THE TAIWAN
FUND, INC.(R)
* * * * * * * * * * *
Annual Report
August 31, 2002
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THE TAIWAN
FUND, INC.
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WHAT'S INSIDE
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Page
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Chairman's Statement 2
Report of the Investment Manager 5
Portfolio Snapshot 10
Investments 11
Financial Statements 15
Notes to Financial Statements 18
Report of Independent Auditors 21
Other Information 22
Summary of Dividend Reinvestment and Cash Purchase Plan 23
* * * * * * * * * * *
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CHAIRMAN'S STATEMENT
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Dear Shareholders:
We are pleased to present the Annual Report of The Taiwan Fund, Inc. (the
"Fund") for the fiscal year ended August 31, 2002. During this period, the
Fund's net asset value ("NAV") increased by 5.21% in U.S. dollar terms and by
3.72% in New Taiwan ("NT") dollar terms. During the same period, the Taiwan
Stock Exchange Index (the "TAIEX") increased by 5.67% in NT dollar terms. The NT
dollar appreciated over the U.S. dollar by 0.97% during this period.
On August 31, 2002, the Fund's shares were trading at US$9.27 per share,
reflecting a discount of 18.04% to the Fund's NAV per share of US$11.31. The
Fund's shares were trading at a discount of 8.09% on August 31, 2001.
The year began well, as the global economy rebounded sharply from its low in
2001. U.S. Gross Domestic Product ("GDP") rose at an annual rate of 2.7% in the
fourth quarter of 2001, up from a decline of 0.3% in the third quarter of 2001.
After dipping into a recession in early 2001 due to a massive inventory
correction, the resilient U.S. economy regained its momentum in late 2001 and
helped in a global recovery. The key to this recovery was continued consumer
demand in the U.S., which was surprisingly strong in the aftermath of the 9-11
terrorist attacks. Low interest rates, growing personal income, stabilizing
stock markets, and a strong housing sector all contributed to the strength of
U.S. consumer spending. As U.S. businesses replenished their inventories,
Taiwan's economy rebounded with strong export growth in the second half of 2001.
Nevertheless, the pace of the global recovery seemed to slow down in the second
quarter of 2002. U.S. GDP growth in the second quarter declined to just 1.1%,
down from 5% in the first quarter. While business investments made a turnaround
with positive growth, consumer spending lost its momentum and experienced weaker
growth for the second consecutive quarter. If consumer spending plateaus, the
global recovery may take more time to resume a stable upward trend. With global
demand easing, Taiwan's export growth is expected to decline during late 2002.
Taiwan's economic activity in 2002 was in line with global activity, with
exports recovering in the fourth quarter of 2001. Driven by stronger export
growth, Taiwan's GDP growth increased from -4.42% in the third quarter of 2001,
to a projected 4.06% in the third quarter of 2002, according to recent
government estimates. In light of a slower global economy, however, we expect to
see softening results in Taiwan's economic activities, including export orders
and industrial production.
2
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Nevertheless, we remain optimistic about Taiwan's economy for the coming year.
Although the global recovery may be slow, we believe it will continue in 2003.
U.S. business investments, for example, have been stabilizing since the fourth
quarter of 2001. Business inventories have been controlled at a reasonable level
after massive corrections in 2001. A stronger recovery is therefore expected for
2003, when businesses increase their investments in areas such as PC upgrades,
and consumers come back into stores to spend with more confidence.
In addition, we believe that Taiwan can benefit significantly from its
increasing ties to the booming Chinese economy. Taiwan is China's fourth largest
foreign investor, and the second largest importer. With its projected GDP growth
of over 7% in 2002 and over 5% in 2003, China is capturing the world's attention
with its enormous potential. Taiwan's exports to China (including via Hong Kong)
as a percentage of total exports have risen significantly from approximately 18%
in 2000 to the current level of 25%. With the current mixed global outlook,
China provides Taiwan a great support to rely on for the foreseeable future.
A positive factor on the economic front, China is nonetheless a negative factor
on the political front. Although political events seldom generate a long-term
impact upon the economy, the stock market may from time-to-time suffer their
consequences. In the next twelve months, however, we do not foresee cross-strait
tensions escalating significantly. In fact, the market appears relatively immune
to such issues after being affected by the "one country on each side" statement,
when President Chen Shui-bian delivered his speech back in August. It should
also be noted that the official reactions to this event, in China, the U.S. and
Taiwan, confirmed that no leaders wanted to increase political tensions at this
time. Economic issues are expected to remain a top priority for policymakers
across the strait.
However, the most important political factor affecting the global market is the
increasing likelihood of a war between the U.S. and Iraq. Confidence will wane
during a period of prolonged warfare, deterring businesses from making their
expected investments. Consumer demand will also weaken. Financial markets are
likely to stay volatile with the impending threat of war.
During the past year, the Fund's shares were trading at an average discount of
around 10.3%. The discount varied primarily due to changes in market sentiment.
We are confident that with the Fund's strong portfolio management team, the
discount should gradually narrow over the long term.
3
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CHAIRMAN'S STATEMENT
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We expect the TAIEX to break out of its downward trend in the near term, as most
of the bad news, such as the slowing economic recovery and the threat of war in
the Middle East, is already reflected in current share prices. Taiwan's
long-term economic outlook, in our opinion, remains promising. The current low
valuation only provides another buying opportunity for prudent investors. We
remain positive on the future performance of the Fund, which has provided
satisfactory results after the Fund's investment adviser implemented its new
portfolio strategy in May. The Board maintains its confidence in the Fund's
long-term performance, and we thank you for your continued support.
Sincerely,
/s/ S.Y. Wang
--------------------
S.Y. Wang
Chairman
4
REPORT OF THE INVESTMENT MANAGER
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INVESTMENT PERFORMANCE
The Fund's net asset value ("NAV") increased by 5.21% in U.S. dollar terms and
by 3.72% in New Taiwan ("NT") dollar terms during the fiscal year ended August
31, 2002. The Taiwan Stock Exchange Index (the "TAIEX") increased by 5.67% in NT
dollar terms during the same period. The Fund's performance during this period
reflected drastic changes in the performance of the technology sector.
As of August 31, 2001, the Fund had allocated 62.9% of its NAV to the technology
sector, compared to the index weighting of about 56%. During the following six
months, the Fund posted a return of 30.1% in NT dollar terms, outperforming the
TAIEX by 3.8%. The technology sector was the main contributor, with the
Electronics Sub-Index beating the TAIEX by 11.9% during the same period. The
Fund's exposure to the technology sector increased to 72.9% as of February 28,
2002, but the technology sector did not outperform the TAIEX in the following
months. In the ensuing three months, the Fund's NAV declined by 6.7% in NT
dollar terms, compared to the 0.36% decline of the TAIEX. The technology sector
was the main reason, with the Electronics Sub-Index falling 7.9% during this
period. The following table outlines the relative performance of the Fund, the
Electronics Sub-Index and the TAIEX during the indicated periods.
Performance Comparison (percentage change in NT dollar terms)
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8/31/2001- 2/28/2002- 5/31/2002-
2/28/2002 5/31/2002 8/31/2002
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The Fund +30.09% -6.70% -14.55%
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Electronics Sub-Index +38.18% -7.89% -21.84%
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TAIEX +26.32% -0.36% -16.05%
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Since May, however, the Fund's performance improved as we took over the
management of the Fund's portfolio and consequently changed the Fund's sector
weighting to match the market's latest developments. We believed that the
technology sector was under pressure because of weakening consumer demand since
late in the first quarter. On the other hand, basic materials stocks were still
trading at high levels, fueled by strong demand in areas such as automobiles and
real estate transactions at lowered interest rates. Therefore, we increased the
weighting in the plastics sector and the rubber sector, and reduced our
weighting in the technology sector. As it turned out, the plastics sector
outperformed the TAIEX by 19.4% and the rubber sector outperformed the TAIEX by
33.7% during the three-month period ended August 31, 2002. As a result, we were
able to outperform our benchmark during that period.
