-----------------------------------------
THE
-----------------------------------------
R.O.C.
-----------------------------------------
TAIWAN FUND
-----------------------------------------
Quarterly Report
June 30, 1998
<PAGE>
- --------------------------------------------------------------------------------
Dear Stockholders
- --------------------------------------------------------------------------------
The 15.1% decline in local currency terms of the net asset value (NAV) per share
of The R.O.C.Taiwan Fund in the second quarter was less than the 17.0% fall in
the Taiwan Stock Exchange Index (TAIEX). When measured in U.S. dollars, the
Fund's NAV declined 19.4% as a result of the New Taiwan dollar's 5.4%
depreciation against the U.S. unit during the period.
After boosting the market in the first few months of the year, the stocks of
technology companies led the downward trend in the second quarter. The period
opened with an initial ruling by the U.S. government that could subject several
Taiwan semiconductor makers to punitive antidumping tariffs. Then came warnings
from some technology companies of reduced growth resulting from weaker demand
and price cuts. Such warnings were buttressed by monthly reports of falling
revenue, followed in June with cuts in annual earnings forecasts by several
technology companies. For the whole quarter, Taiwan's technology
index--comprising stocks which make up more than a quarter of market
capitalization--declined 28%
The market also continued to be unsettled by
economic and political problems in the region. The growing social unrest in
Indonesia that led to the resignation of President Suharto shook the market in
May. For the rest of the quarter, the fall in value of the Japanese yen weighed
on investors as they watched the local currency drop to an 11-year low against
the U.S. dollar, raising concern of possible interest rate hikes and a sell-off
by foreign institutional investors.
In addition, worries increased that Taiwan would be affected by the financial
turmoil troubling the region since mid-1997. To be sure, the structural problems
of many other East Asian countries are largely absent in the case of Taiwan,
which enjoyed economic growth of 6.8% in 1997 and 5.9% in the first quarter of
1998. But as one country after another has slipped into recession, it became
clear that any recovery in these economies would not come until next year at the
earliest.
The major effect of these developments on Taiwan has been the weakening regional
demand for its products. As a result, Taiwan's exports--which are the equivalent
of about 40% of gross national product--fell 8% in the second quarter and 7% in
the first six months. The second quarter drop was deeper than the official
projection of a 5% decline, indicating that the economy most likely did not
reach the government's forecast growth of 5.8%.
Given the weakening economies all around it, Taiwan's own growth
will suffer as well. Even though private investment remains strong and consumer
spending fairly robust, exports are now forecast to decline this year for the
first time since 1982. Economic growth for the year should be within a range of
5.0-5.5%--quite respectable in comparison with recessionary conditions in the
region. The government is attempting to boost growth to the upper end of this
range by facilitating and quickening the pace of large-scale investment projects
in the private and public sectors. And, once major currencies in the region
stabilize, the central bank can be expected to lower interest rates to boost the
economy.
The Fund started to reduce holdings in technology stocks toward the end of the
first quarter. Most important, our underweighting in semiconductor stocks proved
correct, given the sharp fall in share prices of these companies, and was the
main reason the Fund outperformed the market in local currency terms during the
second quarter. Furthermore, we believe such stocks have still not reached a
bottom. For this reason, along with the impact of the Asian financial turmoil on
Taiwan's economy, the market could be rather bumpy in the near term. Our
investment focus will be on small-cap stocks in view of expectations of lower
liquidity. Also targeted are those companies with strong markets in the U.S. and
Europe, where Taiwan's exports continue to show positive growth and its currency
depreciation has further enhanced competitiveness. In addition, we will look for
buying opportunities in mid- and down-stream technology companies such as
notebook computer makers, which should enjoy a big business pick-up during the
peak season in the fourth quarter.
We are grateful for your continuing support and look forward to discussing our
market outlook and portfolio strategy with you in future reports.
