UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-04893
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THE TAIWAN FUND, INC.
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(Exact name of registrant as specified in charter)
C/O STATE STREET BANK AND TRUST COMPANY,
2 AVENUE DE LAFAYETTE, 6TH FLOOR, PO BOX 5049,
BOSTON, 02111
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(Address of principal executive offices)(Zip code)
(Name and Address of Agent for Service) Copy to:
State Street Bank and Trust Company Leonard B. Mackey, Jr., Esq.
Attention: Mary Moran Zeven Clifford Chance US LLP
Assistant Secretary 31 West 52nd Street
2 Avenue de Lafayette, 6th Floor New York, New York 10019-6131
Boston, Massachusetts 02111
Registrant's telephone number, including area code: 1-800-636-9242
Date of fiscal year end: August 31
Date of reporting period: August 31, 2006
1
ITEM 1. REPORT TO STOCKHOLDERS.
2
THE TAIWAN FUND, INC.(R)
Annual Report
August 31, 2006
The Taiwan Fund, Inc.
What's Inside
Page
----
Chairman's Statement 2
Report of the Investment Manager 4
Portfolio Snapshot 11
Sector Allocation 12
Investments 13
Financial Statements 15
Notes to Financial Statements 18
Report of Independent Registered Public Accounting Firm 22
Other Information 23
Summary of Dividend Reinvestment and Cash Purchase Plan 25
Directors and Officers 28
CHAIRMAN'S STATEMENT
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Dear Shareholders:
We are pleased to report that The Taiwan Fund, Inc. performed well for the
fiscal year ended August 31, 2006.
On August 31, 2006, the Fund's net asset value (NAV) was US$17.39, which was an
increase of 18.2%* in U.S. dollar terms for the fiscal year. During the same
period, the Taiwan Total Return Index (TRI) increased by 13.8% in U.S. dollar
terms. Overall, the Fund outperformed the TRI by 3.9% during the fiscal year.
The Taiwan Fund, Inc. is celebrating its 20th anniversary this year. The first
twenty years have been eventful and rewarding. Over the past twenty years, the
Fund has successfully achieved an 10.1% annualized return based on NAV in U.S.
dollar terms.
On behalf of the Board, I would like to thank the Board of Directors and
shareholders for your continued support of The Taiwan Fund, Inc. Looking
forward, we remain committed to making The Taiwan Fund, Inc. a rewarding
investment for shareholders for many years to come.
Sincerely,
/s/ Harvey Chang
Harvey Chang
Chairman
---------------
* "Returns for the Fund are historical total returns that reflect changes in net
asset value per share during each period and assume that dividends and capital
gains, if any, were reinvested."
2
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3
REPORT OF THE INVESTMENT MANAGER
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INVESTMENT PERFORMANCE
The Fund's net asset value ("NAV") increased by 18.2%* in U.S. dollar terms for
the fiscal year ended August 31, 2006. During the same period, the Taiwan Total
Return Index (TRI) increased by 13.8% in U.S. dollar terms. The Fund
outperformed the TRI by 3.9% during the year.
The out-performance was due to both sector allocation and stock selection. On a
sector basis, the Fund's overweight positions in the technology sector and
underweight positions in the financial sector enhanced performance. Stock
selection in technology, financial and industrials sectors all benefited
performance during the year.
In the technology sector, the Fund's exposure to IT hardware companies Hon Hai
and Foxconn Tech continued to positively contribute to performance due to strong
earnings growth. IT component companies such as Tripod Technology and Catcher
Technology also added to relative performance. In the financial sector, the
biggest performance contributor was insurance company Cathay FHC. On the
negative side, the Fund's overweight positions in transistor liquid crystal
display ("TFT-LCD") and underweight positions in materials mildly detracted from
relative performance during the year.
ECONOMIC OUTLOOK
Considering the softening U.S. housing market, rising oil prices and geographic
risk, global economic growth will likely slow. The World Bank forecasts global
economic growth of 3.2% and 3.3% in 2006 and 2007, respectively. The
Organization for Economic Cooperation and Development ("OECD") leading
indicators were down 0.1 point in June to 109.7 from 109.8 in May. The 6-month
rate of change fell for the third consecutive month, signaling that a modest
slowdown is underway in the Major Seven countries.
After strong growth in the first quarter of 2006, U.S. GDP growth decreased to
2.5% in the second quarter of 2006. Household consumer spending, accounting for
60 percent of U.S. GDP, has continued to slow recently. The Fed has put a hold
on interest rate hikes after 17
---------------
* "Returns for the Fund are historical total returns that reflect changes in net
asset value per share during each period and assume that dividends and capital
gains, if any, were reinvested."
4
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consecutive rises, leaving the federal funds rate at 5.25%. We believe that the
accumulative effects of previous liquidity tightening and slowing demand can be
expected to ease inflationary pressure. Orders for non-defense and ex-aircraft
capital goods, indicating future business investment, continue to rise. Although
U.S. consumption is retrenching, business investment spending is expected to
sustain the economy.
Taiwan's financial indicators have been weak of late, while real economic
activity indicators have been solid. This explains why the Leading Index has
been stagnating. Taiwan's economic growth edged down to 4.7% in the second
quarter of 2006, due to slackening domestic demand. Economic growth in the first
half of 2006 was underpinned by soaring net exports. We anticipate the economy
will grow at a slower pace in the second half of 2006 and 2007, given soft
domestic demand and a less favorable global environment. We anticipate Taiwan's
GDP to grow by 4.0% and 3.6% in 2006 and 2007, respectively.
Private consumption, negatively impacted by cash/credit card loan problems and
negative real wage growth, is weighing on GDP in Taiwan. Both consumer
confidence and real purchasing power are being affected. We expect consumer
banking problems to linger for one to two more quarters and consumption momentum
to recover moderately. Private consumption is expected to grow by 1.8% in 2006
and 2.3% in 2007. On the investment front, domestic investment appears to be
sluggish, making a negative contribution of 0.9 percentage points to GDP growth
in the second quarter of 2006. Capital equipment imports have increased over the
past two months, showing signs of modest rebound of investment momentum. The
investment momentum is expected to pick up gradually into 2007. We expect gross
fixed capital investment to decline by 0.5% in 2006, before rising about 1.6%
growth in 2007. In addition, the Taiwan government has vowed to push
cross-strait policies, including opening up the local tourism market to Chinese
visitors and starting regular cross-strait charter flights. If these
cross-strait policies materialize, businesses will likely benefit and investment
confidence and market sentiment will likely improve.
Exports, thanks to solid foreign demand, have grown at a brisk rate so far this
year. China and the United States, accounting for about 50% of Taiwan's exports,
are the two major drivers of Taiwan's foreign trade. However, with the U.S.
economy slowing and private consumption declining, strong export growth is not
expected to be sustained
5
REPORT OF THE INVESTMENT MANAGER (continued)
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but to grow at a slower pace toward year-end and 2007. Moreover, the Chinese
government has reinitiated macro-control measures. It has continued to tighten
up liquidity. If it allows further appreciation of the Chinese currency,
China-bound exports will likely take a hit. Given the external outlook and high
base, we expect Taiwan's exports growth to slow. We anticipate Taiwan's export
growth to be 9% in 2006 and 5% in 2007, respectively.
While real interest rates are still relatively low and the rate disparity
between the U.S. dollar and NT dollar still has room to improve, we expect
Taiwan's central bank to continue to raise the rediscount rate. Consumer prices
have risen by 1.4% since the beginning of the year -- reflecting moderate
inflation compared with the average number of 2% over the past two years.
However, wholesale prices jumped by 9.1% year-over-year in July, affected by
rising crude oil and basic metal prices. Inflationary pressure is looming. The
Consumer Price Index is expected grow by 1.8% in 2006. With the Fed pausing
interest rate increases, Japan's zero-interest-rate policy having been lifted
and China continuing macro tightening, more funds are expected to flow into
Asia. We expect to see mild NT dollar appreciation, as with other Asian
currencies.
