperation and Development. A-3 55 Selected Economic Data The following table sets forth selected economic data relating to the Republic for the indicated periods.
1991 1992 1993 1994 1995(3) ------- ------- ------- ------- ------- Gross national product at current market prices (billion Won).................................. 214,240 238,705 265,518 303,773 348,284 Government budget surplus (billion Won).......... (1,707) (689) 235 1,730 1,712 Growth in gross national product at current prices (percentage change)..................... 20.2 11.4 11.2 14.4 14.7 Growth in real gross national product (percentage change)........................................ 9.1 5.0 5.8 8.4 8.7 Producer price index (percentage change)......... 4.7 2.2 1.5 2.8 4.7 Consumer price index (percentage change)......... 9.3 6.2 4.8 6.2 4.5 Wages (percentage change)(1)..................... 16.9 15.7 10.9 15.5 9.9 Unemployment rate (percent)...................... 2.3 2.4 2.8 2.4 2.0 Industrial production (percentage change)........ 9.7 5.9 4.2 11.0 12.1 Exports (billion Dollars)(2)..................... 71.9 76.6 82.2 96.0 125.1 Imports (billion Dollars)(2)..................... 81.5 81.8 83.8 102.3 135.1 Trade balance (billion Dollars)(2)............... (9.6) (5.2) (1.6) (6.3) (10) Current balance (billion Dollars)................ (8.7) (4.5) 0.4 (4.5) (8.9)
- --------------- (1) Monthly earnings of regular employees of all manufacturing 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 During the past two decades, the average annual increase in real GNP has been approximately 9.0%. Such increases are attributable in part to Government policies favoring export-led growth and an industrious and well-trained labor force. During this period, the Republic made significant progress toward the transformation of its economy from one characterized by agricultural production and the export of raw materials to that of a modern industrial state. In 1990 and 1991, GNP grew at a rate of 9.6% and 9.1%, respectively. In 1992 and 1993, however, GNP grew at a lower growth rate of 5.0% and 5.8%, respectively, as a result of various factors, including the previous administration's policies intended to stabilize growth. In 1994, GNP grew at a rate of 8.4%. In 1995, GNP increased 8.7%. On the demand side, final consumption expenditure increased 7.0%, and gross fixed capital formation recorded a 12.4% increase. From 1990 through 1995, real GNP increased at an average annual rate of 7.4%. This high rate of growth was due to rapid growth in the exports of goods and services and in domestic fixed capital formation. The former grew at an average annual rate of 14.8% and the latter at 8.1%. The growth in the volume of exports has been achieved by diversification of geographical markets and a shift in emphasis in the composition of exports from agricultural products, raw materials and textile products to manufactured goods, particularly semiconductors, automobiles, electronic products, ships machinery and steel. Prices, Wages and Employment Higher wage increases during the period from the late 1980's to the early 1990's put increased inflationary pressure on the economy, resulting in an increase of 8.6% in consumer prices in 1990 and 9.3% in 1991. However, the annual rate of inflation has continued to fall since 1991 due to slower economic growth and A-4 56 prudent economic policy of the Government. The inflation rate stood at 6.2%, 4.8%, 6.2%, 4.5% and 5.0% in 1992, 1993, 1994, 1995 and 1996, respectively. The Republic's labor force is one of the economy's principal assets. In the period from 1990 to November 1996, the economically active population of the Republic increased by 16.6% to 21.6 million, while the number of employees increased 17.1% to 21.2 million. The economically active population of those over the age of 15 has remained a fairly stable proportion of the total population over the age of 15 at between 58% and 63% over the past decade. The labor force is well educated, with literacy being almost universal among workers under 50. Recent Government initiatives to make it easier for Korean companies to lay off workers and curb wage growth have led to worker unrest, including a major walkout in December 1996 and January 1997. Energy Korea has no domestic oil or gas production and is heavily dependent on imported oil to meet its energy requirements. The performance of the Korean economy is therefore broadly affected by the price of oil, resulting in high inflation when world oil prices have risen sharply. Any significant long-term increase in the price of oil may increase inflationary pressures 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. The recent bankruptcy of Hanbo Steel Industry Co. has substantially increased pressure on Korean commercial banks, causing the Government in January 1997 to announce that it would distribute 100 billion Won through the banking sector toward completion of a Hanbo steel mill. Further pressure was placed on Korea's troubled banking sector by the March 1997 bankruptcy of Sammi Steel Co. 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. In addition, the law to introduce the real-name system for real estate transactions became effective on July 1, 1995. This law is intended to discourage real estate speculation and to prevent property taxes from rising out of control by banning the 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 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 A-5 57 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. Pursuant to the 1994 plan, in 1995 interest rates were liberalized for other short-term money market instruments and Bank of Korea-supported policy loans, in 1996 interest rates were 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. The Republic has a very high ratio of exports as a percentage of GNP, and the international economic environment is accordingly of crucial importance to the Republic's economy. In 1986, the Republic recorded the first substantial trade surplus on a balance of payments basis in the nation's history at US$4.2 billion. The trade surplus nearly doubled to US$7.7 billion in 1987 and increased to US$11.4 billion in 1988. In 1989, the trade surplus declined to US$4.6 billion, due principally to the decline in export growth. In 1990, 1991 and 1992, the Republic recorded trade deficits of US$2.0 billion, US$7.0 billion and US$2.1 billion, respectively. The balance of trade in 1990, 1991 and 1992 was adversely affected by increases in oil prices that occurred in late 1990 as a result of Persian Gulf crisis, by increased imports of machinery and other capital goods and consumer goods, by the recession in countries constituting important markets for Korean exports, principally the United States, and by increased competition for the Republic's exports in certain markets. In 1993, the Republic recorded a trade surplus of US$1.9 billion due to slow growth in imports of 2.5% compared with 7.3% growth in exports. In 1994, the Republic sustained a US$3.1 billion trade deficit due to rapid growth in imports of 22.4% compared with 15.7% growth in exports. In 1995, the Republic sustained a US$4.7 billion trade deficit as exports grew 31.5% over the previous year's level to US$123.2 billion. The strong Japanese yen, which made major Korean export items more price-competitive than comparable Japanese products, and the worldwide economic recovery helped boost export figures. Imports, however, increased 32.1% to US$128.0 billion due to rapid infrastructure investment which required the increased importation of capital goods. In 1996, the Republic sustained a US$15.2 billion trade deficit. Exports grew 4.1% over the previous year's level to US$128.3 billion while imports increased 12.2% to US$143.5 billion. The balance of trade was A-6 58 adversely affected by decreases in prices of major export products and increases in imported goods from Japan due to the weak Japanese Yen. The following table summarizes the Republic's balance of trade (on a balance of payments basis) from 1990 through 1996.
EXPORTS PERCENTAGE PERCENTAGE BALANCE AS % OF CHANGE CHANGE EXPORTS IMPORTS OF TRADE IMPORTS EXPORTS IMPORTS ---------- ---------- ----------- ------------- ---------- ---------- (IN MILLIONS OF DOLLARS) 1991............................ 69,582 76,561 (6,980) 90.9% 10.2% 17.6% 1992............................ 75,169 77,315 (2,146) 97.2% 8.0% 1.0% 1993............................ 80,950 79,090 1,860 102.4% 7.7% 2.3% 1994............................ 93,676 96,822 (3,145) 96.8% 15.7% 22.4% 1995............................ 123,203 127,949 (4,747) 96.3% 31.5% 32.1% 1996............................ 128,250 143,528 (15,278) 89.4% 4.1% 12.2% Annual Average 91-96............ -- -- -- -- 12.7% 14.6%
Source: Monthly Bulletin, The Bank of Korea The Republic's largest trading partners are the United States and Japan. In 1996, the United States accounted for approximately 16.7% of Korea's total exports and approximately 22.2% of Korea's total imports, while Japan accounted for approximately 12.2% of Korea's total exports and approximately 20.9% of Korea's total imports. Trade with China has increased in recent years, as diplomatic relations between the two nations have improved, and China accounted for approximately 8.8% of Korea's total exports and approximately 5.7% of Korea's total imports total in 1996. 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
1991 1992 1993 1994 1995 1996(4) ------ ------ ------ ------- ------- ------- (IN MILLIONS OF DOLLARS) Current Balance............................. (8,728) (4,529) 385 (4,531) (8,948) (23,716) Trade Balance............................. (6,980) (2,146) 1,860 (3,145) (4,746) (15,278) Exports(1)................................ 69,582 75,169 80,950 93,676 123,203 128,250 Imports(1)................................ 76,561 77,315 79,090 96,822 127,949 143,528 Invisible Trade Balance................... (1,596) (2,614) (1,967) (1,989) (3,640) (7,683) Unrequited Transfer (net)................. (152) 232 491 604 (561) (756) Long-Term Capital(2)........................ 4,186 7,232 8,900 5,862 7,827 11,806 Basic Balance............................... (4,542) 2,704 9,284 1,331 (1,120) (11,911) Short-Term Capital.......................... 41 1,110 (2,021) 3,163 5,592 5,423 Errors and Omissions........................ 760 1,084 (721) (1,672) (1,437) 750 Overall Balance............................. (3,741) 4,898 6,542 2,822 3,034 (5,737) Financial Account(3)........................ 3,741 (4,898) (6,542) (2,822) (3,034) 5,737 Liabilities............................... 8,430 1,947 674 8,116 14,898 16,812 Assets.................................... (4,689) (6,845) (7,216) (10,938) (17,933) (11,075)
- --------------- (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) Preliminary. Source: Monthly Bulletin, The Bank of Korea. A-7 59 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
1991 1992 1993 1994 1995(P) 1996(1) ------ ------ ------ ------ ------- ---------- (IN BILLIONS OF WON) Revenues Internal Taxes.......................... 24,030 30,099 34,178 38,462 44,387 33,815 Customs Duties.......................... 3,435 3,153 2,886 3,449 4,633 3,498 Defense Surtax.......................... 1,463 330 269 80 65 7 Traffic Tax............................. -- -- -- 2,449 3,372 3,207 Education Surtax........................ 816 943 999 1,205 1,449 1,215 Monopoly Profits........................ -- -- -- -- -- -- Special Agricultural and Fishery Tax.... -- -- -- 186 983 910 Government Enterprise Receipts.......... 810 1,042 902 1,079 1,407 1,133 Other................................... 8,775 10,699 13,894 7,601 20,622 14,449 ------ ------ ------ ------ ------ ------ Total............................ 39,329 46,267 53,128 54,510 76,917 58,235 ====== ====== ====== ====== ====== ====== Expenditures General Expenses........................ 22,320 23,683 26,951 31,118 38,292 25,790 National Defense........................ 8,012 8,771 9,308 10,056 11,051 8,305 Fixed Capital Formation................. 2,049 2,821 2,889 2,547 4,045 2,911 Other................................... 8,617 11,686 13,721 9,053 21,860 13,506 ------ ------ ------ ------ ------ ------ Total............................ 40,997 46,960 52,870 52,774 75,247 50,513 ====== ====== ====== ====== ====== ====== Net Lending............................... 38 (5) 23 6 (42) 78 Budget Surplus............................ (1,707) (689) 235 1,730 1,712 7,645
- --------------- (P) Preliminary. (1) January 1, 1996 through August 31, 1996 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. Since then, however, such external debt was reduced to US$29.4 billion as of December 31, 1989 as a result of substantial A-8 60 current account surpluses following 1986. Such external debt rose to US$39.1 billion, US$42.8 billion, US$43.9 billion and US$56.9 billion as of December 1991, 1992, 1993 and 1994, respectively, as a result of current account deficits in each of these years except for 1993, in which case the increase of the external debt over the previous year was due to a deficit in short-term capital balance. The net external debt, which takes into account external debt and assets at the same time, however, has decreased due to increased holdings of external assets as foreign investment has increased. 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 announced in 1995 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) 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................................................... 798.9 December 31, 1994.................................................... 788.7 March 31, 1995....................................................... 771.5 June 30, 1995........................................................ 758.1 September 30, 1995................................................... 768.4 December 31, 1995.................................................... 774.7 March 31, 1996....................................................... 782.7 June 30, 1996........................................................ 810.6 September 30, 1996................................................... 821.2 December 31, 1996.................................................... 844.2
- --------------- Source: International Financial Statistics, International Monetary Fund; Monthly Bulletin, The Bank of Korea. A-9 61 APPENDIX B [Form of Subscription Certificate] THE KOREA FUND, INC. EXPIRATION DATE: APRIL 18, 1997 THIS SUBSCRIPTION CERTIFICATE MAY BE USED TO SUBSCRIBE FOR SHARES OR MAY BE ASSIGNED OR 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, $0.01 PAR VALUE, OF THE KOREA FUND, INC. (THE "FUND") SHOWN ABOVE, IN THE RATIO OF ONE SHARE OF COMMON STOCK FOR EACH THREE RIGHTS, PURSUANT TO THE PRIMARY SUBSCRIPTION AND UPON THE TERMS AND CONDITIONS AND AT THE PRICE FOR EACH SHARE OF COMMON STOCK SPECIFIED IN THE PROSPECTUS DATED , 1997 RELATING THERETO. DATE: , 1997 I,2 COUNTERSIGNED: STATE STREET BANK & TRUST COMPANY (BOSTON, MASSACHUSETTS) SUBSCRIPTION AGENT BY: AUTHORIZED SIGNATURE REGISTERED OWNER: SUBSCRIPTION CERTIFICATE FOR COMMON SHARES VOID IF NOT EXERCISED AT OR BEFORE 5:00 P.M., (NEW YORK CITY TIME) ON APRIL 18, 1997, THE EXPIRATION DATE THIS SUBSCRIPTION CERTIFICATE IS TRANSFERABLE RIGHTS AND MAY BE DIVIDED AT THE OFFICE OF THE SUBSCRIPTION AGENT SUBSCRIPTION PRICE: U.S.$ PER COMMON SHARE CUSIP 500634 11 8 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 , 1997. NO NEW SUBSCRIPTION CERTIFICATE WILL BE ISSUED AFTER SUCH DATE. IMPORTANT: COMPLETE APPROPRIATE FORM ON REVERSE. THE KOREA FUND, INC. CHAIRMAN OF THE BOARD 62 PLEASE FILL IN ALL APPLICABLE INFORMATION EXPIRATION DATE: APRIL 18, 1997 TO: STATE STREET BANK AND TRUST COMPANY ATTENTION: CORPORATE REORGANIZATION DEPARTMENT By Mail: By Facsimile: P.O. Box 9061 (617) 794-6333, Boston, MA 02205-8686 With the original Subscription Certificate to be sent by mail, hand or overnight courier. Confirm facsimile by telephone to (617) 794-6388 By Overnight Courier: By Hand: State Street Bank & Trust Company Securities Transfer & Reporting Services Inc. Corporate Reorganization c/o Boston EquiServe c/o Boston EquiServe 55 Broadway 23rd Floor 70 Campanelli Dr. New York, New York 10006 Braintree MA 02184 A. PRIMARY SUBSCRIPTION /3 = X = $ (1) ----------------- ---------------- ----------------- ------------ (RIGHTS (NO. OF SHARES) (SUBSCRIPTION EXERCISED) PRICE) B. OVER-SUBSCRIPTION X = $ (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: [ ] SMITH BARNEY 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 63 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: 500 Victory Road 225 Franklin 61 Broadway MB 2 Street or Concourse Level Marina Bay Concourse Level New York, NY 10006 North Quincy, MA 02171 Boston, MA 02110
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 (April 18, 1997 unless extended). Failure to do so will result in a forfeiture of the Rights. C-1 64 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 (5:00 p.m., New York City time) on the third Business Day after the Expiration Date (April 18, 1997, unless extended), 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 / 3) 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 65 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 , 1997 (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 APRIL 18, 1997 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 $ 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 66 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: - --------------------------------------, 1997 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 67 ====================================================== 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 Risk Factors and Special Considerations...................... 21 Investment Advisers................... 27 Foreign Investment and Exchange Controls in Korea................... 32 The Korean Securities Markets......... 36 Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan................................ 43 Taxation.............................. 44 Common Stock.......................... 47 Dividend Paying Agent, Transfer Agent and Registrar....................... 48 Custodian............................. 48 Official Documents.................... 48 Experts............................... 48 Validity of the Shares................ 48 Further Information................... 48 Table of Contents of Statement of Additional Information.............. 49 The Republic of Korea................. 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. 12,429,083 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF RIGHTS TO SUBSCRIBE FOR SUCH SHARES LOGO ------------ PROSPECTUS , 1997 ------------ SMITH BARNEY INC. ====================================================== 68 THE KOREA FUND, INC. --------------------------- STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") is not a prospectus and should be read in conjunction with the Prospectus, dated , 1997 (the "Prospectus"). This SAI does not include all information that a prospective investor should consider before purchasing shares of The Korea Fund, Inc. (the "Fund") and investors should obtain and read the Prospectus before purchasing shares. A copy of the Prospectus may be obtained without charge by calling the Fund's Information Agent, Georgeson & Company Inc., at (800) 223-2064 or collect at (212) 509-6240. Defined terms used herein shall have the same meanings as provided in the Prospectus. The date of this SAI is , 1997. --------------------------- TABLE OF CONTENTS
PAGE ----- Investment Restrictions............................................................... 2 Certain Investment Practices.......................................................... 3 Directors and Officers................................................................ 7 Net Asset Value....................................................................... 10 Taxation.............................................................................. 11 Portfolio Transactions and Brokerage.................................................. 17 Financial Statements.................................................................. F-1 Report of Independent Accountants..................................................... F-35
69 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. 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" in the Prospectus. 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 2 70 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. CERTAIN INVESTMENT PRACTICES 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 the Prospectus. 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. 3 71 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 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 4 72 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 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 liquid securities 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. On May 3, 1996, the Stock Exchange opened a stock index futures market on the Stock Exchange floor. The Stock Exchange has announced that in 1997 it will open a stock index futures option market on the Stock Exchange floor. The Fund may invest in such markets, 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 5 73 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 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. 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. 6 74 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 Advisory Managing Director (and formerly Age 65 and Director Managing Director) of Scudder, Stevens & Clark, Inc.; serves on the Boards of an additional two 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 Yongdung po-gu Seoul, Korea 150-010 Age 60 Nicholas Bratt*(1).......... President and Director Managing Director of Scudder, Stevens & Age 49 Clark Inc.; serves on the Boards of an additional 15 funds managed by Scudder, Stevens & Clark, Inc. William H. Gleysteen, Director Consultant; Guest Scholar, Brookings Jr. ...................... The Japan Society Institution; former President, The Japan 333 East 47th Street Society, Inc. (until 1995); Vice President New York, NY 10017 of Studies, Council on Foreign Relations Age 70 (1987-1989); United Sates Ambassador to Korea (1978-1981); serves on the boards of an additional 12 funds managed by Scudder, Stevens & Clark, Inc. Sang C. Lee................. Director President, Hyundai Plasma Display 352 Stanwich Rd. Division of Hyundai Electronics Greenwich, CT 06830 America; President and Chief Executive Officer, Age 56 Spectron Corporation of America, LLC (technology company) (1994-present); Chairman, International Corporate Ventures, Inc. (1992-present); President and Chief Executive Officer, Spectron 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)). Tai Ho Lee.................. Director Chairman, Imjung Research Institute 301 World Villa T (1992-Present); President and Chief Executive 999 Bangbae-Dong Officer, Hanjin Investment & Securities Seocho-Gu Co., Ltd. (1990-1991). Seoul, Korea Age 74
- --------------- * 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.
7 75
POSITION(S) WITH PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS REGISTRANT DURING PAST FIVE YEARS - ---------------------------- ---------------------- ------------------------------------------ Dr. Wilson Nolen............ Director Consultant; Trustee; Cultural Institutions 1120 Fifth Avenue Retirement Fund, Inc.; Director, New York, NY 10128 Ecohealth, Inc., biotechnology company; Age 70 serves on the boards of an additional 16 funds managed by Scudder, Stevens & Clark, Inc. Hugh T. Patrick............. Director R.D. Calkins Professor of International Graduate School of Business Business, Graduate School of Business, 522 Uris Hall Columbia University; Director, Center on Columbia University Japanese Economy and Business, Columbia New York, NY 10027 University; Co-Director, APEC Study Age 66 Center, Columbia University; and Director, Japan Society; serves on the board of one additional fund managed by Scudder, Stevens & Clark, Inc. Robert J. Callander......... Director Director, ARAMARK Corporation, Barnes 29 Still Hollow Road Group Inc., Beneficial Corporation, and Lebanon, NJ 08833 Omnicom Group, Inc.; Member, Council on Age 66 Foreign Relations; Managing Director, Metropolitan Opera Association; Trustee Drew University; and Visiting Professor/ Executive-in-Residence, Columbia Business Business School, Columbia University (until 1995); serves on the board of an additional three funds managed by Scudder, Stevens & Clark, Inc. 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 Managing Director, Planning Department of Daewoo Securities Co., Ltd. Daewoo Securities Co., Ltd. 34-3 Youido-dong Yongdung po-gu Seoul, Korea John J. Lee(1).............. Vice President Principal of Scudder, Stevens & Clark Inc. Dong Wook Park.............. Vice President Director of Daewoo Capital Management Daewoo Securities Co., Ltd. Co., Ltd. 34-3 Youido-dong Yongdung po-gu Seoul, Korea Young H. Kim................ Vice President President, Daewoo Securities (America) Inc. Daewoo Securities (America) Inc. 101 East 52nd Street New York, NY 10022 Pamela A. McGrath(2)........ Vice President and Managing Director of Scudder, Stevens & Treasurer Clark, Inc. Kathryn L. Quirk(1)......... Vice President and Managing Director of Scudder, Stevens & Assistant Secretary Clark, Inc.
8 76
POSITION(S) WITH PRINCIPAL OCCUPATION(S) NAME, AGE AND ADDRESS REGISTRANT DURING PAST FIVE YEARS - ---------------------------- ---------------------- ------------------------------------------ Edward J. O'Connell(1)...... Vice President and Principal of Scudder, Stevens & Clark, Inc. Assistant Treasurer Thomas F. McDonough(2)...... Vice President, Principal of Scudder, Stevens & Clark, Inc. Secretary and Assistant Treasurer
- --------------- (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* is the Chairman of the Board of Scudder. Edmond D. Villani(#) is the President and Chief Executive Officer of Scudder. Stephen R. Beckwith(#) Lynn S. Birdsong(#), Nicholas Bratt(#), E. Michael Brown*, Mark S. Casady*, Linda C. Coughlin*, Margaret D. Hadzima*, Jerard K. Hartman(#), Richard A. Holt(@), Dudley H. Ladd*, John T. Packard+, Kathryn L. Quirk(#), Cornelia M. Small(#) and Stephen A. Wohler* 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. - --------------- * Two International Place, Boston, Massachusetts (#) 345 Park Avenue, New York, New York + 101 California Street, San Francisco, California (@) Two Prudential Plaza, 180 North Stetson, Suite 5400, Chicago, Illinois
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 $6,000 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, 1996, the aggregate amount for fees and expenses paid to such directors amounted to $123,343. For the six months ended December 31, 1996, directors' fees and expenses amounted to $88,802. 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. 9 77 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, 1996
TOTAL COMPENSATION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL FROM FUND COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON AND FUND COMPLEX NAME OF PERSON, POSITION FROM FUND PART OF FUND EXPENSES RETIREMENT PAID TO DIRECTOR - -------------------------------- ------------ --------------------- ---------------- ------------------ William H. Gleysteen, Jr........ $ 11,500 -- -- $130,336 Director (13 funds) Hugh T. Patrick................. $ 12,250 -- -- $ 25,250 Director (2 funds) Sang C. Lee..................... $ 11,500 -- -- $ 11,500 Director (1 fund) Tai Ho Lee...................... $ 10,600 -- -- $ 10,600 Director (1 fund) Dr. Wilson Nolen................ $ 12,250 -- -- $165,608 Director (17 funds) Robert J. Callander............. $ 2,902 -- -- $ 41,602 Director (4 funds)
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. To the best of the Fund's knowledge, as of February 14, 1997 no 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 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 Nasdaq Stock Market 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 Stock Market, but traded in another over-the-counter market, is its most recent sale 10 78 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" in the Prospectus 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. TAXATION UNITED STATES FEDERAL INCOME TAXES THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW IS A SUMMARY INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IT DOES NOT INCLUDE CERTAIN INFORMATION SET FORTH IN THE PROSPECTUS WITH REGARD TO TAX 11 79 CONSEQUENCES OF THE OFFER UNDER "THE OFFER -- U.S. FEDERAL INCOME TAX CONSEQUENCES; KOREAN TAX CONSEQUENCES" AND WITH REGARD TO CERTAIN OTHER U.S. TAX MATTERS APPLICABLE TO THE FUND UNDER "TAXATION -- U.S. TAXATION." 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 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. In the past, legislation has been proposed that 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 12 80 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" in the Prospectus and "Other Taxation" below. 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 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 Shareholders subject to U.S. Federal alternative minimum tax will be required to include distributions from the Fund in alternative minimum taxable income. 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 March 21, 1997, there was approximately $66.8 million of net unrealized appreciation in the Fund's net assets of approximately $474.2 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. 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 13 81 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 in the Prospectus under "Taxation -- Korean Taxation." 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 "Taxation -- Korean Taxation" in the Prospectus. 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 Corporate shareholders and other shareholders specified in the Code are exempt from 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. 14 82 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 will 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. 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" and "Taxation -- U.S. Taxation." 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, 15 83 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 investment companies held by the Fund and thereby avoid the potential imposition of tax. 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 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 For a discussion of Korean tax matters applicable to the Fund and its shareholders, see "Taxation -- Korean Taxation" and "The Offer -- U.S. Federal Income Tax Consequences; Korean Tax Consequences" in the Prospectus. 16 84 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 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, 1996, the Fund paid total brokerage commissions of $2,211,569, of which $977,539 (44% 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 $295,122, which amounted to 13% of total brokerage commissions paid. The aggregate amount of brokerage transactions was $686,897,249 for the fiscal year. The aggregate amount of brokerage transactions subject to brokerage commissions was $683,216,557 (99% of all brokerage transactions). The aggregate dollar amount of transactions subject to brokerage commissions that were effected through Daewoo Securities was $68,525,287 (10% of the aggregate dollar amount of transactions subject to brokerage commissions). During the fiscal years ended June 30, 1994 and 1995, the Fund paid total brokerage commissions of $603,867 and $461,281, respectively. During the same periods, the Fund paid Daewoo Securities with respect 17 85 to portfolio transactions brokerage commissions of $134,564 and $74,082, respectively, which represented 22% and 16%, respectively, of the total commissions paid for each respective period. Brokerage commissions on equity securities may be negotiated up to a permitted maximum percentage of the sales value of the transaction. The Stock Exchange is permitted to alter the maximum commission rate from time to time. The rates currently provide for a maximum commission of 0.6% for equity securities and 0.3% for bonds. Each broker is required to report its commission rate schedule and any deviation therefrom to the KSEC at least seven days before its effectiveness. As a result of this practice, there generally is no deviation in commission rates schedules among Korean brokers and, in practice, securities companies currently collect brokerage commissions of up to 0.5% of the sales value for equity securities. A Securities Transaction Tax equal to 0.5% (in the case of transactions outside the Stock Exchange) or 0.35% (in the case of transactions on the Stock Exchange) of the sales proceeds is imposed upon a seller of Korean equity securities in most cases. In addition, a special agricultural and fishery tax equal to 0.15% of the sales proceeds is imposed in the case of transactions on the Stock Exchange. The Fund currently is not required to pay such taxes with respect to its sales on the Stock Exchange. It is, however, required to pay the Securities Transaction Tax with respect to any sales it makes outside of the Stock Exchange. 18 86 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Investment Portfolio as of December 31, 1996
=================================================================================================================== Principal Market Amount(e) Value($) - ------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 0.3% U.S.$1,469,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 12/31/96 at 6.7% to be repurchased at $1,469,547 on 1/2/97, collateralized by a $1,200,000 U.S. Treasury Note, 10%, 5/15/10 (Cost $1,469,000) .................................... 1,469,000 ---------- - ------------------------------------------------------------------------------------------------------------------- CORPORATE BONDS 2.7% METALS & MINERALS 10,000,000,000 Korea Tungsten Exchange Bond, Zero Coupon with 36.03% bonus interest at maturity, 11/11/98 (c) (Cost $14,540,668) ................................... 13,036,414 - ------------------------------------------------------------------------------------------------------------------- CONVERTIBLE BONDS 7.2% CONSUMER STAPLES 1.4% Food & Beverage 0.7% 800,000,000 Crown Confectionery Co., 3% with 16.28% bonus interest at maturity, 12/31/97 (Major producer of snacks)(c)(f) ..................................... 1,003,179 2,000,000,000 Haitai Confectionery Co., 1% with 12.69% bonus interest at maturity, 6/30/98 (Major producer of snacks)(c)(f) ........................................ 2,265,580 ---------- 3,268,759 ---------- Textiles 0.7% U.S.$1,000,000 Kolon Industries, Inc., 0.250%, 12/31/04 (Leading manufacturer of nylon, polyester yarn and fabrics) ............................................. 555,000 2,400,000,000 Kukje Corp., 12% with 4.62% bonus interest at maturity, 12/31/97 (Shoe manufacturer)(c)(f) ......... 2,941,717 ---------- 3,496,717 ---------- HEALTH 0.8% Pharmaceuticals 3,000,000,000 Korea Green Cross Corp., 1% with 11.88% bonus interest at maturity, 12/31/97(Leading ethical drug producer)(c)(f) ................................. 3,560,253 400,000,000 Yuhan Corp., 5.5% with 25.41% bonus interest at maturity, 12/31/97 (Pharmaceutical company)(c)(f) .... 550,467 ---------- 4,110,720 ----------
The accompanying notes are an integral part of the financial statements. 10 87
=================================================================================================================== Principal Market Amount(e) Value($) - ------------------------------------------------------------------------------------------------------------------- MANUFACTURING 0.9% Containers & Paper 4,000,000,000 Hansol Paper Manufacturing Co., Ltd., 3% with 28.24% bonus interest at maturity, 12/31/99 (Korea's largest paper manufacturer)(c)(f) ............ 4,590,973 ---------- ENERGY 1.1% Oil & Gas Production 2,000,000,000 Yukong, Ltd., 2% with 8.15% bonus interest at maturity, 12/31/97 (Korea's largest oil refiner)(c)(f) ........................................ 2,316,032 3,000,000,000 Yukong, Ltd., 1% with 13.92% bonus interest at maturity, 12/31/98(c)(f) .............................. 3,250,532 ---------- 5,566,564 ---------- METALS & MINERALS 0.4% Steel & Metals 1,000,000,000 Kangwon Industry, 6% with 19.52% bonus interest at maturity, 6/30/97 (Steel company)(c)(f) ............ 1,395,967 500,000,000 Sammi Steel, 4% with 20.57% bonus interest at maturity, 12/31/97 (Specialty steel company)(c)(f) ........................................ 654,779 ---------- 2,050,746 ---------- CONSTRUCTION 0.3% Miscellaneous 1,000,000,000 Sungwon Construction, 5% with 21.11% bonus interest at maturity, 12/31/97 (Construction company)(c)(f) .... 1,325,717 ---------- TRANSPORTATION 0.5% Marine Transportation 2,000,000,000 Hanjin Shipping, 0.125%, 11/30/99 (Container and bulk shipping)(c) ..................................... 2,199,640 ---------- UTILITIES 1.8% Electric Utilities 5,000,000,000 Korea Electric Power Co., 1% with 9.98% bonus interest at maturity, 12/31/97 (Electric utility)(c)(f) ........................................ 5,834,342 2,300,000,000 Korea Electric Power Co., Zero Coupon with 30.5% bonus interest at maturity, 12/31/98 (c)(f) ........... 2,761,902 ---------- 8,596,244 ---------- TOTAL CONVERTIBLE BONDS (Cost $40,698,801) .............. 35,206,080 ---------- - ------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS 4.2% Shares ------ CONSUMER DISCRETIONARY 0.2% Apparel & Shoes 0.2% 10,700 Baik Yang Co. (Leading maker of under garments) ......... 443,195 50,000 Shin Won Corp. (Major apparel manufacturer) ............. 436,686 ---------- 879,881 ----------
The accompanying notes are an integral part of the financial statements. 11 88 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Investment Portfolio (continued)
=================================================================================================================== Market Shares Value($) - ------------------------------------------------------------------------------------------------------------------- Hotels & Casinos 0.0% 7,070 Hotel Shilla Co. (Hotel and resort operation) ............ 40,161 CONSUMER STAPLES 1.2% Alcohol & Tobacco 0.0% 580 Chosun Brewery Co., Ltd. (Brewery) ....................... 5,491 5,800 Jinro, Ltd. (Leading producer of soju, a distilled spirit) ................................................ 47,430 --------- 52,921 --------- Food & Beverage 0.3% 70,690 Cheil Food and Chemical Co., Ltd. (Korea's leading sugar refiner and major integrated food processor) ..... 1,254,852 --------- Package Goods/Cosmetics 0.2% 118,570 Pacific Corp. (Leading cosmetics producer) ............... 812,450 --------- Textiles 0.7% 184,000 Kohap (Leading maker of synthetic fabrics and yarns) ..... 622,769 225,910 Kolon Industries, Inc. ................................... 1,577,360 161,980 Sunkyong Industries, Ltd. (Leading producer of acetate filament yarn, polyester yarns and fabrics) ..... 1,054,308 --------- 3,254,437 --------- HEALTH 0.1% Pharmaceuticals 6,700 Korea Green Cross Corp. .................................. 197,432 4,700 Shinpoong Pharmaceutical Co., Ltd. (Specialized drug producer) ......................................... 49,670 --------- 247,102 --------- FINANCIAL 0.8% Insurance 0.4% 6,175 Samsung Fire & Marine Insurance Co. (Insurance company)(d) ............................................ 2,130,923 --------- Other Financial Companies 0.4% 87,310 Shin Young Securities (Medium-sized brokerage house) ..... 547,625 252,000 Ssangyong Investment & Securities (Leading brokerage house) ....................................... 1,371,834 --------- 1,919,459 --------- SERVICE INDUSTRIES 0.1% Miscellaneous Commercial Services 76,000 Sunkyong Ltd. (Leading trading company) .................. 496,473 --------- DURABLES 0.4% Automobiles 0.3% 99,130 Mando Machinery Corp. (Major auto parts manufacturer) .......................................... 1,466,420 --------- Tires 0.1% 74,650 Kumho Co. (Korea's largest tire manufacturer) ............ 335,704 ---------
The accompanying notes are an integral part of the financial statements. 12 89
=================================================================================================================== Market Shares Value($) - ------------------------------------------------------------------------------------------------------------------- MANUFACTURING 0.4% Chemicals 0.2% 3,700 Han Wha Co., Ltd. (Leading producer of explosives and petrochemicals) .................................... 26,404 92,285 Oriental Chemical Industries Co., Ltd. (Manufacturer of specialty chemicals) ................................ 944,693 14,095 Oriental Chemical Industries Co., Ltd. (New)(c) .......... 151,792 --------- 1,122,889 --------- Miscellaneous 0.1% 60,000 Jindo Corp. (Manufactures steel, aluminum and refrigerated container for the freight and other industries) ............................................ 362,130 --------- Containers & Paper 0.1% 60,000 Hansol Paper Co. (Leading producer of papers and newsprint) ............................................. 720,710 --------- Technology 0.4% Electronic Components/Distributors 9,918 Samsung Display Devices (Leading manufacturer of CRT and picture tubes) ................................. 278,173 50,000 Samsung Electromechanics Co., Ltd. (Major manufacturer of electronics) ........................... 644,970 37,039 Samsung Electronics Co., Ltd. (Major electronics manufacturer)(d) ....................................... 994,136 11,162 Samsung Electronics Co., Ltd. (New 1)(d) ................. 292,458 --------- 2,209,737 --------- ENERGY 0.0% Oil Companies 1,174 Ssangyong Oil Refining Co. (Major oil refiner)(c) ........ 11,178 --------- METALS & MINERALS 0.0% Steel & Metals 37,170 Kangwon Industry (Steel company) ......................... 237,096 --------- CONSTRUCTION 0.5% Building Materials 0.3% 80,000 Ssangyong Cement Industrial Co., Ltd. (Major cement company)(c) ..................................... 728,994 29,300 Sung Shin Cement Co., Ltd. (Major cement company) ........ 285,718 50,000 Tong Yang Cement Co., Ltd. (Major cement company) ........ 396,450 --------- 1,411,162 --------- Miscellaneous 0.2% 95,000 Hyundai Engineering & Construction Co. (Leading general contractor) .................................... 1,096,154 --------- TRANSPORTATION 0.1% Airlines 0.0% 20,520 Korean Air Co., Ltd. (Airline)(c) ........................ 167,560 ---------
The accompanying notes are an integral part of the financial statements. 13 90 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Investment Portfolio (continued)
=================================================================================================================== Market Shares Value($) - ------------------------------------------------------------------------------------------------------------------- Trucking 0.1% 25,500 Global Enterprises Co., Ltd. (Container transport company) .................................... 482,840 ---------- TOTAL PREFERRED STOCKS (Cost $30,272,448) ............... 20,712,239 ---------- - ------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 85.6% CONSUMER DISCRETIONARY 3.5% Apparel & Shoes 0.4% 52,083 Shin Won ................................................ 1,017,005 30,000 Ssang BangWool Co. (Leading underwear manufacturer) ..... 986,982 ---------- 2,003,987 ---------- Department & Chain Stores 2.9% 182,591 Hwa Sung Industries (Department store) .................. 3,824,687 152,443 Shinsegae (Major department store chain) ................ 6,332,248 16,571 Shinsegae (New 1) ....................................... 607,930 214,599 Taegu Department Store (Department store) ............... 3,504,694 ---------- 14,269,559 ---------- Hotels & Casinos 0.2% 100,000 Hotel Shilla Co. ........................................ 792,899 ---------- CONSUMER STAPLES 4.7% Alcohol & Tobacco 1.1% 3,020 Chosun Brewery Co., Ltd. ................................ 76,840 261,972 Jinro, Ltd. ............................................. 5,456,458 ---------- 5,533,298 ---------- Food & Beverage 2.2% 133,855 Cheil Food and Chemical Co., Ltd. ....................... 5,385,882 120,000 Dongwon Industries Company (Leading deep-sea fishing and processing company) ....................... 1,817,751 10,000 Haitai Confectionery Co. ................................ 112,426 32,271 Nhong Shim Co. (Manufacturer of instant noodles and snacks) ........................................... 1,447,421 48,000 Pulmuone Co., Ltd. (Food producer) ...................... 1,755,266 ---------- 10,518,746 ---------- Package Goods/Cosmetics 0.2% 50,000 Hankook Cosmetics Co. (Manufactures and sells cosmetics) ............................................ 1,124,260 ---------- Textiles 1.2% 1,200 Baik Yang Co. 127,811 20,356 Cheil Industries (Leading woolen yarn and fabric manufacturer) ......................................... 238,490 30,000 Choongnam Spinning Co., Ltd. (Korea's leading manufacturer of cotton yarn) .......................... 280,473 610 Daehan Synthetic Fiber (Manufacturer of polyester yarns and synthetic fibers) ........................... 53,059
The accompanying notes are an integral part of the financial statements. 14 91
=================================================================================================================== Market Shares Value($) - ------------------------------------------------------------------------------------------------------------------- 48,240 Hankook Synthetics Inc. (Textiles) ..................... 2,454,817 40,969 Kolon Industries, Inc. (New 1) ......................... 688,473 5,000 Vivien Corp. (Manufactures lingerie and other women's undergarments) ............................... 313,609 3,040 Taekwang Industrial Co., Ltd. (Major producer of acrylic fiber) ....................................... 1,093,680 29,600 Hyosung T&C, Ltd., (Korea's largest producer of nylon filament yarn) ....................................... 735,621 ----------- 5,986,033 ----------- HEALTH 3.7% Pharmaceuticals 72,632 Chong Kun Dang Co., Ltd. (Pharmaceutical company) ...... 4,770,481 11,011 Daewoong Pharmaceutical Co. (Pharmaceutical company) ............................................. 531,655 241,010 Dong-A Pharmaceutical (Pharmaceutical company) ......... 4,649,069 16,068 Korea Green Cross Corp. ................................ 1,197,969 126,621 Yuhan Corporation ...................................... 4,870,038 27,565 Yuhan Corporation (New 1)(c) ........................... 1,206,988 15,418 Yuhan Corporation (New 2)(c) ........................... 664,160 ----------- 17,890,360 ----------- COMMUNICATIONS 23.0% Cellular Telephone 112,706 Korea Mobile Telecom Corp. (Mobile telecommunication services)(d)(h) .................... 111,911,056 ----------- FINANCIAL 15.7% Banks 7.7% 435,650 Cheju Bank (Regional bank) ............................. 3,449,111 571,400 Cho Hung Bank (GDS) (Commercial bank) .................. 4,285,500 134,692 Kookmin Bank (Major commercial bank) ................... 1,864,966 3,381 Daegu Bank (Leading regional bank) ..................... 39,972 100,000 Hanil Bank (Major commercial bank) ..................... 686,391 461,044 Korea Exchange Bank (Major commercial bank) ............ 4,173,949 200,000 Korea First Bank (Major commercial bank) ............... 1,013,018 391,300 Korea Housing Bank (New 1) ............................. 5,464,308 584,315 Korea Long Term Credit Bank (Major commercial bank) ..................................... 10,026,707 485,950 Shin Han Bank (Major commercial bank) .................. 6,613,521 ----------- 37,617,443 ----------- Insurance 6.8% 45,356 Daehan Fire & Marine Insurance Co., Ltd. (Insurance company) .................................. 1,100,353 44,656 Hyundai Fire and Marine Insurance (Insurance company) .. 1,448,017 49,912 LG Insurance Co., Ltd. (Insurance company) ............. 2,652,131
The accompanying notes are an integral part of the financial statements. 15 92 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Investment Portfolio (continued)
=================================================================================================================== Market Shares Value($) - ------------------------------------------------------------------------------------------------------------------- 68,967 Samsung Fire & Marine Insurance Co. (d)(h) .............. 27,831,653 ---------- 33,032,154 ---------- Other Financial Companies 1.2% 14,638 Boo Kook Securities (Securities company) ................ 114,332 218,224 Hyundai Securities (Securities company) ................. 2,608,358 14,578 Hyundai Securities (New 1) .............................. 163,895 50,000 LG Securities Co., Ltd. (Securities company) ............ 508,876 145,000 Shinyoung Securities .................................... 2,402,367 27,081 Ssangyong Investment & Securities Co. ................... 258,952 ---------- 6,056,780 ---------- SERVICE INDUSTRIES 0.9% Miscellaneous Commercial Services 243,132 Samsung Co., Ltd. (Trading company) ..................... 2,877,302 44,589 Samsung Co., Ltd. (New 1) ............................... 522,404 45,003 Sunkyong Ltd. ........................................... 655,073 6,515 Sunkyong Ltd. (New 1) ................................... 90,208 ---------- 4,144,987 ---------- DURABLES 6.7% Automobiles 4.6% 116,209 Hyundai Motor Co., Ltd. (Korea's largest auto manufacturer) ......................................... 2,750,509 423,380 Hyundai Motor Services Co., Ltd. (Auto parts and services) ............................................. 10,321,453 54,989 Hyundai Motor Services Co., Ltd. (New 1) ................ 1,301,515 113,341 Mando Machinery Corp. ................................... 3,822,745 35,000 Samlip Industries (Auto parts manufacturer) ............. 1,404,142 90,000 Yoosung Enterprise (Leading manufacturer of engine parts) ......................................... 2,566,864 ---------- 22,167,228 ---------- Leasing Companies 0.3% 93,000 Korea Development Leasing Co. (Largest leasing company in Korea) ..................................... 1,309,704 ---------- Telecommunications Equipment 0.1% 5,490 LG Information & Communication (Leading manufacturer of telecommunication equipment) .......... 350,840 5,050 LG Information & Communication (New 1) .................. 357,982 220 Sungmi Telecom Electronics (Leading manufacturer of telecommunication equipment) ....................... 32,805 ---------- 741,627 ----------
The accompanying notes are an integral part of the financial statements. 16 93
