<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>
THE TAIWAN EQUITY FUND, INC.
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January 24, 2000
DEAR SHAREHOLDERS:
We are pleased to present the Annual Report of The Taiwan Equity Fund, Inc.
(the "Fund") for the year ended December 31, 1999
STOCK MARKET REVIEW
The Taiwan stock market as represented by the Taiwan Weighted Index ("TWI")
rose 31.6%, from 6,418 to 8,449, during 1999. During the same period, the New
Taiwan Dollar ("TWD") appreciated from TWD 32.21 to 31.4 against the U.S. Dollar
("USD"), an increase of 2.5%.
The market declined 14% during the first six weeks of 1999 as a result of
deteriorating economic conditions, continuing sluggish trade figures, weak
property demand and tightening credit among financial institutions caused by the
financial distress condition 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, and
brought a revival in the market. 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.
Despite the continuing recovery of the regional economy, strong trade
figures and robust growth in the global Personal Computer Sector, as well as
telecom products consumption growth, the market in Taiwan plunged by 20% in
July. The drop in the market was caused by renewed political tensions and the
possibility of a military confrontation between Taiwan and China. After the
U.S.'s reconfirmation of protection of Taiwan according to the Taiwan Relations
Act and Taiwan's claim that it also pursues a "one-China" policy, China held
back on its military action. The market rebounded strongly to around the 8,000
level in August because of diminished political tensions across the Taiwan
Strait. The announcement by Morgan Stanley Capital International ("MSCI") to
increase Taiwan's weighting in the MSCI Asian Country Far East ex-Japan index
from 17% to 26.8%, beginning in May 2000, brought huge buying by local and
foreign funds. This also helped to push the market higher. However, the
September numbers were down slightly (6%) due to the earthquake. The resulting
power outages caused some disruptions, but actual damage to Taiwan's industrial
and export infrastructure was minor. Following the rally in other major markets,
the Taiwan stock market closed at an 8,449 level at the year-end. Major reasons
for the strong market included the Internet boom, continued strong demand of
semiconductor and telecom products from the U.S., Europe and Asian courtiers, as
well as a better economic outlook in the year 2000.
ECONOMIC REVIEW AND OUTLOOK
TRADE
In 1999, exports grew by 10% year-on-year ("YOY") to USD 121.7 billion while
imports increased by 5.8% to USD 110.7 billion. The trade surplus thus increased
from USD 5.9 billion to USD 11 billion in 1999, an 86% increase. Exports
improved dramatically, reflecting the technology boom, recovering Asian regional
demand and the continuing strength of the U.S. and European economies. Export
growth was driven by the information technology and semiconductor sectors.
Import growth moderated as the acceleration of capital goods did not start to
pick up until the fourth quarter and consumer goods demand remained rather weak
throughout the year.
In 1999, export orders in the fourth quarter of 1999 rose by 6.5% YOY, which
signals that exports in the first quarter of 2000 may be strong. The growth was
due to rising Asian demand and persistent strength in electronics
2
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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orders, particularly from the U.S. and Japan. Exports may continue to be strong
over the first half of the year, considering it is the peak season for
information technology ("IT") products. Overall, due to recovering economic
conditions in Asia and continuing strength of the U.S. and other major countries
demand growth, the Taiwanese government has forecast that 2000 export growth
will be 8.3% YOY and import growth will be 10% 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 0.2% and
declined 4.5%, respectively, in 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 2000. In light of the pick-up in the economy, CPI inflation is
forecast to grow 2.3% and the WPI to rise 2.4% in 2000, given the TWD's possible
strengthening and lowered import taxes as Taiwan prepares to enter the World
Trade Organization.
EXCHANGE RATE
In 1999, the TWD depreciated from 32.21 to 31.4 against the USD. The TWD
first depreciated by 2.8% to around 33.1 vs. the USD due to weak exports in the
first quarter, then gradually appreciated to 31.40 in December 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 fourth
quarter. Stabilized Asian currencies also helped the TWD's appreciation. For the
year of 2000, the TWD may slightly appreciate because of rising exports,
continuing foreign funds inflow, and strengthening Asian currencies due to
strong economic conditions in the region.
