-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jdvj1KTXdS5UJy27KD6rcZK6PTyIXDvjdphtvlMCf40VOEj5cc14adYy8PkicIzf bwU+33UcRdJfQhWb2wYicA== 0000950109-96-002272.txt : 19960423 0000950109-96-002272.hdr.sgml : 19960423 ACCESSION NUMBER: 0000950109-96-002272 CONFORMED SUBMISSION TYPE: N-2 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960419 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAIWAN FUND INC CENTRAL INDEX KEY: 0000804123 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 042942862 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02697 FILM NUMBER: 96549001 FILING VALUES: FORM TYPE: N-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-04893 FILM NUMBER: 96549002 BUSINESS ADDRESS: STREET 1: 225 FRANKLIN STREET CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 8004265523 MAIL ADDRESS: STREET 1: STATE STREET BANK & TRUST STREET 2: PO BOX 9110 CITY: BOSTON STATE: MA ZIP: 02109 N-2 1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 1996 SECURITIES ACT FILE NO. 33- INVESTMENT COMPANY ACT FILE NO. 811-4893 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________ FORM N-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] PRE-EFFECTIVE AMENDMENT NO. [_] POST-EFFECTIVE AMENDMENT NO. [_] AND/OR REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] AMENDMENT NO. 25 [X] (CHECK APPROPRIATE BOX OR BOXES) ___________________ THE TAIWAN FUND, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) 225 FRANKLIN STREET BOSTON, MASSACHUSETTS 02110 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES IN UNITED STATES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 1-800-426-5523 ___________________ LAURENCE E. CRANCH, ESQ. ROGERS & WELLS 200 PARK AVENUE NEW YORK, NEW YORK 10166 (NAME AND ADDRESS OF AGENT FOR SERVICE) ___________________ With copies to: ANTONIA E. STOLPER, ESQ. SHEARMAN & STERLING 599 LEXINGTON AVENUE NEW YORK, NEW YORK 10022 ___________________ APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the effective date of this registration statement. ___________________ If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. [_] It is proposed that this filing will become effective (check the following box, if appropriate) [_] when declared effective pursuant to Section 8(c). If appropriate, check the following box: [_] this amendment designates a new effective date for a previously filed registration statement. [_] This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933 and the Securities Act registration statement number of the earlier effective registration statement for the same offering is . CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=================================================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF BEING REGISTERED REGISTERED PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 Par Value 1,188,508 Shares(1) $24.19 $28,750,009 $9,914 ===================================================================================================================================
(1) Includes 155,023 shares subject to the Underwriters' over-allotment option. (2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933. Based on the average of the high and low sale prices reported on the New York Stock Exchange on April 18, 1996. ___________________ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. THE TAIWAN FUND, INC. FORM N-2 CROSS-REFERENCE SHEET PARTS A AND B OF THE PROSPECTUS
ITEMS IN PART A OF FORM N-2 LOCATION IN PROSPECTUS --------------------------- ---------------------- 1. Outside Front Cover............................................ Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Page....................... Inside Front and Outside Back Cover Page of Prospectus 3. Fee Table and Synopsis......................................... Expense Information 4. Financial Highlights........................................... Financial Highlights 5. Plan of Distribution........................................... Outside Front Cover Page of Prospectus; Underwriting 6. Selling Stockholders........................................... Not Applicable 7. Use of Proceeds................................................ Use of Proceeds 8. General Description of the Registrant.......................... Outside Front Cover Page of Prospectus; The Fund; Investment Objective and Policies; Risk Factors and Special Considerations; Common Stock 9. Management..................................................... Management of the Fund; Common Stock; Custodians; Transfer Agent, Dividend Paying Agent and Registrar 10. Capital Stock, Long-Term Debt, and other Securities............ Common Stock; Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan; Taxation 11. Defaults and Arrears on Senior Securities...................... Not Applicable 12. Legal Proceedings.............................................. Not Applicable 13. Table of Contents of the Statement of Additional Information... Table of Contents of Statement of Additional Information LOCATION IN STATEMENT OF ADDITIONAL ITEMS IN PART B OF FORM N-2 INFORMATION --------------------------- ----------------------------------- 14. Cover Page..................................................... Front Cover Page 15. Table of Contents.............................................. Table of Contents 16. General Information and History................................ The Fund in the Prospectus 17. Investment Objective and Policies.............................. Investment Objective and Policies; Investment Limitations 18. Management..................................................... Management of the Fund 19. Control Persons and Principal Holders of Securities............ Management of the Fund 20. Investment Advisory and Other Services......................... Management of the Fund; Custodians; Transfer Agent, Dividend Paying Agent and Registrar; Experts in the Prospectus 21. Brokerage Allocation and Other Practices....................... Portfolio Transactions and Brokerage 22. Tax Status..................................................... Taxation 23. Financial Statements........................................... Financial Statements
___________________ Information required to be included in Part C is set forth under the appropriate item, so numbered in Part C to this Registration Statement. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PROSPECTUS Subject to Completion dated April 19, 1996 1,033,485 SHARES THE TAIWAN FUND, INC. COMMON STOCK The Taiwan Fund, Inc. (the "Fund") is a diversified, closed-end management investment company which commenced operations in December 1986 following the initial public offering of its common stock, par value $0.01 per share ("Common Stock"). Its investment objective is long-term capital appreciation through investment primarily in equity securities listed on the Taiwan Stock Exchange (the "TSE") in the Republic of China (the "ROC"). See "Investment Objective and Policies." There can be no assurance that the Fund's investment objective will be achieved. INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS WHICH ARE NOT NORMALLY ASSOCIATED WITH INVESTMENTS IN THE UNITED STATES, INCLUDING A HIGH DEGREE OF STOCK PRICE VOLATILITY IN THE ROC SECURITIES MARKETS. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS." The Fund's investment adviser is China Securities Investment Trust Corporation, an ROC corporation (the "Adviser"). The address of the Fund in the United States is 225 Franklin Street, Boston, Massachusetts 02110 and its telephone number is (800) 426-5523. The Fund's currently outstanding shares of Common Stock are, and the shares of Common Stock offered hereby (the "Shares"), subject to notice of issuance, will be, listed on the New York Stock Exchange (the "NYSE") under the symbol "TWN." The net asset value per share of the Fund's Common Stock at the close of business on April __, 1996 was $______ and the last reported sale price of a share of the Fund's Common Stock on the NYSE on that date was $_____. See "Market and Net Asset Value Information." This Prospectus sets forth concisely the information about the Fund that a prospective investor ought to know before investing and should be retained for future reference. A Statement of Additional Information dated ________ __, 1996 (the "SAI"), containing additional information about the Fund, has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this Prospectus. A copy of the SAI, the table of contents of which appears on page __ of this Prospectus, may be obtained without charge by calling the Fund's Shareholder Servicing Agent, Corporate Investors Communications, Inc. at (800) 636-9242. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
========================================================================================================= Price to Public Sales Load(1) Proceeds to Fund(1)(2) - --------------------------------------------------------------------------------------------------------- Per Share........................... $_______ $______ $______ - --------------------------------------------------------------------------------------------------------- Total Maximum(3).................... $_______ $______ $______ =========================================================================================================
(1) The Fund has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deduction of offering expenses incurred by the Fund, estimated at $ , including $ to be paid to the Underwriters in partial reimbursement for their expenses. (3) The Underwriters have been granted an option to purchase up to an aggregate of 155,023 additional Shares, solely to cover over-allotments. If this option is exercised in full, the total public offering price will be $_______, the sales load will be $______, and the proceeds to the Fund will be $_______ before the payment of expenses. See "Underwriting." The Shares are offered by the several Underwriters subject to prior sale when, as and if delivered to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters. The Underwriters reserve the right to reject orders in whole or in part. It is expected that delivery of the Shares will be made in New York, New York on or about ___________, 1996. _________________ DRESDNER BANK - KLEINWORT BENSON ASIAN CAPITAL PARTNERS _________________ THE DATE OF THIS PROSPECTUS IS _________, 1996. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE- COUNTER MARKETS OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. In this Prospectus, unless otherwise specified, all references to "U.S. Dollars," "US$" or "$" are to United States Dollars and to "NT$" or "NT Dollars" are to New Taiwan Dollars. The foreign exchange rate for transfers in NT Dollars was NT$= US$1.00, as quoted in the Taipei Foreign Exchange Market on April __, 1996. No representation is made that the NT$ or US$ amounts in this Prospectus could have been or could be converted into US$ or NT$, as the case may be, at any particular rate or at all. See "Risk Factors and Special Considerations -- Currency Fluctuations" herein and "The Republic of China -- Foreign Exchange" in the SAI for additional information regarding historical rates of exchange between the NT Dollar and the U.S. Dollar. The Adviser has participated with the Fund in the preparation of this Prospectus and SAI. - -------------------------------------------------------------------------------- PROSPECTUS SUMMARY THE FUND.......................... The Taiwan Fund, Inc. (the "Fund") is a diversified, closed-end management investment company registered under the U.S. Investment Company Act of 1940, as amended (the "1940 Act"). The Fund is designed principally for U.S. and other investors wishing to participate in the Taiwan economy through investment in ROC securities. See "The Fund." INVESTMENT OBJECTIVE.............. Long-term capital appreciation through investment primarily in equity securities listed on the Taiwan Stock Exchange (the "TSE"). See "Investment Objective and Policies" and "The Securities Market of the ROC" herein and in the SAI. THE OFFERING...................... 1,033,485 shares of Common Stock. The Underwriters have been granted an option to purchase up to an aggregate of 155,023 additional shares to cover over-allotments. See "Underwriting." LISTING........................... New York Stock Exchange. The average weekly trading volume of the Fund's shares on the New York Stock Exchange during the period from January 1, 1996 through April __, 1996 was ____________ shares. See "Market and Net Asset Value Information." SYMBOL............................ TWN INVESTMENT ADVISER................ China Securities Investment Trust Corporation (the "Adviser"), which manages the investments of the Fund pursuant to a management contract, is an ROC corporation registered under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act"). As of December 31, 1995, the Adviser has ten securities investment trust funds (excluding the Fund) under management, with total net assets of approximately NT$24.6 billion (US$902.8 million) (excluding assets of the Fund). See "Management of the Fund -- The Adviser." ADVISORY FEES AND ESTIMATED The fund pays the Advisor a basic EXPENSES......................... monthly fee at the annual rate of 1.50% of the Fund's average daily net assets, subject to monthly performance adjustments which may increase or decrease the basic fee (by up to 0.50% per annum of the Fund's net assets) depending on the performance of the Fund's investments compared with the performance of the Taiwan Stock Exchange Index (the "TSE Index"). This fee is higher than the advisory fees paid by most other U.S. investment companies primarily because of the additional time and expense required of the Adviser in pursuing the objective of investing in ROC securities. Operating expenses of the Fund (exclusive of amortization of organizational expenses) amounted to $4,136,025, $6,066,785 and $7,037,225 for the fiscal years ended August 31, 1993, 1994 and 1995, respectively. DIVIDEND DISTRIBUTIONS AND The Fund intends to distribute to REINVESTMENT...................... shareholders, at least annually, substantially all of its net investment income from dividends and interest payments and also expects to distribute at least annually its net realized capital gains, if any. Shareholders may elect to have all distributions automatically reinvested in shares of the Fund. See "Dividends and Distributions; Dividend Reimbursement and Cash Purchase Plan." CUSTODIANS........................ The International Commercial Bank of China (the "Custodian"), a bank organized under ROC law, acts as custodian for the Fund's NT Dollar- denominated assets held in Taiwan. State Street Bank and Trust Company acts as custodian for the Fund's U.S. Dollar-denominated assets held in the United States. - -------------------------------------------------------------------------------- 2 - ------------------------------------------------------------------------------- UNDERWRITERS....................... The Shares are being offered by a group of Underwriters led by Kleinwort Benson Limited and Asian Capital Partners Limited. See "Underwriting." RISK FACTORS AND SPECIAL Investing in securities of ROC CONSIDERATIONS..................... companies and the ROC government involves certain risks not typically associated with investing in securities of U.S. companies or the U.S. government, including (1) volatility of the Taiwan securities market, (2) restrictions on repatriation of capital invested in Taiwan, (3) currency fluctuations, and (4) political and economic risks. See "Risk Factors and Special Considerations" for a fuller discussion of these and other risks involved in an investment in the Shares. The growth in the ROC securities market over the past decade has been accompanied during certain periods by a high degree of stock price volatility resulting in very large short-term swings in the TSE Index. During periods when the market has declined rapidly, such as in 1990, the combination of reduced demand and TSE rules confining daily movements in individual company stock prices to fixed limits (currently 7%) around the previous day's closing price has greatly diminished market liquidity. Therefore, it is extremely difficult to protect previously unrealized capital gains as the Fund cannot always sell portfolio securities at a time the Adviser considers to be in the Fund's interest. Also, share price increases and market volatility have during previous periods resulted in pervasive speculative short-term trading among individual investors and have made it necessary for the Fund to engage in short-term trading in order to preserve investment gains. Although the Adviser believes that there are fundamentally sound long-term investment opportunities available among the stocks listed on the TSE, and that past volatility and speculation have been reduced, volatility of the Taiwan securities market is still high compared to the securities markets of the United States and there is no assurance that these past patterns of extreme volatility will not return. Such volatility could adversely affect the net asset value of the Fund's shares. See "Risk Factors and Special Considerations -- Risks of Investing in ROC Securities --Market Volatility." The ROC government recently launched an NT$200 billion Government- sponsored stock market stabilization fund (the "Stabilization Fund") which is authorized to buy or sell securities on the TSE in order to minimize fluctuations in the prices or volumes of sales of listed securities. As a result of the activities of the Stabilization Fund, the market price and liquidity of the securities of companies listed on the TSE and the net asset value of the Fund may be different than they otherwise might be in the absence of such stabilization activities. As of March 29, 1996, the Stabilization Fund had invested approximately NT$70 billion in shares listed on the TSE. See "Risk Factors and Special Considerations -- Risks of Investing in ROC Securities -- Market Volatility." Since the initial public offering of shares by the Fund in December 1986, the Fund's shares have traded both at a premium and at a discount in relation to net asset value. While the shares recently have been trading at a premium and the public offering price for the shares represents a ____% premium over the per share net asset value on ______________, 1996, there can be no assurance that this premium will continue after this offering or that the shares will not again trade at a discount. Shares of closed-end investment companies frequently trade at a discount from net asset value, but in some cases have traded above net asset value. The risk of the shares of Common Stock trading at a discount is a risk separate from the risk of a decline in the Fund's net asset value. See "Financial - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- Highlights"; "Market and Net Asset Value Information"; "Net Asset Value"; and "Risk Factors and Special Considerations -- Net Asset Value Discount." At the time the Fund was formed in 1986, it represented the only vehicle publicly available in the United States, and one of only four vehicles world-wide, through which foreign investors could make portfolio investments in listed ROC securities. Since that time a number of other alternatives to the Fund as a vehicle for investment in ROC securities by foreign investors have been developed. It has been the ROC government's stated policy to liberalize restrictions on foreign investment in its securities markets, and the ROC government has significantly eased restrictions on foreign investment over the past several years. The Adviser believes that the development of these other alternatives to the Fund as a vehicle for investment in ROC securities by foreign investors may reduce any tendency of the shares to trade at a premium in the future. See "Risk Factors and Special Considerations --Investment and Repatriation Restrictions." The Fund's assets are invested primarily in ROC securities and substantially all income is received in NT Dollars. However, the Fund will compute and distribute its income in U.S. Dollars, and the computation of income will be made on the date of its receipt by the Fund at the foreign exchange rate in effect on that date. Therefore, if the value of the foreign currencies in which the Fund receives its income falls relative to the U.S. Dollar between receipt of the income and the making of Fund distributions, the Fund will be required to liquidate securities in order to make distributions if the Fund has insufficient cash in U.S. Dollars to meet distribution requirements. See "Risk Factors and Special Considerations -- Risks of Investing in ROC Securities -- Currency Fluctuations" and " Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan." From January 1990 to December 1995, the NT Dollar rate fluctuated within the range of NT$24.50= US$1 and NT$27.50= US$1. On April ___, 1996, the exchange rate was _______ = US$1. See "The Republic of China --Currency and Exchange Rates" herein and "The Republic of China -- Foreign Exchange -- Currency" in the SAI. The Fund is currently restricted by its investment limitations from engaging in currency hedging transactions, and is therefore limited in its ability to protect its portfolio against foreign currency exchange rate risk. The Fund's board of directors at a meeting held on December 1, 1995, approved an amendment to the Fund's investment limitations to permit the Fund to engage in currency hedging transactions, subject to shareholder approval. The board of directors expects to submit the proposed amendment at the next annual shareholders' meeting to be held in 1997. There can be no assurance that the shareholders will vote to approve such proposal. See "Risk Factors and Special Considerations -- Risks of Investing in ROC Securities -- Currency Fluctuations" herein and "Investment Limitations" in the SAI. The ROC government regulates foreign exchange transactions, and authorization is necessary for non- trading overseas remittances of foreign exchange in excess of $5 million (in the case of individuals) and of $20 million (in the case of corporate entities) per year. See "The Republic of China -- Foreign Exchange -- Exchange Controls" in the SAI. The securities market in Taiwan has become increasingly sensitive to political and economic developments in the People's Republic of China (the "PRC"), and such developments, including, among other things, changes in leadership, could have an impact on the Fund. The PRC has repeatedly indicated that it would - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- resort to force to gain control over Taiwan if Taiwan should take any concrete steps toward political independence, or if the political and social situation in Taiwan should become destabilized. Relations between the ROC and the PRC have recently been strained as a result of PRC's conduct of military exercises in the waters near Taiwan during Taiwan's recent Presidential election campaign and certain other matters. There can be no assurance that relations will not deteriorate in ways that could adversely affect Taiwan's economy or lead to more volatility in Taiwan's securities market. See "Risk Factors and Special Considerations -- Political and Economic Factors." Changes in tax legislation in either the United States or the ROC may have an impact on the Fund. During certain periods in the past, capital gains derived from stock transactions have been subject to tax in the ROC. In the latest imposition of this capital gains tax for the one-year period ended December 31, 1989, the Fund was exempt form the tax until December 31, 1990 pursuant to an earlier ROC government ruling. Since January 1, 1990, the capital gains tax has been suspended. On January 4, 1996, the ROC Legislative Yuan passed a bill for the amendment of the ROC Income Tax Law that would have eliminated the exemption from the ROC income tax for gains realized on the sale of ROC securities and imposed a capital gains tax. On January 12, 1996, this amendment was repealed by the Legislative Yuan. The reintroduction of a capital gains tax would require the Legislative Yuan to engage in the full legislative process for the enactment of tax legislation. There can be no assurance that the capital gains tax will not be imposed in the future or that the Fund will continue to be exempt from such tax. ROC accounting, auditing, financial and other reporting standards are not equivalent to U.S. standards and, therefore, certain material disclosures may not be made and less information may be available to investors investing in Taiwan than in the United States. There is also generally less governmental regulation of the securities industry in Taiwan than in the United States. See "Risk Factors and Special Considerations" and "Foreign Investment and Exchange Controls in the ROC." Reference is also made to "The Securities Market of the ROC" and "The Republic of China" herein and in the SAI. The registration of the Fund under the 1940 Act and the registration of the Adviser under the Advisers Act does not result in supervision or management by the U.S. Securities and Exchange Commission of the Fund's investment policies or of the Adviser's practices. Under applicable ROC regulations, the arrangements between the Fund and the Adviser and the Custodian relating to the management and custody of the Fund's assets in Taiwan are subject to the regulation and supervision of the ROC Securities and Exchange Commission (the "CSEC"). See "ROC Government Supervision and Regulation of the Management Contract and the Adviser" in the SAI. - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES Sales load (as a percentage of offering price).................................. % Dividend Reinvestment and Cash Purchase Plan Fees............................... * ANNUAL EXPENSES (as a percentage of net assets attributable to Common Stock)(1) Management fees (excluding performance adjustment)(2)........................... % Other expenses(1)............................................................... % Administration fees(3)..................................................... % Other operating expenses................................................... % Total annual expenses................................................................ %
_____________________ * No transaction expenses are included with respect to the Fund's DRIP Plan (as defined) because, except for brokerage commissions and a fee of $0.75 per purchase transaction imposed upon purchases made by the Plan Agent (as defined) on behalf of the Fund's shareholders pursuant to DRIP Plan, the Fund pays all expenses incurred in the administration of the DRIP Plan. See "Dividends and Distributions -- Dividend Reinvestment and Cash Purchase Plan." (1) Amounts are based on the Fund's most recently completed fiscal year ended August 31, 1995, except that "Other Expenses" are based on estimated amounts for the Fund's current fiscal year. (2) See "Management of the Fund -- The Adviser" herein. (3) See "Management of the Fund -- Fund Administration and Expenses" herein. The foregoing table is intended to assist investors in understanding the costs and expenses that an investor in the Fund will bear directly or indirectly .
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF --------------------------------------------------- EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------- -------- --------- --------- ---------- You would pay the following expenses on a $1,000 investment, $ $ $ $ assuming a 5% annual return...............................
The Example set forth above assumes reinvestment of all dividends and distributions at net asset value and an expense ratio of %. The tables above and the assumption in the Example of a 5% annual return are required by the U.S. Securities and Exchange Commission regulations applicable to all investment companies. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN. ACTUAL EXPENSES OR ANNUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. In addition, while the Example assumes reinvestment of all dividends and distributions at net asset value, participants in the Fund's Dividend Reinvestment and Cash Purchase Plan (the "DRIP Plan") may receive shares purchased or issued at a price or value different from net asset value. See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan." - -------------------------------------------------------------------------------- 6 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS+ Set forth below is selected financial information, including ratios, for a share of Common Stock outstanding throughout the periods indicated. The information set forth below has been audited by Coopers & Lybrand L.L.P., the Fund's independent accountants. Their report is included in the financial statements and financial highlights of the Fund appearing in the SAI. All of the information set forth below should be read in conjunction with the financial statements and financial highlights of the Fund included in the SAI.
