<PAGE>
THE TAIWAN EQUITY FUND, INC.
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GENERAL INFORMATION
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THE FUND
The Taiwan Equity Fund, Inc. (the "Fund") is a non-diversified, closed-end
management investment company. Its primary investment objective is capital
appreciation, which it seeks through investment primarily in equity securities
issued by companies located in or deriving revenue from the Republic of China.
Daiwa Asset Management (H.K.) Ltd. is the Fund's Investment Manager. National
Capital Management Corp. of Taiwan is the Fund's Investment Adviser.
SHAREHOLDER INFORMATION
The Fund's shares are listed on the New York Stock Exchange ("NYSE") and the
Stock Exchange of Singapore ("SES"). The Fund understands that its shares may
trade periodically on certain exchanges other than the NYSE or the SES, but the
Fund has not listed its shares on those other exchanges and does not encourage
trading on those exchanges.
The Fund's NYSE trading symbol is "TYW". Weekly comparative net asset value
(NAV) and market price information about the Fund is published each Monday in
THE WALL STREET JOURNAL, each Sunday in THE NEW YORK TIMES, and each Saturday in
BARRON'S, and also in many other newspapers.
INQUIRIES
It is the policy of the Fund to respond to inquiries about its portfolio
holdings and performance. Such inquiries should be directed to the Fund's
Manager in Hong Kong at (011-8522) 521-0166, or the Fund's Administrator, Daiwa
Securities Trust Company, at (800) 933-3440 or (201) 915-3020. Inquiries
concerning your share account should be directed to State Street Bank and Trust
Company (the "Plan Agent") at the number noted below. All written inquiries
should be directed to the Fund, c/o Daiwa Securities Trust Company, One
Evertrust Plaza, 9th Floor, Jersey City, New Jersey 07302.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
A Dividend Reinvestment and Cash Purchase Plan (the "Plan") is available to
provide Shareholders with automatic reinvestment of dividends and capital gain
distributions in additional Fund shares. The Plan also allows you to make
optional annual cash investments in the Fund's shares through the Plan Agent. A
brochure fully describing the Plan's terms and conditions is available from the
Plan Agent by calling (800) 426-5523 or by writing to State Street Bank and
Trust Company, c/o The Taiwan Equity Fund, Inc., P.O. Box 8200, Boston, MA
02266-8200.
A brief summary of the material aspects of the Plan follows:
WHO CAN PARTICIPATE IN THE PLAN? If you wish to participate and your shares
are held in your name, you may elect to become a direct participant in the Plan
by completing and mailing the Enrollment Authorization form on the back cover of
the Dividend Reinvestment and Cash Purchase Plan brochure available from the
Plan Agent as noted above. However, if your shares are held in the name of a
brokerage firm, bank or nominee, you should instruct your nominee to participate
in the Plan on your behalf. If your nominee is unable to participate in the Plan
for you, you should request that your shares be registered in your name, so that
you may participate directly in the Plan. Please contact the Plan agent if you
would like more information about how to change your registration so that you
may participate in the Plan.
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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GENERAL INFORMATION (CONCLUDED)
- --------------------------------------------------------------------------------
MAY I WITHDRAW FROM THE PLAN? If your shares are held in your name and you
wish to receive all dividends and capital gain distributions in cash rather than
in shares, you may withdraw from the Plan without penalty at any time by
contacting the Plan Agent. If your shares are held in nominee name, you should
be able to withdraw from the plan without penalty at any time by sending written
notice to your nominee. If you withdraw, you will receive a share certificate
for all full shares or, if you wish, the Plan Agent will sell your shares and
send you the proceeds, after the deduction of brokerage commissions. The Plan
Agent will convert any fractional shares to cash at the then-current market
price and send you a check for the proceeds.
HOW ARE THE DIVIDENDS AND DISTRIBUTIONS REINVESTED? If the market price of
the Fund's shares on the payment date should equal or exceed their net asset
value per share, the Fund will issue new shares to you at the higher of net
asset value or 95% of the then-current market price. If the market price is
lower than net asset value per share, the Fund will issue new shares to you at
the market price. If the dividends or distributions are declared and payable as
cash only, you will receive shares purchased for you by the Plan Agent on the
NYSE or otherwise on the open market to the extent available.
WHAT IS THE CASH PURCHASE FEATURE? The Plan also allows shareholders to
make optional cash investments in Fund shares annually through the Plan Agent in
any amount from $100 to $3,000. The Plan Agent will purchase shares for you on
the NYSE or otherwise on the open market on or about February 15th of each year.
Plan participants should send in voluntary cash payments to be received by the
Plan Agent approximately ten days before the purchase date. The Plan Agent will
return any cash payments received more than thirty days prior to the purchase
date. You may withdraw a voluntary cash payment by written notice, if the notice
is received by the Plan Agent not less than two business days before the
purchase date.
IS THERE A COST TO PARTICIPATE? There are no Plan charges or brokerage
charges for shares issued directly by the Fund. However, each participant will
pay a pro rata portion of brokerage commissions for shares purchased on the NYSE
or otherwise on the open market by the Plan Agent. For purchases from voluntary
cash payments, participants must pay a nominal service fee of $0.75 for each
investment in addition to a pro rata portion of the brokerage commission.
WHAT ARE THE TAX IMPLICATIONS? The automatic reinvestment of dividends and
distributions does not relieve you of any income tax which may be payable (or
required to be withheld) on such dividends and distributions. In addition, the
Plan Agent will reinvest dividends for foreign participants and for any
participants subject to federal backup withholding after the deduction of the
amounts required to be withheld.
PLEASE NOTE THAT, IF YOU PARTICIPATE IN THE PLAN THROUGH A BROKERAGE
ACCOUNT, YOU MAY NOT BE ABLE TO CONTINUE AS A PARTICIPANT IF YOU TRANSFER THOSE
SHARES TO ANOTHER BROKER. CONTACT YOUR BROKER OR NOMINEE OR THE PLAN AGENT TO
ASCERTAIN WHAT IS THE BEST ARRANGEMENT FOR YOU TO PARTICIPATE IN THE PLAN.
