UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-04893
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THE TAIWAN FUND, INC.
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(Exact name of registrant as specified in charter)
225 FRANKLIN STREET
BOSTON, MA 02110
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(Address of principal executive offices)(Zip code)
(Name and Address of Agent for Service) Copy to:
State Street Bank and Trust Company
Attention: Mary Moran Zeven Leonard B. Mackey, Jr., Esq.
Assistant Secretary Clifford Chance US LLP
225 Franklin Street 31 West 52nd Street
Boston, Massachusetts 02110 New York, New York 10019-6131
Registrant's telephone number, including area code: 1-800-636-9242
Date of fiscal year end: August 31
Date of reporting period: February 28, 2006
ITEM 1. REPORT TO STOCKHOLDERS.
THE TAIWAN
FUND, INC.(R)
Semi-Annual Report
February 28, 2006
(Unaudited)
THE TAIWAN
FUND INC.
WHAT'S INSIDE
Page
----
Chairman's Statement 2
Report of the Investment Manager 4
Portfolio Snapshot 10
Industry Allocation 11
Investments 12
Financial Statements 14
Notes to Financial Statements 17
Other Information 21
Summary of Dividend 26
Reinvestment and
Cash Purchase Plan
CHAIRMAN'S STATEMENT
--------------------------------------------------------------------------------
Dear Shareholders:
It is my pleasure to announce that The Taiwan Fund, Inc. (the "Fund") finished
the six months ended February 28, 2006 on a positive note, delivering a 13.3%
return for the period. In comparison, the Taiwan Stock Exchange Index rose by
9.8% in U.S. dollar terms for the same period.
Taiwan's economy grew 6.4% in the fourth quarter, up from 4.4% in the third
quarter of 2005. The strong economic results in the fourth quarter raised the
island's overall annual gross domestic product growth for 2005 to 4.1%. This was
the largest improvement recorded over the past 18 months, fueled by significant
growth in electronics exports and an improving unemployment rate that, in turn,
has spurred domestic spending. In 2006, we anticipate Taiwan's economy to
continue to benefit from a moderate global economy, complemented by recovery in
demand for Information Technology products at home and abroad.
Mr. Lawrence F. Weber retired from the Board of the Fund at the January 2006
Shareholder's Meeting, after having served as a Board member, as well, as a
member of the Fund's Audit Committee since 1995. We thank him for his
contributions to the Fund over the past eleven years and wish him all the best.
On behalf of the Board, I would like to thank you for your continued investment
and support. This year, we will continue to focus on enhancing shareholder value
through dynamic investment strategies, and we look forward to sharing with you
the results of the Fund over the longer term.
Sincerely,
/s/ Harvey Chang
Harvey Chang
Chairman
2
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3
REPORT OF THE INVESTMENT MANAGER
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INVESTMENT PERFORMANCE
The Fund's net asset value (NAV) increased by 13.3% in U.S. dollar terms from
September 1, 2005 to February 28, 2006. During the same period, the Taiwan Stock
Exchange Index (TAIEX) increased by 9.8% in U.S. dollar terms. The Fund
outperformed the TAIEX by 3.2% during the period. The Fund's positive
performance relative to the TAIEX during the period was largely attributable to
overweight positions in the printed circuit board (PCB) substrate and
communication sectors, as well as overweight positions in such stocks as Honhai
Precision and Asustek.
ECONOMIC OUTLOOK
In light of rising exports, recovering production activity and rebounding
financial indicators, we expect the upward trend of Taiwan's economy to continue
through the next few months. With the peak export season now over and after the
U.S. Federal Reserve's fourteen consecutive interest rate hikes, the global
monetary environment would now appear to be neutral. The World Bank forecasts
global economic growth to be 3.2% in 2006, following growth of 3.2% in 2005. We
expect that U.S. consumption will remain stable in 2006 and China's domestic
consumption will continue to grow at higher rates than previous years. Taiwan's
exports will likely continue to benefit from the increasing demand in these two
major export markets. Taiwan's economy could also benefit from a possible
relaxation of the island's restrictions on Chinese tourist visits.
Despite China's rising economic might, the United States remains Taiwan's
primary export driver. In 2005, China accounted for 37.8% of Taiwan's exports
while the United States only accounted for 15.1%. However, Taiwan's exports and
export orders indicate that U.S. orders have increasingly been outsourced
overseas, at a present weighting of 62.6% (up from 19.7% in 1995). We believe
the bulk of these U.S. orders went to China. Taking this into consideration, we
believe the United States remains Taiwan's largest export destination.
Taiwan's economic growth appears to have bottomed out in the first quarter of
2005, but a recovery appears on track. Economic data shows that Taiwan is
undergoing a mild recovery. We expect a modest recovery in export growth coupled
with a steady increase in consumption and resilient investment to support
economic expansion at a rate of 4.3% in 2006. Trade growth is expected to
increase slightly in 2006 as
4
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we expect exports to return to a modest upward trend along with the global
technology recovery. Export growth is expected to be 8.0% and import growth is
expected to be 6.5% in 2006, after growth rates of 6.1% and 4.4%, respectively,
in 2005. Taiwan's consumer price index is expected to increase by 2.4% in 2006
after a 2.3% increase in 2005, mainly due to the possible rise of water and
power fees along with continuing high oil and raw material prices.
Taiwan's real GDP for the fourth quarter of 2005 expanded at 6.4%. GDP growth
for 2005 stood at 4.1%, which was higher than the market forecast. Taiwan's
government has raised its 2006 GDP growth forecast to 4.3%. As expected, the key
growth driver was the surging external demand that boosted net exports in the
fourth quarter of 2005. However, it was the unexpected contraction in aggregate
domestic demand that caused headline quarterly growth to moderate in the fourth
quarter of 2005. The primary, though not exclusive, factor in the moderate
domestic demand was caused by conservative corporate capital expansion. Though
current export order numbers may suggest that external demand and net exports
will moderate, global demand is forecasted to remain stable. This supportive
environment, which has already led to improvements in employment numbers and
wages, should lead to private consumption growth after the temporary pause in
the fourth quarter of 2005. Private consumption expenditures are expected to
grow by 3.1% in 2006, similar to the 3.1% growth in 2005.
The U.S. Federal Reserve has raised the Federal Funds Rate to 4.5%. Taiwan's
Central Bank has also raised interest rates to 2.25%. When the United States
stops raising its interest rates, the disparity between the interest rates of
the U.S. dollar and New Taiwan (NT) dollar will cease to expand. The double
deficits and hurricane-related reconstruction demand in the United States are
likely to heavily determine the U.S. dollar movement. To maintain price
stability, Taiwan's Central Bank will continue to raise interest rates, but at a
slower pace than the U.S. Federal Reserve so as not to hurt economic growth.
Moreover, Taiwan's short-term and long-term yield curves remain relatively flat,
a condition that argues against further increases in interest rates. Despite the
Central Bank's decision to raise interest rates to combat inflation, the
interest rate level remains at a historical low while the real rate remains
around zero.
5
REPORT OF THE INVESTMENT MANAGER (continued)
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INVESTMENT OUTLOOK
In the second half of 2005, despite robust recovery in exports, a decent rebound
in the technology sector led by Thin-Film Transistor LCD, and net foreign buying
totaling USD $17 billion, the market only went up slightly. Despite all the
foreign buying last year, foreign funds in general remain very underweight on
the Taiwan market. Asia funds (excluding Japan) have on average only 16.6% of
their portfolios invested in Taiwan, versus a neutral benchmark weighting of
20.4%. The fundamental picture of Taiwan remains good. As long as the global
industrial cycle remains robust, this recovery should continue in 2006. Domestic
demand has so far been somewhat sluggish as a result of tightening credit among
banks, however, demand is still forecasted to grow by more than 3.1% in 2006.