5
REPORT OF THE INVESTMENT MANAGER (CONTINUED)
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In addition, since May, the Fund has implemented a new investment process in our
portfolio strategy. This process aims to increase investment efficiency and to
utilize the outstanding research quality put together by our in-house investment
team. In short, we divide our portfolio, as in the past, into the "core
portfolio" and the "active portfolio". The core portfolio is designed to track
the performance of the TAIEX. It aims to capture the fundamentals of Taiwan,
which we believe are sound and promising for the long run.
As for the active portfolio, we follow a model portfolio created and maintained
by our research team. The active portfolio is constructed in the following
manner. In each sector, research analysts identify their top investment targets
in a carefully selected universe of stocks, and assign investment weightings to
those targets. Investment managers form an investment committee and together
make decisions on the portfolio proposed by analysts, as well as sector
weightings. The investment committee also decides on additional changes for the
portfolio and weightings within sectors, when requested by analysts. We believe
such a team effort helps generate an optimal portfolio that reflects the
collective strength of our investment research. In fact, the active portfolio
has successfully beaten the benchmark since its inception. We expect this trend
to continue.
INVESTMENT OUTLOOK
For the stock market, the calendar year began with a rebound at the start and
later fell into a downward spiral. Now the question is: will next year produce
another relapse? Or simply put, have we really seen the worst?
On the one hand, we see on-going downward pressure on the market in the near
term, as weaker consumer demand threatens to dampen the global economy. On the
other hand, we think that the current downturn provides great buying
opportunities for long-term investors, as we believe the global economy will
eventually survive the troubled waters and will revive later in 2003.
Looking forward, the global economy is still promising despite negative readings
on recent economic indicators in the U.S., such as deteriorating consumer
sentiment and the troublesome reports of the ISM index for business activity.
The apparent weakness of U.S. consumer spending, which represents two-thirds of
U.S. GDP, certainly cast clouds on the global economic outlook. There is no
doubt that U.S. consumers have become more cautious in spending now, given the
bad news of corporate scandals, falling stock prices and growing fears of a war.
In determining consumers' long-term spending power, what is really important is
their financial soundness, as measured by their job security and income level.
In August, the U.S. Labor Department reported four straight months of na-
6
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tional job gains. The U.S. unemployment rate in August fell to 5.7% from 5.9%.
In addition, continued improvements in productivity have kept wages and salaries
rising, making the case of continuing growth of personal income for U.S.
workers. In light of the above, we believe consumer demand will be back on its
normal track as people recover their confidence.
The corporate front is also starting to show signs of life. Although the profit
outlook remains unclear, companies have stopped cutting back capital spending
since the fourth quarter of 2001. It seems that the inevitable IT replacement
cycle has quietly taken place. According to a CIO Magazine Tech Poll, there is a
growing percentage of corporate IT managers who plan to increase spending in
computer hardware over the next twelve months. As older PCs become more and more
obsolete, chances are high that the much-anticipated PC upgrade cycle will start
in 2003 after a long four-year drought. And since inventory levels remain low, a
kick-off in IT demand driven by businesses may turn the technology sector around
in the next couple of months. We believe it's time to buy while prices are low
before the market comes to reflect this potential development.
For the TAIEX, it is even more tempting now to stay on the buy side. First,
Taiwan has a great connection with China, which offers unparalleled growth
opportunities, especially in today's global economic environment. Second, Taiwan
is receiving an increasing number of outsourcing orders from U.S. and Japanese
companies seeking cost reduction. In other words, Taiwan will survive a
downturn, should that happen, and prosper in the ensuing upturn. Together with
China, Taiwan has established its position as the world's factory. Third, Taiwan
has a banking industry that is developing quickly into the lucrative consumer
banking areas where markets are still relatively unexplored. Also, the
government is reforming this industry at an unprecedented pace that promises to
increase the long-term attractiveness of well-managed banks. Fourth, many
Taiwanese companies have successfully developed new products that are still
growing fast even in a sluggish economic environment. Finally, the valuation of
the TAIEX is now at its lower end. In terms of price-to-book ratio, the market
was trading at 1.5 times book value at the end of August. We believe at this
level the market has limited downside risks, considering that Taiwan's long-term
outlook remains promising. Moreover, liquidity is at an all time high with the
Central Bank's Negotiable Certificate of Deposits outstanding approaching NT$2
trillion. A boost of confidence is needed now and may come at any time.
We have set out four investment themes to focus on the areas described above.
They include: 1) China Harvest Plays 2) Outsourc-
7
REPORT OF THE INVESTMENT MANAGER (CONTINUED)
--------------------------------------------------------------------------------
ing Winners 3) Consumer Banking and 4) New Products. Our top ten holdings in the
active portfolio mostly fall into these categories. The following table provides
a brief comment on each of these companies and shows their connection to our
investment themes.
ACTIVE PORTFOLIO* TOP TEN HOLDINGS
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Active
Company Portfolio
(Core Number) Weighting Investment Theme Comment
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TSMC (2330) 7.90% Outsourcing Winner 1. Foundry leader with strong competitive edge
2. IDM outsourcing to accelerate on constraints in 12" wafer
fab investments
3. World class corporate governance
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Cheng Shin Rubber 5.62% China Harvest Play 1. MAXXIS brand, world's No. 13 tire maker
(2105)
2. China's No. 1 tire maker, to fully enjoy China's growing
car market
3. Capacity in full run, now building new production lines
in all of its China plants
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Mediatek (2454) 4.41% New Product 1. Leader in optical storage driver ICs
2. Continued advance in technology
3. New growth drivers ahead (combo drive, DVD-Player,
handset chipset)
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Hon Hai Precision 4.32% Outsourcing Winner 1. Largest OEM player in Taiwan
(2317)
2. Strong partnership with big brands (HP, Dell, IBM, Acer,
Apple, Sony)
3. Cost leadership via its competitive advantage in molding
and production management
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China Trust Group 3.31% Consumer Banking 1. Largest credit card circulation
(2891)
2. Highest exposure in consumer loans
3. Excellent product innovation
4. Highest ROE among peers
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UMC (2303) 2.78% Outsourcing Winner 1. Leading foundry player
2. Strong relationships with IDMs which pursue outsourcing
aggressively (Motorola, AMD)
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Formosa Plastics 2.77% Cyclical Upturn 1. World's largest manufacturer of PVC resins
(1301)
2. To ride on the industry's upturn through 2005
------------------------------------------------------------------------------------------------------------------
Microstar 2.46% Outsourcing Winner 1. Emerging motherboard OEM manufacturer
International
(2377)
2. To provide higher-profit server motherboards to OEM
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Quanta Computer 2.34% Outsourcing Winner 1. OEMs' preferred notebook PC manufacturer
(2382) New Product
2. To benefit from new businesses in server, handset, and
LCD monitor
------------------------------------------------------------------------------------------------------------------
Compal Computer 2.25% Outsourcing Winner 1. Leading notebook PC manufacturing with strong ties to
(2324) New Product Dell and Toshiba
2. To benefit from new businesses in handset and PDA
------------------------------------------------------------------------------------------------------------------
* As of August 31, 2002, the Active Portfolio represented approximately 35% of
the total investments.
8
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INVESTMENT TEAM DEVELOPMENTS
The following chart shows our current research team members, their assigned duty
and their research focus. With such a strong team, we are well prepared to
deliver continuing strong performance to our investors.
[FLOW CHART]
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-------------------------
Investment & Research
Chief Investment Officer:
Vincent C.S. Lai
-------------------------
|
|
----------------- | ---------------------
Administration of ------------------------- Portfolio Management
Taiwan Fund --------- Research Team ----------- Team
----------------- ------------------------- ---------------------
| | | |
| ------------------------------ | |
| | | | | |
--------- ------------- ----------- -------------- ----------------- ----------
Vicki Hau Non-Tech Team Tech Team A Tech Team B Deputy: Jovi Chen Alan Huang
--------- James Yeh Jack Chang Leslie Lo ----------------- ----------
| ------------- ----------- -------------- | Model & Strategy
--------- | | | | Delivery
Jovi Chen ------------- ----------- -------------- -----------------
--------- Dominic Lin Andy Chang Julian Lin James Yeh
Robert Chuang Sanger Lung Christine King -----------------
Andy Ting Jay Wang Susan Hsu |
Grace Huang -----------------
| | | Jack Chang
| | | -----------------
| | | Deputy: Grace Hunag
------------- ----------- -------------- |
Global Global Regional -----------------
Financial Tech TMT Andy Chang
Team Team Team -----------------
------------- ----------- -------------- |
-----------------
Leslie Lo
-----------------
-------------------------------------------------------------------------------------------------
Although the market may remain volatile in the coming months, we believe the
market's valuation is becoming more and more attractive. With that in mind, we
believe that the year 2003 will be another fruitful year for investors.
