<PAGE> 1
THE TAIWAN
FUND, INC.(R)
* * * * * * * * * * * * * *
---------------------------------------
Annual Report THE TAIWAN
August 31, 1998 FUND, INC.
---------------------------------------
WHAT'S INSIDE
---------------------------------------
Page
----
Portfolio Manager's
Message 2
Portfolio Snapshot 5
Investments 6
Financial Statements 9
Notes to Financial
Statements 12
Report of Independent
Accountants 15
Other Information 16
Summary of Dividend
Reinvestment and
Cash Purchase Plan 16
* * * * * * * *
---------------------------------------
<PAGE> 2
- -------------------------------------------------------------------------------
PORTFOLIO MANAGER'S MESSAGE
- -------------------------------------------------------------------------------
===============================================================================
Dear Shareholders:
We are pleased to present the Annual Report of the Taiwan Fund, Inc. (the
"Fund") for the fiscal year ended August 31, 1998. This has been a difficult
period for Asian markets and the Taiwan market has been no exception. For the
fiscal year ended August 31, 1998, the Fund's U.S. Dollar net asset value
("NAV") decreased by 49.20%. This NAV decline percentage was calculated based on
the change in the NAV and was adjusted for the US$4.61 per share distribution
paid in January and May 1998. During the same period, the New Taiwan Dollar ("NT
Dollar") depreciated against the U.S. Dollar by 21.66%, and the Taiwan Stock
Exchange (TAIEX) Index decreased by 44.8% on a U.S. Dollar basis. For the fiscal
year ended August 31, 1998, the Fund slightly underperformed the TAIEX Index due
to the fact that the Fund's portfolio was heavily concentrated in the
electronics sector, which underperformed the market by 5.8%.
For the fiscal year ended August 31, 1998, the Fund paid out an aggregate of
$4.61 per share in dividends from realized gains. At August 31, 1998, the Fund's
shares were trading at $11.00, which represented a discount of 28.4% from the
Fund's NAV of $15.36. At August 29, 1997 the Fund's shares were trading at a
discount of 29.0% from the Fund's NAV.
The Asian currency crisis and the volatility in world stock markets has been one
of the main contributors to the downturn in the Taiwan stock market. Prior to
the beginning of the Asian crisis in August of 1997, the TAIEX Index reached a
high of 10,000 points. From August 1997 to October 1997, however, the TAEIX
Index fell more than 30% to 7,040 points. From October 1997 to February 1998,
the TAIEX Index rebounded to 9,378 points. The TAIEX Index then entered a
downward trend for the next six months, closing at 6,550 points at the end of
August of 1998. The recent decline in the TAIEX index has coincided with a fall
of the NT Dollar against the U.S. Dollar. The NT Dollar has been under
depreciation pressure since the Asian financial crisis. Capital outflows to safe
havens, as well as concerns over declining exports and a slowing Taiwanese
economy, have contributed to the depreciation of the NT Dollar. In order to
counteract the depreciation of the NT Dollar, the Taiwanese government has had
to raise short term real interest rates to their highest levels this decade.
High real interest rates primarily have in turn had a negative impact on the
Taiwanese economy.
Recent macroeconomic figures released by the government show an increasing
weakness in the Taiwanese economy. The leading Taiwanese Economic indicator has
declined for five consecutive months, declining 8.66% on a year over year basis
since August 1997. For the first eight months of 1998, the trade surplus has
2
<PAGE> 3
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
===============================================================================
decreased 15.72% as compared to the same period the previous year, declining to
U.S. $3.7 billion. The decline in the trade surplus has been due primarily to
weak demand from other Asian countries (please see Albert King on Taiwan's
Exports). In addition, the risk to the Taiwanese Economy seems to be one of
deflation rather than inflation. The annualized growth rates of the Wholesale
Price Index (WPI) and the Consumer Price Index (CPI) as of August of 1998 have
decreased to 0.82% and 0.44%, respectively. As a result of the increasing
weakness in the Taiwanese economy, it appears likely that the monetary
authorities in Taiwan may lower interest rates.
The likelihood of lower interest rates in Taiwan will increase as the U.S.
Federal Reserve moves to ease rates in the United States. Should the government
decide to decrease interest rates, its aim will be to keep economic growth from
slowing below the adjusted 5.11% target for the calendar year ended December 31,
1998.
We believe the possibility of an interest rate cut creates some opportunities in
the Taiwan stock market. In particular, we believe that interest rate sensitive
sectors such as banks and finance companies may benefit from a cut in interest
rates.
In addition, we are still optimistic about the technology sector, though
selectively. While the global economy is moving closer to deflation, falling
prices have been the norm for technology companies. The success of Taiwan's
technology sector is primarily due to this sector's efforts to cut cost and
improve flexibility. The new industry business model of Build-to-Order (BTO), by
which Dell Computer has excelled, will require even more flexible management of
production. This new model should further enhance Taiwan's competitive edge in
the technology sector. We believe that Taiwanese companies are likely to
increase their market share in this sector, independent of the growth
performance of the global technology sector in the future. In particular, we are
relatively bullish on PC companies and PC component makers. We remain
conservative in our outlook towards the IC industry which is still struggling
with over capacity. We will only invest in the strongest IC companies such as
TSMC. Of the more cyclical sectors, we prefer container-shipping companies.
Despite the fact that the industry is suffering from an over-tonnage problem,
there are signs of increased pricing power in the industry. The fact that
several well managed carriers are selling at break-up values indicates that the
negative operating environment has contributed to discounted stock prices.
The Asian financial crisis has become a contagion throughout the global
financial markets. As the shock waves of the crisis spread to Russia, Latin
America, and possibly the U.S., the risk of global deflation increases.
Commodity prices have hit historical lows.
Albert King on the Sectoral Returns:
The volatility of the Stock Market is reflected not only in the index itself but
also among sectors.
