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: 811-4893
______________________________________________
THE TAIWAN FUND, INC.
________________________________________________________________________________
(Exact name of registrant as specified in charter)
225 FRANKLIN STREET
BOSTON, MA 02110
________________________________________________________________________________
(Address of principal executive offices in the United States)(Zip code)
(Name and Address of Agent for Copy to:
Service)
State Street Bank and Laurence E. Cranch, Esq.
Trust Company Clifford Chance U.S. LLP
Attention: Ann M. Casey 200 Park Avenue
225 Franklin Street New York, New York 10166-0153
Boston, MA 02110
Registrant's telephone number, including area code: (800) 636-9242
Date of fiscal year end: August 31, 2003
Date of reporting period: August 31, 2003
ITEM 1. REPORTS TO SHAREHOLDERS.
THE TAIWAN
FUND, INC.(R)
.. . . . . . . . . . . . . . . .
Annual Report
August 31, 2003
THE TAIWAN
FUND, INC.
What's Inside
Page
----
Chairman's Statement 2
Report of the Investment
Manager 4
Portfolio Snapshot 9
Investments 10
Financial Statements 14
Notes to Financial
Statements 17
Independent Auditors'
Report 20
Other Information 21
Summary of Dividend 22
Reinvestment and
Cash Purchase Plan
Directors and Officers 24
. . . . . . . . . . . . . .
CHAIRMAN'S STATEMENT
--------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to present the Annual Report of The Taiwan Fund, Inc. (the
"Fund") for the fiscal year ended August 31, 2003. During this period, the
Fund's net asset value ("NAV") increased by 13.35% in U.S. dollar terms and by
13.10% in New Taiwan ("NT") dollar terms. During the same period, the Taiwan
Stock Exchange Index (the "TAIEX") increased by 18.59% in NT dollar terms. The
NT dollar appreciated over the U.S. dollar by 0.23% during this period.
On August 31, 2003, the Fund's shares were trading at US$11.09 per share,
reflecting a discount of 13.49% to the Fund's NAV per share of US$12.82. The
Fund's shares were trading at a discount of 18.04% on August 31, 2002.
The global economy advanced in the second quarter of 2003, encouraged by a quick
ending of the war between the U.S. and Iraq. Confidence was rebuilt after the
war, and economic growth has resumed on the back of increased spending and
investments. U.S. real GDP growth, for example, accelerated to 3.1% in the
second quarter of 2003 from 1.4% in the first quarter. It is expected that the
global economy should keep growing in the second half of 2003 and even through
2004 with the help of record-low interest rates and continued government
stimuli. According to the International Monetary Fund, the global economy should
grow 4.1% in real terms in 2004 following 2003's projected 3.2%. In the
foreseeable future, the global economic outlook appears to be positive with
optimism rising steadily, albeit slowly.
Taiwan's economy dipped in the second quarter of 2003 before catching up with
the global economy later in the year. In fact, most Asian countries suffered a
sudden setback in economic activity during the second quarter of 2003, as the
outbreak of SARS (severe acute respiratory syndrome) slowed consumer spending.
According to the Taiwan Directorate General of Budget Accounting and Statistics,
Taiwan's real GDP contracted 0.08% in the second quarter of 2003, compared to a
growth of 3.53% in the first quarter. However, the impact of SARS proved to be
short-lived. Taiwan's real GDP growth rate is now expected to increase to 3.96%
in the third quarter of 2003, and to rise to 4.67% in the fourth quarter. Export
growth should continue to lead the way due to robust demand from the U.S. as
well as China. Domestic demand should also recover as the housing market
improves due to lower interest rates. Taiwan's economy is now poised to follow
the global economy and should continue expanding.
Over the longer-term, however, the global economy must overcome some headwinds
to move forward at full speed. The most important one is the economy's inability
to generate jobs. The slack in the
2
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economy may turn out to be so large that more time will be required to restore a
balance between aggregate supply and demand. This means that current economic
growth may not be sustainable, and a cyclical down-cycle may loom as soon as in
2004.
Another issue is the Chinese economy. It is likely that the fast growing Chinese
economy will need to slow down to avoid an investment-led bubble which would
dampen the country's long-term prospects. Foreign investments have been one of
the key factors contributing to China's growth. The Chinese government is
concerned about the amount of money flowing into the nation, especially since
speculation on Renminbi appreciation has further contributed to unstable short-
term liquidity that may adversely affect its economy. Several measures to cool
off excess investment flows, particularly in the property sector, were adopted
by the government, including a symbolic action by the central bank to increase
the reserve requirement. This may put pressure on the economic recovery of other
countries that rely on China's economy. Taiwan, in particular, may suffer a
fairly severe impact because of its close ties to China.
In August 2003, City of London Investment Group PLC and City of London
Investment Management Company Limited (together, "City of London"), which we
believe together constitute the Fund's largest shareholder, filed with the U.S.
Securities and Exchange Commission a statement on Schedule 13D regarding the
Fund. In the Schedule 13D, City of London expressed concern regarding the
under-performance of the Fund's net asset value compared to its benchmark, the
Taiwan Stock Exchange Index (the "TAIEX") and the number of changes that have
taken place in the position of Fund portfolio manager during the past several
years. The Fund's Board of Directors recognizes that the under-performance of
the Fund compared to the TAIEX and the portfolio manager changes are of concern
to shareholders. The Board shares this concern and has been reviewing and
continues to review a number of alternatives to address these issues and thereby
to enhance shareholder value. The Board will keep shareholders advised of its
progress towards addressing these important issues.
We believe that with Taiwan's underlying strength the Fund will remain
competitive on a global basis. We appreciate your continued support.
Sincerely,
/s/ S.Y. Wang
S. Y. Wang
Chairman
3
REPORT OF THE INVESTMENT MANAGER
--------------------------------------------------------------------------------
INVESTMENT PERFORMANCE
The Fund's net asset value ("NAV") increased by 13.35% in U.S. dollar terms and
by 13.10% in New Taiwan ("NT") dollar terms during the fiscal year ended August
31, 2003. The Taiwan Stock Exchange Index (the "TAIEX") increased by 18.59% in
NT dollar terms during the same period. The Fund underperformed the TAIEX in the
first half of the fiscal year, but later recovered to outperform the TAIEX in
the second half of the fiscal year. Relative to other investment funds which the
Fund considers its peers, the Fund has achieved superior performance for the
past year ranking it in first place on a twelve-month basis.