We believe Taiwan's economy will continue to grow on foreign demand. However,
the contribution of net exports to growth will likely level-off as external
demand remains volatile and domestic demand picks up. We expect modest growth
for the remainder of the year and in 2007 for Taiwan's economy.
MARKET OUTLOOK AND INVESTMENT STRATEGY
Following a nice run in the first four months of 2006, the TAIEX pulled back
significantly from early-May to July, due mainly to rising global risk aversion
(from mounting inflation/interest rate fears) and worse-than-expected technology
data-points. Investors' expectations for technology demand in the second quarter
of 2006 were originally fairly high despite it being the traditional slow
season. However, market conditions have turned out to be sluggish, with poor PC
sales and inventory mounting in the semiconductor, TFT-LCD, and even handset
space. With expectations declining, the technology sub-index has dropped over
20% from its peak this year. Following the sharp correction, we expect
technology shares to regain momentum as the inventory
6
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correction finishes and restocking begins. We expect current restocking activity
to continue into the fourth quarter of 2006.
In the current cycle, inventory levels in the technology industry have been
below historical averages due to better capital expenditure discipline over the
past few years. After experiencing worse-than-expected market conditions in the
middle of 2006, semiconductor inventory is indeed high, but inventory in
channels and at system makers remains reasonable. This means that when seasonal
demand kicks in, it will quickly feed through the food chain, leading to a
reduction in upstream inventory.
While the technology sector is set for a rebound in the short term, this does
not mark the start of a genuine recovery, in our view. In the near term, further
earnings downgrades are likely on the back of lackluster company guidance and
muted macro data. Together with a lack of new major products/applications to
drive tech demand in the second half of 2006, upside for technology shares will
be capped, although niche players that deliver solid financial results are
expected to perform well on a per share basis. As a result, the likelihood of
the TAIEX exceeding its previous high of 7,474 points is low. Apart from
technology fundamentals, continued political noise, sluggish performance of the
financial sector, and uncertainty surrounding inflation and consumption in the
United States are also casting a shadow over the TAIEX.
In Taiwan, the President Chen administration is being weakened by a spate of
scandals. Former Democratic Progressive Party ("DPP") chairman Shih Ming-teh's
campaign against Chen has created further political noise in the stock market.
Premier Su, the likely DPP candidate for the next presidential election, has
been struggling with party hardliners to improve cross-strait links. But
progress has been disappointing. While restrictions on Chinese visitors to
Taiwan are likely to be eased soon, the removal of the 40% investment limit in
China (which has a more significant impact on corporate earnings) is not
expected to happen in the near term.
Accounting for 16% of the index in terms of market cap, the performance of
financial shares has a significant impact on the TAIEX. Affected by the cash and
credit card crisis, Taiwan's cash and credit card loans as a percentage of total
lending has declined markedly from the peak of 4.0% in November 2005 to 3.0% in
June 2006, with total loans down from NT$657 billion to NT$509 billion during
the same period. As cash and credit card write-offs amounted to as much as
7
REPORT OF THE INVESTMENT MANAGER (continued)
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NT$85 billion in the first half of 2006, aggregate earnings of local banks
plunged 57% to NT$36 billion during the same period. Major financial holding
companies noted in their investor conferences that one-month-pass-due loans
peaked in the second quarter of 2006, but that charge-offs won't peak until the
third quarter of 2006, making the amount of provisions in the second half of
2006 similar to that in the first half of 2006. During the previous corporate
banking crisis (1998-1999), banks turned to the consumer business after being
hit by huge write-offs. Profits reached record highs on low interest rates and
reversal of write-offs in 2004. In the current cash/credit card crisis, however,
funding costs are higher due to rising interest rates, average lending rates are
shrinking due to reduced card loans, and disposal losses of non-performing loans
are high. These factors have combined to pressure banking earnings and thus
related shares' performance in the near term. Though the pain may be eased in
the fourth quarter of 2006, with more profits coming from declining provisions,
sluggish top line momentum (due to a lack of revenues from high yield assets)
and undecided repayment rate of restructured bad loans are still major
uncertainties in the long term.
On the macro front, while the Fed's rate hikes have paused amid positive
inflation numbers, the market focus is seemingly switching from interest rate
concerns to the slowing U.S. economy. The stubbornly high oil prices and
slower-than-expected U.S. housing data will be likely to have a negative impact
on U.S. consumption, and thus the export growth of Asian countries. Christmas
sales will be a key indicator for judging the strength of U.S. consumption.
Despite the aforementioned negative factors, we believe the TAIEX will be
protected by the Fed's move to pause rate hikes (which should cause liquidity to
flow back to Asia) and the upcoming peak season for technology companies. Thus,
we expect the TAIEX to be range bound until the fourth quarter of 2006.
Technology is our favorite sector, particularly dynamic random access memory
("DRAM"), handset, and packaging & testing. However, we would underweight
operators in the Fund's portfolio. After the expected technology bounce, we may
add some positions in financials to the Fund's portfolio at the year end of 2006
when the sector is expected to bottom out.
We believe we will see a more significant pick-up in technology fundamentals in
the fourth quarter of 2006 and onwards. Our long-term positive view towards the
TAIEX remains intact as: (1) underlying
8
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valuations remain attractive on both a regional and historical basis; and (2)
global emerging market funds remain underweight Taiwan.
Potential catalysts for the TAIEX include: (1) the scheduled launch of
Microsoft's Vista consumer operating system in January 2007, which could be a
key catalyst for a tech sector rally; and (2) switch to an expansionary policy
by the Fed. Although this is uncertain, history suggests it will have a positive
impact on the stock market if it happens.
To conclude, we expect investors to receive reasonable rewards from certain
sectors' positive results. In the year ahead, we intend to maintain the Fund's
exposure in high-beta stocks to take advantage of these diverse themes and
achieve better investment returns. We will continue to strive to achieve
superior performance through a process of bottom-up stock selection. We are
confident that the Taiwanese stock market and healthy economic conditions will
provide significant investment opportunities for investors in the foreseeable
future.
Thank you for your support and we look forward to presenting our strategy again
in coming reports.
Sincerely,
/s/ Chih-Hui Lee
Chih-Hui Lee(1)
Portfolio Manager
/s/ Steven Chan
Steven Chan
Deputy Portfolio Manager
(1) Victor Shih resigned from his position as Portfolio Manager of the Fund,
effective September 9, 2006. Mr. Chih-Hui Lee succeeded Mr. Shih as the
Fund's lead Portfolio Manager.
