<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
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. acts as the Fund's Investment Manager.
National Capital Management Corp., of Taiwan, acts as 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. The Fund's weekly NAV is also
available by calling (800) 933-3440 or (201) 915-3020.
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 (011-852) 2521-0166, or to the Fund at (800) 426-5523 or
(781) 575-2000. Inquiries concerning your share account should be directed to
the Fund at the latter numbers noted immediately above. 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 Fund shares through the State Street Bank
and Trust Company (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 (781) 575-2000, or by writing The Taiwan Equity Fund, Inc., c/o State Street
Bank and Trust Company, P.O. Box 8200, Boston, MA 02266-8200.
<PAGE>
1998 LIPPER
PERFORMANCE ACHIEVEMENT CERTIFICATE
TAIWAN EQUITY FUND INC.
Ranks NUMBER ONE in the
Lipper International Closed-End Fund Service
<TABLE>
<S> <C> <C>
Period Ending Geographical Concentration [LIPPER INC CORPORATE SEAL
December 31, 1998 1999 U.S.A.]
1 Year Taiwan
EQUITY
/s/ Simon Thomson [LOGO] LIPPER /s/ A. Michael Lipper
- ---------------------------- A REUTERS Company ----------------------------
SIMON THOMSON, The Analytical Standard A. MICHAEL LIPPER, CFA
PRESIDENT and CEO for Investment Companies CHAIRMAN
</TABLE>
2
<PAGE>
1998 LIPPER
PERFORMANCE ACHIEVEMENT CERTIFICATE
TAIWAN EQUITY FUND INC.
Ranks NUMBER ONE in the
Lipper International Closed-End Fund Service
<TABLE>
<S> <C> <C>
Period Ending Geographical Concentration [LIPPER INC CORPORATE SEAL
December 31, 1998 1999 U.S.A.]
2 Years Taiwan
EQUITY
/s/ Simon Thomson [LOGO] LIPPER /s/ A. Michael Lipper
- ---------------------------- A REUTERS Company ----------------------------
SIMON THOMSON, The Analytical Standard A. MICHAEL LIPPER, CFA
PRESIDENT and CEO for Investment Companies CHAIRMAN
</TABLE>
3
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
July 15, 1999
DEAR SHAREHOLDERS:
We are pleased to present the Semi-Annual Report of The Taiwan Equity Fund,
Inc. (the "Fund") for the six months ended June 30, 1999. As previously
announced, the Fund had been named by Lipper Inc. as the top-performing fund in
Lipper's Taiwan/Equity category for both the one-year and two-year periods
ending December 31, 1998.
STOCK MARKET REVIEW
The Taiwan Weighted Index (TWI) rose 31.9%, from 6,418 to 8,467, during the
first six months of 1999. During the same period, the New Taiwan Dollar ("TWD")
depreciated from TWD 32.21 to 32.30 against the US Dollar ("USD"). Consequently,
the TWI gained 31.6% in USD terms during the period.
Despite declining interest rates, the Taiwanese government's supporting
measures and the strength of most other markets, the market in Taiwan declined
by 14% in the first one and a half months of 1999. Major reasons for the decline
included deteriorating economic conditions, continuing sluggish trade figures,
worse-than-expected corporate earnings, weak property demand and tightening
credit among financial institutions caused by the financial distress of several
listed companies. However, after the government adopted measures to recapitalize
banks in mid-February, including cuts in required reserve ratios and the tax
rate on banks to lessen the risk of bankruptcy, investor confidence toward the
financial market was restored. This, plus a rally in other Asian markets,
brought a sharp upturn in sentiment. The market hit the bottom in mid-February
and started to rebound afterwards. In addition, continuing positive signals for
the economy, including recovering export growth, rising commodity prices,
continued foreign funds inflow, good sales for most electronics companies and
the recovering semiconductor cycle, all helped to boost the market. The
Taiwanese market continued to move higher and rose by 31.9%, to close at 8,467
in June. During the first half of 1999, the semiconductor and information
technology sectors led the market outperformers as a result of strong demand for
PC-related products and semiconductor products. The construction and banking
sectors underperformed the most due to concerns over the sluggish property
market and the banks' increasing over-due loan ratios.
