[LOGO]
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THE
R. O. C.
TAIWAN FUND
=========================
Annual Report
December 31, 1997
<PAGE>
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Dear Stockholders
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The 28.7% total return in local currency terms of The R.O.C. Taiwan Fund in 1997
considerably outperformed the 18.1% rise in the Taiwan Stock Exchange Index
(TAIEX). When measured in U.S. dollars, the Fund's net asset value (NAV) per
share gained 9.4% after adjustment for dividends. This resulted from the New
Taiwan's dollar's 15.7% depreciation against the U.S. unit during the year.
For much of 1997 Taiwan's stock market was one of the world's best performers
and topped all others in the region outside of China for the full 12 months.
This came amid record-high trading levels, a generally low-interest rate
environment and a steadily improving economy.
Indeed, for most of the first eight months of the year the market's upward
movement was almost unstoppable. As ample liquidity supported mounting trading
levels throughout this period, investor attention increasingly focused on
electronics shares in the expectation that these companies would enjoy high
earnings growth. Such optimism was first buoyed by rising computer sales that
lifted share prices of many components manufacturers and whole-system providers.
Near mid-year the emphasis shifted to semiconductor stocks as chip makers
reported strengthening demand that filled production capacity for as much as the
next six months.
Even after falling over a third from its peak in August to the end of 1997, the
electronics sector still more than doubled on the year and was the clear market
leader through both the rise and fall of the TAIEX. It also attracted roughly
half of all trading while making up about 25% of total market capitalization.
The other significant gainers were construction stocks and some property-rich
companies that benefited from expectations of a pick-up in the real estate
market due primarily to low interest rates.
The major market downturn from late August through October was in reaction to
the Asian financial turmoil sparked in early July by the devaluation of the Thai
baht. As the effects of the so-called "Asia contagion" spread to major currency
and stock markets in the region and around the world, Taiwan was adversely
affected as well. Its stock market fell for three consecutive months, ending
with October's steep 16% decline. The central bank, in order to maintain
Taiwan's international competitiveness, also gave up its defense of the currency
in October after some short-term money-market rates had reached 20-year highs.
This helped restore liquidity to the financial system, and interest rates
started to drop down almost to levels seen at mid-year when some key rates were
at eight-year lows.
Except for the short-term credit crunch resulting from the attempt to hold back
the currency depreciation, the central bank's "appropriately loose" monetary
policy provided a favorable environment for the economy. The government's
estimate of 6.7% growth in 1997 may be a little high, but the economy still
performed well. It was led by double-digit growth in private investment, which
benefited from low interest rates. In addition, the increase in private
consumption--buoyed by the strong stock market--was at a three-year high. Best
of all was the virtual absence of inflation: the 1% rise in the consumer price
index was the lowest in 10 years.
In 1998 the economy is expected to slow its advance somewhat to about 6.0%. The
adverse impact of the Asian turmoil on Taiwan's exports, which are the
equivalent of roughly 40% of gross national product, should largely be offset by
continued strong growth in private investment as several large-scale projects
start up. These include a $5 billion high-speed rail system and an estimated $15
billion in new housing for veterans. The central bank, however, will have to
perform a balancing act in controlling the anticipated inflationary pressures
following the currency depreciation while still providing a favorable climate
for investment.
The interview on page 2 provides an analysis of our portfolio strategy and
current outlook for 1998.
We are grateful for your continuing support and look forward to discussing our
market outlook and investment strategy with you in future reports.
Respectfully submitted,
/s/ Daniel Chiang
Daniel Chiang
President
February 15, 1998
<PAGE>
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An Interview With Your Portfolio Manager
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[Photo omitted]
Q: How did the Fund perform last year?
A: The Fund did quite well, beating the Taiwan Stock Exchange Index (TAIEX) by
almost 60% in local currency terms. This was primarily due to the Fund's
overweight positions in electronics and construction shares in the first six
months and then in semiconductor stocks at mid-year. The reduction of these
holdings in the third and fourth quarters limited the impact of the market
downturn. The Fund had also loaded up on small-cap and OTC brokerage stocks,
which were the best performers for the whole year.
Q: The cash level of the Fund rose in the latter half of the year and, for a
short time, represented about 15% of total net assets. Why?
A: This was done, in part, as a defensive measure against the ill-effects of the
Asian financial turmoil. In December, we also prepared for a big dividend. For
the full year, including the $2.14 distribution announced in December, the Fund
paid out a total of $3.34 per share.
Q: What about the current cash level?
A: We have had an equity weighting of about 95% since the beginning of January
in anticipation of an early-year rally.
Q: What is your outlook for 1998?
A: Given the Asian crisis, we are forecasting that economic growth will be
somewhat weaker compared to last year while remaining healthy at about 6%.
Because of the recent currency depreciation and the fact that Taiwan must import
most raw materials and many intermediate industrial goods, there should be some
cost-push pressures on prices. Effective monetary policy and keen international
competition, however, should limit price rises on the demand side. As a result,
we expect inflation to be a still comfortable 3.5% and interest rates to be
stable.