Thank you for your support and we look forward to presenting our investment
strategy again in coming reports.
Sincerely,
/s/ Vincent Lai /s/ Jovi Chen
Vincent Lai Jovi Chen
Portfolio Manager Deputy Portfolio Manager
9
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PORTFOLIO SNAPSHOT*
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TOP TEN EQUITY HOLDINGS
HOLDINGS AS OF AUGUST 31, 2002 %
--------------------------------------------------
Taiwan Semiconductor Manufacturing Co. 9.1
--------------------------------------------------
United Microelectronics Corp. Ltd. 4.2
--------------------------------------------------
Hon Hai Precision Industry 3.9
--------------------------------------------------
Chunghwa Telecom Co. Ltd. 3.0
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Formosa Plastic 2.7
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Mediatek Incorporation 2.6
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Cheng Shin Rubber Industrial Co. 2.6
--------------------------------------------------
Quanta Computer, Inc. 2.5
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Chinatrust Financial Holdings 2.1
--------------------------------------------------
Nan Ya Plastic 2.0
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TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF AUGUST 31, 2002 %
--------------------------------------------------
Electronics 17.7
--------------------------------------------------
PC & Peripherals 16.5
--------------------------------------------------
Semiconductor 16.3
--------------------------------------------------
Banks 8.7
--------------------------------------------------
Telecommunications 6.8
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Financial Services 6.3
--------------------------------------------------
Plastics 5.4
--------------------------------------------------
Rubber 3.1
--------------------------------------------------
Textiles & Apparel 3.0
--------------------------------------------------
Automobiles, Tires & Accessories 1.6
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TOP TEN EQUITY HOLDINGS
HOLDINGS AS OF AUGUST 31, 2001 %
--------------------------------------------------
Taiwan Semiconductor Manufacturing Co. 8.1
--------------------------------------------------
United Microelectronics Corp. Ltd. 7.0
--------------------------------------------------
Asustek Computer, Inc. 4.0
--------------------------------------------------
Hon Hai Precision Industry 3.9
--------------------------------------------------
Quanta Computer, Inc. 3.2
--------------------------------------------------
Bank Sinopac 3.0
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Chunghwa Telecom Co. Ltd. 2.5
--------------------------------------------------
Ambit Microsystems Corp. 2.4
--------------------------------------------------
Macronix International Co. Ltd. 2.1
--------------------------------------------------
Cathay Life Insurance Co. Ltd. 2.0
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TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF AUGUST 31, 2001 %
--------------------------------------------------
Semi-conductor 20.9
--------------------------------------------------
Electronics 16.5
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Office Equipment & PC 15.1
--------------------------------------------------
Banks 10.8
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Telecommunications 7.5
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Insurance 3.0
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Computer Service & Software 2.9
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Plastics 2.7
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Textiles & Apparel 2.1
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Financial Services 2.1
--------------------------------------------------
* Percentages based on total investments at August 31, 2002 and August 31, 2001.
10
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THE TAIWAN FUND, INC.
INVESTMENTS/AUGUST 31, 2002 (SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT
IN SECURITIES)
--------------------------------------------------------------------------------
US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - 96.2%
BASIC INDUSTRIES -- 13.7%
CEMENT -- 1.2%
Asia Cement............................. 3,169,450 $ 1,052,157
Chia Hsin Cement (a).................... 1,574,000 534,028
Taiwan Cement Corp. (a)................. 2,091,440 623,945
------------
2,210,130
------------
CHEMICALS -- 1.3%
Apex Biotechnology Corp. (a)............ 204,360 385,529
Eternal Chemical Co. Ltd. .............. 759,150 550,656
Oriental Union Chemical Corp. .......... 497,000 356,142
Pihsiang Machinery Manufacturing Co.
Ltd. .................................. 149,677 477,180
Yung Shin Pharmaceutical Industries
Co. ................................... 740,000 549,751
------------
2,319,258
------------
GLASS -- 0.4%
Taiwan Glass............................ 1,207,189 797,967
------------
IRON & STEEL -- 1.5%
China Steel Corp. ...................... 5,037,920 2,342,876
Yieh Phui Enterprise (a)................ 1,196,000 416,274
------------
2,759,150
------------
PAPER & FOREST PRODUCTS -- 0.0%
Yuen Foong Yu Paper Manufacturing....... 50 13
------------
PLASTICS -- 5.4%
Formosa Plastic......................... 4,095,639 4,923,392
Nan Ya Plastics Corp. .................. 4,052,352 3,721,669
Taiwan Polypropylene Co. Ltd. .......... 43,260 27,330
Taiwan Styrene Monomer Corp. (a)........ 1,441,000 1,327,625
------------
10,000,016
------------
RUBBER -- 3.1%
Cheng Shin Rubber Industrial Co. ....... 3,938,920 4,769,561
Kenda Rubber Industrial Co. (a)......... 1,019,000 1,052,082
------------
5,821,643
------------
WIRE & CABLE -- 0.8%
Pacific Electrical Wire & Cable (a)..... 2,766,530 $ 453,132
Sampo Corp. ............................ 1,089,000 414,068
Walsin Lihwa Corp. (a).................. 2,314,348 548,295
------------
1,415,495
------------
TOTAL BASIC INDUSTRIES.................. 25,323,672
------------
DURABLES -- 4.6%
AUTOMOBILES, TIRES & ACCESSORIES -- 1.6%
China Motor Co. ........................ 1,112,031 1,431,102
Yulon Motor............................. 2,016,870 1,521,943
------------
2,953,045
------------
TEXTILES & APPAREL -- 3.0%
Far Eastern Textile Co. Ltd. ........... 2,018,749 699,683
Formosa Chemical & Fiber................ 3,121,724 2,876,113
Formosa Taffeta Co. Ltd. ............... 1,292,551 523,598
Nien Hsing Textile Co. Ltd. ............ 951,000 895,648
Tainan Enterprises Co. ................. 497,000 581,457
------------
5,576,499
------------
TOTAL DURABLES.......................... 8,529,544
------------
FINANCE -- 15.3%
BANKS -- 8.7%
Chang Hwa Commercial Bank............... 1,781,940 750,510
Chinatrust Financial Holding Co. Ltd. .. 5,075,000 3,963,220
CTB Financial Holding Co. .............. 2,854,678 1,477,853
Farmers Bank of China Co. Ltd. (a)...... 1,176,000 285,487
First Commercial Bank (a)............... 1,848,000 1,113,448
International Bank of Taipei............ 1,276,240 530,056
International Commercial Bank of
China.................................. 1,822,740 1,023,592
Shin Kong Financial Holdings Co.
Ltd. .................................. 1,322,000 440,796
Taipei Bank (a)......................... 2,967,000 2,742,240
Taishin Financial Holdings Co.
Ltd. (a).............................. 4,375,000 2,072,975
Taiwan Business Bank (a)................ 2,299,000 406,813
United World Chinese Commercial Bank.... 1,852,000 1,310,863
------------
16,117,853
------------
The accompanying notes are an integral part of the financial statements. 11
--------------------------------------------------------------------------------
INVESTMENTS/AUGUST 31, 2002 (continued)
--------------------------------------------------------------------------------
US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - continued
FINANCIAL SERVICES -- 6.3%
Cathay Financial Holding Co. Ltd. ...... 2,410,000 $ 2,918,222
China Development Financial Holding
Corp. (a).............................. 3,291,000 1,905,873
E. Sun Financial Holding Co. Ltd. (a)... 4,281,000 1,627,757
Fubon Financial Holding Co. Ltd. ....... 2,355,000 2,093,946
Fuh-Hwa Financial Holdings Co. Ltd.