ECONOMIC REVIEW AND OUTLOOK
TRADE
In the first six months of 1999, exports increased by 5.5% year on year
("YOY") to USD 57.5 billion while imports declined by 3.8% to USD 51.2 billion.
This resulted in a trade surplus of USD 6.2 billion, a 416% increase compared to
a year earlier. Exports improved dramatically, reflecting the boost from a
weaker TWD, recovering Asian regional demand and the continuing strength of the
U.S. and European economies. Export growth was driven by the information,
technology and electronics sectors. Import decline was due to still-weak private
consumption and domestic demand during the first five months. However, imports
in June already turned in 5.2% growth, which implies that private consumption
has started to pick up.
Export orders in the first five months of 1999 rose by 3.3% YOY, which
signals that exports in the third quarter may be strong. The growth was due to
rising Asian demand and persistent strength in electronics orders, particularly
from the U.S. and Japan. Exports may continue to be strong over the second half
of the year,
4
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
considering it is the peak season for information technology ("IT") products.
Overall, due to recovering economic conditions in Asia and continuing strength
of U.S. demand growth, the Taiwanese government revised its forecast for 1999
export growth to 5.5% YOY and import growth to +1.0% YOY.
INFLATION
Despite a hike in oil prices, no inflationary pressure on Taiwan exists. The
Consumer Price Index ("CPI") and Wholesale Price Index ("WPI") rose 0.3% and
declined 7.0%, respectively, in the first six months of 1999. Both the CPI and
WPI were low due to the high comparison base of 1998, and the slack local
economy helped keep consumer prices low. The Fund's management expects the CPI
to be higher and the WPI to turn positive in the second half of 1999. In light
of the pick-up in the economy, CPI inflation is forecast to grow 1.6% and the
WPI to shrink 3.0% in 1999, given the TWD's possible strengthening and lowered
import taxes as Taiwan prepares to enter the World Trade Organization.
EXCHANGE RATE
In the first half of 1999, the TWD depreciated from 32.21 to 32.30 against
the USD. The TWD first depreciated by 2.8% to around 33.10 vs. the USD due to
weak exports in the first quarter, then gradually appreciated to 32.30 in June
1999. The strong trade surplus and consistent external liquidity flowing into
the domestic financial markets were the major reasons driving the currency rise
in the second quarter. Stabilized Asian currencies also helped the TWD's
appreciation. For the second half of 1999, the TWD may slightly appreciate,
considering the strengthening exports, stronger-than-expected Asian recovery and
continuing foreign funds inflow. However, there is uncertainty over the
direction of the Chinese Renminibi ("RMB"). Although a sharp depreciation may
have a psychological impact on most Asian currencies, including the TWD, Taiwan
would actually benefit from a depreciation of the RMB. As many local companies
have moved labor-intensive operations to China, devaluation of the RMB may boost
China's exports and benefit those Taiwanese companies.
MONEY SUPPLY, INTEREST RATES AND MONETARY POLICY
In light of the deteriorating economic conditions and in order to restore
confidence in the banking system, after four rate cuts in late 1998, Taiwan's
Central Bank cut bank required reserve ratios by an aggressive 120 basis points
in February 1999. Altogether, bank-required reserve ratios were reduced from
8.3% to 6.4%, and rediscount rates were reduced from 5.3% to 4.5%. Short-term
rates fell from 5.3% to 4.8%. Growth in the M2 and M1b money supply trended
upward with an average of 8.7% YOY and 5.3% YOY, respectively, in the first five
months of 1999. Growth in both rates was due to recovering economic conditions,
a widening trade surplus, active stock market trading and persistent foreign
funds inflow. Looking forward, the Fund's management is anticipating that the
money supply growth rates may continue to rise based on strong market liquidity,
renewed stability in the banking system and growing loan demand associated with
the economic recovery.