With the global industrial cycle likely to improve further, we expect the
economy's momentum to continue.
The market might lack positive catalysts or fundamental surprises in the
upcoming months due to a generally weak sentiment induced by the following
factors: slow season for the technology sector, damage done to the banking
sector's earnings with the rise in the consumer loan delinquency ratio, and the
recent political tension between Taiwan and China. The technology sector's
sustainable sales momentum may not start until June or July of this year.
Although there were expectations that U.S. interest rate hikes may be ending
soon, recent indications of reasonably strong fundamentals and potentially
threatening inflation in the United States seem to suggest that U.S. Federal
Reserve Chairman Ben Bernanke may pursue further increases in the Federal Funds
rate. The liquidity flows into emerging market funds could experience some
slow-down in the coming months, with a potentially negative impact on the
performance of technology sector shares. Despite this, we believe that there is
still little downside risk since domestic liquidity is relatively strong and
should be able to provide the market with further support of technology sector
shares.
We are positive on the market outlook for Taiwan since the strong fundamentals
are matched with the cheapest valuations in the region. Prospective price to
earnings ratio (PER) is only moderately attractive at 12.5 times. What makes the
Taiwan market relatively cheap is its low 10-year bond yield, which is only
1.8%. The spread between the dividend yield and local bond yields is wide
compared to other Asian markets.
6
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- MAJOR CATALYSTS IN 2006
We expect an upturn in the technology cycle in 2006, especially in the second
half of the year. The market also expects the soccer World Cup in late June and
early July to trigger demand for some technology subsectors. Some 3C players aim
to regain market share with aggressive targets, which could further raise market
expectations.
- KEY TECHNOLOGY PRODUCTS, WHICH MIGHT BOOST TECHNOLOGY DEMAND IN 2006
The key products we expect to be in the spotlight for 2006 may not necessarily
be innovations, but may rather be extensions or modifications of existing
products. We believe product extension or product modification can improve
product attractiveness, while intensified competition and falling sales prices
will likely trigger end-consumer demand. Most products we highlight below have
been under preliminary stages of development for the past few years, but are
likely to make meaningful financial contributions this year. (1) Larger flat
panel TVs with higher resolution, and new built-in features such as wireless
connections; and DVD/DVR will be hot products in 2006. (2) Handset sales are
likely to continue to see strong growth in 2006. We are likely to see demand
coming from both extremes: first-time emerging-market buyers and replacement
demand for high-end PDA phones/smart phones/3G handsets. (3) Home media centers
are the focus of both IT and consumer electronics vendors. (4) GPS navigation
may also be one of the hottest products for 2006. Since GPS can be embedded on
their PDA, personal media players (PMP) and car entertainment systems, we expect
competition to intensify between players in different tech subsectors. (5) The
battle of the game consoles is likely to intensify between Xbox 360 and PS3
(planned for launch in the third quarter of 2006). Considering all these
industry trends, most semiconductor companies are upbeat about the industry
outlook in 2006.
CHINA BENEFICIARIES
The International Monetary Fund (IMF) forecasts that China's GDP will grow by
8.2% Year-on-Year in 2006, following 9.9% Year-on-Year growth in 2005. In 2005,
China's economic growth mainly came from investments and exports, with steady
contribution from consumption. Based on year-end data, investment remains high,
export growth continues to slow, and consumption is growing at a moderate pace.
With the growing consumption, we expect companies with exposure to
7
REPORT OF THE INVESTMENT MANAGER (continued)
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China's domestic demand such as the retail, auto and cement industries to be the
major beneficiaries in 2006.
INVESTMENT STRATEGY
We believe that Taiwanese companies will post approximately 22% profit growth in
2006, which will mainly come from the high profit growth in the technology
sector, with more than 45% Year-on-Year growth forecasted. (Companies in TFT,
Integrated Circuit assembly and testing, substrates, handsets and notebook
components are expected to be contributors to the profit growth.) Taiwanese
companies are positioned to reap significant benefits due to their strong
manufacturing abilities. Moreover, demand coming from emerging markets has
increasingly become an important driver of global demand, especially in the
low-priced consumer electronics segments. Taiwanese companies are well
positioned to benefit as major global companies continue to accelerate their
outsourcing plans. Telecom and retail shares should provide some downside
protection due to high cash yields (5% to 9%). Oil refinery firms are likely to
benefit from favorable oil prices in the next 12 months. However, with the
continued deterioration of unsecured individual loans and the possible
Parliamentary approval of a personal bankruptcy law this year, the financial
sector's fundamentals may be depressed while share price performance may be
relatively flat. Thus, we expect to underweight the financial sector in the
coming months.
We have a positive outlook on the market, as valuations are compelling, earnings
momentum is strong, dividend yields are generous, and the global technology
cycle is improving. Taiwan stocks look inexpensive in the regional context with
an estimated dividend yield of higher than 4%. However, overall 2006 should be a
good year for technology stocks, driven by new product applications. We will
overweight technology sectors in the coming months and underweight financial
sectors and industrial cyclical sectors as cyclical sectors have not reached the
end of the current downturn cycle. We expect that the market may have a 10% to
15% upside in the coming 12 months, implying a price to earnings ratio (PER) of
12.5 times, and a price to book ratio (PBR) of 1.9 times in 2006. We see new
product launches and a seasonal uptrend in the second half of 2006 acting as
catalysts for share prices. We hold a positive outlook for the end of the second
half of 2006, considering that technology demand may increase and tough
financial times may have passed by then. Our current strategy will be to
maintain the exposure with companies that show strong fundamentals in the second
8
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half of 2006 and beyond, such as IC design, handset and LCD TV beneficiaries.