MONEY SUPPLY AND MONETARY POLICY
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. In February 1999, it lowered the required reserve deposit ratios by
an aggressive 120 basis points to 6.4%. Short-term interest rates came down from
5.3% to 4.8%, which resulted in a rebound in money supply growth rates. During
the year of 1999, Taiwan's money supply grew well with M1B growth of 9.4% YOY
and M2 growth of 8.8 YOY, on average, respectively. 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 expects the money supply growth rates to continue to rise based on
strong market liquidity, and growing loan demand associated with the domestic
economic recovery.
Despite the strong stock market recovery, the Central Bank did not raise
interest rates at its December 1999 board meeting, and continued to keep loose
liquidity in order to facilitate better economic growth. The Fund's management
expects that the Central Bank will continue with a rather loose, stable monetary
policy unchanged at least until March 2000, while the private sector investment
is relatively weak. Liquidity may stay positive throughout the first half of
2000, as long as consumer price growth remains under control with low
inflationary pressure. However, the Central Bank may tighten its current
monetary policy in the second half of this year if the economic growth continues
to accelerate. The Fund's management is anticipating the M1b and M2 money supply
growth rates in 2000 to be near 9.5% and 10.5%, respectively.
ECONOMIC GROWTH
Exports posted 10% growth in 1999, in contrast to a 9.4% decline in 1998.
The 15% rise in export orders in the fourth quarter of 1999 demonstrates that
exports in the first three months of 2000 should continue to grow. Industrial
production growth of 7.5% was strong, compared to 2.6% growth in 1998. The
estimated Gross Domestic Product ("GDP") growth of 5.4% showed a much better
performance compared to the 4.8% growth in
3
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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1998. In spite of the military threat from China in the third quarter and the
earthquake which struck central Taiwan in September, Taiwan's economy remained
strong due to the robust export growth. Looking forward, the Fund's management
believes that as long as the continuing strong demand from Asian countries is
sustained and a global upturn in the electronics cycle continues to benefit
Taiwan's exports, the economic growth would be stronger in 2000. In accordance
with the International Monetary Fund ("IMF"), the world economy is anticipating
a 3.4% growth in 2000, compared to a 2.8% growth in 1999. Taiwan's economy is
forecast to grow by 6.1% in the year 2000 as exports continue to boom amid the
continuing recovery of the global economy and expansion of private investments
thanks to post-quake reconstruction, export-driven investments and construction
of major infrastructure projects.
POLITICAL REVIEW AND OUTLOOK:
The greatest risk to both the market and the economy is cross-strait
tensions between Taiwan and China. The tensions between Taiwan and China renewed
in July 1999 after Taiwan President Lee's declaration that negotiations between
Taiwan and China should be conducted as a "state-to-state" relationship. After
the U.S.'s reconfirmation of protection of Taiwan according to the Taiwan
Relations Act and Taiwan's claim that it also pursues a "one-China" policy,
China held off on military action. After the earthquake, China's aggressive
actions have faded. It is believed that China may wait several months until
Mr. Lee's term expires and ascertain what the newly elected president will do
after that. 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.
At present, the three finalized candidates evenly share the votes. The winner is
still hard to predict. Regardless, when a new president is elected, he will
probably try unification with China and provide a favorable environment for
better economic growth. Because the Chinese president has set a target to solve
the Taiwan issue by the year 2050, the current political issue should be
considered neutral for the market. The Taiwan stock market may be positively
impacted with any breakthrough in relations with China.
STOCK MARKET OUTLOOK:
Looking forward, China and Taiwan will probably enter the WTO in the first
half of 2000. This may help to smooth the tensions between Taiwan and China.