(a).................................... 1,636,000 447,400
Hua Nan Financial Holdings Co. Ltd. .... 3,249,400 1,929,301
SinoPac Holdings Co. (a)................ 1,560,142 684,473
------------
11,606,972
------------
SECURITIES INDUSTRIES -- 0.3%
Yuanta Core Pacific Securities Co.
(a)................................... 1,195,000 629,131
------------
TOTAL FINANCE........................... 28,353,956
------------
NONDURABLES -- 0.5%
FOODS -- 0.5%
Uni-President Enterprises Corp. ........ 2,682,696 855,261
------------
OTHERS & MISCELLANEOUS -- 1.0%
OTHERS & MISCELLANEOUS -- 1.0%
Giant Manufacturing..................... 233,607 277,404
National Petroleum (a).................. 644,025 525,543
Pou Chen (a)............................ 1,029,948 671,771
Ton Yi Industrial Corp. (a)............. 1,804,000 348,242
Victor Taichung Machinery Works Co. Ltd.
(a).................................... 116 5
------------
1,822,965
------------
TOTAL OTHERS & MISCELLANEOUS............ 1,822,965
------------
RETAIL & WHOLESALE -- 0.5%
GENERAL MERCHANDISE STORES -- 0.5%
President Chain Store Corp. ............ 608,819 1,006,092
------------
TECHNOLOGY -- 59.5%
COMPUTER SERVICE & SOFTWARE -- 1.2%
Cyberlink Corp (a)...................... 145,800 417,912
Fullerton Technology Co. Ltd. .......... 115,000 321,219
Soft-World International Corp. ......... 128,000 540,977
Springsoft, Inc. ....................... 142,900 374,073
Stark Technology, Inc. ................. 159,300 321,489
Systex Corp. (a)........................ 454,800 246,089
------------
2,221,759
------------
ELECTRICAL EQUIPMENT -- 1.0%
Basso Industry Corp. ................... 160,000 $ 245,686
Kaulin Manufacturing Co. Ltd. .......... 200 194
Teco Electric & Machinery Co. (a)....... 2,236,026 722,670
TYC Brother Industrial Co. Ltd. ........ 193,000 240,474
Yung Tay Engineering Co. Ltd. .......... 1,018,000 550,834
------------
1,759,858
------------
ELECTRONICS -- 17.7%
Advanced Semiconductor Engineering, Inc.
(a)................................... 1,588,492 905,984
Asia Optica Co Inc. .................... 600 2,527
Au Optronics Corp. (a).................. 2,161,000 1,674,949
Behavior Technology Computer Corp. ..... 264,000 173,735
Billion Electric Co. Ltd. (a)........... 180 204
Cheng Uei Precision Industry Co.,
Ltd. .................................. 123,050 305,915
Chungwha Picture Tubes Ltd. (a)......... 1,954,000 965,856
CMC Magnetics Corp. .................... 1,143,000 473,046
Compeq Manufacturing Co., Inc. (a)...... 1,198,150 1,082,856
Delta Electronics, Inc. ................ 1,668,700 2,313,436
Elan Microelectronics Corp. ............ 878,851 745,443
Elite Semiconductor Memory Technology
Inc. .................................. 101,400 516,046
Faraday Technology Co (a)............... 210,600 637,529
Greatek Electronics, Inc. .............. 420,000 427,493
Hon Hai Precision Industry.............. 1,884,548 7,165,582
Jean Co. Ltd. (a)....................... 381,000 217,300
Li Shin International Enterprise
Corp. ................................. 278,400 354,209
Lite-On Electronics Inc. ............... 445,080 429,589
MediaTek, Inc. ......................... 558,600 4,885,095
Orient Semiconductor Electronics Ltd.
(a).................................... 770,000 202,691
Phihong Enterprise Co. Ltd. ............ 344,560 483,734
Phoenixtec Power Co. Ltd. .............. 593,000 412,793
Procomp Informatics Co. Ltd. (a)........ 277,500 209,403
Prodisc Technology, Inc. (a)............ 336,150 187,788
Realtek Semiconductor Corp. ............ 921,400 2,641,041
Silicon Integrated Systems Corp. (a).... 502,000 446,353
Siliconware Precision Industry (a)...... 1,204,100 669,140
Silitek Corp. .......................... 402,080 576,248
Sunplus Technology Co. Ltd. ............ 629,250 1,177,888
Unimicron Technology Corp............... 632,049 462,159
Via Technologies, Inc. ................. 419,000 716,920
Welldone Company (a).................... 143,000 271,863
Ya Hsing Industrial Co. Ltd. (a)........ 480,600 584,760
Yageo Corp. (a)......................... 1,122,120 397,124
------------
32,716,699
------------
12 The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
INVESTMENTS/AUGUST 31, 2002 (continued)
--------------------------------------------------------------------------------
US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - continued
PC & PERIPHERALS -- 16.5%
Acer, Inc. ............................. 925,228 $ 936,323
Advantech Co. Ltd. ..................... 583,800 1,067,198
Amtran Technology Co. Ltd. ............. 950,400 1,375,981
Arima Computer Corp. (a)................ 647,900 341,100
Asustek Computer, Inc. ................. 1,365,000 3,293,726
Benq Corp. ............................. 1,839,400 3,120,363
Chicony Electronics Co. Ltd. (a)........ 268,620 436,046
Compal Electronics, Inc. ............... 3,136,200 2,962,833
Coretronic Corp. (a).................... 535,200 688,763
First International Computer, Inc. ..... 1,136,000 275,777
Fu Sheng Industrial Co. Ltd. ........... 661,600 812,729
Gigabyte Technology Co. Ltd. (a)........ 273,000 602,852
Inventec Co. Ltd. ...................... 927,900 673,060
Kinpo Electronics, Inc. ................ 674,610 445,925
Lite-On Technology Corp. ............... 380,723 601,317
Meiloon Industrial Co. Ltd. ............ 256,800 491,968
Micro-Star International Co. Ltd. ...... 943,025 2,675,444
Mitac International Corp. .............. 658,320 304,225
MiTAC Technology Corp. ................. 312,400 360,918
Premier Image Technology Corp. ......... 518,600 728,073
Quanta Computer, Inc. .................. 2,073,375 4,608,848
Synnex Technology International......... 351,900 464,191
Tatung Co. Ltd. (a)..................... 2,157,000 511,018
Test Research, Inc. (a)................. 600 681
Topco Scientific Co. Ltd. .............. 132,080 382,449
Transcend Co. Ltd. ..................... 360,000 1,037,145
World Peace Industrial Co. Ltd. (a)..... 427,500 530,155
Yosun Industrial Corp. ................. 384,230 719,237
------------
30,448,345
------------
SEMI-CONDUCTOR -- 16.3%
Episil Technologies, Inc. (a)........... 520,000 206,844
Macronix International Co. Ltd. (a)..... 1,555,400 595,956
Nanya Technology Corp. (a).............. 2,410,000 2,304,972
Powerchip Semiconductor Corp. (a)....... 974,000 450,108
Pro Mos Technologies, Inc. (a).......... 464,000 217,139
Taiwan Semiconductor Manufacturing Co.
(a).................................... 11,516,800 16,808,667
United Microelectronics Corp. Ltd.
(a).................................... 9,426,775 7,747,657
Winbond Electronics Corp. (a)........... 3,149,000 1,860,480
------------
30,191,823
------------
TELECOMMUNICATIONS -- 6.8%
Accton Technology Corp. (a)............. 878,500 $ 1,361,816
Ambit Microsystems Corp. ............... 398,996 1,102,811
Askey Computer Co. (a).................. 984,200 1,151,448
Chunghwa Telecom Co. Ltd. .............. 4,342,000 5,587,833
D-Link Corp. ........................... 501,950 507,969
Far EasTone Telecommunications Co.