Despite the strong Taiwanese stock market recovery, the Central Bank did not
raise interest rates at its June 24th Board meeting, because Taiwan's economy is
in the early stages of a recovery and reasonably loose liquidity is necessary to
support further economic growth. The Fund's management expects the Central Bank
may maintain a rather loose, stable monetary policy, as the economic recovery is
not strong enough to sustain a rate increase. It may not allow liquidity to
become too loose, as consumer prices could rise in the second half. The M1b and
M2 money supply growth rates in 1999 are forecast to be 8.0% and 8.3%,
respectively.
5
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
ECONOMIC GROWTH
Most of the economic data indicates that Taiwan's economy has been
improving. The strongest indicator is the rebound in exports. Exports posted
5.5% growth in the first six months of 1999, in contrast to a 9.4% decline in
1998. The 3.3% rise in export orders in May 1999 anticipates exports in the
second half will continue to grow. Industrial production growth of 7.1% was
strong, compared to 2.6% growth in 1998. The first quarter Gross Domestic
Product ("GDP") growth of 4.3% showed a much better performance compared to the
3.7% growth in the fourth quarter of 1998. The improving exports will drive
corporate revenues and profits. The rebound in the IC industry and healthy
demand for IT products has caused companies to increase their capital
expenditures. Looking forward, if demand from Asian countries can be sustained
and a global upturn in the electronics cycle can continue to benefit Taiwan's
exports, the economy may grow stronger in the second half of this year and even
better in year 2000. Furthermore, the Taiwanese government may continue to speed
up investment through land development and infrastructure construction. Domestic
demand will serve as an important driving force for GDP growth. In view of the
optimistic outlook, GDP growth in 1999 was revised upward by several
institutions, from 4.8% to above 5.2%.
POLITICAL REVIEW AND OUTLOOK
Political tensions between Taiwan and China eased after high-level talks
resumed in October 1998. Relations between the two sides had been stable since
then. However, tensions increased again in July 1999 as Taiwan announced that it
is not a province of China and negotiations with China are under a
"state-to-state" status. After some high profile statements, China may take more
serious measures to curb Taiwan's political aggressiveness. An important
barometer to watch is whether Beijing will cancel a planned October 1999 visit
to Taiwan by its top Taiwan Strait envoy, Wang Daohan. On the domestic front,
after the ruling Kuomintang ("KMT") Party won 55% of Taiwan's parliamentary
seats in the December 1998 election, its next challenge is the March 2000
presidential election, which is much more important. In the third quarter of
1999, the market may be affected by the KMT nomination period. China may make
some threatening moves to try to warn voters to not choose a leader opposed to
unification with China. The market may be affected by the possible political
instability. Despite this possible uncertainty, the Taiwanese bourse may not be
seriously impacted, as the fundamentals are sound and the government may adopt
more fiscal and monetary policies favorable to the equity market.
STOCK MARKET OUTLOOK
Looking forward, in short term, the tensions between Taiwan and China may
stay for a while. The policies and actions taken by both governments may
continue to affect the market movement. Fortunately, after the Morgan Stanley
Composite Index announced its intention to increase Taiwan's weighting in its AC
Far East ex-Japan Index from 17% to 26.8%, foreign funds may continue to flow
into Taiwan and the market liquidity may improve dramatically. In addition,
considering the strong demand of PC related products, recovering semiconductor
cycle, and stronger than expected Asian regional demand, Taiwan's economy may
continue to improve. If China does not take drastic action toward Taiwan before
the year end, the market has the potential to rise to the 9,000 level
considering the earnings growth momentum of Taiwanese companies.
For the longer term, Taiwan looks relatively sound and attractive as
compared to most Asian countries. The economic growth in Asian countries is
recovering, especially in Korea, Thailand and Singapore. Taiwan's GDP will grow
an estimated 5.2%, with growth in the second half of 1999 stronger than in the
first half. Considering Asia's recovery and growing demand from the U.S. and
Europe, exports and imports could grow well in 1999,
6
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
which may drive private investment and private consumption. Given its relatively
sound financial condition, 15% and 20% corporate earnings growth in 1999 and
2000, respectively, reasonable valuations in the market and a diversified and
competitive industrial base, Taiwan will remain an attractive market for
long-term investment.