We attribute our improving performance to our heavy exposure in the technology
sector, which outperformed the TAIEX from February to August. We re-adjusted our
investment focus to overweight the technology sector in May in time to benefit
from this sector's rally since that time. Our decision to stay underweight in
the finance sector also proved correct, as this sector underperformed the TAIEX
significantly from May to July. Although our performance in the first six months
of Fiscal Year 2003 was adversely affected in January when various domestic
sectors unexpectedly surged, we were able to recoup our underperformance
gradually for the remaining part of the year.
MONTHLY PERFORMANCE COMPARISON, PERCENTAGE IN NT DOLLAR TERMS
RELATIVE RELATIVE
TECH TO FINANCE TO
TAIEX SECTOR TAIEX SECTOR TAIEX
------ ------ -------- ------- --------
2002 Aug (3.55) (3.00) 0.55 (3.17) 0.38
Sep (12.03) (11.51) 0.52 (11.38) 0.65
Oct 9.24 7.11 (2.13) 7.16 (2.08)
Nov 1.48 0.29 (1.19) (0.35) (1.83)
Dec (4.18) (10.85) (6.67) 6.48 10.66
2003 Jan 12.64 6.32 (6.32) 20.17 7.53
Feb (11.62) (8.65) 2.97 (17.80) (6.18)
Mar (2.51) (1.83) 0.68 (3.26) (0.75)
Apr (4.01) (1.00) 3.01 (3.64) 0.37
May 9.83 10.20 0.37 6.31 (3.52)
Jun 6.94 8.83 1.89 4.60 (2.34)
Jul 9.16 13.93 4.77 (2.19) (11.35)
Aug 6.25 6.81 0.56 8.60 2.35
Source: Taiwan Economic Journal
4
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To better enhance portfolio returns with managed risk exposure, we have
gradually increased the degree of concentration in our active portfolio by
focusing on only a few companies which we expect to outperform our TAIEX
benchmark over time. The number of stocks in the active portfolio, as a result
of this initiative, was reduced from 79 at the end of August 2002 to 46 at the
end of February 2003. We further reduced the number of stocks to 25 during May
2003, as we believed such degree of concentration was appropriate given the fact
that we already had a well-diversified core portfolio accounting for 60% of the
Fund's NAV. We intend to keep this level of concentration in the active
portfolio for the foreseeable future.
INVESTMENT OUTLOOK
Last year, we were optimistic about the market, as we believed the global
economy should gradually bottom out on better confidence, recovering consumer
spending, increasing business investments, and an improving job market. We saw
the market bottom out and make a strong rally from the second quarter of 2003.
But there is still one missing aspect: the creation of jobs.
In the U.S. for example, private non-farm payrolls were down by about 1.3
million since the U.S. economy passed its official trough some 21 months ago.
This is inconsistent with historical recovery patterns, which would predict an
increase of more than 2 million jobs at the current stage, according to Morgan
Stanley. This shortfall of new jobs represents a serious issue for the economic
recovery.
On a more bullish note, however, we believe our cautious economic view should be
placed in the context of a favorable market environment characterized by ample
liquidity and rising cyclical demand in the near term. In particular, the
still-pending inventory cycle may emerge to become a major catalyst for
continued economic growth in the next six months. As we have indicated in our
semi-annual report, businesses have been keeping such lean inventories that they
may turn out to be insufficient once demand picks up. The U.S.
inventory-to-sales ratio plunged to record low of 1.37 months in July. As low
interest rates and government stimuli continue to support consumer spending, it
is increasingly likely that businesses may soon begin re-stocking their
inventories, contributing to further economic growth into 2004.
We expect the Taiwan stock market to trend up in the near-term, driven by
improving prospects and ample liquidity. Strong export growth is anticipated in
the second half of 2003, in line with seasonal strengths. More encouragingly,
domestic demand is improving as evidenced by the recovering property sector, in
which stocks have on average risen about 49% so far in 2003. In terms of
liquidity, a
5
REPORT OF THE INVESTMENT MANAGER (continued)
--------------------------------------------------------------------------------
continued stream of money due to positive factors such as low interest rates and
increasing foreign investment interest has helped support the market. The
liquidity from abroad, much of it representing funds invested to track the
Morgan Stanley Capital International Inc. ("MSCI") index, is especially worth
noting because of its scale. Many foreign investors have come to believe that
MSCI is likely to announce the lifting of Taiwan's limited investability factor
("LIF") in its November review in response to the government's decision to
abolish the QFII system by the end of October. Although it is expected that MSCI
will not raise the LIF to a full 100% from the current 55% and the
implementation may occur in two stages, liquidity has already flowed to take
positions while stock prices are relatively low. We estimate that US$2 billion
will flow into Taiwan as a result of the MSCI adjustment, providing strong
support for the market ahead of the actual implementation in 2004.
Another source of liquidity comes from currency exchange. We believe the NT
dollar is set for further appreciation over the US dollar in 2004. As a result,
people are exchanging US dollars for NT dollars to avoid potential currency
losses. The amount of such liquidity (on-shore foreign exchange deposits) has
remained stable at around NT$1 trillion to NT$1.2 trillion since 2001. This
liquidity should result in "asset reflation" in 2004, which should support
domestic demand and benefit related sectors.
China-related opportunities should continue to attract investors in 2004, but
caution is warranted. Momentum may be slowing in various sectors, including both
domestic and export-oriented sectors.
INVESTMENT STRATEGY
We will continue to focus on the investment themes we have repeatedly stressed
in our previous reports, including Outsourcing Winner, China Harvest, and New
Product. But we will also be watching closely the impact of upcoming issues such
as NT dollar appreciation and China's slowing growth. It is becoming more
important to do bottom-up rather than top-down analysis, because of the mixed
macro economic outlook. Strategically, we will be extremely price sensitive in
buying companies that may be affected by these issues. We will also be looking
for opportunities resulting from asset reflation plays in related sectors. In
general, we expect the market to trend up by the end of 2003 and consolidate in
early 2004. The market for the second half of 2004 will depend on whether the
global economy develops a more balanced source of growth; i.e., domestic demand
in countries other than the U.S.
6
--------------------------------------------------------------------------------
For the theme of Outsourcing Winner, we will concentrate on the technology
sector with investments in notebook PC manufacturers, handset manufacturers, IC
foundry and packaging. The replacement effect in the PC industry has favored
notebook suppliers in 2003 and we expect such a trend to continue in 2004.