To conclude, we expect investors to receive reasonable rewards from positive
results of certain sectors. In the year ahead, we intend to maintain exposure in
high-beta stocks to take advantage of the diverse themes and achieve better
investment returns. We will continue to pursue superior performance through a
process of bottom-up stock selection. We are confident that the Taiwanese stock
market and the 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/ Steven Chan
Victor Shih Steven Chan
Portfolio Manager Deputy Portfolio Manager
9
PORTFOLIO SNAPSHOT*
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TOP TEN EQUITY HOLDINGS
HOLDINGS AS OF FEBRUARY 28, 2006 %
--------------------------------------------------
Hon Hai Precision Industry Co. Ltd. 7.2
--------------------------------------------------
MediaTek, Inc. 6.1
--------------------------------------------------
Taiwan Semiconductor Manufacturing Co. 4.7
--------------------------------------------------
Tripod Technology Corp. 4.4
--------------------------------------------------
Asustek Computer, Inc. 4.3
--------------------------------------------------
Siliconware Precision Industries Co. 4.3
--------------------------------------------------
Cheng Uei Precision Industry Co. Ltd. 3.9
--------------------------------------------------
Au Optronics Corp. 3.7
--------------------------------------------------
Catcher Technology Co. Ltd. 3.7
--------------------------------------------------
Chi Mei Optoelectronics Corp. 3.6
--------------------------------------------------
TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF FEBRUARY 28, 2006 %
--------------------------------------------------
PC & Peripherals 18.0
--------------------------------------------------
Semiconductor Manufacturing 16.9
--------------------------------------------------
IC Design 15.3
--------------------------------------------------
Electronic Components 11.0
--------------------------------------------------
Telecommunications 10.0
--------------------------------------------------
TFT-LCD 7.4
--------------------------------------------------
Financial Services 6.7
--------------------------------------------------
Plastics 4.3
--------------------------------------------------
Iron & Steel 2.6
--------------------------------------------------
Memory IC 1.8
--------------------------------------------------
TOP TEN EQUITY HOLDINGS
HOLDINGS AS OF AUGUST 31, 2005 %
--------------------------------------------------
MediaTek, Inc. 7.0
--------------------------------------------------
Hon Hai Precision Industry Co. Ltd. 5.6
--------------------------------------------------
Silicon Integrated System Corp. 4.8
--------------------------------------------------
Taiwan Semiconductor Manufacturing Co. 4.7
--------------------------------------------------
Chi Mei Optoelectronics Corp. 4.5
--------------------------------------------------
Asustek Computer, Inc. 4.5
--------------------------------------------------
Au Optronics Corp. 3.8
--------------------------------------------------
Tripod Technology Corp. 3.8
--------------------------------------------------
Powerchip Semiconductor Corp. 3.7
--------------------------------------------------
Chinatrust Financial Holding Co. Ltd. 3.6
--------------------------------------------------
TOP TEN EQUITY INDUSTRY WEIGHTINGS
WEIGHTINGS AS OF AUGUST 31, 2005 %
--------------------------------------------------
PC & Peripherals 20.1
--------------------------------------------------
IC Design 14.6
--------------------------------------------------
Electronics 10.9
--------------------------------------------------
TFT-LCD 10.2
--------------------------------------------------
Semiconductor Manufacturing 9.1
--------------------------------------------------
Financial Services 6.7
--------------------------------------------------
Electronic Components 6.5
--------------------------------------------------
Telecommunications 5.8
--------------------------------------------------
Memory IC 3.7
--------------------------------------------------
Iron & Steel 3.5
--------------------------------------------------
* Percentages based on total investments at February 28, 2006 and August 31,
2005.
10
INDUSTRY ALLOCATION
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SECTOR ALLOCATION (AS A PERCENTAGE OF TOTAL INVESTMENTS)
11
(PIE CHART)
Other 4.9%
Basic Industries 8.0%
Finance 6.7%
Technology 80.4%
Fund holdings are subject to change and percentages shown above are based on
total investments as of February 28, 2006. The pie chart illustrates the
allocation of the investments by sector. A complete list of holdings as of
February 28, 2006 is contained in the Portfolio of Investments included in this
report. The most currently available data regarding portfolio holdings and
industry allocation can be found on our website, www.thetaiwanfund.com. You may
also obtain updated holdings by calling (800)-636-9242.
12
THE TAIWAN FUND, INC.
INVESTMENTS/FEBRUARY 28, 2006 (SHOWING PERCENTAGE OF TOTAL VALUE OF
INVESTMENT IN SECURITIES) (UNAUDITED)
--------------------------------------------------------------------------------
US$
VALUE
SHARES (NOTE 1)
------ --------
COMMON STOCKS -- 95.1%
BASIC INDUSTRIES -- 8.0%
AUTOMOBILES, TIRES &
ACCESSORIES -- 0.6%
China Motor Corp. ................... 1,400,000 $ 1,579,020
------------
ELECTRIC & MACHINERY -- 0.5%
Depo Auto Parts Industrial Co.
Ltd. .............................. 350,000 1,332,029
------------
IRON & STEEL -- 2.6%
China Steel Corp. ................... 8,000,000 7,284,942
------------
PLASTICS -- 4.3%
Formosa Petrochemical Corp. ......... 2,600,000 4,655,090
Nan Ya Plastics Corp. ............... 5,000,000 7,103,126
------------
11,758,216
------------
TOTAL BASIC INDUSTRIES............... 21,954,207
------------
FINANCE -- 6.7%
FINANCIAL SERVICES -- 6.7%
Cathay Financial Holding Co. Ltd. ... 5,000,000 9,645,460
Chinatrust Financial Holding Co.
Ltd. ............................... 10,166,000 8,552,466
------------
TOTAL FINANCE........................ 18,197,926
------------
TECHNOLOGY -- 80.4%
ELECTRONIC COMPONENTS -- 11.0%
Kinsus Interconnect Technology
Corp. .............................. 3,000,000 9,106,177
Phoenix Precision Technology
Corp. .............................. 2,000,000 4,086,224
Tripod Technology Corp. ............. 3,800,000 12,061,447
Unimicron Technology Corp. .......... 4,000,000 4,745,690
------------
29,999,538
------------
IC DESIGN -- 15.3%
MediaTek, Inc. ...................... 1,600,000 16,542,118
Novatek Microelectronics Corp.
Ltd. ............................... 1,300,000 9,053,790
Realtek Semiconductor Corp. ......... 3,000,000 3,318,901
Sitronix Technology Corp. ........... 1,500,000 4,922,883
Sunplus Technology Co. Ltd. ......... 4,800,000 5,820,557
System General Corp. ................ 1,000,000 2,166,376
------------
41,824,625
------------
US$
VALUE
SHARES (NOTE 1)
------ --------
MEMORY IC -- 1.8%
Powerchip Semiconductor Corp. ....... 8,000,000 $ 4,918,260
------------
PC & PERIPHERALS -- 18.0%
Asustek Computer, Inc. .............. 4,100,000 11,636,493
Catcher Technology Co. Ltd. ......... 1,280,000 10,137,286
Foxconn Technology Co. Ltd. ......... 1,540,000 7,521,918
Hon Hai Precision Industry Co.
Ltd. ............................... 3,104,000 19,704,596
------------
49,000,293
------------
SEMICONDUCTOR MANUFACTURING -- 16.9%
Advanced Semiconductor Engineering
Inc. .............................. 3,800,000 3,161,739
CHIPBOND Technology Corp. ........... 1,300,000 1,878,862
International Semiconductor
Technology Ltd. .................... 4,200,000 5,034,745
Powertech Technology Inc. ........... 2,400,000 7,765,674
Siliconware Precision Industries
Co. ................................ 9,000,000 11,620,776
Taiwan Semiconductor Manufacturing
Co. ................................ 6,800,000 12,761,591
Thailin Semiconductor Corp. ......... 5,000,000 3,790,388
------------
46,013,775
------------
TELECOMMUNICATIONS -- 10.0%
Cheng Uei Precision Industry Co.
Ltd. .............................. 3,300,000 10,525,261
Epistar Corp. ....................... 3,800,000 6,768,463
High Tech Computer Corp. ............ 400,000 8,714,812
Wistron NeWeb Corp. ................. 500,000 1,348,207
------------
27,356,743
------------
TFT-LCD -- 7.4%
Au Optronics Corp. .................. 6,213,000 10,166,571
Chi Mei Optoelectronics Corp. ....... 6,500,000 9,955,162
------------
20,121,733
------------
TOTAL TECHNOLOGY..................... 219,234,967
------------
TOTAL COMMON STOCKS
(Identified Cost -- $179,234,573)... 259,387,100
------------
12 The accompanying notes are an integral part of the financial statements.
INVESTMENTS/FEBRUARY 28, 2006 (unaudited) (continued)
--------------------------------------------------------------------------------
PRINCIPAL US$
AMOUNT VALUE
NT$ (NOTE 1)
--------- --------
COMMERCIAL PAPER -- 4.4%
China Airlines (a)................... 99,300,108 $ 3,060,049
China Development Industrial Bank
(a)................................. 19,926,962 614,073
Grand Bills Finance Corp. (a)........ 24,864,505 766,229
Land Bank (a)........................ 99,888,493 3,078,180
The First Commercial Bank:
1.4250%, 04/12/2006 (a)............. 49,823,297 1,535,363
1.4000%, 04/12/2006 (a)............. 99,710,199 3,072,686
------------
TOTAL COMMERCIAL PAPER
(Identified Cost -- $12,049,150).... 12,126,580
------------
MATURITY
AMOUNT
US$
--------
REPURCHASE AGREEMENT -- 0.5%
State Street Bank and Trust Co.