Last year the stock market enjoyed record-high turnover. While we do not believe
that trading levels can be pushed up much more, liquidity should be more than
adequate to support the market. And, after a two-year rally that saw the TAIEX
rise almost 60%, market fluctuation should decrease while sector rotation speeds
up. On the positive side, market watchers will also see a noticeable amount of
new long-term investment flowing into stocks from government pension funds,
which previously were not significant investors in the equity market. This
development will be furthered by the expected beginning of discretionary funds
management at mid-year. More institutional participation will increase market
stability and long-term growth prospects.
Q: Then what will be your investment strategy?
A: In the first quarter, we will focus on those companies with high dividend
payouts, strong earnings growth and reasonable price/earnings multiples.
Domestically oriented companies have also been targeted, especially those
benefiting from several large
2
<PAGE>
construction projects. And, with liquidity expected to remain ample, we plan to
increase our small-cap holdings five percentage points. At the same time, we
have identified certain companies to avoid. These include those companies
suffering adverse effects of regional currency depreciation and those with
foreign exchange risks--such as foreign currency exposure on their balance
sheets. In addition, we have carefully reviewed all product lines of companies
that might suffer from dumping or competitive price-cutting triggered by current
regional economic problems.
As the market increasingly opens up to foreign investment, our goal over the
long term is to provide country exposure in a highly liquid vehicle for those
investors who want to participate in this country's growth. We aim to achieve
this by beating the benchmark TAIEX in a prudently managed fund.
3
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Portfolio Highlights
Year Ended December 31, 1997
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Ten Largest Holdings
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Percent of
Company Net Assets
- ------------------------------ ----------
Yulon Motor Co. 5.27%
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China Development Corp. 3.92
- --------------------------------------------------------------------------------
Tatung Co. 3.64
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Far Eastern Textile Ltd. 3.50
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Nan Ya Plastics Corp. 3.24
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Yageo Corp. 3.22
- --------------------------------------------------------------------------------
Formosa Plastics Corp. 3.19
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Hon Hai Precision Industry Co. 2.93
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Delta Electronics 2.78
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Kwong Fong Industries Corp. 2.75
================================================================================
- --------------------------------------------------------------------------------
Industry Diversification
- --------------------------------------------------------------------------------
Percent of
Ten Largest Sectors Net Assets
- ------------------------------ ----------
Electronics 22.54%
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Banking 11.47
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Other Financials 9.59
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Textiles 9.51
- --------------------------------------------------------------------------------
Electrical & Machinery 8.21
- --------------------------------------------------------------------------------
Semiconductors 7.26
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Automobile 6.81
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Plastics 6.69
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Construction 6.18
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Steel & Other Metals 2.65
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4
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The R.O.C. Taiwan Fund
Consolidated Schedule of Investments / December 31, 1997
- --------------------------------------------------------------------------------
COMMON STOCKS -- 101.80% % of Value
Automobile -- 6.81% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
9,132,664 shs. Yulon Motor Co., Ltd. .............. 5.27 $16,528,441
2,110,500 China Motor Corp. .................. 1.54 4,823,075
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21,351,516
Banking -- 11.47%
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4,304,000 *China Development Corp. ............ 3.92 12,278,282
3,046,770 The First Commercial Bank .......... 2.68 8,411,328
2,706,000 Chang Hwa Commercial Bank .......... 2.40 7,512,055
2,394,800 Hua Nan Commercial Bank ............ 2.17 6,795,061
1,026,000 *Far Eastern International Bank ..... 0.15 481,528
980,000 *Chung Shing Bank ................... 0.15 480,982
-------------
35,959,236
Other Financials -- 9.59%
- --------------------------------------------------------------------------------
1,851,585 Cathay Life Insurance Co., Ltd. .... 2.63 8,235,578
4,002,000 *Polaris Securities Co., Ltd. ....... 2.55 7,979,448
3,020,516 *Yuan Ta Securities Co., Ltd. ....... 2.44 7,643,944
2,017,440 *Grand Cathay Securities Corp. ...... 1.03 3,218,003
1,192,391 *Capital Securities Corp. ........... 0.61 1,901,973
500,000 *National Securities Corp. .......... 0.24 762,270
257,009 *Taiwan International Securities Corp. 0.09 285,390
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30,026,606
Cement -- 0.43%
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1,245,960 Hsing Ta Cement Co., Ltd. .......... 0.43 1,337,687
-------------
1,337,687
Chemical -- 0.89%
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2,567,000 *Oriental Union Chemical Corp. ...... 0.85 2,661,491
103,000 *Maywufa Company Ltd ................ 0.04 120,061
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2,781,552
Construction -- 6.18%
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3,530,120 Hung Sheng Construction Ltd. ....... 1.81 5,685,010
3,787,000 *Hung Poo Construction Co., Ltd. .... 1.61 5,053,206
4,200,000 *BES Engineering Corp. .............. 1.32 4,148,466
2,310,000 *Pacific Construction Corp. ......... 0.51 1,587,239
2,167,000 *Horng Chung Construction Co., Ltd. . 0.42 1,329,448
741,000 *Chief Construction Corp. ........... 0.35 1,088,770
300,000 *Kee Tai Properties Co., Ltd. ....... 0.16 510,736
-------------
19,402,875
See accompanying notes to consolidated financial statements.
5
<PAGE>
Schedule of Investments (Cont'd.)