Ltd. .................................. 712,480 620,997
GVC Corp. (a)........................... 444,000 261,024
Ichia Technologies, Inc. ............... 167,000 235,431
Radiant Opto-Electronics Corp. ......... 76,000 197,836
Taiwan Cellular Corp (a)................ 558,187 620,389
Zyxel Communications Corp. (a).......... 503,700 957,605
------------
12,605,159
------------
TOTAL TECHNOLOGY........................ 109,943,643
------------
TRANSPORTATION -- 1.1%
AIR TRAVEL -- 0.6%
China Airlines.......................... 2,106,720 717,850
EVA Airways Corp. (a)................... 1,273,000 484,030
------------
1,201,880
------------
SHIPPING -- 0.5%
Evergreen Marine Corp. ................. 1,385,605 553,189
Wan Hai Lines Ltd. ..................... 590,000 364,112
------------
917,301
------------
TOTAL TRANSPORTATION.................... 2,119,181
------------
TOTAL COMMON STOCKS (Identified Cost --
$160,741,410).......................... 177,954,314
------------
MATURITY
AMOUNT
US$
--------
REPURCHASE AGREEMENTS - 0.3%
State Street Bank and Trust Co. at .25%
dated 8/26/02, due 9/3/02
(collateralized by U.S. Treasury Bond
7.5%, 11/15/16, market value
$597,623)............................. $ 584,032 $ 584,000
------------
The accompanying notes are an integral part of the financial statements. 13
--------------------------------------------------------------------------------
INVESTMENTS/AUGUST 31, 2002 (continued)
--------------------------------------------------------------------------------
PRINCIPAL US$
AMOUNT VALUE
NT$ (NOTE 1)
--------- --------
COMMERCIAL PAPER - 3.5%
Ascend Gear International
2.285%, 9/23/02 (b)................... 29,648,405 $ 867,166
Chang Chun Petro Chemical, Co.
1.85%, 12/02/02 (b).................... 4,807,804 140,620
CoCo Corp.
2.285%, 9/16/02 (b).................... 59,347,257 1,735,808
DuPont Far East PetraChemicals
1.85%, 10/25/02 (b).................... 49,755,786 1,455,273
Great Ocean Travel Service
2.285%, 10/11/02 (b)................... 14,856,726 434,534
He Shin Co
1.85%, 9/12/02 (b)..................... 49,765,058 1,455,544
Shinkong Synthetic Fibers Corp.
1.85%, 11/15/02 (b).................... 9,956,951 291,224
------------
TOTAL COMMERCIAL PAPER (Identified
Cost -- $6,377,265).................... 6,380,169
------------
TOTAL INVESTMENTS -- 100% (COST --
$167,702,675).......................... $184,918,483
============
LEGEND:
US$ - United States dollar
NT$ - New Taiwan dollar
(a) Non-income producing
(b) Certificates of Deposit and Commercial Paper that are traded through Bills
Finance Corporations must be guaranteed by either a bank, a trust company or
a Bills Finance Corporation. Since there is no recognized credit rating
system in the Republic of China, the guarantee may not be comparable to a
guarantee issued by a U.S. institution.
INCOME TAX INFORMATION:
At August 31, 2002, the aggregate cost basis of the Fund's investment securities
for income tax purposes was $167,983,425.
Net unrealized appreciation of the Fund's investment securities was $16,935,058
of which $29,964,280 related to appreciated investment securities and
$13,029,222 related to depreciated investment securities for the fiscal year
ended August 31, 2002. In addition, as of August 31, 2002, the Fund had a
capital loss carryforward of $58,717,404 for Federal income tax purposes which
may be utilized to offset future capital gains through August 31, 2009
($18,722,303) and August 31, 2010 ($39,995,101.)
14 The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2002
ASSETS
Investments in securities, at value (cost
$167,702,675) (Notes 1 and 2) - See
accompanying schedule..................... $184,918,483
Cash........................................ 5,298
Cash in New Taiwan dollars (cost
$199,654).................................. 199,545
Dividend receivable......................... 291,288
Interest receivable......................... 34,890
------------
Total assets............................... 185,449,504
------------
LIABILITIES
Accrued management fee (Note 3)............. $127,790
Taiwan withholding tax payable (Note 1)..... 81,637
Other payables and accrued expenses......... 186,575
--------
Total liabilities.......................... 396,002
------------
NET ASSETS.................................. $185,053,502
============
Net Assets consist of (Note 1):
Paid in capital............................. $245,064,787
Accumulated undistributed net realized loss
on Investments in securities and foreign
currency................................... (77,224,232)
Net unrealized appreciation on
Investments in securities and foreign
currency................................. 17,212,947
------------
NET ASSETS.................................. $185,053,502
============
NET ASSET VALUE, per share ($185,053,502 /
16,365,572 shares outstanding)............. $11.31
======
STATEMENT OF OPERATIONS
For the Year Ended August 31, 2002
INVESTMENT INCOME
Dividends................................ $ 2,800,968
Interest................................. 269,197
------------
3,070,165
Less: Taiwan withholding tax (Note 1).... (584,021)
------------
Total Income............................ 2,486,144
------------
EXPENSES:
Management fee (Note 3)
Basic fee............................... $ 2,623,349
Performance adjustment.................. (75,662)
Custodian fees and expenses.............. 352,379
Administration and accounting fees
(Note 3)................................ 211,266
Directors compensation (Note 3).......... 230,915
Legal.................................... 200,275
Audit.................................... 90,869
Shareholder communications............... 192,802
Delaware franchise tax................... 59,965
Insurance fees........................... 61,232
Miscellaneous............................ 37,201
Transfer agent fees...................... 19,400
Taiwan stock dividend tax (Note 1)....... 445,354
------------
Total expenses.......................... 4,449,345
------------
NET INVESTMENT LOSS..................... (1,963,201)
------------
REALIZED AND UNREALIZED GAIN (LOSS)
(NOTE 1)
Net realized loss on:
Investments in securities............... (14,106,382)
Foreign currency transactions........... (4,484)
------------
(14,110,866)
------------
Change in net unrealized appreciation
(depreciation) on:
Investments in securities............... 25,168,705
Assets and liabilities denominated in
foreign currencies.................... (3,601)
------------
25,165,104
------------
Net realized and unrealized gain......... 11,054,238
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.............................. $ 9,091,037
============
The accompanying notes are an integral part of the financial statements. 15
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
August 31, August 31,
2002 2001
------------ -------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment loss........................................ $ (1,963,201) $ (3,468,309)
Net realized loss on investments and foreign currency
transactions............................................. (14,110,866) (81,092,319)
Change in net unrealized appreciation (depreciation) on
investments and foreign currency transactions............ 25,165,104 (86,796,888)
------------ -------------
Net increase (decrease) in net assets resulting from
operations............................................... 9,091,037 (171,357,516)
------------ -------------
Distributions to shareholders
From net realized gains.................................... -- (3,274,574)
------------ -------------
Total distributions to shareholders........................ -- (3,274,574)
------------ -------------
Total increase (decrease) in net assets.................... 9,091,037 (174,632,090)
------------ -------------
NET ASSETS
Beginning of period........................................ 175,962,465 350,594,555
------------ -------------
End of period.............................................. 185,053,502 175,962,465
============ =============
Undistributed Net Investment Income
End of period.............................................. $ -- $ --
============ =============
16 The accompanying notes are an integral part of the financial statements.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended August 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SELECTED PER SHARE DATA
Net asset value, beginning of period........................ $ 10.75 $ 21.42 $ 21.61 $ 15.36 $ 35.98
-------- -------- -------- -------- --------
Income from Investment Operations
Net investment loss(a)..................................... (0.12) (0.21) (0.36) (0.20)(c) (0.33)(b)
Net realized and unrealized gain (loss) on investments..... 0.68 (10.26) 0.17 7.46 (15.68)
-------- -------- -------- -------- --------
Total from investment operations........................... 0.56 (10.47) (0.19) 7.26 (16.01)
-------- -------- -------- -------- --------
Less Distributions
From net realized gains.................................... -- (0.20) -- (1.01) (4.61)
-------- -------- -------- -------- --------
Total distributions........................................ -- (0.20) -- (1.01) (4.61)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 11.31 $ 10.75 $ 21.42 $ 21.61 $ 15.36
======== ======== ======== ======== ========
Market value, end of period................................. $ 9.27 $ 9.88 $ 17.63 $ 18.31 $ 11.00
======== ======== ======== ======== ========
TOTAL RETURN
Per share market value...................................... (6.17)% (43.16)% (3.75)% 79.41% (48.87)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)..................... $185,054 $175,962 $350,595 $353,614 $251,356
Ratio of expenses to average net assets(d).................. 2.20% 2.63% 2.30% 2.21% 2.29%(e)
Ratio of expenses to average net assets, excluding stock
dividend tax expense....................................... 1.98% 2.15% 1.94% 1.88% 1.87%(e)
Ratio of net investment loss to average net assets.......... (0.97)% (1.50)% (1.54)% (1.15)% (1.51)%
Portfolio turnover rate..................................... 167% 125% 139% 125% 97%
(a) Based on average shares outstanding during the period.