China probably will not take military action against Taiwan before the new
President is elected in March 2000 and probably will not take military action
after the election either. Market liquidity may continue to remain strong in
expectation of Taiwan's weighting increase in the MSCI Index beginning in May
2000. With robust earnings growth over the coming 12 months and a stable
interest rate environment, there are more upsides than downsides. In the short
term, the Fund's management believes that the market may gradually move higher
considering the better economic outlook in 2000 and strong momentum of earnings
growth for several sectors (including computers, semiconductors, petrochemicals,
and banks). Considering that Taiwanese semiconductor and electronic companies
continued to expand during the past several years, they will benefit the most
from this recovering cycle.
In the longer term, the Fund's management foresees that the market has good
upside potential considering the continuing economic growth, the sound
infrastructure of Taiwan's electronic industry, stronger-than-expected Asian
regional demand, the Internet boom, strong demand for Personal Computer-related
products, strong competitiveness of semiconductor companies and the loose
liquidity condition in the market. When the uncertainty of the presidential
election diminishes, the market may go up to an 11,000 level this year. Major
reasons include higher economic growth, a forecast of more than 25% corporate
earnings growth, abundant liquidity and the improvement of relations with China
after the March presidential election.
4
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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FUND PERFORMANCE AND STRATEGY:
As of December 31, 1999, the Fund's total net assets were US$67.6 million,
equivalent to US$18.75 per share. For the fiscal year of 1999, the Fund's net
asset value per share increased by 64.3% in U.S. Dollar terms, whereas the index
rose 31.6% in U.S. Dollar terms. Thus, the Fund outperformed the TWI by 32.7%.
In terms of strategy, the Fund's management plans to overweight electronics,
semiconductors, petrochemicals and good-growth non-classified stocks.
Electronics and semiconductors may have good upside potential due to: 1) the
continuation of the outsourcing trend which has propelled superior growth in the
downstream electronics industry, Taiwan's leading position in foundation,
coupled with secular growth drivers from Integrated Device Manufacturer ("IDM")
outsourcing, 2) increasing use by telecom products and 3) continuing strong PC
demand. Some Taiwanese PC systems, telecom products and components producers
will benefit from the continuing trend toward outsourcing. Companies with global
competitiveness and strong relations with major U.S. companies may provide good
value for investors. In addition, the Fund's management also favors the
petrochemical sector, with its rising oil prices and strong demand because of
global economic recovery. On the other hand, the Fund may underweight the
construction sector due to a sluggish property market, and selected shares in
the banking sector with low non-performing loan ratios as well as possible
earnings growth following the broad economic recovery.
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.
PLAN OF LIQUIDATION
As of November 22, 1999, the Board of Directors approved and authorized the
orderly liquidation of the Fund based on its determination that such action is
in the best interests of the Fund and all of its existing stockholders. On
December 2, 1999, the Board of Directors adopted a Plan of Liquidation and
Dissolution (the "Plan") and directed that the Plan be submitted for
consideration by the Fund's stockholders at the annual meeting of stockholders
scheduled for February 15, 2000. Subject to receipt of the requisite stockholder
approval at the Fund's annual meeting and the satisfactory resolution of any and
all claims pending against the Fund and its Board of Directors, stockholders
remaining in the Fund can expect to receive a liquidation distribution, in cash,
as soon as reasonably practicable.
SUBSEQUENT EVENTS
Daniel F. Barry resigned as Vice President and Secretary of the Fund,
effective as of January 14, 2000, and John A. Koopman resigned as Assistant
Treasurer of the Fund, effective as of January 19, 2000. Mr. Barry and
Mr. Koopman also resigned from their positions with the Fund's administrator,
Daiwa Securities Trust Company.
