<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 1996
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-4893
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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. [_]
POST-EFFECTIVE AMENDMENT NO. [_]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 27 [X]
(CHECK APPROPRIATE BOX OR BOXES)
---------------
THE TAIWAN FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
225 FRANKLIN STREET
BOSTON, MASSACHUSETTS 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES IN UNITED STATES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 1-800-426-5523
---------------
LAURENCE E. CRANCH, ESQ.
ROGERS & WELLS
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------
WITH COPIES TO:
ANTONIA E. STOLPER, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
---------------
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. [_]
It is proposed that this filing will become effective (check the following
box, if appropriate)
[_] when declared effective pursuant to Section 8(c).
If appropriate, check the following box:
[_] this amendment designates a new effective date for a previously filed
registration statement.
[X] This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933 and the
Securities Act registration statement number of the earlier effective
registration statement for the same offering is 333-2697.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 Par
Value................. 350,297 Shares(1) $22.42 $7,853,659 $2,708
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 45,691 shares subject to the Underwriters' over-allotment option.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
THE TAIWAN FUND, INC.
FORM N-2
CROSS-REFERENCE SHEET
PARTS A AND B OF THE PROSPECTUS
<TABLE>
<CAPTION>
ITEMS IN PART A OF FORM N-2 LOCATION IN PROSPECTUS
--------------------------- ----------------------
<S> <C>
1. Outside Front Cover............. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Page...................... Inside Front and Outside Back Cover Page of
Prospectus
3. Fee Table and Synopsis.......... Expense Information
4. Financial Highlights............ Financial Highlights
5. Plan of Distribution............ Outside Front Cover Page of Prospectus;
Underwriting
6. Selling Stockholders............ Not Applicable
7. Use of Proceeds................. Use of Proceeds
8. General Description of the Reg-
istrant......................... Outside Front Cover Page of Prospectus; The
Fund; Investment Objective and Policies;
Risk Factors and Special Considerations;
Common Stock
9. Management...................... Management of the Fund; Common Stock;
Custodians; Transfer Agent, Dividend Paying
Agent and Registrar
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
<CAPTION>
LOCATION IN STATEMENT
ITEMS IN PART B OF FORM N-2 OF ADDITIONAL INFORMATION
--------------------------- -------------------------
<S> <C>
14. Cover Page...................... Front Cover Page
15. Table of Contents............... Table of Contents
16. General Information and History. The Fund in the Prospectus
17. Investment Objective and Poli-
cies............................ Investment Objective and Policies;
Investment Limitations
18. Management...................... Management of the Fund
19. Control Persons and Principal
Holders of Securities......,.... Management of the Fund
20. Investment Advisory and Other
Services........................ Management of the Fund; Custodians;
Transfer Agent, Dividend Paying Agent and
Registrar; Experts in the Prospectus
21. Brokerage Allocation and Other
Practices....................... Portfolio Transactions and Brokerage
22. Tax Status...................... Taxation
23. Financial Statements............ Financial Statements
</TABLE>
- --------
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
1,338,091 SHARES
THE TAIWAN FUND, INC.
COMMON STOCK
----------------
The Taiwan Fund, Inc. (the "Fund") is a diversified, closed-end management
investment company which commenced operations in December 1986 following the
initial public offering of its common stock, par value $0.01 per share
("Common Stock"). Its investment objective is long-term capital appreciation
through investment primarily in equity securities listed on the Taiwan Stock
Exchange (the "TSE") in the Republic of China (the "ROC"). See "Investment
Objective and Policies." There can be no assurance that the Fund's investment
objective will be achieved. INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS
WHICH ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN THE UNITED STATES,
INCLUDING A HIGH DEGREE OF STOCK PRICE VOLATILITY IN THE ROC SECURITIES
MARKETS. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS." The Fund's investment
adviser is China Securities Investment Trust Corporation, an ROC corporation
(the "Adviser"). The address of the Fund in the United States is 225 Franklin
Street, Boston, Massachusetts 02110 and its telephone number is
(800) 426-5523.
The Fund's currently outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby (the "Shares"), subject to notice of issuance,
will be, listed on the New York Stock Exchange (the "NYSE") under the symbol
"TWN." The net asset value per share of the Fund's Common Stock at the close
of business on May 2, 1996 was $21.11 and the last reported sale price of a
share of the Fund's Common Stock on the NYSE on that date was $22.75. See
"Market and Net Asset Value Information."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated May 3, 1996 (the
"SAI"), containing additional information about the Fund, has been filed with
the Securities and Exchange Commission and is incorporated by reference in its
entirety into this Prospectus. A copy of the SAI, the table of contents of
which appears on page 36 of this Prospectus, may be obtained without charge by
calling the Fund's Shareholder Servicing Agent, Corporate Investors
Communications, Inc. at (800) 636-9242.
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO PUBLIC SALES LOAD(1) FUND(1)(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................ $22.42 $1.12 $21.30
- --------------------------------------------------------------------------------
Total Maximum(3)..................... $30,000,000 $1,498,662 $28,501,338
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Fund has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deduction of offering expenses incurred by the Fund, estimated at
$268,000, including $75,000 to be paid to the Underwriters in partial
reimbursement for their expenses.
(3) The Underwriters have been granted an option to purchase up to an
aggregate of 200,714 additional Shares, solely to cover over-allotments.
If this option is exercised in full, the total public offering price will
be $34,500,008, the sales load will be $1,723,462, and the proceeds to the
Fund will be $32,776,546 before the payment of expenses. See
"Underwriting."
The Shares are offered by the several Underwriters subject to prior sale
when, as and if delivered to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters
reserve the right to reject orders in whole or in part. It is expected that
delivery of the Shares will be made in New York, New York on or about May 8,
1996.
----------------
KLEINWORT BENSON NORTH AMERICA INC. ASIAN CAPITAL PARTNERS
PAINEWEBBER INCORPORATED ING BARINGS
----------------
The date of this Prospectus is May 3, 1996.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKETS OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
In this Prospectus, unless otherwise specified, all references to "U.S.
Dollars," "US$" or "$" are to United States Dollars and to "NT$" or "NT
Dollars" are to New Taiwan Dollars. The foreign exchange rate for transfers in
NT Dollars was NT$27.17 = US$1.00, as quoted in the Taipei Foreign Exchange
Market on May 2, 1996. No representation is made that the NT$ or US$ amounts
in this Prospectus could have been or could be converted into US$ or NT$, as
the case may be, at any particular rate or at all. See "Risk Factors and
Special Considerations--Currency Fluctuations" herein and "The Republic of
China--Foreign Exchange" in the SAI for additional information regarding
historical rates of exchange between the NT Dollar and the U.S. Dollar.
The Adviser has participated with the Fund in the preparation of this
Prospectus and SAI.
2
<PAGE>
PROSPECTUS SUMMARY
THE FUND................ The Taiwan Fund, Inc. (the "Fund") is a
diversified, closed-end management investment
company registered under the U.S. Investment
Company Act of 1940, as amended (the "1940 Act").
The Fund is designed principally for U.S. and
other investors wishing to participate in the
Taiwan economy through investment in ROC
securities. See "The Fund."
INVESTMENT OBJECTIVE.... Long-term capital appreciation through investment
primarily in equity securities listed on the
Taiwan Stock Exchange (the "TSE"). See
"Investment Objective and Policies" and "The
Securities Market of the ROC" herein and in the
SAI.
THE OFFERING............ 1,338,091 shares of Common Stock. The
Underwriters have been granted an option to
purchase up to an aggregate of 200,714 additional
shares to cover over-allotments. See
"Underwriting."
LISTING................. New York Stock Exchange. The average weekly
trading volume of the Fund's shares on the New
York Stock Exchange during the period from
January 1, 1996 through May 2, 1996 was 522,029
shares. See "Market and Net Asset Value
Information."
SYMBOL.................. TWN
INVESTMENT ADVISER...... China Securities Investment Trust Corporation
(the "Adviser"), which manages the investments of
the Fund pursuant to a management contract, is an
ROC corporation registered under the U.S.
Investment Advisers Act of 1940, as amended (the
"Advisers Act"). As of December 31, 1995, the
Adviser has ten securities investment trust funds
(excluding the Fund) under management, with total
net assets of approximately NT$24.6 billion
(US$902.8 million) (excluding assets of the
Fund). See "Management of the Fund--The Adviser."
ADVISORY FEES AND
ESTIMATED EXPENSES.....
The Fund pays the Adviser a basic monthly fee at
the annual rate of 1.50% of the Fund's average
daily net assets, subject to monthly performance
adjustments which may increase or decrease the
basic fee (by up to 0.50% per annum of the Fund's
net assets) depending on the performance of the
Fund's investments compared with the performance
of the Taiwan Stock Exchange Index (the "TSE
Index"). This fee is higher than the advisory
fees paid by most other U.S. investment companies
primarily because of the additional time and
expense required of the Adviser in pursuing the
objective of investing in ROC securities.
Operating expenses of the Fund (exclusive of
amortization of organizational expenses) amounted
to $4,136,025, $6,066,785 and $7,037,225 for the
fiscal years ended August 31, 1993, 1994 and
1995, respectively.
DIVIDEND DISTRIBUTIONS
AND REINVESTMENT.......
The Fund intends to distribute to shareholders,
at least annually, substantially all of its net
investment income from dividends and interest
payments and also expects to distribute at least
annually its net realized capital gains, if any.
Shareholders may elect to have all distributions
3
<PAGE>
automatically reinvested in shares of the Fund.
See "Dividends and Distributions; Dividend
Reimbursement and Cash Purchase Plan."
CUSTODIANS.............. The International Commercial Bank of China (the
"Custodian"), a bank organized under ROC law,
acts as custodian for the Fund's NT Dollar-
denominated assets held in Taiwan. State Street
Bank and Trust Company acts as custodian for the
Fund's U.S. Dollar-denominated assets held in the
United States.
UNDERWRITERS............ The Shares are being offered by a group of
Underwriters led by Kleinwort Benson North
America Inc. Asian Capital Partners Limited has
acted as financial adviser to the Fund in
connection with this offering. See
"Underwriting."
RISK FACTORS AND
SPECIAL
CONSIDERATIONS.........
Investing in securities of ROC companies and the
ROC government involves certain risks not
typically associated with investing in securities
of U.S. companies or the U.S. government,
including (1) volatility of the Taiwan securities
market, (2) restrictions on repatriation of
capital invested in Taiwan, (3) currency
fluctuations, and (4) political and economic
risks. See "Risk Factors and Special
Considerations" for a fuller discussion of these
and other risks involved in an investment in the
Shares.
The growth in the ROC securities market over the
past decade has been accompanied during certain
periods by a high degree of stock price
volatility resulting in very large short-term
swings in the TSE Index. During periods when the
market has declined rapidly, such as in 1990, the
combination of reduced demand and TSE rules
confining daily movements in individual company
stock prices to fixed limits (currently 7%)
around the previous day's closing price has
greatly diminished market liquidity. Therefore,
it is extremely difficult to protect previously
unrealized capital gains as the Fund cannot
always sell portfolio securities at a time the
Adviser considers to be in the Fund's interest.
Also, share price increases and market volatility
have during previous periods resulted in
pervasive speculative short-term trading among
individual investors and have made it necessary
for the Fund to engage in short-term trading in
order to preserve investment gains. Although the
Adviser believes that there are fundamentally
sound long-term investment opportunities
available among the stocks listed on the TSE, and
that past volatility and speculation have been
reduced, volatility of the Taiwan securities
market is still high compared to the securities
markets of the United States and there is no
assurance that these past patterns of extreme
volatility will not return. Such volatility could
adversely affect the net asset value of the
Fund's shares. See "Risk Factors and Special
Considerations--Risks of Investing in ROC
Securities--Market Volatility."
The ROC government recently launched an NT$200
billion Government-sponsored stock market
stabilization fund (the "Stabilization Fund")
which is authorized to buy or sell securities on
the TSE in order to minimize fluctuations in the
prices or volumes of sales of listed securities.
As a result of the activities of the
Stabilization Fund, the market price and
liquidity of the securities of companies listed
on the TSE and the net asset value of the Fund
may be different than they otherwise might be in
the
4
<PAGE>
absence of such stabilization activities. As of
March 29, 1996, the Stabilization Fund had
invested approximately NT$70 billion in shares
listed on the TSE. See "Risk Factors and Special
Considerations--Risks of Investing in ROC
Securities--Market Volatility."
Since the initial public offering of shares by
the Fund in December 1986, the Fund's shares have
traded both at a premium and at a discount in
relation to net asset value. While the shares
recently have been trading at a premium and the
public offering price for the shares represents a
6.2% premium over the per share net asset value
on May 2, 1996, there can be no assurance that
this premium will continue after this offering or
that the shares will not again trade at a
discount. Shares of closed-end investment
companies frequently trade at a discount from net
asset value, but in some cases have traded above
net asset value. The risk of the shares of Common
Stock trading at a discount is a risk separate
from the risk of a decline in the Fund's net
asset value. See "Financial Highlights"; "Market
and Net Asset Value Information"; "Net Asset
Value"; and "Risk Factors and Special
Considerations--Net Asset Value Discount."
At the time the Fund was formed in 1986, it
represented the only vehicle publicly available
in the United States, and one of only four
vehicles world-wide, through which foreign
investors could make portfolio investments in
listed ROC securities. Since that time a number
of other alternatives to the Fund as a vehicle
for investment in ROC securities by foreign
investors have been developed. It has been the
ROC government's stated policy to liberalize
restrictions on foreign investment in its
securities markets, and the ROC government has
significantly eased restrictions on foreign
investment over the past several years. The
Adviser believes that the development of these
other alternatives to the Fund as a vehicle for
investment in ROC securities by foreign investors
may reduce any tendency of the shares to trade at
a premium in the future. See "Risk Factors and
Special Considerations--Investment and
Repatriation Restrictions."
The Fund's assets are invested primarily in ROC
securities and substantially all income is
received in NT Dollars. However, the Fund will
compute and distribute its income in U.S.
Dollars, and the computation of income will be
made on the date of its receipt by the Fund at
the foreign exchange rate in effect on that date.
Therefore, if the value of the foreign currencies
in which the Fund receives its income falls
relative to the U.S. Dollar between receipt of
the income and the making of Fund distributions,
the Fund will be required to liquidate securities
in order to make distributions if the Fund has
insufficient cash in U.S. Dollars to meet
distribution requirements. See "Risk Factors and
Special Considerations--Risks of Investing in ROC
Securities--Currency Fluctuations" and "Dividends
and Distributions; Dividend Reinvestment and Cash
Purchase Plan." From January 1990 to December
1995, the NT Dollar rate fluctuated within the
range of NT$24.50 = US$1 and NT$27.50 = US$1. On
May 2, 1996, the exchange rate was NT$27.17 =
US$1. See "The Republic of China--Currency and
Exchange Rates" herein and "The Republic of
China--Foreign Exchange--Currency" in the SAI.
5
<PAGE>
The Fund is currently restricted by its
investment limitations from engaging in currency
hedging transactions, and is therefore limited in
its ability to protect its portfolio against
foreign currency exchange rate risk. The Fund's
board of directors at a meeting held on December
1, 1995, approved an amendment to the Fund's
investment limitations to permit the Fund to
engage in currency hedging transactions, subject
to shareholder approval. The board of directors
expects to submit the proposed amendment at the
next annual shareholders' meeting to be held in
1997. There can be no assurance that the
shareholders will vote to approve such proposal.
See "Risk Factors and Special Considerations--
Risks of Investing in ROC Securities--Currency
Fluctuations" herein and "Investment Limitations"
in the SAI.
The ROC government regulates foreign exchange
transactions, and authorization is necessary for
non-trading overseas remittances of foreign
exchange in excess of $5 million (in the case of
individuals) and of $20 million (in the case of
corporate entities) per year. See "The Republic
of China--Foreign Exchange--Exchange Controls" in
the SAI.
The securities market in Taiwan has become
increasingly sensitive to political and economic
developments in the People's Republic of China
(the "PRC"), and such developments, including,
among other things, changes in leadership, could
have an impact on the Fund. The PRC has
repeatedly indicated that it would resort to
force to gain control over Taiwan if Taiwan
should take any concrete steps toward political
independence, or if the political and social
situation in Taiwan should become destabilized.
Relations between the ROC and the PRC have
recently been strained as a result of PRC's
conduct of military exercises in the waters near
Taiwan during Taiwan's recent Presidential
election campaign and certain other matters.
There can be no assurance that relations will not
deteriorate in ways that could adversely affect
Taiwan's economy or lead to more volatility in
Taiwan's securities market. See "Risk Factors and
Special Considerations--Political and Economic
Factors."
Changes in tax legislation in either the United
States or the ROC may have an impact on the Fund.
During certain periods in the past, capital gains
derived from stock transactions have been subject
to tax in the ROC. In the latest imposition of
this capital gains tax for the one-year period
ended December 31, 1989, the Fund was exempt from
the tax until December 31, 1990 pursuant to an
earlier ROC government ruling. Since January 1,
1990, the capital gains tax has been suspended.
On January 4, 1996, the ROC Legislative Yuan
passed a bill for the amendment of the ROC Income
Tax Law that would have eliminated the exemption
from the ROC income tax for gains realized on the
sale of ROC securities and imposed a capital
gains tax. On January 12, 1996, this amendment
was repealed by the Legislative Yuan. The
reintroduction of a capital gains tax would
require the Legislative Yuan to engage in the
full legislative process for the enactment of tax
legislation. There can be no assurance that the
capital gains tax will not be imposed in the
future or that the Fund will continue to be
exempt from such tax.
6
<PAGE>
ROC accounting, auditing, financial and other
reporting standards are not equivalent to U.S.
standards and, therefore, certain material
disclosures may not be made and less information
may be available to investors investing in Taiwan
than in the United States. There is also
generally less governmental regulation of the
securities industry in Taiwan than in the United
States. See "Risk Factors and Special
Considerations" and "Foreign Investment and
Exchange Controls in the ROC." Reference is also
made to "The Securities Market of the ROC" and
"The Republic of China" herein and in the SAI.
The registration of the Fund under the 1940 Act
and the registration of the Adviser under the
Advisers Act does not result in supervision or
management by the U.S. Securities and Exchange
Commission of the Fund's investment policies or
of the Adviser's practices. Under applicable ROC
regulations, the arrangements between the Fund
and the Adviser and the Custodian relating to the
management and custody of the Fund's assets in
Taiwan are subject to the regulation and
supervision of the ROC Securities and Exchange
Commission (the "CSEC"). See "ROC Government
Supervision and Regulation of the Management
Contract and the Adviser" in the SAI.
7
<PAGE>
FEE TABLE
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price).................. 5.00%
Dividend Reinvestment and Cash Purchase Plan Fees............... *
ANNUAL EXPENSES (as a percentage of net assets attributable to
Common Stock)(1)
Management fees (excluding performance adjustment)(2)........... 1.50%
Other expenses(1)............................................... 0.48%
Administration fees(3)........................................ 0.06%
Other operating expenses...................................... 0.42%
Total annual expenses............................................. 1.98%
</TABLE>
- --------
* No transaction expenses are included with respect to the Fund's DRIP Plan
(as defined) because, except for brokerage commissions and a fee of $0.75
per purchase transaction imposed upon purchases made by the Plan Agent (as
defined) on behalf of the Fund's shareholders pursuant to DRIP Plan, the
Fund pays all expenses incurred in the administration of the DRIP Plan. See
"Dividends and Distributions--Dividend Reinvestment and Cash Purchase Plan."
(1) Amounts are based on the Fund's most recently completed fiscal year ended
August 31, 1995, except that "Other Expenses" are based on estimated
amounts for the Fund's current fiscal year.
(2) See "Management of the Fund--The Adviser" herein.
(3) See "Management of the Fund--Fund Administration and Expenses" herein.
The foregoing table is intended to assist investors in understanding the
costs and expenses that an investor in the Fund will bear directly or
indirectly.
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF
-------------------------------------------------
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000
investment, assuming a 5%
annual return............. $70 $110 $153 $271
</TABLE>
The Example set forth above assumes reinvestment of all dividends and
distributions at net asset value and an expense ratio of 1.98%. The tables
above and the assumption in the Example of a 5% annual return are required by
the U.S. Securities and Exchange Commission regulations applicable to all
investment companies. The Example should not be considered a representation of
past or future expenses or annual rates of return. Actual expenses or annual
rates of return may be more or less than those assumed for purposes of the
Example. 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 (the "DRIP Plan") may receive shares
purchased or issued at a price or value different from net asset value. See
"Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan."
8
<PAGE>
FINANCIAL HIGHLIGHTS+
Set forth below is selected financial information, including ratios, for a
share of Common Stock outstanding throughout the periods indicated. The
information set forth below has been audited by Coopers & Lybrand L.L.P., the
Fund's independent accountants. Their report is included in the financial
statements and financial highlights of the Fund appearing in the SAI. All of
the information set forth below should be read in conjunction with the
financial statements and financial highlights of the Fund included in the SAI.
<TABLE>
<CAPTION>
SIX EIGHT
MONTHS MONTHS
ENDED YEARS ENDED AUGUST 31, ENDED
FEBRUARY 29, ------------------------------------------------- AUGUST 31,
1996 1995 1994 1993 1992 1991
------------ -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value,
beginning of period... $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51
-------- -------- -------- -------- -------- --------
Income From Investment
Operations
Net investment income
(loss)............... (0.06)** (0.19) (0.24) 0.20 0.06 (0.10)
Net realized and
unrealized gain
(loss) on
investments.......... (0.56) (7.27) 14.20 (1.70) (0.20) 1.84
-------- -------- -------- -------- -------- --------
Total from investment
operations........... (0.62) (7.46) 13.96 (1.50) (0.14) 1.74
-------- -------- -------- -------- -------- --------
Less Distributions
From net investment
income............... (0.03) -- (0.14) (0.12) -- --
In excess of net
investment income.... -- -- (0.01) -- -- --
From net realized
gains................ -- (5.88) -- -- -- --
In excess of net
realized gains....... -- (0.21) -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions.... (0.03) (6.09) (0.15) (0.12) -- --
-------- -------- -------- -------- -------- --------
Antidilution/(dilution)
resulting from
additional offering of
shares at market and
reinvestment of
dividends at market... -- (0.40) 0.44 -- 0.46 2.07
Offering expenses...... -- (0.03) (0.05) -- (0.31) (0.65)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period................ $ 17.63 $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67
======== ======== ======== ======== ======== ========
Market value, end of
period................ $ 21.13 $ 21.63 $ 31.88 $ 20.13 $ 17.88 $ 24.13
======== ======== ======== ======== ======== ========
Total Return++
Per share market
value................. (2.2)% (12.0)% 59.2 % 13.3% (25.9)% 17.7 %
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of
period (000 omitted).. $261,405 $271,095 $363,723 $145,190 $158,168 $124,974
Ratio of expenses to
average net assets.... 1.82 %+++ 2.43 %+++ 2.49 %+++ 2.67%+++ 2.94 %+++ 3.47 %*
Ratio of net investment
income (loss) to
average net assets.... (0.69)%* (0.78)% (1.01)% 1.05% 0.29 % (0.79)%*
Portfolio turnover
rate.................. 53 % 159 % 267 % 163% 129 % 298 %*
Annual commission
rate***............... $ 0.002 -- -- -- -- --
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1990 1989 1988 1987
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value,
beginning of period... $ 22.35 $ 22.23 $ 17.32 $ 11.07
--------- --------- --------- ---------
Income From Investment
Operations
Net investment income
(loss)............... 0.56 (0.24) (0.36) (0.39)
Net realized and
unrealized gain
(loss) on
investments.......... (6.16) 15.06 11.70 13.90
--------- --------- --------- ---------
Total from investment
operations........... (5.60) 14.82 11.34 13.51
--------- --------- --------- ---------
Less Distributions
From net investment
income............... (0.53) -- -- --
In excess of net
investment income.... -- -- -- --
From net realized
gains................ (1.16) (14.75) (10.35) (7.26)
In excess of net
realized gains....... -- -- -- --
--------- --------- --------- ---------
Total distributions.... (1.69) (14.75) (10.35) (7.26)
--------- --------- --------- ---------
Antidilution/(dilution)
resulting from
additional offering of
shares at market and
reinvestment of
dividends at market... 2.03 0.05 3.97 --
Offering expenses...... (0.58) -- (0.05) --
--------- --------- --------- ---------
Net asset value, end of
period................ $ 16.51 $ 22.35 $ 22.23 $ 17.32
========= ========= ========= =========
Market value, end of
period................ $ 20.50 $ 49.75 $ 34.88 $ 31.38
========= ========= ========= =========
Total Return++
Per share market
value................. (55.7)% 103.4 % 48.6 % 115.6 %
RATIOS AND SUPPLEMENTAL
DATA
Net assets, end of
period (000 omitted).. $69,597 $66,914 $66,040 $41,178
Ratio of expenses to
average net assets.... 2.34 % 2.11 % 2.50 % 3.75 %
Ratio of net investment
income (loss) to
average net assets.... 2.80 % (0.69)% (1.31)% (2.03)%
Portfolio turnover
rate.................. 226 % 169 % 141 % 203 %
Annual commission
rate***............... -- -- -- --
</TABLE>
- --------
* Annualized
** Investment income per share reflects a regular dividend from China Steel
Corp. of $0.05 per share.
*** For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
+ Based on average shares outstanding during the period.
++ Total returns for periods of less than one year are not annualized.
+++ Expense ratio includes 20% tax paid on stock dividends received by the
Fund. If stock dividend tax were excluded from the Fund's expense ratio,
the expense ratio would have been 2.02%, 2.28%, 2.49% and 2.71%, for the
years ended August 31, 1995, 1994, 1993 and 1992, respectively.
9
<PAGE>
MARKET AND NET ASSET VALUE INFORMATION
The Fund's currently outstanding shares of Common Stock are, and the Shares
offered by this Prospectus, subject to notice of issuance, will be, listed on
the NYSE. Shares of the Fund's Common Stock commenced trading on the NYSE on
December 1, 1988. Prior to that time, the Fund's Common Stock was listed on the
American Stock Exchange.
In the past, the Fund's shares have traded both at a premium and at a
discount in relation to net asset value. Although the Fund's shares recently
have been trading at a premium above net asset value, there can be no assurance
that this will continue after the offering or that the shares will not again
trade at a discount. It has been the ROC government's stated policy to
liberalize restrictions on foreign investment in its securities markets, and
the ROC government has significantly eased restrictions on foreign investment
over the past several years. The Adviser believes that the development of
alternatives to the Fund as a vehicle for investment in ROC securities by
foreign investors may reduce any tendency of the shares to trade at a premium
in the future. See "Foreign Investment and Exchange Controls in the ROC" in the
SAI and "The Securities Market of the ROC" herein and in the SAI. Shares of
closed-end investment companies frequently trade at a discount from net asset
value. See "Risk Factors and Special Considerations."
The following table shows for each of the periods indicated the high and low
market prices for shares of the Fund on the NYSE, high and low net asset values
per share and the premium or discount to net asset value per share at which the
Fund's shares were trading. Net asset value is determined on each business day
in Taiwan (defined to be a day on which the TSE is open for trading). See "Net
Asset Value" in the SAI for information as to the determination of the Fund's
net asset value.
MARKET PRICE, NET ASSET VALUE PER SHARE AND PREMIUM/(DISCOUNT) OF FUND SHARES
<TABLE>
<CAPTION>
PREMIUM/(DISCOUNT)
MARKET PRICE NET ASSET VALUE TO NET ASSET VALUE
------------- ---------------- ---------------------
THREE MONTHS ENDED HIGH LOW HIGH(1) LOW(1) HIGH(2) LOW(2)
- ------------------ ------ ------ -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
February 28, 1994........ 39 1/8 26 1/4 25.87 24.15 51.24 % 8.70 %
May 31, 1994............. 30 3/8 24 24.67 23.72 23.13 % 1.18 %
August 31, 1994.......... 33 26 3/4 28.41 24.71 16.16 % 8.26 %
November 30, 1994........ 31 1/2 25 1/4 32.18 29.36 (2.11)% (14.00)%
February 28, 1995........ 29 1/4 22 7/8 31.09 23.61 (5.92)% (3.11)%
May 31, 1995............. 23 1/2 19 3/4 24.07 22.91 (2.37)% (13.79)%
August 31, 1995.......... 24 5/8 20 1/4 22.21 19.63 10.87 % 3.16 %
November 30, 1995........ 23 1/2 19 7/8 19.81 17.96 18.63 % 10.66 %
February 29, 1996........ 23 5/8 20 18.93 17.44 24.80 % 14.68 %
</TABLE>
- --------
Source: Bloomberg Financial and Fund Accounting Records.
(1) Based on the net asset value calculated on the close of business on the
Thursday (or, if the NYSE was not open for trading on that Thursday, the
next day on which the NYSE was open for trading) prior to the indicated
market price high and low, respectively.
(2) Calculated based on the information presented.
The last reported sale price, net asset value per share and percentage
premium to net asset value per share of the Common Stock on May 2, 1996 were
$22.75, $21.11 and 7.8%, respectively. As of May 2, 1996, the Fund had
14,826,714 shares of Common Stock outstanding and the net assets of the Fund
were $312,986,985.
10
<PAGE>
THE FUND
The Fund, incorporated in Delaware in 1986, is a diversified, closed-end
management investment company registered under the 1940 Act. The Fund's
investment objective is long-term capital appreciation through investment
primarily in equity securities listed on the TSE. The Fund is advised by China
Securities Investment Trust Corporation, a ROC corporation registered as an
investment adviser under the Advisers Act. See "Management of the Fund--The
Adviser."
The Fund commenced operations on December 23, 1986 following an initial
public offering of 2,333,333 shares of its Common Stock. Since that time, the
Fund has completed a rights offering of 3,530,085 shares on June 19, 1995 with
an aggregate net proceeds to the Fund of $62,858,255 and five additional
public offerings of shares of its Common Stock in which an aggregate of
8,818,769 shares were sold with aggregate net proceeds to the Fund of
$210,551,752 and, since inception, the Fund has paid or declared dividends and
capital gains distributions aggregating approximately $169,490,000. As of May
2, 1996, the value of the Fund's net assets was $312,986,985. As of May 2,
1996, in excess of 90% of the Fund's net assets were invested in ROC equity
securities.
USE OF PROCEEDS
The net proceeds of this offering (estimated to be approximately $32,508,546
if the Underwriters' over-allotment option is exercised) will be invested
within two months from the date of this Prospectus in accordance with the
Fund's investment objective and the policies set forth under "Investment
Objective and Policies." Pending such investment, the proceeds will be
invested in NT Dollar-denominated bank deposits and money market instruments
in order to preserve liquidity and generate interest income for the Fund.
11
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following discusses risk factors and special considerations with respect
to this offering and with respect to investment in the Fund.
RISKS OF INVESTING IN ROC SECURITIES
Investing in securities of ROC companies and of the ROC government involves
certain risks not typically associated with investing in securities of U.S.
companies or the U.S. government, including (1) volatility of the Taiwan
securities market, (2) restrictions on repatriation of capital invested in
Taiwan, (3) fluctuations in the rate of exchange between the NT Dollar and the
U.S. Dollar, and (4) political and economic risks. In addition, ROC
accounting, auditing, financial and other reporting standards are not
equivalent to U.S. standards and, therefore, certain material disclosures may
not be made, and less information may be available to investors investing in
Taiwan than in the United States. There is also generally less regulation by
governmental agencies and self-regulatory organizations with respect to the
securities industry in Taiwan than there is in the United States.
Market Volatility
The growth in the ROC securities market over the past decade has been
accompanied during certain periods by a high degree of stock price volatility
resulting in very large short-term swings in the TSE Index. From January 1,
1986 to December 31, 1990, despite an overall market gain of 336%, the market
experienced numerous declines exceeding 15% of the then-existing market value.
For example, between February and October 1990, the TSE Index fell from a high
of 12,495 to a low of 2,560 on October 1, 1990, a decline of 79.5%. From
October 1, 1990 to May 9, 1991, the TSE Index rose from 2,560 to 6,305, an
increase of 146%. Between May 9, 1991 and January 7, 1993, the TSE Index fell
from 6,305 to 3,316, a decline of 47%. During the period from January 7, 1993
to December 31, 1995, the TSE Index fluctuated between a low of 3,316 and a
high of 7,184. Since December 31, 1995, the TSE Index has moved in a range
between 4,053 and 7,051. Any volatility in the ROC securities market could
adversely affect the net asset value of the Fund's shares. For further
information relating to the TSE Index, see "The Securities Market of the ROC--
The Taiwan Stock Exchange."
During periods when the market has declined rapidly, such as in 1990, the
combination of reduced demand and TSE rules confining daily movements in
individual company stock prices to fixed limits (currently 7%) around the
previous day's closing price has greatly diminished market liquidity. This has
made it extremely difficult during declining periods to protect previously
unrealized capital gains as the Fund cannot always sell portfolio securities
at a time the Adviser considers to be in the Fund's interest. Trading in the
Taiwan securities market is dominated by individual investors and, during
periods of market volatility, speculative short-term trading has been
pervasive among such investors. Consequently, these conditions have made it
necessary for the Fund during previous periods, and may in the future cause
the Fund, to engage in short-term trading in order to preserve investment
gains. For instance, the Fund's turnover rate was 159% during fiscal year
1995. Although this turnover rate is higher than the rate initially
anticipated by the Fund, it is less than the average turnover rate for stocks
traded on the TSE, which was approximately 228% during the same period.
The ROC government recently launched an NT$200 billion Government-sponsored
stock market stabilization fund (the "Stabilization Fund") which is authorized
to buy or sell securities on the TSE in order to minimize fluctuations in the
prices or volumes of sales of listed securities. As a result of the activities
of the Stabilization Fund, the market price and liquidity of the securities of
companies listed on the TSE and the net asset value of the Fund may be
different than they otherwise might be in the absence of such stabilization
activities. As of March 29, 1996, the Stabilization Fund had invested
approximately NT$70 billion in shares listed on the TSE.
The Adviser believes that short-term trading strategies, without regard to
fundamental investment analysis, currently are factors determining day-to-day
price fluctuations on the TSE. Although the Adviser believes that
12
<PAGE>
there are fundamentally sound long-term investment opportunities available
among the stocks listed on the TSE, and that past volatility and speculation
have been reduced, volatility of the Taiwan securities market is still high
compared to the securities markets of the United States and there is no
assurance that these past patterns of extreme volatility will not return. The
Fund has a long-term trading strategy based on fundamental investment analysis
and therefore short-term volatility in the ROC securities market will affect
the net asset value of the Fund's shares which could cause the Fund's shares
to trade at larger discounts and premiums than are usually experienced by
closed-end investment companies.
Repatriation Restrictions
The Fund does not invest directly in the securities of ROC companies.