Respectfully submitted,
/s/ Daniel Chiang
--------------------------
Daniel Chiang
President
July 31, 1998
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights
June 30, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Key Statistics
- --------------------------------------------------------------------------------
Change in N.A.V. ($10.42 t0 $8.40) $(2.02)
- --------------------------------------------------------------------------------
Total Net Assets $274.7 Million
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ten Largest Holdings
- --------------------------------------------------------------------------------
Percent of
Company Net Assets
- ------- ----------
China Motor Corp. 5.26%
Yulon Motor Co. 4.45
Compal Electronics Inc. 4.11
Delta Electronics Inc. 3.27
China Development Corp. 3.04
Chuntex Electronic Co., Ltd. 2.96
Delpha Construction Co., Ltd. 2.93
Phoenixtec Power Co. 2.73
Cathay Life Insurance Co., Ltd. 2.46
Hung Sheng Construction Ltd. 2.08
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Security Classification
- --------------------------------------------------------------------------------
Value
Percent of Net Assets (000)
- --------------------- ------
Common Stocks 86.10% $236,553
Short-Term Investments 12.78 35,108
------ --------
Total Investments 98.88 271,661
Other Assets Less
Liabilities 1.12 3,075
- --------------------------------------------------------------------------------
Net Assets 100.00% $274,736
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Industry Diversification
- --------------------------------------------------------------------------------
Percent of
Ten Largets Sectors Net Assets
- ------------------- ----------
Computers & Office Equipment 14.71%
Automobile 11.74
Electronics 9.97
Electrical & Machinery 7.98
Banking 6.50
Construction 5.70
Textiles 5.42
Plastics 3.96
Other Financials 3.92
Semiconductors 2.41
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED SCHEDULE OF INVESTMENTS
The R.O.C. Taiwan Fund / June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
COMMON STOCKS -- 86.10% % of Market Value
Automobile -- 11.74% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
5,801,500shs. *China Motor Corp. ................ 5.26 $ 14,440,364
8,826,400 Yulon Motor Co., Ltd. ............ 4.45 12,236,533
3,300,000 *Chinese Automobile Co., Ltd. ..... 2.03 5,587,393
------------
32,264,290
Banking -- 6.50%
- --------------------------------------------------------------------------------
3,635,000 *China Development Corp. .......... 3.05 8,363,940
2,340,280 *Hua Nan Commercial Bank .......... 1.58 4,334,981
2,016,382 *The First Commercial Bank ........ 1.35 3,705,834
2,520,000 *Chung Shing Bank ................. 0.37 1,028,393
1,026,000 *Far Eastern Int'l Bank ........... 0.15 415,733
------------
17,848,881
Other Financials -- 3.92%
- --------------------------------------------------------------------------------
2,221,902 Cathay Life Insurance Co., Ltd. .. 2.46 6,752,329
3,840,480 *Polaris Securities Co., Ltd. ..... 1.46 4,023,773
------------
10,776,102
Chemical -- 1.93%
- --------------------------------------------------------------------------------
2,220,000 *Ho Tung Chemical Corp. ........... 0.92 2,518,711
1,298,700 *Eternal Chemical Co., Ltd. ....... 0.71 1,954,572
846,000 *Maywufa Co., Ltd. ................ 0.27 759,052
67,000 *Everlight Chemical Industrial Corp. 0.03 81,833
------------
5,314,168
Computers & Office Equipment -- 14.71%
- --------------------------------------------------------------------------------
4,213,000 *Compal Electronics Inc. .......... 4.11 11,279,051
2,700,000 *Delta Electronics Inc. ........... 3.28 8,986,715
6,360,000 *Chuntex Electronic Co., Ltd. ..... 2.97 8,136,147
1,498,285 *Inventec Corporation ............. 1.73 4,726,725
1,991,888 *Primax Electronics Ltd. .......... 1.41 3,862,594
1,250,000 *Kinpo Electronics Inc. ........... 0.71 1,971,723
710,000 *Mitac International Corp. ........ 0.50 1,376,805
------------
40,339,760
Construction -- 5.70%
- --------------------------------------------------------------------------------
6,177,000 *Delpha Construction Co., Ltd. .... 2.93 8,045,064
4,239,156 *Hung Sheng Construction Ltd. ..... 2.08 5,705,211
1,000,350 *Chief Construction Corp. ......... 0.41 1,129,161
847,200 Abtron Group Co., Ltd. ........... 0.28 784,649
------------
15,664,085
See accompanying notes to financial statements and accountants' review report.