2
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THE TAIWAN EQUITY FUND, INC.
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January 22, 1997
DEAR SHAREHOLDERS:
We are pleased to present the Annual Report of The Taiwan Equity Fund, Inc.
(the "Fund") for the year ended December 31, 1996.
STOCK MARKET REVIEW
The Taiwan stock market as represented by the Taiwan Weighted Index ("TWI")
rose from 5,174 to 6,934 during 1996, a rise of 34.02%. At the same time, the
New Taiwan Dollar ("TWD") declined against the U.S. Dollar ("USD") from TWD
27.265 to 27.491, a depreciation of 0.83%. Consequently, the TWI gained 32.91%
in USD terms during the period.
Looking back on 1996, Taiwan's Legislative Yuan passed a capital gains tax
bill in January which, coupled with other factors, weakened the market even
more. Fortunately, the ruling Kuomintang Party (KMT) forced a delay in the
implementation of the stock profit tax for at least two years. In the first
quarter, military threats by the People's Republic of China ("PRC") and an
economy mired in recession combined to hold the TWI below 5,000 points. By
March, the Taiwanese government, worried about unstable political relations
between Taiwan and the PRC and its impact on domestic economic development,
adopted several measures, including relaxation of controls on capital flows by
foreign institutions, raising the limitation on foreign investment from 15.0% to
20.0%, allowing foreign individuals to buy local Taiwan shares, cutting interest
rates, and increasing stock market investment ceilings for banks from 15.0% to
20.0% of their net worth. Local and foreign institutions took advantage of
weakness at the lower levels by increasing their positions. Consequently, the
market was well-supported at the 4,700 level. In addition, in order to prevent
the market from being impacted by non-economic factors (i.e., the PRC's military
threat), the government set up a stabilization fund and pumped TWD 60 billion
into the market in late March. Furthermore, investor confidence was boosted by
strong U.S. military support for Taiwan (including a nearby presence of two U.S.
aircraft carriers). After the Taiwanese presidential election, the relaxation of
cross-strait tensions triggered buying interest and the market jumped to 6,000
points by mid-April.
Although facing profit-taking pressure after its surge in April, the
Taiwanese market was well supported at around the 6,000 level as a result of the
Central Bank's loosening of monetary policy and of increased foreign capital
inflow. In addition, signs of easing in cross-strait tensions, signified by
friendly talks between Taiwan and the PRC, also enhanced market sentiment. At
the same time, a large volume of domestic short-term time deposits flowed into
the market following reduced deposit rates. In June, it was announced that
Taiwan would be included in regional indices (broadly used by global equity fund
managers) starting in September 1996. As Taiwan's weights in these indices were
much higher than expected, both foreign and local investors continued to buy
shares and this, in turn, pushed the market even higher. The market finished the
first half of 1996 by rising 26.8%.
After its surge in the first half, the market moved in a range between 6,000
and 6,500 for several months. Factors hindering the market's rise during this
time period included weak economic figures, gloomy prospects for the
semiconductor sector, and the stagnation of Taipei-Beijing relations. Later, the
Central Bank's 25 basis point cut in the rediscount rate, along with a proposal
to allow government-controlled pension funds to increase their equity holdings,
further aided by strong sales and earnings growth at electronics companies,
boosted
3
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THE TAIWAN EQUITY FUND, INC.
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investor confidence and pushed the market higher. Despite fund redemption
pressure from both domestic and overseas investors during November and December,
the market rose steadily as a result of year-end portfolio "window dressing" by
domestic institutional investors and of abundant market liquidity. The market
gradually moved higher and closed 1996 at 6,934.
ECONOMIC REVIEW AND OUTLOOK
TRADE
Export growth rates tumbled across Asia in 1996. This was hardly surprising,
given the heady export growth seen in 1995 when the region was growing at an
average rate of nearly 7.0%. Declining import demand in Asia, as economies
slowed, and softer demand in the Group of Seven (G7) countries led to slower
growth in 1996. In addition, cyclical commodity prices began to decline as
oversupply emerged in global industries such as semiconductors and
petrochemicals, also contributing to a decline in export growth rates in Asia.
In Taiwan, export growth came in at a low 4.9% year-on-year ("YOY") in 1996,
as compared to 20.0% YOY in 1995. Import growth was similarly slow, recording
- -1.2% YOY, down from 21.3% YOY in 1995. The trade surplus increased from USD 8.1
billion to USD 14.0 billion. Import growth fell as the economy continued to slow
and the demand for foreign consumer and capital goods receded. In value terms,
Taiwanese exports performed relatively robustly in 1996 when compared with the
rest of the region. The value of exports to the U.S. started to tail off in the
second half of 1996 as did exports to Japan. Exports to Hong Kong, however,
continued to increase throughout 1996.
For 1997, prospects look better due to stronger global economic growth. The
International Monetary Fund (IMF) forecasts that the global economy will expand
by 3.2% in 1997, up from an estimated 2.4% growth in 1996. Global growth will
strengthen foreign demand for Taiwanese exports, especially from the PRC and
Hong Kong. Import growth can be expected to pick up with faster domestic
economic growth, in particular for consumer expenditures. The trade surplus
should remain roughly the same, estimated at USD 13.5 billion.
INFLATION
The Consumer Price Index ("CPI") held rather steady in 1996. The CPI rose
3.1% in 1996, well below the government's 3.5% target. Except for a 5.0%
annualized jump in August following two consecutive devastating typhoons, the
CPI for all other months came in at less than 3.0%. Continued decline in
non-food inflation reflected demand pressure. The Wholesale Price Index ("WPI")
contracted 0.6% in 1996 as a result of lower import price inflation in the
second half of the year. As for 1997, a more substantial economic recovery and
the rise of oil prices may drive both the CPI and the WPI up slightly. But
import prices are expected to remain weak as the USD stays strong into 1997.