<TABLE>
<S> <C>
Sincerely,
/s/ MASAYASU OHI /s/ SADAMU TSUNEISHI
MASAYASU OHI SADAMU TSUNEISHI
CHAIRMAN OF THE BOARD PRESIDENT
</TABLE>
5
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
- -------------------------------------------
TAIWANESE COMMON STOCKS--97.72%
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<TABLE>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
BANKS--2.91%
1,476,870 Chinatrust Commercial Bank.............. $ 1,717,017
200,400 Hua Nan Commercial Bank................. 251,497
-----------
1,968,515
-----------
COMPUTERS--12.59%
80,000 ARES International Corp................. 351,648
1,500,000 Acer Inc................................ 4,515,050
300,877 Acer Sertek Inc......................... 1,763,382
250,250 Compal Electronics Inc.................. 840,942
790,000 Shuttle Inc............................. 1,044,275
-----------
8,515,297
-----------
ELECTRICAL MACHINERY--1.43%
500,437 Phoenixtec Power Co., Ltd............... 964,371
-----------
ELECTRICAL PRODUCTS AND COMPUTERS--23.33%
200,000 AMBIT Microsystems Corp................. 1,484,313
434,800 ACER Peripherals Inc.................... 1,800,414
500,000 CMC Magnetics Corp...................... 2,269,470
500,000 Compeq Manufacturing Co................. 2,723,364
580,000 Delta Electronics Inc................... 2,512,502
408,000 Hon Hai Precision Industry Corp......... 3,040,994
680,520 Taiwan Secom............................ 1,950,846
-----------
15,781,902
-----------
FINANCIAL SERVICES--4.01%
814,875 Capital Securities Corp................. 469,796
1,000,000 Grand Cathay Securities Corp............ 652,970
1,473,127 Yuanta Securities Co., Ltd.............. 1,590,667
-----------
2,713,433
-----------
</TABLE>
<TABLE>
SHARES VALUE
- ---------- -----------
<C> <S> <C>
LIFE INSURANCE--2.81%
791,358 Cathay Life Insurance Co., Ltd.......... $ 1,903,091
-----------
PLASTIC--10.98%
1,000,000 Formosa Plastics Corp................... 1,990,763
1,962,904 Nan Ya Plastics Corp.................... 4,314,075
800,000 Taiwan Styrene Monomer Corp.*........... 1,121,198
-----------
7,426,035
-----------
SEMICONDUCTORS--27.97%
500,000 Siliconware Precision Industries Co..... 1,274,088
1,400,850 Taiwan Semiconductor Manufacturing
Co..................................... 7,451,567
1,726,035 United Mircoelectronics
Corp................................... 6,157,538
1,700,000 Winbond Electric Co., Ltd.*............. 4,034,082
-----------
18,917,276
-----------
SHIPS & SHIPPING--1.31%
1,080,000 Evergreen Marine Corp................... 887,530
-----------
STEEL INDUSTRY--0.95%
800,000 Sheng Yu Steel Co., Ltd................. 642,140
-----------
TEXTILE--9.42%
2,140,000 Far Eastern Textile Co., Ltd............ 5,112,279
1,000,000 Formosa Chemicals & Fiber Corp.......... 1,261,347
-----------
6,373,626
-----------
Total Taiwanese Common Stocks (Cost--$45,965,342).....
66,093,216
-----------
</TABLE>
6
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THE TAIWAN EQUITY FUND, INC.
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PORTFOLIO OF INVESTMENTS (CONCLUDED)
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
- -------------------------------------------
TIME DEPOSITS--2.54%
- -------------------------------------------
<TABLE>
PRINCIPAL
AMOUNT
(000) VALUE
- ---------- -----------
<C> <S> <C>
NEW TAIWAN DOLLAR SAVINGS
ACCOUNT--2.36%
$50,089 International Commercial Bank of China,
1.50% (Payable on Demand).............. $ 1,595,459
-----------
U.S. DOLLAR TIME DEPOSIT--0.18%
127 Bank of New York, 2.70% due 1/01/00..... 127,017
-----------
Total Short-Term Investments (Cost--$1,711,174).......
1,722,476
-----------
Total Investments--100.26%
(Cost--$47,676,516)................................. 67,815,692
Liabilities in excess of other assets--(0.26)%........