% of Value
Electrical & Machinery -- 8.21% Net Assets (U.S. Dollars)
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10,583,374 shs. Tatung Co., Ltd. ................... 3.64 $ 11,394,982
2,349,000 *Phoenixtec Power Co., Ltd. ......... 1.92 6,016,610
2,634,468 *Teco Electric and Machinery Co., Ltd. 1.16 3,636,536
1,285,129 *Victor Machinery Works Co., Ltd. ... 1.14 3,567,613
230,000 *Fu Sheng Industrial Co., Ltd. ...... 0.25 769,018
145,000 *TYC Brother Industrial Co., Ltd. ... 0.10 318,022
-------------
25,702,781
Electronics -- 22.54%
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4,439,000 *Yageo Corp. ........................ 3.22 10,076,259
1,815,000 *Hon Hai Precision Ind. Co., Ltd. ... 2.93 9,186,350
2,184,960 Delta Electronics Inc. ............. 2.78 8,713,031
471,000 *Asustek Computer Inc. .............. 2.38 7,469,540
1,531,221 *Synnex Technology International Corp. 2.29 7,186,405
6,791,000 *Megamedia Corp. .................... 2.19 6,874,325
3,400,000 *Lite-On Technology Corp. ........... 2.00 6,257,669
1,962,182 *CMC Magnetics Corp. ................ 1.54 4,815,171
1,100,000 *Compal Electronics Inc. ............ 1.02 3,205,522
4,100,000 *Picvue Electronics Ltd. ............ 0.95 2,968,098
400,000 *Compeq Manufacturing Co., Ltd. ..... 0.74 2,306,749
500,000 *Enlight Corp. ...................... 0.46 1,441,718
40,000 *Avermedia Technologies Inc. ........ 0.04 125,767
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70,626,604
Food -- 1.75%
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1,628,810 *Taiwan Tea Corp. ................... 1.08 3,372,536
1,756,960 *President Enterprises Corp. ........ 0.67 2,096,495
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5,469,031
Glass -- 1.53%
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3,865,016 *Taiwan Glass Industrial Corp. ...... 1.53 4,801,630
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4,801,630
Plastics -- 6.69%
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5,125,415 Formosa Plastics Corp. ............. 3.19 9,983,554
5,866,240 Nan Ya Plastics Corp. .............. 3.24 10,166,950
1,100,000 *Dahin Co., Ltd. .................... 0.26 806,442
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20,956,946
Retailing -- 1.78%
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1,418,000 *Aurora Corp. ....................... 0.99 3,088,282
500,000 *President Chain Store Corp. ........ 0.49 1,549,080
880,992 Far Eastern Department Stores Ltd. . 0.30 935,040
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5,572,402
See accompanying notes to consolidated financial statements.
6
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The R.O.C. Taiwan Fund
% of Value
Rubber -- 0.16% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
343,030 shs. Cheng Shin Rubber Ind. Co., Ltd. ... 0.16 $ 492,448
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492,448
Semiconductors -- 7.26%
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2,243,000 *Advanced Semiconductor
Engineering Inc. .................. 2.51 7,878,022
3,140,000 *United Microelectronics Corp. ...... 1.97 6,164,416
3,648,000 *Orient Semiconductor Electronics Ltd. 1.93 6,042,699
1,124,000 *Siliconware Precision Industries Corp. 0.85 2,654,847
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22,739,984
Steel & Other Metals -- 2.65%
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5,950,925 *China Steel Corp. .................. 1.43 4,490,574
3,557,000 *Kuei Hung Industrial Co., Ltd. ..... 1.02 3,196,936
1,233,000 *Yuan Feng Industrial Co., Ltd. ..... 0.20 639,193
-------------
8,326,703
Textiles -- 9.51%
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10,101,101 Far Eastern Textile Co., Ltd. ...... 3.50 10,968,679
7,425,000 *Kwong Fong Industries Corp. ........ 2.75 8,609,356
1,989,000 *Advancetex Enterprise Co., Ltd. .... 1.55 4,850,476
2,229,940 *Everest Textile Co., Ltd. .......... 0.72 2,243,621
2,050,000 *Ruentex Industries Ltd. ............ 0.62 1,936,810
2,000,000 *Hualon Corp. ....................... 0.37 1,153,374
-------------
29,762,316
Transportation -- 1.59%
- --------------------------------------------------------------------------------
2,220,392 Evergreen Marine Corp. (Taiwan) Ltd. 0.77 2,424,722
1,777,000 *Yang Ming Marine Transport Corp. ... 0.46 1,433,592
672,000 *Far Eastern Air Transport Corp. .... 0.36 1,133,742
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4,992,056
Others -- 2.76%
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1,253,760 *Pou Chen Corp. ..................... 1.65 5,153,491
808,080 *Taiwan Secom Co., Ltd. ............. 0.88 2,801,014
500,000 *CTCI Corporation ................... 0.23 713,190
7,640 Giant Manufacturing Co., Ltd. ...... 0.00 10,616
-------------
8,678,311
TOTAL COMMON STOCKS (COST $289,352,647) ............... $ 318,980,684
-------------
BONDS -- 2.03%
- --------------------------------------------------------------------------------
Par Value
---------
$2,453,988 Continental Engineering Corp., 7.60%,
Due 12/28/98 ...................... 0.79 2,461,066
1,822,086 Far Eastern Textile Ltd., 7.75%,
Due 01/19/99 ...................... 0.63 1,970,822
1,909,448 Shinkong Synthetic Fibers Corp.,
7.85%, Due 06/21/99 ............... 0.61 1,926,419
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TOTAL BONDS (COST $6,185,521) $ 6,358,307
-------------
* Non-income producing; these stocks did not pay a cash dividend during the
year ended December 31, 1997.