This may dampen the impact of higher oil prices and offset inflation. As oil
prices may begin to recede in the second half of 1997, the Fund's management
expects that inflation will not be much of a concern after excluding
extraordinary factors, such as potential typhoon damage. The CPI is predicted to
increase at 3.2% YOY in 1997.
EXCHANGE RATE
Since early 1996, the PRC's saber-rattling military maneuvers and Taiwan's
first presidential election put the TWD under pressure as it depreciated from
TWD 27.2 to 27.8 per USD. To stabilize the exchange rate and prevent capital
flight, Taiwan's Central Bank intervened to hold the TWD at 27.5 to the USD.
Since June, the TWD has hovered in the area of TWD 27.5 per USD.
4
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THE TAIWAN EQUITY FUND, INC.
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The Fund's management forecasts a slight depreciation in the TWD in 1997 due
to Taiwan's low interest rates and the strengthening USD against major
currencies. Additionally, Taiwan's Central Bank may maintain a policy aimed at
preventing excess appreciation of the TWD so as not to retard the economic
recovery. Under these circumstances, TWD is forecast to trade between 27.0 and
28.2 per USD in 1997.
MONEY SUPPLY, INTEREST RATES AND MONETARY POLICY
The M2 money supply grew at slightly less than 9.0% YOY throughout 1996,
finishing at around 8.6% YOY. M1b was flat in value terms, although it rose in
percentage terms because of the low base of comparison. This was mainly due to
weak demand for capital amid economic slowdown and political uncertainty. Also,
banks turned more conservative in lending money, under pressure from excessive
bad debt levels as a percentage of total assets.
Monetary policy was geared directly towards re-igniting economic growth. The
Central Bank exercised a series of measures to lower interest rates over the
past year. It lowered the required reserve deposit ratio twice, reducing the
average reserve rate from 10.0% to 9.3%. The prime interest rate decreased from
7.8% to 7.5%. The demand side remained quite sluggish, causing an over-supply of
credit which forced short-term interest rates to fall below 5.0% in October,
reaching a ten-year low. Low deposit returns and cheaper funding costs drove
investors to pour money into stocks throughout the second half of 1996. Looking
forward, the Fund's management believes that economic growth is unlikely to
increase that strongly and no inflation pressure is foreseen. Taiwan's Central
Bank is not expected to change its loose-credit policy in the first half of
1997. Furthermore, the Central Bank may gradually adjust downward reserve
requirement rates, as was proposed by a study which focused on ways to
restructure the reserve requirement system for Taiwan's banking industry.
Nevertheless, the Central Bank could be expected, at the same time, to exercise
open market operations in order to maintain a moderate money supply.
ECONOMIC GROWTH
The Taiwanese economy suffered from military threats and political
uncertainty in the first half of 1996 surrounding the March presidential
election and the May inauguration. Real Gross Domestic Product ("GDP") growth
improved quarter by quarter and was estimated to have averaged 5.5% over the
course of last year, well below the government's forecast at the beginning of
1996. The poor performance was caused by sluggish private capital investment and
insignificant increases in public spending. Private capital investment expanded
just 4.6% in 1996, the lowest rate in seven years, because of a deteriorating
investment environment due to such factors as land acquisition problems,
environmental protests, and labor, water and electricity shortages. Government
investment declined by 2.5% in 1996, down from 3.8% growth in 1995, dragging
down overall economic growth.
The Fund's management forecasts that the 1997 GDP growth will outpace that
of 1996. Growth forecasts by government and private institutions range from 6.2%
to 6.7%. Actual GDP growth will depend on several factors. Among them, the most
important are public and private investment. In 1997, private investment is
expected to grow an estimated 10.0%, up from 4.6% in 1996. Government investment
is expected to grow an estimated 8.0% in 1997, as priority is placed on removing
investment obstacles. The government is addressing the maladies in public
construction by restructuring the public bidding process and by instituting an
island-wide anti-corruption, anti-graft campaign. The long-term effects on
economic development should be positive.
POLITICAL REVIEW AND OUTLOOK
Taiwanese politics entered a new era in 1996 with the first election of a
president by direct popular vote. Aiming to intimidate Taiwanese voters in the
weeks leading up to the March presidential election, the PRC
5
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THE TAIWAN EQUITY FUND, INC.
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conducted missile tests in close proximity to Taiwan. In spite of this, the
incumbent President Lee won a sweeping victory with 54% of the vote in the
election. The overwhelming triumph of President Lee indicates that the PRC's
military exercises failed to bring about transformation in Taiwan's cross-strait
policies, indeed strengthening Taipei's resolve not to succumb to Beijing's
pressure. Despite a lack of response by Beijing to President Lee's offer to
visit Beijing for peace talks, both sides have acted in a more friendly manner.
With Hong Kong's handover to PRC control looming, Beijing is using direct
shipping link proposals to force Taipei to make concessions. In the meantime,
President Lee has been pushing economic and social measures which are designed
to improve cross-strait relations, while continuing to gain space for Taiwan
through pragmatic diplomacy. The political spotlight will focus on Taiwan after
the PRC resumes sovereignty over Hong Kong on July 1, 1997. While the Fund's
management believes that ties between the PRC and Taiwan will develop in a
positive fashion, real progress may not take place until after the 15th Chinese
Communist Party Congress in late 1997.
