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
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THE TAIWAN FUND, INC.
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(Exact name of registrant as specified in charter)
225 FRANKLIN STREET
BOSTON, MA 02110
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(Address of principal executive offices in the United States) (Zip code)
(Name and Address of Agent for Copy to:
Service)
The Taiwan Fund, Inc. Leonard B. Mackey, Jr.
c/o State Street Bank and Clifford Chance US LLP
Trust Company 31 West 52nd Street
Attention: Ann M. Carpenter New York, NY 10019-6131
225 Franklin Street
Boston, MA 02110
Registrant's telephone number, including area code: (800) 636-9242
Date of fiscal year end: August 31, 2004
Date of reporting period: August 31, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
2
THE TAIWAN FUND, INC.(R)
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ANNUAL REPORT
AUGUST 31, 2004
THE TAIWAN FUND, INC.
WHAT'S INSIDE
Page
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Chairman's Statement 2
Report of the Investment
Manager 5
Portfolio Snapshot 10
Investments 11
Financial Statements 13
Notes to Financial
Statements 16
Report of Independent
Registered Public
Accounting Firm 20
Other Information 21
Summary of Dividend
Reinvestment and
Cash Purchase Plan 22
Directors and Officers 24
CHAIRMAN'S STATEMENT
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Dear Shareholders:
We are pleased to present the Annual Report of The Taiwan Fund, Inc. (the
"Fund") for the fiscal year ended August 31, 2004.
During the fiscal year ended August 31, 2004, the Fund's net asset value ("NAV")
decreased by 0.85% (as restated) in U.S. dollar terms and decreased by 1.20% in
New Taiwan ("NT") dollar terms. During the same period, the Taiwan Stock
Exchange Index (the "TAIEX") increased by 2.38% in U.S. dollar terms and
increased by 2.03% in NT dollar terms. The NT dollar depreciated against the
U.S. dollar by 0.35% during this period. The Fund underperformed the TAIEX by
3.16% during the year.
On August 31, 2004, the Fund was trading at US$10.99 per share, reflecting a
discount of 14.00% to the Fund's NAV per share of US$12.78. The Fund's shares
were trading at a discount of 13.96% (as restated) on August 31, 2003. During
the past year, the Fund's shares traded at an average discount of approximately
12%, which was lower than the average discount of approximately 15% in the
previous year. We believe that the narrowing of the discount reflects investors'
growing optimism about the prospects for the Taiwanese market.
The global economy is expected to grow at above trend levels of 4.2% in 2004 and
higher than the 2.8% growth rate recorded in 2003. In the United States, for
example, growth has been driven by increased private consumption, improving
employment opportunities and better corporate earnings. Real GDP growth is
forecasted to be 4.3% in 2004, up from 3.0% in 2003. Strength has also been seen
in the leading indicator for U.S. manufacturing activity, the Institute for
Supply Management ("ISM") Index, which has shown sustained growth of above 60
points in the first half of 2004. The unemployment rate has declined from 6.1%
in September 2003 to 5.4% in August 2004. In China, the economy has also shown
strong growth. The country's real GDP growth rate reached 9.7% in the first half
of 2004, after growth of 9.1% in 2003. This is largely attributable to a
significant rise in fixed investments, strong domestic demand and exports. The
Japanese economy is projected to grow by 4.0% in 2004, after expanding 2.5% in
2003 on the back of stable domestic demand and strong exports.
Looking forward, disruptive oil price hikes and expected rising short-term
interest rates may increase the level of concern and interrupt the recovering
global economy. However, although we anticipate that the global rate of growth
will slow during the second half of 2004 and into
2
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the first half of 2005, recent data provides evidence that in the U.S. real GDP
has slowed from 4.5% in the first quarter to 2.8% in the second quarter. The
current rising interest environment in the United States is one of a
normalization of rates from a previously untenable situation, and we do not
believe that the economic recovery will not be curtailed by this. We concur with
the Federal Reserve assumptions of an easing in oil prices and a declining
unemployment rate, which should position the U.S. economy for a mild expansion.
In turn, this will benefit the Taiwanese economy. According to the International
Monetary Fund, the U.S. economy is forecast to grow at around 4.3% in 2004 and
3.6% in 2005, whilst global economic growth is expected to remain at 4.2% in
2004 and 3.1% in 2005.
Taiwan's real GDP growth is expected to continue on its upward trajectory in
2004 (3.3% in 2003) as strong domestic demand and exports have seen Taiwan's
real GDP growth rise to 7.7% in the second quarter of 2004 from 6.7% in the
first quarter. Export orders have displayed double-digit growth rates of 25.7%
in the first half of 2004, buoyed by surging order growth from China, the United
States and Europe. These orders are projected to rise 21.3% in 2004 compared to
10.4% in 2003. Private consumption is also projected to expand from 0.6% in 2003
to 4.0% in 2004. For the full year, both Taiwan's private and government
investments are expected to jump to 24% in 2004 from a negative 0.7% in 2003.
Despite the forecast of U.S. interest rate rises, we expect the Taiwan Central
Bank to keep real interest rates low in the upcoming quarters in order to
facilitate economic growth.