See accompanying notes to consolidated financial statements.
7
<PAGE>
Schedule of Investments (Cont'd.)
SHORT-TERM INVESTMENTS -- 17.52% % of Value
Commercial Paper -- 14.98% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
Principal
Amount Issuer (Guarantor)
--------- ------------------
$ 1,533,742 Vedan Enterprise Corp.(Bank of Nova
Scotia), 6.00%, Due 01/03/98 ....... 0.49 $ 1,533,239
306,748 Special Steel Co., Ltd.(E Sun Bank),
6.00%, Due 01/03/98 ................ 0.10 306,648
306,748 Sophir International Co., Ltd.
(ChinFon Commercial Bank), 6.25%,
Due 01/05/98 ....................... 0.10 306,539
920,245 China Chemical Synthesis Industrial
(ChinFon Commercial Bank), 6.25%,
Due 01/05/98 ....................... 0.29 919,617
1,533,742 Chung Cheng Investment Co.
(International Bills Finance
Company), 6.00%, Due 01/05/98 ...... 0.49 1,532,737
3,067,485 Hung Fu Construction Co., Ltd.
(China United Trust & Investment),
6.25%, Due 01/06/98 ................ 0.98 3,064,867
122,699 Rich Development Co., Ltd. (Shanghai
Commercial & Savings Bank), 7.25%,
Due 01/06/98 ....................... 0.04 122,578
4,294,479 Rich Development Co., Ltd. (Shanghai
Commercial & Savings Bank), 6.25%,
Due 01/06/98 ....................... 1.37 4,290,815
1,840,491 Grand Cathay Securities Corp.
(International Bills Finance
Company), 6.25%, Due 01/06/98 ...... 0.59 1,838,920
1,840,491 Tuntex Distinct Corp. (International
Bills Finance Company), 6.25%, Due
01/06/98 ........................... 0.59 1,838,921
306,748 Tekcon Electronics Corp. (China
Development Co.), 7.00%, Due
01/07/98 ........................... 0.10 306,397
306,748 Chen Tao Cable TV Co. (ChinFon
Commercial Bank), 6.30%, Due
01/07/98 ........................... 0.10 306,432
613,497 Pan Asia Chemical Corp. (Dah An
Commercial Bank), 6.25%, Due
01/07/98 ........................... 0.20 612,869
920,245 Pan Asia Chemical Corp. (Dah An
Commercial Bank), 7.00%, Due
01/07/98 ........................... 0.29 919,190
460,123 Stongman Cycles Ltd. (Grand
Commercial Bank), 7.25%, Due
01/07/98 ........................... 0.15 459,576
153,374 Fortune Life Enterprise Co., Ltd.
(Grand Commercial Bank), 7.00%,
Due 01/07/98 ....................... 0.05 153,198
1,533,742 Singer Industries (Taiwan) Ltd.
(Grand Commercial Bank), 7.25%,
Due 01/07/98 ....................... 0.49 1,531,920
613,497 Shin Shin Credit Corp. (International
Bills Finance Company), 7.25%, Due
01/07/98 ........................... 0.20 612,767
306,748 Taiwan Prosperity Chemical Co.
(International Bills Finance
Company), 6.25%, Due 01/07/98 ...... 0.10 306,434
613,497 Chemical Leasing Corp. (ANZ
Grindlays Bank), 6.75%, Due
01/08/98 ........................... 0.20 612,704
3,067,485 Ever Fortune Industrial Co., Ltd.
(Asia Pacific Bank), 6.25%, Due
01/08/98 ........................... 0.98 3,063,822
613,497 Solomon Technology Corp. (ChinFon
Commercial Bank), 6.30%, Due
01/08/98 ........................... 0.20 612,758
1,533,742 Ching Chan Construction Corp. (China
United Trust & Investment), 6.30%,
Due 01/08/98 ....................... 0.49 1,531,897
1,533,742 Fuh Hwa Securities Finance Co., (Fuh
Hwa Securities Finance Co.), 6.35%,
Due 01/08/98 ....................... 0.49 1,531,880
See accompanying notes to consolidated financial statements.
8
<PAGE>
The R.O.C. Taiwan Fund
% of Value
Commercial Paper (Cont'd.) -- 14.98% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
$ 4,601,227 Fuh Hwa Securities Finance Co., (Fuh
Hwa Securities Finance Co.), 6.75%,
Due 01/08/98 ....................... 1.47 $ 4,595,286
1,533,742 Ta-Yo-Wei Construction Co., Ltd.
