[LOGO]
=========================
THE
R. O. C.
TAIWAN FUND
=========================
Annual Report
December 31, 1998
<PAGE>
- --------------------------------------------------------------------------------
Dear Stockholders
- --------------------------------------------------------------------------------
The Fund's net asset value (NAV) per share declined 18.4% in 1998 after
adjustment for dividends. This performance was better than the 21.6% fall in the
Taiwan Stock Exchange Index (TAIEX). During the year, the New Taiwan dollar
appreciated 1.1% against the U.S. dollar.
The aftershocks of the Asian financial turmoil--sparked in mid-1997 by the
devaluation of the Thai baht--and its spread to other emerging markets
reverberated in Taiwan throughout most of a dismal 1998. Still, the Taiwan
market got off to a fast start with a double-digit rise in the TAIEX through
early March. This rally was fueled by record-high buying levels of foreign
institutional investors and reports by many listed computer equipment and
electronics makers of better-than-expected 1997 results. At one point in the
first quarter of 1998, in fact, the technology stock index was up more than 40%.
After this initial rise, technology stocks led the market downward. This came in
response to warnings in March of disappointing first quarter profits by Intel
and Compaq. Several Taiwan technology companies then reported a couple of months
of declining revenues and, at mid-year, cut their annual earnings forecasts. In
addition, the market was unsettled by the continuing regional economic and
political problems, especially the social unrest in Indonesia that led to the
resignation of President Suharto. Most troubling, however, was the spread of the
Asian financial turbulence to Russia, with its government's debt default and
currency devaluation.
The collateral effects of the Asian crisis on Taiwan's own economy also weighed
on investors. And, as economic growth slowed under the impact of a decline in
regional demand for Taiwan products, several companies suffered cash-flow
problems. A series of corporate debt defaults and stock settlement failures late
in the year led the government in November to take over three financial
institutions and put forward a rescue package for the stock market. The
program's centerpiece was the creation of an investment task force to support
stock prices. The TAIEX, however, suffered a double-digit fall in December as
one listed company after another issued reduced earnings forecasts.
The economy held up reasonably well under the circumstances. Although
exports--equivalent to about 40% of gross national product--declined 9%, private
investment enjoyed a double-digit rise and private consumption was fairly robust
for most of the year. Overall growth in 1998 reached about 5%, a considerable
achievement compared to the shrinking economies in most of the region.
The official forecast calls for the economy to grow 5.2% in 1999. The government
has adopted measures to boost spending on public infrastructure projects and aid
the real estate market. In addition, monetary authorities have taken a number of
steps over the last half year to lower interest rates. However, we are
projecting economic growth of between 4.5%-5.0%. Domestic demand, especially
private investment, should not expand as much as in 1998. An export recovery is
also not expected before mid-year and will be too mild to provide any
significant boost to the economy.
The Fund handily beat the market through the first three quarters of 1998 and
also outperformed for the full year. In the fourth quarter, 10 listed
companies--after developing financial problems--were granted permission to have
trading in their shares temporarily suspended. Because of our solid research
team,
<PAGE>
the Fund had none of these stocks in its portfolio at the time they encountered
such troubles. In an effort to support the market during this period, the
investment task force focused primarily on buying banking shares. The Fund
remained underweight in this sector, however, based on our view that financial
companies faced heightened risks. As a result, we underperformed the market in
the fourth quarter.
The financial adversity has undercut market confidence, and a recovery could
still be several months away. But Taiwan's problems are unlike those that have
affected Southeast Asia since mid-1997. Taiwan has a low level of foreign debt
as well as large foreign exchange reserves that increased last year to more than
US$90 billion. Plus, there are no signs of a monetary crisis. In fact, the
current market weakness provides good bargain hunting for the investor since
even listed companies with strong earnings growth have suffered and are now
trading at highly attractive levels.
Continuing our value approach, we are focusing on certain industries that have
bottomed out and face improved prospects. The Fund has thus increased its
holdings in semiconductor stocks from virtually nothing to over 10% of total net
assets. We are also targeting internet-related companies and those benefiting
from increased demand associated with solving Year 2000 ("Y2K") computer
problems. At the same time, the Fund will avoid companies involved in the real
estate industry as well as others with high levels of debt, and companies
deriving significant income from stock investment.