INDICES (in NTD)
RETURNS
- ------- 6 Months 6 Months 1 Year
Ending Ending Ending
98/2/27 98/8/31 98/8/31
------- ------- -------
Food 20.7% -17.0% 0.2%
Others 0.5% -13.3% -12.9%
Tourism 16.1% -26.3% -14.4%
Steel -9.6% -7.4% -16.3%
Cable & Wire -1.9% -15.5% -17.2%
Electrical -2.0% -15.5% -17.2%
Rubber -10.0% -10.6% -19.5%
Auto -15.8% -4.7% -19.7%
Cement -5.3% -16.1% -20.5%
Glass -8.8% -17.2% -24.5%
Retail -6.1% -23.1% -27.7%
Construction -0.3% -28.4% -28.2%
Chemical -7.8% -24.7% -30.5%
TAIEX Ex.
Financial -4.9% -27.1% -30.7%
Textile -4.2% -27.7% -30.8%
Transportation -14.3% -20.5% -31.9%
TAIEX Index -5.7% -28.8% -32.9%
Taiwan Fund -13.5% -25.1% -35.2%
Electronics -6.2% -34.7% -38.7%
Financial -7.8% -33.8% -39.0%
Plastics -6.4% -35.5% -39.6%
Paper & Pulp -16.9% -27.6% -39.8%
3
<PAGE> 4
- -------------------------------------------------------------------------------
PORTFOLIO MANAGER'S MESSAGE (CONTINUED)
- -------------------------------------------------------------------------------
===============================================================================
Economic contractions are being felt in many emerging economies. So far, Taiwan
has survived the shock to its capital account, due in large part to its large
foreign exchange reserves and negligible foreign debt. But the economy is
feeling the impact on the current account, which is slowing export growth.
Nonetheless, we are positive about the prospects for Taiwan because of its
competitive manufacturing sector and solid financial position. We believe Taiwan
will emerge from the crisis as a winner, having gained a larger share of the
world economy.
The Taiwan stock market has been very volatile lately. (See Albert King on the
Sectors Return) In order to balance the Fund's objective to outperform the TAIEX
Index with its objective to minimize fluctuations in the Fund's NAV, we have
adopted a more systematic approach to managing the Fund's portfolio. Since March
1998, we have divided the Fund into two parts: core portfolio and active
portfolio. In the core portfolio, we use a "top-down approach" to select, within
each sector, companies that provide good earnings potential over the long term
and are well managed. In the active portfolio, we use the "bottom-up approach"
to pick outperforming stocks that may be growth, value or momentum plays.
The Fund now allocates approximately 70% of its asset value to the core
portfolio, and the remaining portion to the active portfolio.
We thank you for your continued support and look forward to being able to
provide you with the successful results of our investment strategy in future
reports.
Sincerely yours,
/s/ Albert King
Albert King
Portfolio Manager
NOTE:
Effective April 14, 1998 Lawrence J. Lau and Michael Chen were elected by the
Board of Directors of the Fund to serve as directors of the Fund. In addition,
at that time Albert King was appointed the Portfolio Manager of the Fund and
Pedro Tai was appointed the Deputy Portfolio Manager of the Fund.
Effective October 12, 1998, Michael Chen resigned from the Board of Directors of
the Fund. At that time, The Board of Directors elected Gloria Wang to serve as a
Director of the Fund. The Board of Directors appointed S.Y. Wang as Chairman of
the Board and appointed Vicki Hau as Treasurer and Secretary of the Fund.
Albert King on Taiwan's Exports:
Taiwan's exports have decreased on a year to year basis for the first two
quarters of 1998. (See Chart I) and may decline yet again in the third quarter.
The decline in exports has been mainly due to weak Asian demand. (See Chart II).
While export growth to the U.S. has slowed slightly, exports to Europe still
maintain robust growth. Because exports have been the major driving force behind
Taiwan's economic growth, Taiwan's economic recovery may have to wait until
exports begin to increase again.
Chart I. Taiwan's Quarterly Trade Figures:
In US$ billion
Q4 97 Q1 98 Q2 98
----- ----- -----
Total Exports 32.31 26.87 27.64
YoY% Chg 6.36 -6.55 -7.61
Total Imports 30.12 26.97 26.29
YoY% Chg 16.58 0.05 -6.91
Trade Balance 2.19 -0.09 1.35
YoY% Chg -51.74 n.m. -19.48
Chart II. Geographic Breakdown of
Taiwan's Exports:
In US$ billion
Q4 97 Q1 98 Q2 98
----- ----- -----
Asia 15.88 12.16 12.95
YoY% Chg -0.99 -15.15 -16.98
Europe 5.19 4.95 4.69
YoY% Chg 14.03 3.95 9.72
U.S.A 8.00 6.89 7.04
YoY% Chg 15.99 2.21 -0.59
4
<PAGE> 5
- -------------------------------------------------------------------------------
PORTFOLIO SNAPSHOT
- -------------------------------------------------------------------------------