3
<PAGE>
The R.O.C. Taiwan Fund
% of Market Value
Electrical & Machinery -- 7.98% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
3,200,400shs. *Phoenixtec Power Co., Ltd. ....... 2.74 $ 7,502,891
1,778,949 *Victor Machinery Works Co., Ltd. . 1.50 4,093,266
1,376,000 *Lee Chi Enterprise Co., Ltd. ..... 1.37 3,763,480
1,100,000 *Rexon Industrial Corp., Ltd. ..... 1.00 2,753,900
844,800 Fu Sheng Industrial Co., Ltd. .... 0.89 2,457,307
658,000 *GFC., Ltd. ....................... 0.32 877,943
151,950 *TYC Brother Industrial Co., Ltd. . 0.16 461,774
------------
21,910,561
Electronics -- 9.97%
- --------------------------------------------------------------------------------
1,120,000 *Hon Hai Precision
Industry Co., Ltd. ............. 2.06 5,640,358
3,100,000 *Yageo Corp. ...................... 1.87 5,114,179
435,000 *Asustek Computer Inc. ............ 1.28 3,537,814
1,600,000 *Universal Scientific
Industrial Corp. ............... 1.16 3,195,277
1,215,000 *Opto Tech Corp. .................. 0.99 2,725,319
605,000 ` *Synnex Technology
International Corp. ............ 0.94 2,600,287
1,200,000 Taiwan Liteon Electronic Co., Ltd. 0.87 2,396,457
248,000 *Enlight Corp. .................... 0.33 918,758
988,000 *Dialer & Business
Electronics Co., Ltd. .......... 0.30 843,565
400,000 *Silicon Integrated Systems Corp. . 0.17 490,869
------------
27,462,883
Food -- 1.05%
- --------------------------------------------------------------------------------
1,531,200 *Taiwan Tea Corporation ........... 1.05 2,880,611
------------
Glass -- 0.66%
- --------------------------------------------------------------------------------
1,663,500 Taiwan Glass Ind. Corporation .... 0.66 1,805,483
------------
Paper -- 1.92%
- --------------------------------------------------------------------------------
1,598,000 *Shihlin Paper Corp. .............. 1.92 5,272,554
------------
Plastics -- 3.96%
- --------------------------------------------------------------------------------
4,050,240 *Nan Ya Plastics Corporation ...... 1.99 5,462,684
3,972,473 *Formosa Plastics Corporation ..... 1.97 5,403,787
------------
10,866,471
Semiconductors -- 2.41%
- --------------------------------------------------------------------------------
1,704,500 *Taiwan Semiconductor
Manufacturing Co., Ltd. ........ 1.28 3,502,634
1,528,640 *Siliconware Precision
Industries Co., Ltd. ........... 0.80 2,207,726
1,000,000 *Macronix International Co., Ltd. . 0.33 908,801
------------
6,619,161
See accompanying notes to financial statements and accountants' review report.
4
<PAGE>
Schedule of Investments (Cont'd.)