YEARS ENDED AUGUST 31, EIGHT ---------------------------------------------- MONTHS ENDED AUGUST 31, 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- Selected Per Share Data Net asset value, beginning of period....................... $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51 --------- --------- --------- --------- --------- Income From Investment Operations Net investment income (loss)...................... (0.19) (0.24) 0.20 0.06 (0.10) Net realized and unrealized gain (loss) on investments....... (7.27) 14.20 (1.70) (0.20) 1.84 --------- --------- --------- --------- --------- Total from investment operations.................. (7.46) 13.96 (1.50) (0.14) 1.74 --------- --------- --------- --------- --------- Less Distributions From net investment income...................... -- (0.14) (0.12) -- -- In excess of net investment income........... -- (0.01) -- -- -- From net realized gains...... (5.88) -- -- -- -- In excess of net realized gains....................... (0.21) -- -- -- -- --------- --------- --------- --------- --------- Total distributions............ (6.09) (0.15) (0.12) -- -- --------- --------- --------- --------- --------- Antidilution/(dilution) resulting from additional offering of shares at market and reinvestment of dividends at market........... (0.40) 0.44 -- 0.46 2.07 Offering expenses.............. (0.03) (0.05) -- (0.31) (0.65) --------- --------- --------- --------- --------- Net asset value, end of period........................ $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 ========= ========= ========= ========= ========= Market value, end of period.... $ 21.63 $ 31.88 $ 20.13 $ 17.88 $ 24.13 ========= ========= ========= ========= ========= TOTAL RETURN++ Per share market value......... (12.0)% 59.2% 13.3% (25.9)% 17.7% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (000 omitted)................. $ 271,095 $ 363,723 $ 145,190 $ 158,168 $ 124,974 Ratio of expenses to average net assets.................... 2.43%+++ 2.49%+++ 2.67%+++ 2.94%+++ 3.47%* Ratio of net investment income (loss) to average net assets.................... (0.78)% (1.01)% 1.05% 0.29% (0.79)%* Portfolio turnover rate........ 159% 267 % 163% 129% 298%* YEARS ENDED DECEMBER 31, ------------------------------------------------- 1990 1989 1988 1987 -------- -------- -------- -------- Selected Per Share Data Net asset value, beginning of period....................... $ 22.35 $ 22.23 $ 17.32 $ 11.07 ------- -------- -------- -------- Income From Investment Operations Net investment income (loss)...................... 0.56 (0.24) (0.36) (0.39) Net realized and unrealized gain (loss) on investments....... (6.16) 15.06 11.70 13.90 ------- ------- ------- ------- Total from investment operations.................. (5.60) 14.82 11.34 13.51 ------- ------- ------- ------- Less Distributions From net investment income...................... (0.53) -- -- -- In excess of net investment income........... -- -- -- -- From net realized gains...... (1.16) (14.75) (10.35) (7.26) In excess of net realized gains....................... -- -- -- -- ------- ------- ------- ------- Total distributions............ (1.69) (14.75) (10.35) (7.26) ------- ------- ------- ------- Antidilution/(dilution) resulting from additional offering of shares at market and reinvestment of dividends at market........... 2.03 0.05 3.97 -- Offering expenses.............. (0.58) -- (0.05) -- ------- ------- ------- ------- Net asset value, end of period........................ $ 16.51 $ 22.35 $ 22.23 $ 17.32 ======= ======= ======= ======= Market value, end of period.... $ 20.50 $ 49.75 $ 34.88 $ 31.38 ======= ======= ======= ======= TOTAL RETURN++ Per share market value......... (55.7)% 103.4% 48.6% 115.6% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (000 omitted)................. $69,597 $66,914 $66,040 $41,178 Ratio of expenses to average net assets.................... 2.34% 2.11% 2.50% 3.75% Ratio of net investment income (loss) to average net assets.................... 2.80% (0.69)% (1.31)% (2.03)% Portfolio turnover rate........ 226% 169% 141% 203%
________________ * Annualized + Based on average shares outstanding during the period. ++ Total returns for periods of less than one year are not annualized. +++ Expense ratio includes 20% tax paid on stock dividends received by the Fund. If stock dividend tax were excluded from the Fund's expense ratio, the expense ratio would have been 2.02%, 2.28%, 2.49% and 2.71%, for the years ended August 31, 1995, 1994, 1993 and 1992, respectively. - -------------------------------------------------------------------------------- 7 - -------------------------------------------------------------------------------- MARKET AND NET ASSET VALUE INFORMATION The Fund's currently outstanding shares of Common Stock are, and the Shares offered by this Prospectus, subject to notice of issuance, will be, listed on the NYSE. Shares of the Fund's Common Stock commenced trading on the NYSE on December 1, 1988. Prior to that time, the Fund's Common Stock was listed on the American Stock Exchange. In the past, the Fund's shares have traded both at a premium and at a discount in relation to net asset value. Although the Fund's shares recently have been trading at a premium above net asset value, there can be no assurance that this will continue after the offering or that the shares will not again trade at a discount. It has been the ROC government's stated policy to liberalize restrictions on foreign investment in its securities markets, and the ROC government has significantly eased restrictions on foreign investment over the past several years. The Adviser believes that the development of alternatives to the Fund as a vehicle for investment in ROC securities by foreign investors may reduce any tendency of the shares to trade at a premium in the future. See "Foreign Investment and Exchange Controls in the ROC" in the SAI and "The Securities Market of the ROC" herein and in the SAI. Shares of closed-end investment companies frequently trade at a discount from net asset value. See "Risk Factors and Special Considerations." The following table shows for each of the periods indicated the high and low market prices for shares of the Fund on the NYSE, high and low net asset values per share and the premium or discount to net asset value per share at which the Fund's shares were trading. Net asset value is determined on each business day in Taiwan (defined to be a day on which the TSE is open for trading). See "Net Asset Value" in the SAI for information as to the determination of the Fund's net asset value. MARKET PRICE, NET ASSET VALUE PER SHARE AND PREMIUM/(DISCOUNT) OF FUND SHARES
PREMIUM/(DISCOUNT) MARKET PRICE NET ASSET VALUE TO NET ASSET VALUE ------------------------- ---------------------------- -------------------------- THREE MONTHS ENDED HIGH LOW HIGH(1) LOW(1) HIGH(2) LOW(2) - ------------------ ------------ ----------- ------------ ---------- ---------- ----------- February 28, 1994.......... 39 1/8 26 1/4 25.87 24.15 51.24% 8.70% May 31, 1994............... 30 3/8 24 24.67 23.72 23.13% 1.18% August 31, 1994............ 33 26 3/4 28.41 24.71 16.16% 8.26% November 30, 1994.......... 31 1/2 25 1/4 32.18 29.36 (2.11)% (14.00)% February 28, 1995.......... 29 1/4 22 7/8 31.09 23.61 (5.92)% (3.11)% May 31, 1995............... 23 1/2 19 3/4 24.07 22.91 (2.37)% (13.79)% August 31, 1995............ 24 5/8 20 1/4 22.81 17.97 7.96% 12.69% November 30, 1995.......... 23 1/2 19 7/8 19.81 17.25 18.63% 15.22% February 29, 1996.......... 23 5/8 20 18.95 17.44 24.67% 14.68%
_____________________ Source: Bloomberg Financial and Fund Accounting Records. (1) Based on the net asset value calculated on the close of business on the Thursday (or, if the NYSE was not open for trading on that Thursday, the next day on which the NYSE was open for trading) prior to the indicated market price high and low, respectively. (2) Calculated based on the information presented. The last reported sale price, net asset value per share and percentage premium to net asset value per share of the Common Stock on April __, 1996 were $ , $ and %, respectively. As of April __, 1996, the Fund had 14,826,714 shares of Common Stock outstanding and the net assets of the Fund were $ . - -------------------------------------------------------------------------------- 8 THE FUND The Fund, incorporated in Delaware in 1986, is a diversified, closed-end management investment company registered under the 1940 Act. The Fund's investment objective is long-term capital appreciation through investment primarily in equity securities listed on the TSE. The Fund is advised by China Securities Investment Trust Corporation, a ROC corporation registered as an investment adviser under the Advisers Act. See "Management of the Fund -- The Adviser." The Fund commenced operations on December 23, 1986 following an initial public offering of 2,333,333 shares of its Common Stock. Since that time, the Fund has completed a rights offering of 3,530,085 shares on June 19, 1995 with an aggregate net proceeds to the Fund of $62,858,255 and five additional public offerings of shares of its Common Stock in which an aggregate of 8,818,769 shares were sold with aggregate net proceeds to the Fund of $211,142,628 and, since inception, the Fund has paid or declared dividends and capital gains distributions aggregating $169,119,818. As of April __, 1996, the value of the Fund's net assets was approximately $_____________. As of April __, 1996, in excess of 90% of the Fund's net assets were invested in ROC equity securities. USE OF PROCEEDS The net proceeds of this offering (estimated to be approximately $____________ if the Underwriters' over-allotment option is exercised) will be invested within two months from the date of this Prospectus in accordance with the Fund's investment objective and the policies set forth under "Investment Objective and Policies." Pending such investment, the proceeds will be invested in NT Dollar-denominated bank deposits and money market instruments in order to preserve liquidity and generate interest income for the Fund. RISK FACTORS AND SPECIAL CONSIDERATIONS The following discusses risk factors and special considerations with respect to this offering and with respect to investment in the Fund. RISKS OF INVESTING IN ROC SECURITIES Investing in securities of ROC companies and of the ROC government involves certain risks not typically associated with investing in securities of U.S. companies or the U.S. government, including (1) volatility of the Taiwan securities market, (2) restrictions on repatriation of capital invested in Taiwan, (3) fluctuations in the rate of exchange between the NT Dollar and the U.S. Dollar, and (4) political and economic risks. In addition, ROC accounting, auditing, financial and other reporting standards are not equivalent to U.S. standards and, therefore, certain material disclosures may not be made, and less information may be available to investors investing in Taiwan than in the United States. There is also generally less regulation by governmental agencies and self-regulatory organizations with respect to the securities industry in Taiwan than there is in the United States. Market Volatility The growth in the ROC securities market over the past decade has been accompanied during certain periods by a high degree of stock price volatility resulting in very large short-term swings in the TSE Index. From January 1, 1986 to December 31, 1990, despite an overall market gain of 336%, the market experienced numerous declines exceeding 15% of the then-existing market value. For example, between February and October 1990, the TSE Index fell from a high of 12,495 to a low of 2,560 on October 1, 1990, a decline of 79.5%. From October 1, 1990 to May 9, 1991, the TSE Index rose from 2,560 to 6,305, an increase of 146%. Between May 9, 1991 and January 7, 1993, the TSE Index fell from 6,305 to 3,316, a decline of 47%. During the period from January 7, 1993 to December 31, 1995, the TSE Index fluctuated between a low of 3,316 and a high of 7,184. Since December 31, 1995, the TSE Index has moved in a range between 4,053 and 7,051. Any volatility in the ROC securities market could adversely affect the net asset value of the Fund's shares. For further information relating to the TSE Index, see "The Securities Market of the ROC -- The Taiwan Stock Exchange." 