(b) Investment Income per share reflects a regular dividend from China Steel
Corp. of $0.02 per share. (Based on shares outstanding at 8/31/98.)
(c) Investment Income per share reflects a regular dividend from China Steel
Corp. of $0.04 per share. (Based on shares outstanding at 8/31/99.)
(d) Expense ratio includes 20% tax paid on stock dividends received by the
Fund.
(e) Ratio of expenses after waiver (See Note 3).
The accompanying notes are an integral part of the financial statements. 17
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Taiwan Fund, Inc. (the "Fund"), a Delaware corporation, is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified
closed-end management investment company.
The Fund is not permitted to invest directly in the securities of Republic of
China ("ROC") companies. Therefore, it invests through a contractual securities
investment trust fund arrangement. This arrangement was established by means of
the Securities Investment Trust, Investment Management and Custodian Contract
("Management Contract") among HSBC Asset Management (Taiwan) Limited ("Adviser")
(formerly "China Securities Investment Trust Corp." or "CSITC"), the
International Commercial Bank of China (Custodian) and the Fund. Under the
Management Contract the Adviser manages and invests the assets of the Fund and
the Custodian holds the assets. The Fund is the sole beneficiary of the assets
held under the Management Contract and, as required by ROC regulations, its
interest in the assets is evidenced by units of beneficial interest.
The Fund concentrates its investments in the securities listed on the Taiwan
Stock Exchange. Because of this concentration, the Fund may be subject to
additional risks resulting from future political or economic conditions in
Taiwan and the possible imposition of adverse governmental laws of currency
exchange restrictions affecting Taiwan.
The Fund is treated as a Qualified Foreign Institutional Investor ("QFII"),
which allows the Fund to own 100% of a company's shares. However, all Funds
managed by the Adviser are limited in aggregate to 10% ownership of a company's
shares.
Taiwan's Affiliation Rules. ROC investment management company regulations
currently prohibit an investment adviser from investing in securities issued by
companies which are "affiliated parties" of such investment adviser. Recently,
the ROC Securities and Futures Commission (the "SFC") interpreted "affiliated
parties" broadly to include entities with directors or supervisors appointed by
the same third party. As a result of the sale by China Development Industrial
Bank of its interest in the Adviser on August 6, 2001, the Fund no longer holds
any securities issued by "affiliated parties".
The policies described below are consistently followed by the Fund in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America.
Security Valuation. All securities, including those traded over-the-counter,
for which market quotations are readily available are valued at the last sales
price prior to the time of determination of the Fund's net asset value per share
or, if there were no sales on such date, at the closing price quoted for such
securities (but if bid and asked quotations are available, at the mean between
the last current bid and asked prices, rather than such quoted closing price).
In certain instances where the price determined above may not represent fair
market value, the value is determined in such manner as the Board of Directors
may prescribe. Short-term investments, having a maturity of 60 days or less are
valued at amortized cost, which approximates market value, with accrued interest
or discount earned included in interest receivable.
Foreign Currency Translation. The financial accounting records of the Fund are
maintained in U.S. dollars. Investment securities, other assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at the
current exchange rate. Purchases and sales of securities, income receipts and
expense payments are translated into U.S. dollars at the exchange rate on the
dates of the transactions.
Reported net realized gains and losses on foreign currency transactions
represent net gains and losses from disposition of foreign currencies, currency
gains and losses realized between the trade dates and settlement dates of
security transactions, and the difference between the amount of net investment
income accrued and the
18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - continued
U.S. dollar amount actually received. The effects of changes in foreign currency
exchange rates on investments in securities are not segregated in the Statement
of Operations from the effects of changes in market prices of those securities,
but are included in realized and unrealized gain or loss on investments in
securities.
Forward Foreign Currency Transactions. A forward foreign currency contract
("Forward") is an agreement between two parties to buy or sell currency at a set
price on a future date.
The Fund may enter into Forwards in order to hedge foreign currency risk or for
other risk management purposes. Realized gains or losses on Forwards include net
gains or losses on contracts that have matured or which the Fund has terminated
by entering into an offsetting closing transaction. Unrealized appreciation or
depreciation of Forwards is included in the Statement of Assets and Liabilities
and is carried on a net basis. The portfolio could be exposed to risk of loss if
the counterparty is unable to meet the terms of the contract or if the value of
the currency changes unfavorably. As of August 31, 2002 the Fund had no open
Forwards.
Taxes. As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes all of its investment company taxable income and net
realized capital gains for its fiscal year. In addition to federal income tax
for which the Fund is liable on undistributed amounts, the Fund is subject to
federal excise tax on undistributed investment company taxable income and net
realized capital gains. The Schedule of Investments includes information
regarding income taxes under the caption "Income Tax Information." The Fund is
organized in Delaware and as such is required to pay Delaware an annual
franchise tax. Also, the Fund is currently subject to a Taiwan security
transaction tax of 0.3% on equities and 0.1% on corporate bonds and mutual fund
shares of the transaction amount.
The Fund's functional currency for tax reporting purposes is the New Taiwan
dollar.
Investment Income. Dividend income is recorded on the ex-dividend date, certain
dividends from foreign securities are recorded as soon as the Fund is informed
of the ex-dividend date.
Taiwanese companies typically declare dividends in the Fund's third fiscal
quarter of each year. As a result, the Fund receives substantially less dividend
income in the first half of its year. Interest income, which includes accretion
of original discount, is accrued as earned.
Dividend and interest income generated in Taiwan is subject to a 20% withholding
tax. Stock dividends received (except those which have resulted from
capitalization of capital surplus) are taxable at 20% of the par value of the
stock dividends received.
Distributions to Shareholders. The distributable income from the assets held
under the Management Contract, which is limited to cash dividends and interest
income received, may be distributed to the Fund only once in each year at the
Fund's discretion and is recorded on the ex-dividend date. Realized capital
gains and stock dividends may also be distributed to the Fund. Within the above
limitations the Fund will, under current ROC regulations, be able to remit out
of the ROC the proceeds of income and capital gains distributions, unit
redemptions and other distributions of assets held under the Management
Contract.
The Fund distributes to shareholders at least annually, substantially all of its
taxable ordinary income and expects to distribute its taxable net realized
gains. Certain foreign currency gains (losses) are taxable as ordinary income
and, therefore, increase (decrease) taxable ordinary income available for
distribution. Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders may elect to have all distributions automatically
reinvested in Fund shares. (See the summary of the Plan.) Shareholders who do
not participate in the Plan will re-
19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - continued
ceive all distributions in cash paid by check in U.S. dollars. Income and
capital gain distributions are determined in accordance with income tax
regulations, which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for foreign currency
transactions, losses deferred due to wash sales and excise tax regulations.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to the Fund's components of net assets.
Security Transactions. Security transactions are accounted for as of the trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
2. PURCHASES AND SALES OF SECURITIES
For the fiscal year ended August 31, 2002, purchases and sales of securities,
other than short-term securities, aggregated $316,756,692 and $312,087,772,
respectively.
3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management Fee. As the Fund's investment adviser, the Adviser receives a fee
that is computed daily at an annual rate of 1.30% of the Fund's average net
assets. The basic fee is subject to a performance adjustment (up to a maximum of
0.30%) based on the Fund's investment performance as compared to the Taiwan
Stock Exchange Index over a rolling 36-month period.