Instead, it acquires its investments through a contractual securities
investment trust fund arrangement designed to meet the requirements of
applicable ROC regulations. The Fund's securities investment trust fund
arrangement has been established by means of a Securities Investment Trust--
Investment Management and Custodian Contract (the "Management Contract") dated
December 16, 1986 among the Adviser, the Custodian and the Fund. Under the
Management Contract, the Adviser has agreed to manage and invest the assets of
the Fund and the Custodian has agreed to hold the assets being managed under
the Management Contract. The Fund is the sole beneficiary of the assets held
under the Management Contract and, as required by ROC regulations, its
interest in the assets is evidenced by units of beneficial interest ("Units").
Under ROC regulations and the Management Contract, the income realized and
received from the assets held under the Management Contract will be
distributed to the Fund once a year. See "Foreign Investment and Exchange
Controls in the ROC." Under current ROC exchange control regulations, the Fund
is able to remit out of the ROC the proceeds, net of tax, of such
distributions. However, if the Fund were unable to receive and distribute to
its shareholders 90% of its net investment income taxable in the United States
within applicable time periods, it would be unable to qualify as a regulated
investment company for United States federal income tax purposes. See
"Taxation--U.S. Federal Income Taxes" herein and in the SAI.
Currency Fluctuations
The Fund's assets are invested primarily in ROC securities and substantially
all income is received in NT Dollars. However, the Fund will compute and
distribute its income in U.S. Dollars, and the computation of income will be
made on the date of its receipt by the Fund at the foreign exchange rate in
effect on that date. Therefore, if the value of the foreign currencies in
which the Fund receives its income falls relative to the U.S. Dollar between
receipt of the income and the making of Fund distributions, the Fund will be
required to liquidate securities in order to make distributions if the Fund
has insufficient cash in U.S. Dollars to meet distribution requirements. See
"Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan."
The liquidation of investments, if required, may have an adverse impact on the
Fund's performance. In addition, if the liquidated investments include
securities that have been held less than three months, such sales may
jeopardize the Fund's status as a regulated investment company under the U.S.
Internal Revenue Code of 1986, as amended (the "Code"). See "Taxation--U.S.
Federal Income Taxes" herein and in the SAI.
Since the Fund invests in ROC securities denominated in NT Dollars, changes
in the exchange rates of the NT Dollar may affect the value of securities in
the Fund's portfolio and the unrealized appreciation or depreciation of
investments insofar as U.S. investors are concerned. Further, the Fund may
incur costs in connection with conversions between currencies. Changes in the
exchange rate of the NT Dollar will affect the Fund's net asset value
regardless of the performance of the underlying investments of the Fund.
From January 1990 to December 1995, the NT Dollar rate fluctuated within the
range of NT$24.50 = US$1 and NT$27.50 = US$1. On May 2, 1996, the exchange
rate was NT$27.17 = US$1. See "The Republic of China--Foreign Exchange" in the
SAI.
The competitiveness of Taiwan's exports is affected by changes in the
relative exchange rates of the NT Dollar and the currencies of its main
trading partners, primarily the United States and Japan. Changes in the
13
<PAGE>
value of the NT Dollar against the U.S. Dollar, or changes in the value of the
NT Dollar against the currencies of its other trading partners, could have an
adverse impact on Taiwan's export economy and, in turn, on the market value of
export-oriented ROC companies. See "The Republic of China--Recent Economic
Developments" herein and in the SAI. Relative currency values will be taken
into account by the Adviser in selecting industries and companies for
investment. See "Investment Objective and Policies."
The Fund is currently restricted by its investment limitations from engaging
in currency hedging transactions, and is therefore limited in its ability to
protect its portfolio against foreign currency exchange rate risk. The Fund's
board of directors, at a meeting held on December 1, 1995, approved an
amendment to the Fund's investment limitations to permit the Fund to engage in
currency hedging transactions, subject to shareholder approval. The board of
directors expects to submit the proposed amendment at the next annual
shareholders' meeting to be held in 1997. There can be no assurance that the
shareholders will vote to approve such proposal.
Political and Economic Factors
Political Factors
Taiwan has a unique political status. It maintains formal diplomatic
relations with only 31 countries, including the Vatican, but has active trade
and financial relations with most major economic powers and maintains trade
missions in locations around the world. Taiwan remains a member of the Asian
Development Bank, but is not a member of the United Nations and various other
international organizations. The ROC joined the Asia-Pacific Economic
Cooperation group ("APEC") in November 1991, together with Hong Kong and the
People's Republic of China ("PRC"). In 1991, Taiwan applied to rejoin the
General Agreement on Tariffs and Trade ("GATT"), from which it withdrew in
1950. In September 1992, in accordance with a GATT resolution to establish a
committee to examine the Taiwan application for re-admission, Taiwan was
permitted to become a GATT observer during the examination. Taiwan is
currently seeking to become a member of the World Trade Organization, the
successor organization to GATT.
In 1949, in connection with the insurgency of the Communist Party of China
and the formation of the PRC, the ROC government moved to Taiwan from mainland
China. Since that time, the ROC government has maintained that it is the sole
legitimate government of all of China (i.e., Taiwan and all of mainland
China). The PRC also asserts sovereignty over all of China, including Taiwan.
The PRC has repeatedly indicated that it would resort to force to gain control
over Taiwan if Taiwan should take any concrete steps toward political
independence, or if the political and social situation in Taiwan should become
destabilized. Relations between the ROC and PRC have recently been strained as
a result of the PRC's conduct of military exercises in the waters near Taiwan
during Taiwan's recent Presidential election campaign and certain other
matters. There can be no assurance that relations will not deteriorate in ways
that could adversely affect Taiwan's economy or lead to more volatility in
Taiwan's securities market. The securities market in Taiwan is increasingly
sensitive to political and economic developments in the PRC, and such
developments, including, among other things, changes in leadership, could have
an impact on the Fund. See "The Republic of China--General Information--
Political History" and "--Foreign Relations" in the SAI.
On December 21, 1991, the first full elections in Taiwan in over four
decades were held for the National Assembly. The Kuomintang (Nationalist
Party) (the "KMT") prevailed in this election, winning 71% of the popular
vote, while the Democratic Progressive Party ("DPP"), Taiwan's principal
opposition party, received 24% of the popular vote. Since that time, the DPP
has received increasing support and in the parliamentary elections held in
December 1992 and the most recent parliamentary elections held in December
1995, DPP candidates made a strong showing, winning 36% and 32%, respectively,
of the total votes cast. On November 27, 1993, nationwide elections were held
for county chiefs and city mayors. On December 3, 1994, the first
gubernatorial election was held as were mayoral elections in Taipei and
Kaohsiung. On March 23, 1996, the first direct Presidential election was held
and President Lee Teng-Hui was re-elected for a four-year term.
14
<PAGE>
The United States formally recognized the PRC on January 1, 1979 and
thereupon severed formal diplomatic relations with the ROC. In April 1979, the
U.S. Congress enacted the Taiwan Relations Act (the "Act") to govern the
future U.S. relationship with Taiwan and an unofficial entity, the American
Institute in Taiwan, was established to handle U.S. interests in Taiwan. The
Act affirmed as national policies the preservation and promotion of close
commercial and cultural ties with Taiwan and the continuing supply to Taiwan
of arms of a defensive character. See "The Republic of China--General
Information--Foreign Relations" in the SAI.
Economic Factors
Taiwan's growth has to a significant degree been export-driven. While the
percentage of Taiwan's exports purchased by the United States has been
declining recently, the United States has remained a key export market,
purchasing approximately 23.7% of Taiwan's exports in 1995. The decline in
exports to the United States has been offset by a consistent increase in
exports to Hong Kong and indirectly to the PRC, from 7.3% of total exports in
1986 to 23.4% of total exports in 1995. Taiwan is affected by changes in the
economies of the United States and its other main trading partners, by
protectionist impulses in those countries and by the development of export
sectors in lower-wage economies. In the event that growth in the export sector
declines in the future, the burden of future growth will increasingly be
placed on domestic demand. See "The Republic of China--Recent Economic
Developments" herein and "The Republic of China--Domestic Economy--Economic
Planning" in the SAI.
The island of Taiwan has limited natural resources, resulting in dependence
on foreign sources for certain raw materials and vulnerability to global
fluctuations of price and supply. This dependence is especially pronounced in
the energy sector, where in 1994 Taiwan was dependent on imported energy,
mainly oil, for approximately 92.5% of total energy consumed. In recent years,
over half of Taiwan's crude oil has been supplied by Kuwait and Saudi Arabia.
A significant increase in energy prices could have an adverse impact on
Taiwan's economy.
Most of Taiwan's trading partners have trade deficits with Taiwan, and the
U.S. trade deficit with Taiwan for the year ended December 31, 1995 was
approximately $5.6 billion. Taiwan's trade deficit with Japan has consistently
grown from $3.7 billion in 1986 to $17.1 billion in 1995. Taiwan's foreign
exchange reserves were approximately $90.3 billion on December 31, 1995 making
Taiwan second only to Japan in its level of foreign reserves. Taiwan's large
trade surpluses, coupled with the increase in foreign exchange reserves, have
intensified pressures for corrective action, including threats of
protectionist and retaliatory trade measures which could adversely impact
Taiwan's export industries. In 1995, Taiwan had a balance-of-payments deficit
of $3.9 billion.
Taiwan has in the past shown an ability to prosper in a competitive
environment on the strength of product quality, efficiency and responsiveness
to market demand. This ability will continue to be tested in the future as, in
addition to the protectionist threats, Taiwan's export economy faces
competition from producers in other countries with lower wage levels than
those generally prevailing in Taiwan. Skilled workers and technical personnel
are still relatively inexpensive, but unskilled labor is in increasingly short
supply. Recognizing the imperatives of the more competitive Asian economy, the
ROC government is seeking to develop Taiwan into a regional hub for high-end
manufacturing, sea and air transportation, finance, telecommunications and
media. Taiwan is seeking to develop further as a service-oriented economy
rather than a labor-intensive, manufacture-oriented one. One result of the
movement of industrial capacity offshore has been the reduction of the labor
shortage in manufacturing.
From 1990 to 1995, ROC companies have invested approximately US$8.7 billion
in various locations around the world, principally in Southeast Asia. In 1992,
the PRC became the biggest recipient of ROC investment, largely because of
cheap land and labor (wages in the PRC are one-seventh those in Taiwan),
common language, and huge domestic markets. Taiwan's trade with Hong Kong has
increased consistently since 1986 and in 1995, represented 23.4% of total
exports, a substantial portion of which represents indirect trade with the
PRC. The consistent increase of trade with Hong Kong since 1986 may be
attributed to Taiwan's indirect trade with the PRC. As a result of the
substantial increase in trade and investment between the
15
<PAGE>
ROC and the PRC, an economic downturn in the PRC could have a material adverse
effect on the ROC economy. Although there has been recent momentum toward
deregulation, the ROC government still bars some industries from making direct
investments in the PRC.
In April 1993, Taiwan was placed on the United States' "priority watch list"
for possible trade sanctions under Section 301 of the Trade Act of 1974, as
amended. The United States Trade Representative publishes the "priority watch
list" each year to identify nations that deny adequate and effective
intellectual property rights ("IPR") protection to U.S. interests. After being
placed on this "priority watch list," Taiwan quickly passed a series of
legislation revising its IPR laws. Following a comprehensive review of
Taiwan's progress in IPR protection, the United States removed Taiwan from the
"Special 301 priority watch list" and placed Taiwan on the United States'
general "watch list." The general "watch list" includes nations that warrant
special attention because they maintain intellectual property practices or
barriers to market access that are of particular concern to U.S. interests.
Taxation
Changes in tax legislation in either the United States or the ROC may have
an impact on the Fund. During certain periods in the past, capital gains
derived from stock transactions have been subject to tax in the ROC. In the
latest 1989 imposition of this capital gains tax for the one-year period ended
December 31, 1989, the Fund was exempt from the tax until December 31, 1990
pursuant to an earlier ROC government ruling. Since January 1, 1990, the
capital gains tax has been suspended. On January 4, 1996, the ROC Legislative
Yuan passed a bill for the amendment of the ROC Income Tax Law that would have
eliminated the exemption from the ROC income tax for gains realized on the
sale of ROC securities and imposed a capital gains tax. On January 12, 1996,
this amendment was repealed by the Legislative Yuan. The reintroduction of a
capital gains tax would require the Legislative Yuan to engage in the full
legislative process for the enactment of tax legislation. There can be no
assurance that the capital gains tax will not be imposed in the future or that
the Fund will continue to be exempt from such tax. See "Taxation."
NET ASSET VALUE DISCOUNT
Shares of closed-end investment companies frequently trade at a discount
from net asset value. This characteristic of shares of a closed-end fund is a
risk separate and distinct from the risk that the fund's net asset value will
decrease. The Fund cannot predict whether in the future its shares will trade
at, below, or above net asset value. The Fund's shares of Common Stock are not
subject to redemption.
OPENING OF THE ROC SECURITIES MARKET
At the time the Fund was formed in 1986, it represented the only vehicle
publicly available in the United States, and one of only four vehicles world-
wide, through which foreign investors could make portfolio investments in
listed ROC securities. Since that time a number of other alternatives to the
Fund as a vehicle for investment in ROC securities by foreign investors have
been developed. It has been the ROC government's stated policy to liberalize
restrictions on foreign investment in its securities market, and the ROC
government has significantly eased restrictions on foreign investment over the
past several years. The Adviser believes that the development of these other
alternatives to the Fund as a vehicle for investment in ROC securities by
foreign investors may reduce any tendency of the shares to trade at a premium
in the future. See "Risk Factors and Special Considerations--Risks of
Investing in ROC Securities--Investment and Repatriation Restrictions."
16
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation through investment primarily in equity securities listed on the
TSE. It is anticipated that, when the net proceeds of this offering are fully
invested, at least 75% of the Fund's assets will be invested in equity
securities listed on the TSE. This objective may not be changed without the
approval of a majority of the Fund's outstanding voting securities and the
consent of the CSEC. 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. Consistent with
the Fund's objective of seeking long-term capital appreciation, the Fund's
Board of Directors has adopted an operating policy under which, in normal
circumstances, at least 90% of the Fund's assets will be invested in equity
securities listed on the TSE. This operating policy may be changed by the
Board at any time. The remainder of the Fund's assets generally will be
invested in debt securities which are listed on the TSE or traded on the over-
the-counter market, or will be held in bank deposits or short-term money
market instruments in order to provide appropriate liquidity to take advantage
of market opportunities and meet cash needs. Investments in debt securities,
including short-term money market instruments, will be limited to obligations
of the ROC government or government-owned enterprises and obligations issued
or guaranteed by ROC financial institutions with shareholders' equity of at
least US$50 million. Investments in money market instruments may include
government treasury bills, commercial paper, bankers' acceptances and
negotiable certificates of deposit. There is currently no rating system for
debt securities in the ROC. The Fund is currently restricted by its investment
limitations from purchasing equity securities which are traded on the over-
the-counter market. In addition, the Fund currently may not purchase any
equity securities which, at the date purchase is made, are not listed and
traded on TSE. The Fund's board of directors, at a meeting held on December 1,
1995, approved an amendment to permit the Fund to subscribe for shares which
are listed or to be listed on the TSE in an underwritten offering, subject to
shareholder approval. The board of directors expects to submit the proposed
amendment at the next annual shareholders' meeting to be held in 1997. There
can be no assurance that the shareholders will vote to approve such proposal.
See "Investment Limitations" in the SAI. Although the investment objective of
the Fund is long-term capital appreciation, the Fund expects to receive
current income from dividends and interest paid on the equity and debt
securities in which it invests.
The Adviser anticipates that the net proceeds of this offering will be
invested within two months from the date of this Prospectus in accordance with
the policies set forth herein. Pending such investment, it is anticipated that
the net proceeds will be invested in NT Dollar-denominated bank deposits and
money market instruments in order to preserve liquidity and generate interest
income for the Fund. See "Use of Proceeds."
The Fund has diversified and intends to continue to diversify its assets
over a broad spectrum of the ROC economy, including, as conditions warrant
from time to time, cement, chemicals and plastics, construction,
electrical/electronics, finance, banking, food, textiles, glass, rubber, pulp
and paper, metal products and machinery, retailing and tourism. In selecting
industries and companies for investment, the Adviser will consider overall
growth prospects, competitive position in export markets, technology, research
and development, productivity, labor costs, raw materials costs and sources,
profit margins, return on investment, capital resources, government
regulation, management and other factors. The Fund's equity investments have
been and will be predominantly in common stock, but investments may also be
made in preferred stocks and in convertible debentures listed on the TSE.
TEMPORARY INVESTMENTS
During periods in which changes in economic, financial or political
conditions make it advisable, the Fund may for temporary defensive purposes
reduce its holdings in equity securities and increase its holdings in long-
term or short-term debt securities or hold cash. The Fund's policy is to
invest in equity securities listed on the TSE based on the fundamentals of the
investments and generally to disregard short term market volatility in making
investment decisions except in extreme and unusual circumstances. Subject to
applicable ROC regulations, the Fund may also at any time invest funds in U.S.
Dollar-denominated money market instruments
17
<PAGE>
to pay Fund expenses in the United States and as reserves for dividend and
other distributions to shareholders and in response to unforeseen
circumstances. Under current ROC regulations, after funds have been remitted
to Taiwan and invested through the securities investment trust fund
arrangement in NT Dollar-denominated securities, they may not be invested in
U.S. Dollar-denominated securities except to the extent that they are
distributed to the Fund under the Management Contract. Accordingly, the
ability of the Fund to invest in U.S. Dollar-denominated securities will be
limited. See "Foreign Investment and Exchange Controls in the ROC" in the SAI.
PORTFOLIO TURNOVER RATE
The Fund's policy is to invest for long-term capital appreciation, although
the market volatility during certain periods in the Taiwan market has made it
necessary during such periods to engage in some short-term trading in order to
preserve investment gains. When the Fund was established, the Adviser expected
that the annual portfolio turnover rate for the Fund's investments would not
exceed 50%. However, since that time market conditions in Taiwan have resulted
in portfolio activity at a greater rate than anticipated. During the fiscal
years ended August 31, 1993, 1994 and 1995 the Fund's portfolio turnover rate
(excluding short-term investments) was 163%, 267% and 159%, respectively, due
primarily to a high degree of market volatility throughout much of the period.
Although the Fund has experienced high annual portfolio turnover rates in the
past, the Adviser expects that, in view of its policy of investing in ROC
equity securities based on the fundamentals of the investments and of
disregarding short-term market volatility in making investment decisions, and
the Fund's operating policy, adopted by the Fund's Board of Directors, of
investing at least 90% of the Fund's assets in ROC equity securities, the
annual portfolio turnover rate for the Fund will not exceed 150% under normal
circumstances. For the six months ended February 29, 1996, the Fund's
portfolio turnover rate (excluding short-term investments) was 53%. The Fund's
turnover rate may exceed 150% under special situations such as a large
dividend payout or an extremely defensive position. A high portfolio turnover
rate could lead to a higher expense ratio due to increased payments of
brokerage commissions. In addition, the U.S. federal tax requirement that the
Fund derive less than 30% of its gross income from the sale or disposition of
securities held less than three months may limit the Fund's ability to dispose
of its securities. See "Taxation --U.S. Federal Income Taxes" in the SAI. ROC
government regulations prohibit any mutual fund in Taiwan from having an
annual turnover rate with respect to its portfolio securities that exceeds (i)
100% of the average annual turnover rate of all securities listed on the TSE
("Annual Market Turnover Rate"), if the Annual Market Turnover Rate is below
200% or (ii) 200% plus 50% of the portion exceeding 200%, if the Annual Market
Turnover Rate exceeds 200%. Given the high threshold limitations, the Fund
does not expect the ROC regulations regarding turnover rates to be a limiting
factor when management of the Fund deems it appropriate to purchase or sell
securities for the Fund. 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. Other than as described
under "Investment Limitations" and "Foreign Investment and Exchange Controls
in the ROC" in the SAI, ROC government regulations do not impose any
restrictions on the ability of the Fund to purchase and dispose of portfolio
securities.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
The management of the Fund, including general supervision of the duties
performed by the Adviser under the Management Contract, is the responsibility
of its Board of Directors. For certain information regarding the Directors and
officers of the Fund, see "Management of the Fund--Directors and Officers" in
the SAI.
Certain of the Directors of the Fund reside outside the United States and
substantially all the assets of such persons are located outside the United
States. None of the Directors of the Fund who reside outside the United States
have appointed an agent for service of process in the United States. It may
not be possible, therefore, for investors to effect service of process within
the United States upon such persons or to enforce against them, in the U.S.
courts or foreign courts, judgments obtained in U.S. courts predicated upon
the civil liability provisions of the Federal securities laws of the United
States. In addition, it is not certain that a foreign court would enforce, in
original actions, liabilities against such persons predicated solely upon the
U.S. securities laws.
18
<PAGE>
THE ADVISER
The Adviser, China Securities Investment Trust Corporation, is an ROC
corporation incorporated on April 14, 1986 in order to serve as the investment
adviser to the Fund pursuant to the Management Contract. The Adviser was
formed under the Regulations for Administration of Securities Investment Trust
Fund Enterprises (the "Adviser Regulations"), which set out the requirements
for an investment management company seeking to establish investment funds in
Taiwan, for the purpose of acting as a securities investment trust enterprise
under ROC law. As such, in addition to acting as the investment adviser to the
Fund, the Adviser is authorized and engages in the securities business in
Taiwan to the extent permitted under the Adviser Regulations, including
raising funds either in or outside Taiwan for investment in securities of ROC
companies and, in the case of funds raised in Taiwan, for investment in
foreign securities through other securities investment trust funds formed
under the Regulations Governing the Management of Securities Investment Trust
Funds (the "Trust Fund Regulations"), which set out the requirements for the
establishment of investment funds through which non-ROC persons may invest in
securities issued by ROC companies. See "Foreign Investment and Exchange
Controls in the ROC" in the SAI.
In addition to the Fund, the Adviser has established and is managing ten
securities investment trust funds which have sold (and in some cases are
continuing to sell) units of beneficial interest to ROC investors. These funds
had total net assets of approximately NT$24.6 billion (US$902.8 million) as of
December 31, 1995, and include five open-end funds and three closed-end funds
formed to invest in TSE listed securities, an open-end fund formed to invest
in non-ROC equity securities and one open-end fund and one closed-end fund
formed to invest in both equity and debt securities of ROC entities.
The principal shareholder of the Adviser is China Development Corporation,
an ROC corporation formed in 1959 which is engaged in the investment and trust
business in Taiwan and the shares of which are listed on the TSE. As of
December 31, 1995, a portion of China Development Corporation's outstanding
shares were owned by agencies or instrumentalities of the ROC government or by
entities wholly owned or majority owned by the ROC government. China
Development Corporation owns 57.7% of the Adviser's capital stock. The Pre-
Incorporation Agreement dated as of February 24, 1986 entered into by the
shareholders of the Adviser prior to its incorporation provides that, except
for certain permitted transfers of shares among the original shareholders, the
capital stock of the Adviser shall at all times be held so that no less than
65% is beneficially owned by persons residing or incorporated in the ROC and
no more than 35% is owned by persons residing or incorporated outside the ROC.
In addition, each of the shareholders has agreed that if any shareholder
wishes to dispose of its shares each of the other shareholders has a right of
first refusal to purchase the shares before they may be sold to third parties.
The Adviser's Board of Directors consists of ten directors of which five are
nominated by China Development Corporation, two by Merrill Lynch International
Incorporated and one by each of the other institutional shareholders.
The Adviser's offices are located at 99 Tun Hwa South Road, Section 2, 24th
Floor, Taipei, Taiwan, ROC.
For its services, the Adviser receives a monthly basic fee, payable in NT
Dollars, at an annual rate of 1.50% of the Fund's average daily net assets
(including both Taiwan and U.S. assets). The basic fee payable to the Adviser
is subject to monthly performance adjustments (based on a rolling performance
period of 36 months), which may increase or decrease the basic fee (by up to
0.50% per annum of the Fund's average net assets during the performance
period) depending on the performance of the Fund's investments compared to the
performance of the TSE Index.
One-twelfth of the 1.50% annual basic fee rate is applied to the Fund's net
assets averaged over the most recent month, giving a dollar amount which is
the basic fee for that month. The performance adjustment is added to or
subtracted from the basic fee. The Fund's performance is compared with the
performance of the TSE Index over the performance period. For information
regarding the TSE Index, see "The Securities Market of the ROC--The Taiwan
Stock Exchange" herein. Each percentage point difference in performance
between the Fund and
19
<PAGE>
the TSE Index during this period is multiplied by 0.05%. The maximum
annualized performance adjustment rate is plus or minus 0.50%. One-twelfth of
this rate is then applied to the Fund's net assets averaged over the
performance period, giving the dollar amount which is added to or subtracted
from the basic fee. In comparing the Adviser's performance to the TSE Index,
the TSE Index is expressed in U.S. Dollars so as to eliminate the effect of
fluctuations between the NT Dollar and the U.S. Dollar.
The performance adjustments are calculated in compliance with Rule 205-1
under the Advisers Act.
The fee payable to the Adviser is higher than advisory fees paid by most
U.S. investment companies investing in U.S. securities, primarily because of
the additional time and expense required of the Adviser in pursuing the Fund's
objective of investing in ROC securities. The Adviser may, but at no
additional cost to the Fund, retain the services of others in connection with
advising the Fund.
The following table shows the advisory fees paid to the Adviser and their
relation to the Fund's performance compared to the TSE Index:
<TABLE>
<CAPTION>
OUTPERFORMED/ ADVISORY FEES
(UNDERPERFORMED) PERFORMANCE PAID OR
FISCAL YEAR ENDED TSE INDEX FEE ADJUSTMENT PAYABLE(1)
- ----------------- ---------------- -------------- -------------
<S> <C> <C> <C>
August 31, 1993................... 0.8% $702,051 $3,024,404
August 31, 1994................... (5.6)% $623,789(2) $4,360,623
August 31, 1995................... 7.0% $202,418 $4,532,092
</TABLE>
- --------
(1) Includes the performance fee adjustment.
(2) This positive performance adjustment was due to the fact that the fee was
based on a rolling 36-month period.
Fidelity International Investment Advisors ("FIIA"), served as the
investment sub-adviser to the Fund since its inception through April 23, 1994.
For its services, FIIA received from the Adviser a basic fee equal to one half
of the fee paid by the Fund to the Adviser less the fee paid by the Adviser to
Fidelity Investment (Taiwan) Ltd. ("Fidelity Taiwan").
Fidelity Taiwan had an agreement with the Adviser to provide research
services regarding ROC investments to the Adviser since its inception through
April 23, 1994. As compensation for its services, Fidelity Taiwan received
from the Adviser a monthly fee at an annual rate of 0.25% of the Fund's net
assets up to $50 million, 0.20% of net assets in excess of $50 million up to
$100 million and 0.15% of net assets in excess of $100 million.
The understanding reached by the Fund, the Adviser and FIIA at the time the
Fund was established in 1986 contemplated that the investment advisory
services provided by FIIA, and the research services provided by Fidelity
Taiwan, to the Adviser would be temporary, and would permit the Adviser to
develop its own advisory and research staff so that after a minimum period of
five years from the date on which the Fund commenced operations, the
agreements with FIIA and Fidelity Taiwan would be terminated and these
advisory and research services would be provided by the Adviser's own staff.
Prior to the termination of the advisory and research services arrangements
with FIIA and Fidelity Taiwan, the Adviser determined that it would have the
necessary resources such that it no longer would require these services from
FIIA or Fidelity Taiwan. The Adviser currently employs most of the prior
advisory staff of FIIA (including Michael Chen, the Fund's current portfolio
manager) and most of the prior research staff of Fidelity Taiwan.
PORTFOLIO MANAGER
Michael Chen is the Fund's portfolio manager (the "Portfolio Manager") and
is primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Chen received an MBA degree in finance and accounting from
Cornell University and a Bachelor of Business Administration degree from Saint
Joseph's
20
<PAGE>
University in Philadelphia. He has been qualified as a Certified Securities
Analyst in Taiwan since 1987. He is currently Executive Vice President of the
Adviser. He served as a Managing Director of Fidelity Taiwan from 1992 to 1994
and Director and Head of Research of Fidelity Taiwan from 1986 to 1992. Prior
to joining Fidelity Taiwan, Mr. Chen served as an Assistant Loan Officer for
the Taipei branch of First Interstate Bank of California (1984-1986). From
1989 until becoming the Portfolio Manager in July 1992, he acted as Deputy
Portfolio Manager for the Fund. The Portfolio Manager has general
responsibility for managing the investments held under the Management
Contract, including the power to purchase and dispose of securities and other
investments and to conduct all dealings with securities brokers and dealers
effecting transactions for the benefit of the Fund.
Albert King is the Fund's Deputy Portfolio Manager. Mr. King has been
assisting the Portfolio Manager in the day-to-day management of the Fund's
portfolio since July 1994. Mr. King received an MBA degree in finance from New
York University and a Bachelor of Arts degree in political science from
National Taiwan University in Taipei. Mr. King is a Fund Manager of the
Adviser and from 1992 until becoming the Fund's Deputy Portfolio Manager, Mr.
King served as a research analyst with the Adviser's research department.
Prior to joining the Adviser, Mr. King served as a management associate and
assistant relationship manager for the Taipei branch of Citibank from 1990 to
1992.
THE MANAGEMENT CONTRACT
The Fund makes its investments through a securities investment trust fund
arrangement established under the Management Contract in accordance with the
Trust Fund Regulations. Under the Management Contract, the Adviser is required
to manage the investment of the assets of the Fund held by the Custodian in
Taiwan for the exclusive benefit of the Fund, including making investment
decisions, supervising the acquisition and disposition of investments and
selecting brokers or dealers to carry out portfolio transactions, all in
accordance with the Fund's investment objective and policies and with
guidelines and directions from the Fund's Board of Directors. Because the
Management Contract relates only to the Fund's investment activities in
Taiwan, the Fund entered into a separate advisory agreement (the "U.S.
Advisory Agreement") with the Adviser relating to the management of any Fund
assets held in the U.S. by the Fund's U.S. custodian. The Adviser does not
receive any compensation from the Fund, other than the advisory fee described
above, for performing services under the Management Contract or under the
separate advisory agreement relating to U.S. assets.
The Management Contract will continue in force until December 15, 1996 and
from year to year thereafter so long as its continuance is approved annually
by vote of a majority of the Fund's directors who are not "interested persons"
of the Adviser as defined in the 1940 Act, cast in person at a meeting called
for that purpose, and by either (i) a vote of a majority of the Board of
Directors of the Fund or (ii) a vote of a majority of the outstanding shares
of the Fund. The Management Contract may be terminated by the Fund, without
payment of any penalty, upon sixty days' written notice to the Adviser and the
Custodian, and will terminate automatically in the event of its assignment by
the Adviser or the Custodian. The Management Contract will also terminate (i)
upon 60 days' written notice by the Adviser or the Custodian to the other
parties thereto, (ii) upon the liquidation or bankruptcy, or revocation of the
license, of the Adviser or the Custodian, whereupon the Adviser or Custodian
(as the case may be) shall be deemed removed, (iii) if the Adviser notifies
the other parties thereto and the CSEC that in the Adviser's opinion the
Management Contract is illegal, impracticable or inadvisable having regard
solely to the interests of the Fund, (iv) if required by the CSEC, or (v) if
the CSEC determines that the Adviser or the Custodian is incapable of carrying
out its functions and, as described below, a substitute is not appointed
within the ensuing three-month period. In case of termination of or failure to
renew the Management Contract or removal of the Adviser or Custodian, the
Fund's Board of Directors will select a successor investment adviser or
custodian (as the case may be). Any such successor adviser must be a
registered investment adviser under U.S. law and must also be specifically
approved by the CSEC and licensed under the Adviser Regulations to serve as an
investment management company under a new Management Contract. In the event
that (i) the Management Contract is terminated and a new Management Contract
is not entered into within three months, or (ii) the Adviser (or Custodian) is
removed and a successor adviser (or custodian) is not selected or approved and
a new Management Contract entered into within three months, the assets held
under the Management Contract will be liquidated (within three months) in an
orderly manner by the Adviser and the
21
<PAGE>
proceeds thereof distributed to the Fund (with the Adviser acting under the
Management Contract solely for such purpose), and the Fund will be dissolved
and liquidated. Any such sale of assets may require the sale of portfolio
securities at prices less favorable than those which might be obtained under
other circumstances, but in this event the Adviser will endeavor to effect any
such sale in the most advantageous manner.
The Management Contract provides that the Adviser is entitled to
indemnification out of the assets of the securities investment trust fund
established under the Management Contract for costs incurred in enforcing the
obligations of the Custodian under the Management Contract. In addition, the
Adviser is entitled to indemnification out of the assets of the securities
investment trust fund against all claims (and against all costs and expenses
in relation to such claims) incurred or suffered by it as a result of its
acting as adviser under the Management Contract, except with respect to claims
arising out of its own willful or negligent default, reckless disregard of its
duties under the Management Contract or bad faith.
If either the Adviser or the Custodian does not perform its obligations as
set forth in the Management Contract, the Fund is legally entitled to bring an
action in an ROC court to enforce those obligations.
The U.S. Advisory Agreement will also continue in force until December 15,
1996 and from year to year thereafter so long as its continuance is approved
annually by vote of a majority of the Fund's directors who are not "interested
persons" of the Adviser as defined in the 1940 Act, cast in person at a
meeting called for that purpose, and by either (i) a vote of a majority of the
Board of Directors of the Fund or (ii) a vote of a majority of the outstanding
shares of the Fund. The U.S. Advisory Agreement may be terminated by the Fund,
without payment of any penalty, upon sixty days' written notice to the
Adviser, and will terminate automatically in the event of its assignment by
the Adviser.
The U.S. Advisory Agreement provides that the Fund shall indemnify the
Adviser from and against any liability for, and any damages, expenses or
losses incurred in connection with any act or omission in the course of,
connected with or arising out of any services rendered under the U.S. Advisory
Agreement, except by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of the Adviser's obligations and duties under the U.S. Advisory Agreement.
FUND ADMINISTRATION AND EXPENSES
The Adviser or its shareholders bear all expenses associated with its
investment management duties under the Management Contract as well as all
salaries, fees and expenses of the Fund's officers and directors who are
interested persons of the Adviser. Other than expenses borne by the Adviser or
its shareholders, the Fund bears all of its expenses including: fees and
expenses of the Fund's directors who are not interested persons of the
Adviser; interest expense; taxes and governmental fees; brokerage commissions
and other expenses incurred in acquiring or disposing of portfolio securities;
expenses of preparing stock certificates and other expenses in connection with
the issuance, offering, distribution, sale or underwriting of securities
issued by the Fund; expenses of registering and qualifying the Fund's shares
for sale with the U.S. Securities and Exchange Commission and in various
states and foreign jurisdictions; auditing, accounting, insurance and legal
costs; custodian, dividend disbursing and transfer agent expenses; expenses of
obtaining and maintaining stock exchange listings of the Fund's shares; and
the expenses of shareholders' meetings and of the preparation and distribution
of reports to shareholders.