===============================================================================
- --------------------------------------------------
TOP TEN EQUITY HOLDINGS
- --------------------------------------------------
<TABLE>
<S> <C> <C>
HOLDINGS AS OF AUGUST 31, 1998 %
- --------------------------------------------------
Taiwan Semiconductor Manufacturing Co. 4.0
- --------------------------------------------------
Cathay Life Insurance Co. Ltd. 3.5
- --------------------------------------------------
Hou Hai Precision Industry 3.4
- --------------------------------------------------
Mitac International Corp. 3.0
- --------------------------------------------------
Inventec Co. Ltd. 2.8
- --------------------------------------------------
Wus Printed Circuit Co. Ltd. 2.7
- --------------------------------------------------
Nien Hsing Textile Co. Ltd. 2.6
- --------------------------------------------------
China Motor Co. 2.6
- --------------------------------------------------
Delta Electronics, Inc. 2.4
- --------------------------------------------------
China Steel Corp. 2.4
- --------------------------------------------------
</TABLE>
- --------------------------------------------------
TOP TEN EQUITY INDUSTRY WEIGHTINGS
- --------------------------------------------------
<TABLE>
<S> <C> <C>
WEIGHTINGS AS OF AUGUST 31, 1998 %
- --------------------------------------------------
Electronics 19.4
- --------------------------------------------------
Computers & Business Equipment 18.0
- --------------------------------------------------
Textiles & Apparel 9.3
- --------------------------------------------------
Banks 9.0
- --------------------------------------------------
Automobiles, Tires & Accessories 6.1
- --------------------------------------------------
Insurance 5.0
- --------------------------------------------------
Construction & Real Estate 4.5
- --------------------------------------------------
Plastics 4.4
- --------------------------------------------------
Shipping 4.4
- --------------------------------------------------
Foods 4.3
- --------------------------------------------------
</TABLE>
- --------------------------------------------------
TOP TEN EQUITY HOLDINGS
- --------------------------------------------------
<TABLE>
<S> <C> <C>
HOLDINGS AS OF AUGUST 31, 1997 %
- --------------------------------------------------
Taiwan Semiconductor Manufacturing Co. 7.2
- --------------------------------------------------
China Motor Co. 4.8
- --------------------------------------------------
Asustek Computer, Inc. 4.6
- --------------------------------------------------
Nan Ya Plastics Corp. 4.6
- --------------------------------------------------
United Micro Electric Corp. Ltd. 4.5
- --------------------------------------------------
Yue Loong Motor 4.1
- --------------------------------------------------
Liton Electronics 3.9
- --------------------------------------------------
Pou Chen 3.8
- --------------------------------------------------
China Steel Corp. 3.3
- --------------------------------------------------
Hou Hai Precision Industry 2.9
- --------------------------------------------------
</TABLE>
- --------------------------------------------------
TOP TEN EQUITY INDUSTRY WEIGHTINGS
- --------------------------------------------------
<TABLE>
<S> <C> <C>
WEIGHTINGS AS OF AUGUST 31, 1997 %
- --------------------------------------------------
Electronics 22.0
- --------------------------------------------------
Automobiles, Tires & Accessories 14.2
- --------------------------------------------------
Computers & Business Equipment 12.1
- --------------------------------------------------
Plastics 8.1
- --------------------------------------------------
Textiles & Apparel 7.2
- --------------------------------------------------
Construction & Real Estate 6.5
- --------------------------------------------------
Iron & Steel 5.6
- --------------------------------------------------
Banks 4.8
- --------------------------------------------------
Electrical Equipment 2.8
- --------------------------------------------------
Insurance 2.8
- --------------------------------------------------
</TABLE>
5
<PAGE> 6
- -------------------------------------------------------------------------------
THE TAIWAN FUND, INC.
INVESTMENTS/AUGUST 31, 1998 (SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT
IN SECURITIES)
- -------------------------------------------------------------------------------