We believe that Taiwan's economy is very resilient and strong exports and
domestic demand combined with a positive outlook for both the U.S. and Chinese
economies will support the market. China's real GDP is forecast to slow from
9.1% in 2003 to 8.6% in 2004 and 7.2% in 2005. In this context, Taiwan's
investment outlook remains favorable due to the economic links that exist
between China and Taiwan, with exports continuing to grow. According to the
Directorate General of Budget Accounting and Statistics, Taiwan's real GDP is
expected to grow 5.9% in 2004 and 4.5% in 2005. However, should the U.S. economy
slow down unexpectedly or if China were to impose additional macro-economic
cooling measures, then this would have an adverse impact on Taiwan. Other
uncertainties that could unsettle the market would be unfavorable cross-strait
relations or continuing oil price rises. However, at this juncture we do not
believe that any of these scenarios are likely, although we will continue to
monitor the situation.
3
CHAIRMAN'S STATEMENT (continued)
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Political tensions following the Taiwanese presidential elections in March 2004
have increased investor concerns about the cross strait relations. The current
focus is on Taiwan's Legislative Yuan election in December 2004 because it is a
very highly fought race between each party and the implications that this may
have on relations. In addition, the United States supports a one-China policy
and not Taiwan's independence, which should be another stabilizing factor. We
believe that a cautious approach by the United States, China and Taiwan has
always been taken when dealing with political crisis between them and they will
continue to do so. Therefore, we do not expect a significant impact to be felt
by the market from this year-end election as we believe that economic
development will remain the key priority for both Taiwan and China. Despite some
short-term concerns over the global economic slowdown, we believe Taiwan will
remain a favorable market for long-term investment. Against the uncertain
political backdrop, and slowing corporate earnings growth in the coming year,
Taiwan companies' long-term competitiveness should remain the same. This
competitive strength on a global basis, plus their leveraging of lower cost
production in China, will underpin the positive longer term outlook for the
stock market.
Taiwan's stock market will remain one of the more favorable places for global
investors in the future. The Board is confident about Taiwan's investment
outlook and the Fund's performance should provide satisfactory returns for
investors over the longer term.
We appreciate your support and look forward to sharing with you our improving
results over the longer term.
Sincerely,
/s/ S.Y. Wang
S. Y. Wang
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. Returns for the TAIEX are not total returns and
reflect only changes in share price but do not assume that cash dividends, if
any, were reinvested, and thus are not strictly comparable to the Fund returns.
Past performance is not indicative of future results of the Fund.
4
REPORT OF THE INVESTMENT MANAGER
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INVESTMENT PERFORMANCE
The Fund's net asset value ("NAV") decreased by 0.85% (as restated) in U.S.
dollar terms and decreased by 1.20% in New Taiwan ("NT") dollar terms during the
fiscal year ended August 31, 2004. During the same period, the Taiwan Stock
Exchange Index (the "TAIEX") increased by 2.38% in USD terms and increased by
2.03% in NT dollar terms. The Fund underperformed the TAIEX by 3.16% during the
year. Relative to its peers, the Fund's performance was ranked in the second
quartile in the twelve months up to the end of Fiscal Year 2004.
Based on the performance attribution report generated by FactSet (an investment
research service), the Fund saw overall negative performance contributions from
both sector allocation and from stock selection during the year. On the sector
level, we received positive contributions from our overweight position in the
steel/construction sector but this was offset by the overweight positions in the
integrated circuit ("IC") design and handset sectors, which detracted value. At
the stock level, the portfolio benefited from good stock selection in the
financial sector but we suffered from poor selection in some technology stocks
(mainly memory IC and IC design companies), which hurt performance.
INVESTMENT OUTLOOK
At this juncture, our macro-economic outlook is mixed. However, we believe that
Taiwan's healthy economic condition indicates that the economic recovery cycle
still has some way to run. Thus, this should offer reasonable investment
opportunities for investors in the foreseeable future. There are four major
factors that will drive the market over the next year:
- Economic conditions,
- Market liquidity,
- Corporate earnings and valuations, and
- The Morgan Stanley Capital International's ("MSCI") re-weighting changes.
Taiwan's economic fundamentals remain supportive and are on track for continued
economic growth, although we expect this momentum to slow in the latter part of
2004 and 2005. This is due to our concerns related to external factors,
including high oil prices, rising U.S. interest rates and China's efforts to
cool its economy. For 2005, we believe
5
REPORT OF THE INVESTMENT MANAGER (continued)
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that ongoing private investments will foster domestic consumption and private
investment. These investments will be bolstered by historically low interest
rates and the government's policy incentives, an improving employment market and
asset price reflation that has been seen over the past year. For the rest of
2004, the Taiwan government is projecting a quarterly real GDP growth of 5.3% in
the third quarter of 2004 and 4.1% in the fourth quarter of 2004, compared to
6.7% and 7.7% in the first and second quarters of 2004, respectively. For real
GDP growth in 2005, the government's projections are 4.8% in the first quarter
of 2005, 4.4% in the second quarter of 2005, 4.8% in the third quarter of 2005
and 4.1% in the fourth quarter of 2005.
Following the recovery in the property market and decline in non-performing
loans in 2004, we expect M1b (the most narrowly defined measure of a nation's
money supply excluding time deposits and foreign currency deposits) and M2 (the
broadest measure of a nation's money supply) to stay at high levels. The Taiwan
government is projecting M1b growth of 18.5% in 2004 from 11.8% in 2003 and M2
at 7.6% in 2004 from 3.8% in 2003. Although higher oil costs may erode nominal
income and drain liquidity, the liquidity that the Taiwan Central Bank has
accumulated in the past should provide a significant buffer to cushion the
impact from the Fed's interest rate moves. We expect the Taiwan Central Bank's
loose monetary policy to remain in place and that foreign fund inflows will
continue to be an additional source of liquidity.