On the domestic front, the government of Taiwan, aware that it must have an
attractive investment environment in order to both draw the attention of
international companies and retain domestic investment, has made efforts to
crack down on organized crime and corruption in order to improve its own
efficiency. The government has focused on retaining local capital in order to
strengthen the domestic economy and to insulate against economic dependence on
the PRC. Furthermore, recent action by the government to form a consensus among
the different political parties in terms of prioritizing national development
may result in improved legislative efficiency and enable the government to
provide the fiscal stimulus which it failed to deliver in 1996. However, with
local elections to be held in late 1997, the Fund's management looks for
political uncertainty to increase again by mid-1997, especially if electoral
gains by the main opposition Democratic Progressive Party provoke a mainland
response at a sensitive time on the PRC's political calendar. In conclusion,
taking a long-term view, the Fund's management is optimistic that political
influence on the stock market will generally be more benevolent.
STOCK MARKET OUTLOOK
The TWI has the potential to move higher in the first half of 1997, possibly
reaching 7,800 to 8,000 points, which is a price-to-earnings ratio of 30 times.
Taiwan's Central Bank is not expected to tighten monetary policy due to the
weaker-than-expected economy. Domestic liquidity should remain high and provide
strong support for the stock market. Strong buying could emerge if the TWI
approached 6,500 points. In addition, the following four factors should also
provide market support: (1) most foreign investors are still underweighted in
Taiwan, giving the market good downside protection; (2) improved business
sentiment in light of more stable relations with the PRC and increasing demand
from the PRC may help Taiwan's economy; (3) the Taiwanese government's recent
relaxation of equity market investment regulations for several state-managed
funds, including the civil servants' pension, insurance and postal savings
reserve funds, could lead to an injection of additional funds into the market;
and (4) TWI futures have been trading on both The Chicago Mercantile Exchange
(CME) and The Singapore International Monetary Exchange (SIMEX) since early
January, bringing additional liquidity.
Later in the year 1997, the market may start to consolidate when TWI moves
to the higher end of its trading range at 30 times earnings, since institutional
investors and corporate insiders may stay on the "sell side" at this high level.
The supply of shares may increase and it may take the market a period of time to
digest the cash calls. Moreover, several potentially damaging issues exist. The
cross-straits relationship is deadlocked, as Taiwan continues to fight for
international recognition, and the possibility of direct dialogue between the
two sides
6
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THE TAIWAN EQUITY FUND, INC.
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appears to be ebbing. Time is not on Taiwan's side, and after the PRC reclaims
sovereignty over Hong Kong, Taiwan risks losing its most important economic link
with the mainland. Uncertainty could spark a correction in this
politically-sensitive market.
In the longer term, the Fund's management believes that further rises will
depend on a major turnaround in earnings. A stable economic recovery is underway
and corporate earnings growth is estimated to possibly accelerate from 7.0% in
1996 to 9.0% in 1997. The interest rate environment will continue to favor the
equity market while the recovery remains moderate. Earnings growth will secure
the market's downside following the liquidity-driven rally, but the market will
first require time to digest both the additional supply of shares and the
developments on the political front. Looking at all of 1997, the Fund's
management believes that an improving economy plus decent liquidity will make
this market a favorable investment environment. Sustained low interest rate
levels should lure money out of fixed-term deposits as they mature. The
elimination of double taxation on cash dividends starting in 1998 should provide
an additional incentive in the stock market. Shares of electronics companies are
coming off a strong second half in 1996 and should continue to gain in 1997
owing to their low price-to-earnings ratio and solid growth potential.
Construction issues are also expected to be among the market's leaders if the
local property market revives in 1997 and beyond. Industrial cyclicals should
benefit from the PRC's loosening austerity program and an improving mainland
economy.
FUND PERFORMANCE
As of December 31, 1996, the Fund's total net assets were USD 54.5 million,
equivalent to USD 12.09 per share. Compared to USD 9.65 per share on December
31, 1995, the Fund's net asset value appreciated by 25.28%, underperforming the
TWI by 7.63% in USD terms.
The Fund has not invested, and presently does not intend to invest, in
derivative securities. Although foreign currency hedging is permitted by the
Fund's investment policies, the Fund has not engaged in any foreign currency
hedging.
PORTFOLIO MANAGEMENT
Mr. Victor Shih has been the Fund's portfolio manager since January 1, 1996
and is responsible for the day-to-day management of the Fund's portfolio. Mr.
Shih joined Daiwa Asset Management (H.K.) Ltd. ("DAM") in May 1995 and is
currently a portfolio manager with the company specializing in the Taiwan
market. Prior to joining DAM, from 1990 to mid-1995 Mr. Shih worked for the
Taipei Branch of ABN-AMRO Bank where he was Assistant Vice President in charge
of company/industry analysis, credit analysis and marketing corporate financial
products to clients.
We would like to thank you for your continuing support and interest in The
Taiwan Equity Fund, Inc.