Global unit shipments of notebook PC's are expected to grow over 20% in 2004,
following a similar growth rate in 2003. A leading cost-effective producer of
notebook PC's, Taiwan should see larger growth than the market in general, as
related companies continue to gain market share. For handset manufacturers, the
investment rationale is the same: market share gains in a growing industry that
is commoditizing. In the area of IC foundries and packaging, the reasons are
somewhat different. The increasing outsourcing trend in this segment is driven
by companies' strong competence in process technology for IC fabrication. We
believe investing in such companies should consistently provide better
performance in the long run.
For the theme of China Harvest, we will spread our risks among various sectors
benefiting from continued growth in domestic demand. Our previous focus on the
auto sector has been scaled down due to increased competition and slowed market
momentum. Cyclical plays in commodities, basic materials, and transportation are
still attractive, but we think valuations will become rich in 2004 as the
current cycle is expected to peak in 2005. Therefore, we will pay more attention
to consumer non-cyclical plays in sectors such as food and beverage. We believe
there are still plenty of growth opportunities in China-related plays, and the
theme of China Harvest should continue to be a significant focus.
Our New Product theme will focus on TFT-LCD (thin film transistor-liquid crystal
display) and DVD (digital versatile disc) related companies. The proliferation
of TFT-LCD products is perhaps the most exciting development in the technology
sector in recent years. Driven by increasing adoption in monitors and TVs, the
TFT-LCD sector has grown to become a large industry in Taiwan comparable in
significance to the semiconductor sector. It is projected that global TFT-LCD TV
shipments should grow from around 4 million units in 2003 to more than 30
million units by 2006 as prices come down. Supply in this sector, in terms of
TFT-LCD panel production, is constrained by technology hurdles and the limited
number of manufacturers. The thriving DVD market should also experience
continued growth, as the high-quality digital media offered by related products
becomes a necessity in everyday life. We expect companies in the supply chain of
DVD players, DVD drives, or DVD recorders to outperform the market as the
industry's growth extends into 2004. Other areas of interest within the New
7
REPORT OF THE INVESTMENT MANAGER (continued)
--------------------------------------------------------------------------------
Product theme include DSC (digital still camera) and next-generation handset
(color/camera embedded 3G phone), but both of these are less attractive due to
intensified competition and mounting inventory levels.
The big picture in the finance sector, which would benefit from asset reflation,
is improving noticeably with banks cleaning up their non-performing loans during
the past few years. Commercial loan growth may combine with consumer loan growth
and help stimulate financial sector shares. A favorable interest rate outlook
and supportive government policy, also support positive market sentiment.
Valuation is another attractive feature for financial sector shares, which were
trading at around 1.4X book value at the end of August 2003. This is a
relatively low figure compared to the overall market's 1.8X and this sector's
own average of 3.4X for the past ten years. We expect to build up more positions
in the finance sector as conditions improve.
In conclusion, we expect to maintain a balanced portfolio in the year ahead to
take advantage of these various themes. Our investment outlook, though cautious
in the mid-term, is rather optimistic as we are confident in Taiwan's long-term
positive prospects given its proven strengths in global competition.
Thank you for your support of the Fund and we look forward to discussing our
strategy again in coming reports.
Sincerely,
/s/ Alan Huang /s/ Jovi Chen
Alan Huang Jovi Chen
Lead Portfolio Manager Deputy Portfolio Manager
8
PORTFOLIO SNAPSHOT*
--------------------------------------------------------------------------------
TOP TEN EQUITY HOLDINGS
HOLDINGS AS OF AUGUST 31, 2003 %
--------------------------------------------------
Taiwan Semiconductor Manufacturing Co. 9.3
--------------------------------------------------
Au Optronics Corp. 3.8
--------------------------------------------------
MediaTek, Inc. 3.5
--------------------------------------------------
Quanta Computer, Inc. 2.9
--------------------------------------------------
Compal Electronics, Inc. 2.8
--------------------------------------------------
Hon Hai Precision Industry Co. Ltd. 2.5
--------------------------------------------------
Chunghwa Telecom Co. Ltd. 2.5
--------------------------------------------------
Asustek Computer, Inc. 2.4
--------------------------------------------------
Formosa Chemicals & Fibre Corp. 2.4
--------------------------------------------------
United Microelectronics Corp. Ltd. 2.3
--------------------------------------------------
TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF AUGUST 31, 2003 %
--------------------------------------------------
Semi-conductor 20.4
--------------------------------------------------
PC & Peripherals 16.6
--------------------------------------------------
Electronics 12.1
--------------------------------------------------
Financial Services 9.5
--------------------------------------------------
Telecommunications 7.8
--------------------------------------------------
Plastics 5.2
--------------------------------------------------
Automobiles, Tires & Accessories 5.0
--------------------------------------------------
Textiles & Apparel 4.0
--------------------------------------------------
Iron & Steel 3.1
--------------------------------------------------
Others & Miscellaneous 2.4
--------------------------------------------------
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 Co. Ltd. 3.9
--------------------------------------------------
Chunghwa Telecom Co. Ltd. 3.0
--------------------------------------------------
Formosa Plastic Corp. 2.7
--------------------------------------------------
MediaTek, Inc. 2.6
--------------------------------------------------
Cheng Shin Rubber Industrial Co. 2.6
--------------------------------------------------
Quanta Computer, Inc. 2.5
--------------------------------------------------
Chinatrust Financial Holdings 2.1
--------------------------------------------------
Nan Ya Plastic 2.0
--------------------------------------------------
TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF AUGUST 31, 2002 %
--------------------------------------------------
Electronics 17.7
--------------------------------------------------
PC & Peripherals 16.5
--------------------------------------------------
Semi-conductor 16.3
--------------------------------------------------
Banks 8.7
--------------------------------------------------
Telecommunications 6.8
--------------------------------------------------
Financial Services 6.3
--------------------------------------------------
Plastics 5.4
--------------------------------------------------
Rubber 3.1
--------------------------------------------------
Textiles & Apparel 3.0
--------------------------------------------------
Automobiles, Tires & Accessories 1.6
--------------------------------------------------
* Percentages based on total investments at August 31, 2003 and August 31, 2002,
respectively.
9
THE TAIWAN FUND, INC.