9
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10
PORTFOLIO SNAPSHOT*
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TOP TEN EQUITY HOLDINGS
HOLDINGS AS OF AUGUST 31, 2006 %
--------------------------------------------------
Hon Hai Precision Industry Co. Ltd. 7.4
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High Tech Computer Corp. 6.4
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Taiwan Semiconductor Manufacturing Co. 4.4
--------------------------------------------------
MediaTek, Inc. 4.3
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Siliconware Precision Industries Co. 4.1
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Largan Precision Co. Ltd. 3.8
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Cathay Financial Holding Co. Ltd. 3.5
--------------------------------------------------
D-Link Corp. 3.4
--------------------------------------------------
Au Optronics Corp. 3.3
--------------------------------------------------
Cheng Uei Precision Industry Co. Ltd. 3.0
--------------------------------------------------
TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF AUGUST 31, 2006 %
--------------------------------------------------
Telecommunications 19.3
--------------------------------------------------
Electronic Components 14.2
--------------------------------------------------
Semiconductor Manufacturing 13.0
--------------------------------------------------
PC & Peripherals 12.5
--------------------------------------------------
Financial Services 6.9
--------------------------------------------------
IC Design 6.8
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TFT-LCD 6.2
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Electronics 6.1
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Memory IC 4.0
--------------------------------------------------
Construction 3.5
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TOP TEN EQUITY HOLDINGS
HOLDINGS AS OF AUGUST 31, 2005 %
--------------------------------------------------
MediaTek, Inc. 7.0
--------------------------------------------------
Hon Hai Precision Industry Co. Ltd. 5.6
--------------------------------------------------
Silicon Intergrated System Corp. 4.8
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Taiwan Semiconductor Manufacturing Co. 4.7
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Chi Mei Optoelectronics Corp. 4.5
--------------------------------------------------
Asustek Computer, Inc. 4.5
--------------------------------------------------
Au Optronics Corp. 3.8
--------------------------------------------------
Tripod Technology Corp. 3.8
--------------------------------------------------
Powerchip Semiconductor Corp. 3.7
--------------------------------------------------
Chinatrust Financial Holding Co. Ltd. 3.6
--------------------------------------------------
TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF AUGUST 31, 2005 %
--------------------------------------------------
PC & Peripherals 20.1
--------------------------------------------------
IC Design 14.6
--------------------------------------------------
Electronics 10.9
--------------------------------------------------
TFT-LCD 10.2
--------------------------------------------------
Semiconductor Manufacturing 9.1
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Financial Services 6.7
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Electronic Components 6.5
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Telecommunications 5.8
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Memory IC 3.7
--------------------------------------------------
Iron & Steel 3.5
--------------------------------------------------
* Percentages based on total investments at August 31, 2006 and August 31, 2005.
11
SECTOR ALLOCATION
INDUSTRY ALLOCATION (AS A PERCENTAGE OF TOTAL INVESTMENTS)
PIE CHART
Other 2.9%
Basic Industries 8.1%
Finance 6.9%
Technology 82.1%
Fund holdings are subject to change and percentages shown above are based on
total investments as of August 31, 2006. The pie chart illustrates the
allocation of the investment by sector. A complete list of holdings as of August
31, 2006 is contained in the Investments included in this report. The most
currently available data regarding portfolio holdings and industry allocation
can be found on our website, www.thetaiwanfund.com. You may also obtain updated
holdings by calling (800)-636-9242.
12
THE TAIWAN FUND, INC.
INVESTMENTS/AUGUST 31, 2006 (SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT
IN SECURITIES)
--------------------------------------------------------------------------------
US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS -- 97.1%
BASIC INDUSTRIES -- 8.1%
CONSTRUCTION -- 3.5%
Cathay Real Estate Development Co.
Ltd.*............................ 8,000,000 $ 4,486,459
Goldsun Development & Construction
Co. Ltd.*......................... 11,050,000 4,433,569
Highwealth Construction Corp. ..... 1,177,350 1,170,228
------------
10,090,256
------------
ELECTRIC & MACHINERY -- 0.2%
Depo Auto Parts Industrial Co.
Ltd. ............................ 188,999 540,014
------------
IRON & STEEL -- 2.4%
China Steel Corp. ................. 8,280,000 6,719,839
------------
PLASTICS -- 2.0%
Nan Ya Plastics Corp. ............. 2,266,000 3,065,048
Taiwan Hon Chuan Enterprise Co.
Ltd. ............................. 3,500,000 2,585,185
------------
5,650,233
------------
TOTAL BASIC INDUSTRIES............. 23,000,342
------------
FINANCE -- 6.9%
FINANCIAL SERVICES -- 6.9%
Cathay Financial Holding Co.
Ltd. ............................ 5,248,593 10,034,849
Chang Hwa Commercial Bank*......... 14,000,000 8,298,125
Chinatrust Financial Holding Co.
Ltd. ............................. 1,860,000 1,218,365
------------
TOTAL FINANCE...................... 19,551,339
------------
TECHNOLOGY -- 82.1%
ELECTRONIC COMPONENTS -- 14.2%
Cyntec Co. Ltd. ................... 4,404,025 4,404,159
E-Ton Solar Tech Co. Ltd. ......... 87,000 1,491,474
Feei Cherng Enterprise Co. Ltd. ... 319,000 931,818
Ichia Technologies, Inc.*.......... 3,000,000 3,519,864
Kinsus Interconnect Technology
Corp. ............................ 2,488,209 7,079,132
Motech Industries, Inc. ........... 86,000 2,120,004
Nan Ya Printed Circuit Board
Corp.............................. 600,000 4,951,518
Tripod Technology Corp. ........... 2,331,000 7,156,175
Unimicron Technology Corp. ........ 6,180,000 8,612,815
------------
40,266,959
------------
ELECTRONICS -- 6.1%
Delta Electronics, Inc. ........... 2,325,000 6,466,382
Largan Precision Co. Ltd. ......... 525,000 10,883,309
------------
17,349,691
------------
US$
VALUE
SHARES (NOTE 1)
------ --------
IC DESIGN -- 6.8%
MediaTek, Inc. .................... 1,320,000 $ 12,036,840
Novatek Microelectronics Corp.
Ltd. ............................. 1,442,851 7,104,832
------------
19,141,672
------------
MEMORY IC -- 4.0%
Inotera Memories, Inc. ............ 6,800,000 7,027,569
Powerchip Semiconductor Corp. ..... 6,312,289 4,173,145
------------
11,200,714
------------
PC & PERIPHERALS -- 12.5%
Asia Vital Components Co. Ltd. .... 3,000,000 1,326,788
Catcher Technology Co. Ltd. ....... 777,921 6,100,599
Foxconn Technology Co. Ltd. ....... 920,000 6,963,130
Hon Hai Precision Industry Co.
Ltd. ............................. 3,724,800 21,002,170
------------
35,392,687
------------
SEMICONDUCTOR MANUFACTURING --13.0%
Advanced Semiconductor Engineering
Inc. ............................ 6,500,000 6,678,015
Ardentec Corp. .................... 2,693,749 2,137,051
King Yuan Electronics Co. Ltd. .... 5,354,000 4,003,417
Siliconware Precision Industries
Co. .............................. 9,865,556 11,695,087
Taiwan Semiconductor Manufacturing
Co. .............................. 7,003,000 12,367,376
------------
36,880,946
------------
TELECOMMUNICATIONS -- 19.3%
Alpha Networks, Inc. .............. 4,946,483 4,194,865
Cheng Uei Precision Industry Co.
Ltd. ............................. 2,335,761 8,626,249
D-Link Corp. ...................... 9,900,000 9,719,748
Epistar Corp. ..................... 1,049,754 3,142,976
High Tech Computer Corp. .......... 720,000 18,164,686
Merry Electronics Co. Ltd. ........ 1,732,000 6,159,579
Wha Yu Industrial Co. Ltd. ........ 220,043 220,050
Wistron NeWeb Corp. ............... 1,609,580 4,266,251
------------
54,494,404
------------
TFT-LCD -- 6.2%
Au Optronics Corp. ................ 6,399,390 9,472,941
Chi Mei Optoelectronics Corp. ..... 6,812,000 8,075,261
------------
17,548,202
------------
TOTAL TECHNOLOGY................... 232,275,275
------------
TOTAL COMMON STOCKS
(Identified
Cost -- $209,475,826)............. 274,826,956
------------
The accompanying notes are an integral part of the financial statements. 13
INVESTMENTS/AUGUST 31, 2006 (continued)
--------------------------------------------------------------------------------
PRINCIPAL US$
AMOUNT VALUE
NT$ (NOTE 1)
--------- --------
COMMERCIAL PAPER -- 2.6%
Chiao Tung Bank Nan Kong Branch:
1.5350%, 10/12/2006 (a).......... $180,088,105 $ 5,473,969
1.5350%, 10/13/2006 (a).......... 10,012,289 304,334
E. Sun Bank
1.53%, 10/12/2006 (a)............ 50,266,023 1,527,889
------------
TOTAL COMMERCIAL PAPER
(Identified
Cost -- US$7,365,467)............. 7,306,192
------------
MATURITY
AMOUNT
US$
--------
REPURCHASE AGREEMENT -- 0.3%
State Street Bank and Trust Co. at
1.50% dated 8/28/06, due 9/5/06
(collateralized by U.S.