=================================================================================================================== Market Shares Value($) - ------------------------------------------------------------------------------------------------------------------- Tires 1.7% 163,416 Hankook Tire Manufacturing Co., Ltd. (Major tire manufacturer) ......................................... 6,265,892 42,995 Hankook Tire Manufacturing Co., Ltd. (New)(c) ........... 1,679,095 11,570 Hankook Tire Manufacturing Co., Ltd. (New 2)(c) ......... 449,108 ---------- 8,394,095 ---------- MANUFACTURING 5.4% Chemicals 1.5% 85,550 Hanwha Co., Ltd. ........................................ 931,432 13,894 Hanwha Co., Ltd. (New 1) ................................ 154,560 37,540 Korea Chemical Co. (Paint company) ...................... 2,576,710 210,009 LG Chemical Co. Ltd. (Korea's largest integrated chemical company) ..................................... 2,025,531 50,047 Oriental Chemical Industries Co., Ltd. .................. 1,160,854 4,755 Oriental Chemical Industries Co., Ltd. (New 1) .......... 106,354 10,960 Oriental Chemical Industries Co., Ltd. (New 2) .......... 241,250 ---------- 7,196,691 ---------- Containers & Paper 3.3% 100,000 Asia Paper Manufacturing Co. (Specialized maker of cardboard used for packaging) ......................... 3,491,124 37,333 Asia Paper Manufacturing Co. (New 1) .................... 1,219,397 50,000 Dae Young Packaging Co. (New 1) (Leading producer of corrugated board base and boxes) ................... 1,698,225 169,500 Hansol Paper Manufacturing Co., Ltd. .................... 4,553,432 145,807 Hansol Paper Manufacturing Co., Ltd. (New 1) ............ 3,796,159 20,000 Korea Export Packaging Co. (New 1) (Producer of corrugated boards) .................................... 437,870 35,000 Shin Poong Paper Manufacturing Co., Ltd. (Leading manufacturer of white duplex paperboard) .............. 849,112 ---------- 16,045,319 ---------- Diversified Manufacturing 0.0% 22,339 Samsung Heavy Industries Co., Ltd. (New 1) (Shipbuilder, major producer of machinery) ............ 224,976 ---------- Electrical Products 0.6% 114,086 Kyungwon Century Co., Ltd. (Major manufacturer of heating and cooling equipment) ........................ 2,902,780 ---------- TECHNOLOGY 9.1% EDP Peripherals 0.3% 41,240 Chung Ho Computer Co. (Manufacturer of cash dispensers, on-line and automated teller machines) .... 1,674,002 ---------- Electronic Components/ Distributors 8.2% 216,605 Samsung Display Devices ................................. 12,381,091 15,445 Samsung Display Devices (New 1) ......................... 875,521
The accompanying notes are an integral part of the financial statements. 17 94 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Investment Portfolio (continued)
=================================================================================================================== Market Shares Value($) - ------------------------------------------------------------------------------------------------------------------- 236,962 Samsung Electromechanics Co., Ltd. ...................... 5,384,225 59,318 Samsung Electromechanics Co., Ltd. (New 1) .............. 1,312,718 235,220 Samsung Electronics Co., Ltd. ........................... 12,665,692 143,724 Samsung Electronics Co., Ltd. (New 1) ................... 7,381,801 ---------- 40,001,048 ---------- Electronic Data Processing 0.6% 87,817 Trigem Computer Inc. (Major personal computer manufacturer) ......................................... 2,702,062 ---------- ENERGY 1.2% Oil & Gas Production 55,833 Ssangyong Oil Refining Co. .............................. 1,222,379 245,644 Yukong, Ltd. ............................................ 4,651,248 ---------- 5,873,627 ---------- METALS & MINERALS 2.0% Coal Mining 0.3% 30,000 Dongwon Company Ltd. (Thermal coal mining) .............. 1,437,870 ---------- Steel & Metals 1.7% 160,000 Inchon Iron & Steel Co. (Steel producer) ................ 2,575,148 70,857 Inchon Iron & Steel Co. (New 1) ......................... 1,123,649 72,313 Kia Steel Co., Ltd. (New 1) ............................. 315,781 68,200 Pohang Iron & Steel Co., Ltd. (Leading steel producer)(d) .......................................... 4,035,907 ---------- 8,050,485 ---------- CONSTRUCTION 5.3% Building Materials 2.7% 10,000 Asia Cement Manufacturing Co.(Major producer of cement) ............................................... 250,888 24,000 Hanil Cement Manufacturing Co., Ltd. (Cement manufacturing company) ................................ 1,050,888 234,337 Keum Kang Co., Ltd. (Construction company and manufacturer of building materials) ................... 10,676,893 68,915 Ssangyong Cement Industrial Co., Ltd. ................... 970,519 ---------- 12,949,188 ---------- Homebuilding 0.3% 50,000 Chong Gu Housing & Construction Co. (Apartment building construction company) ........................ 1,242,604 46,300 Keang Nam Enterprises (Apartment and urban renewal construction company) ......................... 372,044 ---------- 1,614,648 ---------- Miscellaneous 2.3% 139,125 Dong Ah Construction Industries Co., Ltd. (Leading construction company) ................................. 2,963,609 4,659 Dong Ah Construction Industries Co., Ltd. (New 2) ....... 94,834
The accompanying notes are an integral part of the financial statements. 18 95
=================================================================================================================== Market Shares Value($) - ------------------------------------------------------------------------------------------------------------------- 149,904 Hyundai Engineering & Construction Co. ................. 3,477,063 14,258 Hyundai Engineering & Construction Co. (New 1) ......... 313,845 30,870 Kumho Construction and Engineering (Engineering and construction company) ............................ 233,808 135,350 LG Construction Co. (Major real estate developer and construction company) ................................ 2,658,947 1,234 Sungwon Construction Co. ............................... 13,873 240 Sungwon Construction Co. (New) ......................... 2,542 20,000 Tae Young Corp. (Construction company) ................. 1,315,976 ----------- 11,074,497 ----------- TRANSPORTATION 1.5% Airlines 0.5% 158,146 Korean Air Co., Ltd. ................................... 2,433,015 ----------- Marine Transportation 0.1% 27,930 Hyundai Merchant & Marine Co. (Transportation company) ............................................. 360,280 1,146 Korea Line Corp. (Maritime transportation company) ..... 13,155 ----------- 373,435 ----------- Trucking 0.9% 179,156 Korea Express Co., Ltd. (General freight transport company) ............................................. 4,303,984 ----------- UTILITIES 2.9% Electric Utilities 1.6% 210,900 Korea Electric Power Co. ............................... 6,139,811 91,000 Korea Electric Power Co. (ADR) ......................... 1,865,500 ----------- 8,005,311 ----------- Natural Gas Distribution 1.3% 12,900 Daehan City Gas Co. (Natural gas distributor) .......... 931,243 37,600 Daesung Industrial (Natural gas distributor) ........... 2,202,604 23,687 Daesung Industrial (New 1) ............................. 1,210,980 24,940 Samchully (Producer and distributor of anthracite and gas) ............................................. 1,741,374 4,689 Samchully (New 1)(c) ................................... 338,496 1,875 Samchully (New 2) ...................................... 132,027 ----------- 6,556,724 ----------- TOTAL COMMON STOCKS (Cost $296,131,802) ................ 416,913,878 ----------- - ------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO - 100.0% (Cost $383,112,719)(a) ............................... 487,337,611 ===========
The accompanying notes are an integral part of the financial statements. 19 96 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Investment Portfolio (continued) ================================================================================ - -------------------------------------------------------------------------------- (a) The cost for federal income tax purposes was $383,716,010. At December 31, 1996, net unrealized appreciation for all securities based on tax cost was $103,621,601. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over tax cost of $175,647,533 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over market value of $72,025,932. (b) New shares issued during 1996, eligible for a pro rata share of 1996 dividends (See Note A to the Notes to Financial Statements). (c) Securities valued in good faith by the Valuation Committee of the Board of Directors at fair value amounted to $53,084,865 (10.43% of net assets). Their values have been estimated by the Board of Directors in the absence of readily ascertainable market values. 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. The cost of these securities at December 31, 1996 aggregated $59,806,632. These securities may also have certain restrictions as to resale (See Note A to the Notes to Financial Statements). (d) 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 of $54,963,119 over the local share price of $92,233,014 for these securities valued by the Valuation Committee was approximately 10.80% of the Fund's net assets at December 31, 1996. The cost of these securities at December 31, 1996 was $25,609,696 (See Note A to the Notes to Financial Statements). Their values have been estimated by the Board of Directors in the absence of readily ascertainable market values or other market factors, respectively. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the difference could be material. (e) Principal amount stated in Korean won unless otherwise noted. U.S.$ United States Dollar. (f) Bonus interest represents the amount available to be paid to the holder at maturity in lieu of conversion. (g) Non-income producing. (h) At December 31, 1996, 28% of the Fund's net assets were invested in Korea Mobile Telecom Corp. and Samsung Fire & Marine Insurance Co. The accompanying notes are an integral part of the financial statements. 20 97 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Financial Statements
====================================================================================================== - ------------------------------------------------------------------------------------------------------ STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996 - ------------------------------------------------------------------------------------------------------ ASSETS Investments, at market (identified cost $383,112,719)(Note A) .... $487,337,611 Cash: U.S. dollars .................................................. 14,113 Won at market (identified cost $22,049,372)(Note A) ........... 21,718,387 Receivables: Dividends and interest ........................................ 1,041,520 Other assets ..................................................... 3,747 ------------ Total assets ................................................ 510,115,378 LIABILITIES Payables: Accrued management fee (Note C) ................................ $495,693 Other accrued expenses and payables (Note C) ................... 476,792 -------- Total liabilities ............................................ 972,485 ------------ Net assets, at market value ...................................... $509,142,893 ============ NET ASSETS Net assets consist of: Accumulated net investment loss ................................ $ (1,427,032) Net unrealized appreciation (depreciation) on: Investments .................................................. 104,224,892 Won .......................................................... (330,985) Won related transactions ..................................... (10,076) Accumulated net realized loss ................................ (7,050,450) Paid-in capital .............................................. 413,736,544 ------------ Net assets, at market value ...................................... $509,142,893 ============ NET ASSET VALUE per share ($509,142,893 [divided by sign] 37,570,917 shares of common stock issued and outstanding, 50,000,000 shares authorized, $.01 par value) .................................... $13.55 ======
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 21 98 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Financial Statements (continued)
============================================================================================================ - ------------------------------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 1996 - ------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME Income: Interest (net of withholding taxes of $122,623) ..................... $ 2,543,583 Dividends (net of withholding taxes of $46,223) (Note A) ............ 117,777 ------------- 2,661,360 Expenses: Management fee (Note C) ............................................. $ 3,077,808 Custodian and accounting fees (Note C) .............................. 701,947 Directors' fees and expenses (Note C) ............................... 88,802 Legal ............................................................... 37,732 Auditing ............................................................ 60,459 Reports to shareholders ............................................. 38,922 Services to shareholders ............................................ 41,774 Other ............................................................... 40,948 4,088,392 ------------- ------------- Net investment loss ................................................... (1,427,032) ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS Net realized loss during the period on: Investments ......................................................... (2,375,037) Won related transactions ............................................ (3,850,414) (6,225,451) ------------- Net unrealized appreciation (depreciation) during the period on: Investments ......................................................... (158,292,765) Won ................................................................. 2,042,692 Won related transactions ............................................ (4,580) (156,254,653) ------------- ------------- Net loss on investment transactions ................................... (162,480,104) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .................... $(163,907,136) =============
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 22 99
============================================================================================================ - ------------------------------------------------------------------------------------------------------------ STATEMENTS OF CHANGES IN NET ASSETS - ------------------------------------------------------------------------------------------------------------ SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, INCREASE (DECREASE) IN NET ASSETS 1996 1996 - ----------------------------------------------------------------------------------------------------------- Operations: Net investment income (loss) .......................................... $ (1,427,032) $ 738,094 Net realized gain (loss) from investment transactions ................. (6,225,451) 24,164,248 Net unrealized appreciation (depreciation) on investment transactions during the period ................................................... (156,254,653) (60,906,538) ------------- ------------ Net decrease in net assets resulting from operations .................... (163,907,136) (36,004,196) ------------- ------------ Distributions to shareholders: From net investment income ............................................ -- (738,094) ------------- ------------ In excess of net investment income .................................... -- (1,489,524) ------------- ------------ From net realized gains on investment transactions .................... (22,312,637) (13,231,733) ------------- ------------ Fund share transactions: Reinvestment of distributions ......................................... 6,675,080 5,604,398 ------------- ------------ DECREASE IN NET ASSETS .................................................. (179,544,693) (45,859,149) Net assets at beginning of period ....................................... 688,687,586 734,546,735 ------------- ------------ NET ASSETS AT END OF PERIOD (including accumulated net investment loss of $1,427,032 at December 31, 1996) ................................... $ 509,142,893 $688,687,586 ============= ============ OTHER INFORMATION INCREASE IN FUND SHARES Shares outstanding at beginning of period ............................... 37,188,528 36,930,508 ------------- ------------ Shares issued to shareholders in reinvestment of distributions ........ 382,389 258,020 ------------- ------------ Shares outstanding at end of period ..................................... 37,570,917 37,188,528 ============= ============
The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------- 23 100 [Logo of The Korea Fund, Inc.] 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. - ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, -------------------------------------------------------- 1996 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period..................... $ 18.52 $19.89 $18.66 $11.40 $10.75 $ 10.27 ------- ------ ------ ------ ------ ------- Income from investment operations (a): Net investment income (loss)........................... (.04) .02 (.02) (.03) .02 .08 Net realized and unrealized gain (loss) on investment transactions.............................. (4.34) (.97) 2.42 7.13 .86 .78 ------- ------ ------ ------ ------ ------- Total from investment operations......................... (4.38) (0.95) 2.40 7.10 .88 .86 ------- ------ ------ ------ ------ ------- Less distributions: From net investment income............................. -- (.02) -- (.01) (.04) (.06) In excess of net investment income..................... -- (.04) -- -- -- -- From net realized gains on investment transactions..... (.60) (.36) (.15) -- (.20) (.34) ------- ------ ------ ------ ------ ------- Total distributions...................................... (.60) (.42) (.15) (.01) (.24) (.40) ------- ------ ------ ------ ------ ------- Antidilution (dilution) resulting from the rights offering (1995), fourth tranche (1994), and reinvestment of distributions for shares at market value.................................................. .01 -- (1.02) .22 .01 .02 ------- ------ ------ ------ ------ ------- Underwriting expenditures and offering costs............. -- -- -- (.05) -- -- ------- ------ ------ ------ ------ ------- Net asset value, end of period........................... $ 13.55 $18.52 $19.89 $18.66 $11.40 $ 10.75 ======= ====== ====== ====== ====== ======= Market value, end of period.............................. $ 14.88 $21.13 $19.63 $22.00 $15.00 $ 11.38 ======= ====== ====== ====== ====== ======= TOTAL RETURN Per share market value (%)............................... (24.27)** 9.73 (5.43) 46.74 34.54 (17.01) Per share net asset value (%)(b)......................... (27.17)** (5.09) 13.00 63.77 8.20 7.87 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions)................... 509 689 735 550 258 241 Ratio of operating expenses to average net assets (%).... 1.32* 1.28 1.32 1.37 1.52 1.52 Ratio of net investment income (loss) to average net assets (%)(c)...................................... (.23)** .10 (.10) (.18) .15 .70 Portfolio turnover rate (%).............................. 7.1* 32.6 10.5 14.3 14.3 18.2 Average commission rate paid (d)......................... $ .0853 $.1254 $ -- $ -- $ -- $ -- (a) Based on monthly average of shares outstanding during each period. (b) Total investment returns reflect changes in net asset value per share during each period and assume that dividends and capital gains distributions, if any, were reinvested. These percentages are not an indication of the performance of a shareholder's investment in the Fund based on market price. (c) The ratio for the six months ended December 31, 1996 has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year (Note A). (d) Average commission rate paid per share of common and preferred stocks is calculated for fiscal years ending on or after June 30, 1996. * Annualized ** Not annualized
- -------------------------------------------------------------------------------- 24 101 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Notes to Financial Statements ================================================================================ A. SIGNIFICANT ACCOUNTING POLICIES ------------------------------- The Korea Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a non-diversified, closed-end management investment company. The Fund's financial statements are prepared in accordance with generally accepted accounting principles which require the use of management estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements. SECURITY VALUATION. Portfolio securities which are traded on the Korean, U.S., or foreign stock exchanges are valued at the most recent sale price reported on the exchange on which the security is traded most extensively. If no sale occurred, the security is then valued at the calculated mean between the most recent bid and asked quotations. If there are no such bid and asked quotations, the most recent bid quotation is used. Short-term investments having a maturity of sixty days or less are valued at amortized cost. All other securities are valued at fair value as determined in good faith by the Valuation Committee of the Board of Directors. See notes (c) and (d) of the notes to the Investment Portfolio. 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 16.5% on dividends and 13.2% 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 and certain securities sold at a loss. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund. The Fund uses the identified cost method for determining realized gain or loss on investments for both financial and federal income tax reporting purposes. 25 102 [Logo of The Korea Fund, Inc.] The Korea Fund, Inc. Notes to Financial Statements (continued) ================================================================================ 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, 1996 the exchange rate for Korean won was U.S. $0.001189 to W 1. SUBSCRIPTIONS FOR NEW SHARES. As part of their annual corporate action matters, certain Korean companies offer rights to their shareholders to subscribe to new shares which are eligible for a portion of the dividends paid on existing shares in the year of subscription. The Fund follows a policy of subscribing to new share offerings by Korean companies. OTHER. Investment security transactions are accounted for on a trade-date basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. All original issue and acquisition discounts are accreted for both tax and financial reporting purposes. B. PURCHASES AND SALES OF SECURITIES --------------------------------- For the six months ended December 31, 1996, purchases and sales of investment securities (excluding short-term investments) aggregated $81,446,217 and $19,897,158, respectively. C. RELATED PARTIES --------------- Under the Management Agreement the Fund agrees to pay the Manager a monthly fee at an annual rate equal to 1.15% of the Fund's month-end net assets up to and including $50,000,000, 1.10% of such net assets on the next $50,000,000, 1% of such assets on the next $250,000,000, 0.95% of such net assets on the next $400,000,000, and 0.90% of such net assets in excess of $750,000,000. For the six months ended December 31, 1996, the fee pursuant to such agreement amounted to $3,077,808 which was equivalent to an annual effective rate of 0.99% of the Fund's average month-end net assets. Under the Advisory Agreement, the Manager pays the Korean Adviser a monthly fee, equal to an annual rate of 0.2875% of the first $50,000,000 of the Fund's month-end net assets, 0.275% of such net assets on the next $50,000,000, and 0.25% of such net assets on the next $250,000,000, 0.2375% of such net assets on the next $400,000,000, and 0.225% of such net assets in excess of $750,000,000. For the six months ended December 31, 1996, brokerage commissions on investment transactions amounting to $38,143 were paid by the Fund to Daewoo Securities Co., Ltd., the parent company of the Korean Adviser. 26 103 ================================================================================ Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is responsible for determining the daily net asset value per share and maintaining the portfolio and general accounting records of the Fund. For the six months ended December 31, 1996, the amount charged to the Fund by SFAC aggregated $168,114, of which $25,702 is unpaid at December 31, 1996. The Fund pays each Director not affiliated with the Manager or the Korean Adviser $6,000 annually plus specified amounts for attended board and committee meetings. For the six months ended December 31, 1996, Directors' fees and expenses amounted to $88,802. 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 October 1, 1996, total foreign investment was limited generally to 18% of each class of a company's outstanding shares, while a single foreign investor could only invest up to 4% of each class of outstanding shares. At October 1, 1996, the limits were increased from 18% to 20% and 4% to 5%, respectively. Pursuant to its license, however, the Fund may invest in shares representing 7% of each class in general. E. INVESTING IN THE KOREAN MARKET ------------------------------ Investing in the Korean market may involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currency, high rates of inflation, repatriation restrictions on income and capital, and future adverse political and economic developments. Moreover, securities issued in this market may be less liquid, subject to government ownership controls, delayed settlements, and their prices more volatile than those of comparable securities in the United States. 27 104 [LOGO]The Korea Fund, Inc. Investment Portfolio as of June 30, 1996
========================================================================================================== Principal Market Amount(e) Value($) - ---------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 0.3% U.S. $1,812,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 6/28/96 at 5.45%, to be repurchased at $1,812,823 on 7/1/96, collateralized by a $1,817,000 U.S. Treasury Note, 6.125%, 5/15/98 (Cost $1,812,000) ..... 1,812,000 ---------- - ---------------------------------------------------------------------------------------------------------- CORPORATE BONDS 2.2% METALS & MINERALS 10,000,000,000 Korea Tungsten Exchange Bond, Zero Coupon with 36.03% bonus interest at maturity, 11/11/98 (c)(f) (Cost $13,852,941) .......... 13,120,027 ---------- - ---------------------------------------------------------------------------------------------------------- CONVERTIBLE BONDS 6.4% CONSUMER STAPLES 1.8% Alcohol & Tobacco 0.7% 3,000,000,000 Jinro Ltd., 2% with 14.36% bonus interest at maturity, 9/30/98 (Leading producer of Soju, a distilled spirit) (c)(f) .................. 3,987,242 ---------- Food & Beverage 0.5% 800,000,000 Crown Confectionery Co., 3% with 16.28% bonus interest at maturity, 12/31/97 (Major producer. 1,008,289 of snacks) (c)(f) 2,000,000,000 Haitai Confectionery Co., 1% with 12.69% bonus interest at maturity, 6/30/98 (Major producer of snacks) (c)(f) ............................ 2,256,888 --------- 3,265,177 --------- Textiles 0.6% U.S.$ 1,000,000 Kolon Industries, Inc., 0.25%, 12/31/04 (Leading manufacturer of nylon, polyester yarn and fabrics) ................................... 507,500 2,400,000,000 Kukje Corp., 12% with 4.62% bonus interest at maturity, 12/31/97 (Shoe manufacturer) (c)(f) .. 3,085,109 ---------- 3,592,609 ---------- HEALTH 0.7% Pharmaceuticals 3,000,000,000 Korea Green Cross Corp., 1% with 11.88% bonus interest at maturity, 12/31/97 (Leading ethical drug producer) (c)(f) ................. 3,545,833 ---------- 400,000,000 Yuhan Corp., 5.5% with 25.41% bonus interest at maturity, 12/31/97 (Pharmaceutical company) (c)(f) ................................. 558,481 ---------- 4,104,314 ----------
The accompanying notes are an integral part of the financial statements. 105 [LOGO]The Korea Fund, Inc. Investment Portfolio (continued)
=========================================================================================================== Principal Market Amount(e) Value($) - ----------------------------------------------------------------------------------------------------------- MANUFACTURING 0.8% Containers & Paper 4,000,000,000 Hansol Paper Manufacturing Co., Ltd., 3% with 28.24% bonus interest at maturity, 12/31/99 (Korea's largest paper manufacturer) (c)(f) ....... 4,688,666 ---------- ENERGY 1.0% Oil & Gas Production 2,000,000,000 Yukong, Ltd., 2% with 8.15% bonus interest at maturity, 12/31/97 (Korea's largest oil refiner) (c)(f) ................................... 2,318,739 3,000,000,000 Yukong, Ltd., 1% with 13.92% bonus interest at maturity, 12/31/98 (c)(f) ......................... 3,263,747 ---------- 5,582,486 ---------- METALS & MINERALS 0.4% Steel & Metals 1,000,000,000 Kangwon Industry, 6% with 19.52% bonus interest at maturity, 6/30/97 (Steel company) (c)(f) ....... 1,414,095 500,000,000 Sammi Steel, 4% with 20.57% bonus interest at maturity, 12/31/97 (Specialty steel company) (c)(f) .................. 660,673 ---------- 2,074,768 ---------- CONSTRUCTION 0.2% Miscellaneous 1,000,000,000 Sungwon Construction, 5% with 21.11% bonus interest at maturity, 12/31/97 (Construction company) (c)(f) ..................... 1,343,259 ---------- UTILITIES 1.5% Electric Utilities 5,000,000,000 Korea Electric Power Co., 1% with 9.98% bonus interest at maturity, 12/31/97 (Electric utility) (c)(f) ......................... 5,815,125 2,300,000,000 Korea Electric Power Co., Zero Coupon with 30.5% bonus interest at maturity, 12/31/98 (c)(f) ....... 2,775,824 ---------- 8,590,949 ---------- TOTAL CONVERTIBLE BONDS (Cost $41,504,920) .......... 37,229,470 ---------- - ----------------------------------------------------------------------------------------------------------- PREFERRED STOCKS 3.4% Shares ------ CONSUMER DISCRETIONARY 0.1% Apparel & Shoes 10,700 BYC (Leading maker of under garments) (c) ........... 567,184 ---------- CONSUMER STAPLES 0.7% Alcohol & Tobacco 0.1% 5,800 Jinro, Ltd. ......................................... 53,982 46,165 Oriental Brewery Co., Ltd. (Korea's largest brewery) (g) ..................... 682,914 ---------- 736,896 ----------
The accompanying notes are an integral part of the financial statements. 106
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- Food & Beverage 0.3% 70,690 Cheil Food and Chemical Co., Ltd. (Korea's leading sugar refiner and major integrated food processor) .................................. 1,838,707 ---------- Package Goods/Cosmetics 0.1% 56,070 Pacific Corp. (Leading cosmetics producer) .......... 435,455 ---------- Textiles 0.2% 133,230 Kolon Industries, Inc. .............................. 1,220,290 38,165 Kolon Industries, Inc. Rights (c)(g) ................ 159,962 ---------- 1,380,252 ---------- HEALTH 0.1% Pharmaceuticals 6,700 Korea Green Cross Corp. ............................. 260,170 4,700 Shin Poong Pharmaceutical Co., Ltd. (Specialized drug producer) (c) ................... 77,638 ---------- 337,808 ---------- FINANCIAL 1.0% Insurance 0.5% 6,175 Samsung Fire & Marine Insurance Co. (Insurance company) (d) ........................... 2,428,285 ---------- Other Financial Companies 0.5% 87,310 Shin Young Securities (Securities company) .......... 870,732 252,000 Ssangyong Investment & Securities (Securities company) ............................. 2,336,095 ---------- 3,206,827 ---------- DURABLES 0.4% Automobiles 0.3% 99,130 Mando Machinery Corp. (Major auto parts manufacturer) .................. 1,906,346 ---------- Tires 0.1% 74,650 Korea Kumho Co. (Korea's largest tire manufacturer) (g) ........................... 346,011 ---------- MANUFACTURING 0.2% Chemicals 3,700 Han Wha Corp., Ltd. (Leading producer of explosives and chemicals) ........................ 28,279 70,475 Oriental Chemical Industries Co., Ltd. (Manufacturer of specialty chemicals) ............ 1,033,842 ---------- 1,062,121 ---------- TECHNOLOGY 0.4% Electronic Components/ Distributors 9,918 Samsung Display Devices (Leading manufacturer of CRT and picture tubes) ........................ 402,246 37,039 Samsung Electronics Co., Ltd. (Major electronics manufacturer) (d) ............................... 1,602,466 11,162 Samsung Electronics Co., Ltd. (New) (b)(d)(g) ....... 449,053 ---------- 2,453,765 ----------
The accompanying notes are an integral part of the financial statements. 107 [LOGO] The Korea Fund, Inc. Investment Portfolio (continued)
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- ENERGY 0.0% Oil Companies 1,174 Ssangyong Oil Refining Co. (Major oil refiner)(c) ............................ 12,385 ---------- CONSTRUCTION 0.5% Building Materials 0.2% 50,000 Ssangyong Cement Industrial Co., Ltd. (Major cement producer) ........................... 607,125 27,000 Sung Shin Cement Co., Ltd. (Major cement company) ............................ 352,811 ---------- 959,936 ---------- Miscellaneous 0.3% 95,000 Hyundai Engineering & Construction Co. (Leading general contractor) ...................... 2,049,433 ---------- TRANSPORTATION 0.0% Airlines 20,520 Korean Airlines Co., Ltd. (Airline) ................. 252,959 ---------- TOTAL PREFERRED STOCKS (Cost $21,382,560) ........... 19,974,370 ---------- - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS 87.7% CONSUMER DISCRETIONARY 4.0% Apparel & Shoes 0.5% 52,083 Shin Won (Major apparel manufacturer) ............... 1,592,281 30,000 Ssang Bang Wool Co. (Leading underwear manufacturer) ................. 1,427,515 ---------- 3,019,796 ---------- Department & Chain Stores 3.3% 182,591 Hwa Sung Industries (Department store) .............. 4,794,364 152,443 Shinsegae (Major department store chain) ............ 10,335,756 16,571 Shinsegae (New) (b)(g) .............................. 1,031,602 174,599 Taegu Department Store (Department store) ........... 3,379,197 ---------- 19,540,919 ---------- Hotels & Casinos 0.2% 100,000 Hotel Shilla Co. (Luxury hotel and resort operator) ........................................ 1,183,432 ---------- CONSUMER STAPLES 3.5% Alcohol & Tobacco 0.1% 19,000 Jinro, Ltd. ......................................... 405,202 6,009 Jinro, Ltd. (New) (b)(g) ............................ 120,002 ---------- 525,204 ---------- Food & Beverage 2.5% 123,854 Cheil Food and Chemical Co., Ltd. ................... 8,092,039 120,000 Dongwon Industries Company (Leading deep-sea fishing and processing company) .................. 2,337,278 32,271 Nhong Shim Co. (Manufacturer of instant noodles and snacks) ...................................... 1,209,367 48,000 Pulmuone Co., Ltd. (Food producer) .................. 2,633,136 ---------- 14,271,820 ----------
The accompanying notes are an integral part of the financial statements. 108
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- Textiles 0.9% 20,356 Cheil Industries (Leading woolen yarn and fabric manufacturer) ............................. 356,330 30,000 Choongnam Spinning Co., Ltd. (Korea's leading manufacturer of cotton yarn) (g) ................. 447,485 33,500 Hankook Synthetics (Textile manufacturer) (g) ....... 2,155,695 6,700 Hankook Synthetics Rights (c)(g) .................... 60,293 3,040 Taekwang Industrial Co., Ltd. (Major producer of acrylic fiber) ................ 1,723,866 29,600 Tongyang Nylon (Korea's largest producer of nylon filament yarn) ......................... 773,570 ---------- 5,517,239 ---------- HEALTH 3.2% Pharmaceuticals 72,632 Chong Kun Dang Co., Ltd. (Pharmaceutical company) ......................... 2,954,690 11,011 Daewoong Pharmaceutical Co. (Pharmaceutical company) ......................... 471,008 159,500 Dong-A Pharmaceutical (Pharmaceutical company) ...... 4,089,744 11,068 Korea Green Cross Corp. ............................. 1,185,662 126,621 Yuhan Corporation ................................... 7,648,458 27,565 Yuhan Corporation (New) (Common 1) (b)(g) ........... 1,444,172 15,418 Yuhan Corporation (New) (Common 2) (b)(g) ........... 802,071 ---------- 18,595,805 ---------- COMMUNICATIONS 21.2% Cellular Telephone 100,702 Korea Mobile Telecom (Mobile telecommunication company) (d) ............ 123,940,923 ---------- FINANCIAL 19.3% Banks 7.4% 260,650 Cheju Bank (Regional bank) .......................... 3,309,535 3,381 Daegu Bank (Regional bank) (New) (b) ................ 47,097 134,691 Kookmin Bank (Major commercial bank) ................ 2,490,588 428,454 Korea Exchange Bank (Major commercial bank) ......... 4,912,010 200,000 Korea First Bank (Major commercial bank) (g) ........ 1,651,874 385,000 Korea Housing Bank (Major commercial bank) (New) (b) ................. 8,970,044 584,315 Korea Long Term Credit Bank (Major commercial bank) ........................... 15,126,498 365,585 Shin Han Bank (Major commercial bank) ............... 6,669,943 ---------- 43,177,589 ---------- Insurance 10.4% 45,356 Daehan Fire & Marine Insurance Co., Ltd. (Insurance company) ............................... 1,889,833 44,656 Hyundai Fire and Marine Insurance (Insurance company) ............................... 3,082,761
The accompanying notes are an integral part of the financial statements. 109 [LOGO] The Korea Fund, Inc. Investment Portfolio (continued)
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- 49,912 LG Insurance Co. (Insurance company) ................ 5,076,114 68,967 Samsung Fire & Marine Insurance Co. (d) ............. 50,657,418 ---------- 60,706,126 ---------- Other Financial Companies 1.5% 14,638 Boo Kook Securities (Securities company) ............ 180,449 178,224 Hyundai Securities (Securities company) (g) ......... 4,130,438 14,578 Hyundai Securities Rights (c) (g) ................... 55,710 50,000 LG Securities Co., Ltd. (Securities company) (g) ......................... 899,901 145,000 Shinyoung Securities (Securities company) ........... 3,038,708 27,081 Ssangyong Investment & Securities Co. (Securities company) ............................. 487,405 ---------- 8,792,611 ---------- SERVICE INDUSTRIES 1.2% Miscellaneous Commercial Services 243,132 Samsung Co., Ltd. (Trading company) ................. 5,185,138 44,589 Samsung Co., Ltd. (New) (b)(c)(g) ................... 874,094 45,003 Sunkyong Ltd. (Trading company) ..................... 926,467 ---------- 6,985,699 ---------- DURABLES 7.2% Automobiles 5.1% 116,209 Hyundai Motor Co., Ltd. (Korea's largest auto manufacturer) .............. 4,383,624 423,380 Hyundai Motor Services Co., Ltd. (Auto parts and services) ........................ 14,926,859 113,341 Mando Machinery Corp. (Major auto parts manufacturer) .................. 5,588,808 35,000 Samlip Industries (Auto parts manufacturer) ......... 1,208,087 90,000 Yoosung Enterprise (Leading manufacturer of engine parts) ................................... 3,827,663 ---------- 29,935,041 ---------- Leasing Companies 0.3% 93,000 Korea Development Leasing Co. (Largest leasing company in Korea) ............... 2,120,932 ---------- Telecommunications Equipment 0.1% 5,050 LG Information & Communication (Electronic telephone manufacturer) (New) (b)(c)(g) .......... 539,450 ---------- Tires 1.7% 163,416 Hankook Tire Manufacturing Co., Ltd. (Major tire manufacturer) ........................ 7,453,640 42,995 Hankook Tire Manufacturing Co., Ltd. (New) (Common 1) (b)(g) .......................... 1,844,460 11,569 Hankook Tire Manufacturing Co., Ltd. (New) (Common 2) (b) (g) ............................... 477,763 ---------- 9,775,863 ----------
The accompanying notes are an integral part of the financial statements. 110
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- MANUFACTURING 5.5% Chemicals 2.2% 85,550 Hanwha Co. (Producer of explosives and petrochemicals) .................................. 1,402,632 37,540 Korea Chemical Co. (Paint company) .................. 3,864,140 150,009 LG Chemical Ltd. (Korea's largest integrated chemical company) ................................ 2,367,006 70,000 Namhae Chemical Co. (Chemical producer) ............. 3,607,002 50,047 Oriental Chemical Industries Co., Ltd. .............. 1,758,308 4,755 Oriental Chemical Industries Co., Ltd. (New) (b)(g) . 161,196 ---------- 13,160,284 ---------- Containers & Paper 2.5% 100,000 Asia Paper Manufacturing Co. (Specialized maker of cardboard used for packaging) .................... 3,821,499 50,000 Dae Young Packaging Co. (New) (Leading producer of corrugated board base and boxes) (g) ............. 1,183,432 115,762 Hansol Paper Manufacturing Co., Ltd. ................ 4,338,221 145,807 Hansol Paper Manufacturing Co., Ltd. (New) (Common 1) (b) (g) ......................... 4,529,507 20,000 Korea Export Packaging Co. (Producer of corrugated boards) (g) ........................... 468,442 15,000 Shin Poong Paper Manufacturing Co., Ltd. (Leading manufacturer of white duplex paperboard) ......... 526,997 ---------- 14,868,098 ---------- Diversified Manufacturing 0.1% 22,339 Samsung Heavy Industries Co., Ltd. (New) (Machinery manufacturer) (b)(g) ............ 316,689 ---------- Electrical Products 0.7% 114,086 Kyungwon Century Co., Ltd. (Major manufacturer of heating and cooling equipment) ................ 3,881,624 ---------- TECHNOLOGY 10.3% Electronic Components/ Distributors 9.9% 213,685 Samsung Display Devices ............................. 15,304,609 15,445 Samsung Display Devices (New) (b) (g) ............... 1,047,183 236,962 Samsung Electromechanics Co., Ltd. (Major electronics parts company) ................ 8,500,486 59,318 Samsung Electromechanics Co., Ltd. (New) (b) ........ 1,945,092 235,218 Samsung Electronics Co., Ltd. ....................... 19,746,490 143,723 Samsung Electronics Co., Ltd. (New) (b) ............. 11,427,679 ---------- 57,971,539 ---------- Electronic Data Processing 0.4% 70,000 Trigem Computer Inc. (Major personal computer manufacturer) ........... 2,373,028 ----------
The accompanying notes are an integral part of the financial statements. 111 [LOGO] The Korea Fund, Inc. Investment Portfolio (continued)
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- ENERGY 0.7% Oil & Gas Production 25,243 Ssangyong Oil Refining Co. .......................... 585,020 119,731 Yukong, Ltd. ........................................ 3,512,819 ---------- 4,097,839 ---------- METALS & MINERALS 2.2% Coal Mining 0.3% 30,000 Dongwon Company Ltd. (Thermal coal mining) (g) ...... 1,834,320 ---------- Steel & Metals 1.9% 120,000 Inchon Iron & Steel Co. (Steel producer) ............ 3,402,367 70,857 Inchon Iron & Steel Co. (New) (b)(g) ................ 1,843,051 72,313 Kia Steel Co., Ltd. (Specialty steel company) (New) (b)(g) ............ 384,207 68,200 Pohang Iron & Steel Co., Ltd. (Leading steel producer)(d) ....................... 5,605,902 ---------- 11,235,527 ---------- CONSTRUCTION 5.4% Building Materials 3.0% 10,000 Asia Cement Manufacturing Co. (Major producer of cement) ........................ 368,590 24,000 Hanil Cement Manufacturing Co., Ltd. (Cement manufacturing company) .................... 1,242,604 224,337 Keum Kang Co., Ltd. (Construction company and manufacturer of building materials) ............... 14,269,957 58,915 Ssangyong Cement Industrial Co., Ltd. ............... 1,408,963 ---------- 17,290,114 ---------- Homebuilding 0.3% 50,000 Chong Gu Housing & Construction Co. (Apartment building construction company) .................... 1,140,286 46,300 Keang Nam Enterprises (Apartment and urban renewal construction company) ..................... 499,414 ---------- 1,639,700 ---------- Miscellaneous 2.1% 52,875 Dong Ah Construction Industries Co., Ltd. (Leading construction company) .................... 1,812,038 149,904 Hyundai Engineering & Construction Co. .............. 6,227,521 30,870 Kumho Construction and Engineering (Engineering and construction company) ......................... 308,243 120,150 LG Construction Co. (Major real estate developer and construction company) ......................... 2,636,428 1,234 Sungwon Construction Co. ............................ 23,731 240 Sungwon Construction Co. (New) (b)(g) ............... 3,935 20,000 Tae Young Corp. (Construction company) .............. 1,407,791 ---------- 12,419,687 ---------- TRANSPORTATION 1.7% Airlines 0.6% 148,416 Korean Airlines Co., Ltd. ........................... 3,457,917 ----------
The accompanying notes are an integral part of the financial statements. 112
=========================================================================================================== Market Shares Value($) - ----------------------------------------------------------------------------------------------------------- Marine Transportation 0.1% 27,930 Hyundai Merchant & Marine Co. (Marine transportation company) .......................... 502,685 1,146 Korea Line Corp. (Marine transportation company) .................. 19,072 ----------- 521,757 ----------- Trucking 1.0% 162,216 Korea Express Co., Ltd. (General freight transport company) .............. 5,899,127 ----------- UTILITIES 2.3% Electric Utilities 1.0% 110,900 Korea Electric Power Co. ........................... 3,827,909 91,000 Korea Electric Power Co. (ADR) ..................... 2,206,750 ----------- 6,034,659 ----------- Natural Gas Distribution 1.3% 12,900 Daehan City Gas Co. (Gas utility) .................. 1,176,775 37,600 Daesung Industrial (Natural gas distributor) ....... 2,363,905 23,686 Daesung Industrial (New) (b)(g) .................... 1,343,141 24,940 Samchully (Producer and distributor of anthracite and natural gas) ..................... 1,936,908 4,689 Samchully (New) (Common 1) (b)(g) .................. 335,259 1,875 Samchully (New) (Common 2) (b)(g) .................. 125,509 ----------- 7,281,497 ----------- TOTAL COMMON STOCKS (Cost $243,977,644) ............ 512,911,855 ----------- - ----------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PORTFOLIO - 100.0% (Cost $322,530,065) (a) ......................... 585,047,722 ===========
(a) The cost for federal income tax purposes was $323,133,356. At June 30, 1996, net unrealized appreciation for all securities based on tax cost was $261,914,366. This consisted of aggregate gross unrealized appreciation for all securities in which there was an excess of market value over tax cost of $282,963,094 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over market value of $21,048,728. (b) New shares issued during 1996, eligible for a pro rata share of 1996 dividends (Note A). (c) Securities valued in good faith by the Valuation Committee of the Board of Directors. The cost of these securities at June 30, 1996 was $56,623,037 (Note A). (d) Equity securities that have met the foreign-ownership limitation valued at a premium in good faith by the Valuation Committee of the Board of Directors. The cost of these securities at June 30, 1996 was $12,709,134 (Note A). (e) Principal amount stated in Korean won unless otherwise noted. CHF Swiss Francs. U.S.$ United States Dollar. (f) Bonus interest represents the amount available to be paid to the holder at maturity in lieu of conversion. (g) Non-income producing. The accompanying notes are an integral part of the financial statements. 113 [LOGO] The Korea Fund, Inc. Financial Statements
========================================================================================= - ----------------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1996 - ----------------------------------------------------------------------------------------- ASSETS Investments, at market (identified cost $322,530,065) (Note A) .............. $585,047,722 Cash: U.S. dollars ............................................................. 927 Won at market (identified cost $105,662,409) (Note A) .................... 103,288,732 Receivables: Investments sold ......................................................... 1,344,901 Dividends and interest ................................................... 761,486 Other assets ................................................................ 3,747 ------------ Total assets .......................................................... 690,447,515 LIABILITIES Payables: Investments purchased .................................................... $671,454 Accrued management fee (Note C) .......................................... 570,194 Other accrued expenses and payables (Note C) ............................. 518,281 -------- Total liabilities ..................................................... 1,759,929 ------------ Net assets, at market value ................................................. $688,687,586 ============ NET ASSETS Net assets consist of: Net unrealized appreciation (depreciation) on: Investments ........................................................... $262,517,657 Won ................................................................... (2,373,677) Won related transactions .............................................. (5,496) Accumulated net realized gain ............................................ 21,487,638 Common stock ............................................................. 371,885 Additional paid-in capital ............................................... 406,689,579 ------------ Net assets, at market value ................................................. $688,687,586 ============ NET ASSET VALUE per share ($688,687,586 [divided by sign] 37,188,528 shares of common stock issued and outstanding, 50,000,000 shares authorized, $.01 par value) ............................................... $ 18.52 ============ The accompanying notes are an integral part of the financial statements. - -----------------------------------------------------------------------------------------
114
================================================================================================ - ------------------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 1996 - ------------------------------------------------------------------------------------------------ INVESTMENT INCOME Income: Interest (net of withholding taxes of $370,894) (Note A) ..... $ 4,663,894 Dividends (net of withholding taxes of $1,224,537) (Note A) .. 5,842,031 ------------ 10,505,925 Expenses: Management fee (Note C) ...................................... $ 7,516,289 Custodian and accounting fees (Note C) ....................... 1,523,660 Directors' fees and expenses (Note C) ........................ 123,343 Legal ........................................................ 157,144 Auditing ..................................................... 107,002 Reports to shareholders ...................................... 92,762 Services to shareholders ..................................... 78,223 Other ........................................................ 169,408 9,767,831 ----------- ------------ Net investment income .......................................... 738,094 ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS Net realized gain (loss) during the period on: Investments .................................................. 24,364,471 Won related transactions ..................................... (200,223) 24,164,248 ----------- Net unrealized depreciation during the period on: Investments .................................................. (58,463,815) Won .......................................................... (2,415,407) Won related transactions ..................................... (27,316) (60,906,538) ----------- ------------ Net loss on investment transactions ............................ (36,742,290) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $(36,004,196) ============ The accompanying notes are an integral part of the financial statements. - ------------------------------------------------------------------------------------------------
115 [LOGO] The Korea Fund, Inc.