(Grand Commercial Bank), 7.25%,
Due 01/08/98 ....................... 0.49 1,531,626
3,067,485 Huan Ni Construction Corp. (Our
Commercial Banking Corp.), 6.75%,
Due 01/08/98 ....................... 0.98 3,063,521
613,497 Chieh Ho Construction Corp. (Union
Commercial Bank), 6.15%, Due
01/08/98 ........................... 0.20 612,780
153,374 Pin Yang Co. (Union Commercial Bank),
6.75%, Due 01/08/98 ................ 0.05 153,177
3,067,485 Ho Tai Investment Co. (Cosmos Bank),
6.35%, Due 01/09/98 ................ 0.98 3,063,233
766,871 Heng Shang Construction Co. (ChinFon
Commercial Bank), 7.00%, Due
01/09/98 ........................... 0.24 765,698
552,147 Lien Hsiang Ent. (ChinFon Commercial
Bank), 7.00%, Due 01/09/98 ......... 0.18 551,302
306,748 Askey Computer Corp. (ChinFon
Commercial Bank), 7.00%, Due
01/09/98 ........................... 0.10 306,279
3,067,485 Luo Chieh Construction Co. (China
United Trust & Investment), 6.30%,
Due 01/09/98 ....................... 0.98 3,063,263
920,245 Taipei Motor Co., Ltd. (Grand
Commercial Bank), 7.00%, Due
01/09/98 ........................... 0.29 918,842
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46,941,732
Certificates of Deposit -- 2.44%
- --------------------------------------------------------------------------------
Principal
Amount Issuer
- ----------- ------
$ 1,533,742 Entie Commercial Bank, 7.00%,
Due 01/12/98 ....................... 0.49 $ 1,530,497
3,067,485 Entie Commercial Bank, 6.75%,
Due 01/12/98 ....................... 0.98 3,061,226
3,067,485 Union Bank of Taiwan
7.00%, Due 01/12/98 ................ 0.98 3,060,993
-------------
7,652,716
Bankers' Acceptance -- 0.10%
- --------------------------------------------------------------------------------
Principal
Amount Accepting Bank (Issuer)
--------- -------------------
$ 306,748 Bank of New York (Universal Finance
Co.) 6.65%, Due 01/07/98 ........... 0.10 $ 306,414
-------------
TOTAL SHORT-TERM INVESTMENTS (AMORTIZED COST
$54,900,862) 17.52 54,900,862
-------------
TOTAL INVESTMENTS IN SECURITIES AT MARKET VALUE
(COST $350,439,030) 121.35 380,239,853
LIABILITIES (NET OF OTHER ASSETS) (21.35) (66,895,926)
------ -------------
NET ASSETS 100.00 $ 313,343,927
====== =============
See accompanying notes to consolidated financial statements.
9
<PAGE>
================================================================================
The R.O.C. Taiwan Fund
Consolidated Statement of Assets and Liabilities
December 31, 1997 (Expressed in US Dollars)
================================================================================
Assets
Investments in securities at market value (Notes 3 and 6):
Common stocks (cost -- $289,352,647) ....................... $318,980,684
Bonds (par -- $6,185,521) .................................. 6,358,307
Short-term investments (amortized cost -- $54,900,862) ..... 54,900,862
------------
Total investments in securities at market value
(cost -- $350,439,030) ................................. 380,239,853
Cash .......................................................... 4,403,605
Receivable for sale of investments ............................ 6,966,892
Prepaid expense ............................................... 37,995
Other receivables ............................................. 66,029
------------
Total assets ............................................ 391,714,374
------------
Liabilities
Payable for securities purchased .............................. 7,625,812
Management fee payable (Note 4) ............................... 400,514
Custodian fees payable (Note 5) ............................... 46,550
Accrued Republic of China taxes (Note 2) ...................... 90,898
Distribution payable (Note 8) ................................. 69,975,809
Other payables ................................................ 230,864
------------
Total liabilities ....................................... 78,370,447
------------
Net assets .................................................... $313,343,927
============
Components of net assets (Note 2)
Par value of shares of beneficial interest .................... $ 326,990
Additional paid-in capital .................................... 320,678,375
Undistributed net investment gain ............................. 446,407
Accumulated realized loss on investments ...................... 8,180,888)
Unrealized appreciation on investments ........................ 29,628,037
Cumulative translation adjustment ............................. (29,554,994)
------------
Net assets .................................................... $313,343,927
============
Net asset value per share (32,698,976 shares issued
and outstanding) ............................................ $ 9.58
============
See accompanying notes to consolidated financial statements.
10
<PAGE>
================================================================================
The R.O.C. Taiwan Fund
Consolidated Statement of Operations
For the Year ended December 31, 1997 (Expressed in US Dollars)
================================================================================
Investment Income
Dividends .................................................... $ 1,877,458
Interest ..................................................... 2,307,659
------------
4,185,117
Republic of China Taxes (Note 2) ................................ 2,391,562
------------
1,793,555
------------
Expenses
Management fee (Note 4) ...................................... 5,602,946
Custodian fees (Note 6) ...................................... 654,011
Professional fees ............................................ 373,506
Administrative fee ........................................... 87,250
Insurance expenses ........................................... 79,278
Trustee fees ................................................. 57,000
Other expenses ............................................... 243,558
------------
7,097,549
------------
Net investment loss ............................................. (5,303,994)
------------
Realized and unrealized gain from investments and foreign
currencies (Note 6)
Net realized gain from investments (Note 2) .................. 129,107,327
Net decrease in unrealized appreciation on:
investments (excluding bonds and short-term investments) .. (19,295,468)
translation of assets and liabilities in foreign currencies (62,331,321)
------------
Net realized and unrealized gain from
investments and foreign currencies ........................ 47,480,538
------------
Net increase in net assets resulting from operations ......... $ 42,176,544
============
See accompanying notes to consolidated financial statements.