2.15% dated 2/27/06 due 3/6/06
(collateralized by U.S. Treasury
Note 2.625%, 5/15/08, market value
$1,378,669)....................... $1,349,564 $ 1,349,000
------------
TOTAL INVESTMENTS -- 100.0%
(Cost -- $192,632,723).............. $272,862,680
============
Other Assets and Liabilities, net.... (67,731)
------------
Net Assets........................... $272,794,949
============
LEGEND:
NT$ - New Taiwan dollar
US$ - United States dollar
(a) Certificates of Deposit and Commercial Paper that are traded through Bills
Finance Corporations must be guaranteed by either a bank, a trust company or
a Bills Finance Corporation. Since there is no recognized credit rating
system in the Republic of China, the guarantee may not be comparable to a
guarantee issued by a U.S. institution.
INCOME TAX INFORMATION:
At February 28, 2006, the aggregate cost basis of the Fund's investment
securities for income tax purposes was $192,632,723.
Net unrealized appreciation of the Fund's investment securities was $80,229,957
of which $84,644,909 related to appreciated investment securities and $4,414,952
related to depreciated investment securities for the semi-annual period ended
February 28, 2006. In addition, as of August 31, 2005, the Fund's last fiscal
year end, the Fund had a capital loss carryforward of ($61,467,359) for Federal
income tax purposes which may be utilized to offset future capital gains through
August 31, 2010 ($37,466,000) and August 31, 2011 ($24,001,359).
The accompanying notes are an integral part of the financial statements. 13
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
February 28, 2006 (Unaudited)
ASSETS
Investments in securities, at value
(cost $192,632,723) (Notes 1 and
2) - See accompanying schedule........ $272,862,680
Cash.................................... 5,248
Cash in New Taiwan dollars (cost
$1,489,009)............................ 1,490,638
Interest receivable..................... 26,327
Other Assets............................ 39,313
------------
Total assets........................... 274,424,206
------------
LIABILITIES
Payable for investments purchased....... 1,347,105
Accrued management fee (Note 3)......... 248,906
Taiwan withholding tax payable (Note
1)..................................... 5,184
Other payables and accrued expenses..... 28,062
------------
Total liabilities.................... 1,629,257
------------
NET ASSETS.............................. $272,794,949
============
Net Assets consist of (Note 1):
Paid in capital......................... 252,776,094
Undistributed net investment loss....... (1,775,831)
Accumulated undistributed net realized
loss on investments in securities and
foreign currency....................... (58,435,672)
Net unrealized appreciation on
investment securities and foreign
currency............................... 80,230,358
------------
NET ASSETS.............................. $272,794,949
============
NET ASSET VALUE, per share
($272,794,949/ 16,365,572 shares
outstanding)........................... $16.67
============
STATEMENTS OF OPERATIONS
Six Months Ended February 28, 2006 (Unaudited)
INVESTMENT INCOME
Dividends................................. $ 195,293
Interest.................................. 69,194
-----------
264,487
Less: Taiwan withholding tax (Note 1)..... (13,131)
-----------
Total Income............................. 251,356
EXPENSES:
Management fee (Note 3)
Basic fee................................ $ 1,658,797
Performance adjustment................... (375,554)
Custodian fees and expenses............... 202,452
Administration and accounting fees (Note
3)....................................... 128,377
Directors compensation (Note 3)........... 134,106
Legal..................................... 88,382
Audit..................................... 36,711
Shareholder communications................ 38,248
Insurance fees............................ 49,125
Delaware franchise tax.................... 29,520
Miscellaneous............................. 14,621
Transfer agent fees....................... 9,366
Taiwan stock dividend tax (Note 1)........ 12,884
-----------
Total expenses........................... 2,027,035
-----------
NET INVESTMENT LOSS...................... (1,775,679)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 1)
Net realized gain (loss) on:
Investment securities.................... 3,155,451
Foreign currency transactions............ (55,233)
-----------
3,100,218
Change in net unrealized appreciation
(depreciation) on:
Investment securities.................... 30,723,149
Assets and liabilities denominated in
foreign currencies..................... 50,015
-----------
30,773,164
-----------
Net realized and unrealized gain.......... 33,873,382
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................... $32,097,703
===========
14 The accompanying notes are an integral part of the financial statements.
FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended Year Ended
February 28, 2006 August 31, 2005
----------------- ---------------
(Unaudited)
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment gain (loss)................................. $ (1,775,679) $ 1,049,602
Net realized gain on investments and foreign currency
transactions............................................. 3,100,218 16,684,383
Change in net unrealized appreciation on investments and
foreign currency transactions............................ 30,773,164 15,152,035
------------ ------------
Net increase in net assets resulting from operations....... 32,097,703 32,886,020
------------ ------------
Distributions to shareholders
From net investment income................................. (856,410) (498,168)
------------ ------------
Total distributions to shareholders........................ (856,410) (498,168)
------------ ------------
Total increase in net assets............................... 31,241,293 32,387,852
------------ ------------
NET ASSETS
Beginning of period........................................ 241,553,656 209,165,804
------------ ------------
End of period.............................................. 272,794,949 241,553,656
============ ============
Undistributed net investment income (loss)
End of period.............................................. $ (1,775,831) $ 856,258
============ ============
The accompanying notes are an integral part of the financial statements. 15
FINANCIAL STATEMENTS (continued)
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Six Months
Ended Year Ended August 31,
February 28, ----------------------------------------------------------------------
2006 2005 2004 2003 2002 2001
------------ ---------- ---------- ---------- ---------- ----------
(Unaudited)
SELECTED PER SHARE DATA
Net asset value, beginning of period.... $ 14.76 $ 12.78 $ 12.89(c) $ 11.37(c) $ 10.81(c) $ 21.49(c)
---------- ---------- ---------- ---------- ---------- ----------
Income from Investment Operations
Net investment income (gain) (a)....... (0.11) 0.06 0.03 0.00(c) (0.12)(c) (0.22)(c)
Net realized and unrealized gain (loss)
on investments....................... 2.07 1.95 (0.14) 1.52 0.68 (10.26)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations....... 1.96 2.01 (0.11) 1.52(c) 0.56(c) (10.48(c)
---------- ---------- ---------- ---------- ---------- ----------
Less Distributions
From net investment income............. (0.05) (0.03) -- -- --
From net realized gains................ -- -- -- -- -- (0.20)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions.................... (0.05) (0.03) -- -- -- (0.20)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period.......... $ 16.67 $ 14.76 $ 12.78 $ 12.89(c) $ 11.37(c) $ 10.81(c)
========== ========== ========== ========== ========== ==========
Market value, end of period............. $ 16.09 $ 13.34 $ 10.99 $ 11.09 $ 9.27 $ 9.88
========== ========== ========== ========== ========== ==========
TOTAL RETURN
Per share market value.................. 21.01% 21.68% (0.90)% 19.63% (6.17)% (43.16)%
RATIO AND SUPPLEMENTAL DATA
Net assets, end of period (000
omitted)............................... $ 272,795 $ 241,554 $ 209,166 $ 210,949(c) $ 186,032(c) $ 176,945(c)
Ratio of expenses to average net assets
(b).................................... 1.59%(e) 2.23%(d) 2.07% 2.05%(c) 2.20%(c) 2.69%(c)
Ratio of expenses to average net assets,
excluding stock dividend tax expense... 1.58%(e) 1.93%(d) 1.82% 1.76%(c) 1.98%(c) 2.21%(c)
Ratio of net investment income (loss) to
average net assets..................... (1.39)%(e) 0.45%(d) 0.21% 0.01%(c) (0.97)%(c) (1.56)%(c)
Portfolio turnover rate................. 55% 80% 76% 148% 167% 125%
(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 5)
(d) Ratio includes one time charge to the Management fees; see Note 3. Without
this charge the ratios would be 2.00%, 1.70% and 0.68%, respectively.