9 During periods when the market has declined rapidly, such as in 1990, the combination of reduced demand and TSE rules confining daily movements in individual company stock prices to fixed limits (currently 7%) around the previous day's closing price has greatly diminished market liquidity. This has made it extremely difficult during declining periods to protect previously unrealized capital gains as the Fund cannot always sell portfolio securities at a time the Adviser considers to be in the Fund's interest. Trading in the Taiwan securities market is dominated by individual investors and, during periods of market volatility, speculative short-term trading has been pervasive among such investors. Consequently, these conditions have made it necessary for the Fund during previous periods, and may in the future cause the Fund, to engage in short-term trading in order to preserve investment gains. For instance, the Fund's turnover rate was 159% during fiscal year 1995. Although this turnover rate is higher than the rate initially anticipated by the Fund, it is less than the average turnover rate for stocks traded on the TSE, which was approximately 228% during the same period. The ROC government recently launched an NT$200 billion Government-sponsored stock market stabilization fund (the "Stabilization Fund") which is authorized to buy or sell securities on the TSE in order to minimize fluctuations in the prices or volumes of sales of listed securities. As a result of the activities of the Stabilization Fund, the market price and liquidity of the securities of companies listed on the TSE and the net asset value of the Fund may be different than they otherwise might be in the absence of such stabilization activities. As of March 29, 1996, the Stabilization Fund had invested approximately NT$70 billion in shares listed on the TSE. The Adviser believes that short-term trading strategies, without regard to fundamental investment analysis, currently are factors determining day-to-day price fluctuations on the TSE. Although the Adviser believes that there are fundamentally sound long-term investment opportunities available among the stocks listed on the TSE, and that past volatility and speculation have been reduced, volatility of the Taiwan securities market is still high compared to the securities markets of the United States and there is no assurance that these past patterns of extreme volatility will not return. The Fund has a long-term trading strategy based on fundamental investment analysis and therefore short- term volatility in the ROC securities market will affect the net asset value of the Fund's shares which could cause the Fund's shares to trade at larger discounts and premiums than are usually experienced by closed-end investment companies. Repatriation Restrictions The Fund does not invest directly in the securities of ROC companies. Instead, it acquires its investments through a contractual securities investment trust fund arrangement designed to meet the requirements of applicable ROC regulations. The Fund's securities investment trust fund arrangement has been established by means of a Securities Investment Trust--Investment Management and Custodian Contract (the "Management Contract") dated December 16, 1986 among the Adviser, the Custodian and the Fund. Under the Management Contract, the Adviser has agreed to manage and invest the assets of the Fund and the Custodian has agreed to hold the assets being managed under the Management Contract. 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 ("Units"). Under ROC regulations and the Management Contract, the income realized and received from the assets held under the Management Contract will be distributed to the Fund once a year. See "Foreign Investment and Exchange Controls in the ROC." Under current ROC exchange control regulations, the Fund is able to remit out of the ROC the proceeds, net of tax, of such distributions. However, if the Fund were unable to receive and distribute to its shareholders 90% of its net investment income taxable in the United States within applicable time periods, it would be unable to qualify as a regulated investment company for United States federal income tax purposes. See "Taxation -- U.S. Federal Income Taxes" herein and in the SAI. Currency Fluctuations The Fund's assets are invested primarily in ROC securities and substantially all income is received in NT Dollars. However, the Fund will compute and distribute its income in U.S. Dollars, and the computation of income will be made on the date of its receipt by the Fund at the foreign exchange rate in effect on that date. Therefore, if the value of the foreign currencies in which the Fund receives its income falls relative to the U.S. 10 Dollar between receipt of the income and the making of Fund distributions, the Fund will be required to liquidate securities in order to make distributions if the Fund has insufficient cash in U.S. Dollars to meet distribution requirements. See "Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan." The liquidation of investments, if required, may have an adverse impact on the Fund's performance. In addition, if the liquidated investments include securities that have been held less than three months, such sales may jeopardize the Fund's status as a regulated investment company under the U.S. Internal Revenue Code of 1986, as amended (the "Code"). See "Taxation -- U.S. Federal Income Taxes" herein and in the SAI. Since the Fund invests in ROC securities denominated in NT Dollars, changes in the exchange rates of the NT Dollar may affect the value of securities in the Fund's portfolio and the unrealized appreciation or depreciation of investments insofar as U.S. investors are concerned. Further, the Fund may incur costs in connection with conversions between currencies. Changes in the exchange rate of the NT Dollar will affect the Fund's net asset value regardless of the performance of the underlying investments of the Fund. From January 1990 to December 1995, the NT Dollar rate fluctuated within the range of NT$24.50= US$1 and NT$27.50= US$1. On April __, 1996, the exchange rate was NT$= US$1. See "The Republic of China -- Foreign Exchange" in the SAI. The competitiveness of Taiwan's exports is affected by changes in the relative exchange rates of the NT Dollar and the currencies of its main trading partners, primarily the United States and Japan. Changes in the value of the NT Dollar against the U.S. Dollar, or changes in the value of the NT Dollar against the currencies of its other trading partners, could have an adverse impact on Taiwan's export economy and, in turn, on the market value of export-oriented ROC companies. See "The Republic of China -- Recent Economic Developments" herein and in the SAI. Relative currency values will be taken into account by the Adviser in selecting industries and companies for investment. See "Investment Objective and Policies." The Fund is currently restricted by its investment limitations from engaging in currency hedging transactions, and is therefore limited in its ability to protect its portfolio against foreign currency exchange rate risk. The Fund's board of directors, at a meeting held on December 1, 1995, approved an amendment to the Fund's investment limitations to permit the Fund to engage in currency hedging transactions, subject to shareholder approval. The board of directors expects to submit the proposed amendment at the next annual shareholders' meeting to be held in 1997. There can be no assurance that the shareholders will vote to approve such proposal. Political and Economic Factors Political Factors Taiwan has a unique political status. It maintains formal diplomatic relations with only 31 countries, including the Vatican, but has active trade and financial relations with most major economic powers and maintains trade missions in locations around the world. Taiwan remains a member of the Asian Development Bank, but is not a member of the United Nations and various other international organizations. The ROC joined the Asia-Pacific Economic Cooperation group ("APEC") in November 1991, together with Hong Kong and the People's Republic of China ("PRC"). In 1991, Taiwan applied to rejoin the General Agreement on Tariffs and Trade ("GATT"), from which it withdrew in 1950. In September 1992, in accordance with a GATT resolution to establish a committee to examine the Taiwan application for re-admission, Taiwan was permitted to become a GATT observer during the examination. Taiwan is currently seeking to become a member of the World Trade Organization, the successor organization to GATT. In 1949, in connection with the insurgency of the Communist Party of China and the formation of the PRC, the ROC government moved to Taiwan from mainland China. Since that time, the ROC government has maintained that it is the sole legitimate government of all of China (i.e., Taiwan and all of mainland China). The PRC also asserts sovereignty over all of China, including Taiwan. The PRC has repeatedly indicated that it would resort to force to gain control over Taiwan if Taiwan should take any concrete steps toward political independence, or if the political and social situation in Taiwan should become destabilized. Relations between the ROC and PRC have recently been strained as a result of the PRC's conduct of military exercises in the waters near Taiwan during Taiwan's recent Presidential election campaign and certain other matters. There can be no assurance that relations will not deteriorate in ways that could adversely affect Taiwan's economy or lead 11 to more volatility in Taiwan's securities market. The securities market in Taiwan is increasingly sensitive to political and economic developments in the PRC, and such developments, including, among other things, changes in leadership, could have an impact on the Fund. See "The Republic of China -- General Information -- Political History" and "-- Foreign Relations" in the SAI. On December 21, 1991, the first full elections in Taiwan in over four decades were held for the National Assembly. The Kuomintang (Nationalist Party) (the "KMT") prevailed in this election, winning 71% of the popular vote, while the Democratic Progressive Party ("DPP"), Taiwan's principal opposition party, received 24% of the popular vote. Since that time, the DPP has received increasing support and in the parliamentary elections held in December 1992 and the most recent parliamentary elections held in December 1995, DPP candidates made a strong showing, winning 36% and 32%, respectively, of the total votes cast. On November 27, 1993, nationwide elections were held for county chiefs and city mayors. On December 3, 1994, the first gubernatorial election was held as were mayoral elections in Taipei and Kaohsiung. On March 23, 1996, the first direct Presidential election was held and President Lee Teng-Hui was re-elected for a four-year term. The United States formally recognized the PRC on January 1, 1979 and thereupon severed formal diplomatic relations with the ROC. In April 1979, the U.S. Congress enacted the Taiwan Relations Act (the "Act") to govern the future U.S. relationship with Taiwan and an unofficial entity, the American Institute in Taiwan, was established to handle U.S. interests in Taiwan. The Act affirmed as national policies the preservation and promotion of close commercial and cultural ties with Taiwan and the continuing supply to Taiwan of arms of a defensive character. See "The Republic of China -- General Information -- Foreign Relations" in the SAI. Economic Factors Taiwan's growth has to a significant degree been export-driven. While the percentage of Taiwan's exports purchased by the United States has been declining recently, the United States has remained a key export market, purchasing approximately 23.7% of Taiwan's exports in 1995. The decline in exports to the United States has been offset by a consistent increase in exports to Hong Kong and indirectly to the PRC, from 7.3% of total exports in 1986 to 23.4% of total exports in 1995. Taiwan is affected by changes in the economies of the United States and its other main trading partners, by protectionist impulses in those countries and by the development of export sectors in lower-wage economies. In the event that growth in the export sector declines in the future, the burden of future growth will increasingly be placed on domestic demand. See "The Republic of China -- General Information -- Recent Economic Developments" herein and "The Republic of China -- Domestic Economy -- Economic Planning" in the SAI. The island of Taiwan has limited natural resources, resulting in dependence on foreign sources for certain raw materials and vulnerability to global fluctuations of price and supply. This dependence is especially pronounced in the energy sector, where in 1994 Taiwan was dependent on imported energy, mainly oil, for approximately 92.5% of total energy consumed. In recent years, over half of Taiwan's crude oil has been supplied by Kuwait and Saudi Arabia. A significant increase in energy prices could have an adverse impact on Taiwan's economy. Most of Taiwan's trading partners have trade deficits with Taiwan, and the U.S. trade deficit with Taiwan for the year ended December 31, 1995 was approximately $5.6 billion. Taiwan's trade deficit with Japan has consistently grown from $3.7 billion in 1986 to $17.1 billion in 1995. Taiwan's foreign exchange reserves were approximately $90.3 billion on December 31, 1995 making Taiwan second only to Japan in its level of foreign reserves. Taiwan's large trade surpluses, coupled with the increase in foreign exchange reserves, have intensified pressures for corrective action, including threats of protectionist and retaliatory trade measures which could adversely impact Taiwan's export industries. In 1995, Taiwan had a balance-of-payments deficit of $3.9 billion. Taiwan has in the past shown an ability to prosper in a competitive environment on the strength of product quality, efficiency and responsiveness to market demand. This ability will continue to be tested in the future as, in addition to the protectionist threats, Taiwan's export economy faces competition from producers in other countries with lower wage levels than those generally prevailing in Taiwan. Skilled workers and technical personnel are still relatively inexpensive, but unskilled labor is in increasingly short supply. 