===============================================================================
<TABLE>
<CAPTION>
US$
VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
COMMON STOCKS - 96.3%
BASIC INDUSTRIES - 11.0%
CEMENT - 1.3%
Asia Cement.............................. 1,992,675 $ 1,532,167
Taiwan Cement Corp. ..................... 2,090,880 1,679,662
------------
3,211,829
------------
CHEMICALS - 0.3%
Eternal Chemical Co. Ltd. (a)............ 260,000 366,260
Oriental Union Chemical.................. 780,160 391,703
------------
757,963
------------
GLASS - 0.6%
Taiwan Glass............................. 1,458,513 1,477,134
------------
INDUSTRIAL MACHINERY - 0.3%
Taichung Machinery (a)................... 278,116 646,317
------------
IRON & STEEL - 2.8%
China Steel Corp......................... 10,507,527 5,968,986
Ton Yi Industrial Corp. (a).............. 1,066,393 492,582
Tung Ho Steel............................ 924,000 466,573
------------
6,928,141
------------
PAPER & FOREST PRODUCTS - 0.6%
Shihlin Paper Corp. (a).................. 370,000 1,045,618
Yuen Foong Yu Paper Manufacturing (a).... 1,788,836 587,639
------------
1,633,257
------------
PLASTICS - 4.4%
Asia Polymer Corp........................ 172,500 120,262
China Petrochemical Development Corp. (a) 5,750,000 3,348,874
Formosa Plastic (a)...................... 2,673,355 2,814,865
Nan Ya Plastics Corp. (a)................ 3,321,100 2,953,783
Taiwan Polypropylene..................... 54,000 28,816
Taiwan Synthetic Rubber (a).............. 1,380,000 669,115
USI Far East Corp. (a)................... 2,510,000 1,018,979
------------
10,954,694
------------
WIRE & CABLE - 0.7%
Pacific Electrical Wire & Cable (a)...... 1,576,000 1,103,268
Walsin Lihwa Corp. (a)................... 1,737,004 737,560
------------
1,840,828
------------
TOTAL BASIC INDUSTRIES................... 27,450,163
------------
</TABLE>
<TABLE>
<CAPTION>
US$
VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
CONSTRUCTION & REAL ESTATE - 4.5%
BES Engineering (a)...................... 2,076,000 $ 899,372
Cathay Construction...................... 2,931,264 1,429,680
Continental Engineering Corp. (a)........ 805,000 508,105
GoldSun Development & Construction (a)... 2,035,000 750,244
Hung Poo Construction Corp. (a).......... 1,000,000 877,923
Kindom Construction Co. Ltd. (a)......... 3,150,000 3,434,227
Kuoyang Construction (a)................. 1,950,000 2,735,762
Pacific Construction (a)................. 2,290,194 729,340
------------
TOTAL CONSTRUCTION & REAL ESTATE......... 11,364,653
------------
DURABLES - 15.8%
AUTOMOBILES, TIRES & ACCESSORIES - 6.1%
Cheng Shin Rubber Industrial Co.(a)...... 1,175,618 1,318,797
China Motor Co........................... 3,546,166 6,409,652
Giant Manufacturing...................... 2,638,669 5,110,031
Yue Loong Motor.......................... 2,191,589 2,559,107
------------
15,397,587
------------
CONSUMER ELECTRONICS - 0.4%
Teco Electric & Machinery Co.(a)......... 1,087,261 907,741
------------
TEXTILES & APPAREL - 9.3%
Delicacy Industrial (a).................. 2,500,000 2,424,329
Everest Textile Co. Ltd. (a)............. 2,370,000 2,549,849
Far Eastern Textile Ltd.................. 3,360,000 1,937,627
Formosa Chemical & Fibre (a)............. 3,194,123 1,878,626
Formosa Taffeta Co. Ltd.................. 1,357,188 634,691
Hualon Teijran (a)....................... 3,100,630 862,892
Lealea Enterprise (a).................... 1,500,000 710,085
Nien Hsing Textile Co. Ltd. (a).......... 2,950,000 6,516,998
Pou Chen (a)............................. 2,190,332 4,807,356
Shinkong Synthetic Fibers Corp.(a)....... 1,620,000 462,459
Tainan Spinning (a)...................... 1,836,000 618,936
Tuntex Distinct.......................... 125,000 35,863
------------
23,439,711
------------
TOTAL DURABLES........................... 39,745,039
------------
</TABLE>
6 The accompanying notes are an integral part of the financial statements.
<PAGE> 7
- -------------------------------------------------------------------------------
INVESTMENTS/AUGUST 31, 1998 (continued)
- -------------------------------------------------------------------------------
===============================================================================
<TABLE>
<CAPTION>
US$
VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
COMMON STOCKS - continued
FINANCE - 14.0%
BANKS - 9.0%
Chang Hwa Commercial Bank................ 2,210,600 $ 3,107,715
China United Trust & Investment Co. (a).. 600,000 395,926
China Trust Commercial Bank (a).......... 2,163,200 1,470,889
Chung Hsing Bills Finance (a)............ 3,543,750 1,169,219
Dah An Commercial Bank (a)............... 2,400,920 867,927
First Commercial Bank.................... 2,423,680 3,289,056
Fuh Hwa Securities....................... 803,880 618,103
Hwa Nan Commercial Bank Ltd.............. 1,913,200 2,673,155
ICBC..................................... 2,061,500 2,010,931
Taipei Bank.............................. 1,000,000 1,029,981
Taipei Business Bank (a)................. 1,900,000 1,744,369
Taiwan Business Bank (a)................. 3,780,000 2,499,498
United World Chinese (a)................. 2,082,000 1,791,995
------------
22,668,764
------------
INSURANCE - 5.0%
Cathay Life Insurance Co. Ltd............ 3,200,088 8,722,087
Fubon Insurance Co. (a).................. 1,400,000 1,409,841
Shin Kong Life Insurance Co.............. 1,672,000 2,297,770
------------
12,429,698
------------
TOTAL FINANCE............................ 35,098,462
------------
NONDURABLES - 4.6%
FOODS - 4.3%
AGV Products Corp. (a)................... 4,580,000 2,168,125
President Enterprises Corp. (a).......... 4,000,000 2,639,506
Wei Chuan Food Corp. (a)................. 3,030,000 5,911,347
------------
10,718,978
------------
LEISURE RELATED - 0.3%
Leofoo Development....................... 568,000 912,580
------------
TOTAL NONDURABLES........................ 11,631,558
------------
RETAIL & WHOLESALE - 1.7%
GENERAL MERCHANDISE STORES - 1.7%