Under an Administration Agreement, State Street Bank and Trust Company
provides, or arranges to provide, the Fund with necessary office space,
communications facilities and personnel to perform administrative and clerical
functions for the Fund; maintain and keep certain books and records of the
Fund; prepare and file tax returns and other documents required by U.S.
federal and state laws and by stock exchanges on which the Fund's shares are
listed; prepare and distribute proxy materials and periodic reports to Fund
shareholders; respond to inquiries from Fund shareholders; and coordinate and
monitor the activities of the Fund's transfer agent. Under the Administration
Agreement, the Fund pays State Street Bank and Trust Company its out-of-pocket
expenses for mailing documents to Fund shareholders and a fee based on an
annual rate of 0.09% of the Fund's average
22
<PAGE>
daily net assets up to $150 million, 0.06% of the next $150 million, and 0.04%
of those assets in excess of $300 million, subject to certain minimum
requirements.
THE SECURITIES MARKET OF THE ROC
BACKGROUND AND DEVELOPMENT
The TSE was formed in 1961 and commenced operations in 1962 with 18 listed
companies having an aggregate market value of NT$6.84 billion. Although the
securities market in the ROC has generally grown with the ROC's economic
development, it has also exhibited a high degree of volatility in response to
political and economic events in the ROC and abroad. For example, the TSE
Index, which stood at 835.12 at the end of 1985, increased to 9,624.18 by the
end of 1989, decreased to 4,530.16, 4,600.67 and 3,377.06 at the end of 1990,
1991, and 1992, respectively, and increased to 6,070.56 and 7,124.66 at the
end of 1993 and 1994, respectively. The TSE Index stood at 5,173.73 at the end
of 1995.
The securities market in the ROC is undergoing a process of expansion,
liberalization and internationalization. In the past, the development of the
securities market lagged behind the rapid development of the ROC's economy and
failed to serve as an effective mechanism for channeling the ROC's large pool
of savings into productive investment. Since 1981, the ROC government has
taken a number of steps designed to upgrade the quality and importance of the
securities markets. These steps include incentives to encourage listing of
shares on the TSE, the establishment of an over-the-counter securities market,
improvement of financial reporting requirements, pressure on government-owned
enterprises to use the securities market to raise capital and efforts to
broaden the scope and raise the quality of institutions operating in the
market.
THE TAIWAN STOCK EXCHANGE
The TSE, the ROC's only stock exchange, is a corporation with a
capitalization of NT$2.4 billion at the end of 1994, and is owned 61% by
private banks and enterprises and 39% by government-operated banks and
enterprises. The TSE is managed by a board of directors elected by and from
among the shareholders. The Chairman, President and other executive officers
of the TSE direct day-to-day operations through a number of operation
departments. Selection of the TSE's top management is influenced by the CSEC,
which also monitors the TSE's operations.
Both equity and debt securities are traded on the TSE. At December 31, 1995,
the aggregate trading value of listed equity securities was approximately
NT$10,152.0 billion (US$372.3 billion) and for the period from January 1 to
December 31, 1995, the average daily trading value was NT$35.5 billion (US$1.3
billion). The listed bond market remains small in terms of trading volume: at
December 31, 1995, aggregate trading value of listed debt securities was
approximately NT$18.0 billion (US$660.2 million) and for the period from
January 1 to December 31, 1995, the average daily trading value was
approximately NT$6.5 million (US$238,000).
The following table sets forth certain information regarding the TSE Index
for the periods indicated:
TSE INDEX (1966 = 100)
<TABLE>
<CAPTION>
NUMBER TOTAL
OF LISTED NUMBER TRADING
COMPANIES OF LISTED VALUE INDEX INDEX PERIOD-
YEAR IN INDEX COMPANIES (NT$ BILLION) HIGH LOW END
- ---- --------- --------- ------------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1990............. 174 199 19,031.3 12,495.34 2,560.47 4,530.16
1991............. 198 221 9,682.7 6,305.22 3,316.26 4,600.67
1992............. 234 256 5,917.1 5,391.63 3,327.67 3,377.06
1993............. 253 285 9,056.7 6,070.56 3,135.56 6,070.56
1994............. 280 313 18,812.1 7,183.75 5,194.63 7,124.66
1995............. 333 347 10,151.5 7,051.49 4,503.37 5,173.73
</TABLE>
- --------
Source: 1994 TSE Statistical Data; TSE Monthly Review, January 1996.
23
<PAGE>
In addition to providing a market for securities trading, the TSE has
primary responsibility for reviewing applications by ROC issuers to list on
the TSE. The TSE also has primary responsibility for the delisting of
securities, a step which is taken on the basis of various adverse factors,
including financial deterioration of the issuer. In addition to requirements
imposed by the CSEC, the TSE has specific requirements for listing based on
the number and distribution of shareholders, the amount of capital,
profitability and capital structure. Requirements for listing as First
Category, Second Category, and Third Category companies are set forth under
"The Securities Market of the ROC--The Primary Market" in the SAI.
THE OVER-THE-COUNTER MARKET
An over-the-counter ("OTC") market was established in September 1982 on the
initiative of the CSEC. This market is limited to unlisted equity securities,
corporate bonds and bank debentures, which are at present not widely utilized
as financial instruments in the ROC, and to government bonds. The OTC market
has grown erratically, with the total trading value increasing from NT$47
million in 1985 to approximately NT$2,796.3 million in 1995. A sharp increase
in recent years has resulted from trading in government bonds issued for the
Six-Year National Development Plan (the "Six-Year Plan"), the majority of
which is confined to trading in the repo market. At present, there are 107
brokers in the OTC market, of which 66 are able to trade for their own
account. Active traders include trust and investment companies and bills
finance companies. The OTC Securities and Exchange Commission on September 18,
1995 implemented a new trading system designed to encourage trading of
unlisted equity and debt securities of companies whose securities are not
qualified for listing on the TSE. To become a quotable security, the issuer
must meet certain requirements, including having a paid-in capital of at least
NT$50 million. In addition, the security must be recommended by two members of
the Taipei Securities Dealer Association, each of which must be qualified as
both an underwriter and trader, who will serve as market makers. As of
December 31, 1995, 41 companies had offered their equity securities to be
traded on the OTC market. It is expected that some small and medium-size
companies, which at present have limited funding channels and are too small to
list on the TSE, will utilize the OTC market as a source of funds in the
future.
REGULATORY ENVIRONMENT
The CSEC has operative responsibility for the implementation of the ROC
Securities and Exchange Law and of ROC government policies in the securities
market. In addition, the CSEC has consistently been involved in formulation of
policy and has participated in the comprehensive review of the securities laws
and regulations. The CSEC has a Chairman, a Vice-Chairman and nine to eleven
other commissioners (consisting of two to three full-time commissioners and up
to nine part-time commissioners) from the Ministry of Finance, the Central
Bank, the Ministry of Economic Affairs and other governmental agencies.
The CSEC has extensive regulatory authority over "public companies" and TSE-
listed companies. In order to make securities offerings in the ROC, "public
companies" and TSE-listed companies are required to (i) obtain approval from
the CSEC or (ii) file a report with the CSEC, which report will become
effective 30 days after filing if the CSEC has no objection. The CSEC also
administers the financial reporting system and licenses and supervises the
other participants in the ROC's securities market, including brokers, traders,
underwriters, investment advisers and trust funds. A particular focus of the
CSEC's efforts in recent years has been improving the quality of financial
reporting and accounting practices through the implementation of more
extensive and more frequent disclosure requirements, including periodic
financial reports and operating statements and disclosure of information
regarding material developments and ownership (including beneficial ownership)
of shares, and the imposition of criminal liability on accountants who are
knowingly involved in the preparation of fraudulent financial reports.
The ROC Securities and Exchange Law provides, among other things, for
regulations relating to public offerings, measures to strengthen the capital
structure of issuers, civil liability for material misstatements or
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omissions made by issuers, regulation of the securities activities of
officers, directors, supervisors and holders of more than 10% of the shares of
an issuer, regulations regarding tender offers and significant expansion of
the prohibitions against insider trading, including the imposition of treble
civil damages and criminal sanctions. The ROC Securities and Exchange Law
requires disgorgement of all profits gained by any person trading on inside
information regardless of the timing of the trades. The CSEC has also
instituted a system to oversee stock prices, which was designed to facilitate
the curbing of trading abuses. Nonetheless, there have been recurring press
reports of insider trading and manipulation of stock prices in the ROC. The
CSEC does not have enforcement powers under the ROC Securities and Exchange
Law, and thus its ability to curb abuses is limited to administrative measures
such as issuance of warnings and revocation of licenses. Enforcement
proceedings may be pursued by the district attorney upon the recommendation of
the CSEC.
Since 1983, the ROC authorities have taken steps to facilitate investment in
the ROC securities market by institutional investors, both foreign and
domestic, including investment by certain foreign funds in ROC securities,
direct investment in ROC securities (including securities of investment trust
enterprises) by certain qualified foreign institutional investors, the issue
and sale to foreigners, subject to CSEC approval, of depositary receipts
evidencing the shares of, and convertible bonds of, ROC companies and the
listing on the TSE of Taiwan depositary receipts evidencing shares of foreign
issuers. In addition, the ROC government recently promulgated regulations
which permit non-resident institutional and individual foreign investors
("General Foreign Investors") to invest directly in ROC securities, subject to
prior approval of the TSE. To encourage the development of the domestic
institutional investor base in Taiwan, the ROC authorities recently approved
the establishment of certain securities lending and finance companies.
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THE REPUBLIC OF CHINA
This information relating to the Republic of China is provided for
background purposes only and has generally been extracted from and is
presented on the authority of various public official documents. For further
background information, see "The Republic of China" in the SAI.
LOCATION, AREA AND POPULATION
Taiwan is located approximately 90 miles east of the Chinese mainland, 650
miles south of Japan, 340 miles northeast of Hong Kong and 200 miles north of
the Philippines. Owing to its geographical position, Taiwan plays a
significant role in trade, transportation and tourism in East Asia.
The island is 240 miles in length and 80 miles in width. In addition to the
island of Taiwan, there are over 77 offshore islands currently under the
effective control of the ROC. The total area of the ROC is approximately
13,900 square miles, which is approximately the same as that of the
Netherlands.
Taiwan's total population as of December 31, 1995 was estimated at 21.3
million. The literacy rate is approximately 94%. The bulk of the population is
composed of Chinese descendants of early migrants from the mainland and
mainland Chinese who migrated from the mainland in 1949 and their descendants.
Chinese persons make up approximately 98% of the population, with the
remaining 2% of the population consisting primarily of aboriginal natives of
the island. Population density is among the highest in the world with an
average of approximately 1,498 people per square mile. The largest cities are
Taipei, in the north, with over 2.7 million people, and Kaohsiung, in the
south, with over 1.4 million people. Mandarin is the official language, while
Fukien and Hakka dialects are also widely spoken.
POLITICAL HISTORY
The ROC was established in 1912 by Dr. Sun Yat-Sen and the KMT on mainland
China after the overthrow of the Ching Dynasty in 1911. The ROC government
remained on the mainland until December 1949 when General Chiang Kai-Shek, who
was elected president of the ROC by the National Assembly in 1948, moved the
seat to Taipei. Since that time, the ROC has continued to maintain that it is
the sole legitimate government of all of China (i.e., Taiwan and all of
mainland China and Mongolia). PRC also asserts sovereignty over all of China,
including Taiwan. The KMT is the dominant political party in the ROC and as of
December 31, 1995 controlled approximately 55% of the 334 seats in the
National Assembly and approximately 53% of the 167 seats in the Legislative
Yuan.
The current President, Lee Teng-Hui, assumed the Presidency in January 1988
and was elected Chairman of the KMT in July 1988. He is the first native-born
Taiwanese to hold either the office of President or Chairman of the KMT.
President Lee was re-elected in March 1996 for a four-year term of office.
Under the leadership of President Lee, the KMT has increased the pace of
political liberalization in the ROC, in accordance with a ten-year political
liberalization program introduced by President Lee's predecessor in 1986. The
program provides, among other things, for the gradual increase in the number
of generally elected parliamentary seats and the recognition of opposition
political parties. The Democratic Progress Party has emerged as a significant
opposition party in parliamentary and other national elections. In addition,
the Chinese New Party was formed in 1993 by disaffected members of the KMT.
RECENT ECONOMIC DEVELOPMENTS
Although ROC's gross national product ("GNP") growth has varied from a low
of 1.16% in 1974 to a high of 13.59% in 1978, it has never been negative. The
major components of GNP are private consumption and exports. Although Taiwan's
exports have continued to grow (increasing 20.0% in 1995 to US$111.7 billion)
and the country has continued to enjoy a cumulative trade surplus (US$8.1
billion in 1995), domestic demand has become an increasingly important force
in driving growth in the Taiwan economy. During 1993, the ROC gross
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domestic product ("GDP") grew at a real rate of approximately 6.3%. This
growth was sustained during 1994 when GDP grew at a rate of 6.5%. In 1995, the
ROC GDP grew at an annual rate of 6.1%.
Taiwan's foreign exchange reserves decreased by 2.3% during 1995 and stood
at US$90.3 billion on December 31, 1995. Taiwan's foreign exchange reserves
decreased to US$82.6 billion in March 1996 during recent political tensions
between the PRC and the ROC. On December 31, 1994, external public debt stood
at US$563.3 million, a decrease of 5.9% from 1993. External public debt
service payments represented approximately 0.1% of exports of goods and
services in 1994. Since 1984, Taiwan's favorable trade balance and the build-
up in foreign exchange reserves have caused appreciation of the NT Dollar and
heightened protectionist sentiments in Taiwan's major export markets. In 1987,
the NT Dollar appreciated approximately 19.6% against the U.S. Dollar. The NT
Dollar has further appreciated by 4.5% between December 31, 1987 and December
31, 1995.
Unemployment in Taiwan remained low in 1995, with an average rate of
approximately 1.9%. Wages have increased at a faster rate than inflation but
these wage increases have for the most part been matched by a corresponding
increase in productivity.
The decline of fixed capital formation as a percentage of GDP is a perennial
concern of government officials, but this percentage has remained consistent
over the past several years. Investment was 23.68%, 22.91% and 23.04% of GDP
in 1993, 1994 and 1995, respectively.
The ROC government has continued its policy of economic liberalization. In
March 1996, new regulations were approved which permit General Foreign
Investors to invest directly in ROC securities, subject to TSE approval. In
addition, insurance companies were permitted in March 1996 to invest in new
securities investment trust enterprises. Foreign exchange controls have also
been relaxed recently to allow for inward remittances of US$20 million per
corporate resident and US$5 million per individual resident per year.
In recent years, Taiwan has experienced growing competition from lower-wage
countries, particularly in Asia. In an effort to decrease reliance on labor-
intensive industries, the ROC government is promoting high-technology, energy-
efficient industries. Statutory incentives for high-technology and capital-
intensive industries included five-year tax exemptions, business tax
deductions for research and development expenses, lower tax rates and
accelerated depreciation. The government's initiatives in this area have met
with a large measure of success.
The ROC government supports the modernization of Taiwan's service industry
as a means to support higher levels of agricultural and industrial production
as well as to enhance the quality of life and make Taiwan's economy less
vulnerable to international economic fluctuations. Strategic service
industries include banking and other financial services, information and
software, management and computerization consulting, engineering design,
research and development and product and packaging design.
Although the ROC government has maintained a policy of no official contact
with the PRC, indirect trade has increased significantly, especially in the
past four years. Between 1983 and 1995, trade with Hong Kong, much of which
represents indirect trade between the ROC and PRC, increased over tenfold, to
US$28.0 billion in 1995, an increase of 22.8% from 1994. Companies in Taiwan
have invested significant amounts in PRC businesses through subsidiaries or
investment vehicles located in third countries. In 1991, the ROC government
established a procedure whereby Taiwan investors may register proposed
investments in mainland China with the Ministry of Economic Affairs. If an
investment is approved, the Taiwan investor may legally make an investment in
mainland China.
ECONOMIC PLANNING
Economic planning has been an important part of Taiwan's economic success.
Beginning in 1953, the ROC government instituted a series of economic plans
which have provided a framework for government policies and
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<PAGE>
have helped to adapt Taiwan's economy to changes in the domestic and
international economic environment. The current Four-Year Plan, which is the
eleventh such plan, covers the period from 1993 to 1997. In 1994 and 1995
economic growth averaged 6.30% in real terms, with inflation averaging 3.89%.
Within these same two years, the service sector grew faster than the
manufacturing sector, and accounted for 60.17% of GDP in 1995. One intent of
the Plan is to make domestic demand the primary engine of growth in Taiwan's
economy while limiting the contribution of foreign demand to growth of GDP.
PRICES AND WAGES
From 1982 to 1988, the ROC experienced relatively modest inflation, with an
average annual rise in the consumer price index of approximately 1%. Taiwan's
average annual rates of inflation in 1993, 1994 and 1995, were 2.9%, 4.1% and
3.9%, respectively. Such increases have not been fully reflected in all
sectors of the economy. For example, the wholesale price index fell in 1988
and 1990 although the consumer price index rose in the same periods.
Average monthly employee earnings in the manufacturing sector have generally
outpaced inflation. Between 1977 and 1995, the average monthly employee
earnings index in manufacturing grew faster than the consumer price index. The
rapid growth in wages reflects high demand for labor as evidenced by the low
unemployment rates in Taiwan.
GOVERNMENT PARTICIPATION IN THE ECONOMY
The economic activities of the ROC government have been a significant factor
in the growth of the economy. The government provides traditional government
services including national defense, postal service, education, infrastructure
for transportation and communications and public housing. In addition, the
government influences the level of economic activity through Four-Year Plans,
control of a number of key industrial enterprises and commercial banks and
sponsorship of major construction projects, like the Six-Year Plan, which
contribute to overall capital investment. In 1994, the government controlled
100% of utility production, 48.02% of mining production and 10.50% of all
manufacturing production.
FOREIGN INVESTMENT
Foreign investment in Taiwan has played an important role in the development
of the nation's economy and has received extensive encouragement by the
government, especially in the export and technology transfer sectors.
Aggregate foreign investment from 1952 through December 1995 totalled US$22.3
billion, with US$19.4 billion invested by non-Chinese foreign nationals and
US$2.9 billion invested by overseas Chinese, principally Hong Kong residents.
This money was largely invested in the electronic and electric product
industry (26%), chemicals (14.4%) and the services industry (exclusive of
banking and insurance) (10.8%). In 1995, foreign investment in the ROC
totalled US$2.9 billion, an increase of 79.4% from 1994. Of this amount, over
94.2% came from non-Chinese foreign investors with the remainder coming from
overseas Chinese, principally in Hong Kong.
FOREIGN TRADE
Foreign trade accounts for a major percentage of Taiwan's economic activity.
Taiwan's growth has, to a significant degree, been export driven and in recent
years, nearly 50% of the country's GNP has been derived from the export
sector. Imports are also critical for Taiwan as it is dependent on foreign
sources for over 90% of its energy needs and key raw materials and capital
equipment used in its export industries. In addition, heightened domestic
demand for consumer items has contributed to an increase in imports as a
percentage of GDP. In recent years, Taiwan's trade balance has been
consistently positive; the highest surplus of US$18 billion was recorded in
1987. In 1994 and 1995, the trade surplus was US$7.7 billion and US$8.1
billion, respectively. As a result of high overall balance of payments
surpluses, Taiwan has in the past experienced a dramatic increase in foreign
exchange reserves. Starting in 1991, however, this trend slowed down largely
because of capital outflow and a
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<PAGE>
decreasing trade surplus. At December 31, 1995, Taiwan's foreign exchange
reserves stood at US$90.3 billion. Taiwan's foreign exchange reserves
decreased to US$82.6 billion in March 1996 during recent political tensions
between the PRC and the ROC.
In 1995, the United States was the ROC's largest export market with a 23.7%
share of Taiwan's total exports. Hong Kong and Japan were the next largest
markets in 1995 with shares of 23.4% and 11.8%, respectively. From 1990 to
1995, Taiwan's total exports to Hong Kong increased by 205.3%. Taiwan's
increasing dependence on Hong Kong reflects the growing importance of the PRC
markets to the ROC.
BALANCE OF PAYMENTS
As a result of the increase in world oil prices in 1978-1979, Taiwan
incurred a current account deficit of US$913 million in 1980, and an overall
balance of payments deficit for that year of US$319 million. Since that time,
the country's overall balance of payments situation has steadily improved.
Record high surpluses were recorded in 1987 for the trade balance (US$20.3
billion), the current account balance (US$18.0 billion) and the overall
balance (US$19.3 billion). In 1995, the trade balance stood at US$8.1 billion;
the current account balance was US$5.0 billion; and the overall balance was a
deficit of US$3.9 billion.
CURRENCY AND EXCHANGE RATES
On May 2, 1996, the spot buying rate was NT$27.12 per US$1.00 and the spot
selling rate was NT$27.22 per US$1.00. The NT Dollar depreciated 3.90% versus
the U.S. dollar during the year 1995. The provisions of the Statute Governing
Foreign Exchange of 1960, as amended, provide that all foreign exchange
transactions must be executed by banks duly authorized by the Ministry of
Finance and the Central Bank.
EXTERNAL PUBLIC DEBT
Since 1985, Taiwan's outstanding external public debt has been reduced from
US$5.2 billion to US$563.3 million in 1994.
UNDERWRITING
The Underwriters named below, acting through their representative, Kleinwort
Benson North America Inc. (the "Representative"), have severally agreed,
subject to the terms and conditions of a purchase agreement (the "Purchase
Agreement") among the Underwriters, the Fund and the Adviser, to purchase from
the Fund the number of Shares set forth opposite their names in the following
table. The Underwriters are committed to purchase all such Shares if any are
purchased. Under certain circumstances, the commitments of non-defaulting
Underwriters may be increased as set forth in the Purchase Agreement.
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
------------------- ----------------
<S> <C>
Kleinwort Benson North America Inc. ..................... 1,204,282
PaineWebber Incorporated ................................ 66,905
Baring Brothers Limited ................................. 66,904
---------
Total.................................................. 1,338,091
=========
</TABLE>
The Representative has advised the Fund that the Underwriters propose
initially to offer the Shares to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $0.67 per Share and that the
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $0.09 per Share to certain other dealers. After the initial public
offering, the public offering price, concession and reallowance may be changed
by the Representative. In addition, the Fund has agreed to pay $75,000 to the
Underwriters as reimbursement for certain expenses. Investors must pay for any
Shares purchased in this offering on or before May 8, 1996.
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<PAGE>
The Fund has granted to the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to an aggregate of 200,714
additional Shares at the same price per Share as the initial 1,338,091 Shares
to be purchased by the Underwriters solely to cover over-allotments. In the
event that the Underwriters exercise their option, each Underwriter will be
obligated, subject to certain conditions, to purchase the number of additional
Shares proportionate to its initial commitment.
In the Purchase Agreement, the Fund and the Adviser have agreed, jointly and
severally, to indemnify the Underwriters against certain liabilities,
including liabilities under the U.S. Securities Act of 1933.
Under the Agreement Among Underwriters, all stabilization transactions, if
any, shall be conducted at the direction of the Representative. Asian Capital
Partners Limited has acted as financial adviser to the Fund in connection with
this offering.
Each Underwriter has agreed that it will comply with the applicable
provisions of the U.S. Securities Act of 1933, as amended, and the U.S.
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the
respective rules and regulations of the U.S. Securities and Exchange
Commission thereunder, the applicable rules and regulations of the National
Association of Securities Dealers, Inc. and the applicable rules of any
securities exchange having jurisdiction over the offering.
Each Underwriter has represented and agreed that (i) it has not offered or
sold, and will not offer or sell, any Shares to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public within the meaning of
the Public Offers of Securities Regulations 1995, (ii) it has complied, and
will comply, with all applicable provisions of the Financial Services Act 1986
of Great Britain with respect to anything done by it in relation to the Shares
in, from or otherwise involving the United Kingdom, and (iii) it has only
issued or passed on and will only issue or pass on in the United Kingdom any
document received by it in connection with the issue of the Shares to a person
who is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1995 of Great Britain or is a
person to whom the document may otherwise lawfully be issued or passed on.
Each Underwriter has severally acknowledged and agreed that the Shares have
not been and will not be registered under the Securities and Exchange Law of
Japan and that it has not offered or sold and will not offer or sell, directly
or indirectly, any Shares in Japan or to or for the account of any resident of
Japan, except (i) pursuant to an exemption from the registration requirements
of the Securities and Exchange Law of Japan; and (ii) in compliance with any
other applicable requirements of Japanese law.
Pursuant to the Purchase Agreement, the Fund will agree that, for a period
of 180 days from the date of this Prospectus, it will not, without the prior
written consent of the Representative acting on behalf of the Underwriters (i)
directly or indirectly, sell, offer to sell, grant any option for the sale of,
or otherwise dispose of, any shares of Common Stock or securities convertible
into or exchangeable into or exercisable for shares of Common Stock, or (ii)
permit any of its directors or officers to, directly or indirectly, sell,
offer to sell, grant any option for the sale of, or otherwise dispose of, any
shares of Common Stock or securities convertible into or exchangeable into or
exercisable for shares of Common Stock.
The principal business address of Kleinwort Benson North America Inc. is 200
Park Avenue, New York, New York 10166.
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<PAGE>
DIVIDENDS AND DISTRIBUTIONS;DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Fund intends to distribute to shareholders, at least annually,
substantially all of its investment company taxable income including dividends
and interest and expects to distribute its net realized capital gains, if any,
at least annually. Pursuant to the DRIP Plan, shareholders may elect to have
all distributions automatically reinvested by State Street Bank and Trust
Company (the "Plan Agent") in Fund shares pursuant to the DRIP Plan.
Shareholders who do not participate in the Plan will receive all distributions
in cash paid by check in U.S. Dollars mailed directly to the shareholder by
State Street Bank and Trust Company, as paying agent.
The Plan Agent serves as agent for the shareholders in administering the
DRIP 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, nonparticipants in the DRIP Plan will
receive cash and participants in the DRIP 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 or, if the net asset value is
less than 95% of the market price on the valuation date, then 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 DRIP Plan will be deemed to have elected to receive shares
of stock from the Fund, valued at market price on the valuation date. 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'
accounts on, or shortly after, the payment date.
Participants in the DRIP Plan have the option of making additional cash
payments to the Plan Agent, semiannually, in any amount from $100 to $3,000,
for investment in the Fund's common stock. The Plan Agent will use all funds
received from participants (as well as any dividends and capital gain
distributions received in cash) to purchase Fund shares in the open market on
or about February 15 and August 15 of each year. 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 forty-eight hours before such payment is to be
invested.
The Plan Agent maintains all shareholder accounts in the DRIP Plan and
furnishes written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Shares in the
account of each DRIP 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 DRIP Plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will
administer the DRIP Plan on the basis of the number of shares certified from
time to time by the shareholder as representing the total amount registered in
the shareholder's name and held for the account of beneficial owners who are
participating in the DRIP Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of the
reinvestment of dividends and distributions will be paid by the Fund. However,
each participant's account will be charged a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions.
A participant's account will also be charged brokerage commissions incurred in
purchases from voluntary cash payments made by the participant.
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<PAGE>
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 of individual accounts through the DRIP 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.
Participants in the DRIP Plan may withdraw from the DRIP Plan without
penalty at any time by written notice to State Street Bank and Trust Company,
the Plan Agent. Such withdrawal will be effective immediately if notice is
received by the Plan Agent not less than ten days prior to any dividend or
distribution record date; otherwise such withdrawal will be effective on the
first trading day after the payment date for such dividend or distribution
with respect to any subsequent dividend or distribution.
Upon any termination, the Plan Agent will deliver to the participant,
without charge, stock certificates for all full shares and a cash adjustment
at the current market price for any fractional shares held for that
participant under the DRIP Plan. The Plan Agent, upon written notice in
advance of such termination, will sell part or all of the terminating
participant's shares and remit the proceeds to such participant, less a
service fee of $2.50 and less brokerage commissions.
Shareholders whose securities are held in the name of a brokerage firm,
bank, or other nominee, are requested to contact their nominee to arrange for
it to participate in the DRIP Plan on their behalf. Shareholders whose
securities are held in their own name should contact the Plan Agent at the
address indicated below in order to participate in the DRIP Plan.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax, including withholding tax, which may be
payable on such dividends or distributions.
Experience under the DRIP Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the DRIP Plan
as applied to any voluntary cash payments made and any dividend or
distribution paid subsequent to notice of the change sent to all shareholders
at least 90 days before the record date for such dividend or distribution. The
DRIP Plan also may be amended or terminated by the Plan Agent by at least 90
days' written notice to all shareholders. All correspondence concerning the
DRIP Plan should be directed to the Plan Agent at State Street Bank and Trust
Company, P.O. Box 8200, Boston, Massachusetts 02266 (telephone number: (800)
426-5523).
TAXATION
ROC INCOME TAXES
Under the Income Tax Law of the ROC, dividend and interest income received
on assets held under the Management Contract from sources within the ROC will
be subject to a 20% withholding tax. Stock dividends are subject to an income
tax which is payable on receipt or, in certain cases, on disposal of the stock
dividends. In the case of stock dividends which are so taxable, the Custodian
will receive the full entitlement without deduction, but the Adviser will be
obliged to pay out of cash held under the Management Contract an amount equal
to 20% of the par value of the securities received. Since stock dividends are
held for the investment account of the Fund, the amount of any such payment
will be charged to operations. Securities received as stock dividends are
treated for the purposes of the capital gains income tax described below in
the same way as other securities held. Transactions in securities are not
currently subject to any capital gains tax.
In September 1988, the ROC government announced that, beginning on January
1, 1989, a capital gains tax on gains derived from stock transactions would be
reimposed. A ruling from the ROC government in 1983 had indicated that
investment funds such as the Fund would remain exempt from this tax until
December 31, 1990. On January 1, 1990, this capital gains tax was again
suspended. On January 4, 1996, the ROC Legislative Yuan passed a bill for the
amendment of the ROC Income Tax Law that would have eliminated the exemption
from
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<PAGE>
the ROC income tax for gains realized on the sale of ROC securities and
imposed a capital gains tax. On January 12, 1996, this amendment was repealed
by the Legislative Yuan. The reintroduction of a capital gains tax would
require the Legislative Yuan to engage in the full legislative process for the
enactment of tax legislation. There can be no assurance that the capital gains
tax will not be imposed in the future or that the Fund will continue to be
exempt from such tax.
Profits on sales of Fund shares effected by non-resident foreigners wholly
outside the ROC will not be subject to ROC income tax.
Securities Transaction Tax. In general, on any sale of bonds, stocks,
debentures and certain other securities, a securities transaction tax is
payable by the seller at the rate of 0.3% of the transaction price for stocks
and 0.1% of the transaction price for bonds and mutual fund shares. Sales of
Fund shares effected outside the ROC will not be subject to the securities
transaction tax.
U.S. FEDERAL INCOME TAXES
The Fund intends to continue to qualify, and elect to be treated, as a
regulated investment company under the Code. The Fund intends to distribute
substantially all its net investment income and net capital gains each year
(thereby avoiding the imposition of Federal income and excise taxes on such
distributed income and gain in the Fund). Such distributions will be taxable
as ordinary income and long-term capital gains, respectively, to shareholders
of the Fund who are subject to tax whether received in shares or in cash.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming
such shares are held as a capital asset). Notwithstanding the above, the Fund
may decide to retain all or part of any net capital gains for reinvestment. If
the Fund retains for reinvestment or otherwise an amount of such net long-term
capital gains, it will be subject to a tax of 35% of the amount retained. The
Board of Directors of the Fund will determine at least once a year whether to
distribute any net long-term capital gains in excess of net short-term capital
losses and capital loss carryovers from prior years. The Fund expects to
designate amounts retained as undistributed capital gains in a notice to its
shareholders who, if subject to U.S. federal income taxation on long-term
capital gains, (a) will be required to include in income for U.S. federal
income tax purposes, as long-term capital gains, their proportionate shares of
the undistributed amount, and (b) will be entitled to credit against their
U.S. federal income tax liabilities their proportionate shares of the tax paid
by the Fund on the undistributed amount and to claim refunds to the extent
that their credits exceed their liabilities. For U.S. federal income tax
purposes, the basis of shares owned by a shareholder of the Fund will be
increased by an amount equal to 65% of the amount of undistributed capital
gains included in the shareholder's income.
As set forth above under "ROC Income Taxes," it is expected that dividends
and interest earned by the Fund from ROC resident issuers will be subject to a
20% ROC withholding tax, which, in the case of stock dividends, will be paid
by the Adviser out of assets held under the Management Contract. If the Fund
qualifies as a regulated investment company, if certain distribution
requirements are satisfied, and if more than 50% of the value of the Fund's
assets at the close of the taxable year consists of stocks or securities of
foreign corporations, the Fund may elect, for U.S. federal income tax
purposes, to treat any such ROC withholding taxes that can be treated as
income taxes under U.S. income tax principles as paid by its shareholders. The
Fund has qualified for and has made this election in the past and intends to
again make this election. As a consequence, the amount of such ROC withholding
taxes will be included in the income of the Fund's shareholders and reported
to the U.S. Internal Revenue Service for such shareholders and each such
shareholder may be entitled to credit its portion of these amounts against its
U.S. federal income tax liability, if any, or to deduct its portion from its
U.S. taxable income, if any. The amount of ROC income taxes that may be
credited against a shareholder's United States tax liability in any particular
year generally cannot exceed an amount equal to the shareholder's United
States federal income tax liability multiplied by the percentage of its
taxable income that consists of foreign source taxable income, and the amount
creditable is subject to a further limitation discussed below based on the
category of foreign source income for which credit is claimed. For this
purpose, the Fund expects that the capital gains it distributes to its
shareholders, whether as dividends or capital gains distributions,
33
<PAGE>
will not be treated as foreign source taxable income. Under the Code, the
foreign tax credit limitation must be applied separately to certain categories
of foreign source income including foreign source "passive income." For this
purpose, foreign source "passive income" includes dividends, interest, certain
capital gains and certain foreign currency gains. As a consequence, although
certain shareholders may be able to carryback or carryforward foreign tax
credits, certain shareholders may not be able to claim a foreign tax credit
for the full amount (or possibly any) of their proportionate share of ROC
income taxes paid by the Fund. Each shareholder will be notified within 60
days after the close of the Fund's taxable year whether, pursuant to the
election described above, the foreign taxes paid by the Fund will be treated
as paid by its shareholders for that year and, if so, such notification will
designate (i) such shareholder's portion of the foreign taxes paid to such
country and (ii) the portion of the Fund's dividends and distributions that
represents income derived from sources within such country.