% of Market Value
Steel & Other Metals -- 1.54% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
5,000,000shs. *Kuei Hung Industrial Co., Ltd. ... 1.54 $ 4,240,109
------------
Textiles -- 5.41%
- --------------------------------------------------------------------------------
5,420,000 *Yi Jinn Industrial Co., Ltd. ..... 1.99 5,443,374
5,488,113 Far Eastern Textile Ltd. ......... 1.54 4,225,169
2,375,000 *Kwong Fong Industries Corporation 0.74 2,027,799
989,000 *Taih Yung Enterprise Co., Ltd. ... 0.67 1,860,583
1,200,000 *Ruentex Industries Ltd. .......... 0.35 969,002
507,000 *Chung Fu Textile Corp. ........... 0.12 350,708
------------
14,876,635
Transportation -- 1.12%
- --------------------------------------------------------------------------------
936,000 *Far Eastern Air Transport Corp. .. 0.44 1,210,940
1,500,550 *Yang Ming Marine Transport Corp. . 0.34 933,745
1,000,000 *Far Eastern Silo Shipping Corp. .. 0.34 926,167
392 *Evergreen Marine Corp. (Taiwan) Ltd. 0.00 301
------------
3,071,153
Others -- 5.58%
- --------------------------------------------------------------------------------
3,100,000 *CTCI Corporation ................. 2.05 5,607,652
1,350,000 *Taiwan Sakura Corp. .............. 1.05 2,891,378
1,028,927 *Pou Chen Corp. ................... 0.98 2,695,085
808,000 *Taiwan Secom Co., Ltd. ........... 0.91 2,525,658
1,000,000 Giant Manufacturing Co., Ltd. .... 0.59 1,620,792
------------
15,340,565
TOTAL COMMON STOCKS (COST $234,570,502) .............. $236,553,472
------------
* These stocks did not pay a cash dividend during the six months ended June 30,
1998.
See accompanying notes to financial statements and accountants' review report.
5
<PAGE>
The R.O.C. Taiwan Fund
SHORT-TERM INVESTMENTS -- 12.78% % of Market Value
Bankers' Acceptances -- 0.89% Net Asset (U.S. Dollars)
- --------------------------------------------------------------------------------
Principal
Amount Accepting Bank (Issuer)
--------- -----------------------
$ 868,282 Standard Foods Taiwan Limited
(International Bank of
Taipei), 6.75%, Due 07/02/98 ... 0.32 $ 868,122
144,714 Ou Keh Telecommunications Inc.
(Citibank, N.A.),
7.65%, Due 07/09/98 ............ 0.05 144,473
1,447,136 Furtune Motors Co., Ltd.
(Int'l Nederlanden Bank N.V.),
7.65%, Due 07/14/98 ............ 0.52 1,443,232
------------
2,455,827
Commercial Paper -- 11.89%
- --------------------------------------------------------------------------------
Principal
Amount Issuer (Guarantor)
------ ------------------
$ 5,788,544 Tai Yu Products Corp.
(ChinFon Commercial Bank),
6.70%, Due 07/02/98 ............ 2.12 $ 5,787,484
868,282 A.G.V. Products Corp. (International
Bills Finance Company), 6.70%,
Due 07/02/98 ................... 0.32 868,123
289,427 Tu Jun Fu Company (International
Bills Finance Company), 6.70%,
Due 07/02/98 ................... 0.11 289,374
1,447,136 Pacific Securities Co., Ltd.
(China Development Co.),
6.70%, Due 07/03/98 ............ 0.53 1,446,606
1,447,136 Pacific Securities Co., Ltd.
(China Development Co.),
6.70%, Due 07/03/98 ............ 0.53 1,446,606
1,447,136 Pacific Securities Co., Ltd.
(China Development Co.),
6.70%, Due 07/03/98 ............ 0.53 1,446,607
1,447,136 Pacific Construction Corp., Ltd.
(Chiao Tung Bank),
7.20%, Due 07/03/98 ............ 0.53 1,446,568
2,894,272 Core Pacific Securities Co., Ltd.
(Taishin Int'l Bank),
6.80%, Due 07/03/98 ............ 1.05 2,893,196
1,447,136 Fortune Investment Co., Ltd.