Far Eastern Department Stores............ 1,060,129 547,477
National Petroleum Co. Ltd. (a).......... 1,030,000 945,632
President Chain Store Corp............... 1,006,200 2,655,871
------------
TOTAL RETAIL & WHOLESALE................. 4,148,980
------------
</TABLE>
<TABLE>
<CAPTION>
US$
VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
TECHNOLOGY - 39.8%
COMPUTERS & BUSINESS EQUIPMENT - 18.0%
Acer Peripherals, Inc. (a)............... 1,000,000 $ 1,316,884
Acer, Inc. (a)........................... 2,500,000 2,216,325
Asustek Computer, Inc. (a)............... 750,000 5,422,464
Aurora Corp. (a)......................... 480,000 523,311
Chuntex Electronic Corp. (a)............. 3,100,000 3,753,263
CMC Magnetics Corp. (a).................. 643,500 1,080,039
Compal Electronics, Inc. (a)............. 1,050,000 3,283,603
D-Link Corp. (a)......................... 390,000 945,488
Delta Electronics, Inc................... 2,120,086 6,082,587
First International Computer, Inc. (a)... 1,026,000 912,525
Inventec Co. Ltd. (a).................... 2,390,276 6,926,348
Kye Systems Corp. (a).................... 611,000 1,183,259
Microtek International, Inc. (a)......... 696,480 515,541
Mitac International Corp. (a)............ 4,297,100 7,582,029
Ritek, Inc. (a).......................... 225,000 710,085
Synnex Technology International (a)...... 617,800 2,233,332
Universal Scientific Industrial Co. (a).. 320,000 596,758
------------
45,283,841
------------
ELECTRICAL EQUIPMENT - 2.4%
Phoenixtec Power Co. Ltd. (a)............ 2,000,780 4,104,311
Primax Electronics (a)................... 340,360 673,787
Tatung Co................................ 2,339,739 1,342,555
------------
6,120,653
------------
ELECTRONICS - 19.4%
Advanced Semiconductor
Engineering, Inc.(a).................... 1,700,972 2,440,069
Compeq Manufacturing Co. Inc. (a)........ 653,518 3,806,172
Holtek Microelectronics, Inc. (a)........ 792,000 499,900
Hou Hai Precision Industry (a)........... 1,840,784 8,661,270
Hua Jung Components Co. Ltd. (a)......... 750,000 1,086,645
Liton Electronics........................ 576,000 1,288,997
Macronix International Co. Ltd. (a)...... 1,464,000 957,659
Mosel Vitelic, Inc. (a).................. 2,180,500 1,326,254
Orient Semiconductor Electronics Ltd. (a) 412,500 340,840
Realtek Semiconductor Corp. (a).......... 700,000 2,148,902
Siliconware Precision Industry (a)....... 922,352 1,299,310
Taiwan Mask Corp. (a).................... 240,000 385,597
Taiwan Secom Co. (a)..................... 375,000 753,120
Taiwan Semiconductor
Manufacturing Co. (a)................... 5,666,700 10,022,708
United Microelectronics Corp. Ltd. (a)... 4,290,500 3,902,133
Winbond Electronics Corp. (a)............ 2,391,750 1,756,672
Wus Printed Circuit Co. Ltd. (a)......... 3,000,000 6,842,633
Yageo Corp. (a).......................... 952,000 1,223,629
------------
48,742,510
------------
TOTAL TECHNOLOGY......................... 100,147,004
------------
</TABLE>
The accompanying notes are an integral part of the financial statements. 7
<PAGE> 8
- -------------------------------------------------------------------------------
INVESTMENTS/AUGUST 31, 1998 (continued)
- -------------------------------------------------------------------------------
===============================================================================
<TABLE>
<CAPTION>
US$
VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
TRANSPORTATION - 4.9%
AIR TRAVEL - 0.5%
China Airlines (a)....................... 1,980,000 $ 1,136,135
------------
SHIPPING - 4.4%
Evergreen Marine Corp.................... 8,500,890 5,170,531
U-Ming Marine Transport.................. 2,100,000 765,170
Wan Hai Lines Ltd. (a)................... 850,000 943,767
Yang Ming Marine Transport (a)........... 6,708,400 4,234,250
------------
11,113,718
------------
TOTAL TRANSPORTATION..................... 12,249,853
------------
TOTAL COMMON STOCK
(Identified Cost - $277,201,545)........ 241,835,712
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
NT$
---------
<S> <C> <C>
CERTIFICATES OF DEPOSIT - 1.0%
Hong Kong Bank:
6.90%, 12/14/98......................... 20,000,000 573,805
7.00%, 9/12/98.......................... 20,000,000 573,806
ICBC Central Branch 6.375%, 9/23/98...... 20,173,710 578,790
ICBC Downtown Branch 6.50%, 5/25/99...... 30,000,000 860,709
------------
TOTAL CERTIFICATES OF DEPOSIT
(Identified Cost - $2,632,038).......... 2,587,110
------------
COMMERCIAL PAPER - 2.4%
Chi Tai Co. 6.50%, 9/01/98 (b)........... 86,938,260 2,494,283
Chia Fu Co 6.40%, 9/08/98 (b)............ 49,930,049 1,432,507
Chung Shin 6.40%, 9/10/98 (b)............ 19,965,034 572,803
Lien Jhan International 6.40%, 9/07/98
(b)..................................... 49,938,784 1,432,758
------------
TOTAL COMMERCIAL PAPER
(Identified Cost - $5,934,500).......... 5,932,351
------------
CONVERTIBLE BONDS - 0.1%
United MicroElectronics Corp. Ltd.
0.00%, 1/19/08.......................... 10,000,000 275,140
(Identified Cost - $292,826)
</TABLE>
<TABLE>
<CAPTION>
MATURITY US$
AMOUNT VALUE
US$ (NOTE 1)
-------- --------
<S> <C> <C>
REPURCHASE AGREEMENT - 0.2%
With State Street Bank and Trust Co. at
2.000%, dated 8/31/98, due 9/8/98
(collateralized by U.S. Treasury Notes
5.625%, 2/28/01, market value $455,625). $ 446,198 $ 446,000
------------
TOTAL INVESTMENTS - 100%
(COST - $286,506,909).................... $251,076,313
============
</TABLE>
LEGEND:
NT$ - New Taiwan dollar
US$ - United States dollar
(a) Non-income producing
(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, 1998, the aggregate cost basis of the Fund's investment securities
for income tax purposes was $295,843,607. Net unrealized depreciation of the
Fund's investment securities was $44,767,294, of which $31,596,037 related to
appreciated investment securities and $76,363,331 was related to depreciated
investment securities for the fiscal year ended August 31, 1998. The Fund
distributed to Stockholders from mid-term and long term capital gains
$33,351,350 and $5,713,223, respectively.