Financial Statements (continued) ====================================================================================================== - ------------------------------------------------------------------------------------------------------ STATEMENTS OF CHANGES IN NET ASSETS - ------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30, -------------------- 1996 1995 INCREASE (DECREASE) IN NET ASSETS - ------------------------------------------------------------------------------------------------------- Operations: Net investment income (loss) (Note A) ................................... $ 738,094 $ (615,149) Net realized gain from investment transactions (Note A) ................. 24,164,248 13,445,142 Net unrealized appreciation (depreciation) on investment transactions during the period (Note A) ......................................... (60,906,538) 64,721,917 ------------ ------------ Net increase (decrease) in net assets resulting from operations ........... (36,004,196) 77,551,910 ------------ ------------ Distributions to shareholders: From net investment income ($.02 per share) ............................. (738,094) -- ------------ ------------ In excess of net investment income ($.04 per share) ..................... (1,489,524) -- ------------ ------------ From net realized gains on investment transactions ($.36 and $.15 per share, respectively) ............................. (13,231,733) (4,359,655) ------------ ------------ Fund share transactions: Net proceeds of shares issued in connection with the Fund's rights offering, net of broker and dealer manager fees of $4,006,960 and expenditures and offering costs of $860,000 ................ -- 109,617,621 ------------ ------------ Reinvestment of distributions ..................................... 5,604,398 1,798,229 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS ......................................... (45,859,149) 184,608,105 Net assets at beginning of period ......................................... 734,546,735 549,938,630 ------------ ------------ NET ASSETS AT END OF PERIOD ............................................... $688,687,586 $734,546,735 ============ ============ OTHER INFORMATION INCREASE IN FUND SHARES Shares outstanding at beginning of period ................................. 36,930,508 29,474,985 Shares issued in connection with the Fund's rights offering ............. -- 7,386,102 Shares issued to shareholders in reinvestment of distributions .......... 258,020 69,421 ------------ ------------ Shares outstanding at end of period ....................................... 37,188,528 36,930,508 ============ ============ The accompanying notes are an integral part of the financial statements. - -------------------------------------------------------------------------------------------------------
116 [LOGO] The Korea Fund, Inc. Financial Highlights
============================================================================================================= - ------------------------------------------------------------------------------------------------------------- THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS AND MARKET PRICE DATA. - -------------------------------------------------------------------------------------------------------------- YEARS ENDED JUNE 30, ---------------------------------------------- 1996 1995(d) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period................... $19.89 $18.66 $11.40 $10.75 $ 10.27 ------ ------ ------ ------ ------- Income from investment operations (a): Net investment income (loss)........................ .02 (.02) (.03) .02 .08 Net realized and unrealized gain (loss) on investment transactions......................... (.97) 2.42(b) 7.13 .86 .78 ------ ------ ------ ------ ------- Total from investment operations (0.95) 2.40 7.10 .88 .86 ------ ------ ------ ------ ------- Less distributions: From net investment income.......................... (.02) -- (.01) (.04) (.06) In excess of net investment income.................. (.04) -- -- -- -- From net realized gains on investment transactions.. (.36) (.15) -- (.20) (.34) ------ ------ ------ ------ ------- Total distributions.................................... (.42) (.15) (.01) (.24) (.40) ------ ------ ------ ------ ------- Antidilution (dilution) resulting from the rights offering (1995), fourth tranche (1994), and reinvestment of distributions for shares at market value......... -- (1.02) .22 .01 .02 ------ ------ ------ ------ ------- Underwriting expenditures and offering costs........... -- -- (.05) -- -- ------ ------ ------ ------ ------- Net asset value, end of period......................... $18.52 $19.89 $18.66 $11.40 $ 10.75 ====== ====== ====== ====== ======= Market value, end of period............................ $21.13 $19.63 $22.00 $15.00 $ 11.38 ====== ====== ====== ====== ======= TOTAL RETURN Per share market value (%)............................. 9.73 (5.43) 46.74 34.54 (17.01) Per share net asset value (%) (c)...................... (5.09) 13.00 63.77 8.20 7.87 RATIOS AND SUPPLEMENTAL DATA Net assets, end of period ($ millions)................. 689 735 550 258 241 Ratio of operating expenses to average net assets (%)..................................... 1.28 1.32 1.37 1.52 1.52 Ratio of net investment income (loss) to average net assets (%) (d)......................... .10 (.10) (.18) .15 .70 Portfolio turnover rate (%)............................ 32.6 10.5 14.3 14.3 18.2 Average commission rate paid (e)....................... $.1254 $ -- $ -- $ -- $ --
- ---------- (a) Based on monthly average of shares outstanding during each period. (b) Due to the timing and magnitude of the rights offering, the amount reported herein is not proportional to the aggregate value reported in the Statements of Changes in Net Assets. (c) Total investment returns reflect changes in net asset value per share during each period and assume that dividends and capital gains distributions, if any, were reinvested. These percentages are not an indication of the performance of a shareholder's investment in the Fund based on market price. (d) Certain amounts have been reclassified to conform with fiscal 1996 presentations. (e) Average commission rate paid per share of common and preferred stocks is calculated for fiscal years ending on or after June 30, 1996. 117 [LOGO] The Korea Fund, Inc. Notes To Financial Statements =============================================================================== A. SIGNIFICANT ACCOUNTING POLICIES ------------------------------- The Korea Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a non-diversified, closed-end management investment company. The Fund's financial statements are prepared in accordance with generally accepted accounting principles which require the use of management estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements. SECURITY VALUATION. Portfolio securities which are traded on the Korean, U.S., or foreign stock exchanges are valued at the most recent sale price reported on the exchange on which the security is traded most extensively. If no sale occurred, the security is then valued at the calculated mean between the most recent bid and asked quotations. If there are no such bid and asked quotations, the most recent bid quotation is used. Short-term investments having a maturity of sixty days or less are valued at amortized cost. All other securities are valued at fair value as determined in good faith by the Valuation Committee of the Board of Directors including certain securities valued in good faith by the Valuation Committee amounting to $52,188,713 or 7.6% of the Fund's net assets at June 30, 1996, and certain investments in Korean equity securities that have met the limit for aggregate foreign ownership and for which premiums to the local stock exchange prices are offered by prospective foreign investors. The aggregate premium ($51,600,746) over the local share price ($133,083,301) for these securities valued by the Valuation Committee was approximately 7.5% of the Fund's net assets at June 30, 1996. Their values have been estimated by the Board of Directors in the absence of readily ascertainable market values or other market factors, respectively. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the difference could be material. At June 30, 1996, 25.7% of the Fund's net assets were invested in Korea Mobile Telecom and Samsung Fire & Marine Insurance Co. DIVIDEND INCOME. Korean-based corporations have generally adopted calendar year-ends, and their corporate actions are normally approved by their boards of directors and shareholders in the first quarter of each calendar year. Accordingly, dividend income from Korean equity investments is earned and received by the Fund primarily in the first calendar quarter of each year. As a result, the Fund, which has a June 30 year end, receives substantially less dividend income in the first half of its year than in the second half of such year. INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code which are applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. The Fund, accordingly, paid no federal income taxes and no federal income tax provision was required. Under the United States-Korea Income Tax Treaty, as presently in effect, the government of Korea imposes a nonrecoverable withholding tax and resident tax aggregating 16.125% on dividends and 12.9% on interest paid to the Fund by Korean issuers. Effective January 1, 1996, withholding taxes on dividends and interest were increased to 16.5% and 13.2%, respectively. Under the United States-Korea Income Tax Treaty, there is no Korean withholding tax on realized capital gains. DISTRIBUTION OF INCOME AND GAINS. Distribution of net investment income is made annually. It is expected that net realized gains from investment transactions during any particular year in excess of available capital loss carryforwards which, if not distributed, would be taxable to the Fund, will be distributed to shareholders. An additional distribution may be made to the extent necessary to avoid the payment of a four percent federal excise tax. 118 The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from generally accepted accounting principles. These differences relate primarily to foreign denominated investments and certain securities sold at a loss. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund. The Fund uses the identified cost method for determining realized gain or loss on investments for both financial and federal income tax reporting purposes. FOREIGN CURRENCY TRANSLATIONS. The books and records of the Fund are maintained in U.S. dollars. Foreign currency transactions are translated into U.S. dollars on the following basis: (i) market value of investment securities, other assets and liabilities at the daily rates of exchange, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing on the respective dates of such transactions. The Fund does not isolate that portion of gains and losses on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such fluctuations are included with the net realized and unrealized gains and losses from investments. Net realized gain (loss) from won related transactions includes net currency gains and losses between trade and settlement dates on securities transactions, gains and losses arising from the sales of won and gains and losses between the ex and payment dates on dividends, interest, and foreign withholding taxes. At June 30, 1996 the exchange rate for Korean won was U.S. $0.001233 to W 1. SUBSCRIPTIONS FOR NEW SHARES. As part of their annual corporate action matters, certain Korean companies offer rights to their shareholders to subscribe to new shares which are eligible for a portion of the dividends paid on existing shares in the year of subscription. The Fund follows a policy of subscribing to new share offerings by Korean companies. OTHER. Investment security transactions are accounted for on a trade-date basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. All original issue and acquisition discounts are accreted for both tax and financial reporting purposes. Certain amounts have been reclassified in the fiscal 1995 statement of changes in net assets and financial highlights to conform with fiscal 1996 presentation. Certain amounts with respect to bonus interest reported in the Fund's statements of operations and changes in net assets for the six months ended December 31, 1995 have been reclassified in the aforementioned statements for the year ended June 30, 1996. B. PURCHASES AND SALES OF SECURITIES --------------------------------- For the year ended June 30, 1996, purchases and sales of investment securities (excluding short-term investments) aggregated $244,667,165 and $224,953,333, respectively. C. RELATED PARTIES --------------- Under the Management Agreement the Fund agrees to pay the Manager a monthly fee at an annual rate equal to 1.15% of the Fund's month-end net assets up to and including $50,000,000, 1.10% of such net assets on the next $50,000,000, 1% of such assets on the next $250,000,000, 0.95% of such net assets on the next $400,000,000, and 0.90% of such net assets in excess of $750,000,000. For the year ended June 30, 1996, the fee pursuant to such agreements 119 [LOGO] The Korea Fund, Inc. Notes To Financial Statements (continued) amounted to $7,516,289 which was equivalent to an annual effective rate of 0.99% of the Fund's average month-end net assets. Under the Advisory Agreement, the Manager pays the Korean Adviser a monthly fee, equal to an annual rate of 0.2875% of the first $50,000,000 of the Fund's month-end net assets, 0.275% of such net assets on the next $50,000,000, and 0.25% of such net assets on the next $250,000,000, 0.2375% of such net assets on the next $400,000,000, and 0.225% of such net assets in excess of $750,000,000. For the year ended June 30, 1996, brokerage commissions on investment transactions amounting to $295,613 were paid by the Fund to Daewoo Securities Co., Ltd., the parent company of the Korean Adviser. Effective August 21, 1995, Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, assumed responsibility for determining the daily net asset value per share and maintaining the portfolio and general accounting records of the Fund. For the year ended June 30, 1996, the amount charged to the Fund by SFAC aggregated $343,236, of which $66,854 is unpaid at June 30, 1996. The Fund pays each Director not affiliated with the Manager or the Korean Adviser $6,000 annually plus specified amounts for attended board and committee meetings. For the year ended June 30, 1996, Directors' fees and expenses amounted to $123,343. D. FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN KOREA ------------------------------------------------- The Foreign Exchange Management Act, the Presidential Decree relating to such Act and the regulations of the Minister of Finance and Economy issued thereunder impose certain limitations and controls which generally affect foreign investors in Korea. The Fund has obtained from the Minister of Finance and Economy a license to invest in Korean securities and to repatriate income received from dividends and interest earned on, and net realized capital gain from, its investments in Korean securities and, upon termination of the Fund or for payment of expenses in excess of income, to repatriate investment principal. The Minister of Finance and Economy may, when it deems it to be in the public interest, modify the Fund's license to invest in Korean securities or, according to the terms of the license, revoke it in the event of the Fund's noncompliance with conditions of the license or a material violation of Korean law. The Minister of Finance and Economy or the Securities and Exchange Commission of Korea ("KSEC") may issue orders imposing additional restrictions, when deemed in the public interest, for the protection of investors or in the interest of maintaining an orderly securities market. Under the Foreign Exchange Management Act, the Minister of Finance and Economy has the power, with prior public notice of scope and duration, to suspend all or a part of foreign exchange transactions when emergency measures are deemed necessary in case of radical change in the international or domestic economic situation. The Fund could be adversely affected by delays in, or the refusal to grant, any required governmental approval for such transactions. Under current regulations of the Minister of Finance and the KSEC, foreigners are subject to certain restrictions with respect to investing in equity securities of Korean companies listed on the Korea Stock Exchange. Until April 1, 1996, total foreign investment was limited generally to 15% of each class of a company's outstanding shares, while a single foreign investor could only invest up to 3% of each class of outstanding shares. At April 1, 1996, the limits were increased from 15% to 18% and 3% to 4%, respectively. Pursuant to its license, however, the Fund may invest in shares representing 5% of each class in general. 120 [LOGO]The Korea Fund, Inc. Report of Independent Accountants TO THE BOARD OF DIRECTORS AND THE SHAREHOLDERS OF THE KOREA FUND, INC.: We have audited the accompanying statements of assets and liabilities of The Korea Fund, Inc. including the investment portfolios, as of December 31, 1996 and June 30, 1996, and the related statements of operations for the six months ended December 31, 1996 and for the year ended June 30, 1996, and the statements of changes in net assets for the six months ended December 31, 1996 and for each of the two years in the period ended June 30, 1996, and the financial highlights for the six months ended December 31, 1996 and for each of the five years in the period ended June 30, 1996. 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, 1996 and June 30, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of The Korea Fund, Inc. as of December 31, 1996 and June 30, 1996, the results of its operations for the six months ended December 31, 1996 and for the year ended June 30, 1996, the changes in its net assets for the six months ended December 31, 1996 and for each of the two years in the period ended June 30, 1996, and the financial highlights for the six months ended December 31, 1996 and for each of the five years in the period ended June 30, 1996 in conformity with generally accepted accounting principles. Boston, Massachusetts COOPERS & LYBRAND L.L.P. February 24, 1997 121 THE KOREA FUND, INC. PART C -- OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (1) Financial Statements: The following Financial Statements have been included as part of Item 23: (i) -- Investment Portfolio as of December 31, 1996 and as of June 30, 1996 (ii) -- Statement of Assets and Liabilities as of December 31, 1996 and as of June 30, 1996 (iii) -- Statement of Operations for the six months ended December 31, 1996 and for the fiscal year ended June 30, 1996 (iv) -- Statements of Changes in Net Assets for the six months ended December 31, 1996 and for the fiscal years ended June 30, 1996 and June 30, 1995 (v) -- Financial Highlights for the six months ended December 31, 1996 and for each of the years ended June 30, 1992 through 1996 (vi) -- Notes to Financial Statements for the six months ended December 31, 1996 and for the fiscal year ended June 30, 1996 (vii) -- Report of Independent Accountants
(2) Exhibits: a. (i) -- Articles of Incorporation as of May 15, 1984. (Incorporated by reference to Exhibit 1 to the Fund's original Registration Statement on Form N-2, Registration No. 2-91879 (the "Registration Statement").) a. (ii) -- Amendment dated November 14, 1986 to the Articles of Incorporation. (Incorporated by reference to Exhibit 1(a)(2) to Amendment No. 6 to the Registration Statement.) a. (iii) -- Amendment dated December 1, 1988 to the Articles of Incorporation. (Incorporated by reference to Exhibit 1(a)(3) to Amendment No. 8 to the Registration Statement ("Amendment No. 8").) a. (iv) -- Amendment dated October 29, 1990 to the Articles of Incorporation. (Incorporated by reference to Exhibit 1(D) to Amendment No. 11 to the Registration Statement ("Amendment No. 11").) b. (i) -- Restated By-Laws dated April 15, 1993. b. (ii) -- Amendment dated October 19, 1995 to the Restated By-Laws. b. (iii) -- Amendment dated August 8, 1996 to the Restated By-Laws. c. -- Not applicable. d. (i) -- Specimen certificate representing shares of Common Stock, par value $.01 per share. (Incorporated by reference to Exhibit 4 to Amendment No. 2 to the Registration Statement ("Amendment No. 2").) d. (ii) -- Form of Subscription Rights Distribution and Agency Agreement. e. -- Dividend Reinvestment and Cash Purchase Plan. (Incorporated by reference to Exhibit 10(C) to Amendment No. 11.) f. -- Not applicable. g. (i) -- Investment Advisory, Management and Administration Agreement, dated October 14, 1994, between the Fund and the Manager. (Incorporated by reference to Exhibit g(iii) to Amendment No. 16 to the Registration Statement.)
(i) 122 g. (ii) -- Research and Advisory Agreement, dated October 14, 1994, between the Manager and the Korean Adviser. (Incorporated by reference to Exhibit (g)(ii) to Amendment No. 17 to the Registration Statement ("Amendment No. 17").) h. (i) -- Form of Dealer Manager Agreement. h. (ii) -- Form of Soliciting Dealer Agreement. -- Not applicable. j. (i) -- Custodian Agreement, dated April 19, 1995, between the Fund and Brown Brothers Harriman & Co. (the "Custodian"). j. (ii) -- Subcustodian Agreement (the "Subcustodian Agreement"), dated August 20, 1984, between the Custodian and Citibank, N.A. (Incorporated by reference to Exhibit 9(b)(1) to Amendment No. 2.) j. (iii) -- Amendment dated October 23, 1992 to the Subcustodian Agreement dated August 20, 1984. (Incorporated by reference to Exhibit j(v) to Amendment No. 17.) k. (i) -- Agency Agreement (the "Agency Agreement") dated August 6, 1984, between the Fund and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10(a)(1) to Amendment No. 2.) k. (ii) -- Fee Schedule relating to the Agency Agreement. (Incorporated by reference to Exhibit 10(a)(2) to Amendment No. 2.) k. (iii) -- Form of Information Agent Agreement. l. -- Opinion of Debevoise & Plimpton, and consent to use of the same. m. -- Not applicable. n. (i) -- Opinion of Shin & Kim, and consent to use of the same. n. (ii) -- Consent of Coopers & Lybrand L.L.P. n. (iii) -- License, Approval and Confirmation (the "License"), dated June 22, 1984, issued by the Minister of Finance and Economy of the Republic of Korea (the "MFE"). (Incorporated by reference to Exhibit 12(E) to the Registration Statement.) n. (iv) -- Amendment, dated April 11, 1986, to the License. (Incorporated by reference to Exhibit 12(F) to Amendment No. 3 to the Registration Statement.) n. (v) -- Amendment, dated August 2, 1989, to the License. (Incorporated by reference to Exhibit 21(G) to Amendment No. 10 to the Registration Statement.) n. (vi) -- Amendment, dated October 7, 1992, to the License. (Incorporated by reference to Exhibit 12(H) to Amendment No. 13.) n. (vii) -- Amendment, dated October 20, 1993, to the License. (Incorporated by reference to Exhibit n(vii) to Amendment No. 15 to the Registration Statement.) n. (viii) -- Amendment, dated May 12, 1995, to the License. (Incorporated by reference to Exhibit n(viii) to Amendment No. 17.) n. (ix) -- Response to Inquiry Regarding Korean Tax Treatment of The Korea Fund, Inc., dated May 23, 1995, issued by the MFE. (Incorporated by reference to Exhibit n(ix) to Amendment No. 17.) n. (x) -- Amendment, dated March 30, 1996, to the License.
(ii) 123 n. (xi) -- Amendment, dated February 28, 1997, to the License. o. -- Not applicable. p. -- Not applicable. q. -- Not applicable. r. -- Financial Data Schedule. (Incorporated by reference to Exhibit r to Amendment No. 18 to the Registration Statement ("Amendment No. 18").)
Other Exhibit: Powers of Attorney. (Incorporated by reference to the Other Exhibit to Amendment No. 18.) ITEM 25. MARKETING ARRANGEMENTS See Exhibits h(i) and h(ii) to this Amendment No. 19. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses expected to be incurred in connection with the offering described in this Registration Statement: SEC Registration fees..................................................... $ 46,327 Stock exchange listing fees............................................... $ 50,898 NASD Fees................................................................. $ 16,388 Printing (other than stock certificates) and related delivery expenses.... $165,000 Printing stock certificates............................................... $ 1,000 Dealer Manager expense reimbursement...................................... $ 25,000 Information Agent's fees and expenses..................................... $ 58,000 Subscription Agent's fees and expense..................................... $ 74,000 Fees and expenses of qualification under state securities laws (including fees of counsel)........................................................ $ 5,000 Accounting fees and expenses.............................................. $ 27,500 Legal fees and expenses................................................... $253,000 Travel and related out-of-pocket expenses and miscellaneous............... $ 35,000 -------- Total........................................................... $757,113 ========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT None. ITEM 28. NUMBER OF HOLDERS OF SECURITIES Common Stock, par value $.01 per share: 1,437 record holders as of March 21, 1997. ITEM 29. INDEMNIFICATION The information under Item 3 of Part II of Amendment No. 13 is herein incorporated by reference. See also "The Offer -- Distribution Arrangements" in the Prospectus. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER Information as to the directors and officers of the Manager and Korean Adviser is included in their respective Forms ADV, File Nos. 801-00252 and 801-32282 respectively, filed with the Commission and is incorporated herein by reference thereto. (iii) 124 ITEM 31. LOCATION OF ACCOUNTS AND RECORDS Certain accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the Rules promulgated thereunder will be maintained by Scudder, Stevens & Clark, Inc., 345 Park Avenue, New York, New York 10154. Records relating to the duties of the Registrant's custodian will be maintained by Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts, and those relating to the duties of the transfer agent will be maintained by State Street Bank and Trust Company, Heritage Drive, North Quincy, Massachusetts. ITEM 32. MANAGEMENT SERVICES Not applicable. ITEM 33. UNDERTAKINGS (a) Registrant undertakes to suspend offering of the shares covered hereby until it amends its prospectus contained herein if (1) subsequent to the effective date of this Registration Statement, its net asset per share declines more than 10 percent from its net asset value per share as of the effective date of this Registration Statement, or (2) its net asset value increases to an amount greater than its net proceeds as stated in the prospectus contained herein. (b) Registrant undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains the form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made pursuant to Rule 415, a post effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) Registrant hereby undertakes to send by first-class mail other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, a Statement of Additional Information. (iv) 125 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 25th day of March, 1997. THE KOREA FUND, INC. (Registrant) By: /s/ JURIS PADEGS ------------------------------------------ Juris Padegs Chairman of the Board Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------- ------------------------------------ ------------------ /s/ JURIS PADEGS Chairman of the Board (Principal March 25, 1997 - ------------------------------------- Executive Officer) and Director Juris Padegs /s/ PAMELA A. MCGRATH Treasurer (Principal Financial and March 25, 1997 - ------------------------------------- Accounting Officer) Pamela A. McGrath * Director March 25, 1997 - ------------------------------------- Chang Hee Kim * Director March 25, 1997 - ------------------------------------- Nicholas Bratt * Director March 25, 1997 - ------------------------------------- Robert J. Callender * Director March 25, 1997 - ------------------------------------- William H. Gleysteen, Jr. Director - ------------------------------------- Sand C. Lee * Director March 25, 1997 - ------------------------------------- Tai Ho Lee * Director March 25, 1997 - ------------------------------------- Wilson Nolen * Director March 25, 1997 - ------------------------------------- Hugh T. Patrick * /s/ JURIS PADEGS - ------------------------------------- Juris Padegs as Attorney-in-Fact
(v) 126 EXHIBIT INDEX
SEQUENTIALLY NUMBERED EXHIBIT DESCRIPTION PAGES ---- ----------------------------------------------------------------- ------------ a. (i) -- Articles of Incorporation as of May 15, 1984. (Incorporated by reference to Exhibit 1 to the Fund's original Registration Statement on Form N-2. Registration No. 2-91879 (the "Registration Statement").) a. (ii) -- Amendment dated November 14, 1986 to the Articles of Incorporation. (Incorporated by reference to Exhibit 1(a)(2) to Amendment No. 6 to the Registration Statement.) a. (iii) -- Amendment dated December 1, 1988 to the Articles of Incorporation. (Incorporated by reference to Exhibit 1(a)(3) to Amendment No. 8 to the Registration Statement ("Amendment No. 8").) a. (iv) -- Amendment dated October 29, 1990 to the Articles of Incorporation. (Incorporated by reference to Exhibit 1(D) to Amendment No. 11 to the Registration Statement ("Amendment No. 11").) b. (i) -- Restated By-Laws dated April 15, 1993. b. (ii) -- Amendment dated October 19, 1995 to the Restated By-Laws. b. (iii) -- Amendment dated August 8, 1996 to the Restated By-Laws. c. -- Not applicable. d. (i) -- Specimen certificate representing shares of Common Stock, par value $.01 per share. (Incorporated by reference to Exhibit 4 to Amendment No. 2 to the Registration Statement ("Amendment No. 2").) d. (ii) -- Form of Subscription Rights Distribution and Agency Agreement. e. -- Dividend Reinvestment and Cash Purchase Plan. (Incorporated by reference to Exhibit 10(C) to Amendment No. 11.) f. -- Not applicable. g. (i) -- Investment Advisory, Management and Administration Agreement, dated October 14, 1994, between the Fund and the Manager. (Incorporated by reference to Exhibit g(iii) to Amendment No. 16 to the Registration Statement.) g. (ii) -- Research and Advisory Agreement, dated October 14, 1994, between the Manager and the Korean Adviser. (Incorporated by reference to Exhibit g(ii) to Amendment No. 17 to the Registration Statement ("Amendment No. 17").) h. (i) -- Form of Dealer Manager Agreement. h. (ii) -- Form of Soliciting Dealer Agreement. i. -- Not applicable. j. (i) -- Custodian Agreement, dated April 19, 1995, between the Fund and Brown Brothers Harriman & Co. (the "Custodian"). j. (ii) -- Subcustodian Agreement (the "Subcustodian Agreement"), dated August 20, 1984, between the Custodian and Citibank, N.A. (Incorporated by reference to Exhibit 9(b)(1) to Amendment No. 2.) j. (iii) -- Amendment, dated October 23, 1992, to the Subcustodian Agreement dated August 20, 1984. (Incorporated by reference to Exhibit j(v) to Amendment No. 17.)
127
SEQUENTIALLY NUMBERED EXHIBIT DESCRIPTION PAGES ---- ----------------------------------------------------------------- ------------ k. (i) -- Agency Agreement (the "Agency Agreement") dated August 6, 1984, between the Fund and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10(a)(1) to Amendment No. 2.) k. (ii) -- Fee Schedule relating to the Agency Agreement. (Incorporated by reference to Exhibit 10(a)(2) to Amendment No. 2.) k. (iii) -- Form of Information Agent Agreement. l. -- Opinion of Debevoise & Plimpton, and consent to use of the same. m. -- Not applicable. n. (i) -- Opinion of Shin & Kim, and consent to use of the same. n. (ii) -- Consent of Coopers & Lybrand L.L.P. n. (iii) -- License, Approval and Confirmation (the "License"), dated June 22, 1984, issued by the Minister of Finance and Economy of the Republic of Korea (the "MFE"). (Incorporated by reference to Exhibit 12(E) to the Registration Statement.) n. (iv) -- Amendment, dated April 11, 1986, to the License. (Incorporated by reference to Exhibit 12(F) to Amendment No. 3 to the Registration Statement.) n. (v) -- Amendment, dated August 2, 1989, to the License. (Incorporated by reference to Exhibit 12(G) to Amendment No. 10 to the Registration Statement.) n. (vi) -- Amendment, dated October 7, 1992, to the License. (Incorporated by reference to Exhibit 12(H) to Amendment No. 13.) n. (vii) -- Amendment, dated October 20, 1993, to the License. (Incorporated by reference to Exhibit n(vii) to Amendment No. 15 to the Registration Statement.) n. (viii) -- Amendment, dated May 12, 1995, to the License. (Incorporated by reference to Exhibit n(viii) to Amendment No. 17.) n. (ix) -- Response to Inquiry Regarding Korean Tax Treatment of The Korea Fund, Inc., dated May 23, 1995, issued by the MFE. (Incorporated by reference to Exhibit n(ix) to Amendment No. 17.) n. (x) -- Amendment, dated March 30, 1996, to the License. n. (xi) -- Amendment, dated February 28, 1997, to the License. o. -- Not applicable. p. -- Not applicable. q. -- Not applicable. r. -- Financial Data Schedule. (Incorporated by reference to Exhibit r to Amendment No. 18 to the Registration Statement ("Amendment No. 18").)