INVESTMENTS/AUGUST 31, 2003 (SHOWING PERCENTAGE OF TOTAL VALUE OF
INVESTMENTS IN SECURITIES)
--------------------------------------------------------------------------------
US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - 96.0%
BASIC INDUSTRIES -- 10.4%
CEMENT -- 0.6%
Asia Cement Corp. ......................... 1,064,000 $ 480,657
Taiwan Cement Corp. ....................... 1,749,300 646,558
------------
1,127,215
------------
CHEMICALS -- 0.9%
Apex Biotechnology Corp. .................. 363,789 346,821
Eternal Chemical Co. Ltd. ................. 585,000 298,592
Ho Tung Chemical Corp. (a)................. 871,000 383,250
Oriental Union Chemical Corp. ............. 394,520 425,883
Yung Shin Pharmaceutical Industries Co. ... 654,000 464,265
------------
1,918,811
------------
GLASS -- 0.3%
Taiwan Glass Industrial Corp. ............. 814,730 549,686
------------
IRON & STEEL -- 3.1%
China Steel Corp. ......................... 6,010,830 4,813,601
Feng Hsin Iron & Steel Co. Ltd. ........... 469,000 331,561
Sheng Yu Steel Co. Ltd. ................... 265,630 331,161
Tung Ho Steel Enterprise Corp. (a)......... 1,430,100 509,701
Yieh Phui Enterprise....................... 668,000 562,382
------------
6,548,406
------------
PAPER & FOREST PRODUCTS -- 0.0%
Yuen Foong Yu Paper Manufacturing Co.
Ltd. .................................... 15,990 6,098
------------
PLASTICS -- 5.2%
Formosa Plastic Corp. ..................... 2,847,160 4,217,706
Grand Pacific Petrochemical Co. Ltd. (a)... 1,070,000 414,315
Nan Ya Plastics Corp. ..................... 3,883,840 4,671,089
Taiwan Styrene Monomer Corp. .............. 586,300 466,082
Union Petrochemical Technology Corp. ...... 1,468,800 609,666
USI Far East Corp. (a)..................... 1,559,000 523,630
------------
10,902,488
------------
WIRE & CABLE -- 0.3%
Walsin Lihwa Corp. (a)..................... 2,625,000 673,768
------------
TOTAL BASIC INDUSTRIES..................... 21,726,472
------------
US$
VALUE
SHARES (NOTE 1)
------ --------
CONSTRUCTION & REAL ESTATE -- 0.6%
CONSTRUCTION & REAL ESTATE -- 0.6%
Cathay Real Estate Development Co. Ltd.
(a)...................................... 2,329,627 $ 891,805
CTCI Corp. ................................ 533,000 387,750
------------
1,279,555
------------
TOTAL CONSTRUCTION & REAL ESTATE........... 1,279,555
------------
DURABLES -- 9.2%
AUTOMOBILES, TIRES & ACCESSORIES -- 5.0%
Cheng Shin Rubber Industrial Co. .......... 1,823,040 2,240,698
China Motor Co. ........................... 2,444,625 4,302,655
Ta Yih Industrial Co. Ltd. ................ 1,322,000 1,306,876
TYC Brother Industrial Co. Ltd. ........... 1,221,150 1,808,978
Yulon Motor Co. Ltd. ...................... 691,000 802,687
------------
10,461,894
------------
CONSUMER ELECTRONICS -- 0.2%
Sampo Corp. (a)............................ 1,089,000 479,173
------------
TEXTILES & APPAREL -- 4.0%
Far Eastern Textile Co. Ltd. .............. 1,796,530 779,954
Formosa Chemicals & Fibre Corp. ........... 3,782,160 4,948,206
Formosa Taffeta Co. Ltd. .................. 1,330,760 550,417
Makalot Industrial Co. Ltd. ............... 172,800 380,170
Nien Hsing Textile Co. Ltd. ............... 428,000 463,280
Shinkong Synthetic Fibers Corp. (a)........ 2,090,000 404,635
Tainan Enterprises Co. .................... 302,000 432,314
Yi Jinn Industrial Co. Ltd. (a)............ 2,223,000 436,905
------------
8,395,881
------------
TOTAL DURABLES............................. 19,336,948
------------
FINANCE -- 11.0%
BANKS -- 1.5%
Chang Hwa Commercial Bank (a).............. 2,084,000 1,075,928
Cosmos Bank Taiwan (a)..................... 918,000 414,702
Far Eastern International Bank (a)......... 989,000 478,689
Hsinchu International Bank (a)............. 1,084,000 472,203
International Bank of Taipei............... 1,305,150 612,567
------------
3,054,089
------------
FINANCIAL SERVICES -- 9.5%
Cathay Financial Holding Co. Ltd. ......... 3,075,000 3,842,622
China Development Financial Holding Corp.
(a)....................................... 4,898,000 1,839,085
Chinatrust Financial Holding Co. Ltd. ..... 2,056,830 1,677,321
E. Sun Financial Holding Co. Ltd. (a)...... 1,536,000 761,467
10 The accompanying notes are an integral part of the financial statements.
INVESTMENTS/AUGUST 31, 2003 (continued)
--------------------------------------------------------------------------------
US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - continued
FINANCIAL SERVICES - continued
First Financial Holdings Co. Ltd. (a)...... 1,260,000 $ 746,612
Fubon Financial Holding Co. Ltd. .......... 3,136,000 2,732,156
Fuh-Hwa Financial Holdings Co. Ltd. ....... 1,794,587 539,587
Hua Nan Financial Holdings Co. Ltd. (a).... 2,053,000 1,463,417
Mega Financial Holding Co. ................ 3,903,120 1,900,610
Shin Kong Financial Holdings Co. Ltd.