Sincerely,
/s/ Shuichi Komori /s/ Masaru Arai
SHUICHI KOMORI MASARU ARAI
CHAIRMAN OF THE BOARD PRESIDENT
7
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THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
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- -------------------------------------------
TAIWANESE COMMON STOCKS--95.58%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<C> <S> <C>
SHARES VALUE
- ---------- ------------
AUTOMOTIVE--1.24%
600,000 Yue Loong Motor Co., Ltd.+......... $ 676,585
------------
BANKS--11.33%
1,147,800 Chinatrust Commercial Bank......... 2,150,220
308,400 Far Eastern International Bank..... 247,923
1,000,000 Grand Commercial Bank.............. 1,251,319
145,000 Hua Nan Commercial Bank............ 677,767
700,000 United World Chinese Commercial
Bank.............................. 1,846,059
------------
6,173,288
------------
CHEMICALS--1.98%
800,000 China Petrochemical Development
Corp.+............................ 1,079,626
------------
CONSTRUCTION ENGINEERING--7.00%
600,000 BES Engineering Corp............... 591,466
1,020,000 Cathay Construction Corp........... 1,732,712
600,000 Chief Construction Corp............ 1,134,917
420,000 Pacific Construction Corp.......... 359,027
------------
3,818,122
------------
ELECTRICAL MACHINERY--3.66%
536,025 Phoenixtec Power Co., Ltd.......... 994,408
428,195 Taichung Machinery Works........... 718,046
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
147,487 Tatung Co., Ltd.................... $ 284,341
------------
1,996,795
------------
ELECTRICAL PRODUCTS & COMPUTERS--11.59%
497,104 Acer Inc........................... 913,163
53,100 Compal Electronics Inc............. 118,790
550,000 D-Link Corp........................ 1,360,445
7,366 First International Computer
Corp.............................. 14,067
965,912 GVC Corp........................... 1,514,343
120,000 Inventec Co., Ltd.................. 728,966
650,000 Macronix International Co., Ltd.... 863,010
320,000 Mosel Vitelic Inc.................. 458,623
200,000 Taiwan Liton Electronic Co., Ltd... 345,568
------------
6,316,975
------------
ELECTRONICS--9.65%
460,000 Advanced Semiconductor Engineering
Inc............................... 886,836
200,000 Dyna Image Corp.................... 505,620
418,736 Hon-Hai Precision Industrial
Corp.............................. 1,241,387
700,000 Microelectronics Technology Inc.... 845,368
300,000 Siliconware Precision Industries
Co., Ltd.......................... 632,934
600,000 United Microelectonics Corp........ 851,188
150,000 Yageo Corp......................... 294,642
------------
5,257,975
------------
</TABLE>
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THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
TAIWANESE COMMON STOCKS (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
FINANCIAL SERVICES--3.02%
838,091 Fuh Hwa Securities Finance Corp.... $ 1,646,245
------------
FOOD, BEVERAGE, TOBACCO--2.64%
396,400 Lian Hwa Foods Corp................ 503,232
600,000 President Enterprises Corp......... 934,124
------------
1,437,356
------------
LIFE INSURANCE--6.30%
407,100 Cathay Life Insurance Co., Ltd..... 2,591,484
220,000 Shin Kong Life Insurance Co.,
Ltd............................... 840,275
------------
3,431,759
------------
METAL PRODUCTS--1.38%
1,202,600 Yieh Loong Co., Ltd................ 752,418
------------
MISCELLANEOUS--2.98%
265,937 Hocheng Group Corp................. 454,659
287,100 Taiwan SECOM Corp.................. 1,169,663
------------
1,624,322
------------
PAPER--0.79%
605,000 Cheng Loong Co., Ltd............... 429,140
------------
PHARMACEUTICALS--0.33%
60,425 Yung Shin Pharmaceutical Industries
Co., Ltd.......................... 181,334
------------
PLASTIC--9.70%
960,000 Formosa Plastics Corp.............. 2,409,516
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------
<C> <S> <C>
510,485 Grand Pacific Petrochemical Corp... $ 505,081
996,676 Nan Ya Plastics Corp............... 2,374,678
------------
5,289,275
------------
REAL ESTATE--0.92%
700,000 Hong Chung Construction Co.,
Ltd.+............................. 501,619
------------
RETAIL--2.62%
1,450,000 Ability Enterprises Co., Ltd....... 1,429,377
------------
SHIPS & SHIPPING--4.56%
1,000,000 Evergreen Marine Corp.............. 2,000,655
500,000 U-Ming Marine Transport Corp....... 485,613
------------
2,486,268
------------
STEEL INDUSTRY--4.13%
2,400,000 China Steel Corp................... 2,252,373
------------
TEXTILE--7.99%
1,749,550 Formosa Chemicals & Fiber Corp..... 2,692,007
553,682 Hung Chou Chemical Industries
Co................................ 525,667
1,500,000 Shinkong Synthetic Fiber Corp...... 1,134,917
------------
4,352,591
------------
TRANSPORTATION -- AIR--1.77%
672,000 China Airlines..................... 965,552
------------
Total Taiwanese Common Stocks (Cost --
$47,271,071)................................. 52,098,995
------------
</TABLE>
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THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONCLUDED)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
- -------------------------------------------
SHORT-TERM INVESTMENTS--1.70%
- -------------------------------------------
<TABLE>
<CAPTION>
<C> <S> <C>
PRINCIPAL
AMOUNT
(000) VALUE
- ---------- ------------
NEW TAIWAN DOLLAR
SAVINGS ACCOUNT--1.40%
21,069 International Commercial Bank of
China, 1.50% (Payable on Demand).. $ 766,388
------------
U.S. DOLLAR TIME DEPOSIT--0.30%
162 Bank of New York, 3.40% due
1/2/97............................ 161,785
------------
Total Short-Term Investments
(Cost--$927,989)............................. 928,173
------------
Total Investments--97.28%
(Cost $48,199,060)........................... 53,027,168
Other assets less liabilities--2.72%........... 1,485,240
------------
NET ASSETS (Applicable to 4,507,318 shares of
capital stock outstanding; equivalent to
$12.09 per share)--100.00%................... $ 54,512,408
------------
------------
</TABLE>
- ------------------------
+ Non-income producing securities.