After the end of each taxable year, the Fund will notify shareholders of the
Federal income tax status of any distributions, or deemed distributions, made
by the Fund during such year. For a further discussion of certain income tax
consequences to the Fund and to shareholders of the Fund, see "Taxation--U.S.
Federal Income Taxes" in the SAI.
COMMON STOCK
The authorized capital stock of the Fund is 20,000,000 shares of Common
Stock, par value $0.01 per share, of which, as of the date hereof, 14,826,714
shares have been issued and are outstanding. Each share has equal rights in
respect of the assets or dividends and each of the Shares offered hereby, when
issued, will be fully paid and non-assessable.
The Fund's board of directors, at a meeting held on December 1, 1995,
approved an amendment to increase the authorized capital stock of the Fund
from 20,000,000 to 60,000,000, subject to shareholder approval. The board of
directors expects to submit the proposed amendment at the next annual
shareholders' meeting to be held in 1997. There can be no assurance that the
shareholders will vote to approve such proposal.
The Fund does not have any current plans to make additional offerings of its
shares, except that additional shares may be issued under the DRIP Plan.
Offerings of additional shares, if made, will require approval of the Fund's
Board of Directors and the CSEC. Any such additional offerings would also be
subject to the requirements of the 1940 Act, including the requirement that
shares may not be sold at a price below the then current net asset value of
the Fund's shares (exclusive of any underwriting commission or discount)
except in connection with an offering to existing shareholders or with the
consent of the holders of a majority of the Fund's shares. The Fund may in the
future issue additional shares at a price below market value subject to the
foregoing, and without shareholder approval.
Shareholders are entitled to one vote per share and do not have cumulative
voting rights. Thus, holders of more than 50% of the shares voting for the
election of directors have the power to elect 100% of the directors, and, if
such event should occur, the holders of less than 50% of the shares voting for
directors would not be able to elect any person or persons to the Board of
Directors.
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
State Street Bank and Trust Company acts as the Fund's dividend paying agent
and as transfer agent and registrar for the Fund's Common Stock. The principal
business address of State Street Bank and Trust Company is 225 Franklin
Street, Boston, Massachusetts 02110.
CUSTODIANS
The International Commercial Bank of China (the "Custodian") has been
retained pursuant to the Management Contract to act as Custodian of all the
cash and securities held under the Management Contract. Such cash and
securities will be held for the Fund at the Custodian's Taipei branch. The
principal business address of the Custodian is 100 Chi-lin Road, Taipei 10424,
Taiwan, ROC. State Street Bank and Trust Company
34
<PAGE>
acts as the custodian for the Fund's U.S. Dollar-denominated securities held
in the United States. The principal business address of State Street Bank and
Trust Company is 225 Franklin Street, Boston, Massachusetts 02110.
EXPERTS
The financial statements and financial highlights for the fiscal year ended
August 31, 1995 included in the SAI have been audited by Coopers & Lybrand
L.L.P., independent accountants, as indicated in their report with respect
thereto, and have been included in reliance upon the authority of said firm as
experts in auditing and accounting in giving said report. The principal
business address of Coopers & Lybrand L.L.P. is One Post Office Square,
Boston, Massachusetts 02109.
LEGAL MATTERS
Legal matters in connection with this offering will be passed on for the
Fund by Rogers & Wells, 200 Park Avenue, New York, New York 10166, and for the
Underwriters by Shearman & Sterling, 599 Lexington Avenue, New York, New York
10022. With respect to all matters of ROC law, counsel for the Fund and
counsel for the Underwriters will rely on Lee and Li, 201 Tun Hwa N. Road, 7th
Floor, Taipei, Taiwan, ROC.
Certain of the officers and directors of the Fund, as indicated under the
caption entitled "Management of the Fund" in the SAI, are neither citizens nor
residents of the United States. Consequently, it may be difficult for
investors to effect service of process within the United States upon such
persons or to realize against them upon judgments of courts in the United
States predicated upon civil liability under the U.S. federal securities laws.
The Fund has been advised by its ROC counsel that there is doubt as to whether
ROC courts will enforce liabilities predicated solely upon United States
securities laws, whether or not such liabilities are based upon judgments of
courts in the United States.
The books and records of the Fund will be maintained at the Fund's principal
address in the United States and will be subject to inspection by the U.S.
Securities and Exchange Commission.
ADDITIONAL INFORMATION
The Fund has filed with the U.S. Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933, as amended, with respect to the Shares offered hereby. Further
information concerning the Shares and the Fund may be found in the
Registration Statement, of which this Prospectus and the SAI constitute a
part. The Registration Statement may be inspected without charge at the
Commission's office in Washington, D.C., and copies of all or any part thereof
may be obtained from such office after payment of the fees prescribed by the
Commission.
The Fund is subject to the informational requirements of the 1934 Act, and
the 1940 Act, and in accordance therewith files reports and other information
with 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, Washington, D.C. 20549 and the Commission's regional offices at
Seven World Trade Center, New York, New York 10048. 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. Such reports
and other information concerning the Fund may also be inspected at the offices
of the Commission.
35
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Investment Objective and Policies...................................... SAI-2
Investment Limitations................................................. SAI-2
Management of the Fund................................................. SAI-4
Foreign Investment and Exchange Controls in the ROC.................... SAI-7
ROC Government Supervision and Regulation of the Management Contract
and the Adviser....................................................... SAI-9
The Securities Market of the ROC....................................... SAI-10
The Republic of China.................................................. SAI-14
Estimated Expenses..................................................... SAI-27
Portfolio Transactions and Brokerage................................... SAI-27
Net Asset Value........................................................ SAI-28
Taxation............................................................... SAI-28
Official Documents..................................................... SAI-33
Financial Statements................................................... F-1
</TABLE>
36
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR
THE UNDERWRITERS. 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 OR THE ADVISER SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS
REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLE-
MENTED ACCORDINGLY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OTHER THAN THE SHARES OF-
FERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR AN OFFER
TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SO-
LICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Fee Table................................................................ 8
Financial Highlights..................................................... 9
Market and Net Asset Value Information................................... 10
The Fund................................................................. 11
Use of Proceeds.......................................................... 11
Risk Factors and Special Considerations.................................. 12
Investment Objective and Policies........................................ 17
Management of the Fund................................................... 18
The Securities Market of the ROC......................................... 23
The Republic of China.................................................... 26
Underwriting............................................................. 29
Dividends and Distributions; Dividend Reinvestment and Cash Purchase
Plan.................................................................... 31
Taxation................................................................. 32
Common Stock............................................................. 34
Transfer Agent, Dividend Paying Agent and Registrar...................... 34
Custodians............................................................... 34
Experts.................................................................. 35
Legal Matters............................................................ 35
Additional Information................................................... 35
Table of Contents of Statement of Additional Information................. 36
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,338,091 SHARES
THE TAIWAN FUND, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
KLEINWORT BENSON NORTH AMERICA INC.
ASIAN CAPITAL PARTNERS
PAINEWEBBER INCORPORATED
ING BARINGS
MAY 3, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE TAIWAN 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 May 3, 1996 (the
"Prospectus"). This SAI does not include all information that a prospective
investor should consider before purchasing shares of The Taiwan Fund, Inc.
(the "Fund") and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge by
calling the Fund's Shareholder Servicing Agent, Corporate Investors
Communications, Inc. at (800) 636-9242. This SAI incorporates by reference the
entire Prospectus. Capitalized terms used herein and not otherwise defined
shall have the same meanings as provided in the Prospectus. The date of this
SAI is May 3, 1996.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Objective and Policies...................................... SAI-2
Investment Limitations................................................. SAI-2
Management of the Fund................................................. SAI-4
Foreign Investment and Exchange Controls in the ROC.................... SAI-7
ROC Government Supervision and Regulation of the Management Contract
and the Adviser....................................................... SAI-9
The Securities Market of the ROC....................................... SAI-10
The Republic of China.................................................. SAI-14
Estimated Expenses..................................................... SAI-27
Portfolio Transactions and Brokerage................................... SAI-27
Net Asset Value........................................................ SAI-28
Taxation............................................................... SAI-28
Official Documents..................................................... SAI-33
Financial Statements................................................... F-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital
appreciation through investment primarily in equity securities listed on the
Taiwan Stock Exchange (the "TSE") in the Republic of China (the "ROC"). There
can be no assurance that the Fund's investment objective will be achieved. See
"Investment Objective and Policies" in the Prospectus.
INVESTMENT LIMITATIONS
The following investment limitations are fundamental policies of the Fund
and may not be changed without the approval of the holders of a majority of
the Fund's outstanding voting securities and the consent of the ROC Securities
and Exchange Commission (the "CSEC"). The same investment limitations are set
out in the Management Contract (as defined below), except that the Management
Contract does not contain the provisions in paragraph 4 below permitting
borrowing by the Fund in the United States because the Management Contract
relates only to the Fund's investment activities in Taiwan and such borrowing
transactions are not permitted in Taiwan. See "Investment Objective and
Policies" in the Prospectus and "Foreign Investment and Exchange Controls in
the ROC" herein. 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 of such restriction. Also, if the Fund receives from an issuer of
ROC securities held by the Fund subscription rights to purchase securities of
that ROC issuer, and if the Fund exercises such subscription rights at a time
when the Fund's portfolio holdings of securities of that issuer (or that
issuer's industry) would otherwise exceed the limits set forth in clauses (i),
(ii), (iii) or (iv) of paragraph 1 below (or would, as a result of such
exercise, exceed such limits), it will not constitute a violation if, prior to
receipt of securities upon exercise of such rights, and after announcement of
such rights, the Fund has sold at least as many shares of the same class and
value as it would receive on exercise of such rights.
1. The Fund will not purchase any security (other than obligations of the
U.S. government or its agencies or instrumentalities) if as a result: (i) as
to 75% of the Fund's total assets, more than 5% of the Fund's total assets
(taken at current value) would then be invested in the securities of a single
issuer, (ii) as to the remaining 25% of the Fund's total assets, more than 10%
of the Fund's total assets (taken at current value) would then be invested in
securities of a single issuer (except that the Fund may invest not more than
25% of its total assets in obligations of the ROC government or its agencies
or instrumentalities), (iii) more than 10% of the voting equity securities (at
the time of such purchase) of any one issuer would be owned by the Fund, and
(iv) more than 25% of the Fund's total assets (taken at current value) would
be invested in a single industry.
2. The Fund will not purchase any equity securities which, at the date
purchase is made, are not listed and traded on the TSE.
3. The Fund will not purchase partnership interests.
4. The Fund will not borrow money or pledge its assets, except that the Fund
may borrow from a bank in the United States 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 held in the United States to secure such borrowings.
5. The Fund will not purchase securities on margin, except for short-term
credits as may be necessary for clearance of transactions.
6. The Fund will not make short sales of securities or maintain a short
position.
7. The Fund will not buy or sell commodities or commodity contracts or real
estate or interests in real estate.
SAI-2
<PAGE>
8. The Fund will not act as an underwriter of securities of other issuers.
9. The Fund will not make loans, including loans of cash or portfolio
securities, to any person; for purposes of this investment restriction, the
term "loans" shall not include the purchase of a portion of an issue of
publicly distributed bonds, debentures or other securities.
10. The Fund will not purchase securities issued by any issuer which owns,
whether directly or indirectly or in concert with another person, more than 5%
of the equity securities (whether voting or non-voting) of the Adviser or
which takes a significant role in the management of the Adviser.
11. The Fund may not issue senior securities.
12. The Fund will not purchase beneficiary certificates representing
interests in other ROC securities investment trust funds or effect any
transaction in securities with another ROC securities investment trust fund
managed by the Adviser.
In addition to the foregoing investment limitations, investments by the Fund
are subject to the limitations imposed by the Investment Company Act of 1940,
as amended (the "1940 Act"), including certain more restrictive limitations on
transactions between the Fund and its affiliates. Also, investments by the
Fund are subject to applicable ROC law and regulations. See "ROC Government
Supervision and Regulation of the Management Contract and the Adviser."
Pursuant to the recently amended Trust Fund Regulations (as defined herein),
securities investment trust funds (including the Fund) may subscribe for
shares which are listed or to be listed on the TSE or the Over-the-Counter
("OTC") market in an underwritten offering as well as listed beneficiary
certificates which are issued by other fund managers, each subject to certain
investment limitations. The ability of the Fund to subscribe for shares to be
listed on the TSE or the OTC market would require an amendment to the
Management Contract and the investment limitation set forth in paragraph 2
above. The ability of the Fund to subscribe for listed beneficiary
certificates which are issued by other fund managers would require an
amendment to the Management Contract and the investment limitation set forth
in paragraph 12 above and would be subject to further restrictions set forth
under the 1940 Act. The inability of the Fund to purchase securities in such
offerings is not expected to have a material adverse effect on the Fund's
acquisition of portfolio securities because such offerings do not occur
frequently and are generally over-subscribed with the result that individual
purchasers are given limited allocations.
The Fund's board of directors at a meeting held on December 1, 1995,
approved amendments to the Fund's investment limitations set forth in
paragraphs 2 and 7 above to permit the Fund to subscribe for shares which are
listed or to be listed on the TSE in an underwritten offering and to engage in
currency hedging transactions, respectively, each subject to shareholder
approval. The board of directors expects to submit the proposed amendments at
the next annual shareholders' meeting to be held in 1997. There can be no
assurance that the shareholders will vote to approve such proposal.
SAI-3
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The names of the directors and principal officers of the Fund are set forth
below, together with their positions and their principal occupations during
the past five years and, in the case of the directors, their positions with
certain other international organizations and publicly held companies.
<TABLE>
<CAPTION>
POSITION
NAME AND ADDRESS WITH FUND AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
---------------- ------------ --- -----------------------------------------------
<S> <C> <C> <C>
Benny T. Hu(1)*......... Director and 47 President, China Development Corporation
125 Nanking East Road President (1993-present); Chairman, China Securities
Section 5 Investment Trust Corporation (1992-1993);
Taipei, Taiwan, ROC President, China Securities Investment
Trust Corporation (1985-1992); Chairman,
Far East Air Transport Corp. (1995-pres-
ent); Executive Director, Merrill Lynch In-
ternational, Inc. (1986-1990); Executive
Vice President, International Investment
Trust Co., Ltd. (1983-1986); Director,
China Steel Corporation (1993- present);
Director, MITAC International Corp. (1993-
present)
Harvey H.W. Chang(1)*... Director 44 Chairman, China Securities Investment Trust
99 Tun Hwa South Road Corporation (1993-present); President,
Section 2 China Development Corporation (1992-1993);
Taipei, Taiwan, ROC President, Grand Cathay Securities Corpora-
tion (1989-1992)
Joe O. Rogers........... Director 47 Partner, PHH Fantus Consulting (May 1993-
2018 Gunnell Farms present); Partner, Alcalde, Rousselot & Fay
Drive (1992-May 1993); Director, The China Fund,
Vienna, VA 22181 Inc. (1992-present); President, Rogers In-
USA ternational Inc. (1986-present); President,
Middendorf Rogers Martin Group Inc. (1987-
1989); U.S. Executive Director, Asian De-
velopment Bank (1984-1986); Executive Di-
rector, Republican Conference, U.S. House
of Representatives (1981-1984)
Jack C. Tang(1)......... Director 68 Director, Pacific Rim Investments Ltd.
Suite 1601, Tower 1 (1991-present); Chairman and Chief Execu-
China Hong Kong City 33 tive Officer, Tristate Holdings Limited
Canton Road (1987-present); Director, Mid Pacific Air
Tsim Sha Tsui Corporation (1986-present); Chairman, South
Kowloon, Hong Kong Sea Development Co. Ltd. (March-September
1992); Chairman and Managing Director,
South Sea Textile Manufacturing Co., Ltd.
(1971-1992); Director, The Hong Kong and
Shanghai Banking Corporation (1984-1991);
Chairman, Pacific Rim Investments Ltd.
(1989-1991)
</TABLE>
SAI-4
<PAGE>
<TABLE>
<CAPTION>
POSITION
NAME AND ADDRESS WITH FUND AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
---------------- ------------- --- -----------------------------------------------
<S> <C> <C> <C>
Shao-Yu Wang(1)......... Director 73 Chairman, Taiwan Styrene Monomer Corpora-
8th Floor tion (1979-present); Director, American
6 Roosevelt Road California Bank (1980-present); Chairman of
Section 1 the Board, Soochow University (1987-pres-
Taipei, Taiwan, ROC ent); Director and Chairman, Asia Polymer
Corporation; Director, CTCI Corporation;
Director, Taiwan Synthetic Rubber Corpora-
tion; Director, Oriental Union Chemical
Corp.
David Dean.............. Director 70 Senior Advisor of the Chiang-Ching-Kuo
8361 B. Greensboro Foundation (1990-present); Director, The
Drive American Institute in Taiwan (1979-1989)
McLean, Virginia 22102
USA
Lawrence F. Weber.......... Director 63 Independent Consultant (1993-present); Di-
156 Ide Road rector, East Asia/Australia, UBS Asset Man-
Williamstown, Massachusetts agement (N.Y.) (1991-1993); Managing Direc-
01267 USA tor, Asia-Pacific, Chase Investors Manage-
ment (1983-1991)
Gloria Wang*............ Treasurer and 41 Executive Vice President, China Securities
99 Tun Hwa South Road Secretary Investment Trust Corporation (1995-pres-
Section 2 ent); Senior Vice President, China Securi-
Taipei, Taiwan, ROC ties Investment Trust Corporation (1993-
1995); Assistant Vice President, China Se-
curities Investment Trust Corporation
(1988-1993)
Laurence E. Cranch*........ Assistant 48 Member of Rogers & Wells (1980-present),
200 Park Avenue Secretary U.S. Counsel to the Fund
New York, New York 10166
USA
</TABLE>
- --------
* Interested person of the Fund (as defined in the 1940 Act). Mr. Chang and
Ms. Wang are deemed to be interested persons because of their affiliation
with the Adviser. Mr. Hu is deemed to be an interested person because of
his affiliation with controlling shareholders of the Adviser. Mr. Cranch is
deemed to be an interested person because of his affiliation with the
Fund's U.S. legal counsel.
(1) An officer or director who is neither a citizen nor a resident of the
United States. See "Legal Matters" in the Prospectus.
At April 25, 1996, none of the directors and officers of the Fund owned any
shares of the Fund's Common Stock, except for Mr. Joe O. Rogers, who owned
less than 1% of the outstanding shares.
The officers of the Fund and the Portfolio Manager (as defined in the
Prospectus) conduct and supervise the daily business operations of the Fund,
while the directors review such actions and decide on general policy.
The Fund pays to each of its directors who is not an affiliated person of
the Adviser, in addition to certain out-of-pocket expenses, an annual fee of
$7,500, plus $750 for each directors' meeting and committee meeting attended
in person. For the year ended August 31, 1995, such fees and expenses
aggregated $89,782.
SAI-5
<PAGE>
The following table sets forth the aggregate compensation from the Fund paid
to each director during the fiscal year ended August 31, 1995. The Adviser and
its affiliates do not advise any other U.S. registered investment companies
and therefore the Fund is not considered part of a Fund complex.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF DIRECTOR FROM THE FUND(1)
---------------- ----------------
<S> <C>
Benny T. Hu*............................................. --
Harvey H.W. Chang*....................................... --
Joe O. Rogers............................................ $12,000
Jack C. Tang............................................. $ 9,000
Shao-Yu Wang............................................. $10,500
David Dean............................................... $12,750
Lawrence Weber........................................... $ 6,750
Glen Moreno**............................................ $ 5,250
</TABLE>
- --------
(1) Includes all compensation paid to directors by the Fund. The Fund's
directors do not receive any pension or retirement benefits as
compensation for their service as directors of the Fund.
* Mr. Hu and Mr. Chang, who are affiliated with the Adviser and are therefore
"interested persons" of the Fund, do not receive any compensation from the
Fund for their service as directors.
** Mr. Moreno did not stand for re-election as director of the Fund at the
1995 annual stockholder meeting in February 1995.
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. The current members of the Executive
Committee are Messrs. Chang, Rogers and Wang.
The Fund's Board of Directors also has an Audit Committee which is
responsible for reviewing financial and accounting matters. The current
members of the Audit Committee are Messrs. Dean, Rogers, Tang, Wang and Weber.
The Certificate of Incorporation of the Fund contains a provision permitted
under the Delaware General Corporation Law which by its terms eliminates the
personal liability of the Fund's directors to the Fund or its stockholders for
monetary damages for breach of fiduciary duty as a director, subject to
certain qualifications described below. The Certificate of Incorporation and
the By-Laws of the Fund provide that the Fund will indemnify directors,
officers, employees or agents of the Fund to the full extent permitted by the
Delaware General Corporation Law, which permits indemnification of such
persons against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Fund if they acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the Fund. However, nothing in
the Certificate of Incorporation or By-Laws of the Fund protects or
indemnifies a director for any breach of the director's duty of loyalty to the
Fund or its stockholders, or for any liability for willful or negligent
violation of certain provisions of law governing payment of dividends and
purchase or redemption of stock, or for any liability for a transaction from
which the director obtained an improper personal benefit. Also, nothing in the
Certificate 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 acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
or protects or indemnifies a director or officer of the Fund against any
liability to the Fund or its stockholders 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.
SAI-6
<PAGE>
FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE ROC
In 1983, the ROC government enacted legislation and adopted regulations to
make foreign investment in the securities market of the ROC possible through
the means of authorized and regulated investment funds established in Taiwan.
The ROC government has taken further steps to liberalize restrictions on
foreign investment in Taiwan. As described below, regulations and guidelines
were adopted in 1990 which, in limited circumstances, permit direct portfolio
investment in ROC securities by certain foreign qualified institutional
investors. As another significant step to open the securities market to
foreign participation, the Executive Yuan amended regulations on March 1,
1996, generally permitting non-resident institutional and individual foreign
investors ("General Foreign Investors") to make direct investments in the ROC
securities market.
Under Section 18 of the ROC Securities and Exchange Law, the Executive Yuan
(or Cabinet) of the ROC government adopted Regulations for Administration of
Securities Investment Trust Fund Enterprises, effective May 26, 1983 (the
"Adviser Regulations"), which set out the requirements to be satisfied by an
investment management company seeking to establish investment funds in Taiwan,
and Regulations Governing the Management of Securities Investment Trust Funds,
effective August 10, 1983, as amended (the "Trust Fund Regulations"), which
set out the requirements to be satisfied with respect to the establishment of
investment funds through which non-ROC persons may invest in securities issued
by ROC companies.
The Adviser conducts its operations pursuant to the Adviser Regulations, and
the Fund acquires its investments through a contractual securities investment
trust fund arrangement established under and in conformity with the Trust Fund
Regulations. As required by the Trust Fund Regulations, this arrangement has
been established by means of the Management Contract pursuant to which the
Adviser agrees to manage and invest the assets of the Fund and the Custodian
agrees to hold the assets being managed under the Management Contract. The
Fund is the sole beneficiary of the assets held under the Management Contract
and, in order to comply with the Trust Fund Regulations, the Fund's interest
in the assets is evidenced by Units. The Units are represented by one or more
beneficiary certificates which are issued by the Adviser and such
certificate(s) are acquired by the Fund at the time the proceeds of an
offering are remitted to the Custodian. Although the Trust Fund Regulations
contemplate that the assets of the Fund will be held in a securities
investment trust fund established under ROC law, this trust fund does not have
a separate legal existence and the rights of the Fund with respect to those
assets are based on the contractual agreements contained in the Management
Contract and the provisions of the Trust Fund Regulations relating thereto.
The Adviser Regulations, Trust Fund Regulations and Regulations Governing
Securities Investment by Overseas Chinese and Foreign Investors and Procedures
for Remittances (together, the "Regulations") and the Management Contract
require that all income realized and received with respect to the assets held
under the Management Contract for each year be distributed to the Fund once
each calendar year before the end of March of the following year. Such annual
distributions, net of taxes, may be converted into U.S. dollars and remitted
out of the ROC in accordance with the foreign exchange regulations. Such
distributions are effected by transfer to an account maintained by the Fund
with its U.S. custodian bank.
Pursuant to the terms of the Management Contract, the Fund has essentially
the same legal and economic rights in the assets held under the Management
Contract as it would have if it owned those assets directly and had entered
into separate investment advisory and custodian agreements with the Adviser
and the Custodian, respectively.
The ROC government has adopted a general policy of liberalizing restrictions
on investment by foreigners in ROC securities and has developed guidelines for
such liberalization. As part of this process, the CSEC adopted regulations in
March 1989 which permit foreign insurance companies with branches in Taiwan to
invest (to a limited degree) in listed equity securities of ROC companies.
Since 1989, the CSEC has approved a series of overseas corporate convertible
bonds issued by ROC listed companies in offerings to non-ROC persons and, in
December 1994, the CSEC promulgated regulations to permit companies whose
securities are traded on the over-the-counter market to issue overseas
corporate convertible bonds to non-ROC persons. The terms and conditions
SAI-7
<PAGE>
of such overseas corporate bonds provide that such bonds may be converted into
capital stock of the issuer in certain limited circumstances to the extent
permitted by ROC law. In December 1994, the CSEC approved the proposal to
permit overseas corporate convertible bonds of ROC issuers to be converted
(subject to the terms and conditions of the bonds) into shares of ROC issuers,
provided that such shares are deposited with a depositary under a depositary
receipt facility sponsored by the relevant ROC issuer and the converting
bondholders receive only depositary receipts in respect of such shares and not
the underlying shares of the relevant ROC issuer. In July 1995, the ROC
government amended this regulation to allow the direct conversion (subject to
the terms and conditions of the bonds) of overseas convertible bonds to common
shares of the ROC issuer.
In addition, on December 28, 1990, the Executive Yuan approved guidelines
which allow direct investment in ROC securities by certain qualified foreign
institutional investors. The criteria (as most recently amended in 1996) set
forth by the CSEC pursuant to the guidelines define qualified foreign
institutional investors as:
(i) banks which rank among the top 1,000 banks in the non-communist world
having experience in international financial, securities or trust business;
(ii) insurance companies which have existed for more than three years and
hold securities assets of at least US$300 million;
(iii) fund management institutions which have existed for more than three
years and manage securities assets of at least US$200 million;
(iv) offshore fund management institutions which are more than 50% owned
by a ROC securities investment trust enterprise; provided that the funds to
be used to invest in ROC securities do not come from (a) the ROC, (b) funds
owned by such offshore fund management institutions or (c) mainland China;
(v) general securities firms which have a net worth of at least US$100
million and experience in international securities investments;
(vi) offshore subsidiary securities firms which are more than 50% owned
by a ROC securities firm or other securities firms which are 100% owned by
such offshore subsidiary securities firms;
(vii) offshore subsidiary securities firms which are 100% owned by a ROC
securities firm or other securities firms which are more than 51% owned by
such offshore subsidiary securities firms;
(viii) foreign government-owned investment institutions;
(ix) pension funds which have been set up for two years;
(x) mutual funds, unit trusts or investment trusts which have been
established for three years and have assets of at least US$200 million; and
(xi) other institutional investors approved by the CSEC.
Qualified foreign institutional investors who wish to invest directly in the
ROC securities markets are required to apply for and receive an investment
permit from the CSEC. Qualified foreign institutional investors who receive a
permit may invest up to a maximum of US$400 million (except as may otherwise
be approved by the ROC government) and are required to remit the full amount
into the ROC within six months of receiving their investment permit. Under
such guidelines, a single foreign investor is limited to holding a maximum of
7.5% of a company's stock and aggregate foreign holdings acquired through the
stock market cannot exceed 20% of the company's issued shares. Pursuant to
revised regulations which were adopted in 1995, the Fund became subject to the
restrictions imposed on the percentage of both individual foreign ownership
and total foreign ownership in any one company under these guidelines. The
Fund believes that the imposition of these limitations has not had a material
adverse effect on its operations.
Qualified foreign institutional investors are also required to submit to the
Central Bank and the CSEC every month a report of trading activities and
status of assets under custody. Capital which is remitted out of the ROC may
be remitted back into the ROC within three months after the outward remittance
without obtaining CSEC approval. The liberalization allowing direct investment
by qualified foreign institutional investors has led to the
SAI-8
<PAGE>
creation of a number of offshore funds which invest in the ROC securities
markets. As of December 31, 1995, 133 qualified foreign institutional
investors had been approved by the CSEC to invest up to an aggregate of
approximately $10 billion in Taiwan.
In April of 1992, the CSEC promulgated regulations permitting ROC listed
companies, upon approval by the CSEC, to sponsor the issue and sale to
foreigners of depositary receipts evidencing shares of such companies. In
December 1994, the CSEC revised these regulations to permit companies whose
securities are traded on the over-the-counter market to sponsor the issue and
sale to foreigners of depositary receipts evidencing shares of such companies.
See "The Securities Market of the ROC--Regulatory Environment" in the
Prospectus. In October 1993, the Central Bank announced that, under certain
circumstances, ROC companies would be allowed to repatriate up to $3 billion
raised abroad from issues of global depositary receipts and overseas corporate
bonds.
With the exception of qualified foreign institutional investors, under
existing ROC laws and regulations relating to foreign investment, General
Foreign Investors may invest in the shares of TSE-listed companies or
companies whose shares are traded on the OTC market up to a limit of US$20
million (in the case of institutional investors) and US$5 million (in the case
of individual investors) without obtaining any ROC regulatory approvals.
However, General Foreign Investors (both institutional and individual) can
only remit outside and into ROC foreign currency of up to US$100,000 or its
equivalent for each remittance without the Central Bank's approval. Foreign
investors (other than qualified foreign institutional investors, General
Foreign Investors, investors in overseas convertible bonds and depositary
receipts) who wish to make direct investments in the shares of ROC companies
are required to submit a Foreign Investment Approval ("FIA") application to
the Investment Commission of the Ministry of Economic Affairs or other
government authority. The Investment Commission or such other government
authority reviews each FIA application and approves or disapproves each
application after consultation with other governmental agencies (such as the
Central Bank and the CSEC). Under current law, any non-ROC person possessing
an FIA may repatriate (i) annual net profits and interests attributable to an
approved investment, and (ii) proceeds from the sale of the stock dividends
attributable to such investment. Capital and capital gains attributable to
such investment may be repatriated only after the expiration of a one-year
waiting period after approvals of the Investment Commission or other
authorities have been obtained.
For a detailed discussion on exchange controls, see "The Republic of China--
Foreign Exchange--Exchange Controls."
ROC GOVERNMENT SUPERVISION AND REGULATION
OF THE MANAGEMENT CONTRACT AND THE ADVISER
The securities industry in the ROC is principally regulated by the
Securities and Exchange Law of the ROC, which is administered by the CSEC.
Pursuant to the ROC Securities and Exchange Law, the Executive Yuan of the ROC
government adopted the Adviser Regulations and Trust Fund Regulations in 1983
and, as provided in the Regulations, the substantive responsibility for
supervising the activities of the Adviser and the Custodian in relation to the
assets held and invested under the Management Contract rests with the CSEC.
Pursuant to the Regulations and/or the terms of the Management Contract:
(a) the CSEC may from time to time require that a portion of the assets of
the Fund be held in liquid assets (cash, deposits with financial institutions,
short-term ROC government Treasury bills, negotiable certificates of deposit,
commercial paper and bankers' acceptances), all as specified by the CSEC
(currently the CSEC does not impose any limit on the Fund's liquid assets);
(b) the CSEC's approval is required for, inter alia, any change in the
constitution of the Adviser, any termination or resumption of its business,
its dissolution or merger and the transfer by or to it of any material assets
or business;
SAI-9
<PAGE>
(c) changes in the directors, the chairman, the chief executive officer and
other managerial personnel of the Adviser must be reported to the CSEC;
(d) the Adviser is prohibited from dealing in listed securities for its own
account and from holding or having an interest in securities issued by the
investment trust fund established under the Management Contract or securities
issued by any investment trust fund in the ROC in which the Adviser has an
interest;
(e) the approval of the CSEC is required if any director, supervisor,
managerial personnel or shareholder holding more than 5% of the issued capital
shares of the Adviser wishes to deal in any securities at the time being held
under the Management Contract or which the Adviser has decided to purchase
pursuant to the Management Contract;
(f) no person materially interested (as specified in the Regulations) in an
issuing company may participate in any decision by the Adviser to invest in
the securities of that company for the benefit of the Fund;
(g) neither the Adviser nor any of its directors, supervisors or managers
may be a director, supervisor or manager of a company in which the assets held
under the Management Contract are invested;
(h) the CSEC must approve the selection under the Management Contract of any
successor adviser or custodian of the Fund, and may in certain circumstances
require the appointment of a new adviser or custodian for the Fund;
(i) the CSEC has wide powers to require the submission of financial and
business information from the Adviser and its associates and the Custodian and
also has investigatory powers; and
(j) the CSEC was required to approve the terms of the Management Contract
and retains the right to approve any changes in the Management Contract.
The CSEC's regulatory authority over the Adviser and the Custodian and with
respect to the Management Contract may be exercised without regard to any vote
or approval by the shareholders of the Fund and the only recourse the Fund
would have regarding action taken by the CSEC of which the Fund or its
shareholders did not approve (such as the appointment of a new adviser or new
custodian for the Fund or the imposition of an amendment to the Management
Contract) would be to cause the termination of the Management Contract and the
liquidation and distribution to the Fund of the assets held under the
Management Contract.
THE SECURITIES MARKET OF THE ROC
THE PRIMARY MARKET
TSE-listed companies are not required to obtain prior approval from the CSEC
for capital increases, other than distribution of dividends. Instead,
companies seeking a capital increase, other than distribution of dividends,
are required to file a prospectus and other required documents, such as
underwriters' evaluation reports and legal opinions, with the CSEC and fulfill
a 15-day waiting period during which time additional information or
clarification may be requested.
Equity Issues
Equity issues are effected by underwritten public and/or private offerings
made in conjunction with the issuer's listing on the TSE or in conjunction
with cash and rights offerings. In addition, companies frequently make free
share distributions to existing shareholders. A discussion of ROC law and
regulations applicable to the Fund's ability to purchase certain securities is
set forth under "Investment Limitations."
In conjunction with an issuer's listing on the TSE, the issuer may be
required by the TSE to sell a specified percentage of its outstanding shares
under certain circumstances. The basis of price determination must be filed
SAI-10
<PAGE>
with the CSEC prior to the public offering. The listing process begins with a
written application to the TSE and CSEC, followed by review by the TSE of the
company's financial reports and general condition, approval by the TSE and,
finally, approval by the CSEC.