Treasury Note 3.00%, 11/15/07,
market value $910,949)......... $ 890,297 $ 890,000
------------
TOTAL INVESTMENTS -- 100.0%
(COST -- $217,731,293)........... $283,023,148
============
OTHER ASSETS AND LIABILITIES,
NET.............................. 1,538,006
------------
NET ASSETS......................... $284,561,154
============
LEGEND:
NT$ - New Taiwan dollar
US$ - United States dollar
(a) 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.
* Non-income producing security
INCOME TAX INFORMATION:
At August 31, 2006, the aggregate cost basis of the Fund's investment securities
for income tax purposes was $217,743,208.
Net unrealized appreciation of the Fund's investment securities was $65,279,940
of which $78,414,135 related to appreciated investment securities and
$13,134,195 related to depreciated investment securities for the fiscal year
ended August 31, 2006. In addition, as of August 31, 2006, the Fund had a
capital loss carryforward of ($32,501,720) for Federal income tax purposes which
may be utilized to offset future capital gains through August 31, 2010
($8,500,361) and August 31, 2011 ($24,001,359). For the year ended August 31,
2006, the Taiwan Fund, Inc. utilized $28,965,639 of its capital loss
carryforward for U.S. Federal income tax purposes.
14 The accompanying notes are an integral part of the financial statements.
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
August 31, 2006
ASSETS
Investments in securities, at value (cost
$217,731,293) (Notes 1) - See
accompanying schedule................... $283,023,148
Cash..................................... 82
Cash in New Taiwan dollars (cost
$4,099,466)............................. 4,097,967
Dividend receivable...................... 1,598,927
Interest receivable...................... 10,084
------------
Total assets............................ 288,730,208
------------
LIABILITIES
Payable for investments purchased........ $ 3,433,734
Accrued management fee (Note 3).......... 305,799
Taiwan withholding tax payable (Note 338,232
1)......................................
Other payables and accrued expenses...... 91,289
-----------
Total liabilities....................... 4,169,054
------------
NET ASSETS............................... $284,561,154
============
Net Assets consist of (Note 1):
Paid in capital.......................... 251,789,708
Undistributed net investment income...... --
Accumulated undistributed net realized
loss on investments in securities and
foreign currency........................ (32,513,637)
Net unrealized appreciation on investment
securities and foreign currency......... 65,285,083
------------
NET ASSETS............................... $284,561,154
============
NET ASSET VALUE, per share
($284,561,154/16,365,572 shares
outstanding)............................ $17.39
============
STATEMENTS OF OPERATIONS
For the Year Ended August 31, 2006
INVESTMENT INCOME
Dividends................................. $ 6,404,164
Interest.................................. 130,854
-----------
6,535,018
Less: Taiwan withholding tax (Note 1)..... (1,257,305)
-----------
Total Income............................. 5,277,713
EXPENSES:
Management fee (Note 3)
Basic fee................................ $ 3,383,909
Performance adjustment................... (264,597)
Custodian fees and expenses............... 466,243
Administration and accounting fees (Note
3)....................................... 293,031
Directors compensation (Note 3)........... 317,603
Legal..................................... 206,244
Audit..................................... 100,583
Shareholder communications................ 87,753
Insurance fees............................ 99,065
Delaware franchise tax.................... 71,303
Miscellaneous............................. 31,673
Transfer agent fees....................... 18,189
Taiwan stock dividend tax (Note 1)........ 424,079
-----------
Total expenses........................... 5,235,078
-----------
NET INVESTMENT INCOME.................... 42,635
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 1)
Net realized gain (loss) on:
Investment securities.................... 28,146,347
Foreign currency transactions............ (152,963)
-----------
27,993,384
Change in net unrealized appreciation
(depreciation) on:
Investment securities.................... 15,785,047
Assets and liabilities denominated in
foreign currencies..................... 42,842
-----------
15,827,889
-----------
Net realized and unrealized gain.......... 43,821,273
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................... $43,863,908
===========
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, 2006 August 31, 2005
---------------- ---------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment gain (loss)................................. $ 42,635 $ 1,049,602
Net realized gain on investments and foreign currency
transactions............................................. 27,993,384 16,684,383
Change in net unrealized appreciation on investments and
foreign currency transactions............................ 15,827,889 15,152,035
------------ ------------
Net increase (decrease) in net assets resulting from
operations............................................... 43,863,908 32,886,020
------------ ------------
Distributions to shareholders
From net investment income................................. (856,410) (498,168)
------------ ------------
Total distributions to shareholders........................ (856,410) (498,168)
------------ ------------
Total increase in net assets............................... 43,007,498 32,387,852
------------ ------------
NET ASSETS
Beginning of period........................................ 241,553,656 209,165,804
------------ ------------
End of period.............................................. 284,561,154 241,553,656
============ ============
Undistributed net investment income end of period.......... $ 0 $ 856,258
============ ============
16 The accompanying notes are an integral part of the financial statements.
FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended August 31,
-----------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- -----------
SELECTED PER SHARE DATA
Net asset value, beginning of
period....................... $ 14.76 $ 12.78 $ 12.89(c) $ 11.37(c) $ 10.81(c)
---------- ---------- ---------- ---------- -----------
Income from Investment
Operations
Net investment income (loss)
(a)........................ 0.00* 0.06 0.03 0.00(c)* (0.12)(c)
Net realized and unrealized
gain (loss) on
investments................ 2.68 1.95 (0.14) 1.52 0.68
---------- ---------- ---------- ---------- -----------
Total from investment
operations................. 2.68 2.01 (0.11) 1.52(c) 0.56(c)
---------- ---------- ---------- ---------- -----------
Less Distributions
From net investment income... (0.05) (0.03) -- -- --
From net realized gains...... -- -- -- -- --
---------- ---------- ---------- ---------- -----------
Total distributions.......... (0.05) (0.03) -- -- --
---------- ---------- ---------- ---------- -----------
Net asset value, end of
period....................... $ 17.39 $ 14.76 $ 12.78 $ 12.89(c) $ 11.37(c)
========== ========== ========== ========== ===========
Market value, end of period... $ 15.83 $ 13.34 $ 10.99 $ 11.09 $ 9.27
========== ========== ========== ========== ===========
TOTAL RETURN
Per share market value........ 19.05% 21.68% (0.90)% 19.63% (6.17)%
RATIO AND SUPPLEMENTAL DATA
Net assets, end of period (000
omitted)..................... $ 284,561 $ 241,554 $ 209,166 $ 210,949(c) $ 186,032(c)
Ratio of expenses to average
net assets (b)............... 1.92%(e) 2.23%(d) 2.07% 2.05%(c) 2.20%(c)
Ratio of expenses to average
net assets, excluding stock
dividend tax expense......... 1.77%(e) 1.93%(d) 1.82% 1.76%(c) 1.98%(c)
Ratio of net investment income
(loss) to average net
assets....................... 0.02%(e) 0.45%(d) 0.21% 0.01%(c) (0.97)%(c)
Portfolio turnover rate....... 110% 80% 76% 148% 167%
(a) Based on average shares outstanding during the period.
(b) Expense ratio includes 20% tax paid on stock dividends generated in Taiwan
received by the Fund.
(c) Restated (Note 6)
(d) Ratio includes charge to the Management fee; see Note 3. Without this
charge the ratios would be 2.00%, 1.70% and 0.68%, respectively.
(e) Ratio includes reduction of the Management fee; see Note 3. Without this
reduction the ratios would be 1.98%, 1.82% and -0.04%, respectively.
* Amount represents less than $0.005 per share.