- -------------------------------------------
TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
DECEMBER 31, 1996
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
- ----------------------------------- ----------
<S> <C>
Electrical Products & Computers.... 11.59%
Banks.............................. 11.33
Plastic............................ 9.70
Electronics........................ 9.65
Textile............................ 7.99
Construction Engineering........... 7.00
Life Insurance..................... 6.30
Ships & Shipping................... 4.56
Steel Industry..................... 4.13
Electrical Machinery............... 3.66
</TABLE>
- -------------------------------------------
TEN LARGEST COMMON STOCK
POSITIONS HELD
DECEMBER 31, 1996
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
ISSUE NET ASSETS
- ----------------------------------- ----------
<S> <C>
Formosa Chemicals & Fiber Corp..... 4.94%
Cathay Life Insurance Co., Ltd..... 4.75
Formosa Plastics Corp.............. 4.42
Nan Ya Plastics Corp............... 4.36
China Steel Corp................... 4.13
Chinatrust Commercial Bank......... 3.94
Evergreen Marine Corp.............. 3.67
United World Chinese Commercial
Bank............................. 3.39
Cathay Construction Corp........... 3.18
Fuh Hwa Securities Finance Corp.... 3.02
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost--$48,199,060)....................... $ 53,027,168
Receivable for securities sold............. 1,586,378
Interest receivable........................ 810
Deferred organizational expenses........... 47,424
Prepaid expenses........................... 18,895
-------------
Total assets............................. 54,680,675
-------------
LIABILITIES
Payable to investment manager.............. 54,929
Payable to administrator................... 12,500
Accrued expenses and other liabilities..... 100,838
-------------
Total liabilities........................ 168,267
-------------
NET ASSETS
Capital stock, $0.01 par value per share;
total 100,000,000 shares authorized;
4,507,318 shares issued and outstanding... 45,073
Paid-in capital in excess of par value..... 60,222,166
Accumulated net realized loss on
investments............................... (10,582,939)
Net unrealized appreciation on investments
and other assets and liabilities
denominated in foreign currency........... 4,828,108
-------------
Net assets applicable to shares
outstanding............................. $ 54,512,408
-------------
-------------
NET ASSET VALUE PER SHARE............ $ 12.09
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$87,581).................................. $ 350,325
Interest (net of withholding taxes of
$6,873)................................... 39,044
------------
Total investment income.................. 389,369
------------
EXPENSES:
Investment management fee and expenses..... 570,215
Taiwan stock dividend tax.................. 243,660
Administration fee......................... 150,000
Custodian fees and expenses................ 74,914
Legal fees and expenses.................... 60,034
Audit and tax services..................... 58,727
Insurance expense.......................... 41,111
Reports and notices to shareholders........ 38,371
Directors' fees and expenses............... 31,776
Amortization of organizational expenses.... 19,771
Transfer agency fee and expenses........... 10,587
Other...................................... 25,019
------------
Total expenses........................... 1,324,185
------------
NET INVESTMENT LOSS.......................... (934,816)
------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized losses on investments......... (2,478,779)
Net realized foreign currency transaction
losses.................................... (92,569)
Net change in unrealized appreciation
(depreciation) on investments in equity
securities................................ 14,512,940
Net change in unrealized appreciation
(depreciation) on translation of
short-term investments and other assets
and liabilities denominated in foreign
currency.................................. 9,400
------------
Net realized and unrealized gains from
investment activities and foreign currency
transactions................................ 11,950,992
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $ 11,016,176
------------
------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1996 1995
------------ -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss........................ $ (934,816) $ (942,768)
Net realized loss on:
Investments.............................. (2,478,779) (7,816,692)
Foreign currency transactions............ (92,569) (215,332)
Net change in unrealized appreciation
(depreciation) on:
Investments in equity securities......... 14,512,940 (9,710,425)
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... 9,400 (5,577)
------------ -------------
Net increase (decrease) in net assets
resulting from operations................. 11,016,176 (18,690,794)
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income...................... -- (790,572)
Amounts in excess of net investment
income.................................... -- (806)
Net foreign currency transaction gains..... -- (587,801)
------------ -------------
Total dividends and distributions to
shareholders.............................. -- (1,379,179)
------------ -------------
FROM CAPITAL STOCK TRANSACTIONS:
Sale of capital stock resulting from
reinvestment of dividends................. -- 2,179
------------ -------------
Net increase (decrease) in net assets...... 11,016,176 (20,067,794)
------------ -------------
NET ASSETS:
Beginning of year.......................... 43,496,232 63,564,026
------------ -------------
End of year................................ $ 54,512,408 $ 43,496,232
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Taiwan Equity Fund, Inc. (the "Fund") was incorporated in Maryland on
January 12, 1994. It is registered with the Securities and Exchange Commission
as a closed-end, non-diversified management investment company. Prior to
commencing operations on July 25, 1994, the Fund had no operations other than
the sale of 7,120 shares of common stock for a total of $100,036 on July 19,
1994 to Daiwa Securities America Inc. ("DSA"), the lead underwriter of the Fund
and an affiliate of Daiwa Securities Trust Company ("DSTC"), the Fund's
administrator and custodian, and Daiwa Asset Management (H.K.) Ltd., the Fund's
investment manager. Organizational costs of approximately $98,000 were deferred
and are being amortized on the straight line method over a period of five years
beginning with the date on which the Fund commenced investment operations.
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts and disclosures in the financial statements.
Actual reported results could differ from those estimates.
VALUATION OF INVESTMENTS--Securities which are listed on foreign exchanges
and for which market quotations are readily available are valued at the last
sale price on the exchange on which the securities are traded, as of the close
of business on the day the securities are being valued or, lacking any sales on
such day, at the closing price quoted for such securities. However, if bid and
asked quotations are available, such securities are valued at the mean between
the last current bid and asked prices, rather than at such quoted closing price.
Securities that are traded over-the-counter, if bid and asked price quotations
are available, are valued at the mean between the current bid and asked prices,
or, if such quotations are not available, are valued as determined in good faith
by the Board of Directors (the "Board") of the Fund. In instances where
quotations are not readily available or where the price as determined by the
above procedures is deemed not to represent fair market value, fair value will
be determined in such manner as the Board may prescribe. Short-term investments
having a maturity of 60 days or less are valued at amortized cost, except where
the Board determines that such valuation does not represent the fair value of
the investment. All other securities and assets are valued at fair value as
determined in good faith by, or under the direction of, the Board.