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 4, 1999
- --------------------------------------------------------------------------------
International Investment Trust Co. (IIT), the Fund's adviser, has considered the
impact of the Year 2000 (Y2K) issue and has implemented a plan that is designed
to prevent potential problems from arising in this respect for its own computer
systems and applications. Conversion and testing activities under this plan are
expected to be completed by March 31, 1999. The Fund has been informed by its
other service providers that they are taking similar measures. Although IIT does
not expect the Y2K issue to adversely affect the Fund, IIT cannot guarantee that
its efforts or the efforts of the Fund's other service providers will be
successful.
In addition, the Y2K issue may adversely affect the companies in which the Fund
invests. For example, these "portfolio" companies may incur substantial costs to
correct potential problems and may suffer losses caused by data processing
errors. While IIT and the Fund expect to monitor available information with
regard to any Y2K problems that may be experienced by portfolio companies, it is
impossible to predict whether, or to what extent, such problems would have an
adverse impact on the Fund's investments.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ten Largest Holdings
- --------------------------------------------------------------------------------
Percent of
Company Net Assets
- ---------------------------- ----------
Compal Electronics Inc. 7.24%
- --------------------------------------------------------------------------------
China Motor Corp. 5.91
- --------------------------------------------------------------------------------
Delta Electronics Inc. 5.53
- --------------------------------------------------------------------------------
Yulon Motor Co. 4.92
- --------------------------------------------------------------------------------
Taiwan Semiconductor Manufacturing Co. 4.12
- --------------------------------------------------------------------------------
Formosa Plastics Corp. 3.30
- --------------------------------------------------------------------------------
CMC Magnetics Corp. 3.13
- --------------------------------------------------------------------------------
Cathay Life Insurance Co. 3.11
- --------------------------------------------------------------------------------
Nan Ya Plastics Corp. 3.05
- --------------------------------------------------------------------------------
Systex Corp. 3.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Industry Diversification
- --------------------------------------------------------------------------------
Percent of
Ten Largest Sectors Net Assets
- ---------------------------- ----------
Computers & Office Equipment 19.56%
- --------------------------------------------------------------------------------
Electronics 14.67
- --------------------------------------------------------------------------------
Automobile 10.83
- --------------------------------------------------------------------------------
Semiconductors 8.05
- --------------------------------------------------------------------------------
Plastics 6.35
- --------------------------------------------------------------------------------
Banking 6.25
- --------------------------------------------------------------------------------
Electrical & Machinery 5.71
- --------------------------------------------------------------------------------
Textiles 5.53
- --------------------------------------------------------------------------------
Other Financials 4.30
- --------------------------------------------------------------------------------
Transportation 2.79
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
THE R.O.C. TAIWAN FUND
Consolidated Schedule of Investments / December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS -- 94.41% % of Market Value
Automobile -- 10.83% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
8,000,000 shs. Yulon Motor Co., Ltd. ........... 4.92 $ 2,112,040
7,697,950 China Motor Corp. ............... 5.91 14,567,690
------------
26,679,730
Banking -- 6.25%
- --------------------------------------------------------------------------------
300,000 *Taiwan Business Bank ............ 0.07 166,594