(Union Commercial Bank),
6.70%, Due 07/03/98 ............ 0.53 1,446,607
1,447,136 Fortune Investment Co., Ltd.
(Union Commercial Bank),
6.75%, Due 07/03/98 ............ 0.53 1,446,604
1,736,563 Evergreen Heavy Ind. Corp.
(E. Sun Bills Finance Corp.),
6.80%, Due 07/03/98 ............ 0.63 1,735,920
578,854 Shih Hsiang Ent.
(Dah Chung Bills Finance Corp.),
6.70%, Due 07/03/98 ............ 0.21 578,643
868,282 Kuang Wei Investment Co.
(Entie Commercial Bank),
6.85%, Due 07/06/98 ............ 0.32 867,470
1,447,136 Yi Wang Construction Co.
(China United Trust
Investment), 6.70%, Due 07/06/98 0.52 1,445,813
1,447,136 Yi Wang Construction Co.
(China United Trust
Investment), 6.70%, Due 07/06/98 0.52 1,445,813
See accompanying notes to financial statements and accountants' review report.
6
<PAGE>
Schedule of Investments (Cont'd.)
% of Market Value
Commercial Paper -- 11.89% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
Principal
Amount Issuer (Guarantor)
------ ------------------
$ 289,427 Printed Wire Corp.
(Dah Chung Bills Finance Corp.),
6.75%, Due 07/06/98 ............ 0.10 $ 289,161
868,282 Hooly Fiber Industry Corp.
(Cosmos Bank),
6.70%, Due 07/07/98 ............ 0.32 867,327
1,157,709 Lei Chu Enterprise Co., Ltd.
(Overseas Business Bank),
6.70%, Due 07/07/98 ............ 0.42 1,156,445
115,771 Hsiang Wei Investment Co.
(E. Sun Bills Finance Corp.),
7.65%, Due 07/08/98 ............ 0.04 115,603
1,447,136 Ou Keh Szu Company
(Dah Chung Bills Finance Corp.),
6.70%, Due 07/08/98 0.52 1,445,284
289,427 Fuh Hwa Securities Finance Co., Ltd.
(Fuh Hwa Securities
Finance Co.), 7.65%, Due 07/10/98 0.11 288,885
1,447,136 Yuan Chi Tung Hsing Investment Co.
(International Bills Finance
Company), 7.65%, Due 07/10/98 .. 0.52 1,444,414
144,714 Liang Jing Co., Ltd.
(Chinatrust Commercial Bank),
6.85%, Due 07/13/98 ............ 0.05 144,390
868,282 Yuan Ting Investment Co.
(International Bills Finance
Company), 7.65%, Due 07/14/98 .. 0.31 865,924
1,447,136 Taiwan International Securities Corp.
(Asia Pacific Bank),
7.65%, Due 07/15/98 ............ 0.52 1,442,905
-------------
32,651,772
TOTAL SHORT-TERM INVESTMENTS (AMORTIZED COST $35,107,599) 35,107,599
-------------
TOTAL INVESTMENTS IN SECURITIES (COST $269,678,101) 98.88 271,661,071
OTHER ASSETS (NET OF LIABILITIES) 1.12 3,074,746
------ -------------
NET ASSETS 100.00 $ 274,735,817
====== =============
See accompanying notes to financial statements and accountants' review report.