FOREIGN CURRENCY TRANSLATION--The books and records of the Fund are
maintained in U.S. dollars as follows: (1) the foreign currency market value of
investment securities and other assets and liabilities stated in foreign
currency are translated at the exchange rate prevailing at the end of the
period; and (2) purchases, sales, income and expenses are translated at the rate
of exchange prevailing on the respective dates of such transactions. The
resulting exchange gains and losses are included in the Statement of Operations.
The Fund does not generally isolate the effect of fluctuations in foreign
exchange rates from the effect of fluctuations in the market price of
securities.
14
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
TAX STATUS--The Fund intends to distribute substantially all of its taxable
income and to comply with the minimum distribution and other requirements of the
Internal Revenue Code applicable to regulated investment companies. Accordingly,
no provision for federal income or excise taxes is required.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date (the date upon which the order to buy or sell is
executed). Realized and unrealized gains and losses from security and foreign
currency transactions are calculated on the identified cost basis. Dividend
income and corporate actions are recorded generally on the ex-date, except for
certain dividends and corporate actions involving foreign securities which may
be recorded after the ex-date, but recorded as soon as the Fund acquires
information regarding such dividends or corporate actions. Interest income is
recorded on an accrual basis.
During the year ended December 31, 1996, the Fund was subject to Taiwanese
withholding tax of 20% on interest and cash dividends paid to the Fund by
Taiwanese corporations. The Fund also receives stock dividends which are
recorded as stock splits without recognizing dividend income. However, for
certain stock dividends, the Fund is liable for withholding tax of 20% of the
par value of shares received. Withholding tax is recorded as an expense on the
ex-dividend date, or after the ex-dividend date, but as soon as the Fund is
informed of such dividends.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--The Fund records dividends and
distributions payable to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations, which
may differ from generally accepted accounting principles. These book basis/tax
basis ("book/tax") differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in capital.
FORWARD FOREIGN CURRENCY CONTRACTS--The Fund may enter into forward foreign
currency exchange contracts in connection with planned purchases or sales of
securities or to hedge the U.S. dollar value of its assets denominated in a
particular currency, subject to a maximum limitation of 20% of the value of its
total assets committed to the consummation of such forward foreign currency
contracts. In addition, the Fund will not take positions in foreign currency
contracts where the settlement commitment exceeds the value of its assets
denominated in the currency of the contract. If the Fund enters into forward
foreign currency contracts, its custodian or subcustodian will maintain cash or
readily marketable securities in a segregated account of the Fund in an amount
equal to the value of the Fund's total assets committed to the consummation of
such contracts. Risks may arise upon entering into these contracts from the
potential inability of counterparties to meet the terms of their contracts and
from unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
15
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
INVESTMENT MANAGER AND INVESTMENT ADVISER
The Fund has an Investment Management Agreement (the "Management Agreement")
with Daiwa Asset Management (H.K.) Ltd. (the "Manager"). Pursuant to the
Management Agreement, the Manager makes investment management decisions relating
to the Fund's assets. For such services, the Fund pays the Manager a monthly fee
at an annual rate of 1.20% of the Fund's average weekly net assets. In addition,
as permitted by the Management Agreement, the Fund reimburses the Manager for
its out-of-pocket expenses related to the Fund. During the year ended December
31, 1996, expenses of $2,180 were paid to the Manager, representing
reimbursement to the Manager of costs relating to the attendance by its
employees at meetings of the Fund's Board. During the year ended December 31,
1996, the Fund paid brokerage commissions of $65,635 to Daiwa Securities Co.
Ltd. (Taipei Branch), an affiliate of the Manager, in connection with the
portfolio transactions. At December 31, 1996, the Fund had a receivable of
$521,775 for securities sold to Daiwa Securities Co. Ltd. (Taipei Branch),
acting as agent.
The Manager has entered into an Investment Advisory Agreement (the "Advisory
Agreement") with National Capital Management Corp. (the "Adviser"), which
provides general and specific investment advice to the Manager with the respect
to the Fund's assets. The Manager pays the Adviser a monthly fee at an annual
rate of 0.08% of the first $100 million of the Fund's average weekly net assets
and 0.06% of the Fund's average weekly net assets in excess of $100 million.
Brokerage commissions of $28,736 were paid by the Fund during the year ended
December 31, 1996 to National Securities, an affiliate of the Adviser, in
connection with portfolio transactions.
ADMINISTRATOR AND CUSTODIAN AND OTHER RELATED PARTIES
DSTC provides certain administrative services to the Fund. For such
services, the Fund pays DSTC a monthly fee at an annual rate of 0.20% of the
Fund's average weekly net assets, with a minimum annual fee of $150,000.
DSTC also acts as custodian for the Fund's assets and appoints subcustodians
for the Fund's assets held outside the United States. DSTC has appointed The
International Commercial Bank of China ("ICBC") to act as the subcustodian for
all of the cash and securities of the Fund held in Taiwan. As compensation for
its services as custodian, DSTC receives a monthly fee and reimbursement of
out-of-pocket expenses. Such expenses include the fees and out-of-pocket
expenses of each of the subcustodians. During the year ended December 31, 1996,
DSTC earned $28,162 from the Fund for its custodial services, excluding the fees
and expenses of ICBC.
At December 31, 1996, the Fund owed to DSTC $12,500 and $16,301 for
administration and custodian fees, respectively. The latter amount includes fees
and expenses payable to ICBC totalling $13,777.
During the year ended December 31, 1996, the Fund paid or accrued $57,074,
for legal services in connection with the Fund's on-going operations to a law
firm of which the Fund's Assistant Secretary is a partner.
16
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES AND FEDERAL INCOME TAX MATTERS
For federal income tax purposes, the cost of securities owned at December
31, 1996 was $47,364,979, excluding $927,989 of short-term investments. At that
date, for federal income tax purposes the net unrealized appreciation on
investments, excluding short-term securities, of $4,734,016 was composed of
gross appreciation of $6,620,629 for those investments having an excess of value
over cost, and gross depreciation of $1,886,613 for those investments having an
excess of cost over value. For the year ended December 31, 1996, the total
aggregate cost of purchases and net proceeds from sales of portfolio securities,
excluding short-term securities, were $49,008,902 and $40,994,514 respectively.