8 The accompanying notes are an integral part of the financial statements.
<PAGE> 9
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
===============================================================================
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investment in securities, at value
(including repurchase agreement of
$446,000) (cost $286,506,909) (Notes 1
and 2) - See accompanying schedule...... $251,076,313
Cash...................................... 34,932
Cash in New Taiwan dollars (cost
$1,312,644).............................. 1,337,597
Receivable for investments sold........... 2,014,422
Dividends receivable...................... 18,412
Interest receivable....................... 29,311
Prepaid expenses.......................... 29,433
------------
Total assets............................. 254,540,420
------------
LIABILITIES
Payable for investments purchased......... $2,511,705
Accrued management fee (Note 3)........... 342,254
Taiwan withholding tax payable (Note 1)... 116,964
Other payables and accrued expenses....... 213,353
----------
Total liabilities........................ 3,184,276
------------
NET ASSETS................................ $251,356,144
============
Net Assets consist of (Note 1):
Paid in capital........................... $273,134,732
Accumulated undistributed net realized
gain (loss) on investments and foreign
currency................................. 13,626,692
Net unrealized appreciation (depreciation)
on:
Investment securities.................... (35,430,596)
Assets and liabilities denominated in
foreign currencies..................... 25,316
------------
NET ASSETS................................ $251,356,144
============
NET ASSET VALUE, per share ($251,356,144 /
16,365,572 shares outstanding)........... $15.36
======
</TABLE>
STATEMENT OF OPERATIONS
Year Ended August 31, 1998
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends............................ $ 1,759,988
Interest............................. 1,707,745
---------------
3,467,733
Less: Taiwan withholding tax (Note 1) (667,119)
---------------
Total Income........................ 2,800,614
EXPENSES
Management fee (Note 3)
Basic fee........................... $ 5,175,770
Performance adjustment.............. 53,311
Taiwan stock dividend tax (Note 1)... 1,528,829
Custodian fees and expenses.......... 541,192
Administration and accounting fees
(Note 3)............................ 267,274
Legal................................ 170,000
Shareholder communications........... 137,000
Directors compensation............... 119,500
Audit................................ 107,000
Insurance fees....................... 75,802
Delaware franchise tax............... 65,000
Transfer agent fees.................. 18,000
Miscellaneous........................ 33,000
--------------
Total expenses before waiver........ 8,291,678
Management fee waiver (note 3)....... (79,965)
---------------
Total expenses after waiver......... 8,211,713
---------------
NET INVESTMENT INCOME (LOSS)......... (5,411,099)
---------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 1)
Net realized gain (loss) on:
Investment securities.............. (36,882,793)
Foreign currency transactions...... 2,353,100
--------------
(34,529,693)
Change in net unrealized appreciation
(depreciation) on:
Investment securities.............. (222,181,121)
Assets and liabilities denominated
in foreign currencies............ 12,292
--------------
(222,168,829)
---------------
Net gain (loss)...................... (256,698,522)
---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.......... $ (262,109,621)
===============
</TABLE>
The accompanying notes are an integral part of the financial statements. 9
<PAGE> 10
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
===============================================================================
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
August 31, August 31,
1998 1997
------------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income (loss)............................... $ (5,411,099) $ (8,130,644)
Net realized gain (loss) on investments and foreign
currency transactions.................................... (34,529,693) 88,093,564
Change in net unrealized appreciation (depreciation) on
investments and foreign currency transactions............ (222,168,829) 144,915,883
------------- ------------
Net increase (decrease) in net assets resulting from
operations............................................... (262,109,621) 224,878,803
------------- ------------
Distributions to shareholders
In excess of net investment income......................... 0 (127,651)
From net realized gains.................................... (75,445,287) 0
------------- ------------
Total distributions to shareholders........................ (75,445,287) (127,651)
------------- ------------
Share transactions (Note 4)
Reinvestment of distributions from net investment income... 0 1,254
------------- ------------
Net increase in net assets resulting from share
transactions............................................. 0 1,254
------------- ------------
Total increase (decrease) in net assets.................. (337,554,908) 224,752,406
------------- ------------
NET ASSETS
Beginning of period....................................... 588,911,052 364,158,646
------------- ------------
End of period.............................................. $ 251,356,144 $588,911,052
============= ============
OTHER INFORMATION
Shares (Note 4)
Issued in reinvestment of distributions from net investment
income................................................... 0 53
------------- ------------
Net increase............................................... 0 53
============= ============
</TABLE>
10 The accompanying notes are an integral part of the financial statements.
<PAGE> 11
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS+
<TABLE>
<CAPTION>
Years Ended August 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period........................ $ 35.98 $ 22.25 $ 18.28 $ 32.26 $ 18.06
-------- -------- -------- -------- --------
Income from Investment Operations
Net investment income (loss)............................... (0.33)+++ (0.50) (0.18)++ (0.19) (0.24)
Net realized and unrealized gain (loss) on investments..... (15.68) 14.24 4.18 (7.27) 14.20
-------- -------- -------- -------- --------
Total from investment operations........................... (16.01) 13.74 4.00 (7.46) 13.96
-------- -------- -------- -------- --------
Less Distributions
From net investment income................................. -- -- -- -- (0.14)
In excess of net investment income......................... -- (0.01) (0.03) -- (0.01)
From net realized gains.................................... (4.61) -- -- (5.88) --
In excess of net realized gains............................ -- -- -- (0.21) --
-------- -------- -------- -------- --------
Total distributions........................................ (4.61) (0.01) (0.03) (6.09) (0.15)
-------- -------- -------- -------- --------
Antidilution/(Dilution) resulting from additional offering
of shares at market and reinvestment of dividends at
market..................................................... 0.00 -- 0.02 (0.40) 0.44
Offering expenses........................................... -- -- (0.02) (0.03) (0.05)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 15.36 $ 35.98 $ 22.25 $ 18.28 $ 32.26
======== ======== ======== ======== ========
Market value, end of period................................. $ 11.00 $ 25.56 $ 23.50 $ 21.63 $ 31.88
======== ======== ======== ======== ========
TOTAL RETURN
Per-share market value...................................... (48.87)% 8.8% 8.8% (12.0)% 59.2%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)..................... $251,356 $588,911 $364,159 $271,095 $363,723
Ratio of expenses (after waiver) to average net
assets++++................................................. 2.29% 2.56% 2.24% 2.43% 2.49%
Ratio of expenses (after waiver) to average net assets,
excluding stock dividend tax expense....................... 1.87% 2.25% 1.81% 2.02% 2.28%
Ratio of net investment income (loss) to average net
assets..................................................... (1.51)% (1.74)% (0.92)% (0.78)% (1.01)%
Portfolio turnover rate..................................... 97% 126% 131% 159% 267%
</TABLE>
+ Based on average shares outstanding during the period.
++ Investment Income per share reflects a regular dividend from China Steel
Corp. of $0.05 per share. (Based on shares outstanding at 8/31/96.)