The consensus estimates indicate that Taiwan's corporate profit growth will be
over 54% in 2004, but a low single-digit growth is forecast in 2005 due to a
higher comparative base and slower growth momentum in exports. We expect that
Taiwan's economy will be supported by ongoing domestic demand, but due to the
forecasted slowdown in the global economy believe that this will have an impact
on growth in Taiwan. From a valuation perspective, we believe the TAIEX is not
stretched as it is trading at the lower end of its range, the current
price-to-earnings ratio is approximately 11.0 times (as of the end of August
2004) as compared to its historical five-year mean of 19.0 times. We believe
that the short-term downside risk for the Taiwanese market should be relatively
low. Moving into 2005, the market may start to discount the more moderate
economic growth and weak corporate earnings growth for certain sectors.
6
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In addition, MSCI's re-weighting adjustments should come as a potential catalyst
later this year and in the first half of 2005. As a result of MSCI's decision to
remove the limited investability factor ("LIF") on Taiwan, Taiwan will become
the country with the largest weighting within the MSCI Emerging Market
Index -- a weighting of more than 20% in May 2005. These adjustments are
scheduled to take place in two phases: starting from November 30, 2004, and May
31, 2005. In the first phase, the LIF will rise to 75% from 55% and to a full
weighting from 75% in the second phase.
However, a number of risks remain, related to some upcoming events and current
situations that may impact the market and create some uncertainty; the results
from the U.S. presidential election and Taiwan's Legislative Yuan election,
subtle cross-strait relations, slower economic growth in the United States and
China and oil price movements. In our view, many of these events and the
subsequent results have been widely debated and to a certain extent such risks
have already largely been discounted by the Taiwanese market.
INVESTMENT STRATEGY
Our investment strategy will focus on five themes in the latter part of 2004 and
in 2005, including domestic consumption, liquidity, seasonal returns, new
product development and defensive and yield themes. Defensive and yield stocks
will constitute some of our investment ideas in the near-to-mid term should the
macro picture remain uncertain. We expect Taiwan's ample liquidity, NT dollar
strength and historical low interest rates to be major catalysts for domestic
consumption and companies' asset price reflation in Taiwan. At the end of
August, we witnessed steady share price performance within domestic-focused
sectors, namely cement, finance, property, transportation and retailing. As
fundamentals of these sectors further improve, share performance should continue
as we head into 2005.
We also embrace the positive effect of MSCI's phased re-weighting changes, which
are expected to draw foreign capital inflows, further boosting the Taiwan market
in the coming months. We should see large-cap stocks enjoying relatively
stronger performance as adjustment dates approach. We will continue to look for
opportunities to accumulate large-cap stocks in diverse sectors.
For the second half of 2004 and into 2005, we hold a conservative view on the
technology upstream players (Dynamic Random Access Memory
7
REPORT OF THE INVESTMENT MANAGER (continued)
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("DRAM"), foundry and IC packaging and testing) for two reasons; first, we
expect the utilization rate to fall to a 70%-80% level in 2005 from the current
full capacity and secondly these semiconductor companies may scale back their
2005 CAPEX (capital expenditure) plans. However, in process technology for IC
fabrication, the combination of the trend towards increased outsourcing and
Taiwan's outstanding capability in this sector should still favor IC foundry and
packaging companies to drive long-term growth. Although, DRAM companies'
capacity expansion in the second half of 2004 and 2005 may result in oversupply
concerns. To a large extent, we favor niche and selective downstream consumer
and hardware stocks in the year ahead, as some companies are likely to continue
their market share expansion through leveraging their broad product offerings
and market penetration for further earnings growth. In addition, softening
component costs will serve as another share stimulus to the downstream players.
Another positive factor for the Taiwan technology sector is the historic low
valuation at around 10 times price-to-earnings ratio, suggesting that much of
the earnings risks have been discounted in share prices.
As for the key cutting edge products, TFT-LCDs (thin film transistor-liquid
crystal displays), which are at the incubating and incremental growth stages,
should still draw market attention as prices becomes more affordable, thus
stimulating demand in 2005 and beyond. The increasing adoption of monitors,
notebooks and TVs has led to the proliferation of TFT-LCD products and increased
investors' interests. Despite this, there still remains some concern over price
falls due to production output increases and production yield improvements
somewhat hampered the market sentiment. Consensus estimates suggest that TFT-LCD
panel makers may suffer around a 25%-35% profit drop in 2005. In the
longer-term, the TFT-LCD industry is expected to double its growth to reach
US$42 billion in 2007. Such eye-catching growth is hard for one to ignore when
considering investment in technology stocks. The chief catalyst for this sector
will come from growth in the TFT-LCD TV segment whose growth is projected to be
at a compound annual growth rate (CAGR) of 41% in the four years leading to
2007. Other interesting areas within the new product theme include DSCs (digital
still cameras), camera handsets and optical storage media. We believe these
three industries are somewhat less attractive, owing to severe competition,
dangerously low margins, and the constant need for investments in new technology
in order to stay competitive.
8
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While the financial sector has gone through the ongoing process of balance sheet
cleanup over the past few years, the sector's noticeable fundamental improvement
should be further enhanced from continued growth in the consumer and commercial
loan sectors. While a cyclical headwind in the technology sector will naturally
lead to default concerns, we doubt that the situation will pose any systemic
risk to financial stocks. As of the end of August 2004, the financial sector
traded at a fairly low price-to-book ratio of around 2 times, compared to the
sector's ten-year average of 3.4 times. Improving consumption trends and asset
price reflation should also benefit the financial sector.