(e) Annualized
16 The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS (unaudited)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Taiwan Fund, Inc. (the "Fund"), a Delaware corporation, is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified
closed-end management investment company.
The Fund is not permitted to invest directly in the securities of Republic of
China ("ROC") companies. Therefore, it invests through a contractual securities
investment trust fund arrangement. This arrangement was established by means of
the Securities Investment Trust, Investment Management and Custodian Contract
("Management Contract") among HSBC Investments (Taiwan) Limited ("Adviser"), the
International Commercial Bank of China ("Custodian") and the Fund. Under the
Management Contract the Adviser manages and invests the assets of the Fund and
the Custodian holds the assets. The Fund is the sole beneficiary of the assets
held under the Management Contract and, as required by ROC regulations, its
interest in the assets is evidenced by units of beneficial interest.
The Fund concentrates its investments in the securities listed on the Taiwan
Stock Exchange. Because of this concentration, the Fund may be subject to
additional risks resulting from future political or economic conditions in
Taiwan and the possible imposition of adverse governmental laws of currency
exchange restrictions affecting Taiwan.
The policies described below are consistently followed by the Fund in the
preparation of its financial statements in conformity with 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. Foreign securities may be valued at fair value according to
procedures approved by the Board of Directors if the closing price is not
reflective of current market values due to trading or events occurring in the
valuation time of the Fund. In addition, substantial changes in values in the
U.S. markets subsequent to the close of a foreign market may also affect the
values of securities traded in the foreign market. The value of foreign
securities may be adjusted if such movements in the U.S. market exceed a
specified threshold. Short-term investments, having a maturity of 60 days or
less are valued at amortized cost, which approximates market value, with accrued
interest or discount earned included in interest receivable.
Repurchase Agreements. In connection with transactions in repurchase
agreements, it is the Fund's policy that its custodian take possession of the
underlying collateral securities, the fair value of which exceeds the principal
amount of the repurchase transaction, including accrued interest, at all times.
If the seller defaults, and the fair value of the collateral declines,
realization of the collateral by the Fund may be delayed or limited.
Foreign Currency Translation. The financial accounting records of the Fund are
maintained in U.S. dollars. Investment securities, other assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at the
current exchange rate. Purchases and sales of securities, income receipts and
expense payments are translated into U.S. dollars at the exchange rate on the
dates of the transactions.
Reported net realized gains and losses on foreign currency transactions
represent net gains and losses from disposition of foreign currencies, currency
gains and losses realized between the trade dates and settlement dates of
security transactions, and the difference between the amount of net investment
income accrued and the U.S. dollar amount actually received. The effects of
changes in foreign currency exchange rates on investments in securities are not
segregated in the Statement of Operations from the effects of changes in market
prices of those securities, but are included in realized and unrealized gain or
loss on investments in securities.
17
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - continued
Forward Foreign Currency Transactions. A forward foreign currency contract
("Forward") is an agreement between two parties to buy or sell currency at a set
price on a future date. The Fund may enter into Forwards in order to hedge
foreign currency risk or for other risk management purposes. Realized gains or
losses on Forwards include net gains or losses on contracts that have matured or
which the Fund has terminated by entering into an offsetting closing
transaction. Unrealized appreciation or depreciation of Forwards is included in
the Statement of Assets and Liabilities and is carried on a net basis. The
portfolio could be exposed to risk of loss if the counterparty is unable to meet
the terms of the contract or if the value of the currency changes unfavorably.
As of February 28, 2006 the Fund had no open Forwards.
Indemnification Obligations. Under the Fund's organizational documents, its
Officers and Directors are indemnified against certain liabilities arising out
of the performance of their duties to the Fund. In addition, in the normal
course of business the Fund enters into contracts that provide general
indemnifications to other parties. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred.
Taxes. As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the extent
that it distributes all of its investment company taxable income and net
realized capital gains for its fiscal year. In addition to federal income tax
for which the Fund is liable on undistributed amounts, the Fund is subject to
federal excise tax on undistributed investment company taxable income and net
realized capital gains.
The Schedule of Investments includes information regarding income taxes under
the caption "Income Tax Information." The Fund is organized in Delaware and as
such is required to pay Delaware an annual franchise tax. Also, the Fund is
currently subject to a Taiwan security transaction tax of 0.3% on equities and
0.1% on mutual fund shares of the transaction amount.
The Fund's functional currency for tax reporting purposes is the New Taiwan
dollar.
Investment Income. Dividend income is recorded on the ex-dividend date, except
where the ex-dividend date may have passed; certain dividends from foreign
securities are recorded as soon as the Fund is informed of the ex-dividend date.
Taiwanese companies typically declare dividends in the Fund's third fiscal
quarter of each year. As a result, the Fund receives substantially less dividend
income in the first half of its year. Interest income, which includes accretion
of original discount, is accrued as earned.
Dividend and interest income generated in Taiwan is subject to a 20% withholding
tax. Stock dividends received (except those which have resulted from
capitalization of capital surplus) are taxable at 20% of the par value of the
stock dividends received.
Distributions to Shareholders. The distributable income from the assets held
under the Management Contract, which is limited to cash dividends and interest
income received, may be distributed to the Fund only once in each year at the
Fund's discretion and is recorded on the ex-dividend date. Realized capital
gains and stock dividends may also be distributed to the Fund. Within the above
limitations the Fund will, under current ROC regulations, be able to remit out
of the ROC the proceeds of income and capital gains distributions, unit
redemptions and other distributions of assets held under the Management
Contract.
The Fund distributes to shareholders at least annually, substantially all of its
taxable ordinary income and expects to distribute its taxable net realized
gains. Certain foreign currency gains (losses) are taxable as ordinary income
and, therefore, increase (decrease) taxable ordinary income available for
distribution. Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders may elect to have all distributions automatically
reinvested in Fund shares. (See the summary of the Plan.) Shareholders who do
not participate in the Plan will receive all distributions in cash paid by check
in U.S. dollars. Income and capital gain distributions are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles.
18
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES - continued
These differences are primarily due to differing treatments for foreign currency
transactions, losses deferred due to wash sales and excise tax regulations.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid in capital.
Security Transactions. Security transactions are accounted for as of the trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
Use of Estimates. The preparation of financial statements in conformity with
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 six months ended February 28, 2006, purchases and sales of securities,
other than short-term securities, aggregated $134,458,232 and $135,831,723,
respectively.
3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management Fee. As the Fund's investment adviser, HSBC Investments (Taiwan)
Limited 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 six months ended February 28, 2006, the management fee, including the
performance adjustments, was equivalent to an annual rate of 1.11% of average
net assets.