FUND PERFORMANCE AND STRATEGY
As of June 30, 1999, the Fund's net assets were USD 70.2 million, equivalent
to USD 15.63 per share. For the six months ended June 30, 1999, the Fund's net
asset value per share increased by 36.99% in USD terms, whereas the TWI rose
31.6% in USD terms. Thus, the Fund outperformed the index by 5.0%.
In terms of strategy, the Fund's management plans to overweight electronics,
semiconductors, shipping and good-growth non-classified stocks.
Electronics/semiconductors may have good upside potential due to continuing
strong PC demand and the recovering semiconductor cycle. This signals that
corporate spending on PCs may not be significantly affected when we approach the
year 2000. Some Taiwanese PC system and components producers may benefit from
the continuing trend toward outsourcing, while others may benefit from gaining
market share at the expense of second-tier players. Companies with global
competitiveness and strong relations with major U.S. companies may provide good
value for investments. In addition, the Fund's management also favors shipping
shares with higher container shipping rates expected and selected shares with
stable earnings growth in the non-classified sector. Some cyclicals, like paper
and steel industries, have seen signs of a recovery in light of the
strengthening demand from Asia and after long consolidation phases. The Fund
increased these sectors to neutral and plans to maintain the status quo in the
future. On the other hand, the Fund's management may under-weight the
construction sector due to the sluggish property market. Even though the Fund
also is under-weighting the banking sector now due to valuation and
non-performing loan ratio concerns, it may be looking to add some cheap
valuation banks with low non-performing loan ratios later this year, as bank
earnings may improve following the general economic recovery.
SHARE BUY-BACK PROGRAM
As you may know, the Fund's Board of Directors approved a share repurchase
program on June 3, 1999. The program authorizes the Fund to buy back up to 20%
of its outstanding common shares in the open market. The Board adopted the
program as an appropriate measure to reduce the Fund's discount to its net asset
value at which its shares have traded and to enhance value for the Fund's
shareholders by repurchasing shares at a significant discount, while allowing
its holders to continue to enjoy all the benefits of investment in a closed-end
fund. Under the program, the Fund will repurchase shares at management's
discretion in such quantities and at such times when it considers the purchases
to be consistent with the dual objectives of the program.
THE YEAR 2000 ISSUE
The Fund continues to review the current status of its exposure to the Year
2000 computer issue. The Fund does not own or directly use any computers in
conducting its business. Instead it relies on various service providers to
conduct its business and its service providers may use or depend on computers to
provide services to the Fund. Like other investment companies and financial and
business organizations, the Fund could be adversely affected if the computer
systems used by the Fund's service providers do not properly address this
problem prior to January 1, 2000.
The Fund's Board of Directors has adopted a Year 2000 plan which involves:
(1) collecting information regarding the Year 2000 preparations of its service
providers through a questionnaire prepared and distributed
7
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
by the Fund's management, (2) assessing the information provided by the service
providers, and (3) if necessary, adopting measures to replace service providers
who fail to indicate that they will become Year 2000 compliant on a timely
basis. The Fund had been advised by each of its service providers that it has
adopted a Year 2000 plan, completed an internal assessment of its computer
systems, and begun implementation of procedures to bring its mission-critical
systems into Year 2000 compliance. The Fund has been informed that substantially
all of its service providers will be compliant by the end of July 1999. Based on
this information, management of the Fund does not anticipate that the transition
to the 21st Century will have any material impact on the Fund's operations;
however, management of the Fund will continue to monitor the situation. In
addition, however, no assurance can be given that the Fund's service providers
have anticipated every step necessary to avoid any adverse effect on the Fund
attributable to the Year 2000 problem. The Year 2000 problem could also have a
negative impact on the companies in which the Fund invests, and this could have
a negative impact on the Fund's investment returns.
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 senior portfolio manager with DAM 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.