Distribution of shares by the underwriter may be effected by (i) a public
offering, (ii) an auction and a public offering or (iii) a quotation and a
public offering, all of which are intended to ensure a broad distribution of
shares. The underwriting commission for both stocks and bonds is subject to a
maximum of 5% in the case of underwriting on a firm commitment or stand-by
basis and 2% in the case of underwriting on a best efforts basis. Commissions
are now generally around 0.5%.
A prospectus is required to be delivered to investors and must contain
audited financial statements and an operational report for the most recent
fiscal year, capital and share data, a description of the issuer's general
condition, and a statement of business plans for the coming years and of the
issuer's general prospects.
In order to reduce volatility in trading of newly listed shares, the TSE may
require an undertaking by each of the issuer's directors, supervisors and 10%
shareholders to deliver half of such person's holdings to the central
depository for two years following the listing and not to sell more than 20%
of each such person's holdings within any six-month period after that two-year
period. However, directors, supervisors, 5% shareholders and shareholders
whose capital contribution is in the form of patent rights or know-how of
Third Category companies (as described fully below) are required to make the
above-referenced undertakings.
The ROC Securities and Exchange Law enables the CSEC to set standards of
shareholder diversification requiring issuers intending to issue new shares to
offer a portion of the new shares to the general public, despite the general
rule that existing shareholders and employees have preemptive rights in new
offerings of shares.
The following table sets forth data for new issues of equities on the TSE
for the periods indicated:
EQUITIES
<TABLE>
<CAPTION>
INITIAL RIGHTS OFFERINGS FREE SHARES TOTAL TSE AVERAGE
OFFERINGS BY LISTED COMPANIES DISTRIBUTIONS RAISED DAILY TRADING VALUE
YEAR (NT$ MILLION) (NT$ MILLION) (NT$ MILLION) (NT$ MILLION) (NT$ MILLION)
---- ------------- ------------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
1990.................... 19,047.2 12,757.9 64,316.6 96,121.7 67,727.0
1991.................... 40,079.4 13,583.2 57,512.2 111,174.8 33,855.7
1992.................... 34,958.4 14,927.0 69,548.9 119,434.3 20,834.8
1993.................... 45,796.0 19,623.0 82,347.0 147,766.0 31,230.1
1994.................... 51,531.0 31,668.0 111,063.0 194,262.0 65,776.6
1995.................... 50,838.0 33,767.0 164,529.0 249,134.0 35,494.9
</TABLE>
- --------
Source: 1990 through 1995 CSEC Statistics, CSEC.
Of the 347 companies listed on the TSE as of December 31, 1995, 212 were in
the First Category, 132 were in the Second Category and three were in the
Third Category. In 1995, approximately 83.1% of the total listed company
trading volume was in the First Category, approximately 16.6% was in the
Second Category and approximately 0.3% was in the Third Category.
For a company to be listed as a First Category company, it must have been
established for at least five fiscal years and have paid-in capital of at
least NT$600 million for the latest two fiscal years. To ensure broad
distribution of shares, there must be at least 2,000 shareholders. At least 10
million shares (or 20% of total outstanding shares) must be held by at least
1,000 smaller shareholders with holdings of 1,000 to 50,000 shares each. In
addition, the ratio of net worth (before distribution of dividends) to total
assets for the most recent fiscal year (except for certain limited exceptions)
must exceed 33% and each of the company's pretax net income and operating
income must be positive for the past three fiscal years and have either (1)
exceeded 10% of paid-in
SAI-11
<PAGE>
capital for the past two years, (2) been not less than NT$120 million and
exceeded 6% of paid-in capital for the past two years or (3) the test in (1)
is met in one of the past two years and the test in (2) is met in the other.
Requirements for listing as a Second Category company are less stringent.
The Second Category company must have been established for at least five
fiscal years. The paid-in capital requirement is only NT$300 million for the
two most recent fiscal years. Although the requirement is the same with
respect to the number of publicly-held shares by smaller shareholders (10
million shares or 20% of total outstanding shares), the number of shareholders
can be less (1,000 instead of 2,000) and only 500 smaller shareholders are
required. There is no net worth/total asset test for a Second Category company
and the income tests require taxable net income and operating income to be
positive for the most recent fiscal year and have either (1) exceeded 10% of
paid-in capital for the past year or (2) been not less than 6% for each of the
past two years or averaged not less than 6% for the past two years, with the
most recent year greater than the previous year.
Certain of the above-mentioned requirements for listing as First Category
and Second Category companies may be different for companies in certain
limited industries. Furthermore, the TSE has established a Third Category
which has special, less stringent requirements designed to encourage the
listing of "high-tech" or technological-related enterprises.
Currently, there are no foreign companies listed on the TSE.
The TSE has a Weighted Stock Price Index which is comparable to the Standard
& Poor's Index in the United States and the TSE Index insofar as it takes a
wide selection of listed shares and weights them according to the number of
shares outstanding. It is compiled using the "Paasche Formula" by dividing the
market value by the base day's total market value for the index shares. As of
December 31, 1995, 333 companies are included in the index. The index formula
is:
Index = (PtxOt) where: Pt = Stock Price for the Day
------- Qt = Number of shares issued
(PoxQt) Po = Stock Price of the base day
Bond Issues. Under amended rules issued by the CSEC in May 1995, no prior
CSEC approval is required for the issue of fixed income and convertible bonds
in the domestic market, unless such bonds are offered and sold in a private
placement. An issuer of fixed income bonds offered and sold pursuant to a
public offering is required to file a prospectus and other required documents
with the CSEC and the TSE and fulfill a 15-day waiting period during which
additional information or clarification may be requested. Under the CSEC
rules, at least 60% of convertible bond offerings must be sold in an
underwritten public offering, provided that the aggregate amount of the public
offering must be no less than NT$500 million. Convertible bond offerings must
be sold entirely in an underwritten public offering if amount raised is less
than NT$500 million. There is no such restriction on fixed income bond
offerings which may be sold entirely to prearranged investor groups.
Government bonds may only be issued on an auction basis to primary dealers who
make bids either for their own accounts or on behalf of their customers. State
enterprises are subject to less stringent disclosure requirements in the
offering prospectus. The Ministry of Finance and the Central Bank have issued
over NT$881.5 billion in government bonds since 1991 with proceeds to be used
to fund a portion of the Six-Year National Development Plan (the "Six Year
Plan").
SAI-12
<PAGE>
The following table sets forth information with respect to bond issues for
the periods indicated:
BONDS
<TABLE>
<CAPTION>
CORPORATE
ALL BONDS(1) GOVERNMENT BONDS BONDS(2)
---------------- ---------------- ----------------
TOTAL ISSUED ISSUED ISSUED
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
OF (NT$ OF (NT$ OF (NT$
ISSUES MILLIONS) ISSUES MILLIONS) ISSUES MILLIONS)
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
1990......................... 46 177,739 25 169,063 21 8,676
1991......................... 50 339,779 26 327,642 24 12,137
1992......................... 62 530,252 30 513,597 32 16,655
1993......................... 62 700,009 33 687,486 29 12,523
1994......................... 57 794,962 33 786,791 24 8,171
1995......................... 56 868,023 38 860,950 18 7,073
</TABLE>
- --------
Source: 1995 CSEC Statistics, CSEC.
(1) Excludes Treasury bills.
(2) Includes bonds issued by government-owned corporations.
Turnover in the listed bond market in the ROC is small in terms of trading
volume. In 1995, bond trading represented about 0.11% of total trading volume
for stocks and bonds on the TSE. Private corporations have shown a strong
preference for bank loans as a source of debt funding, and until recently, the
ROC government has generally not been required to turn to the bond market to
finance deficits. In recent years, the ROC government has frequently issued
bonds to finance its deficits. The scope of the listed bond market is further
limited by the fact that bonds can be issued and traded outside the TSE and
bonds issued by the ROC government are typically purchased by financial
institutions which generally hold them to maturity to meet reserve
requirements.
In order to meet the funding needs of the Six-Year Plan, the Ministry of
Finance has expanded the number of institutions qualified to trade bonds and
is considering adopting measures for establishing a centralized bond
transaction and information system.
Other Instruments
The instruments traded in the ROC securities market have primarily been
limited to common stock and bonds. TSE-listed companies have also engaged in
offerings of domestic convertible securities and preference shares. In
addition, listed beneficiary certificates, which are certificates which
represent the shares of closed-end funds, may be listed on the TSE, subject to
CSEC and TSE approval. Continued development of additional types of
instruments, such as Taiwanese depositary receipts, is anticipated. In
particular, the CSEC is considering the establishment of a domestic futures
market which may include, among other things, futures contracts on the TSE
Index. There can be no assurance that this will occur and if so, what impact
it will have on the Fund or the ROC securities market.
In recent years, TSE-listed companies have also engaged in offerings of
convertible securities and global depositary receipts which are not listed on
the TSE.
THE SECONDARY MARKET
Trading in the secondary market is dominated by individual investors and is
marked by a high turnover rate on the TSE, a function of the short-term,
speculative nature of the market, and illegal margin lending and manipulative
practices such as "wash sales" (the buying and selling of stocks on the same
day solely to generate activity). The turnover rate is significantly lower for
bonds, which represent a rather small portion of total market
SAI-13
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capitalization. In 1995, the average turnover rate for stocks and bonds (total
value of bonds traded on TSE/total value of TSE-listed bonds) was 277.8% and
0.11%, respectively.
TRADING AND SETTLEMENT PROCEDURES
In order to reduce market volatility, the TSE has placed limits on large
volume transactions and on the range of daily price movements. Complex
restrictions are imposed on transactions which include 500 trading lots or
more. Currently, fluctuations in price are restricted to 7% above and below
the previous day's closing price (or the most recent closing price or
reference price set by the TSE rules if the previous day's closing price is
not available due to lack of trading activity) in the case of stocks and 5% in
the case of bonds.
All stock certificates have a par value of NT$10, and board lot size is
uniformly 1,000 shares. The minimum trading unit for bonds is NT$100,000.
There is no regulation for the denomination of bonds except for convertible
bonds, which are required to be in denominations of NT$100,000.
The TSE has effected the computerization of all First, Second and Third
Category stock transactions. Delivery and settlement are handled by the
computerized TSE Clearing Department. Sales of stock by brokers and traders
are offset by purchases of the same issue on the same day so that only net
balances of stock are delivered and only net balances of cash are computed and
paid. In 1989, the TSE introduced a securities centralized depositary system
operated by Taiwan Securities Central Depository Co., Ltd.
There are three types of settlement: (i) "regular" settlement made in cash
with share certificate delivery through the TSE Clearing Department on the
second business day following the transaction day; (ii) "cash" settlement made
by cash with share certificate delivery through the TSE Clearing Department on
the same day of the transaction and (iii) "specified day" settlement, which
although permitted, is not currently used.
Listed shares designated by the CSEC as full delivery shares may be
purchased only by advance payment of the purchase price and only upon advance
delivery of share certificates. Full delivery shares are non-marginable. Such
designation by the CSEC is generally made with respect to shares of
financially troubled companies. On December 31, 1995, there were eight full
delivery stocks.
Since February 1995, all settlements on TSE transactions must be effected by
electronic or wire transfer of payment against book-entry for delivery of
securities.
Currently, brokerage commissions for transactions of stocks and convertible
bonds listed on the TSE are 0.1425% and 0.125%, respectively. The TSE takes
10% of the commissions earned by brokerage firms on stock transactions. A
securities transaction tax of 0.3% of the transaction price for stocks and
0.1% for bonds and mutual funds shares is levied on the seller.
THE REPUBLIC OF CHINA
GENERAL INFORMATION
Location, Area and Population
Taiwan is located approximately 90 miles east of the Chinese mainland, 650
miles south of Japan, 340 miles northeast of Hong Kong and 200 miles north of
the Philippines. Owing to its geographical position, Taiwan plays a
significant role in trade, transportation and tourism in East Asia.
The island is 240 miles in length and 80 miles in width. In addition to the
island of Taiwan, there are over 77 offshore islands currently under the
effective control of the ROC. The total area of the ROC is approximately
13,900 square miles, which is approximately the same as that of the
Netherlands.
SAI-14
<PAGE>
Taiwan's total population as of December 31, 1995 was estimated at 21.3
million. The literacy rate is approximately 94%. The bulk of the population is
composed of Chinese descendants of early migrants from the mainland and
mainland Chinese who migrated from the mainland in 1949 and their descendants.
Chinese persons make up approximately 98% of the population, with the
remaining 2% of the population consisting primarily of aboriginal natives of
the island. Population density is among the highest in the world with an
average of approximately 1,498 people per square mile. The largest cities are
Taipei, in the north, with over 2.7 million people, and Kaohsiung, in the
south, with over 1.4 million people. Mandarin is the official language, while
Fukien and Hakka dialects are also widely spoken.
Political History
The ROC was established in 1912 by Dr. Sun Yat-Sen and his Kuomintang
(Nationalist Party) (the "KMT") on mainland China after the overthrow of the
Ching Dynasty in 1911. The ROC government remained on the mainland until
December 1949 when General Chiang Kai-Shek, who was elected president of the
ROC by the National Assembly in 1948, moved the seat to Taipei. Since that
time, the ROC has continued to maintain that it is the sole legitimate
government of all of China (i.e., Taiwan and all of mainland China and
Mongolia). The People's Republic of China (the "PRC") also asserts sovereignty
over all of China, including Taiwan. The KMT is the dominant political party
in the ROC and as of December 31, 1995 controlled approximately 55% of the 334
seats in the National Assembly and approximately 53% of the 167 seats in the
Legislative Yuan.
The current President, Lee Teng-Hui, assumed the Presidency in January 1988
and was elected Chairman of the KMT in July 1988. He is the first native-born
Taiwanese to hold either the office of President or Chairman of the KMT.
President Lee was re-elected in March 1996 for a four-year term of office.
Under the leadership of President Lee, the KMT has increased the pace of
political liberalization in the ROC, in accordance with a ten-year political
liberalization program introduced by President Lee's predecessor in 1986. The
program provides, among other things, for the gradual increase in the number
of generally elected parliamentary seats and the recognition of opposition
political parties. The Democratic Progress Party has emerged as a significant
opposition party in parliamentary and other national elections. In addition,
the Chinese New Party was formed in 1993 by disaffected members of the KMT.
Foreign Relations
The ROC maintains formal diplomatic relations with 31 countries, including
the Vatican. In addition, it has active trade and financial relations with
most major economic powers and maintains trade missions in locations around
the world. Taiwan remains a member of the Asian Development Bank, but is not a
member of the United Nations and various other international organizations.
The ROC government has applied to rejoin the General Agreement on Tariffs and
Trade ("GATT"), from which it withdrew in 1950. In September 1992, in
accordance with a GATT resolution to establish a committee to examine the
Taiwan application for readmission, Taiwan was permitted to become a GATT
observer during the examination. Taiwan is currently seeking to become a
member of the World Trade Organization, the successor organization to GATT.
The ROC joined the Asia-Pacific Economic Cooperation group ("APEC") in
November 1991, together with Hong Kong and the PRC.
Although the United States terminated diplomatic relations with the ROC in
1978, the United States maintains close commercial, cultural and other
relations with the ROC and is committed to assisting the ROC in maintaining
its self-defense capability. In April 1979, the U.S. Congress enacted the
Taiwan Relations Act (the "Act") to govern the future U.S. relationship with
Taiwan and an unofficial entity, the American Institute in Taiwan, was
established to handle U.S. interests in Taiwan. The Act affirmed as national
policies the preservation and promotion of close commercial and cultural ties
with Taiwan and the continuing supply to Taiwan of arms of a defensive
character. Under the Act, all non-military treaties then in effect between the
U.S. and the ROC were affirmed. In addition, the Act provided that, in spite
of the absence of diplomatic relations, U.S. laws with respect to Taiwan would
continue to be applied in the same manner as such laws were applied prior to
January 1, 1979. The Act also provided that the United States would make
available such defense articles and defense services in such quantity as
necessary to enable Taiwan to maintain a sufficient self-defense capability.
The
SAI-15
<PAGE>
quantity and quality of arms sales is determined periodically by the U.S.
President and the U.S. Congress based on their judgment of Taiwan's needs.
Under the Act, the President is also required to inform Congress of any threat
to Taiwan's security or its social or economic system, and the President and
Congress are required to determine appropriate U.S. action in response to any
such threat. Trade relations between the United States and the ROC have not
been adversely impacted by the change in diplomatic status. Until recently,
the United States was Taiwan's largest trading partner. The United States and
the ROC continue to conduct periodic talks on trade relations.
Government Organization
The ROC government is organized into five branches or "Yuans": the Executive
Yuan, the Legislative Yuan, the Judicial Yuan, the Examination Yuan and the
Control Yuan. The ROC Executive Yuan is broadly involved in the formulation
and implementation of economic policy. There is also the National Assembly, an
elected body whose main function is the promulgation and amendment of the
constitution.
The ROC government is headed by the President, who is also commander-in-
chief of the armed forces and is partially entrusted with the exercise of
emergency powers, and the Executive Yuan or cabinet is headed by the Premier.
Prior to March 1996, the President and Vice President were elected by the
National Assembly to six-year terms. As of March 23, 1996, the President and
Vice President are elected by the public rather than by the National Assembly
for a four-year term. The President, in turn, appoints the Premier with the
consent of the majority of the Legislative Yuan (the sitting legislative body)
and also appoints the Deputy Premier and cabinet ministers on the
recommendation of the Premier.
The Legislative Yuan is the ROC's sitting legislative body and is
responsible for the enactment of all national laws. The judicial system is
administered by the Judicial Yuan, with judicial review powers vested in the
Council of Grand Justices. The Control Yuan is responsible for auditing of
government accounts and investigating and impeaching government officials. The
Examination Yuan is empowered to examine and select governmental officials and
establish pay scales and other terms of employment for the civil service.
In addition to the ROC central government, a separate provincial government,
headed by a Provincial Governor, exercises strictly local government
functions. On December 3, 1994, the first gubernatorial election and Taipei
and Kaohsiung mayoral elections were held.
RECENT ECONOMIC DEVELOPMENTS
For a discussion of recent economic developments in the ROC, see "The
Republic of China--Recent Economic Developments" in the Prospectus.
DOMESTIC ECONOMY
Economic Planning
Economic planning has been an important part of Taiwan's economic success.
Beginning in 1953, the ROC government has instituted a series of economic
plans which have provided a framework for government policies and have helped
to adapt Taiwan's economy to changes in the domestic and international
economic environment. The current Four-Year Plan, which is the eleventh such
plan, covers the period from 1993 to 1997. In 1994 and 1995 economic growth
averaged 6.30% in real terms, with inflation averaging 3.89%. Within these
same two years, the service sector grew faster than the manufacturing sector,
and accounted for 60.17% of GDP in 1995. One intent of the Plan is to make
domestic demand the primary engine of growth in Taiwan's economy while
limiting the contribution of foreign demand to growth of GDP.
SAI-16
<PAGE>
Gross National Product
GNP Growth. Although GNP growth has varied from a low of 1.16% in 1974 to a
high of 13.59% in 1978, it has never been negative. The following table
summarizes Taiwan's Gross National Product for the periods indicated with the
annual percentage changes of GNP in current price terms and real terms:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------
(NT$ BILLION)
<S> <C> <C> <C> <C> <C> <C>
Gross National Product at
Current Market Prices........ 4,412 4,928 5,441 5,971 6,454 6,982
Private Consumption........... 2,359 2,635 2,989 3,346 3,772 4,109
Government Consumption........ 740 837 908 940 960 998
Fixed Capital Formation....... 966 1,067 1,240 1,391 1,460 1,591
Increase in Inventory......... 29 54 89 87 61 51
Exports of Goods and
Services..................... 2,014 2,281 2,313 2,599 2,812 3,375
Less: Imports of Goods and
Services..................... (1,799) (2,062) (2,204) (2,488) (2,691) (3,216)
Expenditures on Gross Domestic
Product...................... 4,307 4,811 5,338 5,875 6,376 6,908
Net Factor Income from
Abroad....................... 105 117 103 96 78 75
Percentage Increase of GNP
over Previous Year at Current
Prices....................... 9.5% 11.7% 10.4% 9.7% 8.1% 8.2%
Real GNP Growth Rate.......... 5.5% 7.6% 6.2% 6.0% 6.1% 6.1%
</TABLE>
- --------
Source: Derived from data published in Council for Economic Planning and
Development, Industry of Free China, Vol. LXXX, V, No. 3, March 1996.
Composition of GNP. The major components of GNP are private consumption and
exports. The decline of fixed capital formation as a percentage of GNP in the
mid-1980s has been reversed through a combination of public sector capital
expenditures, increased foreign investment and increased domestic investment
stimulated by export demand. Although the gap between exports and imports as
percentages of GNP has narrowed in recent years, the historic gap has led to
large trade surpluses, particularly with the United States.
COMPOSITION OF GROSS NATIONAL PRODUCT
<TABLE>
<CAPTION>
(PERCENTAGE SHARES)
----------------------------------------------
1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Private Consumption..... 53.46% 53.48% 54.93% 56.04% 58.45% 58.85%
Government Consumption.. 16.77 16.98 16.69 15.74 14.89 14.29
Fixed Capital Forma-
tion................... 21.88 21.64 22.79 23.29 22.63 22.79
Increase in Inventory... 0.65 1.09 1.64 1.46 0.95 0.73
Exports................. 45.64 46.28 42.56 43.53 43.58 48.34
Less: Imports........... (40.78) (41.85) (40.51) (41.67) (41.70) (46.06)
Net Factor Income From
Abroad................. 2.38 2.38 1.90 1.61 1.21 1.07
------ ------ ------ ------ ------ ------
Total................... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ====== ======
Exports Less Imports.... 4.86% 4.43% 2.05% 1.86% 1.88% 2.28%
</TABLE>
- --------
Source: Council for Economic Planning and Development, Industry of Free China,
Vol. LXXX, V, No. 3, March 1996.
Prices and Wages
From 1982 to 1988, the ROC experienced relatively modest inflation, with an
average annual rise in the consumer price index of approximately 1%. Taiwan's
average annual rates of inflation in 1993, 1994 and 1995, were 2.9%, 4.1% and
3.9%, respectively. Such increases have not been fully reflected in all
sectors of the
SAI-17
<PAGE>
economy. For example, the wholesale price index fell in 1988 and 1990 although
the consumer price index rose in the same periods.
Average monthly employee earnings in the manufacturing sector have generally
outpaced inflation. Between 1977 and 1995, the average monthly employee
earnings index in manufacturing grew faster than the consumer price index. The
rapid growth in wages reflects high demand for labor as evidenced by the low
unemployment rates in Taiwan.
The table that follows shows the movement in the indices for wholesale
prices, consumer prices and average monthly employee earnings in manufacturing
for the periods indicated:
<TABLE>
<CAPTION>
MANUFACTURER
WHOLESALE PRICES CONSUMER PRICES EMPLOYEE EARNINGS
------------------ --------------- --------------------
INDEX % CHANGE INDEX % CHANGE INDEX % CHANGE
-------- --------- ------ -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1990.................... 99.8 (0.6) 96.50 4.12 90.11 13.3
1991.................... 100.0 0.2 100.00 3.63 100.00 11.0
1992.................... 96.3 (3.7) 104.47 4.47 110.23 10.2
1993.................... 98.8 2.5 107.54 2.94 117.82 6.9
1994.................... 100.9 2.2 111.94 4.09 125.58 6.6
1995.................... 108.3 7.4 116.06 3.68 N/A N/A
</TABLE>
- --------
Source: Derived from data published in Taiwan Statistical Data Book, CEPD
1995; Commodity--Price Statistics monthly in Taiwan Area of ROC, January 1996,
No. 301.
N/A: Not available
Employment and Labor Force
Taiwan's labor force has been an important factor in the country's economic
success. It is young, well educated and highly productive. Statistics from
1995 indicate that 84.1% of the labor force is under 50 years of age, 54.1% of
the total labor force had at least a junior high school education and a high-
school or vocational school education and 20.1% had received junior college,
college or graduate school education. Labor productivity in the manufacturing
sector increased 3.7% in 1994 and 6.8% in 1995. Wage levels for Taiwan's
workers have also increased in recent years as living standards and skill
levels rise. The resultant overall increase in labor costs increases the
differential between Taiwan and its lower-cost competitors among the less-
developed nations of Asia. Recognizing the imperatives of the more competitive
Asian economy, the ROC government is seeking to develop Taiwan into a regional
hub for high-end manufacturing, sea and air transportation, finance,
telecommunications and media. Taiwan is seeking to develop further as a
service-oriented economy rather than a labor-intensive manufacturing-oriented
one. One result of the movement of industrial capacity offshore has been the
reduction of the labor shortage in manufacturing.
Industrial Structure and Industrial Production
Several of Taiwan's key industrial sectors, including the electronic,
machinery and textile sectors, have been dominated by small, family-owned
companies. These characteristics have provided Taiwan's manufacturing sector
with great flexibility and enabled it to respond quickly to changes in the
world economic environment. However, increased labor costs and the resulting
emphasis on high technology and skill-intensive industries may seriously
impair the ability of Taiwan's small and medium sized firms to compete with
large corporate conglomerates such as South Korea's chaebol. Over the last
several years a large number of small and medium-sized labor intensive
businesses have shifted their operations to lower wage areas such as the PRC
and Southeast Asian countries. As a policy response to this potential
structural deficiency, ROC planners have tried to foster links between large
enterprises that produce intermediate or component products and smaller
manufacturers of downstream products. This concept has been used in a number
of areas, including the plastic, textile, automotive and machinery industries.
SAI-18
<PAGE>
In June 1993, President Lee Teng-Hui ordered the immediate implementation of
an economic stimulus package designed to achieve an annual economic growth
rate of 6% to 10% and a yearly increase of 10% to 15% in domestic investments
by private sectors over the next three years. Pursuant to the economic
stimulus package, the government will take certain steps to stimulate interest
in domestic investment, including the provision of low-cost land and financing
to local industries, tax exemptions, liberalization of financial regulations,
expanded imports of semi-finished products from, and promotion of scientific
and technological exchanges with, the PRC.
Government Participation in the Economy
The economic activities of the ROC government have been a significant factor
in the growth of the economy. The government provides traditional government
services including national defense, postal service, education, infrastructure
for transportation and communications and public housing. In addition, the
government influences the level of economic activity through Four-Year Plans,
control of a number of key industrial enterprises and commercial banks and
sponsorship of major construction projects, like the Six-Year Plan, which
contribute to overall capital investment.
In 1994, the government controlled 100% of utility production, 48.02% of
mining production, and 10.50% of all manufacturing production. The current
Four-Year Plan calls for a continued reduction in public sector industrial
ownership in order to eliminate inefficient government enterprises. Although
no specific timetable has been announced, the ROC government has stated its
intention to sell shares in more than 20 government-owned enterprises to the
public. The government sold a portion of its shares in China Steel Corporation
to the public in 1989 and 1991 and sold 360 million shares in the form of GDRs
for US$330 million in 1992. In 1994, the ROC government resumed its
privatization program and sold shares of five government-owned enterprises to
the public for an estimated amount of NT$50 billion. The government has also
announced its intention to sell to investors a portion of its holdings in four
of the 13 government-owned commercial banks with the intention of reducing the
government's total shareholding position in these banks to below 51%.
Foreign Investment
Foreign investment in Taiwan has played an important role in the development
of the nation's economy and has received extensive encouragement by the
government, especially in the export and technology transfer sectors.
Aggregate foreign investment from 1952 through December 1995 totalled US$22.3
billion, with US$19.4 billion invested by non-Chinese foreign nationals and
US$2.9 billion invested by overseas Chinese, principally Hong Kong residents.
This money was largely invested in the electronic and electric product
industry (26%), chemicals (14.4%) and the services industry (exclusive of
banking and insurance) (10.8%). In 1995, foreign investment in the ROC
totalled US$2.9 billion, an increase of 79.4% from 1994. Of this amount, over
94.2% came from non-Chinese foreign investors with the remainder coming from
overseas Chinese, principally in Hong Kong.
In the past, inadequate protection of intellectual property rights has acted
as a disincentive to foreign investment, but progress has been made in recent
years in improving the legal framework and strengthening enforcement. Changes
include the promulgation in 1985 of a revised Copyright Law, which offers
copyright protection for software and strengthens penalties for infringement,
and a revised Trademark Law, with tougher enforcement provisions. In addition,
amendments have been proposed to the Patent Law which would extend protection
to chemicals, pharmaceuticals and electronics. In April 1993, Taiwan was
placed on the United States' "priority watch list" for possible trade
sanctions under Section 301 of the Trade Act of 1974, as amended. The United
States Trade Representative publishes the "priority watch list" each year to
identify nations that deny adequate and effective intellectual property rights
("IPR") protection to U.S. interests. After being placed on this "priority
watch list," Taiwan quickly passed a series of legislation revising its IPR
laws. Following a comprehensive review of Taiwan's progress in IPR protection,
the United States removed Taiwan from the "Special 301 priority watch list"
and placed Taiwan on the United States' general "watch list." The general
SAI-19
<PAGE>
"watch list" includes nations that warrant special attention because they
maintain intellectual property practices or barriers to market access that are
of particular concern to U.S. interests.
For a more detailed discussion on certain restrictions on investments by
foreigners in securities issued by ROC companies, see "Foreign Investment and
Exchange Controls in the ROC."
Environment
Taiwan's natural environment has suffered significant damage due to growth
policies that ignored the social cost of pollution. In recent years, the
public has become increasingly sensitive to the problem and is demanding
corrective action. Environmental concerns have delayed or forced the
cancellation of several major public-works projects, including construction of
a new nuclear power plant, and have produced substantial delays in obtaining
required approvals for a number of major new industrial facilities. A cabinet-
level Environment Protection Administration was established in 1987 and has
placed a high priority on the enforcement and strengthening of environmental
laws. Environmental concerns may become a significant impediment to industrial
expansion.
FOREIGN TRADE AND BALANCE OF PAYMENTS
Foreign Trade/1/
Foreign trade accounts for a major percentage of Taiwan's economic activity.
Taiwan's growth has, to a significant degree, been export driven and in recent
years, nearly 50% of the country's GNP has been derived from the export
sector. Imports are also critical for Taiwan as it is dependent on foreign
sources for over 90% of its energy needs and key raw materials and capital
equipment used in its export industries. In addition, heightened domestic
demand for consumer items has contributed to an increase in imports as a
percentage of GDP. In recent years, Taiwan's trade balance has been
consistently positive; the highest surplus of US$18 billion was recorded in
1988. In 1994 and 1995, the trade surplus was US$7.7 billion and US$8.1
billion, respectively. As a result of high overall balance of payments
surpluses, Taiwan has experienced a dramatic increase in foreign exchange
reserves. Starting in 1991, however, this trend slowed down largely because of
capital outflow and a decreasing trade surplus. See "Balance of Payments" and
"Foreign Exchange."
The United States is the largest export market with a 23.7% share of
Taiwan's total exports in 1995. Hong Kong and Japan are the next largest
markets with shares of 23.4% and 11.8%, respectively. From 1990 to 1995,
Taiwan's total exports to Hong Kong increased by 205.3%. Taiwan's increasing
dependence on Hong Kong reflects the growing importance of the PRC markets to
the ROC.
Taiwan's main imports are machinery, minerals (including crude oil), basic
metal products and chemicals. Taiwan's main import sources are Japan (29.2% in
1995) and the United States (20.1% in 1995).
The intensification of protectionist sentiments in the U.S. and other of
Taiwan's major trading partners in recent years has highlighted the island's
dependency on key export markets and has led to efforts by the ROC government
to diversify Taiwan's trading partners away from the United States. For
example, in February 1995 Hong Kong became Taiwan's largest trading partner.
United States--Taiwan Trade Relations
Until recently, the United States was Taiwan's largest trading partner in
every year since 1961. Taiwan has had a trade surplus with the United States
in every year since 1968. In 1987, the U.S./ROC trade gap reached a record
high of US$16.0 billion, the U.S.'s second largest bilateral trade deficit
behind Japan. The surplus shrank to US$10.4 billion in 1988 as a result of a
strong increase in imports, increased to US$12.0 billion in 1989 and
subsequently decreased to US$9.1 billion in 1990. In 1995, the surplus stood
at US$5.64 billion.
- --------
/1/All statistics used in this SAI relating to Taiwan's external trade are
based on data compiled by the ROC authorities. Statistics on U.S./ROC trade
compiled by the U.S Department of Commerce differ from those compiled by
ROC agencies due, in part, to the fact that the U.S. statistics calculate
U.S. imports from Taiwan on a customs valuation basis while the ROC
statistics calculate them on an FOB basis.
SAI-20
<PAGE>
The persistent trade surplus with the United States has been a major problem
affecting U.S./ROC relations. The U.S. government has held a series of
consultations with the ROC government on trade matters and has taken a number
of concrete steps designed to deal with specific trade issues. The United
States has also sought significant reductions in Taiwan tariffs, relaxation of
non-tariff barriers, increased access to the Taiwan market for U.S. service
industries, better protection of intellectual property rights and, in 1994, an
appreciation of the NT Dollar against the U.S. Dollar.
In 1989, Taiwan, together with South Korea, Hong Kong and Singapore, was
dropped from the Generalized System of Preferences ("GSP"). The GSP gives
developing countries duty-free access to the U.S. market and, on average,
provides a 5% tariff reduction on the products covered. Taiwan had been the
largest beneficiary of GSP with US$3.42 billion of goods qualifying in 1988.
The ROC government has attempted to ease trade tensions with the United
States both by promoting the purchase of U.S. goods through a "Buy American"
campaign and in efforts to create more open markets. The ROC has liberalized
the importation of U.S. wine, tobacco and beer and restricted textile and
machine tool exports to the U.S. In addition, the government has liberalized
access for foreign firms in the securities, insurance, banking and motion
picture distribution sectors, agreed to eliminate export performance
requirements for foreign companies producing automobiles in Taiwan, and opened
its markets to U.S. soda ash exports. The ROC government has also eliminated
the discrimination in its harbor tax, thereby reducing the burden on imports
and changed its customs valuation system to conform with the GATT Customs
Valuation Code, thereby eliminating artificial price lists which increased
tariffs on certain imported products. In 1989, the ROC Government further
reduced the commodity tax, which affects imports as well as domestically
produced items and a tentative agreement with the United States on the mutual
protection of copyrights was reached.
Balance of Payments
As a result of the increase in world oil prices in 1978-1979, Taiwan
incurred a current account deficit of US$913 million in 1980, and an overall
balance of payments deficit for that year of US$319 million. Since that time,
the country's overall balance of payments situation has steadily improved.
Record high surpluses were recorded in 1987 for the trade balance (US$20.3
billion), the current account balance (US$18.0 billion) and the overall
balance (US$19.3 billion). In 1995, the trade balance stood at US$8.1 billion;
the current account balance was US$5.0 billion; and the overall balance was a
deficit of US$3.9 billion.