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 Investments (Taiwan) Limited ("Adviser"), 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 policies described below are consistently followed by the Fund in the
preparation of its financial statements in conformity with U.S. generally
accepted accounting principles.
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. Foreign securities may be valued at fair value according to
procedures approved by the Board of Directors if the closing price is not
reflective of current market values due to trading or events occurring in the
valuation time of the Fund. In addition, substantial changes in values in the
U.S. markets subsequent to the close of a foreign market may also affect the
values of securities traded in the foreign market. The value of foreign
securities may be adjusted if such movements in the U.S. market exceed a
specified threshold. 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.
Repurchase Agreements. In connection with transactions in repurchase
agreements, it is the Fund's policy that its custodian take possession of the
underlying collateral securities, the fair value of which exceeds the principal
amount of the repurchase transaction, including accrued interest, at all times.
If the seller defaults, and the fair value of the collateral declines,
realization of the collateral by the Fund may be delayed or limited.
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 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.
18
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - continued
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, 2006 the Fund had no open Forwards.
Indemnification Obligations. Under the Fund's organizational documents, its
Officers and Trustees are indemnified against certain liabilities arising out of
the performance of their duties to the Fund. In addition, in the normal course
of business the Fund enters into contracts that provide general indemnifications
to other parties. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred.
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 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, except
where the ex-dividend date may have passed; 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 receive 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 U.S. generally
accepted accounting principles. No capital gain distributions shall be made
until any capital loss carryforwards have been fully utilized or expired.
19
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - continued
These differences are primarily due to differing treatments for foreign currency
transactions, losses deferred due to wash sales and net operating losses.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid in capital. Reclassifications recorded
at August 31, 2006 were ($42,483) from undistributed Net Investment Income,
$1,028,869 from Accumulated Gain (Loss) and ($986,386) to Paid in Capital.
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
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
2. PURCHASES AND SALES OF SECURITIES
For the fiscal year ended August 31, 2006, purchases and sales of securities,
other than short-term securities, aggregated $290,468,222 and $286,516,720,
respectively.
3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management Fee. As the Fund's investment adviser, HSBC Investments (Taiwan)
Limited (the "Adviser") receives a basic 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
monthly performance adjustments based on the Fund's investment performance as
compared to the Taiwan Stock Exchange Index over a rolling 36-month period. The
basic fee may increase or decrease by + or -0.30% depending on the Fund's
performance.
For the year ended August 31, 2006, the management fee, including the
performance adjustments, was equivalent to an annual rate of 1.20% of average
net assets, excluding the following one-time charge. During the period, the
basic fee included a one-time charge of approximately $154,000 as a further
revision to correct errors in the calculation of performance fee adjustments for
the fiscal years prior to 2000 (See footnote 6). The management fee including
this charge is equivalent to an annual rate of 1.15% 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 $15,000 plus
$2,000 for each Board of Directors' meeting or other Committee meeting attended,
and $2,000 for each meeting attended by telephone. On July 18, 2005 the Board of
Directors approved an increase in the annual fee from $10,000 to $15,000
effective September 1, 2005. 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. The Fund also pays State Street $130,000 per
year for certain legal administrative services, including corporate secretarial
services and preparing regulatory filings.
4. FUND SHARES
At August 31, 2006, there were 20,000,000 shares of $0.01 par value capital
stock authorized, of which 16,365,572 were issued and outstanding.
20
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
5. DISTRIBUTIONS
The Fund made a distribution of $856,410 from ordinary income during the year
ended August 31, 2006. As of August 31, 2006, the components of distributable
earnings on a tax basis were $0 of Undistributed Ordinary Income, $0 of
Undistributed Long-Term Capital Gain, $65,273,168 of Unrealized Appreciation and
($32,501,720) of 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.
6. PRIOR PERIODS RESTATEMENT
On August 31, 2004, the Fund restated its statement of changes in net assets for
the year ended August 31, 2003 and its financial highlights for the years ended
August 31, 2000 through 2003 to reflect correction of errors in the calculation
of management fee performance adjustments recorded by the Fund during these
years and prior. The incorrect performance adjustments were calculated based on
average net assets of the Fund over a period different than the period over
which average net assets of the Fund should have been calculated as stipulated
in the Management Contract and resulted in overpayments being made to the
investment adviser. The cumulative effect at September 1, 1999, and the yearly
net effect, of these corrections on net assets, net asset value per share and
the ratio of expenses were as follows:
NAV PER EXPENSE
NET ASSETS SHARE RATIO
---------- ------- -------
Cumulative effect at
September 1, 1999 $1,088,492 $ 0.06 n/a
Effect on Year Ended
August 31, 2000 58,392 0.01 (0.02%)
Effect on Year Ended
August 31, 2001 (163,948) (0.01) 0.06%
Effect on Year Ended
August 31, 2002 (4,479) 0.00 0.00%
Effect on Year Ended
August 31, 2003 121,015 0.01 (0.07%)
7. RECENT ACCOUNTING PRONOUNCEMENT
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48- Accounting for Uncertainty in Income Taxes, which
requires the tax effects of certain tax positions to be recognized. These tax
positions must meet a "more likely than not" standard that based on their
technical merits, have a more than 50 percent likelihood of being sustained upon
examination. FASB Interpretation No. 48 is effective for fiscal periods
beginning after December 15, 2006. At adoption, the financial statements must be
adjusted to reflect only those tax positions that are more likely than not to be
sustained. Management of the Fund is currently evaluating the impact that FASB
Interpretation No. 48 will have on the Fund's financial statements.
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
The Board of Directors and Shareholders of
The Taiwan Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
Taiwan Fund, Inc. (the "Fund"), including the portfolio of investments, as of
August 31, 2006, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. 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 audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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, 2006 by correspondence with
the custodian and brokers, or by other appropriate auditing procedure where
replies from brokers were not received. 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 presents fairly, in all material respects, the financial position of The
Taiwan Fund, Inc., as of August 31, 2006, the results of its operations, the
changes in net assets and the financial highlights for the periods specified in
the first paragraph above, in conformity with U.S. generally accepted accounting
principles.
[KPMG LOGO]
October 19, 2006
22
OTHER INFORMATION (unaudited)
--------------------------------------------------------------------------------
Federal Tax Information. The Taiwan Fund, Inc. has made an election under
Internal Revenue Code Section 853 to pass through foreign taxes paid by the Fund
to its shareholders. For the year ended August 31, 2006, the total amount that
will be passed through to shareholders and foreign source income for information
reporting purposes will be $1,681,384 (representing taxes withheld plus taxes on
stock dividends) and $6,514,475, respectively.
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, 2006 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 it shareholders' nonpublic personal information.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that are used by the Fund's
investment adviser to vote proxies relating to the Fund's portfolio securities
is available (1) without charge, upon request, by calling 1-800-636-9242; and
(2) as an exhibit to the Fund's annual report on Form N-CSR which is available
on the website of the Securities and Exchange Commission (the "Commission") at
http://www.sec.gov. Information regarding how the investment adviser voted these
proxies during the most recent 12-month period ended June 30 is available with
out change, upon request, by calling the same number on the Commission's
website.
QUARTERLY PORTFOLIO OF INVESTMENTS
The Fund files with the Securities and Exchange Commission its complete schedule
of portfolio holdings on Form N-Q for the first and third quarters of each
fiscal year. The Fund's Form N-Q's are available on the Commission's website at
http://www.sec.gov. Additionally, the Portfolio of Investments may be reviewed
and copied at the Commission's Public Reference Room in Washington,
23
OTHER INFORMATION (unaudited) (continued)
--------------------------------------------------------------------------------
D.C. Information on the operation of the Public Reference Room may be obtained
by calling 1-800-SEC-0330. The most recent Form N-Q is available without charge,
upon request, by calling 1-800-636-9242.