2,600,382 *The First Commercial Bank ....... 1.47 3,630,241
1,400,000 Chang Hwa Commercial Bank ....... 0.74 1,811,131
1,500,000 *Taipei Business Bank ............ 0.53 1,302,972
2,100,000 *United World Chinese
Commercial Bank ................ 0.81 2,006,577
4,579,000 *Hsinchu Bank .................... 1.31 3,238,853
1,772,250 *China Development Bank .......... 1.32 3,243,865
------------
15,400,233
Other Financials -- 4.30%
- --------------------------------------------------------------------------------
2,374,902 Cathay Life Insurance
Co., Ltd. ...................... 3.11 7,662,400
3,840,480 *Polaris Securities Co., Ltd. .... 1.19 2,930,937
------------
10,593,337
Chemical -- 2.28%
- --------------------------------------------------------------------------------
1,000,700 *Eternal Chemical Co., Ltd. ...... 0.54 1,334,929
1,450,000 *Yung Chi Paint & Varnish
Mfg. Co., Ltd. ................. 1.46 3,598,685
846,000 *Maywufa Company Ltd. ............ 0.28 695,508
------------
5,629,122
Computers and Office Equipment -- 19.56%
- --------------------------------------------------------------------------------
1,000,000 *Askey Computer Corp. ............ 0.43 1,067,196
1,826,450 *Mitac International Corp. ....... 1.10 2,719,787
2,272,000 *Kinpo Electronics Inc. .......... 1.29 3,178,855
5,571,800 *Chuntex Electronic Co., Ltd. .... 1.87 4,597,936
1,303,285 *Inventec Corporation ............ 2.10 5,175,296
4,240,000 *Delta Electronics Inc. .......... 5.53 13,614,196
5,473,526 *Compal Electronics Inc. ......... 7.24 17,829,628
------------
48,182,894
Construction -- 0.67%
- --------------------------------------------------------------------------------
1,000,156 *Hung Sheng Construction Ltd. .... 0.45 1,117,007
847,200 Abtron Group Co., Ltd. .......... 0.22 533,541
------------
1,650,548
See accompanying notes to consolidated financial statements.
4
<PAGE>
Schedule of Investments (Cont'd.)
% of MarketValue
Electrical & Machinery -- 5.71% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
4,200,000 shs. *Tatung Co., Ltd. ................ 1.63 $ 4,013,154
1,250,400 *Phoenixtec Power Co., Ltd. ...... 1.00 2,463,250
1,950,760 *Lee Chi Enterprise Co., Ltd. .... 1.49 3,665,605
3,500,000 *Pacific Electric Wire &
Cable Co., Ltd. ................ 0.86 2,117,330
437,000 *Rexon Industrial Corp. Ltd. ..... 0.32 779,534
723,800 GFC., Ltd. ...................... 0.28 693,846
428,000 *Sampo Corp. ..................... 0.14 341,242
------------
14,073,961
Electronics -- 14.67%
- --------------------------------------------------------------------------------
549,000 *Sunplus Technology Co., Ltd. .... 0.84 2,069,352
315,160 *Enlight Corp. ................... 0.30 743,071
1,000,000 *Yageo Corp. ..................... 0.52 1,290,563
950,000 *Hon Hai Precision Ind.
Co., Ltd. ...................... 2.13 5,246,014
197,000 *Hua Jung Component Co., Ltd. .... 0.12 305,578
988,000 *Dialer & Business Electronics
Co., Ltd. ...................... 0.35 873,550
302,769 *Synnex Technology International
Corp. .......................... 0.55 1,343,177
500,000 Taiwan Liteon Electronic
Co., Ltd. ...................... 0.40 992,741
240,000 *Arima Computer Corp. ............ 0.51 1,250,853
1,100,000 *Teapo Electronic Corp. .......... 0.64 1,569,771
1,485,000 *Sirtec International Co., Ltd. .. 0.94 2,303,468
3,550,000 *CMC Magnetics Corp. ............. 3.13 7,709,251
812,161 *Ritek Ltd. ...................... 1.24 3,048,690
2,799,000 *Systex Corp. .................... 3.00 7,380,871
------------
36,126,950
Glass -- 0.36%
- --------------------------------------------------------------------------------
918,500 Taiwan Glass Industrial Corp. ... 0.36 883,337
------------
883,337
Plastics -- 6.35%
- --------------------------------------------------------------------------------
5,600,473 *Formosa Plastics Corp. .......... 3.30 8,131,232
5,842,384 *Nan Ya Plastics Corp. ........... 3.05 7,521,838
------------
15,653,070
Paper -- 1.68%
- --------------------------------------------------------------------------------
1,499,000 *Shihlin Paper Corp. ............. 1.68 4,138,829
------------
4,138,829
Rubber -- 0.86%
- --------------------------------------------------------------------------------
1,700,000 *China Synthetic Rubber Corp. .... 0.86 2,109,574
------------
2,109,574
See accompanying notes to consolidated financial statements.