12 Recognizing the imperatives of the more competitive Asian economy, the ROC government is seeking to develop Taiwan into a regional hub for high-end manufacturing, sea and air transportation, finance, telecommunications and media. Taiwan is seeking to develop further as a service-oriented economy rather than a labor-intensive, manufacture-oriented one. One result of the movement of industrial capacity offshore has been the reduction of the labor shortage in manufacturing. From 1990 to 1995, more than 4,000 ROC companies have invested significant amounts of money in various locations around the world, principally in Southeast Asia. In 1992, the PRC became the biggest recipient of ROC investment, largely because of cheap land and labor (wages in the PRC are one-seventh those in Taiwan), common language, and huge domestic markets. Taiwan's trade with Hong Kong has increased consistently since 1986 and in 1995, represented 23.4% of total exports, a substantial portion of which represents indirect trade with the PRC. The consistent increase of trade with Hong Kong since 1986 may be attributed to Taiwan's indirect trade with the PRC. As a result of the substantial increase in trade and investment between the ROC and the PRC, an economic downturn in the PRC could have a material adverse effect on the ROC economy. Although there has been recent momentum toward deregulation, the ROC government still bars some industries from making direct investments in the PRC. In April 1993, Taiwan was placed on the United States' "priority watch list" for possible trade sanctions under Section 301 of the Trade Act of 1974, as amended. The United States Trade Representative publishes the "priority watch list" each year to identify nations that deny adequate and effective intellectual property rights ("IPR") protection to U.S. interests. After being placed on this "priority watch list," Taiwan quickly passed a series of legislation revising its IPR laws. Following a comprehensive review of Taiwan's progress in IPR protection, the United States removed Taiwan from the "Special 301 priority watch list" and placed Taiwan on the United States' general "watch list." The general "watch list" includes nations that warrant special attention because they maintain intellectual property practices or barriers to market access that are of particular concern to U.S. interests. Taxation Changes in tax legislation in either the United States or the ROC may have an impact on the Fund. During certain periods in the past, capital gains derived from stock transactions have been subject to tax in the ROC. In the latest 1989 imposition of this capital gains tax, the Fund was exempt from the tax pursuant to an earlier ROC government ruling. Since January 1, 1990, the capital gains tax has been suspended. On January 4, 1996, the ROC Legislative Yuan passed a bill for the amendment of the ROC Income Tax Law that would have eliminated the exemption from the ROC income tax for gains realized on the sale of ROC securities and imposed a capital gains tax. On January 12, 1996, this amendment was repealed by the Legislative Yuan. The reintroduction of a capital gains tax would require the Legislative Yuan to engage in the full legislative process for the enactment of tax legislation. There can be no assurance that the capital gains tax will not be imposed in the future or that the Fund will continue to be exempt from such tax. See "Taxation." NET ASSET VALUE DISCOUNT Shares of closed-end investment companies frequently trade at a discount from net asset value. This characteristic of shares of a closed-end fund is a risk separate and distinct from the risk that the fund's net asset value will decrease. The Fund cannot predict whether in the future its shares will trade at, below, or above net asset value. The Fund's shares of Common Stock are not subject to redemption. OPENING OF THE ROC SECURITIES MARKET At the time the Fund was formed in 1986, it represented the only vehicle publicly available in the United States, and one of only four vehicles world- wide, through which foreign investors could make portfolio investments in listed ROC securities. Since that time a number of other alternatives to the Fund as a vehicle for investment in ROC securities by foreign investors have been developed. It has been the ROC government's stated policy to liberalize restrictions on foreign investment in its securities market, and the ROC government has significantly eased restrictions on foreign investment over the past several years. The Adviser believes that the development of these other alternatives to the Fund as a vehicle for investment in ROC securities by foreign investors may reduce any tendency of the shares to trade at a premium in the future. See "Risk Factors and Special Considerations -- Risks of Investing in ROC Securities -- Investment and Repatriation Restrictions." 13 INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to seek long-term capital appreciation through investment primarily in equity securities listed on the TSE. It is anticipated that, when the net proceeds of this offering are fully invested, at least 75% of the Fund's assets will be invested in equity securities listed on the TSE. This objective may not be changed without the approval of a majority of the Fund's outstanding voting securities and the consent of the CSEC. As used in this Prospectus, a "majority of the Fund's outstanding voting securities" means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. Consistent with the Fund's objective of seeking long-term capital appreciation, the Fund's Board of Directors adopted in 1995 an operating policy under which, in normal circumstances, at least 90% of the Fund's assets will be invested in equity securities listed on the TSE. This operating policy may be changed by the Board at any time. The remainder of the Fund's assets generally will be invested in debt securities which are listed on the TSE or traded on the over-the-counter market, or will be held in bank deposits or short-term money market instruments in order to provide appropriate liquidity to take advantage of market opportunities and meet cash needs. Investments in debt securities, including short-term money market instruments, will be limited to obligations of the ROC government or government-owned enterprises and obligations issued or guaranteed by ROC financial institutions with shareholders' equity of at least US$50 million. Investments in money market instruments may include government treasury bills, commercial paper, bankers' acceptances and negotiable certificates of deposit. There is currently no rating system for debt securities in the ROC. The Fund is currently restricted by its investment limitations from purchasing equity securities which are traded on the over-the-counter market. In addition, the Fund currently may not purchase any equity securities which, at the date purchase is made, are not listed and traded on TSE. See "Investment Limitations" in the SAI. Although the investment objective of the Fund is long-term capital appreciation, the Fund expects to receive current income from dividends and interest paid on the equity and debt securities in which it invests. The Adviser anticipates that the net proceeds of this offering will be invested within two months from the date of this Prospectus in accordance with the policies set forth herein. Pending such investment, it is anticipated that the net proceeds will be invested in NT Dollar-denominated bank deposits and money market instruments in order to preserve liquidity and generate interest income for the Fund. See "Use of Proceeds." The Fund has diversified and intends to continue to diversify its assets over a broad spectrum of the ROC economy, including, as conditions warrant from time to time, cement, chemicals and plastics, construction, electrical/electronics, finance, banking, food, textiles, glass, rubber, pulp and paper, metal products and machinery, retailing and tourism. In selecting industries and companies for investment, the Adviser will consider overall growth prospects, competitive position in export markets, technology, research and development, productivity, labor costs, raw materials costs and sources, profit margins, return on investment, capital resources, government regulation, management and other factors. The Fund's equity investments have been and will be predominantly in common stock, but investments may also be made in preferred stocks and in convertible debentures listed on the TSE. TEMPORARY INVESTMENTS During periods in which changes in economic, financial or political conditions make it advisable, the Fund may for temporary defensive purposes reduce its holdings in equity securities and increase its holdings in long-term or short-term debt securities or hold cash. The Fund's policy is to invest in equity securities listed on the TSE based on the fundamentals of the investments and generally to disregard short term market volatility in making investment decisions except in extreme and unusual circumstances. Subject to applicable ROC regulations, the Fund may also at any time invest funds in U.S. Dollar- denominated money market instruments to pay Fund expenses in the United States and as reserves for dividend and other distributions to shareholders and in response to unforeseen circumstances. Under current ROC regulations, after funds have been remitted to Taiwan and invested through the securities investment trust fund arrangement in NT Dollar-denominated securities, they may not be invested in U.S. Dollar-denominated securities except to the extent that they are distributed to the Fund under the Management Contract. Accordingly, the ability of the Fund to invest in U.S. Dollar-denominated securities will be limited. See "Foreign Investment and Exchange Controls in the ROC" in the SAI. 14 PORTFOLIO TURNOVER RATE The Fund's policy is to invest for long-term capital appreciation, although the market volatility during certain periods in the Taiwan market has made it necessary during such periods to engage in some short-term trading in order to preserve investment gains. When the Fund was established, the Adviser expected that the annual portfolio turnover rate for the Fund's investments would not exceed 50%. However, since that time market conditions in Taiwan have resulted in portfolio activity at a greater rate than anticipated. During the fiscal years ended August 31, 1993, 1994 and 1995 the Fund's portfolio turnover rate (excluding short-term investments) was 163%, 267% and 159%, respectively, due primarily to a high degree of market volatility throughout much of the period. Although the Fund has experienced high annual portfolio turnover rates in the past, the Adviser expects that, based on its policy of investing in ROC equity securities based on the fundamentals of the investments and of disregarding short-term market volatility in making investment decisions, and the Fund's operating policy, adopted in 1995 by the Fund's Board of Directors, of investing at least 90% of the Fund's assets in ROC equity securities, the annual portfolio turnover rate for the Fund will not exceed 150% under normal circumstances. However, the Fund's turnover rate may exceed 150% under special situations such as a large dividend payout or an extremely defensive position. A high portfolio turnover rate could lead to a higher expense ratio due to increased payments of brokerage commissions. In addition, the U.S. federal tax requirement that the Fund derive less than 30% of its gross income from the sale or disposition of securities held less than three months may limit the Fund's ability to dispose of its securities. See "Taxation -- U.S. Federal Income Taxes" in the SAI. ROC government regulations prohibit any mutual fund in Taiwan from having an annual turnover rate with respect to its portfolio securities that exceeds (i) 100% of the average annual turnover rate of all securities listed on the TSE ("Annual Market Turnover Rate"), if the Annual Market Turnover Rate is below 200% or (ii) 200% plus 50% of the portion exceeding 200%, if the Annual Market Turnover Rate exceeds 200%. Given the high threshold limitations, the Fund does not expect the ROC regulations regarding turnover rates to be a limiting factor when management of the Fund deems it appropriate to purchase or sell securities for the Fund. The portfolio turnover rate is calculated by dividing the lesser of sales or purchases of portfolio securities by the average monthly value of the Fund's portfolio securities. Other than as described under "Investment Limitations" and "Foreign Investment and Exchange Controls in the ROC" in the SAI, ROC government regulations do not impose any restrictions on the ability of the Fund to purchase and dispose of portfolio securities. MANAGEMENT OF THE FUND BOARD OF DIRECTORS The management of the Fund, including general supervision of the duties performed by the Adviser under the Management Contract, is the responsibility of its Board of Directors. For certain information regarding the Directors and officers of the Fund, see "Management of the Fund -- Directors and Officers" in the SAI. Certain of the Directors of the Fund reside outside the United States and substantially all the assets of such persons are located outside the United States. None of the Directors of the Fund who reside outside the United States have appointed an agent for service of process in the United States. It may not be possible, therefore, for investors to effect service of process within the United States upon such persons or to enforce against them, in the U.S. courts or foreign courts, judgments obtained in U.S. courts predicated upon the civil liability provisions of the Federal securities laws of the United States. In addition, it is not certain that a foreign court would enforce, in original actions, liabilities against such persons predicated solely upon the U.S. securities laws. THE ADVISER The Adviser, China Securities Investment Trust Corporation, is an ROC corporation incorporated on April 14, 1986 in order to serve as the investment adviser to the Fund pursuant to the Management Contract. The Adviser was formed under the Regulations for Administration of Securities Investment Trust Fund Enterprises (the "Adviser Regulations"), which set out the requirements for an investment management company seeking to establish investment funds in Taiwan, for the purpose of acting as a securities investment trust enterprise under ROC law. As such, in addition to acting as the investment adviser to the Fund, the Adviser 15 is authorized and engages in the securities business in Taiwan to the extent permitted under the Adviser Regulations, including raising funds either in or outside Taiwan for investment in securities of ROC companies and, in the case of funds raised in Taiwan, for investment in foreign securities through other securities