Directors Fees. No director, officer or employee of the Adviser or its'
affiliates will receive any compensation from the Fund for serving as an officer
or director of the Fund. The Fund pays each of its directors who is not a
director, officer or employee of the Adviser an annual fee of $15,000 plus
$2,000 for each Board of Directors' meeting or Audit Committee meeting attended,
and $2,000 for each meeting attended by telephone. On July 18, 2005 the Board of
Directors approved an increase in the annual fee from $10,000 to $15,000
effective September 1, 2005. In addition, the Fund will reimburse each of the
directors for travel and out-of-pocket expenses incurred in connection with
Board of Directors' meetings.
Administration Fees. State Street Bank and Trust Company ("State Street")
provides, or arranges for the provision of certain administrative and accounting
services for the Fund, including maintaining the books and records of the Fund,
and preparing certain reports and other documents required by federal and/or
state laws and regulations. The Fund pays State Street a fee at the annual rate
of 0.11% of the Fund's average daily net assets up to $150 million, 0.08% of the
next $150 million, and 0.05% of those assets in excess of $300 million, subject
to certain minimum requirements. The Fund also pays State Street $130,000 per
year for certain legal administration services, including corporate secretarial
services and preparing regulatory filings.
4. FUND SHARES
At February 28, 2006, there were 20,000,000 shares of $0.01 par value capital
stock authorized, of which 16,365,572 were issued and outstanding.
5. PRIOR PERIODS RESTATEMENT
On August 31, 2004, the Fund restated its statement of changes in net assets for
the year ended August 31, 2003 and its financial highlights for the years ended
August 31, 2000 through 2003 to reflect correction of errors in the calculation
of management fee performance adjustments recorded by the Fund during these
years and prior. The incorrect performance adjustments were calculated based on
average net assets of the Fund over a period different than the period over
which average net assets of the Fund should have been calculated as stipulated
in the management contract and resulted in overpayments being made to the
investment adviser. The cumulative effect at September 1, 1999,
19
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
--------------------------------------------------------------------------------
5. PRIOR PERIODS RESTATEMENT - continued
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%
20
OTHER INFORMATION (unaudited)
--------------------------------------------------------------------------------
RESULTS OF ANNUAL STOCKHOLDER MEETING VOTING HELD JANUARY 19, 2006
1.) Election of Directors -- The stockholders of the Fund elected M. Christopher
Canavan, Jr., Harvey Chang, Benny T. Hu, Christina Liu, Anthony Kai Yiu Lo,
Blair Pickerell, Joe O. Rogers and Shao-Yu Wang to the Board of Directors to
hold office until their successors are elected and qualified.
FOR ABSTAINED
--------- ---------
Christina Liu 9,152,046 1,480,594
Harvey Chang 10,511,605 121,035
Shao-Yu Wang 6,834,405 3,798,232
Joe O. Rogers 7,412,487 3,220,153
FOR ABSTAINED
--------- ---------
Anthony Kai Yiu Lo 9,700,605 932,035
M. Christopher Canavan
Jr. 9,700,305 932,335
Benny T. Hu 6,884,110 3,748,530
Blair Pickerell 7,393,570 3,239,070
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 February 28, 2006, no shares have been
repurchased by the Fund since the program has been in place.
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.
21
OTHER INFORMATION (unaudited) (continued)
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that are used by the Fund's
investment adviser to vote proxies relating to the Fund's portfolio securities
is available (1) without charge, upon request, by calling 1-800-636-9242; and
(2) as an exhibit to the Fund's annual report on Form N-CSR which is available
on the website of the Securities and Exchange Commission (the "Commission") at
http://www.sec.gov. Information regarding how the investment adviser voted these
proxies during the most recent 12-month period ended June 30 is available
without change, upon request, by calling the same number and on the Commission's
website.
QUARTERLY PORTFOLIO OF INVESTMENTS
The Fund files with the Commission its complete schedule of portfolio holdings
on Form N-Q for the first and third quarters of each fiscal year. The Fund's
Form N-Q's are available on the Commission's website at http://www.sec.gov.
Additionally, the Portfolio of Investments may be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330. The most recent Form N-Q is available without charge, upon
request, by calling 1-800-636-9242.
BOARD DELIBERATIONS REGARDING APPROVAL OF INVESTMENT ADVISORY AGREEMENTS
GENERAL BACKGROUND
HSBC Investments (Taiwan) Limited (the "Adviser") acts as the Fund's investment
manager pursuant to two agreements: (1) the Securities Investment
Trust -- Investment Management and Custodian Contract (the "Management
Contract") among the Fund, the Adviser, and the International Commercial Bank of
China (the "Custodian"); and (2) the Investment Advisory and Management
Agreement (the U.S. Asset Advisory Agreement") (the Management Contract and the
U.S. Asset Advisory Agreement, together, the "Management Agreements") between
the Fund and the Adviser.
The Fund invests in securities issued by Taiwanese companies through a
securities investment trust fund arrangement established under the Management
Contract pursuant to the laws of the Republic of China ("ROC"). Under the
Management Contract, the Adviser is required to manage the investment of the
Fund's assets held by the Custodian for the exclusive benefit of the Fund. The
Adviser's duties include making investment decisions, supervising the
acquisition and disposition of investments and selecting brokers or dealers to
execute these transactions in accordance with the Fund's investment objective
and policies and within the guidelines and directions established by the Fund's
Board of Directors (the "Board"). The Fund invests a portion of its assets in
U.S. dollar-denominated money market instruments in order to facilitate payment
of expenses and distributions to shareholders. Because ROC regulations do not
permit the Adviser to manage U.S. dollar-denominated investments under the
Management Contract, it is necessary to have a separate agreement between the
Fund and the Adviser relating to these investments. The U.S. Asset Advisory
Agreement serves this purpose. It contains the same duration and termination
provisions as the Management Contract and provides for no additional
compensation to the Adviser.
For its services, the Adviser receives a monthly basic fee, payable in New
Taiwan ("NT") dollars, at an annual rate of 1.30% of the Fund's average daily
net assets (including both Taiwan and U.S. assets). In addition, the basic fee
payable to the Adviser is subject to performance adjustments which may increase
or decrease the basic fee (up to 0.30% per annum of the Fund's average net
assets) on a monthly basis, depending on the performance of the Fund's
investments compared to the performance of the Taiwan Stock Exchange Index
during a rolling performance period of 36 months.
22
OTHER INFORMATION (unaudited) (continued)
--------------------------------------------------------------------------------
The Board is legally required to review and re-approve the Management Agreements
once a year. Throughout the year, the Board considers a wide variety of
materials and information about the Fund, including, for example, the Fund's
investment performance, adherence to stated investment objectives and
strategies, assets under management, expenses, regulatory compliance and
management. The Board periodically meets with senior management and portfolio
managers of the Adviser and reviews and evaluates their professional experience,
credentials and qualifications. This information supplements the materials the
Board received in preparation for the meeting described below.
APPROVAL PROCESS
The Board, including a majority of "independent directors" within the meaning of
the Investment Company Act of 1940, unanimously approved the Management
Agreements at an "in person" meeting held on October 24, 2005. In determining
whether it was appropriate to approve the Management Agreements, the Board
requested information, provided by the Adviser, that it believed to be
reasonably necessary to reach its conclusion. At the Meeting, the Board
discussed issues pertaining to the proposed approval of the Management
Agreements with representatives from the Adviser and with legal counsel. This
information together with the information provided to the Directors throughout
the course of year formed the primary basis for the Directors' determinations.