For the year ended August 31, 2002, the management fee, including the
performance adjustments, was equivalent to an annual rate of 1.26% of average
net assets.
Directors Fees. No director, officer or employee of the Adviser or its
affiliates will receive any compensation from the Fund for serving as an officer
or director of the Fund. The Fund pays each of its directors who is not a
director, officer or employee of the Adviser an annual fee of $10,000 plus
$1,000 for each Board of Directors' meeting or Audit Committee meeting attended.
In addition, the Fund will reimburse each of the directors for travel and
out-of-pocket expenses incurred in connection with Board of Directors' meetings.
Administration Fees. State Street Bank and Trust Company ("State Street")
provides, or arranges for the provision of certain administrative and accounting
services for the Fund, including maintaining the books and records of the Fund,
and preparing certain reports and other documents required by federal and/or
state laws and regulations. The Fund pays State Street a fee at the annual rate
of 0.11% of the Fund's average daily net assets up to $150 million, 0.08% of the
next $150 million, and 0.05% of those assets in excess of $300 million, subject
to certain minimum requirements.
4. FUND SHARES
At August 31, 2002, there were 20,000,000 shares of $0.01 par value capital
stock authorized, of which 16,365,572 were issued and outstanding. There were no
shares issued or redeemed for the year ended August 31, 2002.
5. DISTRIBUTIONS
The Fund did not pay any distributions to shareholders during the year ended
August 31, 2002. As of August 31, 2002, the components of distributable earnings
on a tax basis were $0 for Undistributed Ordinary Income, $0 for Undistributed
Long-Term Capital Gain, $16,932,197 for Unrealized Appreciation (Depreciation),
and $(76,943,482) for accumulated capital and other losses.
The difference between book basis and tax basis unrealized appreciation and
depreciation is attributable primarily to the tax deferral of losses on wash
sales.
20
--------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
THE TAIWAN FUND, INC.:
We have audited the accompanying statement of assets and liabilities of The
Taiwan Fund, Inc., including the Fund's investments, as of August 31, 2002, and
the related statements of operations for the year then ended, and changes in net
assets and financial highlights for each of the years in the two-year period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The financial highlights for each of the years in the three-year period
ended August 31, 2000 were audited by other auditors whose report, dated October
12, 2000, expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 2002 by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Taiwan Fund, Inc. as of August 31, 2002, the results of its operations for the
year then ended, and the changes in its net assets and financial highlights for
each of the years in the two-year period then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
October 4, 2002
21
--------------------------------------------------------------------------------
OTHER INFORMATION
--------------------------------------------------------------------------------
SHARE REPURCHASE PROGRAM
The Board of Directors of the Fund, at a meeting held on April 23, 2001,
authorized the Fund to repurchase up to 15% of the Fund's outstanding shares of
common stock. The Fund will purchase such shares in the open market at times and
prices determined by management of the Fund to be in the best interest of
stockholders of the Fund. As of August 31, 2002, no shares have been repurchased
by the Fund.
PRIVACY POLICY
--------------------------------------------------------------------------------
PRIVACY NOTICE
The Taiwan Fund, Inc. collects nonpublic personal information about its
shareholders from the following sources:
[ ] Information it receives from shareholders on applications or other forms;
[ ] Information about shareholder transactions with the Fund, its affiliates, or
others; and
[ ] Information it receives from a consumer reporting agency.
THE FUND'S POLICY IS TO NOT DISCLOSE NONPUBLIC PERSONAL INFORMATION ABOUT ITS
SHAREHOLDERS TO NONAFFILIATED THIRD PARTIES (OTHER THAN DISCLOSURES PERMITTED BY
LAW).
The Fund restricts access to nonpublic personal information about its
shareholders to those agents of the Fund who need to know that information to
provide products or services to shareholders. The Fund maintains physical,
electronic, and procedural safeguards that comply with federal standards to
guard its shareholders' nonpublic personal information.
--------------------------------------------------------------------------------
22
--------------------------------------------------------------------------------
SUMMARY OF DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN
--------------------------------------------------------------------------------
WHAT IS THE DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN?
The Dividend Reinvestment and Cash Purchase Plan (the "Plan") offers
shareholders of The Taiwan Fund, Inc. (the "Fund") a prompt and simple way to
reinvest their dividends and capital gains distributions in shares of the Fund.
The Fund will distribute to shareholders, at least annually, substantially all
of its net income and expects to distribute annually its net realized capital
gains. State Street Bank and Trust Company acts as Plan Agent for shareholders
in administering the Plan. The Plan also allows you to make optional cash
investments in Fund shares through the Plan Agent.
WHO CAN PARTICIPATE IN THE PLAN?
If you own shares in your own name, you can elect to participate directly in the
Plan. If you own shares that are held in the name of a brokerage firm, bank, or
other nominee, you should contact your nominee to arrange for them to
participate on your behalf.
WHAT DOES THE PLAN OFFER?
The Plan has two components; reinvestment of dividends and capital gains
distributions, and a voluntary cash purchase feature.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
If you choose to participate in the Plan, your dividends and capital gains
distributions will be promptly invested for you, automatically increasing your
holdings in the Fund. If the Fund declares a dividend or capital gains
distribution payable in cash, you will automatically receive shares purchased by
the Plan Agent on the New York Stock Exchange or otherwise on the open market.
If a distribution is declared which is payable in shares or cash at the option
of the shareholder and if on the valuation date (generally the payable date) the
market price of shares is equal to or exceeds their net asset value, the Fund
will issue new shares to you at the greater of the following: (a) net asset
value per share or (b) 95% of the market price per share. If the market price
per share on the valuation date is less than the net asset value per share, the
Fund will issue new shares to you at the market price per share on the valuation
date.
All reinvestments are in full and fractional shares, carried to three decimal
places. In the case of foreign (non-U.S.) shareholders, reinvestment will be
made net of applicable withholding tax.
VOLUNTARY CASH PURCHASE OPTION
Plan participants have the option of making investments in Fund shares through
the Plan Agent. You may invest any amount from $100 to $3,000 semi-annually. The
Plan Agent will purchase shares for you on the New York Stock Exchange or
otherwise on the open market on or about February 15 and August 15. If you hold
shares in your own name, you should deal directly with the Plan Agent. We
suggest you send your check to the following address to be received on or about
February 5 or August 5 to allow time for processing: State Street Bank and Trust
Company, P.O. Box 8200, Boston, MA 02266. The Plan Agent will return any cash
payments received more than thirty days prior to February 15 or August 15, and
you will not receive interest on uninvested cash payments. If you own shares
that are held in the name of a brokerage firm, bank, or other nominee, you
should contact your nominee to arrange for them to participate in the cash
purchase option on your behalf.
23
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SUMMARY OF DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN (continued)
--------------------------------------------------------------------------------
IS THERE A COST TO PARTICIPATE?
Each participant will pay a pro rata portion of brokerage commissions payable
with respect to purchases of shares by the Plan Agent on the New York Stock
Exchange or otherwise on the open market. Otherwise, there is no charge to
participants for reinvesting dividends and capital gains distributions, since
the Plan Agent's fees are paid by the Fund. Brokerage charges for purchasing
shares through the Plan are expected to be less than the usual brokerage charges
for individual transactions, because the Plan Agent will purchase stock for all
participants in blocks, resulting in lower commissions for each individual
participant.
For purchases from voluntary cash payments, participants are charged a service
fee of $.75 for each investment and a pro rata share of the brokerage
commissions.
Brokerage commissions and service fees, if any, will be deducted from amounts to
be invested.
WHAT ARE THE TAX IMPLICATIONS FOR PARTICIPANTS?
You will receive tax information annually for your personal records and to help
you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
If the Fund issues shares upon reinvestment of a dividend or capital gains
distribution, for U.S. federal income tax purposes, the amount reportable in
respect of the reinvested amount of the dividend or distribution will be the
fair market value of the shares received as of the payment date, which will be
reportable as ordinary dividend income and/or long term capital gains. The
shares will have a tax basis equal to such fair market value, and the holding
period for the shares will begin on the day after the payment date. State, local
and foreign taxes may also be applicable.