investment trust funds formed under the Regulations Governing the Management of Securities Investment Trust Funds (the "Trust Fund Regulations"), which set out the requirements for the establishment of investment funds through which non-ROC persons may invest in securities issued by ROC companies. See "Foreign Investment and Exchange Controls in the ROC" in the SAI. In addition to the Fund, the Adviser has established and is managing ten securities investment trust funds which have sold (and in some cases are continuing to sell) units of beneficial interest to ROC investors. These funds had total net assets of approximately NT$24.6 billion (US$902.8 million) as of December 31, 1995, and include five open-end funds and three closed-end funds formed to invest in TSE listed securities, an open-end fund formed to invest in non-ROC equity securities and one open-end fund and one closed-end fund formed to invest in both equity and debt securities of ROC entities. The principal shareholder of the Adviser is China Development Corporation, an ROC corporation formed in 1959 which is engaged in the investment and trust business in Taiwan and the shares of which are listed on the TSE. As of December 31, 1995, a portion of China Development Corporation's outstanding shares were owned by agencies or instrumentalities of the ROC government or by entities wholly owned or majority owned by the ROC government. China Development Corporation owns 57.7% of the Adviser's capital stock. The Pre-Incorporation Agreement dated as of February 24, 1986 entered into by the shareholders of the Adviser prior to its incorporation provides that, except for certain permitted transfers of shares among the original shareholders, the capital stock of the Adviser shall at all times be held so that no less than 65% is beneficially owned by persons residing or incorporated in the ROC and no more than 35% is owned by persons residing or incorporated outside the ROC. In addition, each of the shareholders has agreed that if any shareholder wishes to dispose of its shares each of the other shareholders has a right of first refusal to purchase the shares before they may be sold to third parties. The Adviser's Board of Directors consists of ten directors of which five are nominated by China Development Corporation, two by Merrill Lynch International Incorporated and one by each of the other institutional shareholders. The Adviser's offices are located at 99 Tun Hwa South Road, Section 2, 24th Floor, Taipei, Taiwan, ROC. For its services, the Adviser receives a monthly basic fee, payable in NT Dollars, at an annual rate of 1.50% of the Fund's average daily net assets (including both Taiwan and U.S. assets). The basic fee payable to the Adviser is subject to monthly performance adjustments (based on a rolling performance period of 36 months), which may increase or decrease the basic fee (by up to 0.50% per annum of the Fund's average net assets during the performance period) depending on the performance of the Fund's investments compared to the performance of the TSE Index. One-twelfth of the 1.50% annual basic fee rate is applied to the Fund's net assets averaged over the most recent month, giving a dollar amount which is the basic fee for that month. The performance adjustment is added to or subtracted from the basic fee. The Fund's performance is compared with the performance of the TSE Index over the performance period. For information regarding the TSE Index, see "The Securities Market of the ROC -- The Taiwan Stock Exchange" herein. Each percentage point difference in performance between the Fund and the TSE Index during this period is multiplied by 0.05%. The maximum annualized performance adjustment rate is plus or minus 0.50%. One-twelfth of this rate is then applied to the Fund's net assets averaged over the performance period, giving the dollar amount which is added to or subtracted from the basic fee. In comparing the Adviser's performance to the TSE Index, the TSE Index is expressed in U.S. Dollars so as to eliminate the effect of fluctuations between the NT Dollar and the U.S. Dollar. The performance adjustments are calculated in compliance with Rule 205-1 under the Advisers Act. The fee payable to the Adviser is higher than advisory fees paid by most U.S. investment companies investing in U.S. securities, primarily because of the additional time and expense required of the Adviser in 16 pursuing the Fund's objective of investing in ROC securities. The Adviser may, but at no additional cost to the Fund, retain the services of others in connection with advising the Fund. The following table shows the advisory fees paid to the Adviser and their relation to the Fund's performance compared to the TSE Index:
OUTPERFORMED/ ADVISORY FEES (UNDERPERFORMED) PERFORMANCE PAID OR FISCAL YEAR ENDED TSE INDEX FEE ADJUSTMENT PAYABLE(1) ---------------------------- ----------------------------- ---------------------------- August 31, 1993 ................. 0.8% $702,051 $3,024,404 August 31, 1994 ................. (5.6)% $623,789(2) $4,360,623 August 31, 1995 ................. 3.4% $202,418 $4,532,092
________________________ (1) Includes the performance fee adjustment. (2) This positive performance adjustment was due to the fact that the fee was based on a rolling 36-month period. Fidelity International Investment Advisors ("FIIA"), served as the investment sub-adviser to the Fund since its inception through April 23, 1994. For its services, FIIA received from the Adviser a basic fee equal to one half of the fee paid by the Fund to the Adviser less the fee paid by the Adviser to Fidelity Investment (Taiwan) Ltd. ("Fidelity Taiwan"). Fidelity Taiwan had an agreement with the Adviser to provide research services regarding ROC investments to the Adviser since its inception through April 23, 1994. As compensation for its services, Fidelity Taiwan received from the Adviser a monthly fee at an annual rate of 0.25% of the Fund's net assets up to $50 million, 0.20% of net assets in excess of $50 million up to $100 million and 0.15% of net assets in excess of $100 million. The understanding reached by the Fund, the Adviser and FIIA at the time the Fund was established in 1986 contemplated that the investment advisory services provided by FIIA, and the research services provided by Fidelity Taiwan, to the Adviser would be temporary, and would permit the Adviser to develop its own advisory and research staff so that after a minimum period of five years from the date on which the Fund commenced operations, the agreements with FIIA and Fidelity Taiwan would be terminated and these advisory and research services would be provided by the Adviser's own staff. Prior to the termination of the advisory and research services arrangements with FIIA and Fidelity Taiwan, the Adviser determined that it would have the necessary resources such that it no longer would require these services from FIIA or Fidelity Taiwan. The Adviser currently employs most of the prior advisory staff of FIIA (including Michael Chen, the Fund's current portfolio manager) and most of the prior research staff of Fidelity Taiwan. PORTFOLIO MANAGER Michael Chen is the Fund's portfolio manager (the "Portfolio Manager") and is primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Chen received an MBA degree in finance and accounting from Cornell University and a Bachelor of Business Administration degree from Saint Joseph's University in Philadelphia. He has been qualified as a Certified Securities Analyst in Taiwan since 1987. He is currently Executive Vice President of the Adviser. He served as a Managing Director of Fidelity Taiwan from 1992 to 1994 and Director and Head of Research of Fidelity Taiwan from 1986 to 1992. Prior to joining Fidelity Taiwan, Mr. Chen served as an Assistant Loan Officer for the Taipei branch of First Interstate Bank of California (1984-1986). From 1989 until becoming the Portfolio Manager in July 1992, he acted as Deputy Portfolio Manager for the Fund. The Portfolio Manager has general responsibility for managing the investments held under the Management Contract, including the power to purchase and dispose of securities and other investments and to conduct all dealings with securities brokers and dealers effecting transactions for the benefit of the Fund. Albert King is the Fund's Deputy Portfolio Manager. Mr. King has been assisting the Portfolio Manager in the day-to-day management of the Fund's portfolio since July 1994. Mr. King received an MBA degree in finance from New York University and a Bachelor of Arts degree in political science from National Taiwan University in Taipei. Mr. King is a Fund Manager of the Adviser and from 1992 until becoming the 17 Fund's Deputy Portfolio Manager, Mr. King served as a research analyst with the Adviser's research department. Prior to joining the Adviser, Mr. King served as a management associate and assistant relationship manager for the Taipei branch of Citibank from 1990 to 1992. THE MANAGEMENT CONTRACT The Fund makes its investments through a securities investment trust fund arrangement established under the Management Contract in accordance with the Trust Fund Regulations. Under the Management Contract, the Adviser is required to manage the investment of the assets of the Fund held by the Custodian in Taiwan for the exclusive benefit of the Fund, including making investment decisions, supervising the acquisition and disposition of investments and selecting brokers or dealers to carry out portfolio transactions, all in accordance with the Fund's investment objective and policies and with guidelines and directions from the Fund's Board of Directors. Because the Management Contract relates only to the Fund's investment activities in Taiwan, the Fund entered into a separate advisory agreement (the "U.S. Advisory Agreement") with the Adviser relating to the management of any Fund assets held in the U.S. by the Fund's U.S. custodian. The Adviser does not receive any compensation from the Fund, other than the advisory fee described above, for performing services under the Management Contract or under the separate advisory agreement relating to U.S. assets. The Management Contract will continue in force until December 15, 1996 and from year to year thereafter so long as its continuance is approved annually by vote of a majority of the Fund's directors who are not "interested persons" of the Adviser as defined in the 1940 Act, cast in person at a meeting called for that purpose, and by either (i) a vote of a majority of the Board of Directors of the Fund or (ii) a vote of a majority of the outstanding shares of the Fund. The Management Contract may be terminated by the Fund, without payment of any penalty, upon sixty days' written notice to the Adviser and the Custodian, and will terminate automatically in the event of its assignment by the Adviser or the Custodian. The Management Contract will also terminate (i) upon 60 days' written notice by the Adviser or the Custodian to the other parties thereto, (ii) upon the liquidation or bankruptcy, or revocation of the license, of the Adviser or the Custodian, whereupon the Adviser or Custodian (as the case may be) shall be deemed removed, (iii) if the Adviser notifies the other parties thereto and the CSEC that in the Adviser's opinion the Management Contract is illegal, impracticable or inadvisable having regard solely to the interests of the Fund, (iv) if required by the CSEC, or (v) if the CSEC determines that the Adviser or the Custodian is incapable of carrying out its functions and, as described below, a substitute is not appointed within the ensuing three-month period. In case of termination of or failure to renew the Management Contract or removal of the Adviser or Custodian, the Fund's Board of Directors will select a successor investment adviser or custodian (as the case may be). Any such successor adviser must be a registered investment adviser under U.S. law and must also be specifically approved by the CSEC and licensed under the Adviser Regulations to serve as an investment management company under a new Management Contract. In the event that (i) the Management Contract is terminated and a new Management Contract is not entered into within three months, or (ii) the Adviser (or Custodian) is removed and a successor adviser (or custodian) is not selected or approved and a new Management Contract entered into within three months, the assets held under the Management Contract will be liquidated (within three months) in an orderly manner by the Adviser and the proceeds thereof distributed to the Fund (with the Adviser acting under the Management Contract solely for such purpose), and the Fund will be dissolved and liquidated. Any such sale of assets may require the sale of portfolio securities at prices less favorable than those which might be obtained under other circumstances, but in this event the Adviser will endeavor to effect any such sale in the most advantageous manner. The Management Contract provides that the Adviser is entitled to indemnification out of the assets of the securities investment trust fund established under the Management Contract for costs incurred in enforcing the obligations of the Custodian under the Management Contract. In addition, the Adviser is entitled to indemnification out of the assets of the securities investment trust fund against all claims (and against all costs and expenses in relation to such claims) incurred or suffered by it as a result of its acting as adviser under the Management Contract, except with respect to claims arising out of its own willful or negligent default, reckless disregard of its duties under the Management Contract or bad faith. If either the Adviser or the Custodian does not perform its obligations as set forth in the Management Contract, the Fund is legally entitled to bring an action in an ROC court to enforce those obligations. 