<TABLE>
<S> <C>
Sincerely,
/s/ MASAYASU OHI /s/ SADAMU TSUNEISHI
MASAYASU OHI SADAMU TSUNEISHI
CHAIRMAN OF THE BOARD PRESIDENT
</TABLE>
8
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
- -------------------------------------------
TAIWANESE COMMON STOCKS--96.96%
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
BANKS--4.43%
1,273,164 Chinatrust Commercial Bank.............. $ 1,529,184
800,400 Hua Nan Commercial Bank................. 1,585,736
-----------
3,114,920
-----------
COMPUTERS--14.58%
575,000 Acer Peripherals Inc.................... 1,423,972
328,320 Acer Sertek Inc......................... 1,133,224
420,000 Asustek Computer Inc.................... 4,732,541
105,007 Inventec Co., Ltd....................... 352,689
1,500,000 Shuttle Inc............................. 2,600,297
-----------
10,242,723
-----------
CONSTRUCTION ENGINEERING--0.71%
912,660 Cathay Construction Corp................ 497,239
-----------
ELECTRICAL MACHINERY--3.57%
1,257,164 Phoenixtec Power Co. Ltd................ 2,510,125
-----------
ELECTRONICS--15.69%
410,000 Boardtek Electronics Corp............... 487,370
364,000 Chroma Ate Inc.......................... 1,064,822
900,000 Delta Electronics, Inc.................. 4,986,999
200,000 Hon-Hai Precision Industrial Corp....... 1,807,826
2,000,000 Tatung Co., Ltd......................... 2,674,591
-----------
11,021,608
-----------
FINANCIAL SERVICES--4.37%
795,000 Capital Securities Corp................. 750,604
1,280,980 Yuanta Securities Corp.................. 2,319,754
-----------
3,070,358
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
LIFE INSURANCE--3.52%
688,138 Cathay Life Insurance Co., Ltd.......... $ 2,471,026
-----------
MISCELLANEOUS--5.75%
1,200,716 Pou Chen Corp........................... 3,902,773
63,520 Taiwan SECOM Corp....................... 136,659
-----------
4,039,432
-----------
PAPER--1.63%
1,000,000 Chung Hwa Pulp Corp..................... 715,082
1,000,000 Yuen Foong Yu Paper Manufacturing Co.,
Ltd.................................... 430,287
-----------
1,145,369
-----------
PLASTICS--5.83%
2,000,000 Grand Pacific Petrochemical............. 1,163,943
1,768,382 Nan Ya Plastics Corp.................... 2,928,691
-----------
4,092,634
-----------
REAL ESTATE--1.20%
1,187,500 Kindom Construction Co., Ltd............ 845,484
-----------
SEMICONDUCTORS--26.99%
1,600,376 Advanced Semiconductor Engineering
Inc.................................... 5,399,981
1,230,000 Siliconware Precision Industries Co.,
Ltd.................................... 2,341,660
1,961,850 Taiwan Semiconductor Manufacturing
Co..................................... 7,500,262
1,726,035 United Microelectronics Corp............ 3,713,454
-----------
18,955,357
-----------
SHIPS & SHIPPING--1.78%
1,000,000 Evergreen Marine Corp................... 1,250,619
-----------
</TABLE>
9
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONCLUDED)
JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
TAIWANESE COMMON STOCKS (CONCLUDED)
- -------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
STEEL--1.69%
1,600,000 Sheng Yu Steel Co., Ltd................. $ 1,183,754
-----------
TEXTILE--5.22%
2,000,000 Far Eastern Textile Ltd................. 2,971,768
1,800,000 Lealea Enterprise Co.................... 693,722
-----------
3,665,490
-----------
Total Taiwanese Common Stocks
(Cost--$50,968,408)............................. 68,106,138
-----------
</TABLE>
- -------------------------------------------
SHORT-TERM INVESTMENTS--3.44%
- -------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000)
- ----------
<C> <S> <C>
NEW TAIWAN DOLLAR SAVINGS
ACCOUNT--0.55%
12,554 International Commercial Bank of China,
1.50% (Payable on Demand).............. 388,624
-----------
U.S. DOLLAR TIME DEPOSIT--2.89%
2,030 Bank of New York, 2.70% due 7/1/99...... 2,029,607
-----------
Total Short-Term Investments (Cost--$2,412,172)...