CERTIFICATIONS
The Fund's chief executive officer has certified to the New York Stock Exchange
that, as of March 8, 2006, he was not aware of any violation by the Fund of
applicable New York Stock Exchange corporate governance listing standards. The
Fund also has included the certifications of the Fund's chief executive officer
and chief financial officer required by Section 302 and Section 906 of the
Sarbanes-Oxley Act of 2002 in the Fund's Form N-CSR filed with the Securities
and Exchange Commission, for the period of this report.
24
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 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. Computershare
Trust Company, N.A. (formerly, EquiServe Trust Company, N.A.) (the "Plan
Administrator"), a federally chartered trust institution, acts as Plan
Administrator for shareholders in administering the Plan. The Plan also allows
you to make optional cash investments in Fund shares through the Plan
Administrator.
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 Administrator 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 Administrator. You may invest any amount from $100 to $3,000
semi-annually. The Plan Administrator 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 Administrator. Checks should be make payable to "Computershare". The
Plan Administrator will not accept cash, traveler's checks, money orders, or
third party checks for voluntary cash purchase. We suggest you send your check
to the following address to be received at least two business days before the
investment date: Computershare, c/o The Taiwan Fund, Inc. at P.O. Box 43010,
Providence, RI 02940-3010. The Plan Administrator 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
25
SUMMARY OF DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN (continued)
--------------------------------------------------------------------------------
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.
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 Administrator 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 Administrator'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 Administrator
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 calling the Plan
Administrator at 1-800-426-5523, by accessing your Plan account at the Plan
Administrator's web site, www.computershare.com/equiserve or by written notice
to the Plan Administrator.
If you withdraw, you will receive, without charge, stock certificates issued in
your name for all full shares, or, if you wish, the Plan Administrator will sell
your shares and send you the proceeds, less a service fee of $2.50 and less
brokerage commissions. The Plan Administrator 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.
All sale requests having an anticipated market value of $100,000.00 or more are
expected to be submitted in the written form. In addition, all sale requests
within thirty (30) days of an address change are expected to be submitted in
written form.
26
SUMMARY OF DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN (continued)
--------------------------------------------------------------------------------
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: Computershare, c/o The
Taiwan Fund, Inc. at P.O. Box 43010, Providence, RI 02940-3010, by telephone at
1-800-426-5523 or through the Internet at www.computershare.com/equiserve. 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 Administrator 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 30 days before the effective date of any
amendment. In the case of termination, participants will be mailed written
notice at least 30 days before the record date of any dividend or capital gains
distribution by the Fund.
27
DIRECTORS AND OFFICERS (unaudited)
--------------------------------------------------------------------------------
The following table sets forth certain information concerning each of the
directors and officers of the Fund.
PRINCIPAL OCCUPATION OR
NAME, ADDRESS PRESENT OFFICE EMPLOYMENT DURING PAST DIRECTORSHIPS IN PUBLICLY-
AND (AGE) WITH THE FUND DIRECTOR SINCE FIVE YEARS HELD COMPANIES
------------- ------------------ --------------- ----------------------- --------------------------
DIRECTORS CONSIDERED INDEPENDENT PERSONS
Harvey Chang (55) Chairman of the 2005 President and Chief Director, Taiwan Mobile
21F, No. 172-1, Section 2 Board (since July Executive Officer, Co. Ltd. (2003-present)
Ji-Lung Road. 2005) and Director Taiwan Mobil Company
Taipei, Taiwan, ROC 106 Limited (September
2003-present); Senior
Vice President and
Chief Financial
Officer, Taiwan
Semiconductor
Manufacturing Co.
(February
1998-September 2003)
Shao-Yu Wang (81) Director 1986 Chairman of the Board Director, America
Apt. 5H of Trustees, Soochow California Bank (2003-
No. 56 Tun Hwa University present)
South Road, Section 2 (1987-present); Director, TSR Corp
Taipei, Taiwan, ROC Chairman of the Board (1985-present)
of Trustees, Min Chuan
University,
(1986-present);
Chairman of the Board
of Trustees, Fu-Dan
High School
(1986-present);
Chairman, Evernew
Biotech, Inc. (1985-
Present); Director, TSR
Corp. (1985-present);
Chairman, TSR Corp
(2005-present)
28
DIRECTORS AND OFFICERS (unaudited) (continued)
--------------------------------------------------------------------------------
PRINCIPAL OCCUPATION OR
NAME, ADDRESS PRESENT OFFICE EMPLOYMENT DURING PAST DIRECTORSHIPS IN PUBLICLY-
AND (AGE) WITH THE FUND DIRECTOR SINCE FIVE YEARS HELD COMPANIES
------------- ------------------ --------------- ----------------------- --------------------------
Christina Liu (49) Director 2005 Legislator, Legislative Director, Taiwan Stock
Suite 312, No. 3-1 Yuan, ROC (2002- Exchange (1995-2002)
Jinan Road present), Chairperson,
Taipei, Taiwan, ROC Finance Committee,
Legislative Yuan, ROC
(2002-2005), Chairman,
Director and Professor,
Department of Finance,
National Taiwan
University (1993-2001),
Consultative Board
Member, Commission On
Economic Planning and
Development, Executive
Yuan, Taiwan, ROC
(1996-2001);
Consultative Board
Member, Central Deposit
Insurance Corp. Taiwan,
ROC (1996-2001)
Joe O. Rogers (57) Director 1986 Organizing Member, The Director and Member of The
2477 Foxwood Drive Rogers Team LLC, (July Audit Committee, The China
Chapel Hill, NC 27514 2001-present); Manager, Fund, Inc. (1992-present)
The J-Squared Team LLC
(April 2003-May 2004);
Executive Vice
President, Business
Development, Planet
Portal Inc. (September
1999-May 2001)
M. Christopher Director 2003 Independent Consultant Director and Chairman of
Canavan, Jr. (67) (2000-present); The Audit Committee,
73 Brook Street Partner, Bruker Biosciences, Inc.
Wellesley, MA 02482 Pricewaterhouse Coopers (2000-present)
LLP (Coopers & Lybrand)
(1972-1999)
29
DIRECTORS AND OFFICERS (unaudited) (continued)
--------------------------------------------------------------------------------
PRINCIPAL OCCUPATION OR
NAME, ADDRESS PRESENT OFFICE EMPLOYMENT DURING PAST DIRECTORSHIPS IN PUBLICLY-
AND (AGE) WITH THE FUND DIRECTOR SINCE FIVE YEARS HELD COMPANIES
------------- ------------------ --------------- ----------------------- --------------------------
Anthony Kai Yiu Lo (57) Director 2003 Chairman and Co-CEO, Member of Listing
23/F, Shun Ho Tower Shanghai Century Committee, Stock Exchange
24-30 Ice House Street Acquisition Inc. of Hong Kong Ltd.
Central, Hong Kong (February (1996-May 2006)
2006-present);
Director, Advantage
Ltd. (2004-January
2006); Founder and
Managing Director,
Advantage Ltd. (1999-
2004); Vice Chairman,
ABN Amro HG Asia Ltd.