(177,346)
-----------
NET ASSETS (Applicable to 3,606,729 shares of capital
stock outstanding; equivalent to $18.75 per
share)--100%........................................ $67,638,346
===========
</TABLE>
- ------------------------
* Non-income producing securities
- -------------------------------------------
TEN LARGEST COMMON STOCK
CLASSIFICATIONS HELD
DECEMBER 31, 1999
- -------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY NET ASSETS
- -------- ----------
<S> <C>
Semiconductors..................... 27.97%
Electrical Products and
Computers.......................... 23.33
Computers.......................... 12.59
Plastic............................ 10.98
Textile............................ 9.42
Financial Services................. 4.01
Banks.............................. 2.91
Life Insurance..................... 2.81
Electrical Machinery............... 1.43
Ships & Shipping................... 1.31
</TABLE>
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TEN LARGEST COMMON STOCK
POSITIONS HELD
DECEMBER 31, 1999
- -------------------------------------------
<TABLE>
- -----------------------------------------------
TEN LARGEST COMMON STOCK
POSITIONS HELD
DECEMBER 31, 1999
- -----------------------------------------------
PERCENT OF
ISSUE NET ASSETS
- ----------------------------------- ------
<S> <C>
Taiwan Semiconductor Manufacturing
Co............................... 11.02
United Mircoelectronics Corp....... 9.10
Far Eastern Textile Co., Ltd....... 7.56
Acer Inc........................... 6.68
Nan Ya Plastics Corp............... 6.38
Winbond Electric Co., Ltd.......... 5.96
Hon Hai Precision Industry Corp.... 4.50
Compeq Manufacturing Co............ 4.03
Delta Electronics Inc.............. 3.71
CMC Magnetics Corp................. 3.36
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value
(cost--$47,676,516)....................... $67,815,692
Interest receivable........................ 1,045
Prepaid expenses........................... 12,517
-----------
Total assets............................. 67,829,254
-----------
LIABILITIES
Payable to investment manager.............. 53,076
Payable to administrator................... 12,500
Payable for investment securities
purchased................................. 55,968
Accrued expenses and other liabilities..... 69,364
-----------
Total liabilities........................ 190,908
-----------
NET ASSETS
Capital stock, $0.01 par value per share;
total 100,000,000 shares authorized;
3,606,729 shares issued and outstanding... 36,067
Paid-in capital in excess of par value..... 44,707,427
Undistributed net capital gain............. 2,756,148
Net unrealized appreciation on investments
and other assets and liabilities
denominated in foreign currency........... 20,138,704
-----------
Net assets applicable to shares
outstanding............................. $67,638,346
===========
NET ASSET VALUE PER SHARE............ $ 18.75
===========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of
$66,154).................................. $ 264,615
Interest (net of withholding taxes of
$2,288)................................... 34,936
-----------
Total investment income.................. 299,551
-----------
EXPENSES:
Investment management fee and expenses..... 677,031
Taiwan stock dividend tax.................. 189,763
Legal fees and expenses.................... 159,466
Administration fee......................... 150,000
Custodian fees and expenses................ 90,371
Reports and notices to shareholders........ 62,177
Audit and tax services..................... 61,302
Directors' fees and expenses............... 35,758
Insurance expense.......................... 26,570
Transfer agency fee and expenses........... 17,367
Other...................................... 37,110
-----------
Total expenses........................... 1,506,915
-----------
NET INVESTMENT LOSS BEFORE WAIVER............ (1,207,364)
-----------
Waiver of management fee................... 35,499
-----------
NET INVESTMENT LOSS AFTER WAIVER............. (1,171,865)
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM
INVESTMENT ACTIVITIES AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gains on investments.......... 3,926,265
Net realized foreign currency transaction
gains..................................... 1,748
Net change in unrealized appreciation
(depreciation) on investments in equity
securities................................ 25,614,847
Net change in unrealized appreciation
(depreciation) on translation of
short-term investments and other assets
and liabilities denominated in foreign
currency.................................. (471)
-----------
Net realized and unrealized losses from
investment activities and foreign currency
transactions................................ 29,542,389
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $28,370,524
===========
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment loss........................ $ (1,171,865) $ (1,379,573)
Net realized gain (loss) on:
Investments.............................. 3,926,265 4,060,017
Foreign currency transactions............ 1,748 (236,256)
Net change in unrealized appreciation
(depreciation) on:
Investments in equity securities......... 25,614,847 (9,001,170)
Translation of short-term investments and
other assets and liabilities denominated
in foreign currency..................... (471) (7,700)
------------ ------------
Net increase (decrease) in net assets
resulting from operations................. 28,370,524 (6,564,682)
------------ ------------
FROM CAPITAL STOCK TRANSACTIONS:
Sale of capital stock resulting from
reinvestment.............................. 8,979 --
Cost of capital stock repurchased and
retired................................... (12,148,358) --
------------ ------------
Net decrease in net assets derived from
capital stock transactions................ (12,139,379) --
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net realized gains from investment and
foreign currency transactions............. -- (3,493,171)
------------ ------------
Net increase (decrease) in net assets...... 16,231,145 (10,057,853)
------------ ------------
NET ASSETS:
Beginning of year.......................... 51,407,201 61,465,054
------------ ------------
End of year................................ $ 67,638,346 $ 51,407,201
============ ============
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
THE TAIWAN EQUITY FUND, INC.