+++ Investment Income per share reflects a regular dividend from China Steel
Corp. of $0.02 per share. (Based on shares outstanding at 8/31/98.)
++++ Expense ratio includes 20% tax paid on stock dividends received by the
Fund.
The accompanying notes are an integral part of the financial statements. 11
<PAGE> 12
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
===============================================================================
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.
The Fund concentrates its investments in the securities listed on the Taiwan
Stock Exchange. Because of this concentration, the Fund may be subject to
additional risks resulting from future political or economic conditions in
Taiwan and the possible imposition of adverse governmental laws of currency
exchange restrictions affecting Taiwan.
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 10% of such
shares. In addition, all QFIIs together can not own more than 30% 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 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.
12
<PAGE> 13
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
===============================================================================
1. SIGNIFICANT ACCOUNTING POLICIES - continued
Forward Foreign Currency Transactions. A forward foreign currency contract
("Forward") is an agreement between two parties to buy or sell currency at a set
price on a future date. The Fund may enter into Forwards in order to hedge
foreign currency risk or for other risk management purposes. Realized gains or
losses on Forwards include net gains or losses on contracts that have matured or
which the Fund has terminated by entering into an offsetting closing
transaction. Unrealized appreciation or depreciation of Forwards is included in
the Statement of Assets and Liabilities and is carried on a net basis. The
portfolio could be exposed to risk of loss if the counterparty is unable to meet
the terms of the contract or if the value of the currency changes unfavorably.
As of August 31, 1998 the Fund had no open Forwards.
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.
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 the 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, losses deferred due to wash sales
and excise tax regulations. Permanent book
13
<PAGE> 14
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
===============================================================================
1. SIGNIFICANT ACCOUNTING POLICIES - continued
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.
Use of Estimates. 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.
2. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term securities, aggregated
$326,870,320 and $409,499,430, respectively.
3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management Fee. From September 1, 1997 through February 14, 1998, as the Fund's
investment adviser, CSITC received a fee that was computed daily at an annual
rate of 1.50% of the Fund's average net assets. The basic fee was subject to a
performance adjustment (up to a maximum of P .50%) based on the Fund's
investment performance as compared to the Taiwan Stock Exchange Index over a
rolling 36-month period.
Effective February 14, 1998, the Fund's shareholders approved the proposal to
reduce the Fund's Investment Advisory basic fee to an annual rate of 1.30% and
to reduce the performance adjustment to a maximum of P 0.30%. The revised
contract to reduce the Investment Advisory basic fee and the performance fee was
approved on April 30, 1998 by the Republic of China Securities and Exchange
Commission (SEC). Until such approval was received, CSITC voluntarily agreed to
reduce its basic fee and performance fee to 1.30% and P 0.30%, respectively, as
approved by the Fund's shareholders.
For the year ended August 31, 1998, the management fee, including the
performance adjustments and after voluntary reductions, was equivalent to an
annual rate of 1.44% 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
$10,000 plus $1,000 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 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 August 31, 1998, there were 20,000,000 shares of $0.01 par value capital
stock authorized, of which 16,365,572 were issued and outstanding. On January
17, 1997, the Fund issued 53 shares of its common stock, valued at $1,254, to
shareholders participating in the Fund's Dividend Reinvestment and Cash Purchase
Plan.
14
<PAGE> 15
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
===============================================================================
To the Board of Directors of The Taiwan Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Taiwan Fund, Inc. at August 31,
1998 and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Taiwan Fund, Inc.'s management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 12, 1998
15
<PAGE> 16
- -------------------------------------------------------------------------------
OTHER INFORMATION AND SUMMARY OF DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN
- -------------------------------------------------------------------------------
===============================================================================
OTHER INFORMATION
Year 2000. Many computer programs employed throughout the world use two digits
rather than four to identify the year. These programs, if not adapted, may not
correctly handle the change from "99" to "00" on January 1, 2000, and may not be
able to perform necessary functions. The Year 2000 issue affects virtually all
companies and organizations.
The Investment Adviser has advised the Fund that it is implementing steps
intended to ensure that its computer systems are capable of Year 2000
processing. In addition, the Fund is inquiring with third parties to assess the
adequacy of their Year 2000 compliance efforts. The Fund intends to develop
contingency plans intended to ensure that third-party noncompliance will not
materially affect the Fund's operations. The Fund does not currently anticipate
that the Year 2000 issue will have an adverse effect on the Investment Adviser's
ability to continue to provide the services currently provided to the Fund.
Companies in which the Fund invests could be adversely affected by the Year 2000
issue, but the Fund cannot predict the consequential effect on its investment
return. To the extent the impact on a portfolio holding is negative, the Fund's
investment return could be adversely affected.
WHAT IS THE DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN?
The Dividend Reinvestment and Cash Purchase Plan (the "Plan") offers
shareholders of The Taiwan Fund, Inc. (the "Fund") a prompt and simple way to
reinvest their dividends and capital gains distributions in shares of the Fund.
The Fund will distribute to shareholders, at least annually, substantially all
of its net income and expects to distribute annually its net realized capital
gains. State Street Bank and Trust Company acts as Plan Agent for shareholders
in administering the Plan. The Plan also allows you to make optional cash
investments in Fund shares through the Plan Agent.
WHO CAN PARTICIPATE IN THE PLAN?
If you own shares in your own name, you can elect to participate directly in the
Plan. If you own shares that are held in the name of a brokerage firm, bank, or
other nominee, you should contact your nominee to arrange for them to
participate on your behalf.
WHAT DOES THE PLAN OFFER?
The Plan has two components; reinvestment of dividends and capital gains
distributions, and a voluntary cash purchase feature.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
If you choose to participate in the Plan, your dividends and capital gains
distributions will be promptly invested for you, automatically increasing your
holdings in the Fund. If the Fund declares a dividend or capital gains
distribution payable in cash, you will automatically receive shares purchased by
the Plan Agent on the New York Stock Exchange or otherwise on the open market.