ONCE ENROLLED IN THE PLAN, MAY I WITHDRAW FROM IT?
You may withdraw from the Plan without penalty at any time by written notice to
the Plan Agent.
If you withdraw, you will receive, without charge, stock certificates issued in
your name for all full shares, or, if you wish, the Plan Agent will sell your
shares and send you the proceeds, less a service fee of $2.50 and less brokerage
commissions. The Plan Agent will convert any fractional shares you hold at the
time of your withdrawal to cash at the current market price and send you a check
for the proceeds.
WHOM SHOULD I CONTACT FOR ADDITIONAL INFORMATION?
If you hold shares in your own name, please address all notices, correspondence,
questions, or other communications regarding the Plan to: State Street Bank and
Trust Company, P.O. Box 8200, Boston, MA 02266, 1-800-426-5523. If your shares
are not held in your name, you should contact your brokerage firm, bank, or
other nominee for more information and to arrange for them to participate in the
Plan on your behalf.
Either the Fund or the Plan Agent may amend or terminate the Plan. Except in the
case of amendments necessary or appropriate to comply with applicable law, rules
or policies or a regulatory authority, participants will be mailed written
notice at least 90 days before the effective date of any amendment. In the case
of termination, participants will be mailed written notice at least 90 days
before the record date of any dividend or capital gains distribution by the
Fund.
24
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DIRECTORS AND OFFICERS (UNAUDITED)
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The following table sets forth certain information concerning each of the
directors and officers of the Fund.
Principal
Occupation or Employment
Name, Address Present Office Director During Past
and (Age) With the Fund Since Five Years
------------------------------------ ---------------- -------- ------------------------------------
Shao-Yu Wang (78) Chairman of the 1986 Chairman of the Board of Trustees,
Apt. 5H Board and Soochow University (1987-present);
No. 56 Tun Hwa South Road, Director Chairman of the Board of Trustees,
Section 2 Min Chuan University,
Taipei, Taiwan, ROC (1986-present); Chairman of the
Board of Trustees, Fu-Dan High
School (1986-present)
**Benny T. Hu (53) President and 1993 Chairman, China Development Asset
29 F, 97 Tun Hwa Director Management Corp. (June
South Road, Section 2 2001-present); President, China
Taipei, Taiwan, ROC Development Industrial Bank
(1993-2001); Ambassador-at-Large,
Republic of China (May 2001-present)
David Dean (76) Director 1991 Senior Advisor of the
8361 B. Greensboro Drive Chiang-Ching-Kuo Foundation
McLean, Virginia 22102 (1990-present)
Lawrence J. Lau (56) Director 1998 Kwoh-Ting Li Professor of Economic
Stanford University Development, Stanford University
Landau Economics (1992- present); Director, Stanford
Building, Room 340 Institute for Economic Policy
579 Serra Mall Research at Stanford University
Stanford, CA 94305-6072 (1997-1999)
Joe O. Rogers (52) Director 1986 The Rogers Team LLC, Organizing
2477 Foxwood Drive Member (July 2001-present);
Chapel Hill, NC 27514 Executive Vice President, Business
Development, Planet Portal Inc.
(September 1999-May 2001);
President, Rogers International,
Inc. (September 1986-September
1999); Vice President, Business
Development, Thomson Consulting
(1998-1999); Partner, PHH Fantus
Consulting (1993-1996)
Jack C. Tang (74) Director 1989 Honorary Chairman (April
Tristate Holdings Ltd. 2001-present), Co-Chairman (April
66-72 Lei Muk Road 1999-April 2001), Chairman & CEO
Kwai Chung (June 1998-April 1999), Chairman
New Territories Emeritus (January 1997- June 1998),
Hong Kong Chairman & CEO (1987- December
1996), Tristate Holdings Ltd.;
Director, Mid Pacific Air
Corporation (1986-present); Director
(1991-1999), Pacific Rim
Investments, Ltd.
*Gloria Wang (47) Director 1998 Secretary and Treasurer of the Fund
99 Tun Hwa South (1994-October 1998); Executive Vice
Road, Section 2 President, HSBC Asset Management
Taipei, Taiwan, ROC (Taiwan) Ltd. (1996-present)
Name, Address Directorships in
and (Age) Publicly-Held Companies
------------------------------------ ------------------------------------
Shao-Yu Wang (78) Executive Director, China American
Apt. 5H Petrochemical Co., Ltd.
No. 56 Tun Hwa South Road, (1976-present).
Section 2
Taipei, Taiwan, ROC
**Benny T. Hu (53) Group Chairman, Far Eastern Air
29 F, 97 Tun Hwa Transport Corp. (1995-present);
South Road, Section 2 Chairman, China Securities
Taipei, Taiwan, ROC Investment Trust Corporation
(1992-1993); President, China
Securities Investment Trust
Corporation (1986-1992); Director,
China Steel Corporation (1993-2001)
David Dean (76) --
8361 B. Greensboro Drive
McLean, Virginia 22102
Lawrence J. Lau (56) Director, Media Partners
Stanford University International Holdings, Inc.
Landau Economics (2001-present)
Building, Room 340
579 Serra Mall
Stanford, CA 94305-6072
Joe O. Rogers (52) Director, The China Fund, Inc.
2477 Foxwood Drive (1992- present)
Chapel Hill, NC 27514
Jack C. Tang (74) --
Tristate Holdings Ltd.
66-72 Lei Muk Road
Kwai Chung
New Territories
Hong Kong
*Gloria Wang (47) --
99 Tun Hwa South
Road, Section 2
Taipei, Taiwan, ROC
25
Principal
Occupation or Employment
Name, Address Present Office Director During Past
and (Age) With the Fund Since Five Years
------------------------------------ ---------------- -------- ------------------------------------
Lawrence F. Weber (68) Director 1995 Independent Consultant
156 Ide Rd. (1993-present)
Williamstown, MA 01267
Haichi Vicki Hau (39) Secretary and 1998 Senior Analyst of HSBC Asset
99 Tun Hwa South Treasurer of the Management (Taiwan) Limited, (1994-
Road, Section 2 Fund present); Analyst of HSBC Asset
Taipei, Taiwan, ROC Management (Taiwan) Ltd. (1991 to
1994)
Name, Address Directorships in
and (Age) Publicly-Held Companies
------------------------------------ ------------------------------------
Lawrence F. Weber (68) --
156 Ide Rd.
Williamstown, MA 01267
Haichi Vicki Hau (39) --
99 Tun Hwa South
Road, Section 2
Taipei, Taiwan, ROC
---------------
* Director is considered to be an "interested person" (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the Fund or of
the Fund's investment adviser. Ms. Wang is deemed to be an interested person
because of her affiliation with the Fund's investment adviser.
** Mr. Hu was considered to be an "interested person" through August 22, 2001
because of his prior affiliation with the Fund's investment adviser.
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UNITED STATES ADDRESS
The Taiwan Fund, Inc.
225 Franklin Street
Boston, MA
1-800-636-9242
INVESTMENT ADVISER
HSBC Asset Management (Taiwan) Limited
Taipei, Taiwan
DIRECTORS AND OFFICERS
S.Y. Wang, Chairman of the Board and Director
Benny T. Hu, President and Director
David Dean, Director
Joe O. Rogers, Director
Jack C. Tang, Director
Lawrence J. Lau, Director
Gloria Wang, Director
Lawrence F. Weber, Director
Vicki Hau, Secretary and Treasurer
Laurence E. Cranch, Assistant Secretary
ADMINISTRATOR, ACCOUNTING AGENT,
TRANSFER AGENT, DIVIDEND PAYING
AGENT, AND REGISTRAR
State Street Bank and Trust Company
Boston, MA
CUSTODIANS
The International Commercial Bank of China
Taipei, Taiwan
State Street Bank and Trust Company
Boston, MA
LEGAL COUNSEL
Clifford Chance US LLP
New York, NY
Lee and Li
Taipei, Taiwan
INDEPENDENT AUDITORS
KPMG LLP
Boston, MA