(1998-1999)
DIRECTORS CONSIDERED INTERESTED PERSONS
*Benny T. Hu (57) President and 1993 Chairman, China Director, USI Far East
61 F, 76 Tun Hwa Director Development Industrial Corp. (2004-present);
South Road, Section 2 Bank (June 2003-May Supervisor, China Steel
Taipei, Taiwan, ROC 2004); Chairman, China Corp. (2004-present);
Development Asset Supervisor, Winbond
Management Corp. (June Electronics Corp. (2002-
2001-May 2004); present); Director, China
Ambassador-at-Large, Development Financial
Republic of China (May Holding Corp. (June 2001-
2001-present) May 2004) Director,
Yangming Marine Transport
Corp. (2001-present)
30
DIRECTORS AND OFFICERS (unaudited) (continued)
--------------------------------------------------------------------------------
PRINCIPAL OCCUPATION OR
NAME, ADDRESS PRESENT OFFICE EMPLOYMENT DURING PAST DIRECTORSHIPS IN PUBLICLY-
AND (AGE) WITH THE FUND DIRECTOR SINCE FIVE YEARS HELD COMPANIES
------------- ------------------ --------------- ----------------------- --------------------------
*Blair Pickerell (49) Director 2005 Chairman, HSBC --
Chief Executive, Asia-Pacific Investments (Taiwan)
HSBC Investments (Hong Kong) Ltd.(May 2003-present);
Limited Level 22 HSBC Main Chief Executive
Building Officer, Asia-Pacific,
1 Queen's Road Central HSBC Investments Ltd.
Hong Kong, China group of entities in
Asia Pacific (May
2003-present);
Director, HSBC Jintrust
Fund Management Company
Limited (November
2005-present); Managing
Director, Capital
Holdings Ltd. (January
2003-May 2003);
Managing Director, JF
Asset Management Ltd.
(August 1999-December
2002)
PRINCIPAL OCCUPATION OR
NAME, ADDRESS PRESENT OFFICE EMPLOYMENT DURING PAST DIRECTORSHIPS IN PUBLICLY-
AND (AGE) WITH THE FUND OFFICER SINCE FIVE YEARS HELD COMPANIES
------------- ------------------ --------------- ----------------------- --------------------------
OFFICERS
Adelina N. Y. Louie (40) Secretary, 2004 Deputy Chief Operating --
Deputy Chief Operating Officer, Treasurer and Officer, Asia Pacific,
Asia Pacific, HSBC Investments Chief Compliance HSBC Investments (Hong
(Hong Kong) Limited Officer Kong) Limited (May
Level 22 HSBC Main Building 2006-present), Chief
1 Queen's Road Central Operating Officer, HSBC
Hong Kong Investments (Taiwan)
Ltd. (March 2004-April
2006); Area Commercial
Manager, HSBC (U.K.)
Ltd. (February 2002-
March 2004); Senior
Vice President, Custody
& Clearing, HSBC
(Indonesia) Limited
(June 2000-February
2002)
31
DIRECTORS AND OFFICERS (unaudited) (continued)
--------------------------------------------------------------------------------
PRINCIPAL OCCUPATION OR
NAME, ADDRESS PRESENT OFFICE EMPLOYMENT DURING PAST DIRECTORSHIPS IN PUBLICLY-
AND (AGE) WITH THE FUND OFFICER SINCE FIVE YEARS HELD COMPANIES
------------- ------------------ --------------- ----------------------- --------------------------
Mary Moran Zeven (45) Assistant 2005 Senior Vice President --
Secretary and Senior Managing
Counsel, State Street
Bank and Trust Company
(2002-present); and
Vice President and
Counsel, State Street
Bank and Trust Company
(2000-2002)
---------------
* 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. Mr. Pickerell is deemed to be an interested
person because of his affiliation with the Fund's investment adviser. Mr. Hu
is considered to be an interested person because he is the President of the
Fund.
32
--------------------------------------------------------------------------------
UNITED STATES ADDRESS
The Taiwan Fund, Inc.
c/o State Street Bank and Trust Company
2 Avenue de Lafayette
P.O. Box 5049
Boston, MA
1-800-636-9242
www.thetaiwanfund.com
INVESTMENT ADVISER
HSBC Investments (Taiwan) Limited
Taipei, Taiwan
DIRECTORS AND OFFICERS
Harvey Chang, Chairman of the Board and Director
Benny T. Hu, President and Director
S.Y. Wang, Director
Christina Liu, Director
Joe O. Rogers, Director
Blair Pickerell, Director
M. Christopher Canavan, Jr., Director
Anthony Kai Yiu Lo, Director
Adelina N.Y. Louie, Secretary, Treasurer and Chief Compliance Officer
Mary Moran Zeven, Assistant Secretary
ADMINISTRATOR AND ACCOUNTING AGENT
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
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
Computershare Trust Company, N.A.
LEGAL COUNSEL
Clifford Chance US LLP
New York, NY
Lee and Li
Taipei, Taiwan
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
Boston, MA
ITEM 2. CODE OF ETHICS.
(a) The Taiwan Fund, Inc. (the "Fund") has adopted a Code of Ethics that
applies to the Fund's principal executive officer and principal
financial officer.
(b) No information need be disclosed pursuant to this paragraph.
(c) There have been no amendments to the Fund's Code of Ethics during the
reporting period for Form N-CSR.
(d) There have been no waivers granted by the Fund to individuals covered
by the Fund's Code of Ethics during the reporting period for Form
N-CSR.
(e) Not applicable.
(f) A copy of the Fund's Code of Ethics is attached as exhibit 12(a)(1) to
this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a) (1) The Board of Directors of The Taiwan Fund, Inc. (the "Fund")
has determined that the Company has one member serving on the
Fund's Audit Committee that possesses the attributes
identified in Instruction 2(b) of Item 3 to Form N-CSR to
qualify as "audit committee financial expert."
(2) The name of the audit committee financial expert is M.
Christopher Canavan, Jr. Mr. Canavan has been deemed to be
"independent" as that term is defined in Item 3(a)(2) of Form
N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
For the fiscal year ended August 31, 2006, KPMG LLP ("KPMG"), the
Fund's independent registered public accounting firm, billed the Fund aggregate
fees of US$58,500 for professional services rendered for the audit of the Fund's
annual financial statements and review of financial statements included in the
Fund's annual report to shareholders.
For the fiscal years ended August 31, 2005, KPMG billed the Fund
aggregate fees of US$51,500 for professional services rendered for the audit of
the Fund's annual financial statements and review of financial statements
included in the Fund's annual report to shareholders.
(b) Audit-Related Fees
For the fiscal year ended August 31, 2006, KPMG billed the Fund
aggregate fees of US$7,500 for assurances and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and are not reported under the section Audit Fees above.
Audit-Related Fees represent procedures applied to the semi-annual financial
statement amounts (reading the semi-annual report and valuation and existence
procedures on investments) as requested by the registrant's audit committee.
3
For the fiscal year ended August 31, 2005, KPMG billed the Fund
aggregate fees of US$6,500 for assurances and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements and are not reported under the section Audit Fees above.
Audit-Related Fees represent procedures applied to the semi-annual financial
statement amounts (reading the semi-annual report and valuation and existence
procedures on investments) as requested by the registrant's audit committee.
(c) Tax Fees
For the fiscal year ended August 31, 2006, KPMG billed the Fund
aggregate fees of US$12,900 for professional services rendered for tax
compliance, tax advice, and tax planning. The nature of the services comprising
the Tax Fees was the review of the Fund's income tax returns and tax
distribution requirements.
For the fiscal year ended August 31, 2005, KPMG billed the Fund
aggregate fees of US$11,250 for professional services rendered for tax
compliance, tax advice, and tax planning. The nature of the services comprising
the Tax Fees was the review of the Fund's income tax returns and tax
distribution requirements.
(d) All Other Fees
For the fiscal year ended August 31, 2006, KPMG did not bill the Fund
any fees for products and services other than those disclosed above.
For the fiscal year ended August 31, 2005, KPMG did not bill the Fund
any fees for products and services other than those disclosed above.
(e) The Fund's Audit Committee Charter requires that the Audit Committee
pre-approve all audit and non-audit services to be provided to the Fund by the
Fund's independent registered public accounting firm; provided, however, that
the pre-approval requirement with respect to non-auditing services to the Fund
may be waived consistent with the exceptions provided for in the Securities
Exchange Act of 1934, as amended (the "1934 Act"). All of the audit and tax
services described above for which KPMG billed the Fund fees for the fiscal
years ended August 31, 2006 and August 31, 2005 were pre-approved by the Audit
Committee.