(a)....................................... 5,337,000 2,661,455
SinoPac Holdings Co. ...................... 2,183,000 867,693
Taishin Financial Holdings Co. Ltd. ....... 1,448,000 828,278
------------
19,860,303
------------
TOTAL FINANCE.............................. 22,914,392
------------
INDUSTRIAL MACHINERY & EQUIPMENT -- 2.1%
INDUSTRIAL MACHINERY -- 2.1%
Fu Sheng Industrial Co. Ltd. .............. 277,000 450,968
Kaulin Manufacturing Co. Ltd. ............. 1,465,000 2,492,520
Shihlin Electric & Engineering Corp. ...... 947,000 513,919
Teco Electric & Machinery Co. ............. 1,905,000 648,225
Yungtay Engineering Co. Ltd................ 619,000 350,446
------------
4,456,078
------------
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT..... 4,456,078
------------
NON-DURABLES -- 0.4%
FOODS -- 0.4%
Uni-President Enterprises Corp. ........... 2,371,000 813,749
------------
TOTAL NON-DURABLES......................... 813,749
------------
OTHERS & MISCELLANEOUS -- 2.4%
OTHERS & MISCELLANEOUS -- 2.4%
Giant Manufacturing Co. Ltd. .............. 320,000 385,802
National Petroleum Co. Ltd. ............... 795,000 620,329
Nien Made Enterprise Co. Ltd. ............. 244,000 422,294
Pou Chen Corp. ............................ 975,200 1,052,724
Taiwan Hon Chuan Enterprise Co. Ltd. ...... 1,646,034 2,167,994
Ton Yi Industrial Corp. (a)................ 1,414,000 398,193
------------
5,047,336
------------
TOTAL OTHERS & MISCELLANEOUS............... 5,047,336
------------
US$
VALUE
SHARES (NOTE 1)
------ --------
RETAIL & WHOLESALE -- 0.5%
GENERAL MERCHANDISE STORES -- 0.5%
Far Eastern Department Stores (a).......... 1,267,000 $ 343,789
President Chain Store Corp. ............... 467,040 617,879
------------
961,668
------------
TOTAL RETAIL & WHOLESALE................... 961,668
------------
TECHNOLOGY -- 57.2%
COMPUTER SERVICE & SOFTWARE -- 0.3%
Stark Technology, Inc. .................... 357,500 304,122
Systex Corp. .............................. 594,000 336,292
------------
640,414
------------
ELECTRONICS -- 12.1%
Asia Optical Co., Inc. .................... 72,000 447,756
Au Optronics Corp. ........................ 5,917,350 7,897,900
Billion Electric Co. Ltd. ................. 452,000 270,484
Cheng Uei Precision Industry Co. Ltd. ..... 12,300 24,896
Chi Mei Optoelectronics Corp. (a).......... 1,042,000 1,280,722
Chungwha Picture Tubes Ltd. (a)............ 2,305,000 1,203,549
CMC Magnetics Corp. (a).................... 1,182,000 887,627
Compeq Manufacturing Co. Inc. (a).......... 969,000 376,628
Cyntec Co. Ltd. ........................... 349,800 310,911
Delta Electronics, Inc. ................... 609,000 803,901
Everlight Electronics Co. Ltd. ............ 2,625,480 3,303,992
Formosa Epitaxy Inc. (a)................... 386,100 537,980
G Shank Enterprise Co. Ltd. ............... 2,187,704 1,289,905
Holy Stone Enterprise Co. Ltd. ............ 250,000 388,677
Largan Precision Co. Ltd. ................. 64,900 611,115
Lelon Electronics Corp. (a)................ 508,950 291,127
Optimax Technology Corp. .................. 194,000 500,792
Phihong Enterprise Co. Ltd. ............... 484,984 278,841
Phoenixtec Power Co. Ltd. ................. 447,965 525,626
Prodisc Technology, Inc. (a)............... 319,000 295,700
Quanta Display, Inc. (a)................... 1,047,000 577,401
Sintek Photronic Corp. (a)................. 463,000 306,946
Spi Electronic Co. Ltd. ................... 203,000 354,312
Unimicron Technology Corp. ................ 516,738 348,635
Weikeng Industrial Co. Ltd. ............... 581,900 380,650
Wintek Corp. .............................. 504,000 433,183
Ya Hsing Industrial Co. Ltd. .............. 507,604 710,259
Yageo Corp. (a)............................ 1,688,000 618,950
------------
25,258,465
------------
PC & PERIPHERALS -- 16.6%
Acer, Inc. ................................ 860,574 1,274,831
Advantech Co. Ltd. ........................ 288,947 470,418
The accompanying notes are an integral part of the financial statements. 11
INVESTMENTS/AUGUST 31, 2003 (continued)
--------------------------------------------------------------------------------
US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - continued
PC & PERIPHERALS - continued
Aopen, Inc. ............................... 309,735 $ 297,106
Asustek Computer, Inc. .................... 1,860,750 5,021,678
Benq Corp. ................................ 2,931,600 4,342,793
Compal Electronics, Inc. .................. 3,842,450 5,861,173
Gigabyte Technology Co. Ltd. .............. 274,050 562,731
High Tech Computer Corp. .................. 98,400 305,966
Hon Hai Precision Industry Co. Ltd. ....... 1,285,200 5,315,729
Inventec Co. Ltd. ......................... 1,090,500 665,368
Lite-On Technology Corp. .................. 871,160 988,967
Micro-Star International Co. Ltd. ......... 313,131 555,718
Mitac International Corp. ................. 775,000 301,225
Premier Image Technology Corp. ............ 1,144,000 1,946,377
Quanta Computer, Inc. ..................... 2,419,700 5,997,790
Synnex Technology International Corp. ..... 399,400 603,376
Transcend Information Co. Ltd. ............ 136,640 316,649
------------
34,827,895
------------
SEMI-CONDUCTOR -- 20.4%
Advanced Semiconductor Engineering, Inc.
(a)...................................... 1,645,600 1,279,214
Elite Semiconductor Memory Technology
Inc. ..................................... 156,800 413,963
Faraday Technology Corp. .................. 1,126,250 2,725,598
MediaTek, Inc. ............................ 727,650 7,257,290
Nanya Technology Corp. (a)................. 1,420,370 1,149,962
Novatek Microelectronics Corp. Ltd. ....... 238,050 673,858
Realtek Semiconductor Corp. ............... 273,600 593,910
Silicon Integrated Systems Corp. (a)....... 885,000 742,476
Siliconware Precision Industries Co. (a)... 1,027,000 855,582
Sunplus Technology Co. Ltd. ............... 391,900 626,534
Taiwan Semiconductor Manufacturing Co.