Taiwan traditionally has had a positive balance of trade which is reduced by
a deficit on invisible transactions (e.g., shipping and other transportation,
travel and investment income). The impact of the capital account has varied in
recent years as it made a positive contribution to the overall balance in
1980-1983 but was a negative factor from 1984 through 1989 when there were
substantial deficits in the long-term capital account due primarily to
drawings on long-term loans and substantial repayments and prepayments of
principal. This trend continued through 1995.
SAI-21
<PAGE>
BALANCE OF PAYMENTS
(US$ MILLIONS)
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Account Balance.. $10,769 $12,015 $ 8,154 $ 6,714 $ 6,154 $ 5,006
Trade Balance............ 14,928 15,754 12,767 11,587 11,984 13,582
Invisible Trade Balance.. (3,424) (3,488) (4,406) (3,891) (4,473) (5,724)
Unrequited Transfers..... (735) (251) (207) (982) (1,357) (2,852)
Long Term Capital........ (6,601) (2,827) (3,458) (2,600) (1,960) (2,502)
Direct Investment........ (3,913) (583) (990) (1,534) (1,085) (1,106)
Other.................... (2,688) (2,244) (2,468) (1,066) (875) (1,396)
Basic Balance............ 4,168 9,188 4,696 4,114 4,194 2,504
Short Term Capital....... 8,549 600 (3,450) (2,062) 563 (6,772)
Errors and Omissions..... 463 (129) 121 (511) (135) 337
Overall Balance.......... (3,918) 9,659 1,367 1,541 4,622 (3,931)
Counterpart Items........ -- -- -- 6 -- --
Change in Net Foreign
Assets of the
Banking System.......... 3,918 (9,659) (1,367) (1,541) (4,622) 3,931
</TABLE>
- --------
Source: Derived from data published in Financial Statistics Monthly, February
1996, Central Bank.
FOREIGN EXCHANGE
Currency
The Central Bank has in the past attempted to maintain stability in the
market by intervening to purchase or sell foreign exchange so as to avoid
large and sudden fluctuations and to maintain an exchange rate which it deems
compatible with the ROC's economic policy. It is now less active in managing
currency levels, partly due to requests from U.S. trade negotiators made in
1989. Most of the foreign exchange dealings are spot transactions (delivery
within the next business day). Over 90% of the dealings are in U.S. Dollars
although dealing also takes place in other currencies. See "Banking System and
Monetary Policy--Monetary Policy."
SPOT EXCHANGE RATES YEAR-END
(IN TAIPEI, TAIWAN)
<TABLE>
<CAPTION>
BUYING SELLING
------ -------
(NT$ PER US$)
<S> <C> <C>
1990....................................................... 27.11 27.11
1991....................................................... 25.70 25.80
1992....................................................... 25.37 25.47
1993....................................................... 26.62 26.72
1994....................................................... 26.16 26.26
1995....................................................... 27.22 27.32
</TABLE>
- --------
Source: Derived from data published in Taiwan Statistical Data Book, 1994 CEPD
and Monthly Statistics of the Republic of China, Directorate-General of
Budget, Accounting and Statistics, October 1994 and Financial Statistics
Monthly, February 1996.
On May 2, 1996, the spot buying rate was NT$27.12 per US$1.00 and the spot
selling rate was NT$27.22 per US$1.00.
SAI-22
<PAGE>
Exchange Controls
The provisions of the Statute Governing Foreign Exchange of 1960, as
amended, provide that all foreign exchange transactions must be executed by
banks duly authorized by the Ministry of Finance and the Central Bank. As of
December 31, 1995, 34 ROC banks and 38 foreign banks with branches in Taiwan
are authorized to engage in foreign exchange transactions.
The government has liberalized exchange control by, among other things:
(i) permitting ROC companies and resident individuals to remit, without
foreign exchange approval, outside and into the ROC up to US$20 million (or
its equivalent in specified foreign currency) and US$5 million (or its
equivalent in specified foreign currency), respectively, each calendar
year;
(ii) permitting individuals and institutions to convert their NT Dollar
funds into foreign currency and invest them in certain foreign securities;
(iii) permitting individuals and institutions to open, with appointed
banks, foreign exchange demand deposit accounts and time deposit accounts
evidenced by non-negotiable certificates;
(iv) requiring importers and exporters only to file reports with respect
to any foreign exchange that occurs in their trades with counterparts
abroad with the Central Bank instead of obtaining prior approval; and
(v) subject to certain restrictions, permitting non-ROC companies and
individuals to open NT dollar bank accounts.
BANKING SYSTEM AND MONETARY POLICY
Despite Taiwan's relatively high savings rate of 26% in 1995, Taiwan's
banking and financial system remains underdeveloped relative to its economy.
Government-owned banks play a major role in the banking sector. However, 18
new private banks have been established (including two which were changed from
trust investment companies) since government deregulation. Bank financing has
been traditionally short-term in nature and longer-term financing has been
hindered by the lack of a well developed capital market and strict government
regulation of capital issues. In addition, many companies--especially smaller
companies with limited direct access to the banking system--have relied on an
informal unorganized money market outside the banking system as a source of
finance even though rates tend to be higher than those charged by the banks.
The government is currently reforming the financial system and has
implemented some of the recommendations of the Economic Reform Committee
relating to the banking industry. These recommendations call for general
loosening of the tight government control over the financial markets by
deregulating interest rates, minimizing state interference with the day-to-day
operation of the state owned banks, permitting an expansion of foreign branch
bank business, improving the interbank market and facilitating the merger of
financial institutions. Measures instituted to date include: efforts to
develop a formal, short-term money market; deregulation of interest rates;
increased freedom for ROC nationals to place some of their savings in foreign
portfolio investments, liberalization of foreign exchange controls and the
passage of an amendment to the Banking Law which has enabled both foreign and
domestic banks to engage in a wider range of activities.
Central Bank of China
The Central Bank was established in 1935 pursuant to the Central Bank of
China Act. The Central Bank is responsible for formulating and implementing
monetary policy and supervising all financial institutions in the country. It
also holds the nation's foreign exchange reserves, issues the national
currency and acts as fiscal agent of the government and custodian of
government funds.
Banking and Financial Institutions
A wide variety of financial organizations operate in the ROC under the
supervision of the Ministry of Finance including domestic and foreign banks,
credit cooperative associations, trust investment companies, post
SAI-23
<PAGE>
offices and postal agencies, life insurance companies, property and casualty
insurance companies, bills finance companies and securities finance
institutions.
Both local and foreign banks are chartered under the provisions of the
Banking Law, as amended. With the exception of a few specialized banks, all
banks generally engage in a full range of operations and are members of the
Clearing House supervised by the Central Bank.
Under the Banking Law, banks are granted wide latitude to engage in a range
of business including securities investment, underwriting, trading in
securities for their own account, or for their customers, managing bond and
debenture issues and discounting bills and notes, in addition to other normal
banking business. The Banking Law also provides for various types of
specialized banking institutions such as commercial banks, savings banks,
export-import banks, banks which extend credit to medium- and small-sized
enterprises and citizens or district banks.
The postal savings system (post offices and postal agencies) has been the
fastest growing segment of the banking industry. From 1961 through 1995
deposits in the system grew from 3% to about 11.7% of the total. Credit co-
operative associations are also significant, although their growth rate has
not been as fast as the postal savings system. At December 31, 1995, deposits
in credit co-operative associations constituted approximately 12.5% of all
deposits.
The International Commercial Bank of China ("ICBC") is Taiwan's leading
foreign exchange bank. It maintains 51 offices in Taiwan and a number of
foreign branches and representative offices. See "Custodians" in the
Prospectus.
The Export-Import Bank of China Act of 1979 established the government-owned
Export-Import Bank of the ROC and transformed the government-owned Chiaotung
Bank into a development bank. The Export-Import Bank of the ROC specializes in
trade banking with the main objective of promoting the ROC's exports, while
the Chiaotung Bank concentrates on financing investment in manufacturing,
mining and transportation industries. It has close working relationships with
the CEPD, the Industrial Development Bureau of the Ministry of Economic
Affairs and other government bodies.
In 1974, the government established the Medium and Small Business Credit
Guarantee Fund to provide medium and small business credit guarantees for bank
loans. In 1975, the government established eight medium-sized banks throughout
the country to assist in financing medium and small businesses. As of the end
of 1995, about 9.48% of all financial institutions' deposits were held by
these banks.
The Banking Law authorizes the activities of trust investment companies to
manage trust funds and trust properties or, as an investment broker, to invest
in capital markets and to undertake underwriting and trading of securities for
their own account or for customers. The government first allowed trust
investment companies to open in 1971, with the primary purpose of permitting
overseas Chinese financial groups to develop long-term loan and capital
markets in Taiwan. As of the end of 1995, there were 5 trust investment
companies operating in the ROC.
On July 11, 1989, the Legislative Yuan passed an amendment to the Banking
Law which permits the establishment of privately-owned banking institutions
and permits banks to set their own interest rates. The related regulations
have been formulated by the Executive Yuan. The amendment stated for the first
time which actions will be deemed as acceptance of deposits and by limiting
such actions, thereby made the country's numerous underground investment
companies illegal. Following the enactment of this amendment, 15 new private
banks were approved in 1991. Two additional new commercial banks were approved
in 1992 and 1994.
At present, there are 38 foreign banks operating in the ROC from the United
States, the Netherlands, Thailand, Japan, the United Kingdom, Germany,
Singapore, France, Spain, Australia and Canada. While there has been some
recent liberalization of the treatment of foreign banks in Taiwan, their
activities are still strictly
SAI-24
<PAGE>
limited by law and they operate at a competitive disadvantage relative to
Taiwan's domestic banks. In early January 1987, the restriction limiting
foreign banks to taking time deposits of a maturity of six months or less was
eliminated. In addition, a regulation permitting qualified foreign banks to
conduct trust business in Taiwan was adopted in April 1990.
Monetary Policy
The Central Bank is responsible for developing and implementing monetary
policy and controlling the money supply. The major methods it uses to
implement policy include: adjusting deposit reserve ratios; engaging in open
market operations; setting the rediscount rate; acting as lender of last
resort and adjusting bank holdings of foreign currency to influence their
reserve positions.
The rate of growth of the money supply as measured by M1B was approximately
15% in 1993, 12% in 1994, and 0.79% in 1995. The sharp increases in M1B
through 1993 resulted from large-scale injection of reserves which the Central
Bank effected through its constant purchases of U.S. Dollars on the local
foreign exchange market in order to control the appreciation of the NT Dollar
against the U.S. Dollar. The Central Bank relies on these purchases to absorb
excess foreign currency generated by the mounting trade surplus and
speculative currency inflows. At the same time, the Central Bank attempts to
reduce the excess liquidity in the domestic money supply caused by these
purchases by issuing treasury bills, time deposit certificates and savings
notes.
PUBLIC FINANCE AND TAXATION
Revenues and Expenditures
The government policy on fiscal matters has traditionally been conservative.
The ROC government has experienced deficits and for the next several years may
continue to experience deficits in connection with the National Health
Project.
The major sources of 1995 revenue were taxes (62%), surpluses from public
enterprises and utilities (6%) and proceeds from issues of public debt (6%).
The primary areas of expenditure in 1995 were national defense and foreign
affairs and general administration (32.2%), social security and pension
(24.5%), education, science and culture (13.9%) and economic development
(7.1%).
GOVERNMENT REVENUE AND EXPENDITURES
<TABLE>
<CAPTION>
TOTAL TOTAL SURPLUS
REVENUE EXPENDITURES (DEFICIT)
------- ------------ ---------
(NT$ BILLION)
<S> <C> <C> <C>
1990............................................. 1,097.4 1,267.7 (170.3)
1991............................................. 1,134.6 1,513.3 (378.7)
1992............................................. 1,348.1 1,642.8 (294.7)
1993............................................. 1,480.6 1,779.9 (299.3)
1994............................................. 1,559.9 1,922.9 (363.0)
1995............................................. 1,543.9 1,249.3 (294.6)
</TABLE>
- --------
Source: Quarterly National Economic Trends, Taiwan Area, The Republic of
China, February 1996.
Taxation
The tax system in Taiwan includes corporate and personal income taxes,
business taxes, customs duties, and harbor taxes, commodity taxes, land taxes
and stamp and securities transfer taxes. In the spring of 1986, the
SAI-25
<PAGE>
government introduced a value-added tax which replaced, in part, the previous
commodity and business tax. See "Value-Added Tax" below.
For more information regarding ROC taxation of the Fund, see "Taxation--ROC
Income Taxes" herein.
Corporate Income Tax. Taiwan resident corporations are taxed on worldwide
net income at a maximum rate of 25%. Certain approved deductions are allowed.
Non-resident companies doing business in Taiwan are taxed on all Taiwan
source income either at the applicable rates for resident corporations or at
prescribed withholding rates. Interest, royalties, and certain service fees
paid to non-residents are subject to a 20% withholding tax.
Personal Income Tax. Residents and non-residents are taxed on all income
derived from sources within Taiwan. Residents are taxed at a progressive rate
ranging from 6% to 40%. Non-residents are taxed at a flat rate of 20% for
income other than (i) gains realized from the sale of property which are taxed
at the rate of 35% for foreign individuals and 25% for foreign corporations
and (ii) stock or cash dividends which are taxed at the rate of 35% for
foreign individuals and 25% for foreign corporations (or 20% if certain
governmental approval relating to foreign investment is obtained). Residents
may take deductions for insurance payments, medical expenses, property taxes
and charitable donations, or apply a standard deduction in lieu of the
itemized deductions. Non-resident taxpayers are ineligible for deductions.
Value-Added Tax. Under the value-added tax ("VAT") system, a 5% tax is
levied on the value added to many types of goods and services at each stage of
production and distribution. The sale of a number of types of goods and
services are "zero rated" which means that the final seller can recover all
the VAT he paid on his purchase of goods and services and that the price paid
by the final consumer will not reflect any VAT incurred on prior stages. Zero
rated goods and services include exports and services relating to exports.
Estate and Gift Tax. Estate and gift tax is payable on, inter alia, any
estate within the ROC or of a deceased non-resident ROC national regularly
domiciled outside the ROC or of a foreign national and on any donated property
within the ROC donated by any such person, and is accordingly a tax payable by
reference to individuals. Estate tax is payable at rates ranging from 2% of
the first NT$300,000 to 60% of amounts over NT$160 million. Gift tax is
payable at rates ranging from 4% of the first NT$300,000 to 60% of amounts
over NT$150 million.
Capital Gains Tax. During certain periods in the past, capital gains derived
from stock transactions have been subject to tax in the ROC. The latest
imposition of this tax was for the one-year period ended December 31, 1989.
Since January 1, 1990, the capital gains tax has been suspended. On January 4,
1996, the ROC Legislative Yuan passed a bill for the amendment of the ROC
Income Tax Law that would have eliminated the exemption from the ROC income
tax for gains realized on the sale of ROC securities and imposed a capital
gains tax. On January 12, 1996, this amendment was repealed by the Legislative
Yuan. The reintroduction of a capital gains tax would require the Legislative
Yuan to engage in the full legislative process for the enactment of tax
legislation and it cannot be predicted when or whether the Legislative Yuan
will engage in such full legislative process.
SAI-26
<PAGE>
External Debt
Since 1985, Taiwan's outstanding external debt has been reduced from US$5.2
billion to US$563.3 million in 1994. The following table gives total and
disbursed external public debt outstanding for the periods indicated:
EXTERNAL PUBLIC DEBT OUTSTANDING
<TABLE>
<CAPTION>
DISBURSED
TOTAL CHANGE ONLY CHANGE
(US$ MILLION) (%) (US$ MILLION) (%)
------------- ------ ------------- ------
<S> <C> <C> <C> <C>
1990................................. 1,208.7 (18.7) 898.1 (21.6)
1991................................. 998.7 (17.4) 713.5 (20.6)
1992................................. 688.0 (31.1) 455.4 (36.2)
1993................................. 598.7 (13.0) 395.4 (13.2)
1994................................. 563.3 (5.9) 360.4 (8.9)
</TABLE>
- --------
Source: Balance of Payments, March 1995, Central Bank.
Taiwan's debt service requirements are low compared with other countries in
the region. Since 1974, the external debt ratio has not risen higher than
4.7%.
ESTIMATED EXPENSES
On the basis of the anticipated size of the Fund immediately following the
offering and the actual expenses of the Fund since the commencement of
operations in December 1986, the Adviser estimates that the Fund's normal
operating expenses for its fiscal year ending August 31, 1996 will be
approximately $6,768,000, excluding any performance adjustment relating to the
Adviser's fee. While the foregoing estimate has been made in good faith on the
basis of information as to current prices available to the Adviser, including
estimates furnished by the Fund's agents, there can be no assurance, given the
nature of the Fund, that actual operating expenses for fiscal 1996 will not be
substantially more or less than such estimate. For the fiscal years ended
August 31, 1993, 1994 and 1995 the operating expenses of the Fund, exclusive
of amortization of organizational expenses, amounted to $4,136,025, $6,066,785
and $7,037,225, respectively.
The Fund's estimated annual operating expenses are higher than the annual
normal operating expenses of most other U.S. investment companies of
comparable size investing in the securities of U.S. issuers. This results from
the fact that (i) the advisory fees (reflecting the specialized nature of the
Fund, the nature of the advisory effort involved and the need for outside
research services) are higher than advisory fees paid by a number of other
investment companies, (ii) many other registered U.S. investment companies do
not pay fees to administrators in addition to fees paid to investment
advisers, and (iii) the fees charged by certain of the Fund's agents are
higher (reflecting communications and other costs associated with an
investment company investing in the ROC, rather than in the United States)
than fees charged by such agents for services to a more typical investment
company investing in the United States.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In portfolio transactions involving equity securities, the Adviser places
orders on behalf of the Fund directly with brokers except that the purchase of
shares in rights offerings is made directly from the issuer. In portfolio
transactions involving debt securities, the Adviser may place orders on behalf
of the Fund directly with brokers, bills companies or other institutions or
may make purchases directly from the issuer.
The primary objective of the Adviser 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
SAI-27
<PAGE>
of order, difficulty of execution and skill required of the broker/dealer.
Brokerage commissions are fixed under the rules of the TSE. See "The
Securities Market of the ROC--Trading and Settlement Procedures." For the
fiscal years ended August 31, 1993, 1994 and 1995, the Fund paid $391,657,
$570,427 and $1,165,753, respectively, in brokerage commissions.
NET ASSET VALUE
Net asset value is determined on each business day in Taiwan (defined to be
a day on which the TSE is open for trading) by dividing the value of the net
assets of the Fund (the value of its assets less its liabilities, exclusive of
capital stock and surplus) by the total number of shares of Common Stock
outstanding. In valuing the Fund's assets, all securities for which market
quotations are readily available are valued at the last sales price prior to
the time of determination, or, if there was no sales price on such date, at
the closing price quoted for such securities (but if bid and asked quotations
are available, at the mean between the last current bid and asked prices,
rather than such quoted closing price). Securities which are traded over-the-
counter, if bid and asked quotations are available, are valued at the mean
between the current bid and asked prices, or, if such quotations are not
available, are valued as determined in good faith by the Board of Directors of
the Fund. In instances where the price determined above is deemed not to
represent fair market value (for example, if the price of a security listed on
the TSE is fixed by reason of a limit on the daily price change, and the
Fund's officers determine that, because of unusual and material changes
affecting the issuer, the quoted price does not reflect the value of the
security), the price is determined in such manner as the Board of Directors
may prescribe. Short-term investments having a maturity of 60 days or less are
valued at cost with accrued interest or discount earned thereon included in
interest receivable. All other securities and assets are taken at fair value
as determined in good faith by the Board of Directors although the actual
calculation may be done by others. Any assets or liabilities initially
expressed in terms of NT Dollars will be translated into U.S. Dollars at the
closing rate of NT Dollars against U.S. Dollars quoted in the Taipei Foreign
Exchange Market.
The Fund's currently outstanding shares of Common Stock are, and the Shares,
subject to notice of issuance, will be, listed on the New York Stock Exchange.
See "Financial Highlights" and "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.
TAXATION
ROC INCOME TAXES
The following discussion of the anticipated material ROC tax consequences of
this offering and the purchase, ownership and disposition of the Shares is
based on the advice of Lee & Li, ROC counsel to the Fund.
Under the Income Tax Law of the ROC, dividend and interest income received
on assets held under the Management Contract from sources within the ROC will
be subject to a 20% withholding tax. Stock dividends are subject to an income
tax which is payable on receipt or, in certain cases, on disposal of the stock
dividends. In the case of stock dividends which are so taxable, the Custodian
will receive the full entitlement without deduction, but the Adviser will be
obliged to pay out of cash held under the Management Contract an amount equal
to 20% of the par value of the securities received. Since stock dividends are
held for the investment account of the Fund, the amount of any such payment
will be charged to operations. Securities received as stock dividends are
treated for the purposes of the capital gains tax described below in the same
way as other securities held. Transactions in securities are not currently
subject to any capital gains tax.
In September 1988, the ROC government announced that, beginning on January
1, 1989, a capital gains tax on gains derived from stock transactions would be
reimposed. A ruling from the ROC government in 1983 had indicated that
investment funds such as the Fund would remain exempt from this tax until
December 31, 1990. On January 1, 1990, this capital gains tax was again
suspended. On January 4, 1996, the ROC Legislative Yuan
SAI-28
<PAGE>
passed a bill for the amendment of the ROC Income Tax Law that would have
eliminated the exemption from the ROC income tax for gains realized on the
sale of ROC securities and imposed a capital gains tax. On January 12, 1996,
this amendment was repealed by the Legislative Yuan. The reintroduction of a
capital gains tax would require the Legislative Yuan to engage in the full
legislative process for the enactment of tax legislation. There can be no
assurance that the capital gains tax will not be imposed in the future or that
the Fund will continue to be exempt from such tax.
Profits on sales of Fund shares effected by non-resident foreigners wholly
outside the ROC will not be subject to ROC income tax.
Securities Transaction Tax. In general, on any sale of bonds, stocks,
debentures and certain other securities, a securities transaction tax is
payable by the seller at the rate of 0.3% of the transaction price for stocks
and 0.1% of the transaction price for bonds and mutual fund shares. Sales of
Fund shares effected outside the ROC will not be subject to the securities
transaction tax.
U.S. FEDERAL INCOME TAXES
The Fund intends to continue to elect to qualify as a regulated investment
company under the Code. To so qualify, the Fund must, among other things: (a)
derive at least 90% of its gross income from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including, but not
limited to, gains from options, futures contracts or forward contracts)
derived with respect to the Fund's business of investing in stocks, securities
or currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of the following assets held for less than three months: (i)
stock or securities, (ii) options, futures or forward contracts (other than
options, futures or forward contracts on foreign currencies), or (iii) foreign
currencies (or options, futures or forward contracts on foreign currencies)
which are not directly related to the Fund's principal business of investing
in stocks or securities (or options and futures with respect to stocks or
securities); and (c) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the value of the Fund's total
assets is represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies, and other securities, with
such other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of the Fund's total assets is invested in the securities
(other than U.S. government securities or securities of other regulated
investment companies) of any one issuer or of any two or more issuers that the
Fund controls and that are determined to be engaged in the same business or
similar or related businesses. The Fund expects that all of its gains from the
sale or other disposition of foreign currencies will be derived with respect
to its business of investing in stocks, securities or currencies.
As a regulated investment company, the Fund will not be subject to U.S.
federal income tax on its investment company taxable income that it
distributes to its shareholders, provided that at least 90% of its investment
company taxable income for the taxable year is distributed to its
shareholders; however, even if the Fund were so to distribute at least 90% of
its investment company taxable income, the Fund would be subject to tax on its
income and capital gains to the extent that it does not distribute to its
shareholders an amount equal to such income and gain. Investment company
taxable income includes dividends, interest and net short-term capital gains
in excess of net long-term capital losses, but does not include net long-term
capital gains in excess of net short-term capital losses. The Fund intends to
distribute annually to its shareholders substantially all of its investment
company taxable income. If the Fund fails to satisfy the 90% distribution
requirement or fails to qualify as a regulated investment company in any
taxable year, it will be subject to tax in such year on all of its taxable
income, whether or not the Fund makes any distributions to its shareholders.
Dividend distributions of investment company taxable income are taxable to a
U.S. shareholder as ordinary income to the extent of the Fund's current and
accumulated earnings and profits, whether paid in cash or in shares. Since the
Fund will not invest in the stock of domestic corporations, the corporate
shareholders of the Fund will not be entitled to the deduction for dividends
received by corporations.
SAI-29
<PAGE>
As a regulated investment company, the Fund also will not be subject to U.S.
federal income tax on its net long-term capital gains in excess of net short-
term capital losses and capital loss carryovers from the prior eight years, if
any, that it distributes to its shareholders. If the Fund retains for
reinvestment or otherwise an amount of such net long-term capital gains, it
will be subject to a tax of 35% of the amount retained. The Board of Directors
of the Fund will determine at least once a year whether to distribute any net
long-term capital gains in excess of net short-term capital losses and capital
loss carryovers from prior years. The Fund expects to designate amounts
retained as undistributed capital gains in a notice to its shareholders who,
if subject to U.S. federal income taxation on long-term capital gains, (a)
will be required to include in income for U.S. federal income tax purposes, as
long-term capital gains, their proportionate shares of the undistributed
amount, and (b) will be entitled to credit against their U.S. federal income
tax liabilities their proportionate shares of the tax paid by the Fund on the
undistributed amount and to claim refunds to the extent that their credits
exceed their liabilities. For U.S. federal income tax purposes, the basis of
shares owned by a shareholder of the Fund will be increased by an amount equal
to 65% of the amount of undistributed capital gains included in the
shareholder's income. Distributions of net long-term capital gains, if any, by
the Fund are taxable to its shareholders as long-term capital gains regardless
of how long the shareholder has held the Fund's shares, and are not eligible
for the dividends received deduction. Under the Code net long-term capital
gains will be taxed at a rate no greater than 28% for individuals and 35% for
corporations. Shareholders will be notified annually as to the U.S. federal
income tax status of their dividends, distributions and any deemed
distributions.
Shareholders receiving dividends or distributions in the form of additional
shares pursuant to the Plan should be treated for U.S. federal income tax
purposes as receiving a distribution in an amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive
and should have a cost basis in the shares received equal to such amount.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, the distribution may be taxable even
though it, in effect, represents a return of invested capital. Investors
considering buying shares just prior to a distribution should be aware that,
although the price of shares purchased at that time may reflect the amount of
the forthcoming distribution, those who purchase just prior to the record date
for a distribution will receive a distribution which may be taxable to them.
The amount of capital gains realized and distributed (which from an investment
standpoint may represent a partial return of capital rather than income) in
any given year will be the result of action taken for the best investment of
the principal of the Fund, and may therefore vary from year to year.
If the Fund is the holder of record of any stock on the record date for any
dividends payable with respect to such stock, such dividends are included in
the Fund's gross income not as of the date received but as of the later of (a)
the date such stock became ex-dividend with respect to such dividends (i.e.,
the date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date the Fund acquired such stock,
either of which date may be earlier than the date the dividend is received.
Accordingly, in order to satisfy its income distribution requirements, the
Fund may be required to pay dividends based on anticipated earnings, and
shareholders may receive dividends in an earlier year than would otherwise be
the case.
Under the Code, in a year in which the Fund qualifies as a regulated
investment company, the Fund may be subject to a 4% excise tax on a portion of
its undistributed income. To avoid the tax, the Fund must distribute annually
at least 98% of its adjusted taxable ordinary income (not taking into account
capital gain net income) for the calendar year and at least 98% of its capital
gain net income for the 12-month period ending, as a general rule, on October
31 of the calendar year. For this purpose, any income or gain retained by the
Fund that is subject to corporate income tax will be treated as having been
distributed at year end. In addition, the minimum amounts that must be
distributed in any year to avoid the excise tax will be increased or decreased
to reflect any under distribution or over distribution, as the case may be, in
the previous year. For a distribution to qualify under the foregoing test, the
distribution generally must be declared and paid during the year. Any dividend
declared by the Fund in October, November or December of any year and payable
to shareholders of record on a specified date in such a month shall be deemed
to have been paid by the Fund and received by each shareholder on December 31
of such year, provided that such dividend is actually paid by the Fund during
January of the
SAI-30
<PAGE>
following year. Accordingly, such distributions will be taxable to
shareholders in the year the distributions are declared and become payable,
rather than the year in which the distributions are received by the
shareholders.
For backup withholding purposes, the Fund may be required to withhold and
remit to the U.S. Treasury 31% of reportable payments (which may include
dividends, capital gain distributions, and redemptions) to certain
shareholders. A shareholder, however, may generally avoid becoming subject to
this requirement by filing an appropriate form certifying under penalties of
perjury that such shareholder's taxpayer identification number is correct and
that it is not subject to backup withholding, or is exempt from backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules from payments made to Shareholders may be
credited against such Shareholder's federal income tax liability.
Upon the sale or exchange of his or her shares, a shareholder will realize a
taxable gain or loss in an amount equal to the difference between the amount
realized and his or her basis in the shares. Such gain or loss will be treated
as capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term if the shareholder's holding period for the
shares is more than 12 months and otherwise will be short-term. Any loss
realized on a sale or exchange will be disallowed to the extent that the
shares disposed of are replaced (including replacement through the reinvesting
of dividends and capital gains distributions in the Fund) within a period of
61 days beginning 30 days before and ending 30 days after the disposition of
the shares. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by a shareholder on the sale
of Fund shares held by the shareholder for six months or less will be treated
for federal income tax purposes as a long-term capital loss to the extent of
any distributions of long-term capital gains received by the shareholder with
respect to such shares.
If the Fund purchases shares in certain foreign passive investment entities
described in the Code as passive foreign investment companies ("PFIC"), the
Fund will be subject to U.S. federal income tax on a portion of any "excess
distribution" (the Fund's ratable share of distributions in any year that
exceeds 125% of the average annual distribution received by the Fund in the
three preceding years or the Fund's holding period, if shorter, and any gain
from the disposition of such shares) even if such income is distributed as a
taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such "excess distributions." If the Fund were to invest in a PFIC
and elect to treat the PFIC as a "qualified electing fund" under the Code (and
if the PFIC were to comply with certain reporting requirements), in lieu of
the foregoing requirements the Fund would be required to include in income
each year its pro rata share of the PFIC's ordinary earnings and net realized
capital gains, whether or not such amounts were actually distributed to the
Fund. The Fund does not intend, however, to invest in PFICs.
FOREIGN TAX CREDITS
As set forth above under "ROC Income Taxes," it is expected that dividends
and interest earned by the Fund from ROC resident issuers will be subject to a
20% ROC withholding tax, which, in the case of stock dividends, will be paid
by the Adviser out of assets held under the Management Contract. If the Fund
qualifies as a regulated investment company, if certain distribution
requirements are satisfied, and if more than 50% of the value of the Fund's
assets at the close of the taxable year consists of stocks or securities of
foreign corporations, the Fund may elect, for U.S. federal income tax
purposes, to treat any such ROC withholding taxes that can be treated as
income taxes under U.S. income tax principles as paid by its shareholders. The
Fund has qualified for and has made this election in the past and intends
again to make this election. As a consequence, the amount of such ROC
withholding taxes will be included in the income of the Fund's shareholders
and reported to the U.S. Internal Revenue Service for such shareholders and
each such shareholder may be entitled to credit its portion of these amounts
against its U.S. federal income tax due, if any, or to deduct its portion from
its U.S. taxable income, if any.
The amount of ROC income taxes that may be credited against a shareholder's
United States federal income tax liability in any particular year generally
cannot exceed an amount equal to the shareholder's United States federal
income tax liability multiplied by the percentage of its taxable income that
consists of foreign source
SAI-31
<PAGE>
taxable income, and the amount creditable is subject to a further limitation
discussed below based on the category of foreign income for which the credit
is claimed. For this purpose, the Fund expects that the capital gains it
distributes to its shareholders, whether as dividends or capital gains
distributions, will not be treated as foreign source taxable income. Under the
Code, the foreign tax credit limitation must be applied separately to certain
categories of foreign source income including foreign source "passive income."
For this purpose, foreign source "passive income" includes dividends,
interest, certain capital gains and certain foreign currency gains. (For
certain taxpayers, dividends from the Fund may be classified as "financial
services" income and the limitation may be applied separately to that category
of income.) As a consequence, although certain shareholders may be able to
carryback or carryforward foreign tax credits, certain shareholders may not be
able to claim a foreign tax credit for the full amount (or possibly any) of
their proportionate share of ROC income taxes paid by the Fund. Each
shareholder will be notified within 60 days after the close of the Fund's
taxable year whether, pursuant to the election described above, the foreign
taxes paid by the Fund will be treated as paid by its shareholders for that
year and, if so, such notification will designate (i) such shareholder's
portion of the foreign taxes paid to such country and (ii) the portion of the
Fund's dividends and distributions that represents income derived from sources
within such country.
NON-U.S. SHAREHOLDERS
Taxation of a shareholder who, as to the U.S., is a nonresident alien
individual, foreign trust or estate, foreign corporation or foreign
partnership (a "foreign shareholder") depends, in part, on whether the
shareholder's income from the Fund is "effectively connected" with a U.S.
trade or business carried on by the shareholder.
If the income from the Fund is not effectively connected with a U.S. trade
or business carried on by the shareholder, dividends of investment company
taxable income will be subject to U.S. withholding tax of 30%, unless reduced
pursuant to an applicable income tax treaty. In addition, distributions of net
long-term capital gains, amounts retained by the Fund which are designated as
undistributed capital gains, if any, and gain realized upon the sale of shares
of the Fund by a foreign shareholder who is a nonresident alien individual
ordinarily will be subject to U.S. federal income tax at a rate of 30% if such
individual is physically present in the U.S. for more than 182 days during the
taxable year and, in the case of gain realized upon the sale of Fund shares,
if (i) such gain is attributable to an office or other fixed place of business
in the United States maintained by such non-resident alien individual or (ii)
such nonresident alien individual has a tax home in the United States and such
gain is not attributable to an office or fixed place of business located
outside the United States. Furthermore, foreign shareholders may be subject to
the 30% U.S. withholding tax (or lower treaty rate) on their income resulting
from the Fund's election (described above) to "pass through" amounts of
foreign taxes paid by the Fund, but may not be able to claim a credit or
deduction with respect to the additional U.S. withholding tax attributable to
such election.