7
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
The R.O.C. Taiwan Fund / June 30, 1998 (Expressed in US Dollars) (Unaudited)
- --------------------------------------------------------------------------------
Assets
Investments in securities at market value (Notes 3 and 6):
Common stocks (cost -- $234,570,502) ..................... $ 236,553,472
Short-term investments (amortized cost-- $35,107,599) .... 35,107,599
-------------
Total investments in securities at market value
(cost -- $269,678,101) ............................. 271,661,071
Cash ......................................................... 4,527,846
Receivable from sale of investments .......................... 1,615,379
Dividends and interest receivable ............................ 322,957
Prepaid expense .............................................. 64,272
-------------
Total assets ......................................... 278,191,525
-------------
Liabilities
Payable for securities purchased ............................. 2,457,039
Management fee payable (Note 4) .............................. 297,232
Custodian fees payable (Note 5) .............................. 34,241
Accrued Republic of China taxes (Note 2) ..................... 494,401
Other payables ............................................... 172,795
Total liabilities .................................... 3,455,708
-------------
Net assets ................................................... $ 274,735,817
=============
Components of net assets (Note 2)
Par value of shares of beneficial interest ................... 326,990
Additional paid-in capital ................................... 321,274,303
Accumulated net investment loss .............................. (7,854,652)
Undistributed realized gain on investments ................... 7,753,550
Unrealized appreciation on investments ....................... 1,982,970
Cumulative translation adjustment ............................ (48,747,344)
-------------
Net assets ................................................... $ 274,735,817
=============
Net asset value per share (32,698,976 shares
issued and outstanding) ................................... $8.40
=============
See accompanying notes to financial statements and accountants' review report.
8
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
The R.O.C. Taiwan Fund / For the Six Months Ended June 30, 1998
(Expressed in US Dollars) (Unaudited)
- --------------------------------------------------------------------------------
Investment income
Dividends .................................................. $ 792,281
Interest ................................................... 1,208,704
-----------
2,000,985
Republic of China taxes (Note 2) .............................. 1,203,399
-----------
797,586
-----------
Expenses
Management fee (Note 4) ..................................... 2,014,496
Custodian fees (Note 5) ..................................... 232,814
Professional fees ........................................... 162,670
Administrative fee .......................................... 48,000
Insurance expenses .......................................... 40,805
Trustee fees ................................................ 54,250
Other expenses .............................................. 80,430
-----------
2,633,465
-----------
Net investment loss ........................................... (1,835,879)
-----------
Net realized and unrealized gain (loss) on investments and foreign currency
(Notes 2 & 6)
Net realized gain (loss) on:
investments (excluding short-term investments) ........... 10,333,742
foreign currency transactions ............................ (268,556)
Net decrease in unrealized appreciation on
investments (excluding short-term investments) .......... (27,645,067)
Net increase in unrealized depreciation on
translation of assets and liabilities in foreign
currencies ............................................... (19,192,350)
------------
Net realized and unrealized loss on investments
and foreign currency ..................................... (36,772,231)
------------
Net decrease in net assets resulting from operations .......... $(38,608,110)
============
See accompanying notes to financial statements and accountants' review report.
9
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
The R.O.C. Taiwan Fund / For the Six Months Ended June 30, 1998 and the Year
Ended December 31, 1997
(Expressed in US Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
---------------- ------------
<S> <C> <C>
Net decrease in net assets resulting from operations
Net investment loss .................................. $ (1,835,879) $ (5,303,994)
Net realized gains on investments
and foreign currency transactions .................. 10,065,186 129,107,327
Net decrease in unrealized appreciation on investments (27,645,067) (19,295,468)
Net increase/decrease in unrealized
depreciation/appreciation on translation of assets
and liabilities in foreign currencies .............. (19,192,350) (62,331,321)
------------- -------------
Net (decrease) increase in net assets resulting from
operations ......................................... (38,608,110) 42,176,544
------------- -------------
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 in net assets ................................. (38,608,110) (81,399,219
Net assets, beginning of period ........................ 313,343,927 394,743,146
------------- -------------
Net assets, end of period .............................. $ 274,735,817 $ 313,343,927
============= =============
</TABLE>
See accompanying notes to financial statements and accountants' review report.