Prior to the Meeting, the Board met in an executive session for the purpose of
considering the approval of the Management Agreements. During that executive
session, the Directors reviewed a memorandum which detailed the duties and
responsibilities of the Directors with respect to their consideration of the
Management Agreements. The Directors reviewed the contract renewal materials
provided by the Adviser, including, but not limited to (1) an organizational
overview of the Adviser and biographies of those personnel providing services to
the Fund, (2) a copy of each of the Management Contract and the U.S. Asset
Advisory Agreement, (3) a profitability analysis of the Adviser, (4) financial
statements of the Adviser, (5) Form ADV of the Adviser, and (6) performance and
fee comparison data provided by Fundamental Data, a third party vendor of such
information.
MANAGEMENT AGREEMENTS
In deciding whether to renew the Management Agreements, the Directors considered
various factors, including (1) the nature, extent and quality of the services
provided by the Adviser under the Management Agreements, (2) the investment
performance of the Fund, (3) the costs to the Adviser of its services and the
profits realized by the Adviser, from its relationship with the Fund, and (4)
the extent to which economies of scale would be realized if and as the Fund
grows and whether the fee levels in the Management Contract reflect these
economies of scale.
1. Nature, Extent and Quality of the Services provided by the Adviser
In considering the nature, extent and quality of the services provided by the
Adviser, the Directors relied on their prior experience as Directors of the Fund
as well as on the materials provided at the Meeting. They noted that under the
Management Agreements the Adviser is responsible for managing the investment
operations of the Fund in accordance with the Fund's investment objective and
policies, applicable legal and regulatory requirements, and the instructions of
the Directors, for providing necessary and appropriate reports and information
to the Directors, for maintaining all necessary books and records pertaining to
the Fund's securities transactions, and for furnishing the Fund with the
assistance, cooperation, and information necessary for the Fund to meet various
legal requirements regarding registration and reporting. They noted the
distinctive nature of the Fund as investing primarily in equity
23
OTHER INFORMATION (unaudited) (continued)
--------------------------------------------------------------------------------
securities listed on the Taiwan Stock Exchange. They also noted the experience
and expertise of the Adviser as appropriate as an adviser to such Fund.
The Directors reviewed the background and experience of the Adviser's senior
management, including those individuals responsible for the investment and
compliance operations of the Fund, and the responsibilities of the latter with
respect to the Fund. They also considered the resources, operational structures
and practices of the Adviser in managing the Fund's portfolio, in monitoring and
securing the Fund's compliance with its investment objectives and policies and
with applicable laws and regulations, and in seeking best execution of portfolio
transactions. The Directors also considered information about the Adviser's
overall investment management business, noting that the Adviser manages many
funds in the Asia Pacific region. Drawing upon the materials provided and their
general knowledge of the business of the Adviser, the Directors took into
account the fact that the Adviser's experience, resources and strength in these
areas are deep, extensive and of high quality. On the basis of this review, the
Directors determined that the nature and extent of the services provided by the
Adviser to the Fund were appropriate, had been of uniformly high quality, and
could be expected to remain so.
2. Investment Performance of the Fund
The Directors noted that, in view of the distinctive investment objective of the
Fund, the investment performance of the Fund's investments was satisfactory. Of
importance to the Directors was the extent to which the Fund achieved its
objective. Drawing upon information provided at the Meeting and upon reports
provided to the Directors by the Adviser throughout the preceding year, the
Directors determined that the Fund had outperformed the Taiwan Stock Exchange
Capitalization Weighted Stock Index ("TAIEX") for the one-year period ending
September 30, 2005. They further determined that, although the Fund's
performance slightly lagged its benchmark, the Fund's performance for the
three-year period ending September 30, 2005 was almost equal to the TAIEX
benchmark and that the Fund's performance since its inception compared well to
the TAIEX benchmark. They further concluded, on the basis of the limited
universe of comparable funds, that the expense ratios of the Fund were similar,
or lower than, those of their direct competitors. Accordingly, they concluded
that the performance of the Fund was satisfactory.
3. The Costs to the Adviser of its Services and the Profits realized by the
Adviser from its Relationship with the Fund
The Directors considered the profitability of the advisory arrangement with the
Fund to the Adviser. The Directors had been provided with data on the Fund's
profitability to the Adviser for the Fund's last fiscal year. They first
discussed with representatives of the Adviser the methodologies used in
computing the costs that formed the bases of the profitability calculations.
Concluding that these methodologies were reasonable, they turned to the data
provided. After extensive discussion and analysis they concluded that, to the
extent that the Adviser's relationship with the Fund had been profitable, the
profitability was in no case such as to render the advisory fee excessive.
In considering whether the Adviser benefits in other ways from its relationship
with the Fund, the Directors noted that other than the advisory fee, there is no
other investment advisory and brokerage fee received or receivable by the
Adviser or its affiliates from the Fund. The Directors concluded that, to the
extent that the Adviser derives other benefits from its relationship with the
Fund, those benefits are not so significant as to render the Adviser's fees
excessive.
24
OTHER INFORMATION (unaudited) (continued)
--------------------------------------------------------------------------------
4. The Extent to which Economies of Scale would be Realized if and as the Fund
Grows and whether the Fee Levels in the Management Agreements Reflect these
Economies of Scale
On the basis of their discussions with management and their analysis of
information provided at the Meeting, the Directors determined that the nature of
the Fund and its operations is such that the Adviser would not at this time
realize economies of scale in the management of the Fund.
In order to better evaluate the Fund's advisory fee, the Directors had requested
comparative information with respect to fees paid by similar funds -- i.e.,
funds that invest in equity securities listed on the Taiwan Stock Exchange. The
Directors noted that, although the Fund's effective management fee was higher
than the management fees paid by similar funds, the Fund's total expense ratio
was lower than six of the 18 comparable funds' total expense ratio. The
Directors concluded that the limited data available provided some indirect
confirmation of the reasonableness of the Adviser's fees. The Directors also
considered that, in addition to the monthly basic fee paid to the Adviser at an
annual rate of 1.30% of the Fund's average daily net assets, the basic fee is
subject to performance adjustments which may increase or decrease the basic fee
(up to 0.30% per annum of the Fund's average net assets) on a monthly basis,
depending on the performance of the Fund's investments compared to the
performance of the Taiwan Stock Exchange Index during a rolling performance
period of 36 months.
APPROVAL OF MANAGEMENT AGREEMENTS
The Directors approved the continuance of the Fund's Management Agreements after
weighing the foregoing factors. They reasoned that, considered in themselves,
the nature and extent of the services provided by the Adviser were appropriate,
that the performance of the Fund had been satisfactory, and that the Adviser
could be expected to provide services of high quality. As to the Adviser's fees
for the Fund, the Directors determined that the fees, considered in relation to
the services provided, were fair and reasonable, that the Fund's relationship
with the Adviser was not so profitable as to render the fees excessive, and that
any additional benefits to the Adviser were not of a magnitude materially to
affect the Directors' deliberations.
25
SUMMARY OF DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN
--------------------------------------------------------------------------------
WHAT IS THE DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN?
The Dividend Reinvestment and Cash Purchase Plan (the "Plan") offers
shareholders of the Fund, a prompt and simple way to reinvest their dividends
and capital gains distributions in shares of the Fund. The Fund will distribute
to shareholders, at least annually, substantially all of its net income and
expects to distribute annually its net realized capital gains. Computershare
Trust Company, N.A. (formerly, EquiServe Trust Company, N.A.) (the "Plan
Administrator"), a federally chartered trust institution, acts as Plan
Administrator for shareholders in administering the Plan. The Plan also allows
you to make optional cash investments in Fund shares through the Plan
Administrator.
WHO CAN PARTICIPATE IN THE PLAN?