For the fiscal years ended August 31, 2006 and August 31, 2005, the
Fund's Audit Committee did not waive the pre-approval requirement of any
non-audit services to be provided to the Fund by KPMG.
(f) No disclosures are required by this Item 4(f).
(g) For the fiscal year ended August 31, 2006, KPMG did not bill the Fund
any non-audit fees. During this period, KPMG did not provide any services to
HSBC Investments (Taiwan) Limited (the "Investment Adviser").
For the fiscal year ended August 31, 2005, KPMG did not bill the Fund
any non-audit fees. During this period, KPMG did not provide any services to the
Investment Adviser.
(h) KPMG notified the Fund's Audit Committee of all non-audit services that
were rendered by KPMG to the Fund's Investment Adviser and any entity
controlling, controlled by, or under common control with the Investment Adviser
that provides ongoing services to the Fund that were not pre-
4
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X,
allowing the Fund's Audit Committee to consider whether such services were
compatible with maintaining KPMG's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Fund has a separately-designated audit committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The
members of the Fund's audit committee are M. Christopher Canavan, Jr., Joe
Rogers, Anthony K.Y. Lo and S.Y. Wang.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
INVESTMENT COMPANIES.
The registrant has delegated to its investment adviser the voting of proxies
relating to the registrant's portfolio securities. The policies and procedures
used by the investment adviser to determine how to vote proxies relating to the
registrant's portfolio securities, including the procedures used when a vote
presents a conflict of interest involving the investment adviser or any of its
affiliates, are contained in the investment adviser's Proxy Voting Guidelines,
which are attached hereto as Exhibit 12(a)(4).
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANY.
(a)(1) As of September 30, 2006, the portfolio managers of the registrant are
as follows:
CHIH-HUI LEE
Mr. Lee has been the Lead Portfolio Manager of the Taiwan Fund, Inc. since
September 9, 2006. Mr. Lee is a Senior Fund Manager and Vice President of HSBC
Investments (Taiwan) Limited. Since joining HSBC Investments (Taiwan) Limited in
September, 2005, Mr. Lee has managed the HSBC Taiwan Electronic Fund and HSBC
Taiwan Small and Mid Cap Fund. As of September 30, 2006, Mr. Lee only manages
the Taiwan Fund, Inc.
Prior to joining HSBC Investments (Taiwan) Limited, Mr. Lee worked at Allianz
Dresdner Asset Management (Taiwan) where he was Head of Domestic Equities
(January 2003 to August 2005) and a Fund Manager (March 2002 to January 2003).
Prior to that, Mr. Lee worked at Allianz President Life Insurance in Taiwan
where he was an Equity Analyst (September 2000 to March 2002). Mr. Lee began his
investment career in 1999 as an analyst at Allianz Asset Management in Hong
Kong.
STEVEN CHAN
Since joining HSBC Investments (Taiwan) Limited in October 2005, Mr. Chan has
acted as the Deputy Portfolio Manager of the Taiwan Fund, Inc.
Prior to joining HSBC Investments (Taiwan) Limited, Mr. Chan worked at KGI
Securities (Taiwan) where he was a Senior Equity Analyst (September 2002 to
October 2005). Prior to that, Mr. Chan worked at Deloitte & Touche (Taiwan)
where he was a Senior Auditor (August 1997 to August 1999). Mr. Chan began his
investment career in 2002 as an analyst at KGI Securities in Taiwan.
Mr. Lee is responsible for the day-to-day management of the Taiwan Fund, Inc.
Mr. Chan provides research and investment support to Mr. Lee.
5
(a)(2)
As of September 30, 2006, Mr. Lee managed the Taiwan Fund, Inc. with a total of
approximately $283 million in assets. As of September 30, 2006, Mr. Lee does not
manage any other mutual funds, pooled investment vehicles or other accounts.
As of September 30, 2006, Mr. Chan does not manage any other mutual funds,
pooled investment vehicles or other accounts but only co-manages the Taiwan
Fund, Inc. with Mr. Lee.
CONFLICTS OF INTEREST: Although Mr. Lee and Mr. Chan do not currently manage any
other mutual fund, pooled investment vehicles or other accounts, actual or
potential conflicts of interest may arise when a portfolio manager has
management responsibilities with respect to more than one fund. For example, a
portfolio manager may identify a limited investment opportunity that may be
appropriate for the Fund as well as for the other funds or accounts he manages.
A conflict of interest also might arise where a portfolio manager has a larger
personal investment in one fund than in another. A portfolio manager may
purchase a particular security for one or more funds while selling the security
for one or more other funds; this could have a detrimental effect on the price
or volume of the securities purchased or sold by a fund. A portfolio manager
might devote unequal time and attention to the funds he manages. The Investment
Adviser has adopted trade allocation and other policies and procedures that it
believes are reasonably designed to address these and other conflicts of
interest. As a result, the Investment Adviser does not believe that any of these
potential sources of conflicts of interest will affect the portfolio managers'
professional judgment in managing the Fund. However, there is no guarantee that
such procedures will detect each and every situation where a conflict arises.
(a)(3)
COMPENSATION:
The Investment Adviser has structured a compensation program based on factors
designed to attract and retain key personnel as well as to provide incentives
for top quality performance. The program is designed to recognise the long-term
nature of the firm's business, and to encourage retention and continuity of
service of the people who contribute to the organization's success.
The Investment Adviser, through a performance review system rewards both team
and individual contribution. Each individual has a job profile and a set of Key
Performance Measures ("KPMs") to ensure that the year's objectives are clear and
attainable. KPMs do not just reflect tangible outputs of an individual's role;
they also incorporate the behaviours and team efforts displayed by each member
of staff. Thus, the firm's portfolio managers are not assessed solely on the
performance of the funds that they manage.
Investment professionals typically receive a base salary and an incentive bonus.
The total sum set aside for bonus payments each year is a function of HSBC
Investment's profitability as a whole. In determining the amount to allocate to
each individual, three factors are assessed:
- The performance of the local company;
- The performance of the investment team; and
- The performance of the individual.
During the annual appraisal process, each department manager reviews his/her
team's performance and contribution to the Investment Adviser for the past year
on an individual basis. Bonuses and raises are
6
awarded based on the individual's contribution to the team. Promotions are
awarded to individuals who have performed well beyond what was expected for
their level.
(a)(4)
OWNERSHIP OF SECURITIES: The following table sets forth, for each portfolio
manager, the aggregate dollar range of the registrant's equity securities
beneficially owned as of September 30, 2006.
Portfolio Manager Dollar Range of Fund Shares Beneficially
Owned
Chih-Hui Lee none
Steven Chan none
(b) Not applicable
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's Board of Directors during the period
covered by this Form N-CSR filing.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers
have concluded that the registrant's disclosure controls and procedures
(as defined in Rule 30a-3(c) under the Investment Company Act of 1940,
as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of this Form N-CSR based on
their evaluation of these controls and procedures required by Rule
30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b)
or 15d-15(b) under the 1934 Act (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d))) that occurred during the registrant's second fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS
(a)(1) Code of Ethics is attached hereto in response to Item 2(f).
(a)(2) The certifications required by Rule 30a-2 of the 1940 Act are attached
hereto.
(a)(3) Not applicable.
(a)(4) Proxy voting policies and procedures of the Fund and its investment
advisers are attached hereto in response to Item 7.
7
(b) The certifications required by Rule 30a-2(b) of the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE TAIWAN FUND, INC.
By: /s/ Benny T. Hu
----------------------------------
Benny T. Hu
President of The Taiwan Fund, Inc.
Date: November 7, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Benny T. Hu
----------------------------------
Benny T. Hu
President of The Taiwan Fund, Inc.
Date: November 7, 2006
By: /s/ Adelina Louie
----------------------------------
Adelina Louie
Treasurer of The Taiwan Fund, Inc.
Date: November 7, 2006
9