(a)....................................... 9,917,640 19,491,988
United Microelectronics Corp. Ltd. (a)..... 5,917,128 4,860,064
Via Technologies, Inc. .................... 552,000 850,103
Winbond Electronics Corp. (a).............. 1,950,000 1,138,310
Yosun Industrial Corp. .................... 10,745 11,883
------------
42,670,735
------------
TELECOMMUNICATIONS -- 7.8%
Abocom Systems Inc. ....................... 752,000 300,006
Accton Technology Corp. ................... 508,426 390,753
Ambit Microsystems Corp. .................. 159,500 437,467
Askey Computer Co. ........................ 589,100 354,255
US$
VALUE
SHARES (NOTE 1)
------ --------
Chunghwa Telecom Co. Ltd. ................. 3,596,000 $ 5,158,240
D-Link Corp. .............................. 3,347,000 3,593,435
Meiloon Industrial Co. Ltd. ............... 263,250 369,121
Microelectronics Technology, Inc. (a)...... 862,000 302,168
Taiwan Cellular Corp. ..................... 1,888,640 1,357,339
Zyxel Communications Corp. ................ 2,027,450 3,984,721
------------
16,247,505
------------
TOTAL TECHNOLOGY........................... 119,645,014
------------
TRANSPORTATION -- 2.2%
AIR TRAVEL -- 0.4%
China Airlines (a)......................... 1,249,600 509,517
EVA Airways Corp. (a)...................... 1,071,000 400,565
------------
910,082
------------
SHIPPING -- 1.8%
Evergreen Marine Corp. .................... 881,280 607,512
Wan Hai Lines Ltd. ........................ 551,040 505,942
Yang Ming Marine Transport (a)............. 3,079,000 2,637,336
------------
3,750,790
------------
TOTAL TRANSPORTATION....................... 4,660,872
------------
TOTAL COMMON STOCKS (Identified Cost --
$140,609,408)............................. 200,842,084
------------
RIGHTS -- 0.0%
ELECTRONICS -- 0.0%
SPI Electronic Co. Ltd. (a)................ 203,000 5,145
------------
TOTAL RIGHTS (Identified Cost -- $0)....... 5,145
------------
MATURITY
AMOUNT
US$
--------
REPURCHASE AGREEMENTS -- 0.3%
State Street Bank and Trust Co. at 0.50%
dated 8/25/03, due 9/2/03 (collateralized
by U.S. Treasury Note 2.875%, 6/30/04,
market value $673,200)................... $ 659,007 659,000
------------
12 The accompanying notes are an integral part of the financial statements.
INVESTMENTS/AUGUST 31, 2003 (continued)
--------------------------------------------------------------------------------
PRINCIPAL US$
AMOUNT VALUE
NT$ (NOTE 1)
--------- --------
CERTIFICATES OF DEPOSIT -- 0.9%
The Shanghai Commercial Bank 0.775%,
9/05/03 (b).............................. 65,876,722 $ 1,932,435
------------
TOTAL CERTIFICATES OF DEPOSIT (Identified
Cost -- $1,920,604)....................... 1,932,435
------------
COMMERCIAL PAPER -- 2.8%
Chang Chun Petro Chemical Co.
0.85%, 9/01/03 (b)........................ 4,989,879 146,374
HWA Taiwan Electric
0.875%, 9/29/03 (b)....................... 12,690,718 372,271
Kuo Pu Motor Co. Ltd.
1.05%, 10/20/03 (b)....................... 49,753,428 1,459,473
Shinkong Synthetic Fibers Corp.
0.875%, 1/16/04 (b)....................... 49,828,678 1,461,680
Yuen Foong Yu Paper Manufacturing Co. Ltd.
0.85%, 10/21/03 (b)....................... 79,773,426 2,340,083
------------
TOTAL COMMERCIAL PAPER (Identified Cost --
$5,712,293)............................... 5,779,881
------------
TOTAL INVESTMENTS -- 100% (Identified
Cost -- $148,901,305)..................... $209,218,545
============
LEGEND:
US$ - 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, 2003, the aggregate cost basis of the Fund's investment securities
for income tax purposes was $149,151,835.
Net unrealized appreciation of the Fund's investment securities was $60,066,710
of which $63,494,436 related to appreciated investment securities and $3,427,726
related to depreciated investment securities for the fiscal year ended August
31, 2003. In addition, as of August 31, 2003, the Fund had a capital loss
carryforward of $82,718,763 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) and August 31, 2011 ($24,001,359.) As of
August 31, 2003, the Fund elected for Federal income tax purposes to defer
$9,650,144 in current year post October 31 capital losses as though the losses
were incurred on the first day of the next fiscal year.
The accompanying notes are an integral part of the financial statements. 13
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2003
ASSETS
Investments in securities, at value (cost
$148,901,305) (Notes 1 and 2) - See
accompanying schedule..................... $209,218,545
Cash........................................ 4
Cash in New Taiwan dollars (cost $83,982)... 84,102
Dividend receivable......................... 1,194,759
Interest receivable......................... 11,515
------------
Total assets............................... 210,508,925
------------
LIABILITIES
Accrued management fee (Note 3)............. 139,034
Taiwan withholding tax payable (Note 1)..... 257,671
Other payables and accrued expenses......... 262,996
--------
Total liabilities.......................... 659,701
------------
NET ASSETS.................................. $209,849,224
============
Net Assets consist of (Note 1):
Paid in capital............................. 242,144,109
Accumulated undistributed net realized loss
on investments in securities and foreign
currency................................... (92,619,437)
Net unrealized appreciation on investment
securities and foreign currency............ 60,324,552
------------
NET ASSETS.................................. $209,849,224
============
NET ASSET VALUE, per share ($209,849,224 /
16,365,572 shares outstanding)............. 12.82
============
STATEMENT OF OPERATIONS
For the Year Ended August 31, 2003
INVESTMENT INCOME
Dividends................................. $ 4,389,695
Interest.................................. 81,039
------------
4,470,734
Less: Taiwan withholding tax (Note 1)..... (883,570)
------------
Total Income............................. 3,587,164
EXPENSES:
Management fee (Note 3)
Basic fee................................ $ 2,265,868
Performance adjustment................... (369,494)
Custodian fees and expenses............... 297,509
Administration and accounting fees (Note
3)....................................... 184,427
Directors compensation (Note 3)........... 229,672
Legal..................................... 195,333
Audit..................................... 56,793
Shareholder communications................ 164,044
Delaware franchise tax.................... 55,236
Insurance fees............................ 60,471
Miscellaneous............................. 39,170
Transfer agent fees....................... 19,008
Taiwan stock dividend tax (Note 1)........ 491,121
-----------
Total expenses........................... 3,689,158
------------
NET INVESTMENT LOSS...................... (101,994)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 1)
Net realized loss on:
Investment securities.................... (18,151,932)
Foreign currency transactions............ (61,957)
-----------
(18,213,889)
Change in net unrealized appreciation on:
Investment securities.................... 43,101,432
Assets and liabilities denominated in
foreign currencies..................... 10,173
-----------
43,111,605
------------
Net realized and unrealized gain.......... 24,897,716
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................... $ 24,795,722