If a distribution is declared which is payable in shares or cash at the option
of the shareholder and if on the valuation date (generally the payable date) the
market price of shares is equal to or exceeds their net asset value, the Fund
will issue new shares to you at the greater of the following: (a) net asset
value per share or (b) 95% of the market price per share. If the market price
per share on the
16
<PAGE> 17
- -------------------------------------------------------------------------------
OTHER INFORMATION AND SUMMARY OF DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN (continued)
- -------------------------------------------------------------------------------
===============================================================================
valuation date is less than the net asset value per share, the Fund will issue
new shares to you at the market price per share on the valuation date.
All reinvestments are in full and fractional shares, carried to three decimal
places. In the case of foreign (non-U.S.) shareholders, reinvestment will be
made net of applicable withholding tax.
VOLUNTARY CASH PURCHASE OPTION
Plan participants have the option of making investments in Fund shares through
the Plan Agent. You may invest any amount from $100 to $3,000 semi-annually. The
Plan Agent will purchase shares for you on the New York Stock Exchange or
otherwise on the open market on or about February 15 and August 15. If you hold
shares in your own name, you should deal directly with the Plan Agent. We
suggest you send your check to the following address to be received on or about
February 5 or August 5 to allow time for processing: State Street Bank and Trust
Company, P.O. Box 8200, Boston, MA 02266. The Plan Agent will return any cash
payments received more than thirty days prior to February 15 or August 15, and
you will not receive interest on uninvested cash payments. If you own shares
that are held in the name of a brokerage firm, bank, or other nominee, you
should contact your nominee to arrange for them to participate in the cash
purchase option on your behalf.
IS THERE A COST TO PARTICIPATE?
Each participant will pay a pro rata portion of brokerage commissions payable
with respect to purchases of shares by the Plan Agent on the New York Stock
Exchange or otherwise on the open market. Otherwise, there is no charge to
participants for reinvesting dividends and capital gains distributions, since
the Plan Agent's fees are paid by the Fund. Brokerage charges for purchasing
shares through the Plan are expected to be less than the usual brokerage charges
for individual transactions, because the Plan Agent will purchase stock for all
participants in blocks, resulting in lower commissions for each individual
participant.
For purchases from voluntary cash payments, participants are charged a service
fee of $.75 for each investment and a pro rata share of the brokerage
commissions.
Brokerage commissions and service fees, if any, will be deducted from amounts to
be invested.
WHAT ARE THE TAX IMPLICATIONS FOR PARTICIPANTS?
You will receive tax information annually for your personal records and to help
you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
If the Fund issues shares upon reinvestment of a dividend or capital gains
distribution, for U.S. federal income tax purposes, the amount reportable in
respect of the reinvested amount of the dividend or distribution will be the
fair market value of the shares received as of the payment date, which will be
reportable as ordinary dividend income and/or long term capital gains. The
shares will have a tax basis equal to such fair market value, and the holding
period for the shares will begin on the day after the payment date. State, local
and foreign taxes may also be applicable.
17
<PAGE> 18
- -------------------------------------------------------------------------------
OTHER INFORMATION AND SUMMARY OF DIVIDEND
REINVESTMENT AND CASH PURCHASE PLAN (continued)
- -------------------------------------------------------------------------------
===============================================================================
ONCE ENROLLED IN THE PLAN, MAY I WITHDRAW FROM IT?
You may withdraw from the Plan without penalty at any time by written notice to
the Plan Agent.
If you withdraw, you will receive, without charge, stock certificates issued in
your name for all full shares, or, if you wish, the Plan Agent will sell your
shares and send you the proceeds, less a service fee of $2.50 and less brokerage
commissions. The Plan Agent will convert any fractional shares you hold at the
time of your withdrawal to cash at the current market price and send you a check
for the proceeds.
WHOM SHOULD I CONTACT FOR ADDITIONAL INFORMATION?
If you hold shares in your own name, please address all notices, correspondence,
questions, or other communications regarding the Plan to: State Street Bank and
Trust Company, P.O. Box 8200, Boston, MA 02266, 1-800-426-5523. If your shares
are not held in your name, you should contact your brokerage firm, bank, or
other nominee for more information and to arrange for them to participate in the
Plan on your behalf.
Either the Fund or the Plan Agent may amend or terminate the Plan. Except in the
case of amendments necessary or appropriate to comply with applicable law, rules
or policies or a regulatory authority, participants will be mailed written
notice at least 90 days before the effective date of any amendment. In the case
of termination, participants will be mailed written notice at least 90 days
before the record date of any dividend or capital gains distribution by the
Fund.
18
<PAGE> 19
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 20
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
===============================================================================
UNITED STATES ADDRESS
The Taiwan Fund, Inc.
225 Franklin Street
Boston, MA
1-800-636-9242
INVESTMENT ADVISER
China Securities Investment Trust Corporation
Taipei, Taiwan
DIRECTORS AND OFFICERS
Benny T. Hu, President and Director
David Dean, Director
Joe O. Rogers, Director
Jack C. Tang, Director
Lawrence J. Lau, Director
Michael Chen, Director
S.Y. Wang, Director
Lawrence F. Weber, Director
Gloria Wang, Secretary and Treasurer
Laurence E. Cranch, Assistant Secretary
ADMINISTRATOR, ACCOUNTING AGENT,
TRANSFER AGENT, DIVIDEND PAYING
AGENT, AND REGISTRAR
State Street Bank and Trust Company
Boston, MA
CUSTODIANS
The International Commercial Bank of China
Taipei, Taiwan
State Street Bank and Trust Company
Boston, MA
LEGAL COUNSEL
Rogers & Wells LLP, New York, NY
Lee and Li, Taipei, Taiwan
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Boston, MA