18 The U.S. Advisory Agreement will also continue in force until December 15, 1996 and from year to year thereafter so long as its continuance is approved annually by vote of a majority of the Fund's directors who are not "interested persons" of the Adviser as defined in the 1940 Act, cast in person at a meeting called for that purpose, and by either (i) a vote of a majority of the Board of Directors of the Fund or (ii) a vote of a majority of the outstanding shares of the Fund. The U.S. Advisory Agreement may be terminated by the Fund, without payment of any penalty, upon sixty days' written notice to the Adviser, and will terminate automatically in the event of its assignment by the Adviser. The U.S. Advisory Agreement provides that the Fund shall indemnify the Adviser from and against any liability for, and any damages, expenses or losses incurred in connection with any act or omission in the course of, connected with or arising out of any services rendered under the U.S. Advisory Agreement, except by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of reckless disregard of the Adviser's obligations and duties under the U.S. Advisory Agreement. FUND ADMINISTRATION AND EXPENSES The Adviser or its shareholders bear all expenses associated with its investment management duties under the Management Contract as well as all salaries, fees and expenses of the Fund's officers and directors who are interested persons of the Adviser. Other than expenses borne by the Adviser or its shareholders, the Fund bears all of its expenses including: fees and expenses of the Fund's directors who are not interested persons of the Adviser; interest expense; taxes and governmental fees; brokerage commissions and other expenses incurred in acquiring or disposing of portfolio securities; expenses of preparing stock certificates and other expenses in connection with the issuance, offering, distribution, sale or underwriting of securities issued by the Fund; expenses of registering and qualifying the Fund's shares for sale with the U.S. Securities and Exchange Commission and in various states and foreign jurisdictions; auditing, accounting, insurance and legal costs; custodian, dividend disbursing and transfer agent expenses; expenses of obtaining and maintaining stock exchange listings of the Fund's shares; and the expenses of shareholders' meetings and of the preparation and distribution of reports to shareholders. Under an Administration Agreement, State Street Bank and Trust Company provides, or arranges to provide, the Fund with necessary office space, communications facilities and personnel to perform administrative and clerical functions for the Fund; maintain and keep certain books and records of the Fund; prepare and file tax returns and other documents required by U.S. federal and state laws and by stock exchanges on which the Fund's shares are listed; prepare and distribute proxy materials and periodic reports to Fund shareholders; respond to inquiries from Fund shareholders; and coordinate and monitor the activities of the Fund's transfer agent. Under the Administration Agreement, the Fund pays State Street Bank and Trust Company its out-of-pocket expenses for mailing documents to Fund shareholders and a fee based on an annual rate of 0.09% of the Fund's average daily net assets up to $150 million, 0.06% of the next $150 million, and 0.04% of those assets in excess of $300 million, subject to certain minimum requirements. THE SECURITIES MARKET OF THE ROC BACKGROUND AND DEVELOPMENT The TSE was formed in 1961 and commenced operations in 1962 with 18 listed companies having an aggregate market value of NT$6.84 billion. Although the securities market in the ROC has generally grown with the ROC's economic development, it has also exhibited a high degree of volatility in response to political and economic events in the ROC and abroad. For example, the TSE Index, which stood at 835.12 at the end of 1985, increased to 9,624.18 by the end of 1989, decreased to 4,530.16, 4,600.67 and 3,377.06 at the end of 1990, 1991, and 1992, respectively, and increased to 6,070.56 and 7,124.66 at the end of 1993 and 1994, respectively. The TSE Index stood at 5,173.73 at the end of 1995. The securities market in the ROC is undergoing a process of expansion, liberalization and internationalization. In the past, the development of the securities market lagged behind the rapid development of the ROC's economy and failed to serve as an effective mechanism for channeling the ROC's large pool of savings into productive investment. Since 1981, the ROC government has taken a number of steps designed to upgrade the quality and importance of the securities markets. These steps include incentives to encourage 19 listing of shares on the TSE, the establishment of an over-the-counter securities market, improvement of financial reporting requirements, pressure on government-owned enterprises to use the securities market to raise capital and efforts to broaden the scope and raise the quality of institutions operating in the market. THE TAIWAN STOCK EXCHANGE The TSE, the ROC's only stock exchange, is a corporation with a capitalization of NT$2.4 billion at the end of 1994, and is owned 61% by private banks and enterprises and 39% by government-operated banks and enterprises. The TSE is managed by a board of directors elected by and from among the shareholders. The Chairman, President and other executive officers of the TSE direct day-to-day operations through a number of operation departments. Selection of the TSE's top management is influenced by the CSEC, which also monitors the TSE's operations. Both equity and debt securities are traded on the TSE. At December 31, 1995, the aggregate trading value of listed equity securities was approximately NT$10,152.0 billion (US$372.3 billion) and for the period from January 1 to December 31, 1995, the average daily trading value was NT$35.5 billion (US$1.3 billion). The listed bond market remains small in terms of trading volume: at December 31, 1995, aggregate trading value of listed debt securities was approximately NT$18.0 billion (US$660.2 million) and for the period from January 1 to December 31, 1995, the average daily trading value was approximately NT$6.5 million (US$238,000). The following table sets forth certain information regarding the TSE Index for the periods indicated: TSE INDEX (1966 = 100)
NUMBER TOTAL OF LISTED NUMBER COMPANIES OF LISTED TRADING INDEX INDEX YEAR IN INDEX COMPANIES VALUE HIGH LOW PERIOD-END - ---- --------- --------- --------- -------- ---------- (NT$ BILLION) ------------- 1990 ............... 174 199 19,031.3 12,495.34 2,560.47 4,530.16 1991 ............... 198 221 9,682.7 6,305.22 3,316.26 4,600.67 1992 ............... 234 256 5,917.1 5,391.63 3,327.67 3,377.06 1993 ............... 253 285 9,056.7 6,070.56 3,135.56 6,070.56 1994 ............... 280 313 18,812.1 7,183.75 5,194.63 7,124.66 1995 ............... 315 347 10,151.5 7,051.49 4,503.37 5,173.73
_________________ Source: 1994 TSE Statistical Data; TSE Monthly Review, January 1996. In addition to providing a market for securities trading, the TSE has primary responsibility for reviewing applications by ROC issuers to list on the TSE. The TSE also has primary responsibility for the delisting of securities, a step which is taken on the basis of various adverse factors, including financial deterioration of the issuer. In addition to requirements imposed by the CSEC, the TSE has specific requirements for listing based on the number and distribution of shareholders, the amount of capital, profitability and capital structure. Requirements for listing as First Category, Second Category, and Third Category companies are set forth under "The Securities Market of the ROC - -- The Primary Market" in the SAI. THE OVER-THE-COUNTER MARKET An over-the-counter ("OTC") market was established in September 1982 on the initiative of the CSEC. This market is limited to unlisted equity securities, corporate bonds and bank debentures, which are at present not widely utilized as financial instruments in the ROC, and to government bonds. The OTC market has grown erratically, with the total trading value increasing from NT$47 million in 1985 to approximately NT$27,963 million in 1995. A sharp increase in recent years has resulted from trading in government bonds issued for the Six-Year National Development Plan (the "Six-Year Plan"), the majority of which is confined to trading in the repo market. At present, there are 107 brokers in the OTC market, of which 66 are able to trade for their own account. Active traders include trust and investment companies and bills finance companies. The OTC Securities and Exchange Commission on September 18, 1995 implemented a new trading system designed to encourage trading of unlisted equity and debt securities of companies whose securities are not qualified for 20 listing on the TSE. To become a quotable security, the issuer must meet certain requirements, including having a paid-in capital of at least NT$50 million. In addition, the security must be recommended by two members of the Taipei Securities Dealer Association, each of which must be qualified as both an underwriter and trader, who will serve as market makers. As of December 31, 1995, 41 companies had offered their equity securities to be traded on the OTC market. It is expected that some small and medium-size companies, which at present have limited funding channels and are too small to list on the TSE, will utilize the OTC market as a source of funds in the future. REGULATORY ENVIRONMENT The CSEC has operative responsibility for the implementation of the ROC Securities and Exchange Law and of ROC government policies in the securities market. In addition, the CSEC has consistently been involved in formulation of policy and has participated in the comprehensive review of the securities laws and regulations. The CSEC has a Chairman, a Vice-Chairman and nine to eleven other commissioners (consisting of two to three full-time commissioners and up to nine part-time commissioners) from the Ministry of Finance, the Central Bank, the Ministry of Economic Affairs and other governmental agencies. The CSEC has extensive regulatory authority over "public companies" and TSE-listed companies. In order to make securities offerings in the ROC, "public companies" and TSE-listed companies are required to (i) obtain approval from the CSEC or (ii) file a report with the CSEC, which report will become effective 30 days after filing if the CSEC has no objection. The CSEC also administers the financial reporting system and licenses and supervises the other participants in the ROC's securities market, including brokers, traders, underwriters, investment advisers and trust funds. A particular focus of the CSEC's efforts in recent years has been improving the quality of financial reporting and accounting practices through the implementation of more extensive and more frequent disclosure requirements, including periodic financial reports and operating statements and disclosure of information regarding material developments and ownership (including beneficial ownership) of shares, and the imposition of criminal liability on accountants who are knowingly involved in the preparation of fraudulent financial reports. The ROC Securities and Exchange Law provides, among other things, for regulations relating to public offerings, measures to strengthen the capital structure of issuers, civil liability for material misstatements or omissions made by issuers, regulation of the securities activities of officers, directors, supervisors and holders of more than 10% of the shares of an issuer, regulations regarding tender offers and significant expansion of the prohibitions against insider trading, including the imposition of treble civil damages and criminal sanctions. The ROC Securities and Exchange Law requires disgorgement of all profits gained by any person trading on inside information regardless of the timing of the trades. The CSEC has also instituted a system to oversee stock prices, which was designed to facilitate the curbing of trading abuses. Nonetheless, there have been recurring press reports of insider trading and manipulation of stock prices in the ROC. The CSEC does not have enforcement powers under the ROC Securities and Exchange Law, and thus its ability to curb abuses is limited to administrative measures such as issuance of warnings and revocation of licenses. Enforcement proceedings may be pursued by the district attorney upon the recommendation of the CSEC. Since 1983, the ROC authorities have taken steps to facilitate investment in the ROC securities market by institutional investors, both foreign and domestic, including investment by certain foreign funds in ROC securities, direct investment in ROC securities (including securities of investment trust enterprises) by certain qualified foreign institutional investors, the issue and sale to foreigners, subject to CSEC approval, of depositary receipts evidencing the shares of, and convertible bonds of, ROC companies and the listing on the TSE of Taiwan depositary receipts evidencing shares of foreign issuers. In addition, the ROC government recently promulgated regulations which permit non- resident institutional and individual foreign investors ("General Foreign Investors") to invest directly in ROC securities, subject to prior approval of the TSE. To encourage the development of the domestic institutional investor base in Taiwan, the ROC authorities recently approved the establishment of certain securities lending and finance companies. 