Considering the fairly mixed outlook in the year ahead, our investment focus
will be in areas such as the cyclical industries which have steady earnings
growth, and non-cyclical industries (e.g. domestic consumption and retailing),
the financial and property sectors, as well as downstream technology stocks with
un-demanding valuations. We believe these sectors should show relatively strong
performance as evidenced in these companies' stable operating cash flows and
expected attractive cash dividend payout in 2005. We still like the China theme,
as companies with China exposure should still be the beneficiaries of China's
soft landing and relatively high economic growth in the years to come.
In the year ahead, we intend to continue our strategy of maintaining a balanced
portfolio to take advantage of these diverse themes. We will continue to strive
to beat the benchmark through a process of bottom-up stock selections. 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/ Victor Shih /s/ Sally Chang
Victor Shih Sally Chang
Portfolio Manager Deputy Portfolio Manager
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. Returns for the TAIEX are not total returns and
reflect only changes in share price but do not assume that cash dividends, if
any, were reinvested, and thus are not strictly comparable to the Fund returns.
Past performance is not indicative of future results of the Fund.
9
PORTFOLIO SNAPSHOT*
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TOP TEN EQUITY HOLDINGS
HOLDINGS AS OF AUGUST 31, 2004 %
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Taiwan Semiconductor Manufacturing Co. 7.9
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Asustek Computer, Inc. 6.1
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Chunghwa Telecom Co. Ltd. 6.0
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Cathay Financial Holding Co. Ltd. 5.3
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Hon Hai Precision Industry Co. Ltd. 4.5
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Mega Financial Holding Co. 4.3
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Chinatrust Financial Holding Co. Ltd. 4.2
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China Steel Corp. 4.0
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Taishin Financial Holdings Co. Ltd. 3.8
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United Microelectronics Corp. Ltd. 3.6
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TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF AUGUST 31, 2004 %
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Financial Services 17.7
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Semi-conductor 17.6
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PC & Peripherals 14.3
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Electronics 11.5
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Telecommunications 9.9
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Plastics 4.6
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Iron & Steel 4.0
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Textiles & Apparel 2.6
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General Merchandise Stores 2.4
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Petroleum Services 2.1
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TOP TEN EQUITY HOLDINGS
HOLDINGS AS OF AUGUST 31, 2003 %
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Taiwan Semiconductor Manufacturing Co. 9.3
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Au Optronics Corp. 3.8
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MediaTek, Inc. 3.5
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Quanta Computer, Inc. 2.9
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Compal Electronics, Inc. 2.8
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Hon Hai Precision Industry Co. Ltd. 2.5
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Chunghwa Telecom Co. Ltd. 2.5
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Asustek Computer, Inc. 2.4
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Formosa Chemicals & Fibre Corp. 2.4
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United Microelectronics Corp. Ltd. 2.3
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TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF AUGUST 31, 2003 %
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Semi-conductor 20.4
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PC & Peripherals 16.6
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Electronics 12.1
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Financial Services 9.5
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Telecommunications 7.8
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Plastics 5.2
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Automobiles, Tires & Accessories 5.0
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Textiles & Apparel 4.0
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Iron & Steel 3.1
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Others & Miscellaneous 2.4
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* Percentages based on total investments at August 31, 2004 and August 31, 2003.
10
THE TAIWAN FUND, INC.
INVESTMENTS/AUGUST 31, 2004 (SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT
IN SECURITIES)
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US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - 93.7%
BASIC INDUSTRIES -- 13.6%
CEMENT -- 1.3%
Asia Cement Corp. ........................ 4,899,000 $ 2,834,204
------------
CHEMICALS -- 1.6%
Oriental Union Chemical Corp. ............ 3,333,900 3,309,228
------------
IRON & STEEL -- 4.0%
China Steel Corp. ........................ 9,062,460 8,463,122
------------
PETROLEUM SERVICES -- 2.1%
Formosa Petrochemical Corp. .............. 2,774,020 4,399,068
------------
PLASTICS -- 4.6%
Formosa Plastic Corp. .................... 2,818,540 4,221,354
Nan Ya Plastics Corp. .................... 3,776,780 5,212,870
Taiwan Green Point Enterprises Co.