5
<PAGE>
The R.O.C. Taiwan Fund
% of MarketValue
Semiconductors -- 8.05% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
1,200,000 shs. *Advanced Semiconductor
Engineering Inc. ............... 0.82 $ 2,010,300
885,000 *United Microelectronics Corp. ... 0.45 1,106,456
2,400,000 *Winbond Electronics Corp. ....... 1.03 2,538,934
4,250,000 *Mosel Vitelic Inc. .............. 1.63 4,021,375
4,604,500 *Taiwan Semiconductor
Manufacturing Co., Ltd. ........ 4.12 10,142,070
------------
19,819,135
Textiles -- 5.53%
- --------------------------------------------------------------------------------
3,000,113 Far Eastern Textile Co., Ltd. ... 0.99 2,447,818
2,380,750 *Kwong Fong Industries Corp. ..... 0.28 686,883
7,636,000 *Tainan Spinning Co., Ltd. ....... 1.18 2,901,936
4,823,000 *Yi Jinn Industrial Co., Ltd. .... 1.23 3,037,380
5,356,000 *Ruentex Industries Ltd. ......... 1.85 4,552,783
------------
13,626,800
Transportation -- 2.79%
- --------------------------------------------------------------------------------
4,053,000 Evergreen Marine Corp.
(Taiwan) Ltd. .................. 1.44 3,545,778
3,073,000 *Uniglory Marine Corp. ........... 0.97 2,392,886
1,310,400 *Far Eastern Air Transport
Corp. .......................... 0.38 935,013
------------
6,873,677
Others -- 4.52%
- --------------------------------------------------------------------------------
1,028,927 *Pou Chen Corp. .................. 1.00 2,473,843
500,000 *Kent World Ltd. ................. 0.20 490,166
230,000 *National Petroleum Co., Ltd. .... 0.09 214,060
1,177,516 *Taiwan Secom Co., Ltd. .......... 0.92 2,264,875
2,713,000 *CTCI Corporation ................ 1.58 3,888,459
912,000 Giant Manufacturing Co., Ltd. ... 0.73 1,796,612
949 *Miscellaneous securities. ....... 0.00 389
------------
11,128,404
TOTAL COMMON STOCKS (COST $249,891,567) ............. $232,569,601
------------
* Non-income producing; these stocks did not pay a cash dividend during the
year.
See accompanying notes to consolidated financial statements.
6
<PAGE>
Schedule of Investments (Cont'd.)
SHORT-TERM INVESTMENTS-- 6.04% % of Market Value
Commercial Paper -- 6.04% Net Assets (U.S. Dollars)
- --------------------------------------------------------------------------------
Principal
Amount Issuer (Guarantor)
- ---------- ------------------
$ 310,231 Sung-Tso Investment Co., Ltd
(Bank SinoPac), 4.60%,
Due 01/05/99 ................... 0.13 $ 310,076
775,579 Tai-Hua Oil Co., Ltd. (Grand
Commercial Bank), 4.60%,
Due 01/05/99 ................... 0.31 775,188
1,085,810 Barits Securities Co., Ltd.
(Grand Commercial Bank),
4.90%, Due 01/05/99 ............ 0.44 1,085,229
1,240,926 Hsiao Sung Electronic
(Taiwan) Co. (International
Bills Finance Company),
4.60%, Due 01/05/99 ............ 0.50 1,240,303
620,463 Pacific Technology Co., Ltd.
(International Bills Finance
Company), 4.50%, Due 01/05/99 .. 0.25 620,158
930,694 Concord Securities Corp.
(Bank SinoPac), 4.55%,
Due 01/06/99 ................... 0.38 930,116
620,463 Tungya Transportation &
Terminal (Bank SinoPac),
4.55%, Due 01/06/99 ............ 0.25 620,077
930,694 Tung-Chan Corp. (Chiao Tung
Bank), 4.90%, Due 01/07/99 .... 0.38 929,947
1,551,157 Lung-Hsien International
Co., Ltd. (Chase Manhattan
Bank, N.A.), 4.90%,
Due 01/07/99 ................... 0.63 1,549,910
1,551,157 Pacific Electric Wire
& Cable Co. (China United
Trust & Investment),
4.90%, Due 01/08/99 ............ 0.63 1,549,702
310,231 Kuang Tai Metal Corp.