If you own shares in your own name, you can elect to participate directly in the
Plan. If you own shares that are held in the name of a brokerage firm, bank, or
other nominee, you should contact your nominee to arrange for them to
participate on your behalf.
WHAT DOES THE PLAN OFFER?
The Plan has two components; reinvestment of dividends and capital gains
distributions, and a voluntary cash purchase feature.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
If you choose to participate in the Plan, your dividends and capital gains
distributions will be promptly invested for you, automatically increasing your
holdings in the Fund. If the Fund declares a dividend or capital gains
distribution payable in cash, you will automatically receive shares purchased by
the Plan Administrator on the New York Stock Exchange or otherwise on the open
market.
If a distribution is declared which is payable in shares or cash at the option
of the shareholder and if on the valuation date (generally the payable date) the
market price of shares is equal to or exceeds their net asset value, the Fund
will issue new shares to you at the greater of the following: (a) net asset
value per share or (b) 95% of the market price per share. If the market price
per share on the valuation date is less than the net asset value per share, the
Fund will issue new shares to you at the market price per share on the valuation
date.
All reinvestments are in full and fractional shares, carried to three decimal
places. In the case of foreign (non-U.S.) shareholders, reinvestment will be
made net of applicable withholding tax.
VOLUNTARY CASH PURCHASE OPTION
Plan participants have the option of making investments in Fund shares through
the Plan Administrator. You may invest any amount from $100 to $3,000
semi-annually. The Plan Administrator will purchase shares for you on the New
York Stock Exchange or otherwise on the open market on or about February 15 and
August 15. If you hold shares in your own name, you should deal directly with
the Plan Administrator. Checks should be make payable to "Computershare." The
Plan Administrator will not accept cash, traveler's checks, money orders, or
third party checks for voluntary cash purchase. We suggest you send your check
to the following address to be received at least two business days before the
investment date: Computershare, c/o The Taiwan Fund, Inc. at P.O. Box 43010,
Providence, RI 02940-3010. The Plan Administrator will return any cash payments
received more than thirty days prior to February 15 or August 15, and you will
not receive interest on uninvested cash payments. If you own shares that are
held in the name 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.
26
SUMMARY OF DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN (continued)
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IS THERE A COST TO PARTICIPATE?
Each participant will pay a pro rata portion of brokerage commissions payable
with respect to purchases of shares by the Plan Administrator on the New York
Stock Exchange or otherwise on the open market. Otherwise, there is no charge to
participants for reinvesting dividends and capital gains distributions, since
the Plan Administrator's fees are paid by the Fund. Brokerage charges for
purchasing shares through the Plan are expected to be less than the usual
brokerage charges for individual transactions, because the Plan Administrator
will purchase stock for all participants in blocks, resulting in lower
commissions for each individual participant.
For purchases from voluntary cash payments, participants are charged a service
fee of $.75 for each investment and a pro rata share of the brokerage
commissions.
Brokerage commissions and service fees, if any, will be deducted from amounts to
be invested.
WHAT ARE THE TAX IMPLICATIONS FOR PARTICIPANTS?
You will receive tax information annually for your personal records and to help
you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
If the Fund issues shares upon reinvestment of a dividend or capital gains
distribution, for U.S. federal income tax purposes, the amount reportable in
respect of the reinvested amount of the dividend or distribution will be the
fair market value of the shares received as of the payment date, which will be
reportable as ordinary dividend income and/or long term capital gains. The
shares will have a tax basis equal to such fair market value, and the holding
period for the shares will begin on the day after the payment date. State, local
and foreign taxes may also be applicable.
ONCE ENROLLED IN THE PLAN, MAY I WITHDRAW FROM IT?
You may withdraw from the Plan without penalty at any time by calling the Plan
Administrator at 1-800-426-5523, by accessing your Plan account at the Plan
Administrator's web site, www.computershare.com/equiserve or by written notice
to the Plan Administrator.
If you withdraw, you will receive, without charge, stock certificates issued in
your name for all full shares, or, if you wish, the Plan Administrator will sell
your shares and send you the proceeds, less a service fee of $2.50 and less
brokerage commissions. The Plan Administrator will convert any fractional shares
you hold at the time of your withdrawal to cash at the current market price and
send you a check for the proceeds.
All sale requests having an anticipated market value of $100,000.00 or more are
expected to be submitted in the written form. In addition, all sale requests
within thirty (30) days of an address change are expected to be submitted in
written form.
WHOM SHOULD I CONTACT FOR ADDITIONAL INFORMATION?
If you hold shares in your own name, please address all notices, correspondence,
questions, or other communications regarding the Plan to: Computershare, c/o The
Taiwan Fund, Inc. at P.O. Box 43010, Providence, RI 02940-3010, by telephone at
1-800-426-5523 or through the Internet at www.computershare.com/equiserve. If
your shares are not held in your name, you should contact your brokerage firm,
bank, or other nominee for more information and to arrange for them to
participate in the Plan on your behalf.
Either the Fund or the Plan Administrator may amend or terminate the Plan.
Except in the case of amendments necessary or appropriate to comply with
applicable law, rules or policies or a regulatory authority, participants will
be mailed written notice at least 30 days before the effective date of any
amendment. In the case of termination, participants will be mailed written
notice at least 30 days before the record date of any dividend or capital gains
distribution by the Fund.
27
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UNITED STATES ADDRESS
The Taiwan Fund, Inc.
225 Franklin Street
Boston, MA
1-800-636-9242
www.thetaiwanfund.com
INVESTMENT ADVISER
HSBC Investments (Taiwan) Limited
Taipei, Taiwan
DIRECTORS AND OFFICERS
Harvey Chang, Chairman of the Board and Director
Benny T. Hu, President and Director
S.Y. Wang, Director
Christina Liu, Director
Joe O. Rogers, Director
Blair Pickerell, Director
M. Christopher Canavan, Jr., Director
Anthony Kai Yiu Lo, Director
Adelina N.Y. Louie, Secretary, Treasurer and Chief Compliance Officer
Mary Moran Zeven, Assistant Secretary
ADMINISTRATOR AND ACCOUNTING AGENT
State Street Bank and Trust Company
Boston, MA
CUSTODIANS
The International Commercial Bank of China
Taipei, Taiwan
State Street Bank and Trust Company
Boston, MA
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
Computershare Trust Company, N.A.
LEGAL COUNSEL
Clifford Chance US LLP
New York, NY
Lee and Li
Taipei, Taiwan
ITEM 2. CODE OF ETHICS.
Not required for this filing.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not required for this filing.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not required for this filing.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not required for this filing.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
INVESTMENT COMPANIES.
Not required for this filing.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANY.
Not Applicable
Required disclosure beginning with fiscal year end 12/31/05.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's Board of Directors during the period
covered by this Form N-CSR filing.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers have concluded that the registrant's disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment
Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the
filing date of this Form N-CSR based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
1934 Act (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d))) that occurred during the registrant's
during the second fiscal quarter of the period covered by this
report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
ITEM 12. EXHIBITS
(a)(1) Not required for this filing.
(a)(2) The certifications required by Rule 30a-2 of the 1940 Act are
attached hereto.
(a)(3) Not required for this filing.
(b) The certifications required by Rule 30a-2(b) of the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
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: May 8, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/Benny T. Hu
--------------
Benny T. Hu
President of The Taiwan Fund, Inc.
Date: May 8, 2006
By: /s/Adelina Louie
----------------
Adelina Louie
Treasurer of The Taiwan Fund, Inc.
Date: May 8, 2006