Ltd. .................................... 70,892 195,696
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9,629,920
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TOTAL BASIC INDUSTRIES.................... 28,635,542
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DURABLES -- 5.2%
AUTOMOBILES, TIRES & ACCESSORIES -- 1.4%
Cheng Shin Rubber Industry Co. Ltd. ...... 2,193,096 2,833,790
------------
ELECTRICAL EQUIPMENT -- 1.2%
Fu Sheng Industrial Co. Ltd. ............. 1,700,000 2,620,992
------------
TEXTILES & APPAREL -- 2.6%
Formosa Chemicals & Fibre Corp. .......... 3,372,840 5,398,208
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TOTAL DURABLES............................ 10,852,990
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FINANCE -- 17.7%
FINANCIAL SERVICES -- 17.7%
Cathay Financial Holding Co. Ltd. ........ 6,400,000 11,182,896
Chinatrust Financial Holding Co. Ltd. .... 8,476,812 8,936,848
Mega Financial Holding Co. ............... 15,000,000 9,074,357
Polaris Securities Co. Ltd. .............. 71,779 33,727
Taishin Financial Holdings Co. Ltd. ...... 10,625,574 8,081,827
------------
37,309,655
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TOTAL FINANCE............................. 37,309,655
------------
US$
VALUE
SHARES (NOTE 1)
------ --------
RETAIL & WHOLESALE -- 2.4%
GENERAL MERCHANDISE STORES -- 2.4%
President Chain Store Corp. ............. 3,344,800 $ 4,960,425
------------
TECHNOLOGY -- 53.3%
ELECTRONICS -- 11.5%
Asia Vital Components Co. Ltd. (a)........ 1,314,000 1,582,110
Au Optronics Corp. ....................... 4,605,300 5,910,126
Chi Mei Optoelectronics Corp. ............ 3,470,836 4,393,076
Everlight Electronics Co. Ltd. ........... 1,650,000 1,788,001
Tripod Technology Corp. .................. 2,297,764 2,618,150
Unimicron Technology Corp. ............... 3,604,456 2,222,882
Walsin Technology Corp. .................. 1,515,291 1,005,685
Wus Printed Circuit Co. Ltd. ............. 4,921,316 2,399,091
Ya Hsing Industrial Co. Ltd. ............. 2,606,260 2,426,243
------------
24,345,364
------------
PC & PERIPHERALS -- 14.3%
Asustek Computer, Inc. ................... 5,780,000 12,900,270
Benq Corp................................. 4,000,000 4,087,866
Hon Hai Precision Industry Co. Ltd. ...... 2,876,247 9,417,994
Quanta Computer, Inc. .................... 2,200,858 3,748,672
------------
30,154,802
------------
SEMI-CONDUCTOR -- 17.6%
Advanced Semiconductor Engineering, Inc.
(a)..................................... 6,316,907 4,600,590
Nanya Technology Corp. (a)................ 3,600,000 2,653,589
Sunplus Technology Co. Ltd. .............. 3,850,000 5,562,669
Taiwan Semiconductor Manufacturing Co. ... 12,069,230 16,658,458
United Microelectronics Corp. Ltd. (a).... 11,238,480 7,623,895
------------
37,099,201
------------
TELECOMMUNICATIONS -- 9.9%
Chunghwa Telecom Co. Ltd. ................ 8,000,000 12,686,479
Ichia Technologies, Inc. ................. 1,786,500 3,095,369
Zyxel Communications Corp. ............... 2,530,000 5,052,273
------------
20,834,121
------------
TOTAL TECHNOLOGY.......................... 112,433,488
------------
The accompanying notes are an integral part of the financial statements. 11
INVESTMENTS/AUGUST 31, 2004 (continued)
--------------------------------------------------------------------------------
US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS - continued
TRANSPORTATION -- 1.5%
TRANSPORTATION -- 1.5%
Yang Ming Marine Transport................ 3,720,193 $ 3,255,660
------------
TOTAL COMMON STOCKS (Identified Cost --
$163,102,091)............................ 197,447,760
------------
PRINCIPAL
AMOUNT
NT$
---------
CERTIFICATES OF DEPOSIT -- 2.6%
Taishin International Bank:
0.95%, 10/04/04 (b)...................... 30,224,808 887,607
0.95%, 10/08/04 (b)...................... 10,073,849 295,837
0.96%, 10/08/04 (b)...................... 50,370,286 1,479,217
0.965%, 10/04/04 (b)..................... 20,150,321 591,752
0.965%, 10/06/04 (b)..................... 40,301,786 1,183,537
0.975%, 10/08/04 (b)..................... 40,304,947 1,183,629
------------
TOTAL CERTIFICATES OF DEPOSIT (Identified
Cost -- $5,637,265)...................... 5,621,579
------------
COMMERCIAL PAPER -- 3.6%
Allied Material Technology Corp.
1.025%, 10/21/04 (b)..................... 20,133,624 591,261
First Taisec Securities
00.90%, 9/10/04 (b)...................... 116,862,026 3,431,870
Tai Shin Enterprise:
0.975%, 10/08/04 (b)..................... 50,453,783 1,481,669
0.975%, 10/11/04 (b)..................... 50,397,816 1,480,025
1.00%, 10/08/04 (b)...................... 20,136,664 591,350
------------
TOTAL COMMERCIAL PAPER (Identified Cost --
$7,602,241).............................. 7,576,175
------------
MATURITY
AMOUNT
US$
--------
REPURCHASE AGREEMENT -- 0.1%
State Street Bank & Trust Co. at 0.15%
dated 8/30/04, due 9/7/04
(collateralized by U.S. Treasury Note
1.625%, 3/31/05, market value
$155,852)............................... $ 148,005 $ 148,000
------------
TOTAL INVESTMENTS -- 100% (Cost --
$176,489,597)............................ $210,793,514
============
LEGEND:
US$ - 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, 2004, the aggregate cost basis of the Fund's investment securities
for income tax purposes was $176,701,772.
Net unrealized appreciation of the Fund's investment securities was $34,091,742
of which $38,892,788 related to appreciated investment securities and $4,801,046
related to depreciated investment securities for the fiscal year ended August
31, 2004. In addition, as of August 31, 2004, the Fund had a capital loss
carryforward of ($71,371,135) for Federal income tax purposes which may be
utilized to offset future capital gains through August 31, 2009 ($7,374,675),
August 31, 2010 ($39,995,101) and August 31, 2011 ($24,001,359.)