(Grand Commercial Bank)
5.00%, Due 01/08/99 ............ 0.13 309,935
310,231 Wang-Chia Trading Co., Ltd.
(Grand Commercial Bank),
5.00%, Due 01/08/99 ............ 0.13 309,935
1,551,157 Tainan Spinning Co., Ltd
(Shanghai Commercial & Savings
Bank), 4.55%, Due 01/08/99 ..... 0.63 1,549,811
930,694 Grand Pacific Securities
Investment (The Chinese Bank),
4.90%, Due 01/08/99 ............ 0.38 929,821
620,463 Huang Pu Construction Co., Ltd.
(The Chinese Bank),
4.90%, Due 01/08/99 ............ 0.25 619,881
1,551,157 Tao-Chi Investment Corp.
(International Bills Finance
Company), 4.90%, Due 01/08/99 .. 0.63 1,549,708
------------
TOTAL SHORT-TERM INVESTMENTS (AMORTIZED
COST $14,879,797) 14,879,797
------------
TOTAL INVESTMENTS IN SECURITIES AT MARKET VALUE
(COST $264,771,364) 100.45 247,449,398
LIABILITIES (NET OF OTHER ASSETS) (0.45) (1,101,842)
------ ------------
NET ASSETS 100.00 $246,347,556
====== ============
See accompanying notes to consolidated financial statements.
7
<PAGE>
- --------------------------------------------------------------------------------
THE R.O.C. TAIWAN FUND
Consolidated Statement of Assets and Liabilities
December 31, 1998 (Expressed in US Dollars)
- --------------------------------------------------------------------------------
Assets
Investments in securities at market
value (Notes 2B, 3 and 6):
Common stocks (cost-- $249,891,567) .......................... $232,569,601
Short-term investments (amortized cost-- $14,879,797) ........ 14,879,797
------------
Total investments in securities
at market value (cost-- $264,771,364) ................... 247,449,398
Cash ........................................................... 1,355,781
Receivable for sale of investments ............................. 496,577
Dividends and interest receivable .............................. 6,000
Prepaid expense ................................................ 22,250
Other receivables .............................................. 1,916
------------
Total assets 249,331,922
------------
Liabilities
Payable for securities purchased ............................... 2,417,260
Management fee payable (Note 4) ................................ 293,544
Custodian fee payable (Note 5) ................................. 33,720
Accrued Republic of China taxes (Note 2) ....................... 29,983
Other payables ................................................. 209,859
------------
Total liabilities 2,984,366
------------
Net assets ..................................................... $246,347,556
============
Components of net assets (Note 2)
Par value of shares of beneficial interest (Note 7) ............ $ 326,990
Additional paid-in capital ..................................... 313,789,368
Accumulated net investment loss ................................ (1,702,333)
Accumulated realized loss on investments ....................... (21,498,672)
Unrealized depreciation on investments ......................... (17,321,966)
Cumulative translation adjustment .............................. (27,245,831)
------------
Net assets ..................................................... $246,347,556
============
Net asset value per share (32,698,976 shares
issued and outstanding) ...................................... $ 7.53
============
See accompanying notes to consolidated financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
THE R.O.C. TAIWAN FUND
Consolidated Statement of Operations
For the Year ended December 31, 1998 (Expressed in US Dollars)
- --------------------------------------------------------------------------------
Investment income
Dividends .................................................. $ 1,196,007
Interest ................................................... 2,231,292
------------
3,427,299
Republic of China Taxes (Note 2) ............................. 2,024,206
------------
1,403,093
------------
Expenses
Management fee (Note 4) .................................... 3,805,312
Custodian fee (Note 5) ..................................... 438,888
Professional fees .......................................... 322,477
Administrative fee ......................................... 100,640
Insurance expenses ......................................... 82,745
Trustee fees ............................................... 65,250
Other expenses ............................................. 298,990
------------
5,114,302
------------
Net investment loss .......................................... (3,711,209)
------------
Net realized and unrealized loss on investments
and foreign currencies (Note 2 & 6)
Net realized loss on:
investments (excluding short term investments) ........... (8,914,095)