11
<PAGE>
================================================================================
The R.O.C. Taiwan Fund
Consolidated Statement of Changes in Net Assets
For the Years ended December 31, 1997 and 1996 (Expressed in US Dollars)
================================================================================
1997 1996
------------- -------------
Net increase in net assets resulting
from operations
Net investment loss ......................... $ (5,303,994) $ (3,900,067)
Net realized gain on investments ............ 129,107,327 28,549,362
Net (decrease) increase in unrealized
appreciation on investments ................ (19,295,468) 58,325,709
Net decrease in unrealized appreciation on
translation of assets and liabilities in
foreign currencies ......................... (62,331,321) (2,763,569)
------------- -------------
Net increase in net assets resulting from
operations ................................. 42,176,544 80,211,435
------------- -------------
Share transactions
Cost of repurchasing shares (Note 7) ........ (13,340,943) --
------------- -------------
Distributions to Shareholders from (Note 2)
Net investment income ....................... 12,708,377 --
Net realized gain on investments ............ 97,526,443 --
------------- -------------
Total Distributions ......................... (110,234,820) --
------------- -------------
Decrease (increase) in net assets .............. (81,399,219) 80,211,435
Net assets, beginning of year .................. 394,743,146 314,531,711
------------- -------------
Net assets, end of year ........................ $ 313,343,927 $ 394,743,146
============= =============
See accompanying notes to consolidated financial statements.
12
<PAGE>
================================================================================
The R.O.C. Taiwan Fund
Consolidated Financial Highlights
(Expressed in US Dollars)
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period ..... 11.67 9.30 13.12 10.62 8.51
Net investment (loss) income ............. (0.16) (0.12) (0.15) (0.09) 0.16
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions ........................... 3.20 2.57 (3.35) 2.66 2.35
Net increase (decrease) in unrealized
appreciation on translation of foreign
currencies ............................. (1.88) (0.08) (0.35) (0.07) (0.25)
------- ------- ------- ------- -------
Total from investment operations .. 1.16 2.37 (3.85) 2.50 2.26
Net effect of share transactions ............ 0.09 -- 0.03 -- --
Distributions to Shareholders from:
Net investment income .................... (0.39) -- -- -- (0.15)
Net realized gain on investments ......... (2.95) -- -- -- --
------- ------- ------- ------- -------
Total distributions* .............. (3.34) -- -- -- (0.15)
------- ------- ------- ------- -------
Net asset value, end of year ................ 9.58 11.67 9.30 13.12 10.62
======= ======= ======= ======= =======
Per share market price, end of year ......... 8.13 10.13 10.50 11.88 13.75
Total investment return (%):
Based on the Trust's market price ........ 10.55 (3.52) (11.62) (13.60) 59.42
Based on the Trust's net asset value ..... 9.41 25.48 (29.12) 23.54 26.73
Ratios and supplemental data:
Net assets, end of year (in thousands) ... 313,344 394,743 314,532 365,661 295,997
Ratio of expenses to average net assets .. 1.51 1.75 1.98 1.99 2.18
Ratio of net investment income (loss) to
average nets assets (%) ................ (1.13) (1.14) (1.38) (0.84) 1.79
Portfolio turnover ratio (%) ............. 106 148 81 97 151
Average commission rate** ................ 0.002 0.002 -- -- --
</TABLE>
* See Note 2 for information concerning the Trust's distribution policy.
** For fiscal years beginning on or after September 1, 1995, a fund which
invests greater than 10% of the value of average net assets in equity
securities is required to disclose its average commission rate per share
for trades on which commissions are charged.
See accompanying notes to consolidated financial statements.
13
<PAGE>
================================================================================
THE R.O.C. TAIWAN FUND
Notes to Consolidated Financial Statements / December 31, 1997 (Expressed in
US Dollars)
================================================================================
Note 1 -- Organization and the Acquisition of The Taiwan (R.O.C.) Fund
- --------------------------------------------------------------------------------
The R.O.C. Taiwan Fund (the "Trust") is a Massachusetts business trust formed in
July 1988 and registered with the U.S. Securities and Exchange Commission as a
diversified, closed-end management investment company under the Investment
Company Act of 1940 (the "Investment Company Act").
The Trust was formed in connection with the reorganization (the
"Reorganization") of The Taiwan (R.O.C.) Fund (the "Fund"). The Fund, which
commenced operations in October 1983, was established under the laws of the
Republic of China as an open-end contractual investment fund pursuant to an
investment contract between International Investment Trust Company Limited and
Central Trust of China, as custodian. Pursuant to the Reorganization, which was
completed in May 1989, the Trust acquired the entire beneficial interest in the
assets constituting the Fund. For financial reporting purposes, the acquisition
has been accounted for as a purchase transaction. However, for U.S. federal
income tax purposes, the acquisition was treated as a reorganization in which,
pursuant to special rules and regulations of the Internal Revenue Service, the
Trust was deemed to have acquired the individual assets and assumed the
individual liabilities of the Fund at their fair values as of the Reorganization
date.