12 The accompanying notes are an integral part of the financial statements.
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2004
ASSETS
Investments in securities, at value (cost
$176,489,597) (Notes 1 and 2) - See
accompanying schedule................... $210,793,514
Cash...................................... 719
Cash in New Taiwan dollars (cost
$2,157,649).............................. 2,155,763
Receivable for investments sold........... 1,644,065
Receivable from Investment Adviser (Notes
3 and 6)................................. 889,700
Dividend receivable....................... 1,258,277
Interest receivable....................... 4,650
------------
Total assets............................. 216,746,688
------------
LIABILITIES
Payable for investments purchased......... $7,164,760
Taiwan withholding tax payable (Note 1)... 279,310
Other payables and accrued expenses....... 136,814
----------
Total liabilities........................ 7,580,884
------------
NET ASSETS................................ $209,165,804
============
Net Assets consist of (Note 1):
Paid in capital........................... 244,846,401
Undistributed net investment income....... 1,597,555
Accumulated undistributed net realized
loss on investments in securities and
foreign currency......................... (71,583,311)
Net unrealized appreciation on investment
securities and foreign currency.......... 34,305,159
------------
NET ASSETS................................ $209,165,804
============
NET ASSET VALUE, per share ($209,165,804 /
16,365,572 shares outstanding)........... 12.78
============
STATEMENT OF OPERATIONS
For the Year Ended August 31, 2004
INVESTMENT INCOME
Dividends................................ $ 6,296,065
Interest................................. 45,618
------------
6,341,683
Less: Taiwan withholding tax (Note 1).... (1,250,771)
------------
Total Income............................ 5,090,912
EXPENSES:
Management fee (Note 3)
Basic fee............................... $ 2,878,682
Performance adjustment.................. (599,029)
Custodian fees and expenses.............. 377,790
Administration and accounting fees (Note
3)...................................... 222,150
Directors compensation (Note 3).......... 412,655
Legal.................................... 479,446
Audit.................................... 112,334
Shareholder communications............... 5,554
Insurance fees........................... 74,617
Delaware franchise tax................... 49,679
Miscellaneous............................ 16,016
Transfer agent fees...................... 16,511
Taiwan stock dividend tax (Note 1)....... 569,342
------------
Total expenses.......................... 4,615,747
------------
NET INVESTMENT INCOME................... 475,165
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 1)
Net realized gain (loss) on:
Investment securities................... 23,795,853
Foreign currency transactions........... (34,517)
------------
23,761,336
Change in net unrealized appreciation
(depreciation) on:
Investment securities................... (26,013,323)
Assets and liabilities denominated in
foreign currencies.................... (6,070)
------------
(26,019,393)
------------
Net realized and unrealized loss......... (2,258,057)
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS.............................. $ (1,782,892)
============
The accompanying notes are an integral part of the financial statements. 13
FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
August 31, 2004 August 31, 2003
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss)............................... $ 475,165 $ 19,021(a)
Net realized gain (loss) on investments and foreign
currency transactions.................................... 23,761,336 (18,213,889)
Change in net unrealized appreciation (depreciation) on
investments and foreign currency transactions............ (26,019,393) 43,111,605
------------ ------------
Net increase (decrease) in net assets resulting from
operations............................................... (1,782,892) 24,916,737(a)
------------ ------------
NET ASSETS
Beginning of period........................................ 210,948,696(a) 186,031,959(a)
------------ ------------
End of period.............................................. 209,165,804 210,948,696(a)
============ ============
Undistributed net investment income
End of period.............................................. $ 1,597,555 $ 1,099,472(a)
============ ============
(a) Restated (Note 6).
14 The accompanying notes are an integral part of the financial statements.
FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended August 31,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000(d)
-------- -------- -------- -------- --------
SELECTED PER SHARE DATA
Net asset value, beginning of period.... $ 12.89(c) $ 11.37(c) $ 10.81(c) $ 21.49(c) $ 21.67(c)
-------- -------- -------- -------- --------
Income from Investment Operations
Net investment income (loss)(a)........ 0.03 0.00(c) (0.12)(c) (0.22)(c) (0.35)(c)
Net realized and unrealized gain (loss)
on investments....................... (0.14) 1.52 0.68 (10.26) 0.17
-------- -------- -------- -------- --------
Total from investment operations....... (0.11) 1.52(c) 0.56(c) (10.48)(c) (0.18)(c)
-------- -------- -------- -------- --------
Less Distributions
From net realized gains................ -- -- -- (0.20) --
-------- -------- -------- -------- --------
Total distribution..................... -- -- -- (0.20) --
-------- -------- -------- -------- --------
Net asset value, end of period.......... $ 12.78 $ 12.89(c) $ 11.37(c) $ 10.81(c) $ 21.49(c)
======== ======== ======== ======== ========
Market value, end of period............. $ 10.99 $ 11.09 $ 9.27 $ 9.88 $ 17.63
======== ======== ======== ======== ========
TOTAL RETURN
Per share market value.................. (0.90)% 19.63% (6.17)% (43.16)% (3.75)%
RATIO AND SUPPLEMENTAL DATA
Net assets, end of period (000
omitted)............................... $209,166 $210,949(c) $186,032(c) $176,945(c) $351,741(c)
Ratio of expenses to average net
assets(b).............................. 2.07% 2.05%(c) 2.20%(c) 2.69%(c) 2.28%(c)
Ratio of expenses to average net assets,
excluding stock dividend tax expense... 1.82% 1.76%(c) 1.98%(c) 2.21%(c) 1.92%(c)
Ratio of net investment income (loss) to
average net assets..................... 0.21% 0.01%(c) (0.97)%(c) (1.56)%(c) (1.52)%(c)
Portfolio turnover rate................. 76% 148% 167% 125% 139%
(a) Based on average shares outstanding during the period.
(b) Expense ratio includes 20% tax paid on stock dividends received by the
Fund.