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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.
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 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 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.
11
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
During the year ended ended December 31, 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 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. Effective
September 17, 1999, the Manager has voluntarily waived the portion of its
investment management fee in excess of 1.0% of the Fund's average weekly net
assets. In addition, as permitted by the Management Agreement, the Fund
reimburses the Manager for the Manager's out-of-pocket expenses related to the
Fund. During the year ended December 31,
12
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1999, no such expenses were paid. During the year ended December 31, 1999, the
Fund paid brokerage commissions of $68,004 to Daiwa Securities Co. Ltd. (Taipei
Branch), an affiliate of the Manager, in connection with the portfolio
transactions.
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 $1,425 were paid by the Fund during the year ended
December 31, 1999 to National Securities, an affiliate of the Adviser, in
connection with portfolio transactions.
ADMINISTRATOR AND CUSTODIAN AND OTHER RELATED PARTIES
Daiwa Securities Trust Company, ("DSTC"), an affiliate of the Manager,
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 year ended
December 31, 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 year ended December 31, 1999,
DSTC earned $33,318 from the Fund for its custodial services, excluding the fees
and expenses of ICBC.
At December 31, 1999, the Fund owed to DSTC $12,500 and $2,743 for
administration and custodian fees, respectively.
During the year ended December 31, 1999, the Fund paid or accrued $159,466
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.
INVESTMENTS IN SECURITIES AND FEDERAL INCOME TAX MATTERS
For federal income tax purposes, the cost of securities owned at
December 31, 1999 was the same as the cost of securities for financial statement
purposes. At December 31, 1999, the net unrealized depreciation on investments,
excluding short-term securities, of $20,127,874 was composed of gross
appreciation of $21,941,842 for those investments having an excess of value over
cost, and gross depreciation of $1,813,968 for those investments having an
excess of cost over value. For the year ended December 31, 1999, the total
aggregate cost of purchases and net proceeds from sales of portfolio securities,
excluding short-term securities, were $46,667,134 and $61,685,103, respectively.
13
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
At December 31, 1999, the Fund reclassified $1,171,865 from accumulated net
investment loss to undistributed net realized gain on investments as a result of
permanent book/tax differences primarily relating to net realized foreign
currency gain and a net investment loss for the year ended December 31, 1999.
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 3,606,729 shares outstanding at December 31, 1999, Daiwa Securities America
Inc., an affiliate of DSTC, owned 7,957 shares. On June 28, 1999, the Fund
commenced a share repurchase program for purposes of enhancing shareholder value
and reducing the discount at which the Fund's shares traded from their net asset
value. For the year ended December 31, 1999, the Fund repurchased 901,600 shares
or 20.00% of its Common Stock at an average price per share of $13.47 and an
average discount of 12.36% from net asset value per share. The shares
repurchased have been retired.