foreign currency transactions ............................ (247,524)
------------
Net realized loss on investments and foreign
currency transactions .................................... (9,161,619)
Net increase (decrease) in unrealized appreciation on:
investments (excluding short-term
investments) ........................................... (46,950,003)
translation of assets and liabilities in
foreign currencies ..................................... 2,309,163
------------
Net realized and unrealized loss from investments
and foreign currencies ................................... (53,802,459)
------------
Net decrease in net assets resulting from operations ....... $(57,513,668)
============
See accompanying notes to consolidated financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
THE R.O.C. TAIWAN FUND
Consolidated Statement of Changes in Net Assets
For the Years ended December 31, 1998 and 1997 (Expressed in US Dollars)
- --------------------------------------------------------------------------------
1998 1997
------------ -------------
Net (decrease) increase in net assets resulting
from operations
Net investment loss ............................ $ (3,711,209) $ (5,303,994)
Net realized gain (loss) on investments
and foreign currency transactions ............ (9,161,619) 129,107,327
Net (decrease) in unrealized appreciation on
investments .................................. (46,950,003) (19,295,468)
Net increase (decrease) in unrealized
appreciation on translation of assets
and liabilities in foreign currencies ........ 2,309,163 (62,331,321)
------------ ------------
Net (decrease) increase in net assets
resulting from operations .................... (57,513,668) 42,176,544
------------ ------------
Share transactions
Cost of repurchasing shares (Note 7) ........... -- (13,340,943)
------------ ------------
Distributions to Shareholders from (Note 2)
Capital ........................................ (4,243,980) --
Net investment income .......................... (2,229,516) (12,708,377)
Net realized gain on investments ............... (3,009,207) (97,526,443)
------------ ------------
Total distributions ............................ (9,482,703) (110,234,820)
------------ ------------
Decrease in net assets ........................... (66,996,371) (81,399,219)
Net assets, beginning of year .................... 313,343,927 394,743,146
------------ ------------
Net assets, end of year .......................... $246,347,556 $313,343,927
============ ============
See accompanying notes to consolidated financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
THE R.O.C. TAIWAN FUND
Consolidated Financial Highlights
(Expressed in US Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of year ................ 9.58 11.67 9.30 13.12 10.62
Net investment loss ............................... (0.11) (0.16) (0.12) (0.15) (0.09)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions .................................... (1.73) 3.20 2.57 (3.35) 2.66
Net increase (decrease) in unrealized
appreciation on translation of foreign
currencies ...................................... 0.08 (1.88) (0.08) (0.35) (0.07)
------- ------- ------- ------- -------
Total from investment operations .............. (1.76) 1.16 2.37 (3.85) 2.50
Net effect of share transactions -- 0.09 -- 0.03 --
Distributions to Shareholders from:
Capital ........................................... (0.13) -- -- -- --
Net investment income ............................. (0.07) (0.39) -- -- --
Net realized gain on investments .................. (0.09) (2.95) -- -- --
------- ------- ------- ------- -------
Total distributions* ............................ (0.29) (3.34) -- -- --
------- ------- ------- ------- -------
Net asset value, end of year ........................ 7.53 9.58 11.67 9.30 13.12
======= ======= ======= ======= =======
Per share market price, end of year ................. 6.19 8.13 10.13 10.50 11.88
Total investment return (%):
Based on the Trust's market price ................. (20.31) 10.55 (3.52) (11.62) (13.60)
Based on the Trust's net asset value .............. (18.42) 9.41 25.48 (29.12) 23.54
Ratios and supplemental data:
Net assets, end of year (in thousands) ............ 246,348 313,344 394,743 314,532 365,661
Ratio of expenses to average net assets ........... 1.77 1.51 1.75 1.98 1.99
Ratio of net investment loss to average
net assets (%) .................................. (1.28) (1.13) (1.14) (1.38) (0.84)
Portfolio turnover ratio (%) ...................... 133 106 148 81 97
</TABLE>
* See Note 2 for information concerning the Trust's distribution policy.