(c) Restated (Note 6).
(d) Unaudited.
The accompanying notes are an integral part of the financial statements. 15
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 by legal
proceedings.
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
16
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 measured by the difference between the forward foreign
exchange rates at the dates of entry into the contracts and the rates at the
reporting date. 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, 2004, the Fund had no open
Forwards.
Indemnification Obligations. Under the Trust's organizational documents, its
Officers and Trustees are indemnified against certain liabilities arising out of
the performance of their duties to the Trust. In addition, in the normal course
of business the Trust enters into contracts that provide general
indemnifications to other parties. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust 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 or, for
certain dividends from foreign securities, when 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
amortization of premiums and accretion of discounts on debt securities, 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. 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
17
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - continued
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 the Fund's components of net assets and
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
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, 2004, purchases and sales of securities,
other than short-term securities, aggregated $161,200,856 and $162,482,929,
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 +/-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, 2004, the management fee, including the
performance adjustments, was equivalent to an annual rate of 1.02% 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
director or officer 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, 2004, 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, 2004. As of August 31, 2004, the components of distributable earnings
on a tax basis were $498,083 of Undistributed Ordinary Income, $0 of
Undistributed Long-Term Capital Gain, $34,092,984 of Unrealized Appreciation and
($70,271,664) 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.
18
NOTES TO FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
6. PRIOR PERIODS RESTATEMENT
The Fund has 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 that stipulated in the
management contract and resulted in overpayments being made to the investment
adviser. The Fund recorded a receivable at August 31, 2004 for these net
overpayments. 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)%
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
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, 2004, and
the related statement of operations for the year then ended, 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 four-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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 by correspondence with the custodian. As
to securities purchased or sold but not yet received or delivered, we performed
other appropriate auditing procedures. 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, 2004, the results of its operations for the
year then ended, 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
four-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
[KPMG LOGO]
Boston, Massachusetts
October 27, 2004
20
OTHER INFORMATION (unaudited)
--------------------------------------------------------------------------------
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, 2004, 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 votes these
proxies is now available by calling the same number and on the Commission's
website. The Fund has filed its first report on Form N-PX covering the Fund's
proxy voting record for the 12-month period ending June 30, 2004.
QUARTERLY PORTFOLIO ON INVESTMENTS
Beginning November 30, 2004, a Portfolio of Investments will be filed as of the
end of the first and third quarter of each fiscal year on Form N-Q and will be
available on the Securities and Exchange 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, DC.
Information on the operation of the Public Reference Room may be obtained by
calling 1.800.SEC.0330. The quarterly Portfolio of Investments will be made
available with out charge, upon request, by calling 866.443.6337.
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 (80) 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 Vice-Chancellor, The Director, Media
Room 101, University Chinese University of Partners International
Administration Hong Kong (July 1, 2004- Holdings, Inc.
Building, present); Kwoh-Ting Li (2001-2004)
The Chinese University Professor of Economic
of Hong Kong, Development, Stanford
Shatin, New Territories University
Hong Kong, China (1992-present);
Director, Stanford
Institute for Economic
Policy Research at
Stanford University
(1997-1999)
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
------------- -------------- -------- ------------------------ -----------------------
Joe O. Rogers (55) 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)
Jack C. Tang (75) Director 1989 Honorary Chairman (April --
Tristate Holdings Ltd. 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 Canavan, Director 2003 Independent Consultant Director and Chairman
Jr. (66) (2000-present); Partner, of Audit Committee,
73 Brook Street Pricewaterhouse Coopers Bruker Biosciences,
Wellesley, MA 02482 LLP (Coopers & Lybrand) Inc.
(1972-1999)
Anthony Kai Yiu Lo (55) Director 2003 Founder and Director, Member of Listing
1201 Sun Hung Kai Advantage Ltd. (August Committee, Stock
Centre 2004-present); Founder Exchange of Hong Kong
30 Harbor Road and Managing Director, Ltd. (1996-present)
Wanchai, Hong Kong Advantage Ltd. (1999-
August 2004); Vice
Chairman, ABN Amro HG
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
------------- -------------- -------- ------------------------ -----------------------
*Benny T. Hu (54) President and 1993 Chairman, China Director, Compal
30 F, 99 Tun Hwa Director Development Industrial Electronics Inc. (2003-
South Road, Section 2 Bank (June present); Supervisor,
Taipei, Taiwan, ROC 2003-present); Chairman, Winbond Electronics
China Development Asset Corp. (2002-present);
Management Corp. (June Director, China
2001-present); Development Financial
Ambassador-at-Large, Holding Corp. (June
Republic of China (May 2001-present)
2001-present)
**Adelina N.Y. Louie Secretary and 2004 Vice President, Custody --
(38) Treasurer & Clearing, HSBC
99 Tun Hwa South (Philippines) Ltd. (May
Road, Section 2 1998-June 2000); Senior
Taipei, Taiwan, ROC Vice President, Custody
& Clearing, HSBC
(Indonesia) Limited
(June 2000-February
2002) Area Commercial
Manager, HSBC (U.K.)
Ltd. (February
2002-February 2004)
Chief Operating Officer,
HSBC Asset Management
(Taiwan) Ltd. (March
2004-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);
---------------
* 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. Hu is considered to be an interested
person because he is the President of the Fund.
** Ms. Carol Wang resigned as the Fund's Secretary and Treasurer effective May
25, 2004 and Adelina Louie was elected by the Board of Directors as the new
Secretary and Treasurer of the Fund on the same day.