PLAN OF LIQUIDATION
As of November 22, 1999, the Board of Directors approved and authorized the
orderly liquidation of the Fund based on its determination that such action is
in the best interests of the Fund and all of its existing stockholders. On
December 2, 1999, the Board of Directors adopted a Plan of Liquidation and
Dissolution (the "Plan") and directed that the Plan be submitted for
consideration by the Fund's stockholders at the annual meeting of stockholders
scheduled for February 15, 2000. Subject to receipt of the requisite stockholder
approval at the Fund's annual meeting and the satisfactory resolution of any and
all claims pending against the Fund and its Board of Directors, stockholders
remaining in the Fund can expect to receive a liquidation distribution, in cash,
as soon as reasonably practicable.
14
<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 YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..................... $ 11.41 $ 13.64 $ 12.09 $ 9.65 $ 14.10
------- ------- ------- ------- -------
Net investment loss.................................... (0.33) (0.31) (0.34) (0.21) (0.21)
Net realized and unrealized gains (losses) on
investments and foreign currency transactions......... 7.20 (1.14) 1.89 2.65 (3.94)
------- ------- ------- ------- -------
Net increase (decrease) in net asset value resulting
from operations....................................... 6.87 (1.45) 1.55 2.44 (4.15)
------- ------- ------- ------- -------
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)
------- ------- ------- ------- -------
Antidilutive effect of shares repurchased.............. 0.47 -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year........................... $ 18.75 $ 11.41 $ 13.64 $ 12.09 $ 9.65
======= ======= ======= ======= =======
Per share market value, end of year.................... $ 16.75 $ 9.000 $ 11.375 $ 10.125 $ 10.625
======= ======= ======= ======= =======
Total investment return:
Based on market price at beginning and end of year,
assuming reinvestment of dividends.................. 86.11 % (13.97)% 12.35 % (4.71)% (8.04)%
Based on net asset value at beginning and end of
year, assuming reinvestment of dividends............ 64.33 % (9.04)% 12.82 % 25.28 % (29.66)%
Ratios and supplemental data:
Net assets, end of year (in millions)................ $ 67.6 $ 51.4 $ 61.5 $ 54.5 $ 43.5
Ratios to average net assets of:
Expenses, excluding Taiwan stock dividend tax...... 2.22 % 2.11 % 2.03 % 2.29 % 2.34 %
Expenses, including Taiwan stock dividend tax...... 2.55 % 2.63 % 2.44 % 2.80 % 2.72 %
Net investment loss before waiver.................. (2.10)% -- -- -- --
Net investment loss after waiver................... (2.03)% -- -- -- --
Net investment loss................................ (2.03)% (2.29)% (2.16)% (1.46)% (1.88)%
Portfolio turnover................................... 83.01 % 70.78 % 74.22 % 94.12 % 31.75 %
</TABLE>
15
<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, 1999, the results of its operations for the year then
ended, and 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 five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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, 1999 by
correspondence with the custodians, provide a reasonable basis for the opinion
expressed above.
As described in the Notes to the Financial Statements under "Plan of
Liquidation", the Board of Directors of the Fund has approved the orderly
liquidation of the Fund, subject to requisite shareholder approval.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 4, 2000
16
<PAGE>
THE TAIWAN EQUITY FUND, INC.
- ----------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
The Fund is required by Subchapter M of the Internal Revenue Code of 1986,
as amended, to advise you within 60 days of the Fund's fiscal year end
(December 31, 1999) as to the federal tax status of distributions received by
the Fund's shareholders in respect of such fiscal year.
There will be no dividend payment or foreign tax credit with respect to the
fiscal year 1999.
SHAREHOLDERS ARE STRONGLY ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES OF THEIR INVESTMENT IN THE FUND.
17
<PAGE>
- -----------------------------------------
BOARD OF DIRECTORS
Masayasu Ohi, CHAIRMAN
Sadamu Tsuneishi
Martin J. Gruber
Christina Y. Liu
Oren G. Shaffer
- -----------------------------------------
OFFICERS
Sadamu Tsuneishi
PRESIDENT
Sean J. Peters
TREASURER
Judy Runrun Tu
ASSISTANT SECRETARY
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
Clifford Chance Rogers & Wells LLP
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
- -----------------------------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Comapny 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.
------------------------
Annual Report
December 31, 1999
----------------------------------