Other Exhibit: Powers of Attorney. (Incorporated by reference to the Other Exhibit to Amendment No. 18.) EX-99.B.I 2 RESTATED BY-LAWS 1 EXHIBIT b(i) THE KOREA FUND, INC. A MARYLAND CORPORATION RESTATED BY-LAWS AS OF APRIL 15, 1993 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I - NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL 1 Section 1.1 Principal Offices 1 Section 1.2 Seal 1 ARTICLE II - STOCKHOLDERS 2 Section 2.1 Annual Meetings 2 Section 2.2 Special Meetings 2 Section 2.3 Notice of Meetings 3 Section 2.4 Quorum 3 Section 2.5 Voting 3 Section 2.6 Stockholders Entitled to Vote 4 Section 2.7 Proxies 4 Section 2.8 Voting and Inspectors 5 Section 2.9 Action without Meeting 5 Section 2.10 New Business 5 Section 2.11 Director Nominations 7 ARTICLE III - BOARD OF DIRECTORS 9 Section 3.1 Powers 9 Section 3.2 Power to Issue and Sell Stock 9 Section 3.3 Power to Declare Dividends 9 Section 3.4 Number and Term 10 Section 3.5 Election 11 Section 3.6 Vacancies and Newly Created Directorships 11 Section 3.7 Removal 12 Section 3.8 Annual and Regular Meetings 12 Section 3.9 Special Meetings 13 Section 3.10 Waiver of Notice 13 Section 3.11 Quorum and Voting 13 Section 3.12 Action Without a Meeting 14 Section 3.13 Compensation of Directors 14 ARTICLE IV - COMMITTEES 14 Section 4.1 Organization 14 Section 4.2 Executive Committee 15 Section 4.3 Other Committees 15 Section 4.4 Proceedings and Quorum 15
3 ii 4 TABLE OF CONTENTS (CONTINUED)
PAGE ARTICLE V - OFFICERS 15 Section 5.1 General 15 Section 5.2 Election, Tenure and Qualifications 16 Section 5.3 Removal and Resignation 16 Section 5.4 Chairman of the Board 16 Section 5.5 Vice Chairman of the Board 17 Section 5.6 President 17 Section 5.7 Vice President 17 Section 5.8 Treasurer and Assistant Treasurers 18 Section 5.9 Secretary and Assistant Secretaries 18 Section 5.10 Subordinate Officers 19 Section 5.11 Remuneration 19 Section 5.12 Surety Bonds 19 ARTICLE VI - NET ASSET VALUE 20 Section 6.1 Valuation of Assets 20 ARTICLE VII - CAPITAL STOCK 20 Section 7.1 Certificates of Stock 20 Section 7.2 Transfer of Shares 20 Section 7.3 Stock Ledgers 21 Section 7.4 Transfer Agents and Registrars 21 Section 7.5 Fixing of Record Date 21 Section 7.6 Lost, Stolen or Destroyed Certificates 21 ARTICLE VIII - FISCAL YEAR AND ACCOUNTANT 22 Section 8.1 Fiscal Year 22 Section 8.2 Accountant 22 ARTICLE IX - CUSTODY OF SECURITIES 23 Section 9.1 Employment of a Custodian 23 Section 9.2 Termination of Custodian Agreement 23 ARTICLE X - INDEMNIFICATION AND INSURANCE 24 Section 10.1 Indemnification of Officers, Directors, Employees and Agents 24 Section 10.2 Insurance of Officers, Directors, Employees and Agents 25 ARTICLE XI - AMENDMENTS 26 Section 11.1 General 26
5 iii 6 BY-LAWS OF THE KOREA FUND, INC. (A MARYLAND CORPORATION) ARTICLE I NAME OF CORPORATION, LOCATION OF OFFICES AND SEAL Section 1.1. Principal Offices. The principal office of the Corporation in the State of Maryland shall be located in Baltimore, Maryland. The Corporation may, in addition, establish and maintain such other offices and places of business as the Board of Directors may, from time to time, determine. [MGCL Section 2-108] Section 1.2. Seal. The corporate seal of the Corporation shall be circular in form and shall bear the name of the Corporation, the year of its incorporation, and the word "Maryland." The form of the seal shall be subject to alteration by the Board of Directors and the seal may be used by causing it or a facsimile to be impressed or affixed or printed or otherwise reproduced. Any officer or Director of the Corporation shall have authority to affix the corporate seal of the Corporation to any document requiring the same. If the Corporation is required to place its corporate seal to a document, it shall be sufficient to place the word "(seal)" adjacent to the signature of the authorized officer of the corporation signing the document. [MGCL Section 1-304] ARTICLE II STOCKHOLDERS Section 2.1. Annual Meetings. An annual meeting of stockholders for the election of Directors and the transaction of such other business as may properly come before the meeting shall be held the first Tuesday in October, if not a legal holiday, or if a legal holiday, then on 7 the next succeeding day not a legal holiday unless the Board of Directors shall have selected another date in the month of October for holding said annual stockholders' meeting. The meeting will be held at such place within the United States as the Board of Directors shall select. The first annual stockholders' meeting shall be held in October 1985 unless otherwise determined by the Board of Directors. [MGCL Section 2-501] Section 2.2. Special Meetings. Special meetings of stockholders may be called at any time by the President, by a majority of the Board of Directors or by the Chairman of the Board, if any, and shall be held at such time and place as may be stated in the notice of the meeting. Special meetings of the stockholders shall also be called by the Secretary upon the written request of the holders of shares entitled to not less than 25% of all the votes entitled to be cast at such meeting, provided that (1) such request shall state the purposes of such meeting and the matters proposed to be acted on, and (2) the stockholders requesting such meeting shall have paid to the Corporation the reasonably estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine and specify to such stockholders. No special meeting shall be called upon the request of stockholders to consider any matter which is substantially the same as a matter voted upon at any special meeting of the stockholders held during the preceding 12 months, unless requested by the holders of a majority of all shares entitled to be voted at such meeting. [MGCL Section 2-502] Section 2.3. Notice of Meetings. The Secretary shall cause notice of the place, date and hour, and, in the case of a special meeting or if otherwise required by law, the purpose or purposes for which the meeting is called, to be mailed, not less than 10 nor more than 90 days before the date of the meeting, to each stockholder entitled to vote at such meeting at his address as it appears on the records of the Corporation at the time of such mailing. Notice of any stockholders' meeting need not be given to any stockholder who shall sign a written waiver of such notice whether before or after the time of such meeting, which waiver shall be filed with the record of such meeting, or to any stockholder who is present at such meeting in 8 person or by proxy. Notice of adjournment of a stockholders' meeting to another time or place need not be given if such time and place are announced at the meeting. [MGCL Section 2-504] Section 2.4. Quorum. The presence at any stockholders' meeting, in person or by proxy, of stockholders entitled to cast a majority of the votes entitled to be cast thereat shall be necessary and sufficient to constitute a quorum for the transaction of business. In the absence of a quorum, the holders of a majority of shares entitled to vote at the meeting and present in person or by proxy, or, if no stockholder entitled to vote is present in person or by proxy, any officer present entitled to preside or act as Secretary of such meeting, may adjourn the meeting sine die or from time to time without further notice to a date not more than 120 days after the original record date. Any business that might have been transacted at the meeting originally called may be transacted at any such adjourned meeting at which a quorum is present. [MGCL SectionSection 2-506, 2-511] Section 2.5. Voting. At each stockholders' meeting, each stockholder entitled to vote shall be entitled to one vote for each share of stock of the Corporation validly issued and outstanding and standing in his name on the books of the Corporation on the record date fixed in accordance with Section 5 of Article VII hereof. Except as otherwise specifically provided in the Articles of Incorporation or these By-Laws or as required by law, as amended from time to time, all matters shall be decided by a vote of the majority of the votes validly cast. The vote upon any question shall be by ballot whenever requested by any person entitled to vote, but, unless such a request is made, voting may be conducted in any way approved by the meeting. [MGCL Section 2-507] Section 2.6. Stockholders Entitled to Vote. If the Board of Directors sets a record date for the determination of stockholders entitled to notice of or to vote at any stockholders' meeting in accordance with Section 7.5 of Article VII hereof, each stockholder of the Corporation shall be entitled to vote, in person or by proxy, each share of stock standing in his name on the books of the Corporation on such record date. If no record date has been fixed, 9 the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be determined in accordance with the Maryland General Corporation Law. [MGCL Section 2-511] Section 2.7. Proxies. The right to vote by proxy shall exist only if the instrument authorizing such proxy to act shall have been signed by the stockholder or by his duly authorized attorney. Unless a proxy provides otherwise, it is not valid more than eleven months after its date. Proxies shall be delivered prior to the meeting to the Secretary of the Corporation or to the person acting as Secretary of the meeting before being voted. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by one of them unless at or prior to exercise of such proxy the Corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise. [MGCL Section 2-507] Section 2.8. Voting and Inspectors. At any election of Directors, the Chairman of the meeting may appoint two inspectors of election who shall first subscribe an oath or affirmation to execute faithfully the duties of inspectors at such election with strict impartiality and according to the best of their ability, and shall after election make a certificate of the result of the vote taken. No candidate for the office of Director shall be appointed such Inspector. Section 2.9. Action without Meeting. Any action to be taken by stockholders may be taken without a meeting if (1) all stockholders entitled to vote on the matter consent to the action in writing, (2) all stockholders entitled to notice of the meeting but not entitled to vote at it sign a written waiver of any right to dissent and (3) said consents and waivers are filed with the records of the meetings of stockholders. Such consent shall be treated for all purposes as a vote at the meeting. [MGCL Section 2-505] Section 2.10. New Business. At an annual meeting of stockholders, only such new business shall be conducted, and only such proposals shall be acted upon, as shall have been brought before the annual meeting (a) by or at the recommendation of a majority of the 10 directors then in office or (b) by any stockholder of record at the time of giving of notice provided for in this Section who complies with the notice procedures set forth in this Section. For a proposal to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the date of the meeting, as established pursuant to Section 2.1, regardless of any postponement, deferral, or adjournment of that meeting to a later date (provided, however, that if less than seventy (70) days' notice or prior public disclosure of the date of the scheduled meeting is given or made, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the tenth (10th) day following the earlier of the day on which such notice of the date of the scheduled meeting was given or the day on which such public disclosure was made). Such stockholder's notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting; (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business; (c) the class and number of shares of the Corporation's stock which are beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "1934 Act")) by the stockholder; and (d) any material interest of the stockholder in such proposal. The presiding officer of the annual meeting shall determine and declare at the annual meeting whether the stockholder proposal was made in accordance with the terms of this Section. If the presiding officer determines that a stockholder proposal was made in accordance with the terms of this Section, he shall so declare at the annual meeting and ballots shall be provided for use at the meeting with respect to any such proposal. If the presiding officer determines that a stockholder proposal was not made in accordance with the terms of this Section, he shall so declare at the annual meeting and any such proposal shall not be acted 11 upon at the annual meeting. Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder with respect to the matters set forth in this Section. This Section shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed and received as herein provided. Section 2.11. Director Nominations. Nominations of candidates for elections as directors at any meeting of stockholders may be made (a) by or at the recommendation of a majority of the directors then in office or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote for the election of directors at the meeting, and who complies with the notice procedures set forth in this Section. Only persons nominated in accordance with the procedures set forth in this Section shall be eligible for election as directors by the stockholders. Nominations, other than those made by or at the recommendation of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section. To be timely, a stockholder's notice shall be delivered to, or mailed to and received at, the principal executive offices of the Corporation, not less than sixty (60) days nor more than ninety (90) days prior to the date of the meeting, as established pursuant to Section 2.1 or Section 2.2 of Article II hereof (depending on whether the meeting is an annual meeting or special meeting), regardless of any postponement, deferral, or adjournment of that meeting to a later date (provided, however, that if less than seventy (70) days' notice or prior public disclosure of the date of the scheduled meeting is given or made, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the tenth (10th) day following the earlier of the day on 12 which such notice of the date of the scheduled meeting was given or the day on which such public disclosure was made). Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation's stock which are beneficially owned (as defined in Rule 13d-3 under the 1934 Act) by such person on the date of such stockholder's notice, (iv) such person's written consent to being nominated and, if elected, to serving as a director, and (v) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors, or is otherwise required, in such case pursuant to Regulation 14A under the 1934 Act and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation's stock which are beneficially owned (as defined in Rule 13d-3 under the 1934 Act) by such stockholder. At the request of the Board of Directors, any person nominated by or at the recommendation of the Board of Directors for election as a director shall promptly furnish to the Secretary of the Corporation the information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. The presiding officer of the meeting shall determine and declare at the meeting whether the nomination was made in accordance with the terms of this Section. If the presiding officer determines that the nomination was made in accordance with the terms of this Section, he shall so declare at the meeting. If the presiding officer determines that a nomination was not made in accordance with the terms of this Section, he shall so declare at the meeting and the defective nomination shall be disregarded. Ballots bearing the names of all the persons who have been nominated for election as directors at a meeting in accordance with the procedures set forth in this Section shall be provided for use at the meeting. Notwithstanding the foregoing provisions of this Section, a stockholder shall also 13 comply with all applicable requirements of the 1934 Act and the rules and regulation thereunder with respect to the matters set forth in this Section. ARTICLE III BOARD OF DIRECTORS Section 3.1. Powers. The property, affairs, and business of the Corporation shall be managed by the Board of Directors, which may exercise all the powers of the Corporation except those powers vested solely in the stockholders of the Corporation by statute, by the Articles of Incorporation, or by these By-Laws. [MGCL Section 2-401] Section 3.2. Power to Issue and Sell Stock. The Board of Directors may from time to time authorize by resolution the issuance and sale of any of the Corporation's authorized shares to such persons as the Board of Directors shall deem advisable and such resolution shall fix the consideration or minimum consideration for which such shares are to be issued, or a formula or method pursuant to which such consideration is to be fixed and determined, and shall include a fair description of any consideration other than money and a statement of the actual value of such consideration as then determined by the Board of Directors or a statement that such consideration is or will be not less than a stated sum. [MGCL SectionSection 2-201, 2-203] Section 3.3. Power to Declare Dividends. (a) The Board of Directors, from time to time as they may deem advisable to the extent permitted by applicable law, may declare and pay dividends in cash or other property of the Corporation, out of any source available for dividends, to the stockholders according to their respective rights and interests. [MGCL Section 2-309] (b) The Board of Directors shall cause to be accompanied by a written statement any dividend payment wholly or partly from any source other than (i) the Corporation's accumulated undistributed net income (determined in accordance with good accounting practice and the rules and regulations of the Securities and Exchange Commission then in effect) and not including profits or losses realized 14 upon the sale of securities or other properties; or (ii) the Corporation's net income so determined for the current or preceding fiscal year. [MGCL Section 2-309; ICA Section 19(a)] Such statement shall adequately disclose the source or sources of such payment and the basis of calculation, and shall be in such form as the Securities and Exchange Commission may prescribe. (c) Notwithstanding the above provisions of this Section 3.3, the Board of Directors may at any time declare and distribute pro rata among the stockholders a stock dividend out of the Corporation's authorized but unissued shares of stock to the extent permitted by applicable law, including any shares previously purchased by the Corporation, provided that such dividend shall not be distributed in shares of any class with respect to any shares of a different class. [MGCL Section 2-309(e)] Section 3.4. Number and Term. The Board of Directors shall consist of such number of Directors, not less than three nor more than ten, as may be specified by resolution adopted by at least the majority of the entire Board of Directors, provided that at least 40% of the entire Board of Directors shall be persons who are not interested persons of the Corporation as defined in the Investment Company Act of 1940. The Directors shall be divided into three classes, and shall be designated as Class I, Class II, and Class III Directors, respectively. The Class I Directors shall originally consist of three Directors who shall be elected at the annual meeting of stockholders held in 1988 and shall serve for a term of office that expires at the annual meeting of stockholders to be held in 1989. The Class II Directors shall originally consist of three Directors who shall be elected at the annual meeting of stockholders held in 1988 and shall serve for a term of office that expires at the annual meeting of stockholders to be held in 1990. The Class III Directors shall originally consist of three Directors who shall be elected at the annual meeting of stockholders to be held in 1988 and shall serve for a term of office that expires at the annual meeting of stockholders to be held in 1991. After expiration of the terms of office specified for the Directors elected at such 1988 annual 15 meeting, the Directors of each class shall serve for terms of three years, or, when filling a vacancy, for the unexpired portion of such term (or, if elected by the Directors, until the next annual meeting of stockholders) and until their successors are elected and have qualified. [MGCL Section 2-402, ICA Section 10(a)] Section 3.5. Election. At the first annual meeting of stockholders and at each annual meeting thereafter, Directors shall be elected by vote of the holders of a majority of the shares present in person or by proxy and entitled to vote thereon. [MGCL Section 2-404] Section 3.6. Vacancies and Newly Created Directorships. If any vacancies shall occur in the Board of Directors by reason of death, resignation, removal or otherwise, or if the authorized number of Directors shall be increased, the Directors then in office shall continue to act, and such vacancies (if not previously filled by the stockholders) may be filled by a majority of the Directors then in office, although less than a quorum, except that a newly created Directorship may be filled only by a majority vote of the entire Board of Directors; provided, however, that immediately after filling such vacancy, at least two-thirds (2/3) of the Directors then holding office shall have been elected to such office by the stockholders of the Corporation. In the event that at any time, other than the time preceding the first annual stockholders' meeting, less than a majority of the Directors of the Corporation holding office at that time were elected by the stockholders, a meeting of the stockholders shall be held promptly and in any event within 60 days for the purpose of electing Directors to fill any existing vacancies in the Board of Directors unless the Securities and Exchange Commission shall by order extend such period. [MGCL Section 2-407; ICA Section 16] Section 3.7. Removal. At any meeting of stockholders duly called and at which a quorum is present, the stockholders may, by the affirmative vote of the holders of a majority of the votes entitled to be cast for the election of Directors, remove any Director or Directors from office, with cause, and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of the removed Directors. [MGCL Section 2-406] Section 3.8. Annual and Regular Meetings. The annual meeting of the Board of 16 Directors for choosing officers and transacting other proper business shall be held at such time and place as the Board may determine. The Board of Directors from time to time may provide by resolution for the holding of regular meetings and fix their time and place within or outside the State of Maryland. Notice of such annual and regular meetings need not be in writing, provided that written notice of any change in the time or place of such meetings shall be sent promptly, in the manner provided in Section 3.9 of this Article III for notice of special meetings, to each Director not present at the meeting at which such change was made. Members of the Board of Directors or any committee designated thereby may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. [MGCL Section 2-409] Section 3.9. Special Meetings. Special meetings of the Board of Directors may be held at any time or place and for any purpose when called by the Chairman of the Board or by a majority of the Directors. Notice of special meetings, stating the time and place, shall be (1) mailed to each Director at his residence or regular place of business at least three days before the day on which a special meeting is to be held or (2) delivered to him personally or transmitted to him by telegraph, cable or other communication leaving a visual record at least one day before the meeting. [MGCL Section 2-409(b)] Section 3.10. Waiver of Notice. No notice of any meeting need be given to any Director who is present at the meeting or who waives notice of such meeting in writing (which waiver shall be filed with the records of such meeting), whether before or after the time of the meeting. [MGCL Section 2-409(c)] Section 3.11. Quorum and Voting. At all meetings of the Board of Directors, the presence of a majority of the number of Directors then in office shall constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the Directors present may adjourn the meeting, from time to time, until a quorum shall be present. The action of a 17 majority of the Directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by law, by the Articles of Incorporation or by these By-Laws, provided that no action shall be taken without the affirmative vote of 75% of the Directors, with respect to the following matters: (i) a merger or consolidation of the Corporation with or into, or the sale of substantially all of the Corporation's assets to, any other company; (ii) the dissolution of the Corporation; (iii) the election of officers and the compensation of directors and officers; or (iv) the declaration that an amendment to the Articles of Incorporation is advisable, if such amendment would cause any stock of the Corporation to be a "redeemable security" under the Investment Company Act of 1940. [MGCL Section 2-408] Section 3.12. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent to such action is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. [MGCL Section 2-408(c)] Section 3.13. Compensation of Directors. Directors shall be entitled to receive such compensation from the Corporation for their services as may from time to time be determined by resolution of the Board of Directors. ARTICLE IV COMMITTEES Section 4.1. Organization. By resolution adopted by the Board of Directors, the Board may designate one or more committees, including an Executive Committee, which shall consist of not less than two Directors. The Chairman of such committees shall be elected by the Board of Directors. Each member of a committee shall be a Director and shall hold office 18 in accordance with the By-Laws. The Board of Directors shall have the power at any time to change the members of such committees and to fill vacancies in the committees. The Board may delegate to these committees any of its powers, except the powers to declare a dividend, authorize the issuance of stock, recommend to stockholders any action requiring stockholders' approval, amend these By-Laws, or approve any merger or share exchange which does not require stockholder approval. [MGCL Section 2-411] Section 4.2. Executive Committee. Unless otherwise provided by resolution of the Board of Directors, when the Board of Directors is not in session the Executive Committee shall have and may exercise all powers of the Board of Directors in the management of the business and affairs of the Corporation that may lawfully be exercised by an Executive Committee. The Chairman of the Board, if any, and the President shall be members of the Executive Committee. Section 4.3. Other Committees. The Board of Directors may appoint other committees which shall have such powers and perform such duties as may be delegated from time to time by the Board. Section 4.4. Proceedings and Quorum. In the absence of an appropriate resolution of the Board of Directors, each committee may adopt such rules and regulations governing its proceedings, quorum and manner of acting as it shall deem proper and desirable. In the event any member of any committee is absent from any meeting, the members thereof present at the meeting, whether or not they constitute a quorum, may appoint a member of the Board of Directors to act in the place of such absent member. ARTICLE V OFFICERS Section 5.1. General. The officers of the Corporation shall be a President, a Secretary and a Treasurer, and may include one or more Vice Presidents, Assistant Secretaries or Assistant Treasurers, and such other officers as may be appointed in accordance with the 19 provisions of Section 5.10 of this Article V. The Board of Directors may elect, but shall not be required to elect, a Chairman of the Board. [MGCL Section 2-412] Section 5.2. Election, Tenure and Qualifications. The officers of the Corporation, except those appointed as provided in Section 5.10 of this Article V, shall be elected by the Board of Directors at its first meeting or such meetings as shall be held prior to its first annual meeting, and thereafter annually at its annual meeting. If any officers are not chosen at any annual meeting, such officers may be chosen at any subsequent regular or special meeting of the Board. Except as otherwise provided in this Article V, each officer chosen by the Board of Directors shall hold office until the next annual meeting of the Board of Directors and until his successor shall have been elected and qualified. Any person may hold one or more offices of the Corporation except the same person may not concurrently hold the offices of President and Vice President. The Chairman of the Board, if any, shall be elected from among the Directors of the Corporation and may hold such office only so long as he continues to be a Director. No other officer need be a Director. [MGCL Section 2-413] Section 5.3. Removal and Resignation. Whenever in the Board's judgment the best interest of the Corporation will be served thereby, any officer may be removed from office by the vote of a majority of the members of the Board of Directors given at a regular meeting or any special meeting called for such purpose. Any officer may resign his office at any time by delivering a written resignation to the Board of Directors, the President, the Secretary, or any Assistant Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. [MGCL Section 2-413] Section 5.4. Chairman of the Board. The Chairman of the Board, if there be such an officer, shall be the senior officer of the Corporation, shall preside at all stockholders' meetings and at all meetings of the Board of Directors and shall be ex officio a member of all committees of the Board of Directors. He shall have such powers and perform such other duties as may be assigned to him from time to time by the Board of Directors. Section 5.5. Vice Chairman of the Board. The Vice Chairman of the Board shall 20 consult with the Chairman as to the policies of the Corporation and as to the agendas to be presented at the meetings of the Board of Directors. In the absence of the Chairman of the Board and the President, he shall preside at meetings of the Board of Directors. He shall have such powers and perform such other duties as may be assigned to him from time to time by the Chairman. Section 5.6. President. The President shall be the chief executive officer of the Corporation and, in the absence of the Chairman of the Board or if no Chairman of the Board has been chosen, he shall preside at all stockholders' meetings and at all meetings of the Board of Directors and shall in general exercise the powers and perform the duties of the Chairman of the Board. Subject to the supervision of the Board of Directors, he shall have general charge of the business, affairs, and property of the Corporation and general supervision over its officers, employees and agents. Except as the Board of Directors may otherwise order, he may sign in the name and on behalf of the Corporation all deeds, bonds, contracts or agreements. He shall exercise such other powers and perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 5.7. Vice President. The Board of Directors may from time to time elect one or more Vice Presidents who shall have such powers and perform such duties as from time to time may be assigned to them by the Board of Directors or the President. At the request or in the absence or disability of the President, the Vice President (or, if there are two or more Vice Presidents, then the senior of the Vice Presidents present and able to act) may perform all the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Section 5.8. Treasurer and Assistant Treasurers. The Treasurer shall be the principal financial and accounting officer of the Corporation and shall have general charge of the finances and books of account of the Corporation. Except as otherwise provided by the Board of Directors, he shall have general supervision of the funds and property of the Corporation and of the performance by the Custodian of its duties with respect thereto. He shall render to 21 the Board of Directors, whenever directed by the Board, an account of the financial condition of the Corporation and of all his transactions as Treasurer; and as soon as possible after the close of each financial year he shall make and submit to the Board of Directors a like report for such financial year. He shall perform all acts incidental to the Office of Treasurer, subject to the control of the Board of Directors. Any Assistant Treasurer may perform such duties of the Treasurer as the Treasurer or the Board of Directors may assign, and, in the absence of the Treasurer, he may perform all the duties of the Treasurer. Section 5.9. Secretary and Assistant Secretaries. The Secretary shall attend to the giving and serving of all notices of the Corporation and shall record all proceedings of the meetings of the stockholders and Directors in books to be kept for that purpose. He shall keep in safe custody the seal of the Corporation, and shall have charge of the records of the Corporation, including the stock books and such other books and papers as the Board of Directors may direct and such books, reports, certificates and other documents required by law to be kept, all of which shall at all reasonable times be open to inspection by any Director. He shall perform such other duties as appertain to his office or as may be required by the Board of Directors. Any Assistant Secretary may perform such duties of the Secretary as the Secretary or the Board of Directors may assign, and, in the absence of the Secretary, he may perform all the duties of the Secretary. Section 5.10. Subordinate Officers. The Board of Directors from time to time may appoint such other officers or agents as it may deem advisable, each of whom shall have such title, hold office for such period, have such authority and perform such duties as the Board of Directors may determine. The Board of Directors from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Section 5.11. Remuneration. The salaries or other compensation of the officers of the 22 Corporation shall be fixed from time to time by resolution of the Board of Directors, except that the Board of Directors may by resolution delegate to any person or group of persons the power to fix the salaries or other compensation of any subordinate officers or agents appointed in accordance with the provisions of Section 5.10 of this Article V. Section 5.12. Surety Bonds. The Board of Directors may require any officer or agent of the Corporation to execute a bond (including, without limitation, any bond required by the Investment Company Act of 1940, as amended, and the rules and regulations of the Securities and Exchange Commission) to the Corporation in such sum and with such surety or sureties as the Board of Directors may determine, conditioned upon the faithful performance of his duties to the Corporation, including responsibility for negligence and for the accounting of any of the Corporation's property, funds or securities that may come into his hands. [ICA Section 17(g)] ARTICLE VI NET ASSET VALUE Section 6.1. Valuation of Assets. The value of the Corporation's net assets shall be determined at such times and by such method as shall be established from time to time by the Board of Directors. Such method shall be reduced to writing and maintained in the Corporation's permanent records. ARTICLE VII CAPITAL STOCK Section 7.1. Certificates of Stock. The interest of each stockholder of the Corporation shall be evidenced in such form as the Board of Directors may from time to time prescribe. No certificate shall be valid unless it is signed by the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation and sealed with its seal, or bears the facsimile signatures of such officers and a facsimile of such seal. [MGCL Sections 2-210, 2-212] 23 Section 7.2. Transfer of Shares. Shares of the Corporation shall be transferable on the books of the Corporation by the holder thereof in person or by his duly authorized attorney or legal representative upon surrender and cancellation of a certificate or certificates for the same number of shares of the same class, duly endorsed or accompanied by proper instruments of assignment and transfer, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. The shares of stock of the Corporation may be freely transferred, and the Board of Directors may, from time to time, adopt rules and regulations with reference to the method of transfer of the shares of stock of the Corporation. Section 7.3. Stock Ledgers. The stock ledgers of the Corporation, containing the names and addresses of the stockholders and the number of shares held by them respectively, shall be kept at the principal offices of the Corporation or, if the Corporation employs a transfer agent, at the offices of the transfer agent of the Corporation. [MGCL Section 2-209] Section 7.4. Transfer Agents and Registrars. The Board of Directors may from time to time appoint or remove transfer agents and/or registrars of transfers of shares of stock of the Corporation, and it may appoint the same person as both transfer agent and registrar. Upon any such appointment being made, all certificates representing shares of capital stock thereafter issued shall be countersigned by one of such transfer agents or by one of such registrars of transfers or by both and shall not be valid unless so countersigned. Section 7.5. Fixing of Record Date. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any stockholders' meeting or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, provided that (1) such record date shall be within 90 days prior to the date on which the particular action requiring such determination will be taken; (2) the transfer books shall not be closed for a period longer than 20 days, and (3) in the case of a meeting of stockholders, the record date or 24 any closing of the transfer books shall be at least 10 days before the date of the meeting. [MGCL Section 2-511] Section 7.6. Lost, Stolen or Destroyed Certificates. Before issuing a new certificate for stock of the Corporation alleged to have been lost, stolen or destroyed, the Board of Directors or any officer authorized by the Board may, in its discretion, require the owner of the lost, stolen or destroyed certificate (or his legal representative) to give the Corporation a bond or other indemnity, in such form and in such amount as the Board or any such officer may direct and with such surety or sureties as may be satisfactory to the Board or any such officer, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. [MGCL Section 2-213] ARTICLE VIII FISCAL YEAR AND ACCOUNTANT Section 8.1. Fiscal Year. The fiscal year of the Corporation shall, unless otherwise ordered by the Board of Directors, be twelve calendar months ending on the 30th day of June. Section 8.2. Accountant. (a) The Corporation shall employ an independent public accountant or a firm of independent public accountants of national reputation as its Accountant to examine the accounts of the Corporation and to sign and certify financial statements filed by the Corporation. The Accountant's certificates and reports shall be addressed both to the Board of Directors and to the stockholders. The employment of the Accountant shall be conditioned upon the right of the Corporation to terminate the employment forthwith without any penalty by vote of a majority of the outstanding voting securities at any stockholders' meeting called for that purpose. (b) A majority of the members of the Board of Directors who are not "interested persons" (as such term is defined in the Investment Company Act of 1940, as amended) of the 25 Corporation shall select the Accountant at any meeting held within 30 days before or after the beginning of the fiscal year of the Corporation or before the annual stockholders' meeting in that year. Such selection shall be submitted for ratification or rejection at the next succeeding annual stockholders' meeting. If such meeting shall reject such selection, the Accountant shall be selected by majority vote of the Corporation's outstanding voting securities, either at the meeting at which the rejection occurred or at a subsequent meeting of stockholders called for that purpose. (c) Any vacancy occurring between annual meetings, due to the resignation of the Accountant, may be filled by the vote of a majority of the members of the Board of Directors who are not "interested persons." [ICA Section 32(a)] ARTICLE IX CUSTODY OF SECURITIES Section 9.1. Employment of a Custodian. The Corporation shall place and at all times maintain in the custody of a Custodian (including any sub-custodian for the Custodian) all funds, securities and similar investments owned by the Corporation. The Custodian (and any sub-custodian) shall be an institution conforming to the requirements of Section 17(f) of the Investment Company Act of 1940 and the rules of the U.S. Securities and Exchange Commission thereunder. The Custodian shall be appointed from time to time by the Board of Directors, which shall fix its remuneration. [ICA Section 17(f)] Section 9.2. Termination of Custodian Agreement. Upon termination of the Custodian Agreement or inability of the Custodian to continue to serve, the Board of Directors shall promptly appoint a successor Custodian, but in the event that no successor Custodian can be found who has the required qualifications and is willing to serve, the Board of Directors shall call as promptly as possible a special meeting of the stockholders to determine whether the Corporation shall function without a Custodian or shall be liquidated. If so directed by vote of the holders of a majority of the outstanding shares of stock entitled to vote of the 26 Corporation, the Custodian shall deliver and pay over all property of the Corporation held by it as specified in such vote. ARTICLE X INDEMNIFICATION AND INSURANCE Section 10.1. Indemnification of Officers, Directors, Employees and Agents. To the maximum extent permitted by the Investment Company Act of 1940, the Securities Act of 1933 (as such statutes are now or hereinafter in force) and by Maryland law in effect from time to time, the Corporation shall indemnify, and shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (i) any individual who is a present or former Director or officer of the Corporation or (ii) any individual who serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director or officer of such corporation or other enterprise or as a partner or trustee of such partnership, joint venture, trust, employee benefit plan or other enterprise at the request of the Corporation. The Corporation may, with the approval of its Board of Directors, provide such indemnification and advancement of expenses to a person who served a predecessor of the Corporation in any of the capacities described in (i) or (ii) above and to any employee or agent of the Corporation or a predecessor of the Corporation. Indemnification shall be made only as authorized for a specific proceeding upon (i) a determination that indemnification of such person is proper in the circumstances because he has met the applicable standard of conduct for indemnification and (ii) such other authorizations and determinations as may be required by law to be made by (A) the Board of Directors of the Corporation by the vote of a majority of a quorum consisting of Directors who are neither "interested persons" of the Corporation as defined in the Investment Company Act of 1940 nor parties to such proceeding or, if such quorum cannot be obtained, by a majority vote of a committee of the Board of Directors consisting solely of two or more such Directors who are duly designated to act in the matter by a majority vote of the full Board of Directors; or (B) independent legal counsel in a written 27 opinion, which counsel shall be selected in accordance with such procedures as may be required by law, provided, however, that such counsel shall make only such determinations and authorizations as are permitted by law to be made by independent counsel; or (C) the stockholders of the Corporation acting in accordance with the Charter and By-Laws of the Corporation and applicable law. Neither the amendment nor repeal of this Section, nor the adoption or amendment of any other provision of the By-Laws or Charter of the Corporation inconsistent with this Section, shall apply to or affect in any respect any act or failure to act which occurred prior to such amendment, repeal or adoption. Section 10.2. Insurance of Officers, Directors, Employees and Agents. The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in or arising out of his position, whether or not the Corporation would have the power to indemnify him against such liability. [MGCL Section 2-418(k)] ARTICLE XI AMENDMENTS Section 11.1. General. All By-Laws of the Corporation, whether adopted by the Board of Directors or the stockholders, shall be subject to amendment, alteration or repeal, and new By-Laws may be made, by the affirmative vote of a majority of either: (1) the holders of record of the outstanding shares of stock of the Corporation entitled to vote, at any annual or special meeting, the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new By-Law; or (2) the Directors, at any regular or special meeting the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new By-Law. [MGCL Section 2-109(b)] EX-99.B.II 3 AMENDMENT (10/19/95) TO RESTATED BY-LAWS 1 Exhibit b(ii) THE KOREA FUND, INC. Certificate as to Resolution of Board of Directors The undersigned certifies that he is the Secretary of the above named fund (the "Fund"), a Maryland corporation, and that, as such, he is authorized to execute this Certificate on behalf of the Fund, and further certifies that the following is a complete and correct copy of resolutions duly adopted by the duly elected Members of the Board of the Fund at a meeting duly called, convened and held on October 11, 1995, at which a quorum was present and acting throughout, and that such resolutions are in full force and effect. RESOLVED, that pursuant to Article XI, Section 11.1 of the Fund's By-Laws, Article III A entitled "Emeritus Founding Directors" be added to the Fund's By-Laws and shall read as follows: ARTICLE IIIA EMERITUS FOUNDING DIRECTORS Section 3A.1. Number; Qualification; Term: The Board of Directors may from time to time designate and appoint one or more directors who have served on the Board of Directors since the Corporation's inception to the position of "emeritus founding director". Each emeritus founding director shall serve for such term as shall be specified in the resolution of the Board of Directors appointing him or until his earlier resignation or removal. An emeritus founding director may be removed from such position with or without cause by the vote of a majority of the Board of Directors given at any regular meeting or special meeting. Section 3A.2. Duties; Remuneration: An emeritus founding director shall be invited to attend all meetings of the Board of Directors but shall not be present at any portion of a meeting from which the emeritus founding director shall have been excluded by 2 vote of the directors. An emeritus founding director shall not be a "Director" or "officer" within the meaning of the Corporation's Articles of Incorporation or of these By-Laws, shall not be deemed to be a member of an "advisory board" within the meaning of the Investment Company Act of 1940, as amended from time to time, shall not hold himself out as any of the foregoing, and shall not be liable to any person for any act of the Corporation. Notice of special meetings may be given to an emeritus founding director but the failure to give such notice shall not affect the validity of any meeting or the action taken thereat. An emeritus founding director shall not have the powers of a Director, may not vote at meetings of the Board of Directors and shall not take part in the operation or governance of the Corporation. An emeritus founding director shall receive such compensation as shall be determined by the vote of a majority of the Board of Directors. IN WITNESS WHEREOF, I hereunto set my hand this day of October, 1995. Secretary EX-99.B.III 4 AMENDMENT (08/08/96) TO RESTATED BY-LAWS 1 Exhibit b(iii) THE KOREA FUND, INC. Certificate as to Resolution of Board of Directors The undersigned certifies that he is the Secretary of the above named fund (the "Fund"), a Maryland corporation, and that, as such, he is authorized to execute this Certificate on behalf of the Fund, and further certifies that the following is a complete and correct copy of resolutions duly adopted by the duly elected Members of the Board of the Fund at a meeting duly called, convened and held on July 23, 1996, at which a quorum was present and acting throughout, and that such resolutions are in full force and effect. RESOLVED, that pursuant to Section 11.1 of the Fund's By-Laws, Section 2.2 of the Fund's By-Laws shall be amended by deleting the number "25%" in the third line of the second paragraph thereof and inserting in its place the number "50%"; FURTHER RESOLVED, that pursuant to Section 11.1 of the Fund's By-laws, Section 4.1 of the Fund's By-Laws shall be amended by inserting the following immediately after the fifth sentence thereof: "If the Board of Directors has given general authorization for the issuance of stock providing for or establishing a method or procedure for determining the maximum number of shares to be issued, a committee of the Board, in accordance with that general authorization or any stock option or other plan or program adopted by the Board, may authorize or fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors under Section 3.2 of these By-Laws." ; and FURTHER RESOLVED, that the foregoing amendments to the Fund's By-Laws shall be deemed effective on October 1, 1996. IN WITNESS WHEREOF, I hereunto set my hand this day of August, 1996. Secretary EX-99.D.II 5 SUBSCRIPTION RIGHTS DISTRIBUTION AND AGENCY AGREE 1 Exhibit d(ii) STATE STREET BANK AND TRUST COMPANY SUBSCRIPTION RIGHTS DISTRIBUTION AND AGENCY AGREEMENT This Subscription Rights Distribution and Agency Agreement (the "Agreement") is made as of March __, 1997 between The Korea Fund, Inc. (the "Company"), a Maryland corporation and State Street Bank and Trust Company, a national banking association, as subscription and distribution agent ("Agent"). Certain capitalized terms used herein without definition have the respective meanings specified therefor in the Prospectus (as defined below). WHEREAS, the Company proposes to make a subscription offer by issuing certificates or other evidences of subscription rights, in the form designated by the Company ("Subscription Certificates"), to shareholders of record ("Record Date Shareholders") of its Common Stock, par value $0.01 per share ("Common Stock"), as of a record date specified by the Company (the "Record Date"), pursuant to which each Record Date Shareholder will receive transferable rights (the "Rights") to subscribe to purchase shares of Common Stock, as described in the prospectus (the "Prospectus") included in the Form N-2 Registration Statement filed by the Company with the Securities and Exchange Commission on February 28, 1997, as amended by any amendments filed with respect thereto (the "Registration Statement"); WHEREAS, the Company wishes the Agent to perform certain acts on behalf of the Company and the Agent is willing so to act, in connection with the distribution of the Subscription Certificates and the issuance and exercise of the Rights all upon the terms and conditions set forth herein and in the manner described in the Prospectus; NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements set forth herein, the parties agree as follows: 1. The Company hereby appoints and authorizes the Agent to act on its behalf in accordance with the provisions hereof, and the Agent hereby accepts such appointment and agrees to so act. 2. (a) Each Subscription Certificate shall evidence the Rights of the Record Date Shareholder therein named to purchase Common Stock upon the terms and 2 conditions therein and in the Prospectus set forth. (b) Upon the written advice of the Company signed by its Chairman, President, Secretary or Assistant Secretary, as to the Record Date, the Agent shall, from a list of the Company's Shareholders as of the Record Date to be prepared by the Agent in its capacity as the Company's Transfer Agent, prepare and record Subscription Certificates in the names of the Record Date Shareholders, setting forth the number of Rights to subscribe to the Company's Common Stock calculated on the basis of one Right for each 1.01 shares recorded on the Company's books in the name of each such Record Date Shareholder as of the Record Date, rounded to the nearest whole Right. Fractional Rights will not be issued. Each Subscription Certificate shall be dated as of the Record Date. Upon the written advice as to the effective date of the Registration Statement, the Agent shall as promptly as practicable deliver the Subscription Certificates, together with a copy of the Prospectus, to all Record Date Shareholders whose addresses are in the United States. 3. (a) Each Subscription Certificate shall be irrevocable and shall be fully transferable. The Agent shall maintain a register of Subscription Certificates and the holders of record thereof. Each Subscription Certificate shall entitle the holder to the rights set forth on the face thereof and set forth in the Prospectus. (b) A Record Date Shareholder may exercise his Rights under the Primary Subscription and Over- Subscription Privilege by delivery to the Agent in the manner specified in the Prospectus of (i) the Subscription Certificate with respect thereto, duly executed by such Record Date Shareholder in accordance with and as provided by the terms and conditions of the Subscription Certificate, together with (ii) the Subscription Price for each share of Common Stock subscribed for by exercise of such Rights, in United States dollars in cash, by check, or money order drawn on a bank in the continental United States or by postal, telegraphic, or express money order, in each case payable to the order of the Company. 