*** Ms. Gloria Wang resigned as President of HSBC Asset Management (Taiwan)
Limited and Director of the Fund effective June 30, 2004. Ms. Wang is deemed
to be an interested person because of her affiliation with the Fund's
investment adviser.
26
--------------------------------------------------------------------------------
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
Lawrence F. Weber, Director
M. Christopher Canavan, Jr., Director
Anthony Kai Yiu Lo, Director
Adelina N.Y. Louie, Secretary and Treasurer
Leonard B. Mackey, Jr., 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 REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
Boston, MA
ITEM 2. CODE OF ETHICS.
(a) The registrant has adopted a code of ethics (the "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 11(a).
(b) No information need be disclosed pursuant to this paragraph.
(c) The registrant has not amended the Code of Ethics during the period covered
by the shareholder report presented in Item 1 hereto.
(d) The registrant has not granted a waiver or an implicit waiver from a
provision of its Code of Ethics.
(e) Not applicable.
(f) (1) The Code of Ethics is attached hereto as Exhibit 11(a).
(2) Not applicable.
(3) Not applicable.
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.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2004
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES.................................. $47,500 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES................. $47,500(2) $ --
TAX FEES........................... $10,500(3) $ --
ALL OTHER FEES..................... $ -- $ --
TOTAL NON-AUDIT FEES........................ $58,000 $ --
TOTAL....................................... $105,500 $ --
2003
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES.................................. $45,000 N/A
3
NON-AUDIT FEES
AUDIT-RELATED FEES................. $ 5,000(2) $ --
TAX FEES........................... $ 9,500(3) $ --
ALL OTHER FEES..................... $ -- $ --
TOTAL NON-AUDIT FEES........................ $14,500 $ --
TOTAL....................................... $59,500 $ --
-----------------
N/A- Not applicable, as not required by Item 4.
(1) "Covered Entities" include the registrant's investment adviser
(excluding any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another
investment adviser) and any entity controlling, controlled by
or under common control with the registrant's adviser that
provides ongoing services to the registrant.
(2) 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
amounting to $6,000 in 2004 and $5,000 in 2003. The 2004
amounts also include agreed-upon procedures engagements
performed to the registrant's performance calculations
(recalculation of the registrant's performance) included in
its monthly reports posted to the registrant's website. Total
fees received for the agreed-upon procedures engagements were
$41,500, of which $20,000 was paid by the registrant's service
providers and not charged to the registrant.
(3) Tax Fees represent fees received for tax compliance services
provided to the registrant, including the review of tax
returns.
(e)(1) Before the registrant's principal accountant is engaged to render audit
or non-audit services to the registrant and non-audit services to the
registrant's investment adviser and its affiliates, each engagement is
approved by the registrant's audit committee.
(e)(2) 100% of the services described in each of (b) through (d) of this Item
4 were approved by the registrant's audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) See table above.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to Covered Entities that were not pre-approved pursuant to
paragraph (C)(7)(ii) of Rule 2-01 of
4
Regulation S-X is compatible with maintaining the auditors'
independence in performing audit services.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately-designated standing audit committee established
in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the
audit committee are as follows: M. Christopher Canavan, Jr., David Dean, Anthony
Kai Yiu Lo, Joe O. Rogers, Jack C. Tang, Shao-Yu Wang and Lawrence F. Weber.
ITEM 6. SCHEDULE OF INVESTMENTS.
A Schedule of Investments is included as part of the report to shareholders
filed under Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT 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 11(c).
ITEM 8. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
REGISTRANT PURCHASES OF EQUITY SECURITIES
Period (a) (b) (c) (d)
Total Number of Average Price Total Number of Shares Maximum Number (or Approximate
Shares (or Units) Paid per Share (or Units) Purchased Dollar Value) of Shares (or
Purchased (or Unit) as Part of Publicity Units) that may yet be
Announced Plans or Purchased Under the Plans or
Programs Programs
September 0 N/A 0 0
October 0 N/A 0 0
November 0 N/A 0 0
December 0 N/A 0 0
January 0 N/A 0 0
February 0 N/A 0 0
March 0 N/A 0 0
April 0 N/A 0 0
5
0 N/A 0 0
May
June 0 N/A 0 0
July 0 N/A 0 0
August 0 N/A 0 0
Total 0 N/A 0 0
ITEM 9. 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.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Within 90 days of the filing date of this Form N-CSR, Benny T. Hu, the
registrant's President, and Adelina Louie, 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. Louie
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) Following the discovery of errors in the calculation of the registrant's
management fee performance adjustments dating back to the period when the
registrant first began recording management fee performance adjustments, the
registrant's administrator, investment adviser and management have modified the
procedures used to determine such performance adjustments. Going forward, the
registrant's administrator will calculate the monthly management fee performance
adjustments based on the average net assets of the registrant over the period
stipulated in the management contract. The registrant's investment adviser will
independently calculate the registrant's management and performance fees for
comparison with the administrator's records, and the registrant's management
will review the administrator's monthly calculation of such fees to ensure
adherence to the management contract. When conducting their semi-annual review,
the registrant's independent auditors will verify that the management and
performance fees accrued to the registrant during the period are reflective of
the policy set forth in the management contract.
ITEM 11. 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 Section 906 of the Sarbanes-Oxley Act of 2002 are attached
hereto.
(c) Proxy Voting Guidelines.
6
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 9, 2004
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/ Adelina Louie
------------------
Adelina Louie
Treasurer of The Taiwan Fund, Inc.
Date: November 9, 2004
7