10
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL HIGHLIGHTS
The R.O.C. Taiwan Fund (Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31,
June 30, 1998 --------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period ...... $9.58 $11.67 $9.30 $13.12 $10.62 $8.51
Net investment income (loss) .............. (0.06) (0.16) (0.12) (0.15) (0.09) 0.16
Net realized and unrealized gain (loss) on
investments ............................ (0.53) 3.20 2.57 (3.35) 2.66 2.35
Net realized and unrealized loss
on foreign currencies ................... (0.59) (1.88) (0.08) (0.35) (0.07) (0.25)
----- ------ ----- ------ ------ -----
Total from investment operations . (1.18) 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 period .............. 8.40 9.58 11.67 9.30 13.12 10.62
===== ====== ===== ====== ====== =====
Per share market price, end of period ....... 6.06 8.13 10.13 10.50 11.88 13.75
Total investment return (%)**:
Based on the Trust's market price ......... (25.38) 10.55 (3.52) (11.62) (13.60) 59.42
Based on the Trust's net asset value ...... (12.32) 9.41 25.48 (29.12) 23.54 26.73
Ratios and supplemental data:
Net Assets, end of period (in thousands) .. 274,736 313,344 394,743 314,532 365,661 295,997
Ratio of expenses to average net assets (%) 1.68+ 1.51 1.75 1.98 1.99 2.18
Ratio of net investment income (loss) to
average net assets (%) ................. (1.17)+ (1.13) (1.14) (1.38) (0.84) 1.79
Portfolio turnover ratio (%)** ............ 65 106 148 81 97 151
Average commission rate*** ................ 0.002 0.002 0.002 -- -- --
</TABLE>
* See Note 2 for information concerning the Trust's distribution policy.
** Investment return and portfolio turnover ratio are calculated for the six
months ended June 30, 1998 (not annualized) and for each of the five years
ended December 31, 1997.
*** 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.
+ Annualized.
See accompanying notes to financial statements and accountants' review report.
11
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The R.O.C. Taiwan Fund / June 30, 1998 (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. 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 June 30, 1998, this rate was approximately NT$34.551 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
12
<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 accounting principles. Permanent book and tax differences
primarily relate to the treatment of capital gains on the disposition of passive
foreign investment company ("PFIC") shares 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.
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 $704,624 for the six
months ended June 30, 1998.
H -- Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Note 3 -- Investment Considerations
- --------------------------------------------------------------------------------
Because the Trust concentrates its investments in publicly traded equity and
debt securities issued by R.O.C. corporations, its portfolio involves
considerations not typically associated with investing in U.S. securities. In
addition, the Trust is more susceptible to factors adversely affecting the
R.O.C. economy than a fund not concentrated in these issuers to the same extent.
Since the Trust's investment securities are primarily denominated in New Taiwan
Dollars, changes in the relationship of the New Taiwan Dollar to the U.S. Dollar
may also significantly affect the value of the investments and the earnings of
the Trust.
Note 4 -- Investment Management
- --------------------------------------------------------------------------------
Pursuant to an investment contract (the "Investment Contract"), IIT (the
"Manager"), an R.O.C. corporation, is responsible, among other things, for
investing and managing the assets of the Trust and administering the Trust's
affairs. The Trust pays the Manager a fee in NT$, 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$12 billion.
13
<PAGE>
Note 5 -- Custodians
- --------------------------------------------------------------------------------
Pursuant to the Investment Contract, the Central Trust of China ("CTC") serves
as custodian of the assets of the Trust held in the R.O.C. CTC owns
approximately 8% of the outstanding capital stock of IIT. The Trust pays the
custodian a monthly fee in NT$ at the annual rate of 0.16% of the NAV with
respect to Trust assets held in Taiwan under 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 $69,000).
Note 6 -- Investments in Securities
- --------------------------------------------------------------------------------
Purchases and proceeds from sales, excluding bonds and short-term investments,
for the six months ended June 30, 1998, included approximately $184,000,000 for
stock purchases and approximately $234,000,000 for stock sales, respectively. At
June 30, 1998, the cost of investments, excluding short-term investments and
bonds, for U.S. federal income tax purposes was approximately $233,000,000.