2,418,231
-----------
Total Investments--100.40%
(Cost--$53,380,580)............................. 70,524,369
Liabilities in excess of other assets-- (0.40)%...
(281,792)
-----------
NET ASSETS (Applicable to 4,493,129 shares of
capital stock outstanding; equivalent to $15.63
per share)100.00%............................... $70,242,577
-----------
-----------
</TABLE>
- -------------------------------------------
TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
JUNE 30, 1999 (UNAUDITED)
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
- ----------------------------------- ----------
<S> <C>
Semiconductors..................... 26.99%
Electronics........................ 15.69
Computers.......................... 14.58
Plastics........................... 5.83
Miscellaneous...................... 5.75
Textile............................ 5.22
Banks.............................. 4.43
Financial Services................. 4.37
Electrical Machinery............... 3.57
Life Insurance..................... 3.52
</TABLE>
- -------------------------------------------
TEN LARGEST COMMON STOCK
POSITIONS HELD
JUNE 30, 1999 (UNAUDITED)
- -------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------
TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
JUNE 30, 1999 (UNAUDITED)
- -------------------------------------------
PERCENT OF
ISSUE NET ASSETS
- ----------------------------------- ----------
<S> <C>
Taiwan Semiconductor
Manufacturing Co................. 10.68%
Advanced Semiconductor Engineering
Inc.............................. 7.69
Delta Electronics, Inc............. 7.10
Asustek Computer Inc............... 6.74
Pou Chen Corp...................... 5.56
United Microelectronics Corp....... 5.29
Far Eastern Textile Ltd............ 4.23
Nan Ya Plastics Corp............... 4.17
Tatung Co., Ltd.................... 3.81
Shuttle Inc........................ 3.70
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost--$53,380,580)....................... $ 70,524,369
Interest and dividends receivable.......... 112,485
Prepaid expenses........................... 34,083
------------
Total assets............................. 70,670,937
------------
LIABILITIES
Payable for capital stock repurchased...... 199,567
Payable to investment manager.............. 60,645
Payable to administrator................... 12,500
Accrued expenses and other liabilities..... 155,648
------------
Total liabilities........................ 428,360
------------
NET ASSETS
Capital stock, $0.01 par value per share;
total 100,000,000 shares authorized;
4,493,129 shares issued and outstanding... 44,931
Paid-in capital in excess of par value..... 56,647,349
Accumulated net investment loss............ (502,854)
Accumulated net realized loss on
investments............................... (3,091,973)
Net unrealized appreciation on investments
and other assets and liabilities
denominated in foreign currency........... 17,145,124
------------
Net assets applicable to shares
outstanding............................. $ 70,242,577
------------
------------
NET ASSET VALUE PER SHARE............ $ 15.63
------------
------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$39,879).................................. $ 159,515
Interest (net of withholding taxes of
$1,150)................................... 8,839
------------
Total investment income.................. 168,354
------------
EXPENSES:
Investment management fee.................. 320,183
Administration fee......................... 75,000
Taiwan stock dividend tax.................. 68,445
Legal fees and expenses.................... 53,367
Custodian fees and expenses................ 42,943
Audit and tax services..................... 30,399
Reports and notices to shareholders........ 24,212
Directors' fees and expenses............... 15,876
Insurance expense.......................... 13,200
Transfer agency fee and expenses........... 7,557
Other...................................... 20,026
------------
Total expenses........................... 671,208
------------
NET INVESTMENT LOSS.......................... (502,854)
------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized losses on investments......... (3,073,951)
Net realized foreign currency transaction
losses.................................... (18,022)
Net change in unrealized appreciation
(depreciation) on investments in equity
securities................................ 22,616,897
Net change in unrealized appreciation
(depreciation) on translation of
short-term investments and other assets
and liabilities denominated in foreign
currency.................................. 3,894
------------
Net realized and unrealized gains from
investment activities and foreign currency
transactions................................ 19,528,818
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $ 19,025,964
------------
------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED FOR THE YEAR
JUNE 30, ENDED
1999 DECEMBER 31,