Note 2 -- Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
A -- Principles of consolidation -- The consolidated financial statements
include the accounts of the Trust and the Fund. All significant intercompany
transactions and balances have been eliminated in consolidation.
B -- Valuation of investments -- Common stocks represent securities that are
traded on the Taiwan Stock Exchange or the Taiwan over-the-counter market. Such
securities are valued at the closing market price, or, if not quoted at the end
of the period, generally at the last quoted closing market price. Bonds
represent investments in unlisted debt securities for which market quotations
are not available. Accordingly, the fair value of such investments has been
estimated in good faith by the Trust's management using a yield-to-maturity
basis. Short-term investments are valued using the amortized cost method which
approximates market value. Under this method, securities are valued at cost and
the difference between the cost of each security and its value at maturity is
accrued into income on a straight-line basis over the days to maturity.
C -- Security transactions and investment income -- Security transactions are
recorded on the date the transactions are entered into (the trade date).
Dividend income is recorded on the ex-dividend date, and interest income is
recorded on the accrual basis as it is earned.
D -- Realized gains and losses -- Realized gains and losses on security
transactions are determined using the average cost method for the cost of
investments.
E -- Foreign currency translation--Substantially all of the Trust's income is
earned, and its expenses are largely paid, in New Taiwan Dollars ("NT$"). The
cost and market value of securities, currency holdings and other assets and
liabilities which are denominated in NT$ are reported in the accompanying
financial statements after translation into United States Dollars based on the
closing market rate for United States Dollars in Taiwan at the end of the
period. At December 31, 1997, this rate was approximately NT$32.600 to $1.00.
Investment income and expenses are translated at an average exchange rate for
the period. Currency translation gains or losses are reported as a separate
component of changes in net assets resulting from operations. The Trust does not
separately record that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices
14
<PAGE>
of securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
F -- Distributions to shareholders -- It is the Trust's policy to distribute all
ordinary income and net capital gains, calculated in accordance with U.S.
federal income tax regulations. Such calculations may differ from those based on
generally accepted acco unting principles. Permanent book and tax differences
primarily relate to the treatment of capital gains on the disposition of passive
foreign investment company ("PFIC") shares during 1997 as ordinary income for
U.S. federal income tax purposes. Temporary book and tax differences are
primarily due to differing treatments for net capital losses, wash sale
deferrals, and the current marking-to-market of PFIC shares held by the Trust at
December 31, 1997. The 1997 distribution from net investment income, even though
the Trust had a book net investment loss, is a result of realized securities
gains and mark-to-market income generated from PFIC investments, which
constitute ordinary income for U.S. income tax purposes.
G -- Taxes -- The Trust intends to continue to elect and to continue to qualify
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). If the Trust complies with all of the applicable
requirements of the Code, it will not be subject to U.S. federal income and
excise taxes provided that it distributes all of its investment company taxable
income and net capital gains to its shareholders. The Republic of China
("R.O.C.") levies a tax at the rate of 20% on cash dividends and interest
received by the Trust on investments in R.O.C. securities. In addition, a 20%
tax is levied based on the par value of stock dividends (except those which have
resulted from capitalization of capital surplus) received by the Trust. Realized
gains on securities transactions are not subject to income tax in the R.O.C.;
instead, a securities transaction tax of 0.3% of the market value of stocks sold
or transferred, and 0.1% of the market value of bonds and beneficial
certificates sold or transferred, is levied. Proceeds from sales of investments
are net of securities transaction tax paid of approximately $1,781,083 for the
twelve months ended December 31, 1997.
H -- Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Note 3 -- Investment
- --------------------------------------------------------------------------------
Considerations Because the Trust concentrates its investments in publicly traded
equity and debt securities issued by R.O.C. corporations, its portfolio involves
considerations not typically associated with investing in U.S. securities. In
addition, the Trust is more susceptible to factors adversely affecting the
R.O.C. economy than a fund not concentrated in these issuers to the same extent.
Since the Trust's investment securities are primarily denominated in New Taiwan
Dollars, changes in the relationship of the New Taiwan Dollar to the U.S. Dollar
may also significantly affect the value of the investments and the earnings of
the Trust.
Note 4 -- Investment Management
- --------------------------------------------------------------------------------
Pursuant to an investment contract (the "Investment Contract"), IIT (the
"Manager"), an R.O.C. corporation, is responsible, among other things, for
investing and managing the assets of the Trust and administering the Trust's
affairs. The Trust pays the Manager a fee in NT$, which is accrued daily and
paid monthly in arrears, at the annual rate of 1.40% of the net asset value
("NAV") with respect to Trust assets held in Taiwan under the Investment
Contract up to NT$6 billion, 1.20% of such NAV in excess of NT$6 billion up to
NT$9 billion, 1.00% of such NAV in excess of NT$9 billion up to NT$12 billion,
and 0.80% of such NAV in excess of NT$12 billion.