If dividends or distributions from the Fund are effectively connected with a
U.S. trade or business carried on by a foreign shareholder, dividends of
investment company taxable income, distributions of net long-term capital
gains, allocations of designated undistributed capital gains and any gains
realized upon the sale of shares of the Fund will be subject to U.S. federal
income tax in the same manner and at the graduated income tax rates applicable
to U.S. citizens or domestic corporations. If the income or gain from the Fund
is effectively connected with a U.S. trade or business carried on by a foreign
shareholder that is a corporation, then such shareholder may also be subject
to the 30% branch profits tax. Whether a foreign shareholder is engaged in
trade or business in the U.S. is a factual question. With respect to
securities trading activities, a foreign shareholder who is not a dealer in
securities is not considered to be engaged in trade or business in the U.S. by
virtue of his securities trading activities if certain conditions are met.
Foreign shareholders should consult their tax advisers to determine whether
they are engaged in trade or business in the U.S. and, if they are, whether
the income or gain derived from the Shares is effectively connected therewith.
SAI-32
<PAGE>
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described above.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY INCLUDED FOR
GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE OF TAX
CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT HIS OWN TAX ADVISER WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO HIM OF THIS OFFERING AND/OR
PARTICIPATION IN THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF STATE,
LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL OR OTHER TAX LAWS.
OFFICIAL DOCUMENTS
All of the documents, except ROC company annual reports, referred to herein
as the source of statistical information are public official documents of the
ROC, its ministries, the Central Bank or the TSE.
SAI-33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Portfolio of Investments as of August 31, 1995........................... F-2
Statement of Assets and Liabilities as of August 31, 1995................ F-4
Statement of Operations for the fiscal year ended August 31, 1995........ F-4
Statement of Changes in Net Assets for the fiscal years ended August 31,
1994 and 1995........................................................... F-5
Financial Highlights..................................................... F-6
Notes to Financial Statements............................................ F-7
Report of Independent Accountants dated October 17, 1995................. F-10
Portfolio of Investments as of February 29, 1996 (unaudited)............. F-11
Statement of Assets and Liabilities as of February 29, 1996 (unaudited).. F-14
Statement of Operations for the six-month period ended February 29, 1996
(unaudited)............................................................. F-14
Statement of Changes in Net Assets for the six-month periods ended Febru-
ary 28, 1995
and February 29, 1996 (unaudited)....................................... F-15
Financial Highlights (unaudited)......................................... F-16
Notes to Financial Statements (unaudited)................................ F-17
</TABLE>
F-1
<PAGE>
- --------------------------------------------------------------------------------
The Taiwan Fund, Inc.
Investments/August 31, 1995 (Showing Percentage of Total Value of Investment
in Securities)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
US$
Value
Shares (Note 1)
------ --------
<S> <C> <C>
COMMON STOCKS - 90.2%
BASIC INDUSTRIES - 19.6
Chemicals - 5.5%
Asia Chemical Corp........................ 2,925,325 $ 2,659,580
China Petrochemical Development Corp (a).. 9,000,000 5,956,797
China Synthetic Rubber.................... 2,406,814 3,632,365
Everlight Chemical Industry Corp. (a)..... 550 450
Oriental Union Chemical (a)............... 1,780,800 1,813,310
Taiwan Synthetic Rubber Corp. (a)......... 604,800 763,203
-----------
14,825,705
-----------
Drugs & Health Care - 0.8%
Yung Shin Pharmaceuticals................. 1,115,300 2,048,245
-----------
Iron & Steel - 4.7%
China Steel Corp.......................... 16,561,000 12,647,502
Feng Hsing Iron & Steel................... 91,000 96,632
-----------
12,744,134
-----------
Metals & Mining - 1.8%
Walsin Lihwa Corp......................... 4,282,565 4,890,266
-----------
Paper & Forest Products - 0.4%
Chung Hwa Pulp (a)........................ 565,000 723,253
Yuen Foong Yu Manufacturing............... 575,000 476,762
-----------
1,200,015
-----------
Plastics - 6.4%
Formosa Plastic........................... 4,547,980 7,393,072
Nan Ya Plastics Corp...................... 5,635,334 9,529,531
Sun Yad Plastic Co. Ltd. (a).............. 634,800 443,238
-----------
17,365,841
-----------
TOTAL BASIC INDUSTRIES.................... 53,074,206
-----------
CONSTRUCTION & REAL ESTATE - 6.3%
Building Materials - 6.3%
Asia Cement............................... 3,881,900 6,310,311
Chia Hsin Cement.......................... 50,000 37,275
Continental Construction.................. 460,000 490,145
Gold Sun Development & Construction (a)... 575,096 376,454
Taiwan Cement Corp........................ 180,008 226,499
Taiwan Glass.............................. 5,090,000 9,347,771
Universal Cement.......................... 128,800 102,111
-----------
16,890,566
-----------
<CAPTION>
US$
Value
Shares (Note 1)
------ --------
<S> <C> <C>
DURABLES - 17.5%
Automobiles, Tires & Accessories - 3.6%
Cheng Shin Rubber Industrial Co. (a)...... 3,705,792 $ 4,164,266
China Motor Co............................ 2,147,000 3,021,634
Giant Manufacturing....................... 985,000 1,393,429
Kenda Rubber Industrial Co. (a)........... 1,062,500 1,081,897
9,661,226
-----------
Consumer Electronics - 5.8%
Sampo Corp................................ 4,887,696 4,088,189
Tatung Co................................. 4,011,151 7,512,338
Teco Electric & Machinery Co.............. 2,294,332 4,055,005
-----------
15,655,532
-----------
Electrical Equipment - 0.1%
China Electric Manufacturing Co. (a)...... 368,000 355,982
-----------
Textiles & Apparel - 8.0%
Far East Textile.......................... 4,103,000 4,148,062
Formosa Chemical & Fibre.................. 155,445 145,846
Formosa Taffeta Co. Ltd................... 114,202 82,647
Hualon Teijran (a)........................ 10,300,000 7,191,796
Nien Hsing Textile Co. Ltd. (a)........... 1,079,000 1,137,937
Shinkong Synthetic Fibers (a)............. 6,590,000 6,638,410
Tainan Spinning Co. (a)................... 2,599,000 2,136,061
-----------
21,480,759
-----------
TOTAL DURABLES............................ 47,153,499
-----------
FINANCE - 5.8%
Banks - 3.1%
Chang Hwa Bank............................ 682,500 2,246,209
China Bills Finance Corp. (a)............. 500,000 560,041
Chung Hsing Bills (a)..................... 500,000 592,770
First Commercial Bank.................... 702,000 2,323,151
Hwa Nan Commercial Bank Ltd............... 810,000 2,710,015
8,432,186
-----------
Insurance - 2.7%
Cathay Life Insurance Co. Ltd............. 924,000 3,998,691
Shin Kong Life Insurance Co............... 1,360,000 3,239,508
-----------
7,238,199
TOTAL FINANCE............................. 15,670,385
-----------
</TABLE>
6 The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
- --------------------------------------------------------------------------------
Investments/August 31, 1995 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
US$
Value
Shares (Note 1)
------ --------
<S> <C> <C>
Common Stocks - continued
TECHNOLOGY - 31.7%
Computers & Business Equipment - 10.1%
Acer, Inc. (a)............................ 7,008,838 $14,146,138
D Link Corp. (a).......................... 2,233,000 3,573,060
Delta Electronics Inc. (a)................ 4,306,467 5,528,340
Silitek................................... 4,100,000 3,995,927
-----------
27,243,465
-----------
Electronics - 21.6%
Advanced Semiconductor Engineering
Inc. (a)................................ 2,440,972 4,704,761
Compeq Manufacturing Co., Inc............. 4,614,780 11,328,011
Hon Hai Precision (a)..................... 1,080,800 2,751,327
Liton Electronics......................... 3,504,048 4,587,451
Siliconware Precision Industry (a)........ 2,198,987 5,517,860
Taiwan Mask Corp. (a)..................... 711,250 1,629,528
Taiwan Semiconductor Manufacturing
Co. (a)................................. 5,540,000 21,255,000
United Micro Electronics Corp............. 2,250,000 6,054,986
Yageo Corp. (a)........................... 214,891 421,998
58,250,922
-----------
TOTAL TECHNOLOGY.......................... 85,494,387
-----------
TRANSPORTATION - 9.3%
Shipping - 9.3%
Evergreen Marine.......................... 3,675,000 5,332,479
Sincere Navigation (a).................... 2,805,000 2,835,806
U Ming Marine............................. 5,786,150 5,786,571
Uniglory Marine (a)....................... 1,339,000 1,855,259
Yang Ming Marine.......................... 9,000,000 9,393,410
-----------
25,203,525
-----------
TOTAL COMMON STOCK
(Identified Cost -- $278,785,977)....... 243,486,568
-----------
<CAPTION>
Principal
Amount
NT$
---
<S> <C> <C>
Certificates of Deposit - 1.0%
Far Eastern International Bank:
7.25%, 9/06/95.......................... 25,000,000 909,157
7.25%, 9/08/95.......................... 50,312,818 1,829,690
-----------
TOTAL CERTIFICATES OF DEPOSIT
(Identified Cost -- $2,738,648)......... 2,738,847
-----------
<CAPTION>
Principal US$
Amount Value
NT$ (Note 1)
--- --------
<S> <C> <C>
COMMERCIAL PAPER - 8.4%
Da Tong Plastic 7.25%, 9/08/95............ 9,822,862 $ 357,220
Far Eastern Textile 7.25%, 9/07/95........ 99,578,100 3,621,285
Formosan Rubber Group 6.85%,
9/18/95 (b)............................. 398,496,538 14,491,837
Kong Lien Enterprise 7.00%, 9/04/95....... 14,940,611 543,334
Taiwan Security Company Limited
6.75%, 9/05/95 (b)...................... 99,868,375 3,631,841
-----------
TOTAL COMMERCIAL PAPER
(Identified Cost -- $22,650,464)........ 22,645,517
-----------
<CAPTION>
Maturity
Amount
US$
---
<S> <C> <C>
REPURCHASE AGREEMENT - 0.4%
With State Street Bank and Trust Company at
4.50%, dated 8/28/95, due 9/5/95
(collateralized by U.S. Treasury Notes
5.875%, 7/31/97, market value
$1,221,191)............................. 1,197,196 1,196,000
------------
TOTAL INVESTMENTS -- 100%
(COST -- $305,371,089).................. $270,066,932
------------
Legend:
NT$ - New Taiwan dollar
US$ - United States dollar
</TABLE>
(a) Non-income producing (No cash dividends paid during preceding 12 months)
(b) Certificates of Deposit and Commercial Paper that are traded through Bills
Finance Corporations must be guaranteed by either a bank, a trust company
or a Bills Finance Corporation. Since there is no recognized credit rating
system in the Republic of China, the guarantee may not be comparable to a
guarantee issued by a U.S. institution.
Income Tax Information:
At August 31, 1995, the aggregate cost of investment securities for income tax
purposes was $308,644,925. Net unrealized depreciation aggregated $38,577,993,
of which $5,176,234 related to appreciated investment securities and $43,754,227
related to depreciated investment securities.
7 The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1995
<TABLE>
<S> <C> <C>
Assets
Investment in securities, at value
(including repurchase agreement
of $1,196,000) (cost $305,371,089)
(Notes 1 and 2) - See accompanying
schedule $ 270,066,932
Cash 114,652
Receivables for investments sold 3,027,409
Dividends receivable 14,547
Interest receivable 12,495
Prepaid expenses 36,321
-------------
Total assets 273,272,356
Liabilities
Due to custodian $ 19,787
Payable for investments purchased 1,465,384
Accrued management fee 323,281
Taiwan withholding tax payable (Note 1) 199,559
Other payables and accrued expenses 169,063
-------------
Total liabilities 2,177,074
-------------
Net Assets $ 271,095,282
=============
Net Assets consist of (Note 1):
Paid in capital $ 300,314,132
Accumulated undistributed net realized
gain (loss) on investments and
foreign currency 6,076,549
Net unrealized appreciation
(depreciation) on:
Investment securities (35,304,157)
Assets and liabilities denominated in
foreign currencies 8,758
-------------
Net Assets $ 271,095,282
=============
Net Asset Value per share
($271,095,282 / 14,826,357 shares
outstanding) $ 18.28
=============
</TABLE>
STATEMENT OF OPERATIONS
Year Ended August 31, 1995
<TABLE>
<S> <C> <C>
Investment Income
Dividends................................. $ 2,956,400
Interest.................................. 2,889,497
-------------
5,845,897
Less: Taiwan withholding tax (Note 1)..... (1,053,761)
Total Income............................ 4,792,136
-------------
Expenses
Management fee (Note 3)
Basic fee............................... $ 4,329,674
Performance adjustment.................. 202,418
Taiwan stock dividend tax (Note 1)........ 1,178,276
Custodian fees and expenses............... 578,448
Accounting fees and expenses (Note 3)..... 198,119
Legal..................................... 149,616
Audit..................................... 94,808
Directors' compensation................... 89,782
Delaware franchise tax.................... 73,797
Insurance fees............................ 57,374
Reports to shareholders................... 50,880
Transfer agent fees....................... 17,952
Miscellaneous............................. 16,081
-------------
Total expenses.......................... 7,037,225
-------------
Net investment income (loss).............. (2,245,089)
-------------
Realized and Unrealized Gain (Loss)
on Investments (Note 1)
Net realized gain (loss) on:
Investment securities................... 16,179,330
Foreign currency transactions........... 3,019,693 19,199,023
-------------
Change in net unrealized appreciation
(depreciation) on:
Investment securities................. (104,283,595)
Assets and liabilities denominated
in foreign currencies............... 14,526 (104,269,069)
------------- -------------
Net gain (loss)........................... (85,070,046)
-------------
Net increase (decrease) in net assets
resulting from operations............... $ (87,315,135)
=============
</TABLE>
8 The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
- --------------------------------------------------------------------------------
Financial Statements (continued)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
August 31, August 31,
1995 1994
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income (loss)................. $ (2,245,089) $ (2,459,191)
Net realized gain (loss) on investments
and foreign currency transactions............ 19,199,023 63,659,598
Change in net unrealized appreciation
(depreciation) on investments and foreign
currency translations........................ (104,269,069) 82,706,928
------------- ------------
Net increase (decrease) in net assets
resulting from operations.................... (87,315,135) 143,907,335
------------- ------------
Distributions to shareholders
From net investment income................... -- (1,176,939)
In excess of net investment income........... -- (93,460)
From net realized gains...................... (66,261,035) --
In excess of net realized gains.............. (2,399,848) --
------------- ------------
Total distributions to shareholders.......... (68,660,883) (1,270,399)
Share transactions
Net proceeds from sales of shares (Note 4)... 62,858,255 75,884,091
Reinvestment of distributions................ 490,170 11,501
------------- ------------
Net increase (decrease) in net assets
resulting from share transactions............ 63,348,425 75,895,592
------------- ------------
Total increase (decrease) in net assets...... (92,627,593) 218,532,528
Net Assets
Beginning of period.......................... 363,722,875 145,190,347
------------- ------------
End of period................................ $ 271,095,282 $363,722,875
============= ============
Other Information
Shares
Sold (Note 4)................................ 3,530,085 3,236,180
Issued in reinvestment of distributions...... 21,907 384
------------- ------------
Net increase (decrease)........................ 3,551,992 3,236,564
============= ============
</TABLE>
9 The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS+
<TABLE>
<CAPTION>
Eight Months Years Ended
Years Ended August 31, Ended December 31,
--------------------------------------------- August 31 ----------------------
1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Per Share Data
Net asset value, beginning of period..... $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51 $ 22.35 $ 22.23
-------- -------- -------- -------- -------- -------- --------
Income from Investment Operations
Net investment income (loss)........... (0.19) (0.24) 0.20 0.06 (0.10) 0.56 (0.24)
Net realized and unrealized gain
(loss) on investments................ (7.27) 14.20 (1.70) (0.20) 1.84 (6.16) 15.06
-------- -------- -------- -------- -------- -------- --------
Total from investment operations....... (7.46) 13.96 (1.50) (0.14) 1.74 (5.60) 14.82
-------- -------- -------- -------- -------- -------- --------
Less Distributions
From net investment income............. -- (0.14) (0.12) -- -- (0.53) --
In excess of net investment income..... -- (0.01) -- -- -- -- --
From net realized gains................ (5.88) -- -- -- -- (1.16) (14.75)
In excess of net realized gains........ (0.21) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total distributions.................... (6.09) (0.15) (0.12) -- -- (1.69) (14.75)
-------- -------- -------- -------- -------- -------- --------
Antidilution/(Dilution) resulting from
additional offering of shares at
market and reinvestment of dividends
at market.............................. (0.40) 0.44 -- 0.46 2.07 2.03 0.05
Offering expenses........................ (0.03) (0.05) -- (0.31) (0.65) (0.58) --
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period........... $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51 $ 22.35
======== ======== ======== ======== ======== ======== ========
Market value, end of period.............. $ 21.63 $ 31.88 $ 20.13 $ 17.88 $ 24.13 $ 20.50 $ 49.75
======== ======== ======== ======== ======== ======== ========
Total return ++
Per-share market value................... (12.0)% 59.2% 13.3% (25.9)% 17.7% (55.7)% 103.4%
Ratios and Supplemental Data
Net assets, end of period (000 omitted).. $271,095 $363,723 $145,190 $158,168 $124,974 $ 69,597 $ 66,914
Ratio of expenses to average net assets.. 2.43%+++ 2.49%+++ 2.67%+++ 2.94%+++ 3.47%* 2.34% 2.11%
Ratio of net investment income (loss)
to average net assets.................. (0.78)% (1.01)% 1.05% 0.29% (0.79)%* 2.80% (0.69)%
Portfolio turnover rate.................. 159% 267% 163% 129% 298%* 226% 169%
</TABLE>
* Annualized
+ Based on average shares outstanding during the period.
++ Total returns for periods of less than one year are not annualized.
+++ Expense ratio includes 20% tax paid on stock dividends received by the Fund.
If stock dividend taxes paid were excluded from the Fund's expense ratio,
the expense ratio would have been 2.02%, 2.28%, 2.49% and 2.71%, for the
years ended August 31, 1995, 1994, 1993 and 1992, respectively.
10
F-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. Significant Accounting Policies.
The Taiwan Fund, Inc. (the "Fund"), a Delaware corporation, is registered under
the Investment Company Act of 1940, as amended (the Act), as a diversified
closed-end management investment company.
The Fund is not permitted to invest directly in the securities of Republic of
China (ROC) companies. Therefore, it invests through a contractual securities
investment trust fund arrangement. This arrangement was established by means of
the Securities Investment Trust, Investment Management and Custodian Contract
(Management Contract) among China Securities Investment Trust Corporation
(Adviser), the International Commercial Bank of China (Custodian) and the Fund.
Under the Management Contract the Adviser manages and invests the assets of the
Fund and the Custodian holds the assets. The Fund is the sole beneficiary of the
assets held under the Management Contract and, as required by ROC regulations,
its interest in the assets is evidenced by units of beneficial interest.
Effective July, 1995, the Fund is now treated as a Qualified Foreign
Institutional Investor (QFII) which limits the Fund's ownership of a company's
shares to no more than 7.5% of such shares. In addition, all QFIIs together can
not own more than 15% of a company's shares. All funds managed by China
Securities Investment Trust Company (CSITC), the Fund's investment adviser, are
limited in the aggregate to 10% ownership of a company's shares.
The policies described below are consistently followed by the Fund in the
preparation of its financial statements in conformity with U.S. generally
accepted accounting principles.
Security Valuation. All securities for which market quotations are readily
available are valued at the last sales price prior to the time of determination
of the Fund's net asset value per share or, if there was no sales price on such
date, at the closing price quoted for such securities (but if bid and asked
quotations are available, at the mean between the last current bid and asked
prices, rather than such quoted closing price). Securities which are traded
over-the-counter are valued at the mean between the current bid and asked prices
or, if no quotations are available, are valued as determined in good faith by
the Board of Directors of the Fund. In certain instances where the price
determined above may not represent fair market value, the value is determined in
such manner as the Board may prescribe. Short-term investments, having a
maturity of 60 days or less are valued at cost which approximates market value,
with accrued interest or discount earned included in interest receivable.
Foreign Currency Translation. The financial accounting records of the Fund are
maintained in U.S. dollars. Investment securities, other assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at the
current exchange rate. Purchases and sales of securities, income receipts and
expense payments are translated into U.S. dollars at the exchange rate on the
dates of the transactions.
Reported net realized gains and losses on foreign currency transactions
represent net gains and losses from disposition of foreign currencies, currency
gains and losses realized between the trade dates and settlement dates of
security transactions, and the difference between the amount of net investment
income accrued and the U.S. dollar amount actually received. The effects of
changes in foreign currency exchange rates on investments in securities are not
segregated in the Statement of Operations from the effects of changes in market
prices of those securities, but are included in realized and unrealized gain or
loss on investments in securities.
Taxes. As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes all of its investment company taxable income and net
realized capital gains for its fiscal year. In addition to federal income tax
for which the Fund is liable on undistributed amounts, the Fund is subject to
federal excise tax on undistributed investment company taxable income and net
realized capital gains. The schedule of investments includes information
regarding income taxes under the caption "Income Tax Information." The Fund is
organized in Delaware and as such is required to pay Delaware an annual
franchise tax. Also, the Fund is currently subject to a Taiwan security
transaction tax of 0.3% on equities and 0.1% on corporate bonds and mutual fund
shares of the transaction amount.
The Fund's functional currency for tax reporting purposes is the New Taiwan
dollar.
11
F-7
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment Income. Dividend income is recorded on the ex-dividend date, except
where the ex-dividend date may have passed, certain dividends from foreign
securities are recorded as soon as the Fund is informed of the ex-dividend date.
Dividends are typically declared by Taiwanese companies in the Fund's third
fiscal quarter of each year. As a result, the Fund receives substantially less
dividend income in the first half of its year. Interest income, which includes
accretion of original discount, is accrued as earned.
Dividend and interest income generated in Taiwan is subject to a 20% withholding
tax. Stock dividends received (except those which have resulted from
capitalization of capital surplus) are taxable at 20% of the par value of the
stock dividends received.
Distributions to Shareholders. The distributable income from the assets held
under the Management Contract, which is limited to cash dividends and interest
income received, may be distributed to the Fund only once in each year at the
Fund's discretion and is recorded on the ex-dividend date. Realized capital
gains and stock dividends may also be distributed to the Fund. Within the above
limitations the Fund will, under current ROC regulations, be able to remit out
of the ROC the proceeds of income and capital gains distributions, unit
redemptions and other distributions of assets held under the Management
Contract.
The Fund distributes to shareholders at least annually, substantially all of its
taxable ordinary income and expects to distribute its taxable net realized
gains. Certain foreign currency gains (losses) are taxable as ordinary income
and, therefore, increase (decrease) taxable ordinary income available for
distribution. Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders may elect to have all distributions automatically
reinvested in Fund shares. (See page 15 for a summary of the Plan.) Shareholders
who do not participate in the Plan will receive all distributions in cash paid
by check in U.S. dollars.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for foreign currency
transactions and losses deferred due to wash sales and excise tax regulations.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid in capital.
Security Transactions. Security transactions are accounted for as of the trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. Purchases and Sales of Securities.
Purchases and sales of securities, other than short-term securities, aggregated
$420,325,659 and $401,006,285, respectively.
3. Fees and Other Transactions with Affiliates
Management Fee. As the Fund's investment adviser, CSITC receives a fee that is
computed daily at an annual rate of 1.50% of the Fund's average net assets. The
basic fee is subject to a performance adjustment (up to a maximum of plus/minus
.50%) based on the Fund's investment performance as compared to the Taiwan Stock
Exchange Index over a rolling 36-month period. For the year ended August 31,
1995, the management fee was equivalent to an annual rate of 1.56% of average
net assets.
Administration Fees. State Street Bank and Trust Company ("State Street")
provides, or arranges for the provision of certain administrative and accounting
services for the Fund, including maintaining the books and records of the Fund,
and preparing certain reports and other documents required by federal and/or
state laws and regulations. For these services, the Fund pays State Street a fee
at the annual rate of 0.09% of the Fund's average daily net assets up to $150
million, 0.06% of the next $150 million, and 0.04% of those assets in excess of
$300 million, subject to certain minimum requirements.
12
F-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. Fund Shares.
At August 31, 1995, there were 20,000,000 shares of $0.01 par value capital
stock authorized, of which 14,826,357 were issued and outstanding. On January
31, 1995, the Fund issued 21,907 shares of its common stock, valued at $490,170,
to shareholders participating in the Fund's Dividend Reinvestment and Cash
Purchase Plan. On July 27, 1995, the Fund completed a rights offering by issuing
3,530,085 shares of its common stock. Proceeds to the Fund, after deducting
solicitation and financial advisory fees of $2,467,529 and offering expenses of
$475,000, amounted to $62,858,255.
5. Quarterly Results of Operations (Unaudited).
<TABLE>
<CAPTION>
Net Increase
(Decrease)
in Net Assets
Investment Net Investment Net Gain (Loss) Resulting
Income Income (Loss) on Investments from Operations
-------------------- -------------------- -------------------- -------------------
Per Per Per Per
Total Share Total Share Total Share Total Share
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
For the quarters ended:
November 30, 1994 $1,532,687 $0.17 $ (297,059) $(0.03) $(33,857,011) $(3.00) $(34,154,070) $(3.03)
February 28, 1995 855,573 0.09 (371,616) (0.03) 4,489,450 0.39 4,117,834 0.36
May 31, 1995 1,210,163 0.11 (132,518) (0.01) (8,254,262) (0.73) (8,386,780) (0.74)
August 31, 1995 1,193,713 0.09 (1,443,896) (0.12) (47,448,223) (3.93) (48,892,119) (4.05)
1994
For the quarters ended:
November 30, 1993 $ 441,764 $0.05 $ (166,793) $(0.02) $ 17,775,492 $ 2.21 $ 17,608,699 $ 2.19
February 28, 1994 308,979 0.03 (1,474,695) (0.15) 28,097,283 3.09 26,622,588 2.94
May 31, 1994 1,660,975 0.15 219,482 0.02 14,817,418 1.31 15,036,900 1.33
August 31, 1994 1,195,876 0.18 (1,037,185) (0.09) 85,676,333 7.59 84,639,148 7.50
1993
For the quarters ended:
November 30, 1992 $1,507,260 $0.19 $ 446,355 $ 0.06 $ (2,575,302) $(0.32) $ (2,128,947) $(0.26)
February 28, 1993 1,290,702 0.16 356,074 0.04 5,140,218 0.64 5,496,292 0.68
May 31, 1993 1,644,255 0.20 550,079 0.07 (779,494) (0.10) (229,415) (0.03)
August 31, 1993 1,316,185 0.16 269,869 0.03 (15,429,363) (1.92) (15,159,494) (1.89)
</TABLE>
13
F-9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of The Taiwan Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
Taiwan Fund, Inc., including the schedule of portfolio investments, as of
August 31, 1995, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the four years in the
period then ended, the eight month period ended August 31, 1991 and for each of
the two years in the period ended December 31, 1990. 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
August 31, 1995 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
Taiwan Fund, Inc., as of August 31, 1995, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the four years in
the period then ended, the eight month period ended August 31, 1991 and for each
of the two years in the period ended December 31, 1990 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
October 17, 1995
F-10
<PAGE>
Investments/February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
US$
Value
Shares (Note 1)
------ --------
<S> <C> <C>
COMMON STOCK - 97.7%
BASIC INDUSTRIES - 24.1%
Chemicals - 5.6%
Asia Chemical Corp............................. 1,808,325 $ 2,216,181
China Petrochemical
Development Corp. (a)......................... 9,000,000 6,513,201
Oriental Union Chemical (a).................... 1,882,800 2,218,442
Taita Chemical Co. Ltd......................... 956,000 1,216,816
Union Petrochemical............................ 2,019,000 2,400,949
-----------
14,565,589
Drugs & Health Care - 1.0%
Yung Shin Pharmaceuticals...................... 1,115,300 2,453,838
Iron & Steel - 9.3%
China Steel Corp............................... 17,561,000 12,900,291
Chun Yuan Steel................................ 2,904,000 2,397,294
Kao Hsing Chang Iron & Steel(a)................ 3,456,000 2,563,910
Mayer Steel Pipe Co. Ltd.(a)................... 1,282,000 1,062,972
OrnaTube Enterprises (a)....................... 3,878,000 2,369,278
Ton Yi Industrial Corp. (a).................... 2,606,000 3,117,950
-----------
24,411,695
Metals & Mining - 0.4%
Walsin Lihwa Corp.............................. 1,282,565 1,091,426
Paper & Forest Products - 1.9%
Cheng Loong Co. Ltd. (a)....................... 4,045,000 2,927,322
Yuen Foong Yu Paper Manufacturing.............. 2,477,000 2,125,871
5,053,193
-----------
Plastics - 5.9%
Formosa Plastic................................ 4,345,980 6,337,690
Grand Pacific Petrochemical.................... 3,000,000 3,545,712
Nan Ya Plastics Corp........................... 1,581,334 2,329,043
Sun Yad Plastic Co. Ltd.(a).................... 273,800 185,202
Taiwan Styrene Monomer (a)..................... 2,000,000 3,083,861
-----------
15,481,508
-----------
TOTAL BASIC INDUSTRIES......................... 63,057,249
-----------
CONSTRUCTION & REAL ESTATE - 10.8%
Building Materials - 10.8%
Asia Cement.................................... 3,881,900 6,126,790
Cathay Construction............................ 2,850,000 3,503,164
Gold Sun Development & Construction (a)........ 4,115,099 2,888,261
Hsing Ta Cement (a)............................ 581,000 735,283
Lucky Cement Corp.............................. 1,695,000 1,799,913
Pacific Construction (a)....................... 2,000,000 1,345,552
Taiwan Glass................................... 5,090,000 10,180,740
Tung Ho Steel (a).............................. 2,100,000 1,756,491
-----------
28,336,194
DURABLES - 19.5%
Automobiles, Tires & Accessories - 7.9%
Cheng Shin Rubber Industrial Co.(a)............ 6,046,792 6,772,900
China Motor Co................................. 4,131,000 5,723,729
Ensure Co. (a)................................. 907,000 831,202
Giant Manufacturing............................ 2,589,000 3,540,127
Yue Loong Motor (a)............................ 4,972,000 3,742,832
-----------
20,610,790
-----------
Consumer Electronics - 2.7%
Sampo Corp..................................... 5,387,696 4,545,587
Tatung Co...................................... 1,499,827 2,683,522
-----------
7,229,109
-----------
Textiles & Apparel - 8.9%
Far East Textile............................... 3,052,000 2,552,767
Formosa Chemical & Fibre....................... 7,238,000 6,080,362
Formosa Taffeta Co. Ltd........................ 2,000,000 1,549,204
Hualon Teijran (a)............................. 8,000,000 4,713,070
Nien Hsing Textile Co. Ltd.(a)................. 2,618,000 3,198,953
Ruentex Industries............................. 1,500,000 845,516
Shinkong Synthetic Fibers(a)................... 4,708,000 3,390,007
Tainan Spinning Co. (a)........................ 1,599,000 1,029,249
-----------
23,359,128
TOTAL DURABLES................................. 51,199,027
-----------
FINANCE - 19.3%
Banks - 13.8%
Chang Hwa Bank................................. 682,500 2,432,359
China Bills Finance Corp. (a).................. 5,500,000 6,540,476
Chung Hsing Bills (a).......................... 5,650,000 6,451,742
First Commercial Bank.......................... 702,000 2,552,913
Fuh Hwa Securities............................. 4,500,000 7,282,348
Hwa Nan Commercial Bank Ltd.................... 810,000 2,444,905
ICBC........................................... 2,000,000 5,200,378
</TABLE>
6 The accompanying notes are an integral part of the financial statements.
F-11
<PAGE>
Investments/February 29, 1996 (Unaudited)(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
US$
Value
Shares (Note 1)
------ --------
<S> <C> <C>
Common Stock - Continued
FINANCE - Continued
Banks - Continued
International Bills Finance Corp.(a)............ 5,000,000 $ 3,327,515
36,232,636
------------
Insurance - 5.5%
Cathay Life Insurance Co. Ltd................... 2,424,000 10,490,072
Shin Kong Life Insurance Co..................... 1,760,000 3,904,284
------------
14,394,356
------------
TOTAL FINANCE................................... 50,626,992
NONDURABLES - 0.8%
Foods - 0.8%
AGV Products Corp.(a)........................... 1,117,000 816,485
Great Wall Enterprises(a)....................... 1,000,000 618,227
Ve Wong......................................... 800,000 651,684
------------
2,086,396
TECHNOLOGY - 20.1%
Computers & Business Equipment - 5.8%
Acer, Inc.(a)................................... 2,919,838 6,211,744
D Link Corp.(a)................................. 2,512,000 4,476,253
Delta Electronics Inc.(a)....................... 2,306,467 3,170,574
Silitek......................................... 1,100,000 1,224,089
------------
15,082,660
Electronics - 14.3%
Advanced Semiconductor Engineering, Inc.(a)..... 4,155,972 9,899,490
Compeq Manufacturing Co., Inc................... 2,679,780 5,993,398
Hou Hai Precision(a)............................ 588,349 1,048,407
Liton Electronics............................... 1,734,048 2,364,783
Mosel Vitelic Inc.(a)........................... 995,000 2,370,081
Opto Tech Corporation(a)........................ 1,000,000 927,340
Siliconware Precision Industry(a)............... 2,198,987 5,357,922
Taiwan Mask Corp.(a)............................ 1,829,240 3,924,837
Taiwan Semiconductor Manufacturing Co.(a)....... 1,940,000 5,467,670
------------
37,353,928
TOTAL TECHNOLOGY................................ 52,436,588
TRANSPORTATION - 3.1%
Shipping - 3.1%
Sincere Navigation(a)........................... 1,505,000 1,340,916
U Ming Marine................................... 1,786,150 1,630,386
Yang Ming Marine................................ 5,000,000 5,109,463
------------
8,080,765
------------
TOTAL COMMON STOCK.........
(Identified Cost -- $276,705,950)............... 255,823,211
------------
<CAPTION>
Principal
Amount
NT$
<S> <C> <C>
Certificates of Deposit - 0.1%
Dah An Commercial Bank 7.95%, 3/18/96(b)........ 10,232,470 372,117
(Identified Cost - $372,428) ------------
Commercial Paper - 1.7%
Chan Ki Construction 7.95%, 3/12/96(b).......... 59,584,125 2,166,853
Golden Old Cock/Feedmeal 5.40%, 3/27/96(b)...... 49,802,012 1,811,114
Hosu Construction 5.40%, 3/28/96(b)............. 9,958,789 362,164
------------
TOTAL COMMERCIAL PAPER.....