2 3 (c) Rights may be exercised at any time after the date of issuance of the Subscription Certificates with respect thereto but no later than 5:00 P.M. New York City Time on such date as the Company shall designate to the Agent in writing (the "Expiration Date"). For the purpose of determining the time of the exercise of any Rights, delivery of any material to the Agent shall be deemed to occur when such materials are received at the corporate office of the Agent specified in the Prospectus. (d) Notwithstanding the provisions of Section 3(b) and 3(c) regarding delivery of an executed Subscription Certificate to the Agent prior to 5:00 P.M. New York City Time on the Expiration Date, if prior to such time the Agent receives notice of guaranteed delivery by telegram or otherwise from a bank, trust company or a New York Stock Exchange member guaranteeing delivery of (i) full payment for Shares purchased and subscribed for under the Primary Subscription and the Over- Subscription Privilege (if any) and (ii) a properly completed and executed Subscription Certificate, then such exercise of Primary Subscription Rights and the Over-Subscription Privilege shall be regarded as timely, subject, however, to receipt of the duly executed Subscription Certificate and full payment for the Common Stock by the Agent within three business days after the Expiration Date. (e) Within eight Business Days following the Expiration Date (the "Confirmation Date"), the Agent shall sent to each shareholder (or, if shares of Common Stock on the Record Date are held by Cede & Co. or any other depository or nominee, to Cede & Co. or such other depository or nominee), (A) a confirmation showing (i) the number of Shares acquired pursuant to the Primary Subscription Rights, (ii) the number of Shares, if any, acquired pursuant to the Over-Subscription Privilege, (iii) the per Share and total purchase price for the Shares, (iv) any amount payable to the Shareholder pursuant to Section 9, and (v) any excess to be refunded by the Company to such Shareholder, in each case based on the Subscription Price; and (B) a letter explaining the allocation of shares pursuant to the Over- Subscription Privilege. Any excess payment to be 3 4 refunded by the Company to a Shareholder, shall be mailed by the Agent to the Shareholder as promptly as possible but in no event later than fifteen Business Days after the Expiration Date, as provided in Section 5 below. 4. If, after allocation of Shares to persons exercising Rights in the Primary Subscription, there remain unexercised Rights, then the Agent shall allot the Shares issuable upon exercise of such unexercised Rights (the "Remaining Shares") to persons exercising the Over-Subscription Privilege, in the amounts of such Over-Subscriptions. If the number of Shares for which the Over-Subscription Privilege has been exercised is greater than the Remaining Shares, the Agent shall allot the Remaining Shares to the persons exercising the Over-Subscription Privilege pro rata based solely on the number of Rights originally issued to them, as more fully described in the Prospectus. The Agent shall advise the Company immediately upon the completion of the allocation set forth above as to the total number of Shares subscribed and distributable. 5. (a) The Agent will deliver (i) certificates representing those Shares purchased pursuant to the Primary Subscription as soon as practicable after the corresponding Rights have been validly exercised and full payment for such Shares has been received and cleared, it being understood that certificates representing those Shares purchased by the Dealer Manager upon its exercise of the corresponding Rights will be delivered to the Dealer Manager no later than the close of business on the Business Day following the day that full payment for such Shares has been received by the Agent; (ii) certificates representing those Shares purchased pursuant to the Over-Subscription Privilege as soon as practicable after the Expiration Date and after all allocations have been effected; (iii) in the case of each holder of Rights whose Rights were sold pursuant to Section 9, as promptly as possible but in no event later than fifteen Business Days after the Expiration Date, proceeds of such sale (provided, however, that proceeds of sales on behalf of Record Date Shareholders whose Subscription Certificates are undeliverable shall be held by the Agent until they are either claimed or escheated); (iv) in the case of each Record 4 5 Date Shareholder who subscribed, pursuant to the Over-Subscription Privilege, for a greater number of Shares than was allotted to such Record Date Shareholder under Section 4, as promptly as possible but in no event later than fifteen Business Days after the Expiration Date, a refund in the amount of the difference between the purchase price delivered for the Shares subscribed for pursuant to such Over-Subscription Privilege and the purchase price of the Shares so allotted under Section 4 (an "Excess Payment"), and the Agent will deliver to the Company all interest accrued on such Excess Payment; (v) in the case of Record Date shareholders who are participants in the Dividend Reinvestment and Cash Purchase Plan, as promptly as possible but in no event later than fifteen Business Days after the Expiration Date, account statements reflecting a credit of uncertificated Shares for their Primary Subscription and Over-Subscription Shares unless such shareholders have elected to receive certificates. 6. (a) All proceeds received by the Agent from holders of Rights in respect of the exercise of Rights shall be held by the Agent, on behalf of the Company, in a segregated, interest-bearing account (the "Account") pending disbursement in the manner described in Section 6(b) below. (b) The Agent shall deliver all proceeds received in respect of the exercise of the Rights (including interest earned thereon) to the Company as promptly as practicable after full payment in respect of such exercise has been received and cleared; provided that the Agent shall not deliver to the Company proceeds in excess of the aggregate maximum offering price shown on the Registration Statement, and any such excess proceeds shall be held in the Account to fund Excess Payments after the Expiration Date. 7. The Agent (a) shall supply the Company with a certified list of Record Date Shareholders and the number of shares owned of record by each and (b) shall promptly advise the Company as to the date of delivery of and the number of Common Stock issued pursuant to the exercise of Rights hereunder. 5 6 8. The Agent shall account promptly to the Company with respect to Rights exercised and concurrently account for all monies received and returned by the Agent with respect to the purchase of Shares of Common Stock upon the exercise of Rights. 9. The Agent shall use its best efforts to sell, at current market prices, either to the Dealer Manager or through the Dealer Manager on the New York Stock Exchange, on the terms set forth in the Prospectus, (i) all Rights submitted to it for sale by Record Date Shareholders in accordance with the Prospectus, provided such Rights are received by the Agent prior to the Expiration Date, (ii) all Rights of Record Date Shareholders whose Subscription Certificates remain unclaimed as a result of being returned by postal authorities as undeliverable the fourth Business Day prior to the Expiration Date, (iii) all Rights of Foreign Record Date Shareholders in respect of which no instructions have been received by the Agent by 12:00 noon, New York City time, two Business Days prior to the Expiration Date, and (iv) all Rights a Record Date Holder is unable to exercise because such Rights represent the right to subscribe for less than one Share. Such sales will be made exclusively either to or through the Dealer Manager, and the Agent shall deliver the proceeds of such sales to the respective Record Date Holders net of commissions charged by the Dealer Manager. The Agent agrees to inform the Dealer Manager at reasonable intervals each Business Day during the Subscription Period (orally, to be followed by written confirmation) of the matter of Rights available for sale pursuant to this Section 9. 10. In the event that the Agent does not receive, within three Business Days after the Expiration Date, any Certificate or amount due from a holder of Rights as specified in Section 3(d), then it shall take such action with respect to such Holder's Rights as may be instructed by telephone or in writing by the Company including without limitation (i) applying any payment actually received by it toward the purchase of the greatest whole number of Shares of common stock which could be acquired with such payment, (ii) allocating the Shares subject to such Rights to Record Date Shareholders who have exercised their Over-Subscription Privilege as set forth in Section 4 hereof, but have not been allocated the full number of shares requested, and (iii) selling all or a portion of the Shares of 6 7 Common Stock deliverable upon exercise of such Rights on the open market, and applying the proceeds thereof to the amount owed. 11. No Subscription Certificate shall entitle a holder of Rights to vote or receive dividends or be deemed the holder of Shares of Common Stock for any purpose, nor shall anything contained in any Subscription Certificate by construed to confer upon any holder of Rights any of the rights of a shareholder of the Company or any right to vote, give or withhold consent to any action by the Company (whether upon any recapitalization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings or other action affecting shareholders or receive dividends or otherwise, until the Rights evidenced thereby shall have been exercised and the Shares of Common Stock purchasable upon the exercise thereof shall have become deliverable as provided in this Agreement and in the Prospectus. 12. If the Agent is requested to issue a new Subscription Certificate to replace one that has been lost, stolen, mutilated or destroyed, the Agent may issue a new Subscription Certificate of like denomination in substitution for the Subscription Certificate so lost, stolen, mutilated or destroyed, subject to the conditions that the party requesting the replacement Subscription Certificate (i) provides appropriate indemnification to the Company, (ii) in the case of a mutilated Subscription Certificate, and (iii) complies with any such other conditions as the Agent in its discretion may impose. 13. (a) The Company covenants that all Shares of Common Stock issued on exercise of Rights set forth in the Subscription Certificates will be validly issued, fully paid, nonassessable and free of preemptive rights (other than the Rights). (b) The Company shall furnish to the Agent, upon request, an opinion of counsel satisfactory to the Agent to the effect that a registration statement under the Securities Act of 1933, as amended (the "Act"), is then in effect with respect to its Shares of Common Stock issuable upon the exercise of the Rights evidenced by the Subscription Certificates. Upon written advice to the Agent that the Securities and Exchange Commission shall 7 8 have issued or threatened to have issued any order preventing or suspending the use of the Prospectus, or if for any reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Act, the Agent shall cease acting hereunder until receipt of written instructions from the Company and such assurances as it may reasonably request that it may comply with such instruction without violation of the Act. 14. (a) Any corporation into which the Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Agent shall be a party, or any corporation succeeding to the corporate trust business of the Agent, shall be the successor to the Agent hereunder without the execution or filing of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor agent. In case at the time such successor to the Agent shall succeed to the agency created by this Agreement, any of the Subscription Certificates shall have been countersigned but not delivered, any such successor to the Agent may adopt this countersignature of the original agent and deliver such Subscription Certificates so countersigned, and in case at that time any of the Subscription Certificates shall not have been countersigned, any successor to the Agent may countersign such Subscription Certificates either in the name of the predecessor Agent or in the name of the successor Agent, and in all such cases such Subscription Certificates shall have the full force provided in the Subscription Certificates and in this Agreement. (b) In case at any time the name of the Agent shall be changed and at such time any of the Subscription Certificates shall have been signed but not delivered, the Agent may adopt the signature under its prior name and deliver Subscription Certificates so signed, and in case at that time any of the Subscription Certificates either in its prior name or in its changed name, and in all such cases such Subscription Certificates shall have the full force provided in the Subscription Certificates and this Agreement. 8 9 15. The Company agrees to pay to the Agent from time to time, on demand of the Agent, reasonable compensation for all services rendered by it hereunder and also its reasonable expenses and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder, all as set forth in the Rights Subscription Fee Schedule attached hereto. 16. The Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions: (a) Whenever in the performance of its duties under this Agreement the Agent shall deem it necessary or desirable that any fact or matter be proved or established, prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof is herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board or President or a Vice President or the Secretary or Assistant Secretary or the Treasurer of the Company delivered to the Agent, and such certificate shall be full authorization to the Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (b) The Agent shall not be responsible for and the Company shall indemnify and hold the Agent harmless from and against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to all actions of the Agent or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence, willful misconduct, or material breach of this Agreement. (c) Nothing herein shall preclude the Agent from acting in any other capacity for the Company or for any other legal entity. (d) The Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any 9 10 officer referred to in subsection (a) above of the Company and to apply to any such officer of the Company for advice or instructions in connection with its duties, and shall be indemnified and not liable for any action taken or suffered by it in good faith in accordance with instructions of such officer. (e) The Agent shall be indemnified and shall incur no liability for or in respect of any action taken, suffered, or omitted by it in reliance upon any Subscription Certificate or certificate for Common Stock, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document that it reasonably believes to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons. (f) Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any consequential damages arising out of any act or failure to act hereunder. 17. The Agent may, without the consent or concurrence of the shareholders in whose names Subscription Certificates are registered, by supplemental agreement or otherwise, concur with the Company in making any changes or corrections in a Subscription Certificate that it shall have been advised by counsel (who may be counsel for the Company) and are appropriate to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error therein or herein contained, and which shall not be inconsistent with the provisions of the Subscription Certificate except insofar as any such change may confer additional rights upon the holders of Rights. 18. (a) Except as provided in Section c below, neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party. (b) This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 10 11 (c) The Agent may, without further consent on the part of the Company subcontract for the performance hereof with (i) Boston Financial Data Services, Inc. a Massachusetts Corporation ("BFDS") which is duly registered as a transfer agent pursuant to Section 17(c)(1) of the Securities Exchange Act of 1934 or (ii) the current third party vendor utilized by BFDS; provided, however, that the Agent shall be as fully responsible to the Company for the acts and omissions of any agent or subcontractor as it is for its own acts and omissions. 19. All covenants and provisions of this Agreement by or for the benefit of the Company or the Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. 20. The validity, interpretation and performance of this Agreement shall be governed by the law of the Commonwealth of Massachusetts. STATE STREET BANK THE KOREA FUND, INC. AND TRUST COMPANY By: By: --------------------------- --------------------------- Vice President Title: Dated: Dated: ------------------------- ------------------------ 11 EX-99.H.I 6 DEALER MANAGER AGREEMENT 1 Exhibit h.(i) DEALER MANAGER AGREEMENT ___________, 1997 Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: The Korea Fund Inc., a corporation formed under the laws of the State of Maryland (the "Company"), and Smith Barney Inc., a corporation formed under the laws of the State of Delaware ("Smith Barney"), confirm their agreement, subject to the terms and conditions set out below, with respect to the proposed issuance by the Company to its shareholders of rights entitling their holders to subscribe for shares of the Company's Common Stock, par value $.01 per share. 1. DEFINITIONS The following terms have the following meanings when used in this Agreement: (a) "Acts" means the Securities Act and the Investment Company Act collectively. (b) "Agreement" means this Dealer Manager Agreement as originally executed and as amended, modified, supplemented or restated from time to time. (c) "Availability Date" has the meaning set forth in Section 8(d) of this Agreement. (d) "Business Day" means any day on which the NYSE is open for trading. (e) "Code" means the U.S. Internal Revenue Code of 1986, as amended. (f) "Commission" means the U.S. Securities and Exchange Commission. (g) "Common Stock" means the Company's Common Stock, par value $.01 per share. 2 (h) "Custodian" means Brown Brothers Harriman & Co. (i) "Custodian Agreement" means the Custodian Agreement, dated ____________, between the Company and the Custodian. (j) "Effective Date" means the date of the Effective Time. (k) "Effective Time" has the meaning set forth in Section 4(a) of this Agreement. (l) "Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. (m) "Exercising Rights Holders" means Record Date Shareholders and Rights Holders purchasing Shares in the Primary Subscription. (n) "Expiration Date" means April __, 1997. (o) "Investment Advisers Act" means the U.S. Investment Advisers Act of 1940, as amended. (p) "Investment Company Act" means the U.S. Investment Company Act of 1940, as amended. (q) "Korea" means the Republic of Korea. (r) "Korean Adviser" means _______________Daewoo Capital Management Co., Ltd. (s) "Manager" means Scudder, Stevens & Clark, Inc., the Company's investment adviser and manager. (t) "Management Agreement" means the Investment Advisory, Management and Administration Agreement, dated [as of] October 13, 1994, between the Company and the Manager. (u) "NYSE" means the New York Stock Exchange, Inc. (v) "Offer" means the offer of Shares contemplated by the Company's proposed issuance of Rights. (w) "OSE" means the Osaka Stock Exchange. 2 3 (x) "Primary Subscription" means a Record Date Shareholder's right to acquire Shares during the Subscription Period at the Subscription Price. (y) "Prospectus" means collectively the forms of prospectus and statement of additional information as first filed with the Commission pursuant to and in accordance with rule 497(h) under the Securities Act or (if no such filing is required) as included in the Registration Statement. (z) "PSE" means the Pacific Stock Exchange. (aa) "Record Date" means April __, 1997. (bb) "Record Date Shareholders" means the Company's shareholders of record as of the close of business on the Record Date. (cc) "Registration Statement" means the registration statement relating to the Offer on Form N-2 (File Nos. 333-________ and 811-4058) under the Acts, as amended at the Effective Time, including all information (if any) deemed to be a part of such registration statement as of the Effective Time pursuant to Rule 430A(b) under the Securities Act, filed by the Company with the Commission. (ee) "Research Agreement" means the Research and Advisory Agreement, dated ___________, between the Manager and the Korean Adviser. (ff) "Rights" means the right proposed to be issued by the Company to Record Date Shareholders, which rights entitle their holders to subscribe for Shares. (gg) "Rights Holders" means the holders of Rights. (hh) "Rules and Regulations" means the rules and regulations adopted by the Commission under the Securities Act and/or the Investment Company Act. (ii) "Securities Act" means the U.S. Securities Act of 1933, as amended. (jj) "Shares" means an aggregate of up to _________ shares of Common Stock for which Rights Holders may subscribe. 3 4 (kk) "Subscription Agent" means State Street Bank and Trust Company. (ll) "Subscription Agent Agreement" means the Subscription Rights Distribution and Agency Agreement, dated as of _____________ , between the Company and the Subscription Agent. (mm) "Subscription Period" means the period of time beginning on __________, 1997 and ending at 5:00 p.m., New York City time, on the Expiration Date. (nn) "Subscription Price" means the Subscription Price per Share of $_____. 2. THE OFFER The Company is proposing to issue Rights to Record Date Shareholders, which Rights entitle their holders to subscribe for Shares. Under the Company's proposal, each Record Date Shareholder will be issued one Right for each full share of Common Stock owned on the Record Date. No fractional Rights will be issued. The rights will entitle each Record Date Shareholder to acquire in the Primary Subscription at the Subscription Price one Share for each three Rights held, except that any Record Date Shareholder who is issued fewer than three Rights will be able to subscribe for one full Share at the Subscription Price. All Rights will be able to be exercised immediately upon receipt and until 5:00 p.m., New York City time, on the Expiration Date. Any Record Date Shareholder who fully exercises all Rights initially issued to him (other than those Rights that cannot be exercised because they represent the right to acquire less than one Share) will be entitled to subscribe for, subject to allotment, Shares that are not otherwise subscribed for by Exercising Rights Holder son the Primary Subscription. Additional terms and conditions of the Offer are set out in the Registration Statement. 3. APPOINTMENT OF DEALER MANAGER The Company appoints Smith Barney as the exclusive dealer manager in connection with the Offer and Smith Barney accepts that appointment. The Company also authorizes Smith Barney to form and manage a group of securities dealers (each, a "Selling Group Member," and, 4 5 collectively, the "Selling Group") to solicit the exercise of Rights and sell Shares purchased by Smith Barney from the Company through the exercise of Rights. Smith Barney represents and warrants that it is a broker-dealer registered under the Exchange Act. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to, and agrees with, Smith Barney that: (a) A registration statement (File Nos. 333-_______ and 811-4058) including a form of prospectus relating to the Offer has been filed with the Commission and either (i) has been declared effective under the Securities Act and is not proposed to be amended or (ii) is proposed to be amended by amendment or post-effective amendment. If the Company does not propose to amend such registration statement and if any post-effective amendment to such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent such amendment has been declared effective by the Commission. For purposes of this Agreement, "Effective Time" means (i) if the Company has advised Smith Barney that is does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission, or (ii) if the Company has advised Smith Barney that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. (b) If the Effective Time is prior to the execution and delivery of this Agreement: (i) on the Effective Date, the Registration Statement conformed in all respects to the requirements of the Acts and the Rules and Regulations and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) on the date of this Agreement, the Registration Statement conforms, and at the time of filing of the Prospectus pursuant to Rule 5 6 497(h) under the Securities Act, the Registration Statement and the Prospectus will conform, in all respects to the requirements of the Acts and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time is subsequent to the execution an delivery of this Agreement: on the Effective Date, the Registration Statement and the Prospectus will conform in all respects to the requirements of the Acts and the Rules and Regulations, and neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The two preceding sentences do not apply to statements in or omissions from the Registration Statement or Prospectus based upon written information furnished to the Company by Smith Barney specifically for use therein. (c) Coopers & Lybrand L.L.P., whose report appears in the Prospectus, are independent accountants as required by the Acts and the Rules and Regulations with respect to the Company. The financial statements and financial highlights (including the related notes) included in the Registration Statement or the Prospectus present fairly the financial position, results of operations, changes in net assets and financial highlights of the Company at the dates and for the periods indicated therein and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated. (d) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland, with full power and authority to own or lease its properties and conduct its business as described in the Prospectus and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the character of the business conducted by it or the location of the properties owned or leased by it make such qualification necessary. 6 7 (e) All of the outstanding shares of Common Stock have been duly authorized and are validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof; the Offer, the Rights and the Shares have been duly authorized, and the Rights and the Shares, upon issuance and delivery and, in the case of the Shares, payment therefor, as described in the Registration Statement and the Prospectus, will be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof. Except for the Rights, there are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock (including the Shares) pursuant to the Company's Articles of Incorporation, by-laws or other governing documents or any agreement or other instrument to which the Company is a party or by which it may be bound. Neither the filing of the Registration Statement nor the Offer as contemplated by this Agreement and the Subscription Agent Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock or other securities of the Company. The capitalization of the Company as of __________, 1997 is as set forth in the Prospectus, and the Rights and the Shares conform to the descriptions thereof contained in the Prospectus. (f) Except as described in or contemplated by the Registration Statement and the Prospectus, there has not been any material adverse change in, or adverse development which materially affects, the condition (financial or other), results of operation, business or prospects, of the Company from the date as of which information is given in the Prospectus. (g) Except as described in the Prospectus, there is no litigation or governmental proceeding to which the Company is a party or to which any property of the Company is subject or which is pending or, to the knowledge of the Company, contemplated against the Company which might result in any material adverse change in the condition (financial or other), results of operations, business or prospects of the Company or which is required to be disclosed in the Prospectus. 7 8 (h) The Company is not in violation of any law, ordinance, governmental rule or regulation or court decree to which it may be subject which violation might have a material adverse effect on the condition (financial or other), results of operation, business or prospects of the Company. (i) The Subscription Agent Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by the Subscription Agent, constitutes the valid and binding agreement of the Company and is enforceable against the Company in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles. (j) This Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and binding agreement of the Company, and is enforceable against the Company in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equitable principles. (k) The Company is not, or with the giving of notice or lapse of time or both would not be, in violation of or in default under, nor will the execution or delivery hereof and of the Subscription Agent Agreement or consummation of the transactions contemplated hereby or by the Subscription Agent Agreement, including, without limitation, the distribution of the Rights and the allotment, issue and sale of the Shares, result in a violation of, or constitute a default under, the Articles of Incorporation or by-laws of the Company, or any agreement, indenture or other instrument, to which the Company is a party or by which it is bound, or to which any of its properties is subject, nor will the performance by the Company of its obligations hereunder or under the Subscription Agent Agreement violate any law, rule, administrative regulation or decree of any court, or any governmental agency or body having jurisdiction over the Company, or any of its properties, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of the Company. Except for permits and similar authorizations required under the 8 9 Acts and the securities or "Blue Sky" laws of certain jurisdictions and for such permits and authorization which have been obtained, no consent, approval, authorization or order of any court, governmental agency or body or financial institution is required in connection with the consummation of the transactions contemplated by this Agreement or the Subscription Agent Agreement. (l) The Rights are duly authorized for listing, subject to official notice of issuance, on the NYSE and are, or as soon as practicable after the date of this Agreement, will be, admitted to trading on the NYSE. (m) The Shares are duly authorized for listing, subject to official notice of issuance, on each of the NYSE, the OSE and the PSE and, as soon as practicable after the date of this Agreement, will be admitted to trading on each of the NYSE, the OSE and the PSE. (n) The Company has not taken and shall not take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the Offer, provided that the Company makes no representation with respect to any transactions by Smith Barney or any other broker or dealer unaffiliated with Company, the Manager or the Korean Adviser to stabilize the price of the shares of Common Stock in connection with the Offer. (o) The Company is duly registered with the Commission under the Investment Company Act as a closed-end non-diversified management investment company. (p) Any required approval by the Korean Government, including any required approval by the Minister of Finance and Economy of Korea under the Fund's license to invest in Korean securities, of the offering, and confirmation of applicability of the United States-Korea Income Tax Treaty (the "Treaty") have been obtained and have not been rescinded or modified. 9 10 5. REPRESENTATIONS AND WARRANTIES OF THE MANAGER The Manager represents and warrants to, and agrees with, Smith Barney that: (a) The Manager has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to conduct its business as described in the Prospectus. (b) The Manager is duly registered as an investment adviser under the Investment Advisers Act and is not prohibited by the Investment Advisers Act or the Investment Company Act, or the rules and regulations under such acts, from acting as Manager for the Company as contemplated by the Prospectus. (c) This Agreement has been duly authorized, exe- cuted and delivered by the Manager. (d) The Manager Agreement and the Research Agreement have each been duly authorized, executed and delivered on behalf of the Manager and each constitutes a valid and binding obligation of the Manager enforceable in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization or of the laws relating to or affecting creditors' rights generally and to general equity principles; and neither the execution and delivery of this Agreement, the Management Agreement or the Research Agreement nor the performance by the Manager of its obligations thereunder will conflict with or result in a breach or violation of any other terms and provisions of the charter or By-laws of the Manager or any law, order, rule or regulation applicable to the Manager of any United States jurisdiction, court, federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Manager or its properties or operations, or, to the best knowledge of the Manager after reasonable investigation, constitute, with or without giving notice or lapse of time or both, a default under, any agreement or instrument to which the Manager is a party or by which the Manager or to which any of the properties of the Manager is subject. 10 11 (e) All written information furnished by the Manager specifically for use in the Registration Statement and Prospectus, including, without limitation, the description of the Manager, does not, and on the Expiration Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make the Registration Statement and Prospectus not misleading. (f) There has not, since the date of the Prospectus, been any material adverse change, or any development reasonably likely to cause a material adverse change, in the Manager's ability to perform its obligations under this Agreement or under the Manager Agreement. 6. SOLICITATION OF RIGHTS EXERCISE; FINANCIAL ADVISORY SERVICES (a) On the basis of the representations and warranties, and subject to the terms and conditions, set forth in this Agreement: (i) Smith Barney agrees to (A) solicit, in accordance with the Acts, the Exchange Act, the Rules and Regulations and its customary practice, the exercise of the Rights, subject to the terms and conditions of this Agreement, the Subscription Agent Agreement and the procedures described in the Registration Statement; and (B) form and manage the Selling Group to (i) solicit, in accordance with the Acts, the Exchange Act, the Rules and Regulations and its customary practice, the exercise of the Rights, subject to the terms and conditions of this Agreement, the Subscription Agent Agreement and the procedures described in the Registration Statement, and (ii) sell Shares purchased by Smith Barney from the Company as provided herein. No securities dealer shall be considered a Selling Group Member until it shall have entered into a Selling Group Agreement with Smith Barney in substantially the form of Exhibit D hereto. (ii) Smith Barney is authorized to buy and exercise Rights and to sell Shares to the public or to Selling Group Members at the offering price set by Smith Barney from time to time. Sales of Shares by Smith Barney or Selling Group Members shall be at 11 12 not more than the offering price set by Smith Barney from time to time. (iii) the Company agrees to furnish, or cause to be furnished, to Smith Barney, lists, or copies of those lists, showing the names and addresses of, and number of Shares held by, Record Date Shareholders as of the Record Date, and to use its best efforts to advise Smith Barney, or cause it to be advised, on each Business Day during the Subscription Period as to any transfers of Rights, and Smith Barney agrees to use such information only in connection with the Offer; (iv) the Company will arrange for the Subscription Agent (A) to inform Smith Barney orally, on each Business Day during the Subscription Period (to be followed by written confirmation), as to the number of Rights that have been exercised since its previous daily report to Smith Barney under the provision of this Section 6(a)(iv), (B) not later than 10:00 a.m. (New York City time) on __________ [Expiration Date plus 7 days], to provide Smith Barney with a written statement as to the total number of Rights exercised (separately setting forth the number of Rights exercised by Record Date Shareholders), (C) to sell any Rights received for resale from Record Date Shareholders exclusively to or through Smith Barney, which may, at its election, purchase such Rights as principal or act as Agent for such resales and (D) to issue shares of Common Stock upon Smith Barney's exercise of Rights no later than the close of business on the business day following the day that full payment for such shares has been received by the Agent. (v) Smith Barney agrees to notify the Company on or prior to ___________ [Expiration Date plus 7 days] of the Shares purchased by Smith Barney through the exercise of Rights and sold to the public or to each Selling Group Member and the total amount of the commissions payable by the Fund pursuant to Section 7 of this Agreement in connection with such sales. (b) Smith Barney agrees to provide to the Company, in addition to the services described in paragraph (a) of 12 13 this Section 6, financial advisory services in connection with the Offer. (c) The Company and Smith Barney agree that Smith Barney and each Selling Group Member is an independent contractor with respect to its solicitation of the exercise of Rights contemplated by this Agreement and the performance of financial advisory services to the Company contemplated by this Agreement, and Smith Barney represents and warrants that it is not a partner or agent of any other securities broker, dealer or other person soliciting the exercise of Rights as contemplated by this Agreement, or of the Company or any of its affiliates. (d) In rendering the services contemplated by this Agreement, Smith Barney and the Selling Group Members agree not to make any representations, oral or written, to any shareholders or prospective shareholders of the Company that are not contained in the Prospectus, unless previously authorized to do so in writing by the Company. (e) In rendering the services contemplated by this Agreement, neither Smith Barney nor any Selling Group Member will be subject to any liability to the Company, the Manager, the Korean Adviser or any of their affiliates, for any act or omission on the part of any securities broker or dealer (other than itself or any of its affiliates) or any other person, and neither Smith Barney nor any Selling Group Member will be liable for its own acts or omissions in performing its obligations under this Agreement, except for any losses, claims, damages, liabilities and expenses that result from any acts or omissions undertaken or omitted to be taken by Smith Barney or a Selling Group Member through its gross negligence or willful misconduct. 7. DEALER MANAGER AND SOLICITATION FEES The Company agrees to pay in New York Clearing House (next day) funds on ___________ [Expiration Date plus 10 days]: (a) to Smith Barney, as compensation for its services to the Company as financial adviser in connection with the Offer, a fee equal to an amount computed by multiplying (i) .01, by (ii) the aggregate number of 13 14 Shares purchased in the Offer, by (iii) the Subscription Price; (b) to Smith Barney for its own account a fee equal to an amount computed by multiplying (i) .025, by (ii) the sum of the number of Shares purchased pursuant to each subscription form relating to the Rights upon which Smith Barney is designated (other than Shares purchased by Smith Barney through the exercise of Rights and sold to the public or to Selling Group Members) plus the number of Shares sold by Smith Barney to the public as indicated in the notice provided by Smith Barney to the Fund pursuant to Section 6(a)(v) of this Agreement, by (iii) the Subscription Price; (c) to Smith Barney for the account of each Selling Group Member a fee equal to an amount computed by multiplying (i) .025, by (ii) the sum of the number of Shares purchased pursuant to each subscription form relating to the Rights upon which the Selling Group Member is designated plus the number of Shares sold by Smith Barney to such Selling Group Member as indicated in the notice provided by Smith Barney to the Fund pursuant to Section 6(a)(v) of this Agreement, by (iii) the Subscription Price; (d) to each securities broker or dealer who has executed the Company's Soliciting Dealer Agreement (other than Smith Barney or any Selling Group Member) designated on any subscription form related to the Rights ("Listed Broker") a fee equal to an amount computed by multiplying (i) .005, by (ii) the number of Shares purchased pursuant to each subscription form upon which the Listed Broker is designated, by (iii) the Subscription Price, provided that the aggregate fees paid to any Listed Broker (other than a Listed Broker who is registered as a specialist in the Rights with the NYSE and who has been approved by the NYSE to act as such during the Subscription Period) may not exceed the product of (A) .50% of the Subscription Price per Share, times (B) the aggregate number of shares of Common Stock held in such Listed Broker's participant accounts with The Depository Trust Company on the Record Date divided by three; and (e) to Smith Barney a fee equal to an amount computed by multiplying (i) .025, by (ii) the number of Shares purchased pursuant to each subscription form upon 14 15 which neither Smith Barney nor any Selling Group Member or Listed Broker is designated plus the number of Shares purchased pursuant to subscription forms upon which a Listed Broker is designated but which are in excess of the limit set forth in clause (B) of the proviso in paragraph (d) of this Section 7, by (iii) the Subscription Price. 8. COVENANTS OF THE COMPANY The Company agrees: (a) If the Effective Time is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with Rule 497(h) under the Securities Act not later than the earlier of (a) the second business day following execution and delivery of this Agreement or (b) the fifteenth business day after the Effective Date. The Company will advise Smith Barney promptly of any such filing pursuant to Rule 497(h). (b) The Company will advise Smith Barney promptly of any proposal to amend or supplement the registration statement as filed, or the related prospectus or statement of additional information, and will not effect such amendment or supplementation without Smith Barney's consent; the Company will also advise Smith Barney promptly of the effectiveness of the Registration Statement (if the Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendments or supplementation of the Registration Statement or the Prospectus, and of the institution by the Commission of any stop order proceedings in respect of the Registration Statement, and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If at any time when a prospectus relating to the Offer is required to be delivered under the Securities Act, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Acts, the 15 16 Company promptly will prepare and file with the Commission an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its security holders an earnings statement covering a period of at least twelve months beginning after the effective date of the Registration Statement which will satisfy the provisions of Section 11(a) of the Securities Act. For the purpose of the preceding sentence "Availability Date" means the 60th day after the end of the fourth fiscal quarter following the fiscal quarter that includes the Effective Date, except that, if such fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to Smith Barney copies of the Registration Statement (one of which will be signed and will include all exhibits), the Prospectus and any other soliciting materials authorized by the Company relating to the offer, and all amendments and supplements to such documents, in each case as soon as available and in such quantities as Smith Barney requests. (f) The Company will pay all expenses incident to the performance of its obligations under this Agreement, and will reimburse the Dealer Manager (i) for its out-of-pocket expenses (including fees and disbursements of counsel) up to an aggregate of $25,000 and (ii) for any reasonable expenses (including reasonable fees and disbursements of counsel) incurred by it in connection with qualification of the Rights and the Shares under the securities laws of the jurisdictions as provided in paragraph (g) of this Section 8 and the printing of memoranda relating thereto, and for the filing fee of the National Association of Securities Dealers, Inc. relating to the Rights and the Shares. If this Agreement is terminated pursuant to Section 10 or if for any reason the issuance of the Rights and the sale of the Shares is not consummated, the Company shall not be required to reimburse Smith Barney for its expenses pursuant to Section 8(f)(i). Smith Barney will be entitled to the payment of any fees pursuant to Section 7 earned with respect to Shares purchased upon the exercise of Rights prior to the 16 17 date of any termination and to Shares purchased pursuant to the Over-Subscription Privilege, as defined in the Registration Statement, by holders who exercised such Rights prior to such date. (g) To use every reasonable effort in cooperating with Smith Barney to permit the distribution of the Rights and the offer and sale of the Shares under the securities laws of the United States (including any state, territory or possession and the District of Columbia) for so long as necessary for the distribution of the Rights and the Shares, provided, however, that the Company shall not be obligated to file any general consent to service of process, or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not now so qualified. (h) During the period of five years hereafter, the Company will furnish to Smith Barney, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to Smith Barney (i) as soon as available, a copy of each report or definitive proxy statement of the Company filed with the Commission under the Investment Company Act or the Exchange Act or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as Smith Barney may reasonably request. (i) To advise Smith Barney promptly of any action by any of the NYSE, the OSE or the PSE rejecting, suspending or terminating the application for the listing of, or the listing of, the Rights or the Shares, as the case may be. (j) To comply with the undertaking contained in paragraph 6 of Item 33 in Part C of the Registration Statement. 9. INDEMNIFICATION AND CONTRIBUTION (a) The Company agrees to indemnify and hold harmless Smith Barney and each person, if any, who controls Smith Barney within the meaning of the Securities Act against any losses, claims, damages or liabilities, joint or several, to which Smith Barney or such controlling person may become subject, under the Securities Act or 17 18 otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse Smith Barney and each such controlling person for any legal or other expenses reasonably incurred by Smith Barney or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any of such documents in reliance upon and in conformity with written information furnished to the Company by Smith Barney specifically for use therein, (ii) any failure of the Company to consummate the Offer, including any failure of the Company to issue the Rights or issue and sell the Shares, (iii) any action taken or omitted to be taken by Smith Barney with the consent of the Company, (iv) any action taken or omitted to be taken by the Company, and/or the Manager and/or the Korean Adviser, (v) any breach by the Company of any representation or warranty, or any failure by the Company and/or the Manager to comply with any agreement or covenant contained in this Agreement or (vi) any of the other transactions contemplated by the Offer or by Smith Barney's performance of its obligations under this Agreement, and will reimburse Smith Barney and each person, if any, who controls Smith Barney within the meaning of the Securities Act for any legal or other expenses reasonably incurred by Smith Barney or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Smith Barney agrees to indemnify and hold harmless the Company and its directors, each of the Company's officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act, against any losses, 18 19 claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by Smith Barney specifically for use therein; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability Smith Barney may otherwise have. (c) The Manager agrees to indemnify and hold harmless Smith Barney and each person, if any, who controls Smith Barney within the meaning of the Securities Act, against any losses, claims, damages or liabilities to which Smith Barney or such controlling person of Smith Barney may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by the Manager specifically for use therein; and will reimburse any legal or other expenses reasonably incurred by Smith Barney or such controlling person of Smith Barney in connection with investigating or defend- 19 20 ing any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability the Manager may otherwise have. (d) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section , notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section . In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than the reasonable costs of investigation. No indemnifying party shall be liable under the foregoing indemnity agreement in respect of any compromise or settlement of any such action without its consent, which consent shall not be unreasonably delayed or withheld. If settlement is made with the consent of the indemnifying party, such indemnifying party shall indemnify and hold harmless the indemnified party against any loss or liability incurred by reason of such settlement. (e) If the indemnification provided for in this Section is unavailable, for any reason other than as specified therein, to hold harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b) or (c) above in such proportion as is appropriate to reflect the relative benefits received by the 20 21 Company on the one hand and Smith Barney on the other from the Offer. If the allocation provided by the immediately preceding sentence is not permitted by applicable law in the case of a claim for contribution by an indemnified party under subsection (a) above, then the Company and the Manager shall each contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) above in such proportion as is appropriate to reflect not only the relative benefits referred to in the immediately preceding sentence but also the relative fault of the Company, the Manager and Smith Barney in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. If the allocation provided by the second preceding sentence is not permitted by applicable law in the case of a claim for contribution by an indemnified party under subsection (b) above, then Smith Barney shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (b) above in such proportion as is appropriate to reflect not only the relative benefits referred to in the second preceding sentence but also the relative fault of the Company on the one hand and Smith Barney on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and Smith Barney on the other shall be deemed to be in the same proportion as the total net proceeds from the subscription for the Shares (before deducting expenses) received by the Company bear to the total fees received by Smith Barney pursuant to Section 7 of this Agreement with respect to the Offer. The relative fault of the Company and Smith Barney shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relate to information supplied by the Company or Smith Barney and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The relative fault of the Manager shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to any negligence, reck- 21 22 lessness or willful misfeasance by the Manager in its performance of, or its failure to perform, its obligations to the Company under the Management Agreement, and the Manager shall not be liable for contribution under this subsection (e) in the absence of such negligence, recklessness or willful misfeasance. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (e). Notwithstanding the provisions of this subsection (e), Smith Barney shall not be required to contribute any amount in excess of the amount by which the total fees received by Smith Barney pursuant to Section 7 of this Agreement exceeds the amount of any damages that Smith Barney has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (f) The obligations of the Company and the Manager under this Section shall be in addition to any liability which the Company or the Manager may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls Smith Barney within the meaning of the Securities Act; and the obligations of Smith Barney under this Section shall be in addition to any liability which Smith Barney may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed the Registration Statement and to each person, if any, who controls the Company within the meaning of the Securities Act. (g) Smith Barney confirms that the statements with respect to the public offering of the Rights and Shares set forth [in the paragraph immediately following the table appearing on the cover page of, and in the fifth and sixth paragraphs under] the caption "The Offer Distribution Arrangements" in, the Prospectus, and the stabilization legend on the inside cover of the Prospectus, are correct and constitute the only information furnished in writing to the Company by Smith Barney for 22 23 inclusion in the Registration Statement and the Prospectus. (h) The Manager confirms that the statements set forth in the [penultimate sentence] under the caption "Use of Proceeds" and under the caption "Investment Advisers and Administrator - The Investment Manager" in the Prospectus are correct and constitute the only information furnished in writing to the Company by the Manager for inclusion in the Registration Statement and the Prospectus. 10. TERMINATION Smith Barney may terminate this Agreement, in its absolute discretion, by notice given to and received by the Company prior to the issuance of the Rights, or if (a) the Company or the Manager has failed, refused or been unable to perform any material agreement on its part to be performed under this Agreement, (b) there has been, since the dates as of which information is given in the Registration Statement, any material adverse change in the net asset value of the Company or the tax, exchange control or other laws or regulations applicable to the Company in Korea, Japan or the United States, the effect of which, in the reasonable judgment of Smith Barney, renders it impracticable to proceed with the solicitation of the exercise of Rights, or (c) any other condition of Smith Barney's obligations under this Agreement is not fulfilled. Any termination of this Agreement pursuant to this Section 10 will be without liability on the part of the Company, the Manager or Smith Barney except as otherwise provided in Section 8(f), Section 9 and/or Section 12 of this Agreement. Termination of this Agreement by Smith Barney will not preclude the Company from consummating the Offer at its discretion. 11. CONDITIONS OF SMITH BARNEY'S OBLIGATIONS The obligations of Smith Barney to perform and to continue to perform as Dealer Manager under this Agreement will at all times be subject to the accuracy, when made and at all times during the Offer and the Subscription Period, including any extension thereof, of the representations and warranties of the Company herein, to the accuracy of the statements of the officers of the Company and Manager made pursuant to the provisions 23 24 hereof, to the performance by the Company and the Manager of their respective obligations hereunder and to each of the following additional conditions precedent: (a) Smith Barney shall have received a letter, dated the date of delivery thereof (which, if the Effective Time is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, it the Effective Time is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to the Effective Time), of Coopers & Lybrand L.L.P. confirming that they are independent accountants within the meaning of the Acts and the Rules and Regulations and stating in effect that: (i) in their opinion the financial statements including the schedules audited by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Acts and related published Rules and Regulations as applicable to Form N-2; (ii) they have read the latest available minutes of meetings of the Board of Directors of the Company as set forth in the minute books through a specified date not more than five business days prior to the date of delivery of such letter, and have made inquires of certain officials of the Company who have responsibility for financial and accounting matters, as to whether, at a specified date not more than five days prior to the date of this Agreement, there was any change in the Common Stock, any increase in long-term debt of the Company or any decrease in net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; except in all cases for changes, increases or decreases which the Prospectus discloses have occurred or may occur or they shall state any specific changes or decreases; and (iii) they have compared certain dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statement, which have been 24 25 specified by the Dealer Manager, to the appropriate accounts in the Company's accounting records subject to the internal controls of the Company's accounting system and to schedules prepared by the Company therefrom and have found such dollar amounts, percentages and other financial information to be in agreement. The Dealer Manager will inform Coopers & Lybrand L.L.P. as to which amounts and information shall be subject to the comparison described in this subsection (iii). For purposes of this subsection, if the Effective Time is subsequent to the execution and delivery of this Agreement, "Registration Statement" shall mean the registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to the Effective Time, and "Prospectus" shall mean the prospectus and statement of additional information included in the Registration Statement. (b) If the Effective Time is not prior to execution and delivery of this Agreement, the Effective Time shall have occurred not later than 10:00 P.M., New York City Time, on the date of this Agreement, or such later date as shall have been consented to by Smith Barney. If the Effective Time is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 8(a) of this Agreement. At or before the date of this Agreement, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted, or to the knowledge of the Company, the Manager or Smith Barney, shall be contemplated by the Commission. (c) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting particularly the business or properties of the Company which, in the judgment of Smith Barney, materially impairs the investment quality of the Shares, (ii) any suspension or limitation of trading in securities generally on the NYSE, the Korea Stock Exchange, the OSE or the PSE, or any setting of minimum prices for trading on any of such exchanges, or any suspension of trading of the Common Stock of the Company 25 26 on any exchange or in the over-the-counter market; (iii) any banking moratorium declared by federal, New York or Korean authorities; (iv) any outbreak or escalation of major hostilities in which the United States or Korea is involved, any declaration of war by Congress or Korea or any other substantial U.S. or Korean national or international calamity or emergency if, in the judgment of Smith Barney the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with the solicitation of the exercise of the Rights; or (v) any material adverse change in general economic, political or financial conditions that, or any international conditions the effect of which on the financial markets in the United States, Korea or Japan in the judgment of Smith Barney, makes it impractical or inadvisable to proceed with the solicitation of the exercise of the Rights. (d) The Rights have been listed on the NYSE no later than the opening of trading on the NYSE on the first full day of trading after the date of this Agreement and admitted for trading on the NYSE no later than the opening of trading on the NYSE on the first full day of trading after the date of this Agreement. (e) The Korean Government, including the Minister of Finance and Economy, shall not have issued any order rescinding their authorization for the Company to issue the Shares, or to invest in Korean securities pursuant to the license granted by the Minister of Finance and Economy of Korea, or rescinding their interpretation of the applicability of the Treaty. (f) On the date of this Agreement, there shall have been furnished to Smith Barney an opinion of Debevoise & Plimpton, counsel for the Company, dated the date of this Agreement, and addressed to Smith Barney, to the effect set forth in Exhibit A to this Agreement. (g) On the date of this Agreement, there shall have been furnished to Smith Barney an opinion of Counsel for the Manager, dated the date of this Agreement, and addressed to Smith Barney, to the effect set forth in Exhibit B to this Agreement. (h) On the date of this Agreement, there shall have been furnished to Smith Barney an opinion of Shin & Kim, 26 27 Korean counsel for the Company, dated the date of this Agreement, and addressed to Smith Barney, to the effect set forth in Exhibit C to this Agreement. (i) Smith Barney shall have received from Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Dealer Manager, such opinion or opinions, dated the date of this Agreement, with respect to the Registration Statement, the Prospectus, and other related matters as Smith Barney may require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (j) Smith Barney shall have received certificates of the Chairman, President or any Vice-President and a principal financial or accounting officer of the Company, and of the President and any Vice-President or any two Vice-Presidents of the Manager, each dated the date of this Agreement, in which such officers, to the best of their knowledge after reasonable investigation, shall state that each such party has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the date of this Agreement, and, in the case of the certificate of officers of the Company, that the representations and warranties of the Company in this Agreement are true and correct as of such date, that no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission, and that, subsequent to the date of the balance sheet in the Prospectus, there has been no material adverse change in the financial position or results of operation of the Company except as set forth or contemplated in the Prospectus or as described in such certificate. The Company and the Manager will furnish Smith Barney with such conformed copies of such opinions, certificates, letters and documents as Smith Barney reasonably requests. 12. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS The respective indemnities, agreements, representations, warranties, and other statements of the Company and the Manager of their respective officers and 27 28 of Smith Barney set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of termination of this Agreement, and regardless of any investigation, or statement as to the results thereof, made by or on behalf of Smith Barney or the Company and the Manager or any of their respective officers or directors or any controlling person, and will survive delivery of the Rights and the Shares. If this Agreement is terminated pursuant to Section 10 or if for any reason the issuance of the Rights and the sale of Shares is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 8(f) and the respective obligations of the Company and the Manager and Smith Barney pursuant to Section 9 shall remain in effect. 13. NOTICES All communications hereunder will be in writing and, if sent to Smith Barney will be mailed, delivered or telegraphed and confirmed to it at 390 Greenwich Street, New York, New York 10013, Attention: [Will Corkhill,] Equity Capital Markets, 212-723-7300, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 345 Park Avenue, New York, New York 10154, Attention: President, or if sent to the Manager, will be mailed, delivered or telegraphed and confirmed to it at 345 Park Avenue, New York, New York 10154, Attention: President. 14. SUCCESSORS This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 9, and no other person will have any right or obligation hereunder. 15. APPLICABLE LAW This Agreement will be governed by, and construed in accordance with, the laws of the State of New York applicable to contacts made and to be performed within the State of New York. 16. COUNTERPARTS. 28 29 This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts will each be deemed to be an original but all such counterparts will together constitute one and the same instrument. * * * * * 29 30 If the foregoing correctly sets forth the agreement among the Company, the Manager and Smith Barney, please indicate Smith Barney's acceptance in the space provided for that purpose below, whereupon it will become a binding agreement among the Company, the Manager and Smith Barney in accordance with its terms. Very truly yours, THE KOREA FUND, INC. By: ____________________________________ Name: Title: SCUDDER, STEVENS & CLARK, INC., as Manager By: ____________________________________ Name: Title: Accepted as of the date first above written: SMITH BARNEY INC. By: _________________________ Name: Title: 30 31 EXHIBIT A Form of Opinion of Debevoise & Plimpton Debevoise & Plimpton is of the opinion that: (1) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in New York, and in all other United States jurisdictions in which it owns or leases substantial properties or in which the conduct of its business requires such qualification except where failure to so qualify would not have a material adverse effect on the business of the Company. (2) All of the outstanding shares of the Common Stock of the Company have been duly authorized, validly issued, fully paid and nonassessable; the Offer, the Rights and the Shares have been duly authorized, and the Rights and the Shares, upon issuance and delivery and, in the case of the Shares, payment therefor, as described in the Registration Statement and the Prospectus, will be, validly issued, fully paid and nonassessable; the Rights conform to the statements concerning them included in the Prospectus; the Shares conform to the description thereof contained under the caption "Common Stock" in the Prospectus; the Rights are duly authorized for listing, subject to official notice of issuance, on the NYSE and are, or as soon as practicable after the date of this Agreement, will be, admitted to trading on the NYSE; the Shares are duly authorized for listing, subject to official notice of issuance, on the NYSE and, as soon as practicable after the date of this Agreement, will be admitted to trading on the NYSE and are registered under the Exchange Act; and the stockholders of the Company have no preemptive rights (except for the Rights) with respect to the Shares. 32 (3) Each of this Agreement and the Subscription Agent Agreement has been duly authorized, executed and delivered by the Company, and the Subscription Agent Agreement constitutes the valid and binding agreement of the Company and is enforceable against the Company, in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles. (4) The Management Agreement, the Research Agreement and the Custodian Agreement have each been duly authorized and approved by the Company and comply with all applicable provisions of the Investment Company Act, and the Management Agreement and Custodian Agreement have been duly executed and delivered by the Company and constitute the valid and binding obligations of the Company enforceable in accordance with their respective terms subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles. (5) The Company is duly registered with the Commission under the Investment Company Act as a closed-end non-diversified management investment company, and all required action has been taken by the Company under the Acts and the Exchange Act to make the public offering and consummate the issuance of the Rights and sale of the Shares pursuant to this Agreement; the provisions of the Articles of Incorporation and By-laws of the Company comply as to form in all material respects with the requirements of the Investment Company Act; and no consent, approval, authorization or order of, or filing with, any court or governmental agency, authority or body is required under Maryland corporate law, the laws of New York or federal law, or, to the best of such counsel's knowledge, the laws of any other jurisdiction in the United States for the consummation of the transactions contemplated herein or in the Subscription Agent Agreement in connection with the issuance of the Rights or the sale of the Shares by the Company except such as have been obtained under the Acts and the Exchange Act and A-2 33 such as may be required under state securities laws in connection with the distribution of the Rights and the Shares. (6) The execution, delivery and performance of this Agreement and the Subscription Agent Agreement and the consummation of the transactions contemplated herein and in the Subscription Agent Agreement will not result in a breach or violation of any of the terms and provisions of the Articles of Incorporation or By-laws of the Company or any law, order, rule or regulation applicable to the Company of any United States jurisdiction, court, federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Company, or its properties or operations, or, to the best knowledge of such counsel after reasonable investigation, constitute, with or without giving notice or lapse of time or both, a default under, any agreement or instrument to which the Company is a party or by which the Company is bound or to which any of the properties of the Company is subject (except that in this paragraph (6) they express no opinion as to the accuracy or completeness of the Registration Statement or of the Prospectus). (7) The Registration Statement was declared effective under the Securities Act as of the date and as of the time specified in such opinion, the Prospectus was either filed with the Commission pursuant to the subparagraph of Rule 497(h) specified in such opinion on the date specified therein or was included in the Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, and the Registration Statement and the Prospectus (except as to the financial statements and other financial data contained therein, as to which they express no belief), as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Acts and the Rules and Regulations. A-3 34 (8) The descriptions in the Registration Statement and Prospectus of United States statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; and such counsel do not know of any legal or governmental proceedings required to be described in the Prospectus which are not described as required, nor of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described and filed as required. Such counsel shall also state that, while they have not themselves checked the accuracy and completeness of or otherwise verified, and are not passing upon and assume no responsibility for the accuracy or completeness of, the statements contained in the Registration Statement or the Prospectus, except to the limited extent stated in paragraph (8) above, in the course of their review and discussion of the contents of the Registration Statement and Prospectus with certain officers and employees of the Company and its independent accountants and with Korean counsel to the Company, no facts have come to their attention which cause them to believe that either the Registration Statement of the Prospectus, or any amendment or supplement thereto (except as to any financial statements or other financial date included in the Registration Statement, the Prospectus or any such amendment or supplement, as to which they express no belief), as of such respective effective or issue dates, contained an untrue statement or a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading. A-4 35 EXHIBIT B Form of Opinion of Counsel for Manager Counsel for the Manager is of the opinion that: (1) The Manager has been duly incorporated and is an existing corporate in good standing under the laws of the State of Delaware, with corporation power and authority to conduct its business as described in the Prospectus. (2) The Manager is duly registered as an investment adviser under the Investment Advisers Act and is not prohibited by the Investment Advisers Act or the Investment Company Act, or the rules and regulations under such acts, from acting as Manager for the Company as contemplated by the Prospectus. (3) This Agreement has been duly authorized, executed and delivered by the Manager. (4) The Management Agreement and the Research Agreement have each been duly authorized, executed and delivered on behalf of the Manager and each constitutes a valid and binding obligation of the Manager enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or affecting creditors' rights and to general equity principles; and neither the execution and delivery of this Agreement, the Management Agreement or the Research Agreement nor the performance by the Manager of its obligations thereunder will conflict with or result in a breach or violation of any of the terms and provisions of the charter or By-laws of the Manager or any law, order, rule or regulation applicable to the Manager of any United States jurisdiction, court, federal or state regulatory body, administrative agency or other governmental body, stock exchange or securities association having jurisdiction over the Manager or its properties or operations, or, to the best knowledge of such counsel after reasonable investigation, constitute, with or without giving notice or lapse of time 36 or both, a default under, any agreement or instrument to which the Manager is a party or by which the Manager or to which any of the properties of the Manager is subject. B-2 37 EXHIBIT C Form of Opinion of Shin & Kim Shin & Kim is of the opinion that: (1) The information in the Prospectus, to the extent that it relates to matters of Korean law or legal conclusions, has been reviewed by them and is an accurate and complete description of all Korean law or legal conclusions applicable to the Company and the operation of its business as described in the Prospectus and, at the Effective Time, such information did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and such counsel has no reason to believe that the Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (2) The Company, the Manager and the Korean Adviser have received all governmental and other licenses, authorizations, approvals and consents in Korea which are necessary for the consummation by the Company, the Manager and the Korean Adviser of the transactions contemplated by this Agreement, the Subscription Agent Agreement, the Management Agreement, the Research Agreement and the Custodian Agreement, as the case may be, and for the operation of the business of the Company as described in the Prospectus, and there is no other license, authorization, approval or consent of, or filing with, any governmental or other regulatory authority, stock exchange or securities business association in Korea necessary in order for the Company, the Manager and the Korean Adviser lawfully to perform their respective obligations under such Agreements or to conduct the business of the Company as described in the Prospectus. 38 (3) To the best of the knowledge of such counsel, there are no actions, investigations or other proceedings in Korea of any nature pending, commenced or threatened, which in any case or in the aggregate, might result in any material adverse change in the business of the Company, the Manager or the Korean Adviser or which question the validity of the Agreements referred to under (2) above or the performance by the Company, the Manager or the Korean Adviser, of such Agreements. (4) The Korean Adviser has been duly organized and is validly existing under the laws of Korea, with corporate power to conduct its business as described in the Prospectus. (5) The Research Agreement has been duly authorized, executed and delivered on behalf of the Korean Adviser and constitutes a valid and binding obligation of the Korean Adviser enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization or other laws relating to or generally affecting creditors' rights, and neither the execution and delivery of the Research Agreement nor the performance by the Korean Adviser of its obligations thereunder will, to the best of such counsel's knowledge after reasonable investigation, conflict with, or result in a breach or violation of any of the terms and provisions of, or constitute, with or without giving notice or lapse of time or both, a default under, any agreement or instrument to which the Korean Adviser is party or by which the Korean Adviser is bound or to which any of the properties of the Korean Adviser is subject, or the charter or by-laws of the Korean Adviser or will violate any law, order, rule or regulation in Korea applicable to the Korean Adviser of any jurisdiction, court, regulatory body, administrative agency or other governmental body, stock exchange or securities business association in Korea having jurisdiction over the Korean Adviser or its properties or operations. In addition, such counsel will also confirm their opinions set forth under caption "Taxation-Korean Taxes" in the Prospectus. C-2 EX-99.H.II 7 SOLICITING DEALER AGREEMENT 1 Exhibit h.(ii) THE KOREA FUND, INC. Rights Offering for Shares of Common Stock SOLICITING DEALER AGREEMENT THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON APRIL ___, 1997, UNLESS EXTENDED. To Securities Dealers and Brokers: The Korea Fund, Inc. (the "Company") is issuing to its shareholders of record ("Record Date Shareholders") as of the close of business on April ___, 1997 (the "Record Date") rights ("Rights") to subscribe for an aggregate of __________ shares of Common Stock (the "Shares") of the Company upon the terms and subject to the conditions set forth in the Company's Prospectus dated __________, 1997 (the "Offer"). Each such Record Date Shareholder is being issued one Right for each full share of Common Stock owned on the Record Date. No fractional Rights will be issued. The Rights may be traded on the New York Stock Exchange. The Rights entitle the Record Date Shareholders and holders of Rights acquired during the Subscription Period (as hereinafter defined) to acquire at the Subscription Price (as hereafter defined), one Share for each three (3) Rights held in the primary subscription. The Subscription Price is $_____ per Share. Any Record Date Shareholder who is issued fewer than three (3) Rights may subscribe, at the Subscription Price, for one full Share of Common Stock during the Subscription Period, which commences on __________, 1997 and ends at 5:00 p.m., New York City time, on the Expiration Date. (With respect to the Offer, the term "Expiration Date" means 5:00 p.m., New York City time, on Friday, April ___, 1997, unless and until the Company shall, in its sole discretion, have extended the period for which the Offer is open, in which event the term "Expiration Date" with respect to the Offer will mean the latest time any date on which the Offer, as so extended by the Company, will expire.) 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 2 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"). Shares acquired pursuant to the Over-Subscription Privilege are subject to allotment, as more fully discussed in the Prospectus. For the duration of the Offer, the Company will pay Soliciting Fees (as defined below) to any qualified broker or dealer who solicits the exercise of Rights in connection with the Offer and who complies with the procedures described below (a "Soliciting Dealer"). Upon timely delivery to State Street Bank and Trust Company, the Company's Subscription Agent for the Offer (the "Subscription Agent"), of payment for Shares purchased pursuant to the exercise of Rights and of properly completed and executed documentation as set forth in this Soliciting Dealer Agreement, a Soliciting Dealer will be entitled to receive a fees equal to .50% of the Subscription Price per Share purchased pursuant to exercise of the Rights (the "Soliciting Fees"); provided that the aggregate fees paid to any Soliciting Dealer hereunder (other than a Soliciting Dealer who is registered as a specialist in the Rights with The New York Stock Exchange and who has been approved by The New York Stock Exchange to act as such during the Subscription Period) may not exceed the product of (i) .50% of the Subscription Price Per Share, times (ii) the aggregate number of shares of Common Stock held in such Soliciting Dealer's participant accounts with The Depository Trust Company on the Record Date divided by three. A qualified broker or dealer is a broker or dealer which is a member of a registered national securities exchange in the United States or the National Association of Securities Dealers, Inc. ("NASD"). The Company hereby agrees to pay the Soliciting Fees payable to the Soliciting Dealers. Solicitation and other activities by Soliciting Dealers may be undertaken only in accordance with the applicable rules and regulations of the Securities and Exchange Commission and only in those states and other jurisdictions where such solicitations and other activities may lawfully be undertaken and in accordance with the laws thereof. Compensation will not be paid for solicitations in any state or other jurisdiction in which, in the opinion of counsel to the Company or counsel to Smith Barney Inc., the Dealer 2 3 Manager in connection with the Offer (the "Dealer Manager"), such compensation may not lawfully be paid. No Soliciting Dealer shall be paid Soliciting Fees with respect to Shares purchased pursuant to an exercise of Rights for its own account or for the account of any affiliate of the Soliciting Dealer, except that the Dealer Manager shall receive the Soliciting Fees with respect to Shares purchased pursuant to an exercise of Rights for its own account provided that such Shares are offered and sold by the Dealer Manager to its clients. No Soliciting Dealer or any other person is authorized by the Company or the Dealer Manager to give any information or make any representations in connection with the Offer other than those contained in the Prospectus and other authorized solicitation material furnished by the Company through the Dealer Manager. No Soliciting Dealer is authorized to act as agent of the Company or the Dealer Manager in any connection or transaction. In addition, nothing herein contained shall constitute the Soliciting Dealers partners with the Dealer Manager or with one another, or agents of the Dealer Manager or of the Company, or create any association between such parties, or shall render the Dealer Manager or the Company liable for the obligations of any Soliciting Dealer. The Dealer Manager shall be under no liability to make any payment to any Soliciting Dealer, and shall be subject to no other liabilities to any Soliciting Dealer, and no obligations of any sort shall be implied. In order for a Soliciting Dealer to receive Soliciting Fees, the Subscription Agent must have received from such Soliciting Dealer no later than 5:00 p.m., New York City time, on the Expiration Date, a properly completed and duly executed Soliciting Dealer Agreement (or a facsimile thereof), accompanied by either (i) a properly completed and duly executed Subscription Certificate with respect to Shares purchased pursuant to the exercise of Rights and full payment for such Shares; or (ii) a Notice of Guaranteed Delivery guaranteeing delivery to the Subscription Agent, by close of business on the third New York Stock Exchange trading day after the Expiration Date, of a properly completed and duly executed Subscription Certificate with respect to Shares purchased pursuant to the exercise of Rights and full payment for such Shares. In the case of a Notice of Guaranteed Delivery, Soliciting Fees will only be paid 3 4 after payment and delivery in accordance with such Notice of Guaranteed Delivery has been effected. All questions as to the form, validity and eligibility (including time of receipt) of the Soliciting Dealer Agreement will be determined by the Company, in its sole discretion, which determination shall be final and binding. Unless waived, any irregularities in connection with a Soliciting Dealer Agreement or delivery thereof must be cured within such time as the Company shall determine. None of the Company, the Dealer Manger, the Information Agent for the Offer (Georgeson & Company Inc.) or any other person will be under any duty to give notification of any defects or irregularities in any Soliciting Dealer Agreement or incur any liability for failure to give such notification. The acceptance of Soliciting Fees from the Company by a Soliciting Dealer shall constitute a representation by such Soliciting Dealer to the Company that; (i) it has received and reviewed the Prospectus; (ii) in soliciting purchases of Shares pursuant to the exercise of the Rights, it has complied with the applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the applicable rules and regulations thereunder, any applicable securities laws of any state or jurisdiction where such solicitations may lawfully be made, and the applicable rules and regulations of any self-regulatory organization or registered national securities exchange; (iii) in soliciting purchases of Shares pursuant to the exercise of Rights, it has not published, circulated or use any soliciting materials other than the Prospectus and any other authorized solicitation material furnished by the Company through the Dealer Manager; (iv) it has not purported to act as agent of the Company or the Dealer Manager in any connection or transaction relating to the Offer; (v) the information contained in this Soliciting Dealer Agreement is, to its best knowledge, true and complete; (vi) it is not affiliated with the Company; (vii) it will not accept Soliciting Fees paid by the Company pursuant to the terms hereof with respect to Shares purchased by the Soliciting Dealer pursuant to an exercise of Rights for its own account; (viii) it will not remit, directly or indirectly, any part of Soliciting Fees paid by the Company pursuant to the terms hereof to any beneficial owner of Shares purchased pursuant to the Offer; and (ix) it has 4 5 agreed to the amount of the Soliciting Fees and the terms and conditions set forth herein with respect to receiving such Soliciting Fees. By returning a Soliciting Dealer Agreement and accepting Soliciting Fees, a Soliciting Dealer will be deemed to have agreed to indemnify the Company against losses, claims, damages and liabilities to which the Company may become subject as a result of the breach of such Soliciting Dealer's representations made herein and described above. [In making the foregoing representations, Soliciting Dealers are reminded of the possible applicability of Regulation M if they have bought, sold, dealt in or traded in any Shares for their own account since the commencement of the Offer.] Soliciting Fees due to eligible Soliciting Dealers will be paid promptly after consummation of the Offer. Upon expiration of the Offer, no Soliciting Fees will be payable to Soliciting Dealers with respect to Shares purchased thereafter. This Soliciting Dealer Agreement will be governed by the laws of the State of New York. This Soliciting Dealer Agreement may be signed in two or more counterparts, each of which will be an original, with the same effect as if the signatures were upon the same instrument. Please list on the Appendix attached hereto and forming part of this Soliciting Dealer Agreement the number of Shares purchased pursuant to exercise of the Rights by each beneficial owner whose purchases pursuant to exercise of Rights you, as a Soliciting Dealer, have solicited. All amounts beneficially owned by a beneficial owner, whether in one account or several, and in however many capacities, must be aggregated for purposes of completing the table in the Appendix hereto. Any questions as to what constitutes beneficial ownership should be directed to the Company. The number of shares not listed in the Appendix for reasons of inadequate space should be listed on a separate schedule attached to, and forming part of, this Soliciting Dealer Agreement. Please execute this Soliciting Dealer Agreement below accepting the terms and conditions hereof and confirming that you are a member firm of a registered na- 5 6 tional securities exchange or of the NASD, and certifying that you have solicited the purchase of the Shares pursuant to exercise of the Rights, all as described above, in accordance with the terms and conditions set forth in this Soliciting Dealer Agreement. Very truly yours, THE KOREA FUND, INC. ___________________________________ Name: Title: ACCEPTED AND CONFIRMED ______________________________ ___________________________________ Printed Firm Name Address ______________________________ ___________________________________ Authorized Signature Area Code and Telephone Number ______________________________ Name and Title Dated: _______________________ 6 7 ALL SOLICITING DEALER AGREEMENTS SHOULD BE RETURNED TO STATE STREET BANK AND TRUST COMPANY BY FACSIMILE (TELECOPIER) AT (617) 774-4519. FACSIMILE TRANSMISSIONS MAY BE CONFIRMED BY CALLING (617) 575-4511. ALL QUESTIONS CONCERNING SOLICITING DEALER AGREEMENTS SHOULD BE DIRECTED TO GEORGESON & COMPANY INC. AS FOLLOWS: FOR BANK INQUIRIES, PLEASE CALL (212) 440-9901 AND FOR BROKER INQUIRIES, PLEASE CALL (212) 440-9907. 7 8 APPENDIX TO SOLICITING DEALER AGREEMENT - --------------------------------------------------------------------------- TO BE COMPLETED BY THE SOLICITING DEALER - --------------------------------------------------------------------------- Beneficial Owners Number of Shares Purchased - --------------------------------------------------------------------------- Beneficial Owner No. 1 - --------------------------------------------------------------------------- Beneficial Owner No. 2 - --------------------------------------------------------------------------- Beneficial Owner No. 3 - --------------------------------------------------------------------------- Beneficial Owner No. 4 - --------------------------------------------------------------------------- Beneficial Owner No. 5 - --------------------------------------------------------------------------- Beneficial Owner No. 6 - --------------------------------------------------------------------------- Beneficial Owner No. 7 - --------------------------------------------------------------------------- Beneficial Owner No. 8 - --------------------------------------------------------------------------- Beneficial Owner No. 9 - --------------------------------------------------------------------------- Beneficial Owner No. 10 - --------------------------------------------------------------------------- Beneficial Owner No. 11 - --------------------------------------------------------------------------- Beneficial Owner No. 12 - --------------------------------------------------------------------------- Beneficial Owner No. 13 - --------------------------------------------------------------------------- Beneficial Owner No. 14 - --------------------------------------------------------------------------- Beneficial Owner No. 15 - --------------------------------------------------------------------------- Beneficial Owner No. 16 - --------------------------------------------------------------------------- Beneficial Owner No. 17 - --------------------------------------------------------------------------- Beneficial Owner No. 18 - --------------------------------------------------------------------------- Beneficial Owner No. 19 - --------------------------------------------------------------------------- Beneficial Owner No. 20 - --------------------------------------------------------------------------- Beneficial Owner No. 21 - --------------------------------------------------------------------------- TOTAL: - --------------------------------------------------------------------------- 8 EX-99.J.I 8 CUSTODIAN AGREEMENT 1 EXHIBIT j(i) CUSTODIAN AGREEMENT Dated as of April 19, 1995 Between THE KOREA FUND, INC. and BROWN BROTHERS HARRIMAN & CO. 2 TABLE OF CONTENTS ARTICLE I APPOINTMENT OF CUSTODIAN ARTICLE II POWERS AND DUTIES OF CUSTODIAN
2.1. Safekeeping 1 2.2. Manner of Holding Securities 2 2.3. Registered Name; Nominee 2 2.4. Purchases by the Fund 2 2.5. Exchanges of Securities 3 2.6. Sales of Securities 4 2.7. Depositary Receipts 4 2.8. Exercise of Rights; Tender Offers 5 2.9. Stock Dividends, Rights, Etc. 5 2.10. Options 5 2.11. Futures and Forward Contracts 6 2.12. Borrowings 6 2.13. Bank Accounts 7 2.14. Interest-Bearing Deposits 7 2.15. Foreign Exchange Transactions 8 2.16. Securities Loans 9 2.17. Collections 9 2.18. Dividends, Distributions and Redemptions 10 2.19. Proxies; Communications Relating to Portfolio Securities 10 2.20. Bills 11 2.21. Nondiscretionary Details 11 2.22. Deposit of Fund Assets in Securities Systems 11 2.23. Other Transfers 12 2.24. Establishment of Segregated Accounts 12 2.25. Custodian Advances 13
3 TABLE OF CONTENTS ARTICLE III PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS AND RELATED MATTERS
3.1. Proper Instructions and Special Instructions 13 3.2. Authorized Persons 14 3.3 Persons Having Access to Assets of the Fund 15 3.4. Actions of Custodian Based on Proper Instructions and Special Instructions 15 ARTICLE IV SUBCUSTODIANS 4.1. Domestic Subcustodians 15 4.2. Foreign Subcustodians and Interim Subcustodians 16 4.3. Termination of a Subcustodian 17 4.4. Agents 18 ARTICLE V STANDARD OF CARE; INDEMNIFICATION 5.1. Standard of Care 18 5.2. Liability of Custodian for Actions of Other Persons 20 5.3. Indemnification 20 5.4. Investment Limitations 21 5.5. Fund's Right to Proceed 22 ARTICLE VI RECORDS 6.1. Preparation of Reports 23 6.2. Custodian's Books and Records 23 6.3. Opinion of Fund's Independent Certified Public Accountants 23 6.4. Reports of Custodian's Independent
4
Certified Public Accountants 24 6.5. Calculation of Net Asset Value 24 6.6. Information Regarding Foreign Subcustodians and Foreign Depositories 26
5 TABLE OF CONTENTS ARTICLE VII CUSTODIAN FEES ARTICLE VIII TERMINATION ARTICLE IX MISCELLANEOUS
9.1. Execution of Documents 28 9.2. Entire Agreement 29 9.3. Waivers and Amendments 29 9.4. Captions 29 9.5. Governing Law 29 9.6. Notices 29 9.7. Successors and Assigns 29 9.8. Counterparts 29 9.9. Representative Capacity; Nonrecourse Obligations 30
Appendix A Procedures Relating to Custodian's Security Interest Appendix B Subcustodians, Foreign Countries, and Foreign Depositories Appendix C Sources of Price Quotations 6 FORM OF CUSTODIAN AGREEMENT CUSTODIAN AGREEMENT dated as of April 19, 1995, between The Korea Fund, Inc. (the "Fund"), a Maryland corporation, and Brown Brothers Harriman & Co. (the "Custodian"), a New York limited partnership. In consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE I APPOINTMENT OF CUSTODIAN The Fund hereby employs and appoints the Custodian as a custodian for the term of and subject to the provisions of this Agreement. The Fund agrees to deliver to the Custodian all securities, cash and other assets owned by it, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Fund from time to time, and the cash consideration received by it for such new or treasury shares of capital stock of the Fund as may be issued or sold from time to time. The Custodian shall not be under any duty or obligation to require the Fund to deliver to it any securities, cash or other assets owned by the Fund and shall have no responsibility or liability for or on account of securities, cash or other assets not so delivered. The Fund will deposit with the Custodian copies of the Articles of Incorporation and By-Laws (or comparable documents) of the Fund and all amendments thereto, and copies of such votes and other proceedings of the Fund as may be necessary for or convenient to the Custodian in the performance of its duties. ARTICLE II POWERS AND DUTIES OF CUSTODIAN 7 The Custodian shall have and perform, or cause to be performed in accordance with this Agreement, the powers and duties set forth in this Article II. Pursuant to and in accordance with Article IV, the Custodian may appoint one or more Subcustodians (as that term is defined in Article IV) to exercise the powers and perform the duties of the Custodian set forth in this Article II and, except as the context shall otherwise require, references to the Custodian in this Article II shall include any Subcustodian so appointed. 2.1. SAFEKEEPING. The Custodian shall keep safely the cash, securities and other assets of the Fund that have been delivered to the Custodian and from time to time shall accept delivery of cash, securities and other assets for safekeeping. 2.2. MANNER OF HOLDING SECURITIES. (a) The Custodian shall hold securities of the Fund (i) by physical possession of the share certificates or other instruments representing such securities in registered or bearer form, or the broker's receipts or confirmations for forward contracts, futures contracts, options and similar contracts and securities, or (ii) in book-entry form by a Securities System (as that term is defined in section 2.22) or (iii) by a Foreign Depository (as that term is defined in section 4.2(a)). (b) The Custodian shall identify securities and other assets held by it hereunder as being held for the account of the Fund and shall require each Subcustodian to identify securities and other assets held by such Subcustodian as being held for the account of the Custodian for the Fund (or, if authorized by Special Instructions, for customers of the Custodian) or for the account of another Subcustodian for the Fund (or, if authorized by Special Instructions, for customers of such Subcustodian); provided that if assets are held for the account of the Custodian or a Subcustodian for customers of the Custodian or such Subcustodian, the records of the Custodian shall at all times indicate the Fund and other customers of the Custodian for which such assets are held in such account and their respective interests therein. 2.3. REGISTERED NAME; NOMINEE. (a) The Custodian shall hold registered securities and other assets of the Fund (i) in the name of the Custodian (including any Subcustodian), the Fund, a Securities System, a Foreign Depository or any nominee of any such person or (ii) in street certificate form, 8 so-called, and in any case with or without any indication of fiduciary capacity, provided that such securities and other assets of the Fund are held in an account of the Custodian containing only assets of the Fund or only assets held as fiduciary or custodian for customers. (b) Except with respect to securities or other assets which under local custom and practice generally accepted by Institutional Clients are held in the investor's name, the Custodian shall not hold registered securities or other assets in the name of the Fund, and shall require each Subcustodian not to hold registered securities or other assets in the name of the Fund, unless the Custodian or such Subcustodian promptly notifies the Fund that such registered securities are being held in the Fund's name and causes the Securities System, Foreign Depository, issuer or other relevant person to direct all correspondence and payments to the address of the Custodian or such Subcustodian, as the case may be. 2.4. PURCHASES BY THE FUND. Upon receipt of Proper Instructions (as that term is defined in section 3.1(a)) and insofar as funds are available for the purpose (or as funds are otherwise provided by the Custodian at its discretion pursuant to section 2.25), the Custodian shall pay for and receive securities or other assets purchased for the account of the Fund, payment being made only upon receipt of the securities or other assets (a) by the Custodian, or (b) by credit to an account which the Custodian may have with a Securities System, clearing corporation of a national securities exchange, Foreign Depository or other financial institution approved by the Fund. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i) in the case of repurchase agreements entered into by the Fund in a transaction involving a Securities System or a Foreign Depository, the Custodian may release funds to the Securities System or Foreign Depository prior to the receipt of advice from the Securities System or Foreign Depository that the securities underlying such repurchase agreement have been transferred by book entry into the Account (as defined in section 2.22) of the Custodian maintained with such Securities System or similar account with a Foreign Depository, provided that the instructions of the Custodian to the Securities System or Foreign Depository require that the Securities System or Foreign Depository, as the case may be, may make payment of such funds to the other party to the repurchase agreement only upon transfer by book-entry of the securities underlying the repurchase agreement into the Account, 9 (ii) in the case of futures and forward contracts, options and similar securities, foreign currency purchased from third parties, time deposits, foreign currency call account deposits, and other bank deposits, and transactions pursuant to sections 2.10, 2.11, 2.13, 2.14 and 2.15, the Custodian may make payment therefor prior to delivery of the contract, currency, option or security without receiving an instrument evidencing said contract, currency, option, security or deposit, and (iii) in the case of the purchase of securities or other assets the settlement of which occurs outside the United States of America, the Custodian may make payment therefor and receive delivery thereof in accordance with local custom and practice generally accepted by Institutional Clients (as defined below) in the country in which settlement occurs, provided that in every case the Custodian shall be subject to the standard of care set forth in Article V and to any Special Instructions given in accordance with section 3.1(b). Except in the cases provided for in the immediately preceding sentence, in any case where payment for purchase of securities or other assets for the account of the Fund is made by the Custodian in advance of receipt of the securities or other assets so purchased in the absence of Proper Instructions to so pay in advance, the Custodian shall be absolutely liable to the Fund for such securities or other assets to the same extent as if the securities or other assets had been received by the Custodian. For purposes of this Agreement, "Institutional Clients" means U.S. registered investment companies, or major, U.S.-based commercial banks, insurance companies, pension funds or substantially similar financial institutions which, as a substantial part of their business operations, purchase or sell securities and make use of custodial services. 2.5. EXCHANGES OF SECURITIES. Upon receipt of Proper Instructions, the Custodian shall exchange securities held by it for the account of the Fund for other securities in connection with any reorganization, recapitalization, split-up of shares, change of par value, conversion or other event, and to deposit any such securities in accordance with the terms of any reorganization or protective plan. Without Proper Instructions, the Custodian may surrender securities in temporary form for definitive securities, may surrender securities for transfer into a name or nominee name as permitted in section 2.3, and may surrender securities for a different number of certificates or instruments representing the same number of shares or same principal amount of indebtedness, provided that the securities to 10 be issued are to be delivered to the Custodian. 2.6. SALES OF SECURITIES. Upon receipt of Proper Instructions, the Custodian shall make delivery of securities or other assets which have been sold for the account of the Fund, but only against payment therefor (a) in cash, by a certified check, bank cashier's check, bank credit, or bank wire transfer, or (b) by credit to the account of the Custodian with a Securities System, clearing corporation of a national securities exchange, Foreign Depository or other financial institution approved by the Fund by Proper Instructions. However, (i) in the case of delivery of physical certificates or instruments representing securities, the Custodian may make delivery to the broker acting as agent for the buyer of the securities, against receipt therefor, for examination in accordance with "street delivery" custom, provided that the Custodian shall have taken reasonable steps to ensure prompt collection of the payment for, or the return of, such securities by the broker or its clearing agent and (ii) in the case of the sale of securities or other assets the settlement of which occurs outside the United States of America, such securities shall be delivered and paid for in accordance with local custom and practice generally accepted by Institutional Clients in the country in which settlement occurs, provided that in every case the Custodian shall be subject to the standard of care set forth in Article V and to any Special Instructions given in accordance with section 3.1(b). Except in the cases provided for in the immediately preceding sentence, in any case where delivery of securities or other assets for the account of the Fund is made by the Custodian in advance of receipt of payment for the securities or other assets so sold in the absence of Proper Instructions to so deliver in advance, the Custodian shall be absolutely liable to the Fund for such payment to the same extent as if such payment had been received by the Custodian. 2.7. DEPOSITARY RECEIPTS. Upon receipt of Proper Instructions, the Custodian shall surrender securities to the depositary used by an issuer of American Depositary Receipts, European Depositary Receipts, Global Depositary Receipts, International Depositary Receipts and other types of Depositary Receipts (hereinafter collectively referred to as "ADRs") for such securities against a written receipt therefor adequately describing such securities and written evidence satisfactory to the Custodian that the depositary has acknowledged receipt of instructions to issue ADRs with respect to such securities in the 11 name of the Custodian, or a nominee of the Custodian, for delivery to the Custodian in Boston, Massachusetts, or at such other place as the Custodian may from time to time designate. Upon receipt of Proper Instructions, the Custodian shall surrender ADRs to the issuer thereof against a written receipt therefor adequately describing the ADRs surrendered and written evidence satisfactory to the Custodian that the issuer of the ADRs has acknowledged receipt of instructions to cause its depositary to deliver the securities underlying such ADRs to the Custodian. 