(UNAUDITED) 1998
------------ -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss........................ $ (502,854) $ (1,379,573)
Net realized gain (loss) on:
Investments.............................. (3,073,951) 4,060,017
Foreign currency transactions............ (18,022) (236,256)
Net change in unrealized appreciation
(depreciation) on:
Investments in equity securities......... 22,616,897 (9,001,170)
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... 3,894 (7,700)
------------ -------------
Net increase (decrease) in net assets
resulting from operations................. 19,025,964 (6,564,682)
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized gains from investment and
foreign currency transactions............. 0 (3,493,171)
------------ -------------
FROM CAPITAL STOCK TRANSACTIONS:
Sale of capital stock resulting from
reinvestment of dividends................. 8,979 0
Cost of capital stock repurchased.......... (199,567) 0
------------ -------------
Net increase (decrease) in net assets
derived from capital stock transactions... (190,588) 0
------------ -------------
Net increase (decrease) in net assets...... 18,835,376 (10,057,853)
NET ASSETS:
Beginning of period........................ 51,407,201 61,465,054
------------ -------------
End of period (including accumulated net
investment loss of $502,854 and $0,
respectively)............................. $ 70,242,577 $ 51,407,201
------------ -------------
------------ -------------
</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.
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.
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
14
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 six months ended June 30, 1999, 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.
INVESTMENT MANAGER AND INVESTMENT ADVISER
The Fund has entered into an Investment Management Agreement dated July 9,
1999 (the "Management Agreement") with Daiwa Asset Management (H.K.) Ltd. (the
"Manager"). Pursuant to the Manager 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,
15
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
as permitted by the Management Agreement, the Fund reimburses the Manager for
its out-of-pocket expenses related to the Fund. During the six months ended June
30, 1999, no such expenses were paid to the Manager. During the six months ended
June 30, 1999, the Fund paid brokerage commissions of $39,465 to Daiwa
Securities Co. Ltd. (Taipei Branch), an affiliate of the Manager, in connection
with the portfolio transactions.
The Investment Management Agreement became effective July 9, 1999 when a
change of control with respect to the ultimate parent company of the Investment
Manager occurred. While the Fund will accrue the fee owed under the Agreement
from July 9, 1999 until the Agreement is approved by the Fund's stockholders,
the fee for that period will not be paid to the Investment Manager, unless the
Agreement and payment of the fees is approved by the Fund's stockholders. A
stockholders' meeting for this purpose is scheduled for September 17, 1999.
The Manager has 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. During the six
months ended June 30, 1999, there were no commissions paid by the Fund to
affiliates 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. In
addition, as permitted by the Administration Agreement, the Fund reimburses the
Administrator for its out-of-pocket expenses related to the Fund. However, for
the six months ended June 30, 1999, there were no out-of-pocket expenses
incurred by the Administrator.
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 six months ended June 30,
1999, DSTC earned $16,299 from the Fund for its custodial services, excluding
the fees and expenses of ICBC.
At June 30, 1999 the Fund owed to DSTC $12,500 and $17,838 for
administration and custodian fees, respectively. The latter amount includes fees
and expenses payable to ICBC totalling $14,902.
During the six months ended June 30, 1999, the Fund paid or accrued $53,367,
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 June 30,
1999 was $50,968,408, excluding $2,412,172 of short-term investments. At that
date, for federal income tax purposes the net unrealized appreciation on
investments, excluding short-term securities, of $17,137,730 was composed of
gross appreciation of $20,082,012 for those investments having an excess of
value over cost, and gross depreciation of $2,944,282 for those investments
having an excess of cost over value. For the six months ended June 30, 1999, the
total aggregate cost of purchases and net proceeds from sales of portfolio
securities, excluding short-term securities, were $24,704,171 and $27,718,857,
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.
During the six months ended June 30, 1999, 1,011 shares were issued as a result
of the reinvestment of the dividend paid on January 21, 1999 to those
shareholders electing to reinvest dividends.