At June 30, 1998, for U.S. federal income tax purposes, the aggregate gross
unrealized appreciation on these investments was approximately $22,000,000 and
the aggregate gross unrealized depreciation on these investments was
approximately $18,000,000 or a net unrealized appreciation of approximately
$4,000,000.
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 at a net cost of $13,340,943 out of a 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 June 30, 1998, 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, 1997. 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 14
years experience in the financial industry and for the past 11 years has worked
at IIT, where he previously served as Vice President in charge of the dealing
department.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
1998 ANNUAL MEETING OF STOCKHOLDERS
- --------------------------------------------------------------------------------
On June 4, 1998, the Fund held an annual meeting to:
1. Elect four trustees,
2. Ratify the appointment of KPMG Peat Marwick as the Fund's independent
accountants for 1998, and
3. Consider whether to convert the Fund from a closed-end investment company
into an open-end investment company. The Fund's Declaration of Trust
required a shareholder vote on this question, because the Fund's shares had
traded at an average discount of more than 10% to its net asset value over
a 12-week-period during the 12 months preceding the annual meeting.
Proxies representing 12,866,182, or 39.35% of the 32,698,976 eligible shares
outstanding, were voted. The results are shown below. The trustees of the Fund
recommended that stockholders vote against the conversion issues. The
affirmative vote of a majority of the shares outstanding was required in order
to pass the proposal. Of the 32,698,976 shares outstanding, less than 8% were
voted for conversion. Management of the Fund expressed its appreciation for the
support of stockholders on this matter..
- --------------------------------------------------------------------------------
For Withheld
- --------------------------------------------------------------------------------
Nominees to the Board of Trustees
Theodore S.S. Cheng 12,164,473 701,709
David N. Laux 12,162,276 703,906
Alfred P. Miossi 12,160,283 705,899
Robert P. Parker 12,167,323 698,859
Messrs. Pedro-Pablo Kuczynski, Li-Yin Kung, Gregory Kuo-Hua Wang and Daniel K.L.
Chiang, whose terms did not expire in 1998, are the remaining trustees.
- --------------------------------------------------------------------------------
For Against Abstain
- --------------------------------------------------------------------------------
KPMG Peat Marwick as independent
accountants for 1998 12,539,056 282,527 44,599
- --------------------------------------------------------------------------------
For Against Abstain
- --------------------------------------------------------------------------------
Conversion of the Fund from
a closed-end to an open-end
investment company 2,472,433 4,893,590 56,199
Proxies covering 5,443,960 shares, or 42.31% of the shares represented at the
meeting, were not voted on this proposal.
- --------------------------------------------------------------------------------
15
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Trustees and Shareholders of
The R.O.C. Taiwan Fund:
We have reviewed 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 June 30,
1998, and the related consolidated statement of operations, changes in net
assets and financial highlights for the six months then ended. These
consolidated financial statements and financial highlights are the
responsibility of the Trust's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review consists principally of
making inquiries of persons responsible for financial and accounting matters and
applying analytical procedures to financial data. It is substantially less in
scope than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements and financial highlights
referred to above in order for them to be in conformity with generally accepted
accounting principles.
We have previously audited the consolidated statement of changes in net assets
for the year ended December 31, 1997 and the consolidated financial highlights
of The R.O.C. Taiwan Fund for each of the years in the five-year period ended
December 31, 1997 and expressed an unqualified opinion on the consolidated
statement of changes in net assets and financial highlights in our report dated
January 9, 1998, but have not performed any auditing procedures since that date.
KPMG Peat Warick
Taipei, Taiwan
July 22, 1998
16
<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
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
Robert P. Parker, 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.
Telephone: 800-426-5523
U.S. Administrator:
Dewe Rogerson Inc
1440 Broadway, 16th Floor
New York, NY 10018
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.