Note 5 -- Custodians
- --------------------------------------------------------------------------------
Pursuant to the Investment Contract, the Central Trust of China ("CTC") serves
as custodian of the assets of the Trust held in the R.O.C. CTC owns
approximately 8% of the outstanding capital stock of IIT. The Trust pays the
custodian a monthly fee in NT$ at the annual rate of 0.16% of the NAV with
respect to Trust assets held in Taiwan under
15
<PAGE>
the Investment Contract up to NT$6 billion, 0.14% of such NAV in excess of NT$6
billion up to NT$9 billion, 0.12% of such NAV in excess of NT$9 billion up to
NT$12 billion, and 0.10% of such NAV in excess of NT$12 billion, subject to a
minimum annual fee of NT$2.4 million (approximately $74,000).
Note 6 -- Investments in Securities
- --------------------------------------------------------------------------------
Purchases and proceeds from sales, excluding bonds and short-term investments,
for the twelve months ended December 31, 1997, included approximately
$511,000,000 for stock purchases and approximately $591,000,000 for stock sales,
respectively.
At December 31, 1997, the cost of investments, excluding short-term investments
and bonds, for U.S. federal income tax purposes was approximately $304,000,000.
At December 31, 1997, for U.S. federal income tax purposes, the aggregate gross
unrealized appreciation on these investments was approximately $36,000,000 and
the aggregate gross unrealized depreciation on these investments was
approximately $21,000,000 or a net unrealized appreciation of approximately
$15,000,000.
Note 7 -- Shares of Beneficial Interest
- --------------------------------------------------------------------------------
The Trust's "Declaration of Trust" permits the Trustees to issue an unlimited
number of shares of beneficial interest or additional classes of other
securities. The shares have a par value of $0.01, and no other classes of
securities are outstanding at present.
During the year ended December 31, 1997, the Trust repurchased 1,116,400 of its
own shares whose net cost accounted for $13,340,943 out of the maximum potential
expenditure of $25 million approved by the Board of Trustees. The weighted
average discount per share between the repurchase cost and the net asset value
applicable to such shares at the date of repurchase was 17.80%. At December 31,
1997, 32,698,976 shares were outstanding.
- --------------------------------------------------------------------------------
The Fund and its predecessor, The Taiwan (R.O.C.) Fund, have been certified as
distributing funds by the Board of Inland Revenue of the United Kingdom for the
period from their inception to December 31, 1996. The Fund intends to apply for
such status for succeeding accounting periods.
================================================================================
Daniel Chiang has been the portfolio manager and a trustee of the Fund, as well
as its President and Chief Executive Officer, since April 1994. He is also the
President of International Investment Trust Co. (IIT), the Fund's investment
manager. Mr. Chiang has 13 years experience in the financial industry and for
the past 10 years has worked at IIT, where he previously served as Vice
President in charge of the dealing department. Independent Auditors' Report
- --------------------------------------------------------------------------------
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders of
The R.O.C. Taiwan Fund
We have audited the accompanying consolidated statement of assets and
liabilities of The R.O.C. Taiwan Fund, a Massachusetts business trust (the
"Trust"), including the consolidated schedule of investments, as of December 31,
1997, and the related consolidated statement of operations for the year then
ended, the consolidated statements of changes in net assets for each of the
years in the two-year period then ended, and the consolidated financial
highlights for each of the years in the five-year period then ended. These
consolidated financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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 consolidated financial statements. Our procedures
included the physical examination of short-term investments owned as of December
31, 1997, and confirmation of securities owned as of December 31, 1997, 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 consolidated 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
R.O.C. Taiwan Fund as of December 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended, in conformity with generally accepted
accounting principles in the United States of America.
/s/ KPMG Peat Marwick
Taipei, Taiwan
January 9, 1998
17
<PAGE>
THE R.O.C. TAIWAN FUND
Manager:
International Investment Trust Company Limited
17th Floor
167 Fuhsing North Road
Taipei, Taiwan, Republic of China
Telephone: 886-2-2713-7702
Fax: 886-2-2717-3077
Officers and Trustees:
Theodore S. S. Cheng, Chairman and Trustee
Daniel Chiang, President and Chief Executive
Officer, Trustee, and Fund Manager
Raymund A. Kathe, Trustee and Audit Committee
Member
Pedro-Pablo Kuczynski, Trustee
David N. Laux, Trustee and Audit Committee
Member
Alfred F. Miossi, Trustee and Audit Committee
Member
Li-Yin Kung, Trustee and Audit Committee
Member
Gregory Kuo-Hua Wang, Trustee
James M. Wang, Chief Financial Officer,
Treasurer, and Secretary
Custodian:
Central Trust of China
49 Wuchang Street, Sec. 1
Taipei, Taiwan
Republic of China
Transfer Agent,
Paying and Plan Agent:
State Street Bank and Trust Co.
P.O. Box 8200
Boston, Massachusetts 02266-8200
U.S.A.
U.S. Administrator:
Dewe Rogerson Inc.
850 Third Avenue
New York, NY 10022
U.S.A.
Telephone: (212) 688-6840
U.S. Legal Counsel:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Telephone: (212) 373-3000
For information on the Fund, including the NAV,
please call toll free 1-800-343-9567.