At December 31, 1996, the Fund had a capital loss carryover of $10,029,114,
of which $129,339 expires in 2002, $3,892,236 expires in 2003 and $6,007,539
expires in 2004. In addition, the Fund had $459,918 of post-October capital
losses which the Fund has elected to defer until January 1, 1997.
At December 31, 1996, the Fund made a capital account reclassification due
to permanent book/tax differences relating to net investment loss and foreign
currency loss for the year ended December 31, 1996. This reclassification
resulted in a charge of $1,133,230 to paid-in capital in excess of par value and
corresponding credits to accumulated net investment loss and accumulated net
realized loss on foreign currency transactions of $934,816 and $198,414,
respectively.
CONCENTRATION OF RISK
Investments in countries in which the Fund may invest may involve certain
considerations and risks not typically associated with U.S. investments as a
result of, among others, the possibility of future political and economic
developments and the level of governmental supervision and regulation of the
securities markets in which the Fund invests.
CAPITAL STOCK
There are 100,000,000 shares of $0.01 par value common stock authorized. Of
the 4,507,318 shares outstanding at December 31, 1996, DSA owned 7,318 shares.
17
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding during each period is
presented below:
<TABLE>
<CAPTION>
FOR THE
PERIOD
JULY 25,
FOR THE YEARS ENDED DECEMBER 31, 1994*
THROUGH
-------------------------------- DECEMBER 31,
1996 1995 1994
--------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period......................................... $ 9.65 $ 14.10 $ 14.05
--------------- ------------- -------------
Net investment income (loss)................................................. (0.21) (0.21) 0.18
Net realized and unrealized gains (losses) on investments and foreign
currency transactions....................................................... 2.65 (3.94) 0.06
--------------- ------------- -------------
Net increase (decrease) in net asset value resulting from operations......... 2.44 (4.15) 0.24
--------------- ------------- -------------
Less: dividends and distributions to shareholders
Net investment income...................................................... -- (0.17) --
Net realized gains from investments and foreign currency transactions...... -- (0.13) --
--------------- ------------- -------------
Total dividends and distributions to shareholders........................ -- (0.30) --
--------------- ------------- -------------
Offering costs charged to paid-in capital in excess of par value............. -- -- (0.19)
--------------- ------------- -------------
Net asset value, end of period............................................... $12.09 $ 9.65 $ 14.10
--------------- ------------- -------------
--------------- ------------- -------------
Per share market value, end of period........................................ $10.125 $ 10.625 $ 11.875
--------------- ------------- -------------
--------------- ------------- -------------
Total investment return:
Based on market price at beginning and end of period, assuming
reinvestment of dividends................................................. (4.71) % (8.04)% (15.48)%+
Based on net asset value at beginning and end of period, assuming
reinvestment of dividends................................................. 25.28 % (29.66)% 0.36%+
Ratios and supplemental data:
Net assets, end of period (in millions).................................... $54.5 $ 43.5 $ 63.6
Ratios to average net assets of:
Expenses, excluding Taiwan stock dividend tax............................ 2.29 % 2.34% 2.12%**
Expenses, including Taiwan stock dividend tax............................ 2.80 % 2.72% 2.20%**@
Net investment income (loss)............................................. (1.98) % (1.88)% 2.96%**
Portfolio turnover......................................................... 94.12 % 31.75% 9.33%
Average commission rate per share.......................................... $ 0.0042++ N/A N/A
</TABLE>
- --------------------------
* Commencement of operations.
** Annualized.
+ Total return is calculated exclusive of sales charges.
++ For the year ended December 31, 1996, the average commission rate paid
on trades where commissions were charged was 0.29% of the trade
amount.
@ Reflects reclassification of certain expenses in 1994 for comparative
purposes.
18
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and
Board of Directors of
The Taiwan Equity Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Taiwan Equity Fund, Inc. (the
"Fund") at December 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the two years in the period
then ended and for the period July 25, 1994 (commencement of operations) through
December 31, 1994, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondence with the custodian, subcustodian and
brokers, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 20, 1997
19
<PAGE>
- -----------------------------------------
BOARD OF DIRECTORS
Shuichi Komori, CHAIRMAN
Masaru Arai
Martin J. Gruber
Christina Y. Liu
Oren G. Shaffer
- -----------------------------------------
OFFICERS
Masaru Arai
PRESIDENT
Daniel F. Barry
VICE PRESIDENT
Lawrence Jacob
SECRETARY
Edward J. Grace
TREASURER
John J. O'Keefe
ASSISTANT TREASURER
Laurence E. Cranch
ASSISTANT SECRETARY
- -----------------------------------------
ADDRESS OF THE FUND
c/o Daiwa Securities Trust Company
One Evertrust Plaza, 9th Floor
Jersey City, New Jersey 07302
- -----------------------------------------
INVESTMENT MANAGER
Daiwa Asset Management (H.K.) Ltd.
INVESTMENT ADVISER
National Capital Management Corp.
ADMINISTRATOR AND CUSTODIAN
Daiwa Securities Trust Company
TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company
LEGAL COUNSEL
Rogers & Wells
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
- -----------------------------------------
Notice is hereby given in accordance with Section 23(c)
of the Investment Company Act of 1940 that from time to time the Fund may
purchase shares of its common stock in the open market at prevailing market
prices.
This report is sent to shareholders of the Fund for their information. It is not
a prospectus, circular or representation intended for use in the purchase or
sale of shares of the Fund or of any securities mentioned in the report.
The
Taiwan
------------------------
Equity
------------------------
Fund, Inc.
------------------------
[ART]
Annual Report
December 31, 1996
----------------------------------