See accompanying notes to consolidated financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
THE R.O.C. TAIWAN FUND
Notes to Consolidated Financial Statements/December 31, 1998
(Expressed in US Dollars)
- --------------------------------------------------------------------------------
Note 1 -- Organization and Acquisitionof 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 ("IIT") acquired the entire beneficial interest
in the assets constituting the Fund.
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 cost, 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 for financial reporting purposes using the average
cost method for the cost of investments. For federal income tax purposes,
realized gains and losses on security transactions are determined using the
first-in-first-out method. During 1998, the Trust generated a net capital loss
of $15,042,768. This loss may be used to offset any future capital gains
generated by the Trust and, if unused, will expire on December 31, 2006.
E -- Foreign currency translation--Substantially all of the Trust's income is
earned, and its expenses are largely paid, in New Taiwan Dollars ("NT$"). 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, 1998, this rate was approximately NT$32.234 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 of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
12
<PAGE>
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 recognition of gains on the disposition of passive
foreign investment company ("PFIC") shares during 1998 as ordinary income for
U.S. federal income tax purposes as well as the treatment of the Trust's foreign
currency and net operating losses 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, 1998. The 1998 distribution from
net investment income of $0.07 per share and from net realized gains of $0.09
per share, represents undistributed tax basis income generated by the Trust
during the fiscal year ended December 31, 1997. The distribution from capital of
$0.13 per share should be treated as a return of capital distribution for
federal 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 $1,136,530 for the
twelve months ended December 31, 1998.
H -- Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Note 3 -- Investment Considerations
- --------------------------------------------------------------------------------
Because the Trust concentrates its investments in publicly traded equity and
debt securities issued by R.O.C. corporations, its portfolio involves
considerations not typically associated with investing in U.S. securities. In
addition, the Trust is more susceptible to factors adversely affecting the
R.O.C. economy than a fund not concentrated in these issuers to the same extent.
Since the Trust's investment securities are primarily denominated in New Taiwan
Dollars, changes in the relationship of the New Taiwan Dollar to the U.S. Dollar
may also significantly affect the value of the investments and the earnings of
the Trust.
Note 4 -- Investment Management
- --------------------------------------------------------------------------------
Pursuant to an investment contract (the "Investment Contract"), IIT (the
"Manager"), an R.O.C. corporation, is responsible, among other things, for
investing and managing the assets of the Trust and administering the Trust's
affairs. The Trust pays the Manager a fee in NT$, 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$12 billion.
Note 5 -- Custodian
- --------------------------------------------------------------------------------
Pursuant to the Investment Contract, the Central Trust of China ("CTC") serves
as custodian of the assets of the Trust held in the R.O.C. CTC owns
approximately 8% of the outstanding capital stock
13
<PAGE>
of IIT. The Trust pays the custodian a monthly fee in NT$ 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 $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, 1998, included approximately
$342,000,000 for stock purchases and approximately $377,000,000 for stock sales,
respectively.
At December 31, 1998, the cost of investments, excluding bonds and short-term
investments, for U.S. federal income tax purposes was approximately
$246,000,000. At December 31, 1998, for U.S. federal income tax purposes, the
aggregate gross unrealized appreciation on these investments was approximately
$13,000,000 and the aggregate gross unrealized depreciation on these investments
was approximately $27,000,000 or a net unrealized depreciation of approximately
$14,000,000.
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. At December 31, 1998, 32,698,976 shares
were outstanding.
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%.
- --------------------------------------------------------------------------------
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>
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,
1998, 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 and financial
highlights. Our procedures included the physical examination of short-term
investments owned as of December 31, 1998, and confirmation of securities owned
as of December 31, 1998, 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, 1998, 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
-------------------
Taipei, Taiwan
January 18, 1999
15
<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.
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.