2.8. EXERCISE OF RIGHTS; TENDER OFFERS. Upon receipt of Proper Instructions, the Custodian shall (a) deliver to the issuer or trustee thereof, or to the agent of either, warrants, puts, calls, futures contracts, options, rights or similar securities for the purpose of being exercised or sold, provided that the new securities and cash, if any, acquired by such action are to be delivered to the Custodian, and (b) deposit securities upon invitations for tenders of securities, provided that the consideration is to be paid or delivered or the tendered securities are to be returned to the Custodian. Notwithstanding any provision of this Agreement to the contrary, the Custodian shall take all necessary action, unless otherwise directed to the contrary by Proper Instructions, to comply with the terms of all mandatory or compulsory exchanges, calls, tenders, redemptions or similar rights of security ownership of which the Custodian receives notice or otherwise becomes aware, and shall promptly notify the Fund of any such action in writing by facsimile transmission or in such other manner as the Fund and the Custodian may agree in writing. 2.9. STOCK DIVIDENDS, RIGHTS, ETC. The Custodian shall receive and collect all stock dividends, rights and other items of like nature and shall deal with the same as it would other deposited assets or as directed in Proper Instructions. 2.10. OPTIONS AND SWAPS. Upon receipt of Proper Instructions or instructions from a third party properly given under any Procedural Agreement, the Custodian shall (a) receive and retain confirmations or other documents (to the extent confirmations or other documents are provided to the Custodian) evidencing the purchase, sale or writing of an option or swap of any type on or in respect of a security, securities index, currency or similar form of property by the Fund; (b) deposit and 12 maintain in a segregated account, either physically or by book-entry in a Securities System or Foreign Depository or with a broker, dealer or other party designated by the Fund, securities, cash or other assets in connection with options transactions or swap agreements entered into by the Fund; (c) transfer securities, cash or other assets to a Securities System, Foreign Depository, broker, dealer or other party or organization, as margin (including variation margin) or other security for the Fund's obligations in respect of an option or swap; and (d) pay, release and/or transfer such securities, cash or other assets only in accordance with a notice or other communication evidencing the expiration, termination, exercise of any such option or default under any such option or swap furnished by The Options Clearing Corporation, the securities or options exchange on which such option is traded, or such other organization, party, broker or dealer as may be responsible for handling such options or swap transactions or have authority to give such notice or communication under a Procedural Agreement. Subject to the standard of care set forth in Article V (and to its safekeeping duties set forth in section 2.1) , the Custodian shall not be responsible for the sufficiency of assets held in any segregated account established and maintained in accordance with Proper Instructions or instructions from a third party properly given under any Procedural Agreement or for the performance by the Fund or any third party of its obligations under any Procedural Agreement. For purposes of this Agreement, a "Procedural Agreement" is a procedural agreement relating to options, swaps (including caps, floors and similar arrangements), futures contracts, forward contracts or borrowings by the Fund to which the Fund, the Custodian and a third party are parties. 2.11. FUTURES AND FORWARD CONTRACTS. Upon receipt of Proper Instructions or instructions from a third party properly given under any Procedural Agreement, the Custodian shall (a) receive and retain confirmations or other documents (to the extent confirmations or other documents are provided to the Custodian) evidencing the purchase or sale of a futures contract or an option on a futures contract by the Fund or the entry into a forward contract by the Fund; (b) deposit and maintain in a segregated account, either physically or by book entry in a Securities System or Foreign Depository, for the benefit of any futures commission merchant, or pay to such futures commission merchant, securities, cash or other assets designated by the Fund as initial, maintenance or variation "margin" deposits in tended to secure the Fund's performance of its obligations under any 13 futures contracts purchased or sold or any options on futures contracts written, purchased or sold by the Fund or any forward contracts entered into, in accordance with the provisions of any Procedural Agreement designed to comply with the rules of the Commodity Futures Trading Commission and/or any contract market, or any similar organization or organizations on which such contracts or options are traded; and (c) pay, release and/or transfer securities, cash or other assets into or out of such margin accounts only in accordance with any such agreements or rules. Subject to the standard of care set forth in Article V, the Custodian shall not be responsible for the sufficiency of assets held in any such margin account established and maintained in accordance with Proper Instructions or instructions from a third party properly given under any Procedural Agreement or for the performance by the Fund or any third party of its obligations under any Procedural Agreement. 2.12. BORROWINGS. Upon receipt of Proper Instructions or instructions from a third party properly given under any Procedural Agreement, the Custodian shall deliver securities of the Fund to lenders or their agents, or otherwise establish a segregated account as agreed to by the Fund and the Custodian, as collateral for borrowings effected by the Fund, but only against receipt of the amounts borrowed (or to adjust the amount of such collateral in accordance with the Procedural Agreement), provided that if such collateral is held in book-entry form by a Securities System or Foreign Depository, such collateral may be transferred by book-entry to such lender or its agent against receipt by the Custodian of an undertaking by such lender to pay such borrowed money to or upon the order of the Fund on the next business day following such transfer of collateral. 2.13. BANK ACCOUNTS. The Custodian shall open and operate one or more accounts in the name of the Fund on the Custodian's books subject only to draft or order by the Custodian. All funds received by the Custodian from or for the account of the Fund shall be deposited in said account(s). The responsibilities of the Custodian to the Fund for deposits accepted on the Custodian's books shall be that of a U.S. bank for a similar deposit. Upon receipt of Proper Instructions, the Custodian may open and operate additional accounts in such other banks or trust companies, including any Subcustodian, as may be designated by the Fund in such instructions (any such bank or trust company 14 other than the Custodian so designated by the Fund being referred to hereafter as a "Banking Institution"), provided that any such account shall be in the name of the Custodian for the account of the Fund (or, if authorized by Special Instructions, for the account of the Custodian's customers generally) and subject only to the Custodian's draft or order; provided that if assets are held in such an account for the account of the Custodian's customers generally, the records of the Custodian shall at all times indicate the Fund and other customers for which such assets are held in such account and their respective interests therein. Such accounts may be opened with Banking Institutions in the United States and in other countries and may be denominated in U.S. Dollars or such other currencies as the Fund may determine. So long as the Custodian exercises reasonable care and diligence in executing Proper Instructions, the Custodian shall have no responsibility for the failure of any Banking Institution to make payment from such an account upon demand. 2.14. INTEREST-BEARING DEPOSITS. The Custodian shall place interest-bearing fixed term and call deposits with such banks and in such amounts as the Fund may authorize pursuant to Proper Instructions. Such deposits may be placed with the Custodian or with Subcustodians or other Banking Institutions as the Fund may determine. Deposits may be denominated in U.S. Dollars or other currencies, as the Fund may determine, and need not be evidenced by the issuance or delivery of a certificate to the Custodian, provided that the Custodian shall include in its records with respect to the assets of the Fund, appropriate notation as to the amount and currency of each such deposit, the accepting Banking Institution and all other appropriate details, and shall retain such forms of advice or receipt evidencing such deposits as may be forwarded to the Custodian by the Banking Institution in question. The responsibility of the Custodian for such deposits accepted on the Custodian's books shall be that of a U.S. bank for a similar deposit. With respect to interest-bearing deposits other than those accepted on the Custodian's books, (a) the Custodian shall be responsible for the collection of income as set forth in section 2.17, and (b) so long as the Custodian exercises reasonable care and diligence in executing Proper Instructions, the Custodian shall have no responsibility for the failure of any Banking Institution to make payment in accordance with the terms of such an account. Upon receipt of Proper Instructions, the Custodian shall take such reasonable steps as the Fund deems necessary or appropriate to cause such deposits to be insured to the maximum extent possible 15 by the Federal Deposit Insurance Corporation and any other applicable deposit insurers. 2.15. FOREIGN EXCHANGE TRANSACTIONS. (a) Upon receipt of Proper Instructions, the Custodian shall settle foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery on behalf and for the account of the Fund with such currency brokers or Banking Institutions as the Fund may direct pursuant to Proper Instructions. The Custodian shall be responsible for the transmission of cash and instructions to and from the currency broker or Banking Institution with which the contract or option is made, the safekeeping of all certificates and other documents and agreements received by the Custodian evidencing or relating to such foreign exchange transactions and the maintenance of proper records as set forth in section 6.2. In connection with such transactions, upon receipt of Proper Instructions, the Custodian shall be authorized to make free outgoing payments of cash in the form of U.S. Dollars or foreign currency without receiving confirmation of a foreign exchange contract or option or confirmation that the countervalue currency completing the foreign exchange contract has been delivered or that the option has been delivered or received. The Custodian shall have no authority to select third party foreign exchange dealers and, so long as the Custodian exercises reasonable care and diligence in executing Proper Instructions, shall have no responsibility for the failure of any such dealer to settle any such contract or option in accordance with its terms. The Fund shall reimburse the Custodian for any interest charges or reasonable out-of-pocket expenses incurred by the Custodian resulting from the failure or delay of third party foreign exchange dealers to deliver foreign exchange, other than interest charges and expenses occasioned by or resulting from the negligence, misfeasance or misconduct of the Custodian. (b)The Custodian shall not be obligated to enter into foreign exchange transactions as principal. However, if the Custodian has made available to the Fund its services as principal in foreign exchange transactions, upon receipt of Proper Instructions, the Custodian shall enter into foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery on behalf of and for the account of the Fund with the Custodian as principal. The responsibility of the Custodian with respect to foreign exchange contracts and options executed with the Custodian as principal 16 shall be that of a U.S. bank with respect to a similar contract or option. 2.16. SECURITIES LOANS. Upon receipt of Proper Instructions, the Custodian shall deliver securities of the Fund, in connection with loans of securities by the Fund, to the borrower thereof in accordance with the terms of a written securities lending agreement to which the Fund is a party or which is otherwise approved by the Fund. 2.17. COLLECTIONS. The Custodian shall promptly collect, receive and deposit in the account or accounts referred to in section 2.13 all income, payments of principal and other payments with respect to the securities and other assets held hereunder, promptly endorse and deliver any instruments required to effect such collections and in connection therewith deliver the certificates or other instruments representing securities to the issuer thereof or its agent when securities are called, redeemed, retired or otherwise become payable; provided that the payment is to be made in such form and manner and at such time, which may be after delivery by the Custodian of the instrument representing the security, as is in accordance with the terms of the instrument representing the security, such Proper Instructions as the Custodian may receive, governmental regulations, the rules of the Securities System or Foreign Depository in which such security is held or, with respect to securities referred to in clause (iii) of the second sentence of section 2.4, in accordance with local custom and practice generally accepted by Institutional Clients in the market where payment or delivery occurs, but in all events subject to the standard of care set forth in Article V. The Custodian shall promptly execute ownership and other certificates and affidavits for all federal, state and foreign tax purposes in connection with receipt of income or other payments with respect to securities or other assets of the Fund or in connection with transfer of securities or other assets. Pursuant to Proper Instructions, the Custodian shall take such other actions, which may involve an investment decision, as the Fund may request with respect to the collection or receipt of funds or the transfer of securities. Except in the cases provided for in the first sentence of this section, in any case where delivery of securities for the account of the Fund is made by the Custodian in advance of receipt of payment with respect to such securities in the absence of Proper Instructions to so deliver in advance, the Custodian shall be absolutely liable to the Fund for such 17 payment to the same extent as if such payment had been received by the Custodian. The Custodian shall promptly notify the Fund in writing by facsimile transmission or in such other manner as the Fund and the Custodian may agree in writing if any amount payable with respect to securities or other assets of the Fund is not received by the Custodian when due. 2.18. DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. Upon receipt of Proper Instructions, or upon receipt of instructions from the Fund's shareholder servicing agent or agent with comparable duties (the "Shareholder Servicing Agent") (given by such person or persons and in such manner on behalf of the Shareholder Servicing Agent as the Fund shall have authorized by Proper Instructions), the Custodian shall release funds or securities, insofar as available, to the Shareholder Servicing Agent or as such Shareholder Servicing Agent shall otherwise instruct (a) for the payment of dividends or other distributions to Fund shareholders or (b) for payment to the Fund shareholders who have delivered to such Shareholder Servicing Agent a request for repurchase or redemption of their shares of capital stock of the Fund. 2.19. PROXIES; COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. The Custodian shall, as promptly as is appropriate under the circumstances, deliver or mail to the Fund all forms of proxies and all notices of meetings and any other notices, announcements or information (including, without limitation, information relating to pendency of calls and maturities of securities and expirations of rights in connection therewith, notices of exercise of call and put options written by the Fund, and notices of the maturity of futures contracts (and options thereon) purchased or sold by the Fund) affecting or relating to securities owned by the Fund that are received by the Custodian. Upon receipt of Proper Instructions, the Custodian shall execute and deliver or cause its nominee to execute and deliver such proxies or other authorizations as may be required. Neither the Custodian nor its nominees shall vote upon any of such securities or execute any proxy to vote thereon or give any consent or take any other action with respect to securities or other assets of the Fund (except as otherwise herein provided) unless ordered to do so by Proper Instructions. The Custodian shall notify the Fund on or before ex-date (or if later within 24 hours after receipt by the Custodian of the notice of such corporate action) of all 18 corporate actions affecting portfolio securities of the Fund received by the Custodian from the issuers of the securities involved, from third parties proposing a corporate action, from subcustodians, or from commonly utilized sources (including proprietary sources) providing corporate action information, a list of which will be provided by the Custodian to the Fund from time to time upon request. Information as to corporate actions shall include information as to dividends, distributions, stock splits, stock dividends, rights offerings, conversions, exchanges, tender offers, recapitalizations, mergers, redemptions, calls, maturity dates and similar transactions, including ex-, record and pay dates and the amounts or other terms thereof. If the Fund desires to take action with respect to any corporate action, the Fund shall notify the Custodian within such period as will give the Custodian (including any Subcustodian) a sufficient amount of time to take such action. 2.20. BILLS. Upon receipt of Proper Instructions, the Custodian shall pay or cause to be paid, insofar as funds are available for the purpose, bills, statements, or other obligations of the Fund (including but not limited to interest charges, taxes, advisory fees, compensation to Fund officers and employees, and other operating expenses of the Fund). 2.21. NONDISCRETIONARY DETAILS. Without the necessity of express authorization from the Fund, the Custodian shall (a) attend to all nondiscretionary details in connection with the sale, exchange, substitution, purchase, transfer or other dealings with securities, cash or other assets of the Fund held by the Custodian except as otherwise directed from time to time by the Board of Directors of the Fund, and (b) make payments to itself or others for minor expenses of handling securities or other assets and for other similar items relating to the Custodian's duties under this Agreement, provided that all such payments shall be accounted for to the Fund. 2.22. DEPOSIT OF FUND ASSETS IN SECURITIES SYSTEMS. The Custodian may deposit and/or maintain securities owned by the Fund in (a) The Depository Trust Company, (b) the Participants Trust Company, (c) any book-entry system as provided in Subpart O of Treasury Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, or the book-entry regulations of federal agencies substantially in the form of Subpart O, or (d) any other domestic clearing agency registered with the Securities and Exchange Commission (the "SEC") under Section 17A of the Securities 19 Exchange Act of 1934, as amended, which acts as a securities depository and whose use the Fund has previously approved by Special Instructions (as that term is defined in section 3.1(b)) (each of the foregoing being referred to in this Agreement as a "Securities System"). Utilization of a Securities System shall be in accordance with applicable Federal Reserve Board and SEC rules and regulations, if any, and subject to the following provisions: (i) The Custodian may deposit and/or maintain securities held hereunder in a Securities System, provided that such securities are represented in an account ("Account") of the Custodian in the Securities System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian, or otherwise for customers; (ii) The records of the Custodian with respect to securities of the Fund which are maintained in a securities System shall identify by book entry those securities belonging to the Fund; (iii) The Custodian shall pay for securities purchased for the account of the Fund only upon (A) receipt of advice from the Securities System that such securities have been transferred to the Account, and (B) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund only upon (1) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (2) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian and be provided to the Fund at its request. The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund on the next business day; (iv) The Custodian shall provide the Fund with any 20 report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System; and the Custodian shall send to the Fund such reports on its own systems of internal accounting control as the Fund may reasonably request from time to time; and (v) Upon receipt of Special Instructions, the Custodian shall terminate the use of any such Securities System on behalf of the Fund as promptly as practicable and shall take all actions reasonably practicable to safeguard the securities of the Fund that had been maintained with such Securities System. 2.23. OTHER TRANSFERS. The Custodian shall deliver securities, cash, and other assets of the Fund to a Subcustodian as necessary to effect transactions authorized by Proper Instructions. Upon receipt of Proper Instructions in writing in advance, the Custodian shall make such other disposition of securities, cash or other assets of the Fund in a manner other than or for purposes other than as enumerated in this Agreement, provided that such written Proper Instructions relating to such disposition shall include a statement of the purpose for which the delivery is to be made, the amount of funds and/or securities to be delivered and the name of the person or persons to whom delivery is to be made. 2.24. ESTABLISHMENT OF SEGREGATED ACCOUNTS. Upon receipt of Proper Instructions, the Custodian shall establish and maintain on its books a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities or other assets of the Fund, including securities maintained by the Custodian in a Securities System, said account to be maintained (a) for the purposes set forth in sections 2.10, 2.11, 2.12 and 2.15; (b) for the purposes of compliance by the Fund with the procedures required by Release No. 10666 under the Investment Company Act of 1940, as amended (the "1940 Act"), or any subsequent release or releases of the SEC relating to the maintenance of segregated accounts by registered investment companies; or (c) for such other purposes as set forth, from time to time, in Special Instructions. 2.25. CUSTODIAN ADVANCES. (a) In the event that the Custodian is directed by Proper Instructions to make any payment 21 or transfer of funds on behalf of the Fund for which there would be, at the close of business on the date of such payment or transfer, insufficient funds held by the Custodian on behalf of the Fund, the Custodian may, in its discretion without further Proper Instructions, provide an advance ("Advance") to the Fund in an amount sufficient to allow the completion of the transaction by reason of which such payment or transfer of funds is to be made. In addition, in the event the Custodian is directed by Proper Instructions to make any payment or transfer of funds on behalf of the Fund as to which it is subsequently determined that the Fund has overdrawn its cash account with the Custodian as of the close of business on the date of such payment or transfer, said overdraft shall constitute an Advance. Any Advance shall be payable on demand by the Custodian, unless otherwise agreed by the Fund and the Custodian, and shall accrue interest from the date of the Advance to the date of payment by the Fund at a rate agreed upon in writing from time to time by the Custodian and the Fund. It is understood that any transaction in respect of which the Custodian shall have made an Advance, including but not limited to a foreign exchange contract or other transaction in respect of which the Custodian is not acting as a principal, is for the account of and at the risk of the Fund, and not, by reason of such Advance, deemed to be a transaction undertaken by the Custodian for its own account and risk. The Custodian and the Fund acknowledge that the purpose of Advances is to finance temporarily the purchase or sale of securities for prompt delivery or to meet redemptions or emergency expenses or cash needs that are not reasonably foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing (an "Notice of Advance") of any Advance by facsimile transmission or in such other manner as the Fund and the Custodian may agree in writing. At the request of the Custodian, the Fund shall pledge, assign and grant to the Custodian a security interest in certain specified securities of the Fund, as security for Advances provided to the Fund, under the terms and conditions set forth in Appendix A attached hereto. ARTICLE III PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS AND RELATED MATTERS 3.1. PROPER INSTRUCTIONS AND SPECIAL INSTRUCTIONS. 22 (a) Proper Instructions. As used in this Agreement, the term "Proper Instructions" shall mean: (i) a tested telex from the Fund or the Fund's investment manager or adviser, or a written request, direction, instruction or certification (which may be given by facsimile transmission) signed or initialed on behalf of the Fund by, one or more Authorized Persons (as that term is defined in section 3.2); (ii) a telephonic or other oral communication by one or more Authorized Persons; or (iii) a communication (other than facsimile transmission) effected directly between electro-mechanical or electronic devices or systems (including, without limitation, computers) by the Fund or the Fund's investment manager or adviser or by one or more Authorized Persons on behalf of the Fund; provided that communications of the types described in clauses (ii) and (iii) above purporting to be given by an Authorized Person shall be considered Proper Instructions only if the Custodian reasonably believes such communications to have been given by an Authorized Person with respect to the transaction involved. Instructions given in the form of Proper Instructions under clause (i) shall be deemed to be Proper Instructions if they are reasonably believed by the Custodian to be genuine. Proper Instructions in the form of oral communications shall be confirmed by the Fund in the manner set forth in clauses (i) or (iii) above, but the lack of such confirmation shall in no way affect any action taken by the Custodian in reliance upon such oral instructions prior to the Custodian's receipt of such confirmation. The Fund, the Custodian and any investment manager or adviser of the Fund each is hereby authorized to record any telephonic or other oral communications between the Custodian and any such person. Proper Instructions may relate to specific transactions or to types or classes of transactions, provided that Proper Instructions may take the form of standing instructions only if they are in writing. (b) Special Instructions. As used in this Agreement, the term "Special Instructions" shall mean Proper Instructions countersigned or confirmed in writing by the Treasurer or any Assistant Treasurer of the Fund or any other person designated by the Treasurer of the Fund in writing, which countersignature or confirmation shall be (i) included on the instrument containing the Proper Instructions or on a separate instrument relating thereto, and (ii) delivered by hand, facsimile transmission, mail or courier service or in such other manner as the Fund and the Custodian agree in writing. 23 (c) Address for Proper Instructions and Special Instructions. Proper Instructions and Special Instructions shall be delivered to the Custodian at the address and/or telephone, telecopy or telex number agreed upon from time to time by the Custodian and the Fund. 3.2. AUTHORIZED PERSONS. Concurrently with the execution of this Agreement and from time to time thereafter, as appropriate, the Fund shall deliver to the Custodian a certificate, duly certified by the Secretary or Assistant Secretary of the Fund, setting forth: (a) the names, titles, signatures and scope of authority of all persons authorized to give Proper Instructions or any other notice, request, direction, instruction, certificate or instrument on behalf of the Fund (each an "Authorized Person"); and (b) the names, titles and signatures of those persons authorized to issue Special Instructions. Such certificate may be accepted and relied upon by the Custodian as conclusive evidence of the facts set forth therein and shall be considered to be in full force and effect until delivery to the Custodian of a similar certificate to the contrary. Upon delivery of a certificate which deletes the name(s) of a person previously authorized to give Proper Instructions or to issue Special Instructions, such persons shall no longer be considered an Authorized Person or authorized to issue Special Instructions. 3.3. PERSONS HAVING ACCESS TO ASSETS OF THE FUND. Notwithstanding anything to the contrary in this Agreement, the Custodian shall not deliver any assets of the Fund held by the Custodian to or for the account of any Authorized Person, director, officer, employee or agent of the Fund, provided that nothing in this section 3.3 shall prohibit (a) any Authorized Person from giving Proper Instructions, or any person authorized to issue Special Instructions from issuing Special Instructions, provided such action does not result in delivery of or access to assets of the Fund prohibited by this section 3.3; or (b) the Fund's independent certified public accountants from examining or reviewing the assets of the Fund held by the Custodian. The Fund shall provide a list of such persons to the Custodian, and the Custodian shall be entitled to rely upon such list and any modifications thereto that are provided to the Custodian from time to time by the Fund. 3.4. ACTIONS OF CUSTODIAN BASED ON PROPER INSTRUCTIONS AND SPECIAL INSTRUCTIONS. So long as and to the extent that the 24 Custodian acts in accordance with Proper Instructions or Special Instructions, as the case may be, and the terms of this Agreement, the Custodian shall not be responsible for the title, validity or genuineness of any property, or evidence of title thereof, received or delivered by it pursuant to this Agreement. ARTICLE IV SUBCUSTODIANS The Custodian may, from time to time, in accordance with the relevant provisions of this Article IV, appoint one or more Domestic Subcustodians, Foreign Subcustodians and Interim Subcustodians (as such terms are defined below) to act on behalf of the Fund. For purposes of this Agreement, all duly appointed Domestic Subcustodians, Foreign Subcustodians and Interim Subcustodians are referred to collectively as "Subcustodians." 4.1. DOMESTIC SUBCUSTODIANS. The Custodian may, at any time and from time to time, at its own expense, appoint any bank as defined in section 2(a)(5) of the 1940 Act meeting the requirements of a custodian under section 17(f) of the 1940 Act and the rules and regulations thereunder, to act on behalf of the Fund as a subcustodian for purposes of holding cash, securities and other assets of the Fund and performing other functions of the Custodian within the United States (a "Domestic Subcustodian"), provided that the Custodian shall notify the Fund in writing of the identity and qualifications of any proposed Domestic Subcustodian at least 30 days prior to appointment of such Domestic Subcustodian, and the Fund may, in its sole discretion, by written notice to the Custodian executed by an Authorized Person disapprove of the appointment of such Domestic Subcustodian. If following notice by the Custodian to the Fund regarding appointment of a Domestic Subcustodian and the expiration of 30 days after the date of such notice, the Fund shall have failed to notify the Custodian of its disapproval thereof, the Custodian may, in its discretion, appoint such proposed Domestic Subcustodian as its subcustodian. 4.2. FOREIGN SUBCUSTODIANS AND INTERIM SUBCUSTODIANS. (a) Foreign Subcustodians. The Custodian may, at any time and from time to time, at its own expense, appoint: (i) any bank, trust company or other entity meeting the requirements of an 25 "eligible foreign custodian" under section 17(f) of the 1940 Act and the rules and regulations thereunder or exempted therefrom by order of the SEC, or (ii) any bank as defined in section 2(a)(5) of the 1940 Act meeting the requirements of a custodian under section 17(f) of the 1940 Act and the rules and regulations thereunder to act on behalf of the Fund as a subcustodian for purposes of holding cash, securities and other assets of the Fund and performing other functions of the Custodian in countries other than the United States of America (a "Foreign Subcustodian"); provided that prior to the appointment of any Foreign Subcustodian, the Custodian shall have obtained written confirmation of the approval of the Board of Directors of the Fund (which approval may be withheld in the sole discretion of such Board of Directors) with respect to (A) the identity and qualifications of any proposed Foreign Subcustodian, (B) the country or countries in which, and the securities depositories or clearing agencies (meeting the requirements of an "eligible foreign custodian" under section 17(f) of the 1940 Act and the rules and regulations thereunder or exempted therefrom by order of the SEC) through which, any proposed Foreign Subcustodian is authorized to hold Securities, cash and other assets of the Fund (each a "Foreign Depository") and (C) the form and terms of the subcustodian agreement to be entered into between such proposed Foreign Subcustodian and the Custodian. In addition, the Custodian may utilize directly any Foreign Depository, provided the Board of Directors shall have approved in writing the use of such Foreign Depository by the Custodian. Each such duly approved Foreign Subcustodian and the countries where and the Foreign Depositories through which it may hold securities and other assets of the Fund and the Foreign Depositories that the Custodian may utilize shall be listed in Appendix B, as it may be amended from time to time in accordance with the provisions of section 9.3. The Fund shall be responsible for informing the Custodian sufficiently in advance of a proposed investment which is to be held in a country in which no Foreign Subcustodian is authorized to act, in order that there shall be sufficient time for the Custodian to effect the appropriate arrangements with a proposed Foreign Subcustodian, including obtaining approval as provided in this section 4.2(a). The Custodian shall not agree to any material amendment to any subcustodian agreement entered into with a Foreign Subcustodian, or agree to permit any material changes thereunder, or waive any material rights under such agreement, except upon prior approval pursuant to Special Instructions. The Custodian shall promptly provide the Fund with notice of any such amendment, change, or waiver, whether or not 26 material, including a copy of any such amendment. For purposes of this subsection, a material amendment, change or waiver means an amendment, change or waiver that may reasonably be expected to have an adverse effect on the Fund in any material way, including but not limited to the Fund's or the Board's obligations under the 1940 Act, including Rule 17f-5 thereunder. (b) Interim Subcustodians. In the event that the Fund shall invest in a security or other asset to be held in a country in which no Foreign Subcustodian is authorized to act (whether because the Custodian has not appointed a Foreign Subcustodian in such country and entered into a subcustodian agreement with it or because the Board of Directors of the Fund has not approved the Foreign Subcustodian appointed by the Custodian in such country and the related subcustodian agreement), the Custodian shall promptly notify the Fund in writing by facsimile transmission or in such other manner as the Fund and Custodian shall agree in writing that no Foreign Subcustodian is approved in such country and the Custodian shall, upon receipt of Special Instructions, appoint any person designated by the Fund in such Special Instructions to hold such security or other asset. Any person appointed as a Subcustodian pursuant to this section 4.2(b) is hereinafter referred to herein as an "Interim Subcustodian." Each Interim Custodian and the securities or assets of the Fund that it is authorized to hold shall be set forth in Appendix B. In the absence of such Special Instructions, such security or other asset shall be held by such agent as the Custodian may appoint unless and until the Fund shall instruct the Custodian to move the security or other asset into the possession of the Custodian or a Subcustodian. 4.3. TERMINATION OF A SUBCUSTODIAN. The Custodian shall (a) cause each Domestic Subcustodian and Foreign Subcustodian to, and (b) use its best efforts to cause each Interim Subcustodian to, perform all of its obligations in accordance with the terms and conditions of the subcustodian agreement between the Custodian and such Subcustodian. In the event that the Custodian is unable to cause such Subcustodian to fully perform its obligations thereunder, the Custodian shall forthwith, upon the receipt of Special Instructions, exercise its best efforts to recover any Losses (as hereinafter defined) incurred by the Fund because of such failure to perform from such Subcustodian under the applicable subcustodian agreement and, if necessary or desirable, terminate such subcustodian and appoint a 27 replacement Subcustodian in accordance with the provisions of this Agreement. In addition to the foregoing, the Custodian (i) may, at any time in its discretion, upon written notification to the Fund, terminate any Domestic Subcustodian, Foreign Subcustodian or Interim Subcustodian, and (ii) shall, upon receipt of Special Instructions, terminate any Subcustodian with respect to the Fund, in each case in accordance with the termination provisions of the applicable subcustodian agreement. 4.4. AGENTS. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank, trust company, securities depository or clearing agency that is itself qualified to act as a custodian under the 1940 Act and the rules and regulations thereunder, as its agent (an "Agent") to carry out such of the provisions of this Agreement as the Custodian may from time to time direct, provided that the appointment of one or more Agents (other than an agent appointed to the second paragraph of section 4.2(b)) shall not relieve the Custodian of its responsibilities under this Agreement. Without limiting the foregoing, the Custodian shall be responsible for any notices, documents or other information, or any securities, cash or other assets of the Fund, received by any Agent on behalf of the Custodian or the Fund as if the Custodian had received such items itself. ARTICLE V STANDARD OF CARE; INDEMNIFICATION 5.1. STANDARD OF CARE. (a) General Standard of Care. The Custodian shall exercise reasonable care and diligence in carrying out all of its duties and obligations under this Agreement, and shall be liable to the Fund for all Losses suffered or incurred by the Fund resulting from the failure of the Custodian to exercise such reasonable care and diligence. For purposes of this Agreement, "Losses" means any losses, damages, and expenses. (b) Actions Prohibited by Applicable Law, Etc. In no event shall the Custodian incur liability hereunder if the Custodian or any Subcustodian or Securities System, or any subcustodian, securities depository or securities system utilized by any such Subcustodian or the Custodian, or any nominee of the 28 Custodian or any Subcustodian, is prevented, forbidden or delayed from performing, or omits to perform, any act or thing which this Agreement provides shall be performed or omitted to be performed, by reason of: (i) any provision of any present or future law or regulation or order of the United States of America, or any state thereof, or of any foreign country, or political subdivision thereof or of any court of competent jurisdiction; or (ii) any act of God or war or action of any de facto or de jure government or other similar circumstance beyond the control of the Custodian, unless, in each case, such delay or nonperformance is caused by the negligence, misfeasance or misconduct of such person. (c) Mitigation by Custodian. Upon the occurrence of any event which causes or may cause any Losses to the Fund (i) the Custodian shall, and shall cause any applicable Domestic Subcustodian or Foreign Subcustodian to, and (ii) the Custodian shall use its best efforts to cause any applicable Interim Subcustodian to, use all commercially reasonable efforts and take all reasonable steps under the circumstances to mitigate the effects of such event and to avoid continuing harm to the Fund. (d) Advice of Counsel. The Custodian shall be entitled to receive and act upon advice of counsel on all matters. The Custodian shall be without liability for any action reasonably taken or omitted in good faith pursuant to the advice of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other counsel as the Fund may agree to, such agreement not to be unreasonably withheld or delayed; provided that with respect to the performance of any action or omission of any action upon such advice, the Custodian shall be required to conform to the standard of care set forth in section 5.1(a). (e) Expenses. In addition to the liability of the Custodian under this Article V, the Custodian shall be liable to the Fund for all reasonable costs and expenses incurred by the Fund in connection with any claim by the Fund against the Custodian arising from the obligations of the Custodian hereunder including, without limitation, all reasonable attorneys' fees and expenses incurred by the Fund in asserting any such claim, and all reasonable expenses incurred by the Fund in connection with any investigations, lawsuits or proceedings relating to such claim, provided that the Fund has recovered from the Custodian for such claim. 29 (f) Liability for Past Records. The Custodian shall have no liability in respect of any Losses suffered by the Fund, insofar as such Losses arise from the performance of the Custodian's duties hereunder by reason of the Custodian's reliance upon records that were maintained for the Fund by entities other than the Custodian prior to the Custodian's employment hereunder. (g) Reliance on Certifications. The Secretary or an Assistant Secretary of the Fund shall certify to the Custodian the names and signatures of the officers of the Fund, the name and address of the Shareholder Servicing Agent, and any instructions or directions to the Custodian by the Fund's Board of Directors or shareholders. Any such certificate may be accepted and relied upon by the Custodian as conclusive evidence of the facts set forth therein and may be considered in full force and effect until receipt of a similar certificate to the contrary. 5.2. LIABILITY OF CUSTODIAN FOR ACTIONS OF OTHER PERSONS. (a) Domestic Subcustodians, Foreign Subcustodians and Agents. The Custodian shall be liable for the actions or omissions of any Domestic Subcustodian, Foreign Subcustodian or Agent (other than an agent appointed pursuant to section 4.2(b)) to the same extent as if such action or omission were performed by the Custodian itself pursuant to this Agreement. In the event of any Losses suffered or incurred by the Fund caused by or resulting from the actions or omissions of any Domestic Subcustodian, Foreign Subcustodian or Agent (other than an agent appointed pursuant to section 4.2(b)) for which the Custodian would be directly liable if such actions or omissions were those of the Custodian, the Custodian shall promptly reimburse the Fund in the amount of any such Losses. (b) Interim Subcustodians. Notwithstanding the provisions of section 5.1 to the contrary, the Custodian shall not be liable to the Fund for any Losses suffered or incurred by the Fund resulting from the actions or omissions of an Interim Subcustodian or an agent appointed pursuant to section 4.2(b) unless such Losses are caused by, or result from, the negligence, misfeasance or misconduct of the Custodian; provided that in the event of any Losses (whether or not caused by or resulting from the negligence, misfeasance or misconduct of the Custodian), the Custodian shall take all reasonable steps to enforce such rights 30 as it may have against such Interim Subcustodian or agent to protect the interests of the Fund. (c) Securities Systems and Foreign Depositories. Notwithstanding the provisions of section 5.1 to the contrary, the Custodian shall not be liable to the Fund for any Losses suffered or incurred by the Fund resulting from the use by the Custodian or any Subcustodian of a Securities System or Foreign Depository, unless such Losses are caused by, or result from, the negligence, misfeasance or misconduct of the Custodian; provided that in the event of any such Losses, the Custodian shall take all reasonable steps to enforce such rights as it may have against the Securities System or Foreign Depository, as the case may be, to protect the interests of the Fund. (d) Reimbursement of Expenses. The Fund agrees to reimburse the Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in connection with the fulfillment of its obligations under this section 5.2, provided that such reimbursement shall not apply to expenses occasioned by or resulting from the negligence, misfeasance or misconduct of the Custodian. 5.3. INDEMNIFICATION. (a) Indemnification Obligations. Subject to the limitations set forth in this Agreement, the Fund agrees to indemnify and hold harmless the Custodian and its nominees for all Losses suffered or incurred by the Custodian or its nominee (including Losses suffered under the Custodian's indemnity obligations to Subcustodians) caused by or arising from actions taken by the Custodian in the performance of its duties and obligations under this Agreement, provided that such indemnity shall not apply to Losses occasioned by or resulting from the negligence, misfeasance or misconduct of the Custodian or any Subcustodian, Securities System, Foreign Depository or their respective nominees. In addition, the Fund agrees to indemnify the Custodian against any liability incurred by reason of taxes assessed to the Custodian, any Subcustodian, any Securities System, any Foreign Depository, and their respective nominees, or other Losses incurred by such persons, resulting from the fact that securities and other property of the Fund are registered in the name of such persons, provided that in no event shall such indemnification be applicable to income, franchise or similar taxes which may be imposed or assessed against such persons. 31 (b) Notice of Litigation, Right to Prosecute, etc. The Fund shall not be liable for indemnification under this section 5.3 unless the person seeking indemnification shall have notified the Fund in writing (i) within such time after the assertion of any claim as is sufficient for such person to determine that it will seek indemnification from the Fund in respect of such claim or (ii) promptly after the commencement of any litigation or proceeding brought against such person, in respect of which indemnity may be sought; provided that in the case of clause (i) of this section 5.3(b) the Fund shall not be liable for such indemnification to the extent the Fund is disadvantaged by any such delay in notification. With respect to claims in such litigation or proceedings for which indemnity by the Fund may be sought and subject to applicable law and the ruling of any court of competent jurisdiction, the Fund shall be entitled to participate in any such litigation or proceeding and, after written notice from the Fund to the person seeking indemnification, the Fund may assume the defense of such litigation or proceeding with counsel of its choice at its own expense in respect of that portion of the litigation for which the Fund may be subject to an indemnification obligation, provided that such person shall be entitled to participate in (but not control) at its own cost and expense, the defense of any such litigation or proceeding if the Fund has not acknowledged in writing its obligation to indemnify such person with respect to such litigation or proceeding. If the Fund is not permitted to participate in or control such litigation or proceeding under applicable law or by a ruling of a court of competent jurisdiction, such person shall reasonably prosecute such litigation or proceeding. A person seeking indemnification hereunder shall not consent to the entry of any judgment or enter into any settlement of any such litigation or proceeding without providing the Fund with adequate notice of any such settlement or judgment and without the Fund's prior written consent, which consent shall not be unreasonably withheld or delayed. All persons seeking indemnification hereunder shall submit written evidence to the Fund with respect to any cost or expense for which they are seeking indemnification in such form and detail as the Fund may reasonably request. 5.4. INVESTMENT LIMITATIONS. If the Custodian has otherwise complied with the terms and conditions of this Agreement in performing its duties generally, and more particularly in connection with the purchase, sale or exchange of securities made by or for the Fund, the Custodian shall not be 32 liable to the Fund, and the Fund agrees to indemnify the Custodian and its nominees, for any Losses suffered or incurred by the Custodian and its nominees arising out of any violation of any investment or other limitation to which the Fund is subject. 5.5. FUND'S RIGHT TO PROCEED. Notwithstanding anything to the contrary contained herein, the Fund shall have, at its election upon reasonable notice to the Custodian, the right to enforce, to the extent permitted by any applicable agreement and applicable law, the Custodian's rights against any Subcustodian, Securities System, Foreign Depository or other person for Losses caused the Fund by such Subcustodian, Securities System, Foreign Depository or other person, and shall be entitled to enforce the rights of the Custodian with respect to any claim against such Subcustodian, Securities System, Foreign Depository or other person which the Custodian may have as a consequence of any such Losses, if and to the extent that the Fund has not been made whole for such Losses. If the Custodian makes the Fund whole for such Losses, the Custodian shall retain the ability to enforce its rights directly against such Subcustodian, Securities System, Foreign Depository or other person. Upon the Fund's election to enforce any rights of the Custodian under this section 5.5, the Fund shall reasonably prosecute all actions and proceedings directly relating to the rights of the Custodian in respect of the Losses incurred by the Fund; provided that, so long as the Fund has acknowledged in writing its obligation to indemnify the Custodian under section 5.3 hereof with respect to such claim, the Fund shall retain the right to settle, compromise and/or terminate any action or proceeding in respect of the Losses incurred by the Fund without the Custodian's consent; and provided further that if the Fund has not made an acknowledgement of its obligation to indemnify the Custodian, the Fund shall not settle, compromise or terminate any such action or proceeding without the written consent of the Custodian, which consent shall not be unreasonably withheld or delayed. The Custodian agrees to cooperate with the Fund and take all actions reasonably requested by the Fund in connection with the Fund's enforcement of any rights of the Custodian. The Fund agrees to reimburse the Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in connection with the fulfillment of its obligations under this section 5.5, provided that such reimbursement shall not apply to expenses occasioned by or resulting from the negligence, misfeasance or misconduct of the Custodian. 33 ARTICLE VI RECORDS 6.1. PREPARATION OF REPORTS. The Custodian shall, as reasonably requested by the Fund, assist generally in the preparation of reports to Fund shareholders, regulatory authorities and others, audits of accounts, and other ministerial matters of like nature. The Custodian shall render statements, including interim monthly and complete quarterly financial statements, or copies thereof, from time to time as reasonably requested by Proper Instructions. 