============
14 The accompanying notes are an integral part of the financial statements.
FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
August 31, 2003 August 31, 2002
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss........................................ $ (101,994) $ (1,963,201)
Net realized loss on investments and foreign currency
transactions............................................. (18,213,889) (14,110,866)
Change in net unrealized appreciation on investments and
foreign currency transactions............................ 43,111,605 25,165,104
------------ ------------
Net increase in net assets resulting from operations....... 24,795,722 9,091,037
------------ ------------
NET ASSETS
Beginning of year.......................................... 185,053,502 175,962,465
------------ ------------
End of year................................................ 209,849,224 185,053,502
============ ============
Undistributed net investment income
End of year................................................ $ -- $ --
============ ============
The accompanying notes are an integral part of the financial statements. 15
FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended August 31,
------------------------------------------------------------
2003 2002 2001(d) 2000 1999
-------- -------- -------- -------- --------
SELECTED PER SHARE DATA
Net asset value, beginning of period.... $ 11.31 $ 10.75 $ 21.42 $ 21.61 $ 15.36
-------- -------- -------- -------- --------
Income from Investment Operations
Net investment loss(a)................. (0.01) (0.12) (0.21) (0.36) (0.20)(b)
Net realized and unrealized gain (loss)
on investments....................... 1.52 0.68 (10.26) 0.17 7.46
-------- -------- -------- -------- --------
Total from investment operations....... 1.51 0.56 (10.47) (0.19) 7.26
-------- -------- -------- -------- --------
Less Distributions
From net realized gains................ -- -- (0.20) -- (1.01)
-------- -------- -------- -------- --------
Total distributions.................... -- -- (0.20) -- (1.01)
-------- -------- -------- -------- --------
Net asset value, end of period.......... $ 12.82 $ 11.31 $ 10.75 $ 21.42 $ 21.61
======== ======== ======== ======== ========
Market value, end of period............. $ 11.09 $ 9.27 $ 9.88 $ 17.63 $ 18.31
======== ======== ======== ======== ========
TOTAL RETURN
Per share market value.................. 19.63% (6.17)% (43.16)% (3.75)% 79.41%
RATIO AND SUPPLEMENTAL DATA
Net assets, end of period (000
omitted)............................... $209,849 $185,054 $175,962 $350,595 $353,614
Ratio of expenses to average net
assets(c).............................. 2.12% 2.20% 2.63% 2.30% 2.21%
Ratio of expenses to average net assets,
excluding stock dividend tax expense... 1.83% 1.98% 2.15% 1.94% 1.88%
Ratio of net investment loss to average
net assets............................. (0.06)% (0.97)% (1.50)% (1.54)% (1.15)%
Portfolio turnover rate................. 148% 167% 125% 139% 125%
(a) Based on average shares outstanding during the period.
(b) Net investment loss per share reflects a regular dividend from China Steel
Corp. of $0.04 per share. (Based on shares outstanding at 8/31/99.)
(c) Expense ratio includes 20% tax paid on stock dividends received by the
Fund.
(d) Prior to 2001, the Fund was audited by PricewaterhouseCoopers LLP.
16 The accompanying notes are an integral part of the financial statements.
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"), 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 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.
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.
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
17
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - continued
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, 2003 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 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 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 paid in capital.
18
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - continued
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, 2003, cost of purchases and proceeds from
sales of securities, other than short-term securities, aggregated $246,213,287
and $248,240,289, respectively.
3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management Fee. As the Fund's investment adviser, HSBC 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 + or
-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, 2003, the management fee, including the
performance adjustments, was equivalent to an annual rate of 1.09% 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
$2,000 for each Board of Directors' meeting or Audit Committee meeting attended,
and $1,000 for each meeting attended by telephone. 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 Corporation ("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, 2003, there were 20,000,000 shares of $0.01 par value capital
stock authorized, of which 16,365,572 were issued and outstanding.
5. DISTRIBUTIONS
The Fund did not pay any distributions to shareholders during the year ended
August 31, 2003. As of August 31, 2003, the components of distributable earnings
on a tax basis were $0 of Undistributed Ordinary Income, $0 of Undistributed
Long-Term Capital Gain, $60,074,022 of Unrealized Appreciation and ($92,368,907)
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.
19
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, 2003, and
the related statement of operations for the year then ended, and statements of
changes in net assets for each of the years in the two-year period then ended
and financial highlights for each of the years in the three-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. The financial highlights for each of the years in the two-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, 2003 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, 2003, the results of its operations for the
year ended, and the changes in its net assets for each of the years in the
two-year period then ended and financial highlights for each of the years in the
three-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
October 3, 2003
20
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, 2003 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.
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 votes these
proxies will become available by calling the same number and on the Commission's
website when the Fund files its first report on Form N-PX which is due by August
31, 2004 covering the Fund's proxy voting record for the 12-month period ending
June 30, 2004.
21
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. Equiserve Trust Company, N.A. ("Equiserve" or 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. 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:
Equiserve, 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 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.
22
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 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 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.
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: Equiserve, c/o The
Taiwan Fund, Inc. at P.O. Box 43010, Providence, RI 02940-3010, 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.
23
DIRECTORS AND OFFICERS (Unaudited)
--------------------------------------------------------------------------------
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 DIRECTORSHIPS IN
AND (AGE) WITH THE FUND SINCE FIVE YEARS PUBLICLY-HELD COMPANIES
------------- -------------- -------- ------------------------ -----------------------
Shao-Yu Wang (79) Chairman of the 1986 Chairman of the Board of --
Apt. 5H Board and Trustees, Soochow
No. 56 Tun Hwa Director University
South Road, Section 2 (1987-present); Chairman
Taipei, Taiwan, ROC of the Board 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)
David Dean (77) Director 1991 Senior Advisor of the --
8361 B. Greensboro Chiang-Ching-Kuo
Drive Foundation
McLean, Virginia 22102 (1990-present)
Lawrence J. Lau (58) Director 1998 Kwoh-Ting Li Professor Director, Media
Stanford University of Economic Development, Partners International
Landau Economics Stanford University Holdings, Inc.