On June 3, 1999, the Fund announced that its Board of Directors had approved
a share repurchase program that authorizes the Fund to buy back up to 20% of its
outstanding common shares in the open market. As of June 30, 1999, the Fund had
repurchased 15,200 shares in connection with its repurchase program.
Of the 4,493,129 shares outstanding at June 30, 1999, DSA owned 7,957
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
SIX FOR THE
MONTHS PERIOD
ENDED JULY 25,
JUNE 30, FOR THE YEARS ENDED DECEMBER 31, 1994* TO,
1999 ---------------------------------------------------- DECEMBER 31,
(UNAUDITED) 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 11.41 $ 13.64 $ 12.09 $ 9.65 $ 14.10 $ 14.05
---------- ---------- ---------- ---------- ---------- ------------
Net investment loss..................... (0.11) (0.31) (0.34) (0.21) (0.21) 0.18
Net realized and unrealized gains
(losses) on investments and foreign
currency transactions.................. 4.32 (1.14) 1.89 2.65 (3.94) 0.06
---------- ---------- ---------- ---------- ---------- ------------
Net increase (decrease) in net asset
value resulting from operations........ 4.21 (1.45) 1.55 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.... -- (0.78) -- -- (0.13) --
---------- ---------- ---------- ---------- ---------- ------------
Total dividends and distributions to
shareholders....................... -- (0.78) -- -- (0.30) --
---------- ---------- ---------- ---------- ---------- ------------
Anti-dilutive effect of shares
repurchased............................ 0.01 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ------------
Offering costs charged to paid-in
capital in excess of par value......... -- -- -- -- -- (0.19)
---------- ---------- ---------- ---------- ---------- ------------
Net asset value, end of period.......... $ 15.63 $ 11.41 $ 13.64 $ 12.09 $ 9.65 $ 14.10
---------- ---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ---------- ------------
Per share market value, end of period... $ 13.50 $ 9.00 $ 11.375 $ 10.125 $ 10.625 $ 11.875
---------- ---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ---------- ------------
Total investment return:
Based on market price at beginning and
end of period, assuming reinvestment
of dividends......................... 50.00% (13.97)% 12.35% (4.71)% (8.04)% (15.48)%+
Based on net asset value at beginning
and end of period, assuming
reinvestment of dividends............ 36.99% (9.04)% 12.82% 25.28% (29.66)% 0.36%+
Ratios and supplemental data:
Net assets, end of period (in
millions)............................ $ 70.2 $ 51.4 $ 61.5 $ 54.5 $ 43.5 $ 63.6
Ratios to average net assets of:
Expenses, excluding Taiwan stock
dividend tax....................... 2.20%** 2.11% 2.03% 2.29% 2.34% 2.12%**
Expenses, including Taiwan stock
dividend tax....................... 2.45%** 2.63% 2.44% 2.80% 2.72% 2.20%**@
Net investment income (loss)........ (1.84)%** (2.29)% (2.16)% (1.46)% (1.88)% 2.96%**
Portfolio turnover.................... 45.65% 70.78% 74.22% 94.12% 31.75% 9.33%
</TABLE>
- --------------------------
* Commencement of operations.
** Annualized.
+ Total return is calculated exclusive of sales charges.
@ Reflects reclassification of certain expenses for comparative
purposes.
18
<PAGE>
- -----------------------------------------
BOARD OF DIRECTORS
Masayasu Ohi, CHAIRMAN
Sadamu Tsuneishi
Martin J. Gruber
Christina Y. Liu
Oren G. Shaffer
- -----------------------------------------
OFFICERS
Sadamu Tsuneishi
PRESIDENT
Daniel F. Barry
VICE PRESIDENT AND SECRETARY
Sean J. Peters
TREASURER
John A. Koopman
ASSISTANT TREASURER
Laurence E. Cranch
ASSISTANT SECRETARY
Judy Runrun Tu
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
PricewaterhouseCoopers 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 financial information included herein is taken from the records of the Fund
without examination by independent accountants who do not express an opinion
thereon.
The
Taiwan
------------------------
Equity
------------------------
Fund, Inc.
------------------------
Semi-Annual Report
June 30, 1999
----------------------------------