(Identified Cost -- $4,342,025)................. 4,340,131
------------
Time Deposits - 0.3%
Chinfon Bank 6.50%, 3/23/96..................... 25,085,835 912,279
(Identified Cost -- $918,861) ------------
<CAPTION>
Maturity
Amount
US$
<S> <C> <C>
Repurchase Agreement - 0.2%
With State Street Bank and Trust Company at
2.000%, dated 2/26/96, due 3/4/96
(collateralized by U.S. Treasury Notes
5.875%, 5/31/96, market value $614,492)...... 602,234 602,000
------------
TOTAL INVESTMENTS -- 100%
(COST -- $282,941,264).......................... $262,049,738
============
</TABLE>
7 The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
Investments/February 29, 1996 (Unaudited)(continued)
- --------------------------------------------------------------------------------
Legend:
NT$ - New Taiwan dollar
US$ - United States dollar
(a) Non-income producing (No cash dividends paid during preceding 12 months)
(b) Certificates of Deposit and Commercial Paper that are traded through Bills
Finance Corporations must be guaranteed by a major bank. Since there is no
recognized credit rating system in the Republic of China, the guarantee may
not be comparable to a guarantee issued by a U.S. institution.
Income Tax Information:
At February 29, 1996, the aggregate cost of investment securities for income tax
purposes was $286,215,100. Net unrealized depreciation aggregated $24,165,362,
of which $5,942,562 related to appreciated investment securities and $30,107,924
related to depreciated investment securities.
8 The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
February 29, 1996 (Unaudited)
<TABLE>
Assets
<S> <C> <C>
Investment in securities, at value (including
repurchase agreement of $602,000)
(cost $282,941,264) (Notes 1 and 2) -
See accompanying schedule..................................... $ 262,049,738
Cash............................................................ 49,265
Cash in New Taiwan dollars (cost $318,233)...................... 318,174
Receivables for investments sold................................ 4,503,226
Interest receivable............................................. 28,210
Prepaid expenses................................................ 7,005
-------------
Total assets.................................................. 266,955,618
-------------
Liabilities
Payable for investments purchased............................... $ 4,790,297
Accrued management fee.......................................... 371,198
Taiwan withholding tax payable (Note 1)......................... 5,615
Other payables and accrued expenses............................. 383,686
------------
Total liabilities............................................. 5,550,796
-------------
Net Assets...................................................... $ 261,404,822
=============
Net Assets consist of (Note 1):
Paid in capital................................................. $ 300,321,349
Accumulated net investment income (loss)........................ (1,305,507)
Accumulated undistributed net realized gain
(loss) on investments and foreign currency.................... (16,719,570)
Net unrealized appreciation (depreciation) on:
Investment securities......................................... (20,891,526)
Assets and liabilities denominated in foreign currencies...... 76
-------------
Net Assets...................................................... $ 261,404,822
=============
Net Asset Value, per share
($261,404,822/14,826,714 shares outstanding).................. $17.63
</TABLE>
STATEMENT OF OPERATIONS
Six Months Ended February 29, 1996 (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income
Dividends....................................................... $ 1,304,802
Interest........................................................ 597,794
-------------
1,902,596
Less: Taiwan withholding tax (Note 1)........................... (359,587)
-------------
Total Income.................................................. 1,543,009
Expenses
Management fee (Note 3)....
Basic fee..................................................... $ 2,036,144
Performance adjustment........................................ (444,795)
Custodian fees and expenses..................................... 271,497
Legal........................................................... 176,027
Accounting fees and expenses (Note 3)........................... 114,178
Taiwan stock dividend tax (Note 1).............................. 96,869
Reports to shareholders......................................... 68,237
Audit........................................................... 45,267
Directors compensation.......................................... 43,976
Delaware franchise tax.......................................... 28,492
Insurance fees.................................................. 21,137
Miscellaneous................................................... 11,852
Transfer agent fees............................................. 8,976
------------
Total expenses.............................................. 2,477,857
-------------
Net investment income (loss).................................... (934,848)
-------------
Realized and Unrealized Gain (Loss)
on Investments (Notes 1 and 3)
Net realized gain (loss) on:
Investment securities......................................... (18,722,466)
Foreign currency transactions................................. (4,073,653) (22,796,119)
Change in net unrealized appreciation
(depreciation) on:
Investment securities......................................... 14,412,631
Assets and liabilities denominated in
foreign currencies.......................................... (8,682) 14,403,949
------------ -------------
Net gain (loss)............................................... (8,392,170)
-------------
Net increase (decrease) in net assets
resulting from operations..................................... $ (9,327,018)
=============
</TABLE>
9 The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
FINANCIAL STATEMENTS(continued)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months
Ended
February 29,
1996 Year Ended
(Unaudited) August 31, 1995
----------- ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income (loss)...................................................... $ (934,848) $ (2,245,089)
Net realized gain (loss) on investments........................................... (22,796,119) 19,199,023
Change in net unrealized appreciation (depreciation) on investments
and foreign currency transactions............................................... 14,403,949 (104,269,069)
------------- ---------------
Net increase (decrease) in net assets resulting from operations................... (9,327,018) (87,315,135)
------------- ---------------
Distributions to shareholders
From net investment income........................................................ (370,659) -
From net realized gains........................................................... - (66,261,035)
In excess of net realized gains................................................... - (2,399,848)
------------- ---------------
Total distributions to shareholders............................................... (370,659) (68,660,883)
------------- ---------------
Share transactions
Net proceeds from sales of shares (Note 4)........................................ - 62,858,255
Reinvestment of distributions from net investment income.......................... 7,217 490,170
------------- ---------------
Net increase (decrease) in net assets resulting from share transactions........... 7,217 63,348,425
------------- ---------------
Total increase (decrease) in net assets......................................... (9,690,460) (92,627,593)
Net Assets
Beginning of period............................................................... 271,095,282 363,722,875
------------- ---------------
End of period (including accumulated net investment loss of $1,305,507
and $0 respectively)............................................................. $261,404,822 $ 271,095,282
============= ===============
Other Information
Shares
Sold (Note 4)..................................................................... - 3,530,085
Issued in reinvestment of distributions from net investment income................ 357 21,907
------------- ---------------
Net increase (decrease)........................................................... 357 3,551,992
============= ===============
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS +
Six Months Eight
Ended Months
February 29, Years Ended August 31, Ended Year Ended
1996 --------------------------------------- August 31 December 31,
(Unaudited) 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Per Share Data
Net asset value, beginning of period............... $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51 $ 22.35
-------- -------- ------- -------- -------- -------- --------
Income from Investment Operations
Net investment income (loss)..................... (0.06)** (0.19) (0.24) 0.20 0.06 (0.10) 0.56
Net realized and unrealized gain (loss)
on investments................................... (0.56) (7.27) 14.20 (1.70) (0.20) 1.84 (6.16)
-------- -------- ------- -------- -------- -------- --------
Total from investment operations................. (0.62) (7.46) 13.96 (1.50) (0.14) 1.74 (5.60)
-------- -------- ------- -------- -------- -------- --------
Less Distributions
From net investment income....................... (0.03) -- (0.14) (0.12) -- -- (0.53)
In excess of net investment income............... -- -- (0.01) -- -- -- --
From net realized gains.......................... -- (5.88) -- -- -- -- (1.16)
In excess of net realized gains.................. -- (0.21) -- -- -- -- --
-------- -------- ------- -------- -------- -------- --------
Total distributions.............................. (0.03) (6.09) (0.15) (0.12) -- -- (1.69)
-------- -------- ------- -------- -------- -------- --------
Antidilution/(Dilution) resulting from additional
offering of shares at market and reinvestment of
dividends at market.............................. -- (0.40) 0.44 -- 0.46 2.07 2.03
Offering expenses.................................. -- (0.03) (0.05) -- (0.31) (0.65) (0.58)
-------- -------- ------- -------- -------- -------- --------
Net asset value, end of period..................... $ 17.63 $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51
======== ======== ======= ======== ======== ======== ========
Market value, end of period........................ $ 21.13 $ 21.63 $ 31.88 $ 20.13 $ 17.88 $ 24.13 $ 20.50
======== ======== ======= ======== ======== ======== ========
Total return ++
Per-share market value............................. (2.2)% (12.0)% 59.2% 13.3% (25.9)% 17.7% (55.7)%
Ratios and Supplemental Data
Net assets, end of period (000 omitted)............ $261,405 $271,095 $363,723 $145,190 $158,168 $124,974 $ 69,597
Ratio of expenses to average net assets............ 1.82%*+++ 2.43%+++ 2.49%+++ 2.67%+++ 2.94%+++ 3.47%* 2.34%
Ratio of net investment income (loss) to average
net assets....................................... (0.69)%* (0.78)% (1.01)% 1.05% 0.29% (0.79)%* 2.80%
Portfolio turnover rate............................ 53% 159% 267% 163% 129% 298%* 226%
Average commission rate***......................... $0.002 -- -- -- -- -- --
</TABLE>
* Annualized
** Investment Income per share reflects a regular dividend from China Steel
Corp. of $0.05 per share.
*** For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
+ Based on average shares outstanding during the period.
++ Total returns for periods of less than one year are not annualized.
+++ Expense ratio includes 20% tax paid on stock dividends received by the
Fund. If stock dividend taxes paid were excluded from the Fund's expense
ratio, the expense ratio would have been 1.75% for the six months ended
February 29, 1996 and 2.02%, 2.28%, 2.49% and 2.71%, for the years ended
August 31, 1995, 1994, 1993 and 1992, respectively.
11
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies.
The Taiwan Fund, Inc. (the "Fund"), a Delaware corporation, is registered under
the Investment Company Act of 1940, as amended (the Act), as a diversified
closed-end management investment company.
The Fund is not permitted to invest directly in the securities of Republic of
China (ROC) companies. Therefore, it invests through a contractual securities
investment trust fund arrangement. This arrangement was established by means of
the Securities Investment Trust, Investment Management and Custodian Contract
(Management Contract) among China Securities Investment Trust Corporation
(Adviser), the International Commercial Bank of China (Custodian) and the Fund.
Under the Management Contract the Adviser manages and invests the assets of the
Fund and the Custodian holds the assets. The Fund is the sole beneficiary of
the assets held under the Management Contract and, as required by ROC
regulations, its interest in the assets is evidenced by units of beneficial
interest.
Effective July, 1995, the Fund is treated as a Qualified Foreign Institutional
Investor (QFII) which limits the Fund's ownership of a company's shares to no
more than 7.5% of such shares. In addition, all QFIIs together can not own more
than 15% of a company's shares. Effective March 3, 1996, all QFIIs together can
not own more than 20% of a company's shares. All Funds managed by China
Securities Investment Trust Company (CSITC) are limited in aggregate to 10%
ownership of a company's shares.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The policies described below are consistently followed by the Fund in the
preparation of its financial statements in conformity with U.S. generally
accepted accounting principles.
Security Valuation. All securities for which market quotations are readily
available are valued at the last sales price prior to the time of determination
of the Fund's net asset value per share or, if there was no sales price on such
date, at the closing price quoted for such securities (but if bid and asked
quotations are available, at the mean between the last current bid and asked
prices, rather than such quoted closing price). Securities which are traded
over-the-counter are valued at the mean between the current bid and asked prices
or, if no quotations are available, are valued as determined in good faith by
the Board of Directors of the Fund. In certain instances where the price
determined above may not represent fair market value, the value is determined in
such manner as the Board may prescribe. Short-term investments, having a
maturity of 60 days or less are valued at cost which approximates market value,
with accrued interest or discount earned included in interest receivable.
Foreign Currency Translation. The financial accounting records of the Fund are
maintained in U.S. dollars. Investment securities, other assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at the
current exchange rate. Purchases and sales of securities, income receipts and
expense payments are translated into U.S. dollars at the exchange rate on the
dates of the transactions.
Reported net realized gains and losses on foreign currency transactions
represent net gains and losses from disposition of foreign currencies, currency
gains and losses realized between the trade dates and settlement dates of
security transactions, and the difference between the amount of net investment
income accrued and the U.S. dollar amount actually received. The effects of
changes in foreign currency exchange rates on investments in securities are not
segregated in the Statement of Operations from the effects of changes in market
prices of those securities, but are included in realized and unrealized gain or
loss on investments in securities.
Taxes. As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes all of its investment company taxable income and net
realized capital gains for its fiscal year. In addition to federal income tax
for which the Fund is liable on undistributed amounts, the Fund is subject to
federal excise tax on undistributed investment company taxable income and net
realized capital gains. The schedule of investments includes information
regarding income taxes under the caption "Income Tax Information." The Fund is
organized in Delaware and as such is required to pay Delaware an annual
franchise tax. Also, the Fund is currently subject to a Taiwan security
transaction tax of 0.3%
12
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
on equities and 0.1% on corporate bonds and mutual fund shares of the
transaction amount.
The Fund's functional currency for tax reporting purposes is the New Taiwan
dollar.
Investment Income. Dividend income is recorded on the ex-dividend date, except
where the ex-dividend date may have passed, certain dividends from foreign
securities are recorded as soon as the Fund is informed of the ex-dividend date.
Dividends are typically declared by Taiwanese companies in the Fund's third
fiscal quarter of each year. As a result, the Fund receives substantially less
dividend income in the first half of its year. Interest income, which includes
accretion of original discount, is accrued as earned.
Dividend and interest income generated in Taiwan is subject to a 20% withholding
tax. Stock dividends received (except those which have resulted from
capitalization of capital surplus) are taxable at 20% of the par value of the
stock dividends received.
Distributions to Shareholders. The distributable income from the assets held
under the Management Contract, which is limited to cash dividends and interest
income received, may be distributed to the Fund only once in each year at the
Fund's discretion and is recorded on the ex-dividend date. Realized capital
gains and stock dividends may also be distributed to the Fund. Within the above
limitations the Fund will, under current ROC regulations, be able to remit out
of the ROC the proceeds of income and capital gains distributions, unit
redemptions and other distributions of assets held under the Management
Contract.
The Fund distributes to shareholders at least annually, substantially all of its
taxable ordinary income and expects to distribute its taxable net realized
gains. Certain foreign currency gains (losses) are taxable as ordinary income
and, therefore, increase (decrease) taxable ordinary income available for
distribution. Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders may elect to have all distributions automatically
reinvested in Fund shares. (See page 16 for a summary of the Plan.) Shareholders
who do not participate in the Plan will receive all distributions in cash paid
by check in U.S. dollars.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for foreign currency
transactions and losses deferred due to wash sales and excise tax regulations.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid in capital.
Security Transactions. Security transactions are accounted for as of the trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. Purchases and Sales of Securities.
Purchases and sales of securities, other than short-term securities, aggregated
$155,597,099 and $135,103,429, respectively.
3. Fees and Other Transactions with Affiliates
Management Fee. As the Fund's investment adviser, CSITC receives a fee that is
computed daily at an annual rate of 1.50% of the Fund's average net assets. The
basic fee is subject to a performance adjustment (up to a maximum of +.50%)
based on the Fund's investment performance as compared to the Taiwan Stock
Exchange Index over a rolling 36-month period. For the six month period ended
February 29, 1996, the management fee was equivalent to an annual rate of 1.17%
of average net assets.
Directors Fees. No director, officer or employee of the Investment Manager or
its' affiliates will receive any compensation from the Fund for serving as an
officer or director of the Fund. The Fund pays each of its directors who is not
a director, officer or employee of the Investment Manager an annual fee of
$7,500 plus $750 for each Board of Directors' meeting or Audit Committee meeting
attended. In addition, the Fund will reimburse each of the directors for travel
and out-of-pocket expenses incurred in connection with Board of Directors'
meetings.
Administration Fees. State Street Bank and Trust Company ("State Street")
provides, or arranges for the provision of certain administrative and accounting
services for the Fund, including
13
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
maintaining the books and records of the Fund, and preparing certain reports and
other documents required by federal and/or state laws and regulations. For
these services, the Fund pays State Street a fee at the annual rate of 0.09% of
the Fund's average daily net assets up to $150 million, 0.06% of the next $150
million, and 0.04% of those assets in excess of $300 million, subject to certain
minimum requirements.
4. Fund Shares.
At February 29, 1996, there were 20,000,000 shares of $0.01 par value capital
stock authorized, of which 14,826,714 were issued and outstanding. On January
31, 1996, the Fund issued 357 shares of its common stock, valued at $7,217, to
shareholders participating in the Fund's Dividend Reinvestment and Cash Purchase
Plan.
14
F-19
<PAGE>
- --------------------------------------------------------------------------------
5. Quarterly Results of Operations (Unaudited).
<TABLE>
<CAPTION>
Net Increase
(Decrease)
in Net Assets
Investment Net Investment Net Gain (Loss) Resulting
Income Income (Loss) on Investments from Operations
-------------- ------------------- ------------------ -------------------
Per Per Per Per
Total Share Total Share Total Share Total Share
----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
For the quarters ended:
November 30, 1995........ $1,051,957 $0.07 $ (368,985) $(0.02) $ (8,279,100) $(0.55) $ (8,648,085) $(0.57)
February 29, 1996........ 491,052 0.03 (565,863) (0.04) (113,070) (0.01) (678,933) (0.05)
1995
For the quarters ended:
November 30, 1994........ $1,532,687 $0.17 $ (297,059) $(0.03) $(33,857,011) $(3.00) $(34,154,070) $(3.03)
February 28, 1995........ 855,573 0.09 (371,616) (0.03) 4,489,450 0.39 4,117,834 0.36
May 31, 1995............. 1,210,163 0.11 (132,518) (0.01) (8,254,262) (0.73) (8,386,780) (0.74)
August 31, 1995.......... 1,193,713 0.09 (1,443,896) (0.12) (47,448,223) (3.93) (48,892,119) (4.05)
1994
For the quarters ended:
November 30, 1993........ $ 441,764 $0.05 $ (166,793) $(0.02) $ 17,775,492 $ 2.21 $ 17,608,699 $ 2.19
February 28, 1994........ 308,979 0.03 (1,474,695) (0.15) 28,097,283 3.09 26,622,588 2.94
May 31, 1994............. 1,660,975 0.15 219,482 0.02 14,817,418 1.31 15,036,900 1.33
August 31, 1994.......... 1,195,876 0.18 (1,037,185) (0.09) 85,676,333 7.59 84,639,148 7.50
1993
For the quarters ended:
November 30, 1992........ $1,507,260 $0.19 $ 446,355 $ 0.06 $ (2,575,302) $(0.32) $ (2,128,947) $(0.26)
February 28, 1993........ 1,290,702 0.16 356,074 0.04 5,140,218 0.64 5,496,292 0.68
May 31, 1993............. 1,644,255 0.20 550,079 0.07 (779,494) (0.10) (229,415) (0.03)
August 31, 1993.......... 1,316,185 0.16 269,869 0.03 (15,429,363) (1.92) (15,159,494) (1.89)
</TABLE>
F-20
<PAGE>
THE TAIWAN FUND, INC.
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
(i) --Portfolio of Investments as of August 31, 1995
(ii) --Statement of Assets and Liabilities as of August 31, 1995
(iii) --Statement of Operations for the fiscal year ended August 31,
1995
(iv) --Statement of Changes in Net Assets for the fiscal years ended
August 31, 1994 and 1995
(v) --Financial Highlights for the fiscal years ended August 31, 1992-
1995, the eight-month period ended August 31, 1991 and the fiscal
years ended December 31, 1989-1990
(vi) --Notes to Financial Statements for the fiscal year ended August
31, 1995
(vii) --Report of Independent Accountants dated October 17, 1995
(viii) --Portfolio of Investments as of February 29, 1996 (unaudited)
(ix) --Statement of Assets and Liabilities as of February 29, 1996
(unaudited)
(x) --Statement of Operations for the six-month period ended February
29, 1996 (unaudited)
(xi) --Statement of Changes in Net Assets for the six-month periods
ended February 28, 1995 and February 29, 1996 (unaudited)
(xii) --Financial Highlights for the six-month period ended February 29,
1996 (unaudited), fiscal years ended August 31, 1992-1995, the
eight-month period ended August 31, 1991 and the fiscal years
ended December 31, 1989-1990
(xiii) --Notes to Financial Statements for the six-month period ended
February 29, 1996 (unaudited)
(2) EXHIBITS
(a) --Restated Certificate of Incorporation (previously filed as
Exhibit 1 to Pre-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-2 (File No. 33-9522) filed with
the Securities and Exchange Commission on December 12, 1986
("Pre-Effective Amendment No. 3"))
(b) --Amended and Restated By-laws (previously filed as Exhibit 2 to
Pre-Effective Amendment No. 3)
(c) --Not applicable
(d)(1) --Specimen certificate for Common Stock (previously filed as
Exhibit 4 to Amendment No. 8 to Registrant's Registration
Statement on Form N-2 (File No. 811-4893) filed with the
Securities and Exchange Commission on May 1, 1989).
(e) --Dividend Reinvestment and Cash Purchase Plan of the Registrant
(previously filed as Exhibit 10(E) to Registrant's Registration
Statement on Form N-2 (File No. 33-21789) filed with the
Securities and Exchange Commission on April 27, 1988 ("Amendment
No. 5"))
(f) --Not applicable
(g)(1) --Securities Investment Trust Investment Management and Custodian
Contract dated December 16, 1986 among Registrant, China
Securities Investment Trust Corporation and The International
Commercial Bank of China (previously filed as Exhibit 6(A) to
Amendment No. 5)
C-1
<PAGE>
(2) --Investment Advisory and Management Agreement Relating to U.S.
Dollar Assets dated as of December 16, 1986 between Registrant
and China Securities Investment Trust Corporation (previously
filed as Exhibit 6(B) to Amendment No. 5)
(h)(1) --Form of Underwriting Agreement (incorporated by reference to
Exhibit h(1) to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-2 (File No. 333-2697) previously
filed with the Securities and Exchange Commission on April 26,
1996 ("Pre-Effective Amendment No. 1-1996")
(2) --Form of Agreement among Underwriters (incorporated by reference
to Exhibit h(2) to Pre-Effective Amendment No.1-1996)
(3) --Form of Selected Dealer Agreement (incorporated by reference to
Exhibit h(3) to Pre-Effective Amendment No.1-1996)
(i) --Not applicable
(j)(1) --See Exhibit (g)(1)
(2) --Custodian Agreement Relating to U.S. Dollar Assets dated
December 16, 1986 between Registrant and State Street Bank and
Trust Company (previously filed as Exhibit 9(B) to Amendment No.5)
(k)(1) --Registrar, Transfer Agency and Service Agreement dated December
16, 1986 between Registrant and State Street Bank and Trust
Company (previously filed as Exhibit 10(D) to Amendment No. 5)
(2) --Administration Agreement dated April 1, 1994 between State
Street Bank and Trust Company and the Registrant (previously
filed as Exhibit k(2) to Pre-Effective No. 1 to Registrant's
Registration Statement on Form N-2 (File No. 33-92378) filed with
the Securities and Exchange Commission on June 19, 1995 ("Pre-
Effective Amendment No. 1")
(3) --Accounting Services Agreement dated April 1, 1994 between State
Street Bank and Trust Company and the Registrant (previously
filed as Exhibit k(3) to Pre-Effective Amendment No. 1)
(l) --Opinion and consent of Rogers & Wells*
(m) --Not applicable
(n)(1) --Opinion and consent of Lee & Li*
(2) --Consent of Coopers & Lybrand L.L.P.*
(o) --Not applicable
(p) --See Exhibit (g)(1)
(q) --Not applicable
- --------
* Filed herewith.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) of this Registration Statement.
C-2
<PAGE>
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.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration fees............ $12,622
National Association of Securities Dealers, Inc. fees........... 3,950
New York Stock Exchange additional listing fee.................. 7,000
Printing (other than stock certificates)........................ 25,000
Fees and expenses of qualification under state securities laws
(including fees of counsel).................................... 20,000
Accounting fees and expenses.................................... 15,000
Legal fees and expenses......................................... 107,000
Underwriters expense reimbursement.............................. 75,000
Miscellaneous................................................... 2,428
-------
Total......................................................... 268,000
=======
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF APRIL 19, 1996)
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Common Stock, $0.01 par value per share 736
</TABLE>
ITEM 29. INDEMNIFICATION
(a) In accordance with the indemnification provisions of the Delaware
General Corporation Law, Paragraph 3.2 of Registrant's Certificate of
Incorporation provides that no director or officer of Registrant will have any
personal liability to Registrant or its stockholders for monetary damages for
breach of fiduciary duty as a director except (i) for any breach of the
director's duty of loyalty to Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, as amended, or (iv) for any transaction from which the director obtained
an improper personal benefit. Paragraph 7.3 of Registrant's Certificate of
Incorporation further provides that each director and each officer of
Registrant shall be indemnified by Registrant to the full extent permitted
under the Delaware General Corporation Law and all other applicable laws of
the State of Delaware, subject to the provisions and rules and regulations of
the Investment Company Act of 1940, as amended (the "1940 Act"). Article VI of
Registrant's By-Laws further provides that each officer, director, employee or
agent of Registrant shall be indemnified by Registrant to the full extent
permitted by Section 145 of the Delaware General Corporation Law and all other
applicable laws of the State of Delaware, subject to the requirements of the
1940 Act, and the rules and regulations thereunder. In addition, the
Underwriting Agreement, filed as Exhibit 2(h)(1) to this Registration
Statement, provides for indemnification of the Underwriters by Registrant in
certain circumstances. Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended (the "1933 Act") may be permitted
to directors, officers and controlling persons of Registrant, pursuant to the
foregoing provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a director, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
C-3
<PAGE>
indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
(b) The Securities Investment Trust--Investment Management and Custodian
Contract among Registrant, China Securities Investment Trust Corporation and
The International Commercial Bank of China, filed as Exhibit 6(A) to Amendment
No. 5, provides for indemnification of the Adviser and the Custodian by the
Registrant in certain circumstances.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The description of the business of the Adviser is set forth under the
caption "Management of the Fund--The Adviser" in the Prospectus forming part
of this Registration Statement. The Adviser does not have any other business
of a substantial nature.
Information as to the directors and officers of each of the Adviser is
included in the Adviser's Form ADV (File No. 801-28464) and is incorporated
herein by reference thereto.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant required by Section 31(a) under
the 1940 Act and the rules promulgated thereunder are maintained at the office
of State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) Registrant undertakes to suspend the offering of its shares of Common
Stock covered hereby until it amends its Prospectus if:
(1) subsequent to the effective date of this Registration Statement, the
net asset value declines more than 10% from its net asset value per share
as of the effective date of this Registration Statement; or
(2) the net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus.
(b) Registrant hereby undertakes:
(1) that for purposes of determining any liability under the 1933 Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 497(h) under the
1933 Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective;
(2) that for purposes of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(3) to send by first class mail or other means designed to ensure equally
prompt delivery, within two business days of receipt of a written or oral
request, any Statement of Additional Information.
C-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
THE U.S. INVESTMENT COMPANY ACT OF 1940, AS AMENDED, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN TAIPEI, TAIWAN ON THE 3RD DAY OF
MAY, 1996.
The Taiwan Fund, Inc.
/s/ Benny T. Hu
By: _________________________________
Benny T. Hu,
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Benny T. Hu and Gloria Wang, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all Amendments
(including pre-effective and post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Benny T. Hu Director and May 3, 1996
- ------------------------------------- President
BENNY T. HU (Principal
Executive Officer
/s/ Harvey H.W. Chang Director May 3, 1996
- -------------------------------------
HARVEY H.W. CHANG
/s/ Joe O. Rogers Director May 3, 1996
- -------------------------------------
JOE O. ROGERS
/s/ Jack C. Tang Director May 3, 1996
- -------------------------------------
JACK C. TANG
Director
- -------------------------------------
S. Y. WANG
/s/ David Dean Director May 3, 1996
- -------------------------------------
DAVID DEAN
/s/ Lawrence F. Weber Director May 3, 1996
- -------------------------------------
LAWRENCE F. WEBER
/s/ Gloria Wang Treasurer and May 3, 1996
- ------------------------------------- Secretary
GLORIA WANG (Principal
Financial and
Accounting Officer)
C-5
<PAGE>
EXHIBITS
(a) --Restated Certificate of Incorporation (previously filed as
Exhibit 1 to Pre-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-2 (File No. 33-9522) filed with
the Securities and Exchange Commission on December 12, 1986
("Pre-Effective Amendment No. 3"))
(b) --Amended and Restated By-laws (previously filed as Exhibit 2 to
Pre-Effective Amendment No. 3)
(c) --Not applicable
(d)(1) --Specimen certificate for Common Stock (previously filed as
Exhibit 4 to Amendment No. 8 to Registrant's Registration
Statement on Form N-2 (File No. 811-4893) filed with the
Securities and Exchange Commission on May 1, 1989).
(e) --Dividend Reinvestment and Cash Purchase Plan of the Registrant
(previously filed as Exhibit 10(E) to Registrant's Registration
Statement on Form N-2 (File No. 33-21789) filed with the
Securities and Exchange Commission on April 27, 1988 ("Amendment
No. 5"))
(f) --Not applicable
(g)(1) --Securities Investment Trust Investment Management and Custodian
Contract dated December 16, 1986 among Registrant, China
Securities Investment Trust Corporation and The International
Commercial Bank of China (previously filed as Exhibit 6(A) to
Amendment No. 5)
(2) --Investment Advisory and Management Agreement Relating to U.S.
Dollar Assets dated as of December 16, 1986 between Registrant
and China Securities Investment Trust Corporation (previously
filed as Exhibit 6(B) to Amendment No. 5)
(h)(1) --Form of Underwriting Agreement (incorporated by reference to
Exhibit h(1) to Pre-Effective Amendment No.1 to Registrant's
Registration Statement on Form N-2 (File No.333-2697) previously
filed with the Securities and Exchange Commission on April 26,
1996 ("Pre-Effective Amendment No.1-1996")
(2) --Form of Agreement among Underwriters (incorporated by reference
to Exhibit h(2) to Pre-Effective Amendment No.1-1996)
(3) --Form of Selected Dealer Agreement (incorporated by reference to
Exhibit h(3) to Pre-effective Amendment No.1-1996)
(i) --Not applicable
(j)(1) --See Exhibit (g)(1)
(2) --Custodian Agreement Relating to U.S. Dollar Assets dated
December 16, 1986 between Registrant and State Street Bank and
Trust Company (previously filed as Exhibit 9(B) to Amendment No.5)
(k)(1) --Registrar, Transfer Agency and Service Agreement dated December
16, 1986 between Registrant and State Street Bank and Trust
Company (previously filed as Exhibit 10(D) to Amendment No. 5)
(2) --Administration Agreement dated April 1, 1994 between State
Street Bank and Trust Company and the Registrant (previously
filed as Exhibit k(2) to Pre-Effective No. 1 to Registrant's
Registration Statement on Form N-2 (File No. 33-92378) filed with
the Securities and Exchange Commission on June 19, 1995 ("Pre-
Effective Amendment No. 1")
(3)
--Accounting Services Agreement dated April 1, 1994 between State
Street Bank and Trust Company and the Registrant (previously
filed as Exhibit k(3) to Pre-Effective Amendment No. 1)
1
<PAGE>
EXHIBITS
(l) --Opinion and consent of Rogers & Wells*
(m) --Not applicable
(n)(1) --Opinion and consent of Lee & Li*
(2) --Consent of Coopers & Lybrand L.L.P.*
(o) --Not applicable
(p) --See Exhibit (g)(1)
(q) --Not applicable
- --------
* Filed herewith.
2
<PAGE>
[LETTERHEAD OF ROGERS & WELLS APPEARS HERE]
3 May 1996
The Taiwan Fund, Inc.
c/o State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Ladies and Gentlemen:
We have acted as counsel for The Taiwan Fund, Inc., a Delaware
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 "1933 Act"), and the Investment Company Act of 1940, as
amended, of a registration statement on Form N-2 (the "Registration Statement")
filed pursuant to Rule 462(b) under the 1933 Act. The Registration Statement,
together with the registration statement (Registration No. 333-2697) previously
filed by the Fund with, and declared effective by, the Commission, relate to the
proposed offering by the Fund of up to an aggregate of 1,538,805 shares of
Common Stock of the Fund, par value $0.01 per share (the "Shares").
In rendering the opinions expressed herein, we have examined originals
or copies, certified or otherwise identified to our satisfaction, of such
corporate records, documents, certificates and other instruments as we have
deemed necessary or appropriate.
Based upon the foregoing, and on such examinations of law as we have
deemed necessary, we are of the opinion that:
1. The Fund has been duly incorporated and is validly existing in
good standing under the laws of the State of Delaware.
2. When the Shares have been offered and sold as contemplated in
the Registration Statement and in accordance with the terms of the Purchase
Agreement filed
<PAGE>
[LOGO OF ROGERS & WELLS APPEAR HERE]
The Taiwan Fund, Inc. 2 3 May 1996
or incorporated by reference as an Exhibit to the Registration Statement, the
Shares will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion with the Securities and
Exchange Commission as an Exhibit to the Registration Statement and to the
reference to this firm under the heading "Legal Matters" in the form of
prospectus contained therein. In giving this consent, we do not admit that we
are within the category of persons whose consent is required under Section 7 of
the 1933 Act or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Rogers & Wells
<PAGE>
[LETTERHEAD OF LEE AND LI APPEARS HERE]
May 3, 1996
Ref. No. 96-0503
T12470/14
The Taiwan Fund, Inc.
225 Franklin Street
Boston, Massachusetts 02110
U. S. A.
Re: The Taiwan Fund, Inc.
---------------------
Gentlemen:
We have acted as the Republic of China ("ROC") counsel to The Taiwan Fund, Inc.
in connection with the preparation and filing of a registration statement on
Form N-2 (the "Registration Statement") filed pursuant to Rule 462(b) under the
Securities Act of 1933. The Registration Statement, together with the
registration statement (Registration no. 333-2697) previously filed by the Fund
with, and declared effective by, the Securities and Exchange Commission relate
to the offering of up to 1,538,805 shares of common stock.
As such counsel, it is our opinion that the conclusions based on ROC tax law
expressed under the heading "Taxation - ROC Income Taxes" in the Prospectus
contained in the Registration Statement and in the Statement of Additional
Information contained in the Registration Statement are true and correct.
We consent to the use of this letter as an exhibit to the Registration Statement
and to the reference to us in the Prospectus under the section captioned "Legal
Matters". In giving our consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the Rules and Regulations of the Securities and Exchange
Commission thereunder.
Sincerely yours,
LEE AND LI
By /s/ Paul S.P. Hsu
--------------------------------
Paul S.P. Hsu
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
The Taiwan Fund, Inc.:
We consent to the inclusion in the Registration Statement of The Taiwan Fund,
Inc., on Form N-2 filed pursuant to Rule 462(b) of the Securities Act of 1933
relating to the Registration Statement of the Taiwan Fund, Inc. (File No. 333-
2697) of our report dated October 17, 1995 on our audit of the financial
statements and financial highlights of the Fund for the year ended August 31,
1995 which are included in the Registration Statement. We also consent to the
references to our Firm under the captions "Financial Highlights" and "Experts"
in the Prospectus.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
MAY 3, 1996
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