Building, Room 340 (1992- present); (2001-present)
579 Serra Mall Director, Stanford
Stanford, CA Institute for Economic
94305-6072 Policy Research at
Stanford University
(1997-1999)
Joe O. Rogers (53) Director 1986 Manager, The J-Squared Director, The China
2477 Foxwood Drive Team LLC (2003-present) Fund, Inc.
Chapel Hill, NC 27514 The Rogers Team LLC, (1992-present)
Organizing Member (July
2001-present); 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)
24
DIRECTORS AND OFFICERS (continued) (unaudited)
--------------------------------------------------------------------------------
PRINCIPAL
OCCUPATION OR EMPLOYMENT
NAME, ADDRESS PRESENT OFFICE DIRECTOR DURING PAST DIRECTORSHIPS IN
AND (AGE) WITH THE FUND SINCE FIVE YEARS PUBLICLY-HELD COMPANIES
------------- -------------- -------- ------------------------ -----------------------
Jack C. Tang (75) Director 1989 Honorary Chairman --
Tristate Holdings Ltd. (April 2001-present),
66-72 Lei Muk Road Co-Chairman (April 1999-
Kwai Chung April 2001), Chairman &
New Territories CEO (June 1998-April
Hong Kong 1999), Chairman Emeritus
(January 1997-June
1998), Tristate Holdings
Ltd.
Lawrence F. Weber (69) Director 1995 Independent Consultant --
156 Ide Rd. (1993-present)
Williamstown, MA 01267
M. Christopher Director 2003 Independent Consultant Chairman and Director
Canavan, Jr. (64) (2000-present); Partner, of the Audit Committee,
73 Brook Street PricewaterhouseCoopers Bruker Biosciences,
Wellesley, MA 02482 LLP (Coopers & Lybrand) Inc.
(1972-1999)
Anthony Kai Yiu Lo (54) Director 2003 Founder and Managing Member of Listing
1201 Sun Hung Kai Director, Advantage Ltd. Committee, Stock
Centre (1999-present); Vice Exchange of Hong Kong
30 Harbor Road Chairman, ABN Amro HG Ltd. (1996-present)
Wanchai, Hong Kong Asia Ltd. (1998-1999);
25
DIRECTORS AND OFFICERS (continued) (unaudited)
--------------------------------------------------------------------------------
PRINCIPAL
OCCUPATION OR EMPLOYMENT
NAME, ADDRESS PRESENT OFFICE DIRECTOR DURING PAST DIRECTORSHIPS IN
AND (AGE) WITH THE FUND SINCE FIVE YEARS PUBLICLY-HELD COMPANIES
------------- -------------- -------- ------------------------ -----------------------
Directors Considered Interested Persons
*Benny T. Hu (54) President and 1993 Chairman, China Director, Winbond
29 F, 97 Tun Hwa Director Development Industrial Electronics Corp.
South Road, Section 2 Bank (June (2002- present);
Taipei, Taiwan, ROC 2003-present); Chairman, Director, Yangming
China Development Asset Marine Transport Corp.
Management Corp. (June (2001- present);
2001-present); Director, China
Ambassador-at-Large, Development Financial
Republic of China (May Holding Corp. (June
2001-present) 2001- present)
*Gloria Wang (48) Director 1998 President, HSBC Asset --
99 Tun Hwa South Management (Taiwan)
Road, Section 2 Limited (February 2002-
Taipei, Taiwan, ROC present); Vice
President, HSBC Asset
Management (Taiwan)
Limited (1996-February
2002); Secretary and
Treasurer of the Fund
(1994-October 1998)
Carol Wang (38) Secretary and Manager of Legal --
99 Tun Hwa South Treasurer Department, HSBC Asset
Road, Section 2 Management (Taiwan)
Taipei, Taiwan, ROC Limited (April 1994-June
2002); Manager of
General Administration
Office, HSBC Asset
Management (Taiwan)
Limited (June
2002-present)
---------------
* 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
is considered to be an interested person because he is the President of the
Fund.
26
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27
--------------------------------------------------------------------------------
UNITED STATES ADDRESS
The Taiwan Fund, Inc.
225 Franklin Street
Boston, MA
1-800-636-9242
www.thetaiwanfund.com
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
M. Christopher Canavan, Jr., Director
Anthony Kai Yiu Lo, Director
Carol Wang, Secretary and Treasurer
Laurence E. Cranch, 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
Equiserve Trust Company, N.A.
LEGAL COUNSEL
Clifford Chance US LLP
New York, NY
Lee and Li
Taipei, Taiwan
INDEPENDENT ACCOUNTANTS
KPMG LLP
Boston, MA
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial and accounting officer. A
copy of the registrant's code of ethics is attached hereto as Exhibit 10(a).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of directors has determined that the registrant has at
least one audit committee financial expert serving on its audit committee. The
audit committee financial expert is M. Christopher Canavan, Jr. who is
"independent" for purposes of this item.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The registrant has delegated to its investment advisor the voting of proxies
relating to the registrant's portfolio securities. The policies and procedures
used by the investment advisor 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 advisor or any of its
affiliates, are contained in the investment advisor's Proxy Voting Guidelines,
which are attached hereto as Exhibit 10(c).
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Within 90 days of the filing date of this Form N-CSR, Benny T. Hu, the
registrant's President, and Carol Wang, the registrant's Treasurer, reviewed the
registrant's disclosure controls and procedures (the "Procedures") and evaluated
their effectiveness. Based on their evaluation, Mr. Hu and Ms. Wang determined
that the Procedures adequately ensure that information required to be disclosed
by the registrant in its periodic reports is recorded, processed, summarized and
reported within the time periods required by the Securities and Exchange
Commission's rules and regulations.
(b) There were no significant changes in the registrant's internal control over
financial reporting that occurred during the registrant's last fiscal half-year
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 10. EXHIBITS
(a) Code of Ethics for Principal Executive and Senior Financial Officers.
(b) Certifications required by Rule 30a-2(a) of the Investment Company Act of
1940, as amended, and Sections 906 of the Sarbanes-Oxley Act of 2002 are
attached hereto.
(c) Proxy Voting Guidelines.
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 5, 2003
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.
By: /s/Carol Wang
-------------
Carol Wang
Treasurer of The Taiwan Fund, Inc.
Date: November 5, 2003