6.2. CUSTODIAN'S BOOKS AND RECORDS. The Custodian shall maintain complete and accurate records with respect to securities and other assets held for the account of the Fund as required by the rules and regulations of the SEC applicable to investment companies registered under the 1940 Act, including: (a) journals or other records of original entry containing a detailed and itemized daily record of all receipts and deliveries of securities (including certificate and transaction identification numbers, if any), and all receipts and disbursements of cash; (b) ledgers or other records reflecting (i) securities in physical possession, (ii) securities in transfer, (iii) securities borrowed, loaned or collateralizing obligations of the Fund, (iv) monies borrowed and monies loaned (together with a record of the collateral therefor and substitutions of collateral), and (v) dividends and interest received; and (c) cancelled checks and bank records related thereto. The Custodian shall keep such other books and records of the Fund as the Fund shall reasonably request. All such books and records maintained by the Custodian shall be maintained in a form acceptable to the Fund and in compliance with the rules and regulations of the SEC (including, but not limited to, books and records required to be maintained under Section 31(a) of the 1940 Act and the rules and regulations from time to time adopted thereunder), and any other applicable Federal, State and foreign tax laws and administrative regulations. All such records will be the property of the Fund and in the event of termination of this Agreement shall be delivered to the successor custodian. All books and records maintained by the Custodian pursuant to this Agreement and any insurance policies and 34 fidelity or similar bonds maintained by the Custodian shall be made available for inspection and audit at reasonable times by officers of, attorneys for, and auditors employed by, the Fund and the Custodian shall promptly provide the Fund with copies of all reports of its independent auditors regarding the Custodian's controls and procedures. 6.3. OPINION OF FUND'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. The Custodian shall take all reasonable action as the Fund may request to obtain from year to year favorable opinions from the Fund's independent certified public accountants with respect to the Custodian's activities hereunder in connection with the preparation of any periodic reports to or filings with the SEC and with respect to any other requirements of the SEC. 6.4. REPORTS OF CUSTODIAN'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. At the request of the Fund, the Custodian shall deliver to the Fund a written report prepared by the Custodian's independent certified public accountants with respect to the services provided by the Custodian under this Agreement, including, without limitation, the Custodian's accounting system, internal accounting control and procedures for safeguarding cash, securities and other assets, including cash, securities and other assets deposited and/or maintained in a Securities System or with a Subcustodian. Such report shall be of sufficient scope and in sufficient detail as may reasonably be required by the Fund and as may reasonably be obtained by the Custodian. 6.5. CALCULATION OF NET ASSET VALUE. The Custodian shall compute and determine the net asset value per share of capital stock of the Fund as of the close of regular business on the New York Stock Exchange on each day on which such Exchange is open, unless otherwise directed by Proper Instructions. Such computation and determination shall be made in accordance with (a) the provisions of the By-Laws of the Fund and Articles of Incorporation, as they may from time to time be amended and delivered to the Custodian, (b) the votes of the Board of Directors of the Fund at the time in force and applicable, as they may from time to time be delivered to the Custodian, and (c) Proper Instructions. On each day that the Custodian shall compute the net asset value per share of the Fund, the Custodian shall provide the Fund with written reports which permit the Fund to verify that portfolio transactions have been recorded in accordance with the Fund's instructions. 35 In computing the net asset value, the Custodian may rely upon any information furnished by Proper Instructions, including without limitation any information (i) as to accrual of liabilities of the Fund and as to liabilities of the Fund not appearing on the books of account kept by the Custodian, (ii) as to the existence, status and proper treatment of reserves, if any, authorized by the Fund, (iii) as to the sources of quotations to be used in computing the net asset value, including those listed in Appendix C hereto, (iv) as to the fair value to be assigned to any securities or other assets for which price quotations are not readily available, and (v) as to the sources of information with respect to "corporate actions" affecting portfolio securities of the Fund, including those listed in Appendix C. (Information as to "corporate actions" shall include information as to dividends, distributions, stock splits, stock dividends, rights offerings, conversions, exchanges, recapitalizations, mergers, redemptions, calls, maturity dates and similar transactions, including the ex- and record dates and the amounts or other terms thereof.) In like manner, the Custodian shall compute and determine the net asset value as of such other times as the Board of Directors of the Fund, or any valuation committee thereof, from time to time may reasonably request. The Custodian shall be held to the standard of care set forth in Article V with respect to the performance of its responsibilities under this Article VI. The parties hereto acknowledge, however, that the Custodian's causing an error or delay in the determination of net asset value may, but does not in and of itself, constitute negligence, gross negligence or reckless or willful misconduct. The Custodian's liability for any such negligence, gross negligence or reckless or willful misconduct which results in an error in determination of such net asset value shall be limited to the direct, out-of-pocket loss the Fund, shareholder or former shareholder shall actually incur, measured by the difference between the actual and the erroneously computed net asset value, and any expenses incurred by the Fund in connection with correcting the records of the Fund affected by such error (including charges made by the Fund's registrar and transfer agent for making such corrections), communicating with shareholders or former shareholders of the Fund affected by such error or responding to or defending against any inquiry or proceeding with respect to such error made or initiated by the 36 SEC or other regulatory or self-regulatory body. Without limiting the foregoing, the Custodian shall not be held accountable or liable to the Fund, any shareholder or former shareholder thereof or any other person for any delays or Losses any of them may suffer or incur resulting from (A) the Custodian's failure to receive timely and suitable notification concerning quotations or corporate actions relating to or affecting securities of the Fund or (B) any errors in the computation of the net asset value based upon or arising out of quotations or information as to corporate actions if received by the Custodian either (1) from a source which the Custodian was authorized pursuant to the second paragraph of this section 6.5 to rely upon, or (2) from a source which in the Custodian's reasonable judgment was as reliable a source for such quotations or information as the sources authorized pursuant to that paragraph. Nevertheless, the Custodian will use its best judgment in determining whether to verify through other sources any information it has received as to quotations or corporate actions if the Custodian has reason to believe that any such information might be incorrect. In the event of any error or delay in the determination of such net asset value for which the Custodian may be liable, the Fund and the Custodian will consult and make good faith efforts to reach agreement on what actions should be taken in order to mitigate any Losses suffered by the Fund or its present or former shareholders, in order that the Custodian's exposure to liability shall be reduced to the extent possible after taking into account all relevant factors and alternatives. Such actions might include the Fund or the Custodian taking reasonable steps to collect from any shareholder or former shareholder who has received any overpayment upon redemption of shares such overpaid amount or to collect from any shareholder who has underpaid upon a purchase of shares the amount of such underpayment or to reduce the number of shares issued to such shareholder. It is understood that in attempting to reach agreement on the actions to be taken or the amount of the loss which should appropriately be borne by the Custodian, the Fund and the Custodian will consider such relevant factors as the amount of the loss involved, the Fund's desire to avoid loss of shareholder good will, the fact that other persons or entities could have reasonably expected to have detected the error sooner than the time it was actually discovered, the appropriateness of limiting or eliminating the benefit which shareholders or former 37 shareholders might have obtained by reason of the error, and the possibility that other parties providing services to the Fund might be induced to absorb a portion of the loss incurred. Upon written notice from the Fund to the Custodian, the Custodian's responsibilities under this Section 6.5 shall terminate, but this Agreement shall otherwise continue in full force and effect. Upon such termination, the fee schedule provided for under Article VII hereof shall be adjusted by the parties in such manner as they may agree, and the Custodian will transfer such of the Fund's books and records, and provide such other reasonable cooperation, as the Fund may request in connection with the transfer of such responsibilities. 6.6. INFORMATION REGARDING FOREIGN SUBCUSTODIANS AND FOREIGN DEPOSITORIES. (a) The Custodian shall use reasonable efforts to assist the Fund in obtaining the following with respect to any country in which any assets of the Fund are held or proposed to be held: (1) information concerning whether, and to what extent, applicable foreign law would restrict the access afforded the Fund's independent public accountants to books and records kept by a foreign custodian or foreign securities depository used, or proposed to be used, in that country; (2) information concerning whether, and to what extent, applicable foreign law would restrict the Fund's ability to recover its assets in the event of the bankruptcy of a foreign custodian or foreign securities depository used, or proposed to be used, in that country; (3) information concerning whether, and to what extent, applicable foreign law would restrict the Fund's ability to recover assets that are lost while under the control of a foreign custodian or foreign securities depository used, or proposed to be used, in that country; (4) information concerning the likelihood of expropriation, nationalization, freezes or confiscation of the Fund's assets in that country; (5) information concerning whether difficulties in converting the Fund's cash and cash equivalents held in that 38 country into U.S. Dollars are reasonably foreseeable, including without limitation as a result of applicable foreign currency exchange regulations; (6) information concerning the financial strength, general reputation and standing and ability to perform custodial services of each foreign custodian or foreign securities depository used, or proposed to be used, in that country; (7) information concerning whether each foreign custodian or foreign securities depository used, or proposed to be used, in that country would provide a level of safeguards for maintaining the Fund's assets not materially different from that provided by the Custodian in maintaining the Fund's securities in the United States; (8) information concerning whether each foreign custodian or foreign securities depository used, or proposed to be used, in that country has offices in the United States in order to facilitate the assertion of jurisdiction over and enforcement of judgments against such custodian or depository; (9) as to each foreign securities depository used, or proposed to be used, in that country information concerning the number of participants in, and operating history of, such depository; and (10) such other information as may be requested by the Fund to ensure compliance with Rule 17f-5 under the 1940 Act. (b) During the term of this Agreement, the Custodian shall use reasonable efforts to provide the Fund with prompt notice of any material changes in the facts or circumstances upon which any of the foregoing information or statements were based. (c) Upon request of the Fund, the Custodian shall deliver to the Fund a certificate stating: (i) the identity of each Foreign Subcustodian then acting on behalf of the Custodian; and (ii) the countries in which and the Foreign Depositories through which each such Foreign Subcustodian or the Custodian is then holding cash, securities and other assets of the Fund. 39 ARTICLE VII CUSTODIAN FEES The Fund shall pay the Custodian a custody fee based on such fee schedule as may from time to time be agreed upon in writing by the Custodian and the Fund. Such fee, together with all amounts for which the Custodian is to be reimbursed in accordance with the following sentence, shall be billed to the Fund in such a manner as to permit payment either by a direct cash payment to the Custodian or by placing Fund portfolio transactions with the Custodian resulting in an agreed-upon amount of commissions being paid to the Custodian within an agreed-upon period of time. The Custodian shall be entitled to receive reimbursement from the Fund on demand for its cash disbursements and expenses (including cash disbursements and expenses of any Subcustodian or Agent for which the Custodian has reimbursed such Subcustodian or Agent) permitted by this Agreement, but excluding salaries and usual overhead expenses, upon receipt by the Fund of reasonable evidence thereof. ARTICLE VIII TERMINATION This Agreement shall continue in full force and effect until terminated by either party by an instrument in writing delivered or mailed, postage prepaid, to the other party, such termination to take effect not sooner than sixty (60) days after the date of such delivery or mailing. In the event of termination, the Custodian shall be entitled to receive prior to delivery of the securities, cash and other assets held by it all accrued fees and unreimbursed expenses the payment of which is contemplated by Article VII, upon receipt by the Fund of a statement setting forth such fees and expenses. In the event of the appointment of a successor custodian, it is agreed that the cash, securities and other assets owned by the Fund and held by the Custodian or any Subcustodian or Agent shall be delivered to the successor custodian, and the Custodian agrees to cooperate with the Fund in 40 execution of documents and performance of other actions necessary or desirable in order to substitute the successor custodian for the Custodian under this Agreement. ARTICLE IX MISCELLANEOUS 9.1. EXECUTION OF DOCUMENTS. Upon request, the Fund shall deliver to the Custodian such proxies, powers of attorney or other instruments as may be reasonable and necessary or desirable in connection with the performance by the Custodian or any Subcustodian of their respective obligations under this Agreement or any applicable subcustodian agreement. 9.2. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter hereof. 9.3. WAIVERS AND AMENDMENTS. No provision of this Agreement may be amended or terminated except by a statement in writing signed by the party against which enforcement of the amendment or termination is sought, provided that Appendix B listing the Foreign Subcustodians and Foreign Depositories approved by the Fund and Appendix C listing quotation and information sources may be amended from time to time to add or delete one or more of such entities or sources by delivery to the Custodian of a revised Appendix B or C executed by an Authorized Person, such amendment to take effect immediately upon execution of the revised Appendix B or C by the Custodian. In connection with the operation of this Agreement, the Custodian and the Fund may agree in writing from time to time on such provisions interpretative of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. No interpretative or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. 9.4. CAPTIONS. The section headings in this Agreement are for the convenience of the parties and in no way alter, amend, limit or restrict the contractual obligations of the 41 parties set forth in this Agreement. 9.5. GOVERNING LAW. This instrument shall be governed by and construed in accordance with the laws of the State of New York. 9.6. NOTICES. Notices and other writings delivered or mailed postage prepaid to the Fund addressed to the Fund at 345 Park Avenue, New York, NY 10154 or to such other address as the Fund may have designated to the Custodian in writing, or to the Custodian at 40 Water Street, Boston, Massachusetts 02109, Attention: Manager, Securities Department, or to such other address as the Custodian may have designated to the Fund in writing, shall be deemed to have been properly delivered or given hereunder to the respective addressee. 9.7. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on and shall inure to the benefit of the Fund and the Custodian and their respective successors and assigns, provided that neither party hereto may assign this Agreement or any of its rights hereunder without the prior written consent of the other party. 9.8. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. This Agreement shall become effective when one or more counterparts have been signed and delivered by each of the parties. 9.9. REPRESENTATIVE CAPACITY; NONRECOURSE OBLIGATIONS. The Custodian agrees that any claims by it against the Fund under this Agreement may be satisfied only from the assets of the Fund; that the person executing this Agreement has executed it on behalf of the Fund and not individually, and that the obligations of the Fund arising out of this Agreement are not binding upon such person or the Fund's shareholders individually but are binding only upon the assets and property of the Fund; and that no shareholders, directors or officers of the Fund may be held personally liable or responsible for any obligations of the Fund arising out of this Agreement. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in its name and behalf on the day and year first above written. 42 BROWN BROTHERS HARRIMAN & CO. per pro____________________________ Name: Title: THE KOREA FUND, INC. By:________________________________ Name: Nicholas Bratt Title: President APPENDIX A TO THE CUSTODIAN AGREEMENT BETWEEN THE KOREA FUND, INC. AND BROWN BROTHERS HARRIMAN & CO. DATED AS OF April 19, 1995 PROCEDURES RELATING TO CUSTODIAN'S SECURITY INTEREST As security for any Advances (as defined in the Custodian Agreement) of the Fund, the Fund shall pledge, assign and grant to the Custodian a security interest in Collateral (as hereinafter defined), under the terms, circumstances and conditions set forth in this Appendix A. SECTION 1. DEFINED TERMS. As used in this Appendix A the following terms shall have the following respective meanings: (a) "Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which the Custodian is closed for business. (b) "Collateral" shall mean those securities having a fair market value (as determined in accordance with the procedures set forth in the prospectus for the Fund) equal to the aggregate of all Advance Obligations of the Fund that are (i) identified in any Pledge Certificate executed on behalf of the Fund or (ii) designated by the Custodian for the Fund pursuant to Section 3 of this Appendix A. Such securities shall consist of marketable securities held by the Custodian on behalf of the Fund or, if no such marketable securities are held by the Custodian on behalf of the Fund, such other securities designated by the Fund in the applicable Pledge Certificate or by the Custodian pursuant to Section 3 of this Appendix A. 43 (c) "Advance Obligations" shall mean the amount of any outstanding Advance(s) provided by the Custodian to the Fund together with all accrued interest thereon. (d) "Pledge Certificate" shall mean a Pledge Certificate in the form attached as Exhibit 1 to this Appendix A, executed by a duly authorized officer of the Fund and delivered by the Fund to the Custodian by facsimile transmission or in such other manner as the Fund and the Custodian may agree in writing. (e) "Release Certificate" shall mean a Release Certificate in the form attached as Exhibit 2 to this Appendix A, executed by a duly authorized officer of the Custodian and delivered by the Custodian to the Fund by facsimile transmission or in such other manner as the Fund and the Custodian may agree in writing. (f) "Written Notice" shall mean a written notice executed by a duly authorized officer of the party delivering the notice and delivered by facsimile transmission or in such other manner as the Fund and the Custodian shall agree in writing. SECTION 2. PLEDGE OF COLLATERAL. To the extent that any Advance Obligations of the Fund are not satisfied by the close of business on the first Business Day following the Business Day on which the Fund receives a Written Notice requesting security for such Advance Obligation and stating the amount of such Advance Obligation, the Fund shall pledge, assign and grant to the Custodian a first priority security interest in Collateral specified by the Fund by delivering to the Custodian a Pledge Certificate executed by the Fund describing such Collateral. Such Written Notice may, in the discretion of the Custodian, be included within or accompany the Notice of Advance (as defined in the Custodian Agreement) relating to the applicable Advance Obligation. SECTION 3. FAILURE TO PLEDGE COLLATERAL. In the event that the Fund shall fail (a) to pay the Advance Obligation described in such Written Notice, (b) to deliver to the Custodian a Pledge Certificate pursuant to Section 2, or (c) to identify substitute securities pursuant to Section 6 upon the sale or maturity of any securities identified as Collateral, the Custodian may, by Written Notice to the Fund, specify Collateral which shall secure the applicable Advance Obligation. The Fund hereby pledges, assigns and grants to the Custodian a first priority security 44 interest in any and all Collateral specified in such Written Notice; provided that such pledge, assignment and grant of security shall be deemed to be effective only upon receipt by the Fund of such Written Notice, and provided further that if the Custodian specifies Collateral in which a first priority security interest has already been granted, the security interest pledged, assigned and granted hereunder shall be a security interest that is not a first priority security interest. SECTION 4. DELIVERY OF ADDITIONAL COLLATERAL. If at any time the Custodian shall notify the Fund by Written Notice that the fair market value of the Collateral securing any Advance Obligation is less than the amount of such Advance Obligation, the Fund shall deliver to the Custodian, within one Business Day following the Fund's receipt of such Written Notice, an additional Pledge Certificate describing additional Collateral. If the Fund shall fail to deliver such additional Pledge Certificate, the Custodian may specify Collateral which shall secure the unsecured amount of the applicable Advance Obligation in accordance with Section 3 of this Appendix A. SECTION 5. RELEASE OF COLLATERAL. Upon payment by the Fund of any Advance Obligation secured by the pledge of Collateral, the Custodian shall promptly deliver to the Fund a Release Certificate pursuant to which the Custodian shall release Collateral from the lien under the applicable Pledge Certificate or Written Notice pursuant to Section 3 having a fair market value equal to the amount paid by the Fund on account of such Advance Obligation. In addition, if at any time the Fund shall notify the Custodian by Written Notice that the Fund desires that specified Collateral be released and (a) that the fair market value of the Collateral securing any Advance Obligation exceeds the amount of such Advance Obligation, or (b) that the Fund has delivered a Pledge Certificate pursuant to Section 6 substituting Collateral in respect of such Advance Obligation, the Custodian shall deliver to the Fund, within one Business Day following the Custodian's receipt of such Written Notice, a Release Certificate relating to the Collateral specified in such Written Notice. SECTION 6. SUBSTITUTION OF COLLATERAL. The Fund may substitute securities for any securities identified as Collateral by delivery to the Custodian of a Pledge Certificate executed by the Fund, indicating the securities pledged as Collateral. SECTION 7. SECURITY FOR FUND ADVANCE OBLIGATIONS. The 45 pledge of Collateral by the Fund shall secure only Advance Obligations of the Fund. In no event shall the pledge of Collateral by the Fund be deemed or considered to be security for any other types of obligations of the Fund to the Custodian or for the Advance Obligations or other types of obligations of any other fund. SECTION 8. CUSTODIAN'S REMEDIES. Upon (a) the Fund's failure to pay any Advance Obligation of the Fund within thirty days after receipt by the Fund of a Written Notice demanding security therefor, and (b) one Business Day's prior Written Notice to the Fund, the Custodian may elect to enforce its security interest in the Collateral securing such Advance Obligation, by taking title to (at the then prevailing fair market value), or selling in a commercially reasonable manner, so much of the Collateral as shall be required to pay such Advance Obligation in full. Notwithstanding the provisions of any applicable law, including, without limitation, the Uniform Commercial Code, the remedy set forth in the preceding sentence shall be the only right or remedy to which the Custodian is entitled with respect to the pledge and security interest granted pursuant to any Pledge Certificate or Section 3. Without limiting the foregoing, the Custodian hereby waives and relinquishes all contractual and common law rights of set-off to which it may now or hereafter be or become entitled with respect to any obligations of the Fund to the Custodian arising under this Appendix A to the Custodian Agreement. IN WITNESS WHEREOF, each of the parties has caused this Appendix A to be executed in its name and behalf on the day and year first above written. BROWN BROTHERS HARRIMAN & CO. per pro____________________________ Name: Title: THE KOREA FUND, INC. By:________________________________ Name: Nicholas Bratt Title: President 46 EXHIBIT 1 TO Appendix A PLEDGE CERTIFICATE This Pledge Certificate is delivered pursuant to the Custodian Agreement dated as of _____________________ (the "Agreement"), between _____________________ (the "Fund") and Brown Brothers Harriman & Co. (the "Custodian"). Capitalized terms used herein without definition shall have the respective meanings ascribed to them in the Agreement. Pursuant to [Section 2 or Section 4] of Appendix A attached to the Agreement, the Fund hereby pledges, assigns and grants to the Custodian a first priority security interest in the securities listed on Schedule A attached to this Pledge Certificate (collectively, the "Pledged Securities"). Upon delivery of this Pledge Certificate, the Pledged Securities shall constitute Collateral, and shall secure all Advance Obligations of the Fund described in that certain Written Notice dated , 19 , delivered by the Custodian to the Fund. The pledge, assignment and grant of security in the Pledged Securities hereunder shall be subject in all respects to the terms and conditions of the Agreement, including, without limitation, Sections 7 and 8 of Appendix A attached hereto. IN WITNESS WHEREOF, the Fund has caused this Pledge Certificate to be executed in its name, on behalf of the Fund this day of , 19 . By: _____________________ Name: _____________________ Title: _____________________ 47 SCHEDULE A TO PLEDGE CERTIFICATE
Type of Certificate/CUSIP Number of Issuer Security Numbers Shares - ------ -------- ------- ------
48 EXHIBIT 2 TO Appendix A RELEASE CERTIFICATE This Release Certificate is delivered pursuant to the Custodian Agreement dated as of _________, 199_ (the "Agreement"), between _______________________ (the "Fund") and Brown Brothers Harriman & Co. (the "Custodian"). Capitalized terms used herein without definition shall have the respective meanings ascribed to them in the Agreement. Pursuant to Section 5 of Appendix A attached to the Agreement, the Custodian hereby releases the securities listed on Schedule A attached to this Release Certificate from the lien under the [Pledge Certificate dated __________, 19 or the Written Notice delivered pursuant to Section 3 of Appendix A dated ___________, 19 ]. IN WITNESS WHEREOF, the Custodian has caused this Release Certificate to be executed in its name and on its behalf this ____ day of 19__. Brown Brothers Harriman & Co. By: _____________________ Name: _____________________ Title: _____________________ 49 SCHEDULE A TO RELEASE CERTIFICATE
Type of Certificate/CUSIP Number of Issuer Security Numbers Shares - ------ -------- ------- ------
50 [Translation] MINISTRY OF FINANCE AND ECONOMY Document No.: JEUNGJAE 41610-57 Enforcement Date: March 30, 1996 To: Dr. Young Moo Shin and Law Offices of Shin & Kim Re: Amendment to the License for Investment in Korean Securities Regarding The Korea Fund, Inc. and The Korea- Europe Fund Limited - ------------------------------------------------------------------------------ 1. Reference is made to your letters, SEJONG NO. 96-0351 (dated March 27, 1996) and SEJONG NO. 96-0354 (dated March 28, 1996). 2. Pursuant to Article 203 of the Securities and Exchange Act and Article 10-66 of the Foreign Exchange Management Regulations, we hereby approve the investment in Korean securities by The Korea Fund, Inc. and The Korea-Europe Fund Limited as set forth in the attached. Attachment: A copy of the "Amendment to the License, Approval and confirmation Regarding The Korea Fund, Inc." and a copy of the "Amendment to the Approval for Investment by The Korea-Europe Fund Limited". MINISTER OF FINANCE AND ECONOMY (Official Seal Affixed) - ------------------------------------------------------------------------------ 51 To: The Korea Fund, Inc. Re: Amendment to the License, Approval and Confirmation of The Korea Fund, Inc. The Minister of Finance and Economy, on behalf of the Government of the Republic of Korea, pursuant to Korean Law presently in force, hereby amends the License, Approval and Confirmation dated June 22, 1984, as amended on April 11, 1986, August 2, 1989, October 7, 1992, October 20, 1993 and May 12, 1995 (as amended, the "License") as set forth below. In all other respects, the License remains unchanged and in full force and effect, and the confirmations made therein are repeated as of the date of this Amendment. 1. Paragraph 4. D of the License, setting forth the limit on investments in securities of an individual issuer, is deleted in its entirety and replaced with the following new Paragraph 4. D: "D. Limits on Investments (1) The Fund shall not acquire shares of a Korean issuer if, as a result of such acquisition, the Fund would hold in excess of 5% of the shares then outstanding of any class of stock of the issuer (2) The Fund shall not acquire listed bonds (as defined in the regulations of KSEC) if, as a result of such acquisition, the Fund's holdings of such, listed bonds would have a value (calculated at the time of acquisition) in excess of 10% of the net asset value of the Fund (as such value is calculated as at the date of such acquisition). (3) The Fund is permitted to acquire unlisted shares which are registered with the Korea Securities Dealers Association for the trading on the over-the-counter market in Korea (the "Registered OTC Shares"); provided that the Fund shall not 52 acquire the Registered OTC Shares if, as a result, more than 25% of the net asset value of the Fund (as such value is calculated as at the date of such acquisition) would be invested in the Registered OTC Shares in aggregate or more than 5% of the net asset value of the Fund (as such value is calculated as at the date of such acquisition) would be invested in any class of the Registered OTC Shares. The Fund shall trade the Registered OTC only with Korean nationals or foreigners treated as Korean nationals (as defined in the regulations of KSEC) through Korean securities companies as intermediary and may rely on information provided by such securities companies with respect to the status of the counter-parties to such trades. (4) If any of the matters set forth above in paragraphs (1) through (3) comes to be permitted under a provision of law or regulation applicable to investment by foreigners, or to be permitted otherwise by KSEC, then, to the extent permitted to other foreigners, such matters shall be permitted to the Fund. (5) The Fund may invest in securities index futures market which will be established in Korea, and such investment shall be made in accordance with the regulations which apply to foreigners' investment or as otherwise permitted by KSEC." EX-99.K.III 9 FORM OF INFORMATION AGENT AGREEMENT 1 [GEORGESON & COMPANY, INC. LETTERHEAD] Exhibit k(iii) March 25, 1997 The Korea Fund, Inc. 345 Park Avenue New York, NY 10154 LETTER OF AGREEMENT This Letter of Agreement (the "Agreement") sets forth the terms and conditions under which Georgeson & Company Inc. ("Georgeson") has been retained by The Korea Fund, Inc. ("The Korea Fund") as Information Agent for its rights offer (the "Offer"). The term of the Agreement shall be the term of the Offer, including any extensions thereof. 1. During the term of the Agreement, Georgeson will: provide advice and consultation with respect to the planning and execution of the Offer; assist in the preparation and placement of newspaper ads; assist in the distribution of Offer documents to brokers, banks, nominees, institutional investors, and other shareholders and investment community accounts; answer collect telephone inquiries from shareholders and their representatives; and, if requested, call individuals who are registered holders. 2. The Korea Fund will pay Georgeson a fee of $7,500.00, of which half is payable in advance per the enclosed invoice and the balance at the expiration of the Offer, plus an additional fee to be mutually agreed upon if the Offer is extended more than fifteen days beyond the initial expiration date. If Georgeson is requested to call individuals who are registered holders of Common Stock of The Korea Fund, The Korea Fund, Inc. will pay Georgeson an additional sum computed on the basis of $6.00 per call. 3. In connection with our services under this agreement, you agree to reimburse us, or pay directly, or, where requested by us, advance sufficient funds to us for payment for the following reasonable costs and expenses: --expenses incidental to the Offer, including typesetting, printing, distribution, mailing, postage and freight charges incurred by us on your behalf; --expenses we incur in working with your agents or other parties, including bank threshold lists, data processing, charges for facsimile transmissions or other forms of electronic communications, charges of courier, and other such services authorized by you; --expenses we incur at your request or for your convenience,including printing additional and/or supplemental material, copying, and travel expenses of our executives; --fees and expenses authorized by you resulting from extraordinary contingencies during the solicitation, including advertising, media relations, stock watch and analytical services. 2 The Korea Fund, Inc. March 25, 1997 Page 2 4. If requested, we will check, itemize and pay, on your behalf, from funds provided by you, the charges of brokers and banks, with the exception of ADP Proxy Services which will bill you directly, for forwarding Offer material to beneficial owners. To ensure that we have sufficient funds in your account to pay these bills promptly, you agree to provide us, at the time we complete the initial delivery of this material, with a preliminary payment equal to 75% of the anticipated broker and bank charges for distributing this material. For this service, you will pay us five dollars and fifty cents ($5.50) for each broker and bank invoice paid by us. If you prefer to pay these bills directly, please strike out and initial this clause before returning the Agreement to us. 5. Georgeson hereby agrees not to make any representations not included in the Korea Fund's Registration Statement when it becomes effective. 6. The Korea Fund agrees to indemnify and hold Georgeson harmless against any loss, damage, expense (including, without limitation, reasonable legal fees and expenses), liability or claim arising out of Georgeson's fulfillment of the Agreement (except for any loss, damage, expense, liability or claim arising out of Georgeson's own negligence or misconduct or failure to substantially perform any of its duties or obligations under this Agreement). At its election, The Korea Fund may assume the defense of any such action. Georgeson hereby agrees to advise The Korea Fund of any such liability or claim promptly after receipt of any notice thereof. The Korea Fund shall not be liable for any settlement of any action without its written consent. The indemnification contained in this paragraph will survive the term of the Agreement for a period of three years from the date hereof. 7. Georgeson agrees to preserve the confidentiality of all non-public information provided by The Korea Fund or its agents for our use in providing services under this Agreement, or information developed by Georgeson based upon such non-public information. IF THE ABOVE IS AGREED TO BY YOU, PLEASE SIGN AND RETURN THE ENCLOSED DUPLICATE OF THIS AGREEMENT TO GEORGESON & COMPANY INC., WALL STREET PLAZA, NEW YORK, NEW YORK 10005, ATTENTION: MARCY ROTH, CONTRACT ADMINISTRATOR. ACCEPTED: Sincerely, THE KOREA FUND, INC. GEORGESON & COMPANY INC. By: By: ------------------------------- --------------------------------- Kay DeAngelis Senior Managing Director Title: ---------------------------- Date: ---------------------------- EX-99.L 10 OPINION OF DEBEVOISE & PLIMPTON 1 Exhibit l [Debevoise & Plimpton Letterhead] March 25, 1997 The Korea Fund, Inc. 345 Park Avenue New York, New York 10154 The Korea Fund, Inc. Registration Statement on Form N-2 Ladies and Gentlemen: We have acted as counsel for The Korea Fund, Inc., a Maryland corporation (the "Fund"), in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act") of a Registration Statement on Form N-2 (File Nos. 333-22595 and 811-4058) (the "Registration Statement"), relating to the issuance of transferable rights (the "Rights") for the purchase of shares of common stock of the Fund, par value $.01 per share (the "Shares"). In so acting, we have examined and relied upon the originals, or copies certified or otherwise identified to our satisfaction, of such documents, records, certificates and other instruments and have made such other investigations as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. 2 The Korea Fund, Inc. 2 March 25, 1997 We are of the opinion that the Shares have been duly authorized for issuance and, when issued and paid for pursuant to the terms set forth in the Registration Statement, will be validly issued, fully paid and non-assessable. We consent to the filing of this opinion as an Exhibit to Amendment No. 19 to the Registration Statement and to the reference to us under the heading "Validity of the Shares" in the Prospectus forming a part of the Registration Statement. In giving such consent, we do not hereby concede that we are within the category of persons whose consent is required under Section 7 of the Act or Rules and Regulations of the Commission thereunder. Very truly yours, Debevoise & Plimpton EX-99.N.1 11 OPINION OF SHIN & KIM 1 Exhibit n(i) [SHIN & KIM LETTERHEAD] March 25, 1997 The Korea Fund, Inc. 345 Park Avenue New York, NY 10154 U.S.A. Korean Taxes Applicable to The Korea Fund, Inc. and the Operation of its Business ------------------------------------------------------ Dear Sirs: We have acted as legal advisers in the Republic of Korea ("Korea") to The Korea Fund, Inc. (the "Company") and to Daewoo Capital Management Co., Ltd. (the "Korean Adviser") in connection with the offering of shares of common stock of the Company. We hereby consent to the reference to our firm under the headings, "Taxation - Korean Taxes" and "Validity of the Shares", in the Prospectus constituting a part of the Company's Registration Statement on Form N-2 and to the filing of this opinion with the United States Securities and Exchange Commission as an exhibit to the Company's Registration Statement on Form N-2. This opinion is confined to, and given on the basis of, Korean law as currently enforced by the relevant authorities and applied by the courts in Korea. We have made no independent investigation of the laws of the United States that govern the taxation of the Company, and we do not express or imply any opinion on the laws of any other jurisdiction. We have assumed that there is nothing in the law of any other place which will affect this opinion. All terms used herein have the meanings set forth in the Prospectus or the Dealer Manager Agreement between the Company and the Dealer Manager. For the purposes of this opinion, we have examined the following documents: 1. The Company's Registration Statement on Form N-2 (Registration No. 333-22595) under the Securities Act of 1933, as amended, and Amendment No. 18 to the Company's Registration Statement under the Investment Company Act of 1940, as amended, including the Prospectus for the offering of shares of common stock of the Company and the Exhibits attached thereto; 2. The License, Approval and Confirmation, dated June 22, 1984, issued by the Minister of Finance and Economy of Korea to the Company, Scudder, Stevens & Clark, Inc. (the "Manager"), and the Korean Adviser; 3. The Amendment, dated April 11, 1986, to the License, Approval and Confirmation, dated June 22, 1984, issued by the Minister of Finance and Economy of Korea; 4. The Amendment, dated August 3, 1989, to the License, Approval and Confirmation, dated June 22, 1984, issued by the Minister of Finance and Economy of Korea; 5. The Amendment, dated October 7, 1992, to the License, Approval and Confirmation, dated June 22, 1984, issued by the Minister of Finance and Economy of Korea; 6. The Amendment, dated October 20, 1993, to the License, Approval and Confirmation, dated June 22, 1984, issued by the Minister of Finance and Economy of Korea; 7. The Amendment, dated May 12, 1995, to the License, Approval and Confirmation, dated June 22, 1984, issued by the Minister of Finance and Economy of Korea; 8. The Amendment, dated March 30, 1996, to the License, Approval and Confirmation, dated June 22, 1984, issued by the Minister of Finance and Economy of Korea; 2 9. The Amendment, dated September 30 1996, to the License, Approval and Confirmation, dated June 22, 1984, issued by the Minister of Finance and Economy of Korea; 10. The Amendment, dated February 28, 1997, to the License, Approval and Confirmation, dated June 22, 1984, issued by the Minister of Finance and Economy of Korea; 11. The Response to Inquiry Regarding Korean Tax Treatment of The Korea Fund, Inc., dated November 17, 1993, issued by the Minister of Finance and Economy of Korea; 12. The Response to Inquiry Regarding Korean Tax Treatment of The Korea Fund, Inc., dated May 23, 1995, issued by the Minister of Finance and Economy of Korea; and 13. The opinion of Debevoise & Plimpton pertaining to the United States taxation of investment companies such as the Company, dated March 24, 1997. In giving this opinion, we have assumed in relation to the documents listed above the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity with the originals of all documents submitted to us as copies thereof, and we have found nothing to indicate that such assumptions are not fully justified. We have also assumed that the representations and warranties (other than as to matters of Korean law) made by the Company in the Dealer Manager Agreement are true and correct and that the shares of common stock will be duly registered, issued, offered and sold. As to any other matters of fact material to the opinions expressed herein, we have relied upon the statements of officers and other representatives of the Company, the Manager, the Korean Adviser and the appropriate governmental ministries and agencies. Based upon and subject to the foregoing and the qualifications set forth below, we are of the opinion that: 1. The information in the Prospectus, to the extent that it relates to Korean taxes, has been reviewed by us and is an accurate description of Korean taxes applicable to the Company and the operation of its business as described in the Prospectus and such information does not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. In rendering this opinion, we have relied upon the opinion of Debevoise & Plimpton that since the date on which the United States of America - Republic of Korea Income Tax Treaty was signed, the United States has enacted no special measures by reason of which the United States tax imposed on dividend, interest, royalty and capital gains income of investment companies such as the Company is substantially less than the tax imposed by the United States on corporate profits. 3 2. As for the shareholders of the Company, no Korean withholding tax will in any event be applicable to any payments by the Company to its shareholders and no capital gains tax will be payable with respect to gains on sales of shares of the Company held by (1) individuals who are not Korean nationals nor domiciled in Korea; (2) foreign corporations that have no place of business in Korea or (3) foreign partnerships, foreign trusts or foreign estates, all of whose partners or beneficiaries, as the case may be, are persons described in Clauses (1), (2) or (3) (all persons described in Clauses (1), (2) or (3) being hereinafter referred to as "Non-Korean Shareholders"). Non-Korean Shareholders will not be subject to income tax or corporate tax with respect to any distributions from the Company or gains on sales of shares of the Company. Except as described in the Prospectus and by us above, under Korean law presently in force, neither the Company nor any Non-Korean Shareholders will be subject to any Korean taxes upon or with respect to the operations or conduct of business by the Company, the income, profits, receipts or gains derived by the Company, the ownership by the Company of stocks and securities of Korean corporations, the ownership of shares of the Company or the receipt of distributions with respect thereto, or otherwise upon or with respect to the contemplated transactions. This opinion is subject to the qualification that we have not been responsible for investigating or verifying the accuracy of the facts, or the reasonableness of any statement of opinion, contained in the Prospectus, or that no material facts have been omitted therefrom, other than to the extent that such relates to matters of Korean law, legal conclusions or taxation. This opinion is given on the basis that it will be governed by, and be construed and have effect in accordance with, Korean law. This opinion is limited to the matters addressed herein and is not to be read as an opinion with respect to any other matter. Very truly yours, [Signature] Shin & Kim EX-99.N.II 12 CONSENT OF COOPERS & LYBRAND L.L.P. 1 Exhibit n(ii) CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of The Korea Fund, Inc.: We consent to the inclusion in Pre-Effective Amendment No. 1 to the Registration Statement of The Korea Fund, Inc. on Form N-2 (File No. 811-4058) of our report dated February 24, 1997 on our audits of the financial statements and financial highlights of the Fund for the six months ended December 31, 1996, and for the year ended June 30, 1996, which are included in the Registration Statement. We also consent to the reference to our Firm under the captions "Financial Highlights" and "Experts" in the Prospectus. Coopers & Lybrand L.L.P. Boston, Massachusetts March 24, 1997 EX-99.N.X 13 AMENDMENT TO LICENSE (3/30/96) 1 Exhibit n (x) MINISTRY OF FINANCE AND ECONOMY Document No.: JEUNGJAE 41610-57 Enforcement Date: March 30, 1996 To: Dr. Young Moo Shin and Law Offices of Shin & Kim Re: Amendment to the License for Investment in Korean Securities Regarding The Korea Fund, and The Korea- Europe Fund Limited - -------------------------------------------------------------------------------- 1. Reference is made to your letters, SEJONG NO. 96-0351 (dated March 27, 1996) and SEJONG NO. 96-0354 (dated March 28, 1996. 2. Pursuant to Article 203 of the Securities and Exchange Act and Article 10-66 of the Foreign Exchange Management Regulations, we hereby approve the investment in Korean securities by The Korea Fund, Inc. and The Korea-Europe Fund Limited as set forth in the attached. Attachment: A copy of the "Amendment to the License, Approval and confirmation Regarding The Korea Fund, Inc." and a copy of the "Amendment to the Approval for Investment by The Korea-Europe Fund Limited." Minister of Finance and Economy (Official Seal Affixed) 2 To: The Korea Fund, Inc. Re: Amendment to the License, Approval and Confirmation of The Korea Fund, Inc. ------------------------------------ The Minister of Finance and Economy, on behalf of the Government of the Republic of Korea, pursuant to Korean law presently in force, hereby amends the License, Approval and Confirmation dated June 22, 1984, as amended on April 11, 1986, August 2, 1989, October 7, 1992, October 20, 1993 and May 12, 1995 (as amended, the "License") as set forth below. In all other respects, the License remains unchanged and in full force and effect, and the confirmations made therein are repeated as of the date of this Amendment. 1. Paragraph 4. D of the License, setting forth the limit on investments in securities of an individual issuer, is deleted in its entirety and replaced with the following new Paragraph 4. D: "D. Limits on Investments --------------------- 1) The Fund shall not acquire shares of a Korean issuer if, as a result of such acquisition, the Fund would hold in excess of 5% of the shares then outstanding of any class of stock of the issuer. 2) The Fund shall not acquire listed bonds (as defined in the regulations of KSEC) if, as a result of such acquisition, the Fund's holdings of such, listed bonds would have a value (calculated at the time of acquisition) in excess of 10% of the net asset value of the Fund (as such value is calculated as at the date of such acquisition). 3) The Fund is permitted to acquire unlisted shares which are registered with the Korea Securities Dealers Association for the trading on the over-the-counter market in Korea (the "Registered OTC Shares"): provided that the Fund shall not acquire the Registered OTC Shares if, as a result, more than 25% of the net asset value of the Fund (as such value is calculated as at the date of such acquisition) would be invested in the Registered OTC Shares in aggregate or more than 5% of the net asset value of the Fund (as such value is calculated as at the date of such acquisition) would be invested in any class of the Registered OTC Shares. The Fund shall trade the Registered OTC Shares only with Korean nationals or foreigners treated as Korean nationals (as defined in the regulations of KSEC) through Korean securities companies as intermediary and may rely on information provided by such securities companies with respect to the status of the counter-parties to such trades. 4) If any of the matters set forth above in paragraphs (1) through (3) comes to be permitted under a provision of law or regulation applicable to investment by foreigners, or to be permitted otherwise by KSEC, then, to the extent permitted to other foreigners, such matters shall be permitted to the Fund. 5) The Fund may invest in securities index futures market which will be established in Korea, and such investment shall be made in accordance with the regulations which apply to foreigners' investment or as otherwise permitted by KSEC." EX-99.N.XI 14 AMENDMENT TO LICENSE (2/28/97) 1 Exhibit n(xi) [Translation] MINISTRY OF FINANCE AND ECONOMY Document No.: JEUNGJAE 41296-20 Enforcement Date: February 28, 1997 To: Young Moo Shin, Esq. and Law Offices of Shin & Kim Re: Amendment to the Approval of the Investment in Korean Securities Regarding The Korea Fund, Inc. - ------------------------------------------------------------------------- 1. Reference is made to your letter, SEJONG NO. 97-0212 (dated February 26, 1997). 2. Pursuant to Article 303 of the Securities and Exchange Act and Article 10-66 of the Foreign Exchange Management Regulations, we hereby approve the investment in Korean securities by the Korea Fund, Inc. of the proceeds of its sixth offering as set forth in the attached. Attachment: A copy of the "Amendment to the License, Approval and Confirmation Regarding The Korea Fund, Inc." MINISTER OF FINANCE AND ECONOMY (Official Seal Affixed) 2 To: The Korea Fund, Inc. Scudder, Stevens & Clark, Inc. Daewoo Capital Management Co., Ltd. Re: Amendment to the Licence, Approval and Confirmation of The Korea Fund, Inc. We understand that The Korea Fund, Inc. (the "Fund") has proposed to increase its capital through a stock offering of its Common Stock to its shareholders (the "Six Offering"). Shares of such Common Stock will be offered in the Six Offering with the aggregate increase in capital (i.e. gross subscription price) of not more than US$200 million. The Minister of Finance and Economy, on behalf of the Government of the Republic of Korea, pursuant to Korean law presently in force, hereby amends the Licence, Approval and Confirmation dated June 22, 1984, as amended on April 11, 1986, August 2, 1989, October 7, 1992, October 20, 1993, May 12, 1995, March 30, 1996 and September 30, 1996 (as amended, the "License") as set forth below. In all other respects, the Licence remains unchanged and in full force and effect, and the confirmations made therein are repeated as of the date of this Amendment. 1. The permission granted by Paragraph 1.A of the License shall extend as well to the investment of proceeds from the Sixth Offering. 2. The following new sentence shall be added to the end of Paragraph 1.A of the Licence: "The Fund may purchase shares in initial public offering on the same basis as Korean domestic institutional investors." 3. The limit on investments in listed bonds set forth in Paragraph 4.D.2) of the License shall be changed from 10% to 20%. -----END PRIVACY-ENHANCED MESSAGE-----