21 THE REPUBLIC OF CHINA This information relating to the Republic of China is provided for background purposes only and has generally been extracted from and is presented on the authority of various public official documents. For further background information, see "The Republic of China" in the SAI. LOCATION, AREA AND POPULATION Taiwan is located approximately 90 miles east of the Chinese mainland, 650 miles south of Japan, 340 miles northeast of Hong Kong and 200 miles north of the Philippines. Owing to its geographical position, Taiwan plays a significant role in trade, transportation and tourism in East Asia. The island is 240 miles in length and 80 miles in width. In addition to the island of Taiwan, there are over 77 offshore islands currently under the effective control of the ROC. The total area of the ROC is approximately 13,900 square miles, which is approximately the same as that of the Netherlands. Taiwan's total population as of December 31, 1995 was estimated at 21.3 million. The literacy rate is approximately 94%. The bulk of the population is composed of Chinese descendants of early migrants from the mainland and mainland Chinese who migrated from the mainland in 1949 and their descendants. Chinese persons make up approximately 98% of the population, with the remaining 2% of the population consisting primarily of aboriginal natives of the island. Population density is among the highest in the world with an average of approximately 1,498 people per square mile. The largest cities are Taipei, in the north, with over 2.7 million people, and Kaohsiung, in the south, with over 1.4 million people. Mandarin is the official language, while Fukien and Hakka dialects are also widely spoken. POLITICAL HISTORY The ROC was established in 1912 by Dr. Sun Yat-Sen and the KMT on mainland China after the overthrow of the Ching Dynasty in 1911. The ROC government remained on the mainland until December 1949 when General Chiang Kai-Shek, who was elected president of the ROC by the National Assembly in 1948, moved the seat to Taipei. Since that time, the ROC has continued to maintain that it is the sole legitimate government of all of China (i.e., Taiwan and all of mainland China and Mongolia). PRC also asserts sovereignty over all of China, including Taiwan. The KMT is the dominant political party in the ROC and as of December 31, 1995 controlled approximately 55% of the 334 seats in the National Assembly and approximately 53% of the 167 seats in the Legislative Yuan. The current President, Lee Teng-Hui, assumed the Presidency in January 1988 and was elected Chairman of the KMT in July 1988. He is the first native-born Taiwanese to hold either the office of President or Chairman of the KMT. President Lee was re-elected in March 1996 for a four-year term of office. Under the leadership of President Lee, the KMT has increased the pace of political liberalization in the ROC, in accordance with a ten-year political liberalization program introduced by President Lee's predecessor in 1986. The program provides, among other things, for the gradual increase in the number of generally elected parliamentary seats and the recognition of opposition political parties. The Democratic Progress Party has emerged as a significant opposition party in parliamentary and other national elections. In addition, the Chinese New Party was formed in 1993 by disaffected members of the KMT. RECENT ECONOMIC DEVELOPMENTS Although ROC's gross national product ("GNP") growth has varied from a low of 1.16% in 1974 to a high of 13.59% in 1978, it has never been negative. The major components of GNP are private consumption and exports. Although Taiwan's exports have continued to grow (increasing 20.0% in 1995 to US$111 billion) and the country has continued to enjoy a cumulative trade surplus (US$8.1 billion in 1995), domestic demand has become an increasingly important force in driving growth in the Taiwan economy. During 1993, the ROC gross domestic product ("GDP") grew at a real rate of approximately 6.3%. This growth was sustained during 1994 when GDP grew at a rate of 6.5%. In 1995, the ROC GDP grew at an annual rate of 7.4%. Taiwan's foreign exchange reserves decreased by 2.3% during 1995 and stood at US$90.3 billion on December 31, 1995. Taiwan's foreign exchange reserves decreased to US$82.6 billion in March 1996 during 22 recent political tensions between the PRC and the ROC. On December 31, 1994, external public debt stood at US$563.3 million, a decrease of 5.9% from 1993. External public debt service payments represented approximately 0.1% of exports of goods and services in 1994. Since 1984, Taiwan's favorable trade balance and the build-up in foreign exchange reserves have caused appreciation of the NT Dollar and heightened protectionist sentiments in Taiwan's major export markets. In 1987, the NT Dollar appreciated approximately 19.6% against the U.S. Dollar. The NT Dollar has further appreciated by 4.5% between December 31, 1987 and December 31, 1995. Unemployment in Taiwan remained low in 1995, with an average rate of approximately 1.9%. Wages have increased at a faster rate than inflation but these wage increases have for the most part been matched by a corresponding increase in productivity. The decline of fixed capital formation as a percentage of GDP is a perennial concern of government officials, but this percentage has increased consistently over the past several years. Investment increased to 23.68%, 23.12% and 23.12% of GDP in 1993, 1994 and 1995, respectively. The ROC government has continued its policy of economic liberalization. In March 1996, new regulations were approved which permit General Foreign Investors to invest directly in ROC securities, subject to TSE approval. In addition, insurance companies were permitted in March 1996 to invest in new securities investment trust enterprises. Foreign exchange controls have also been relaxed recently to allow for inward remittances of US$20 million per corporate resident and US$5 million per individual resident per year. In recent years, Taiwan has experienced growing competition from lower-wage countries, particularly in Asia. In an effort to decrease reliance on labor- intensive industries, the ROC government is promoting high-technology, energy- efficient industries. Statutory incentives for high-technology and capital- intensive industries included five-year tax exemptions, business tax deductions for research and development expenses, lower tax rates and accelerated depreciation. The government's initiatives in this area have met with a large measure of success. The ROC government supports the modernization of Taiwan's service industry as a means to support higher levels of agricultural and industrial production as well as to enhance the quality of life and make Taiwan's economy less vulnerable to international economic fluctuations. Strategic service industries include banking and other financial services, information and software, management and computerization consulting, engineering design, research and development and product and packaging design. Although the ROC government has maintained a policy of no official contact with the PRC, indirect trade has increased significantly, especially in the past four years. Between 1983 and 1995, trade with Hong Kong, much of which represents indirect trade between the ROC and PRC, increased over tenfold, to US$28.0 billion in 1995, an increase of 22.8% from 1994. Companies in Taiwan have invested significant amounts in PRC businesses through subsidiaries or investment vehicles located in third countries. In 1991, the ROC government established a procedure whereby Taiwan investors may register proposed investments in mainland China with the Ministry of Economic Affairs. If an investment is approved, the Taiwan investor may legally make an investment in mainland China. ECONOMIC PLANNING Economic planning has been an important part of Taiwan's economic success. Beginning in 1953, the ROC government instituted a series of economic plans which have provided a framework for government policies and have helped to adapt Taiwan's economy to changes in the domestic and international economic environment. The current Four-Year Plan, which is the eleventh such plan, covers the period from 1993 to 1997. In 1994 and 1995 economic growth averaged 6.44% in real terms, with inflation averaging 3.85%. Within these same two years, the service sector grew faster than the manufacturing sector, and accounted for 60.11% of GDP in 1995. One intent of the Plan is to make domestic demand the primary engine of growth in Taiwan's economy while limiting the contribution of foreign demand to growth of GDP. 23 PRICES AND WAGES From 1982 to 1988, the ROC experienced relatively modest inflation, with an average annual rise in the consumer price index of approximately 1%. Taiwan's average annual rates of inflation in 1993, 1994 and 1995, were 2.9%, 4.1% and 4.6%, respectively. Such increases have not been fully reflected in all sectors of the economy. For example, the wholesale price index fell in 1988 and 1990 although the consumer price index rose in the same periods. Average monthly employee earnings in the manufacturing sector have generally outpaced inflation. Between 1977 and 1995, the average monthly employee earnings index in manufacturing grew faster than the consumer price index. The rapid growth in wages reflects high demand for labor as evidenced by the low unemployment rates in Taiwan. GOVERNMENT PARTICIPATION IN THE ECONOMY The economic activities of the ROC government have been a significant factor in the growth of the economy. The government provides traditional government services including national defense, postal service, education, infrastructure for transportation and communications and public housing. In addition, the government influences the level of economic activity through Four- Year Plans, control of a number of key industrial enterprises and commercial banks and sponsorship of major construction projects, like the Six-Year Plan, which contribute to overall capital investment. In 1994, the government controlled 100% of utility production, 49.4% of mining production and 10% of all manufacturing production. FOREIGN INVESTMENT Foreign investment in Taiwan has played an important role in the development of the nation's economy and has received extensive encouragement by the government, especially in the export and technology transfer sectors. Aggregate foreign investment from 1952 through December 1995 totalled US$22.3 billion, with US$19.4 billion invested by non-Chinese foreign nationals and US$2.9 billion invested by overseas Chinese, principally Hong Kong residents. This money was largely invested in the electronic and electric product industry (26%), chemicals (14.4%) and the services industry (exclusive of banking and insurance) (10.8%). In 1995, foreign investment in the ROC totalled US$2.9 billion, an increase of 79.4% from 1994. Of this amount, over 94.2% came from non-Chinese foreign investors with the remainder coming from overseas Chinese, principally in Hong Kong. FOREIGN TRADE Foreign trade accounts for a major percentage of Taiwan's economic activity. Taiwan's growth has, to a significant degree, been export driven and in recent years, nearly 50% of the country's GNP has been derived from the export sector. Imports are also critical for Taiwan as it is dependent on foreign sources for over 90% of its energy needs and key raw materials and capital equipment used in its export industries. In addition, heightened domestic demand for consumer items has contributed to an increase in imports as a percentage of GDP. In recent years, Taiwan's trade balance has been consistently positive; the highest surplus of US$18 billion was recorded in 1988. In 1994 and 1995, the trade surplus was US$7.7 billion and US$8.1 billion, respectively. As a result of high overall balance of payments surpluses, Taiwan has in the past experienced a dramatic increase in foreign exchange reserves. Starting in 1991, however, this trend slowed down largely because of capital outflow and a decreasing trade surplus. At December 31, 1995, Taiwan's foreign exchange reserves stood at US$90.3 billion. Taiwan's foreign exchange reserves decreased to US$82.6 billion in March 1996 during recent political tensions between the PRC and the ROC. In 1995, the United States was the ROC's largest export market with a 23.7% share of Taiwan's total exports. Hong Kong and Japan were the next largest markets in 1995 with shares of 23.4% and 11.8%, respectively. From 1990 to 1995, Taiwan's total exports to Hong Kong increased by 205.3%. Taiwan's increasing dependence on Hong Kong reflects the growing importance of the PRC markets to the ROC. 24 BALANCE OF PAYMENTS As a result of the increase in world oil prices in 1978-1979, Taiwan incurred a current account deficit of US$913 million in 1980, and an overall balance of payments deficit for that year of US$319 million. Since that time, the country's overall balance of payments situation has steadily improved. Record high surpluses were recorded in 1987 for the trade balance (US$20.3 billion), the current account balance (US$18.0 billion) and the overall balance (US$19.3 billion). In 1995, the trade balance stood at US$8.1 billion; the current account balance was US$5.0 billion; and the overall balance was a deficit of US$3.9 billion. CURRENCY AND EXCHANGE RATES On April __, 1996, the spot buying rate was NT$ per US$1.00 and the spot selling rate was NT$ per US$1.00. The NT Dollar depreciated 3.90% versus the U.S. dollar during the year 1995. The provisions of the Statute Governing Foreign Exchange of 1960, as amended, provide that all foreign exchange transactions must be executed by banks duly authorized by the Ministry of Finance and the Central Bank. EXTERNAL PUBLIC DEBT Since 1985, Taiwan's outstanding external public debt has been reduced from US$5.2 billion to US$563.3 million in 1994. UNDERWRITING The Underwriters named below, acting through their representatives, Kleinwort Benson North America Inc. ("Kleinwort Benson") and Asian Capital Partners Limited (the "Representatives"), have severally agreed, subject to the terms and conditions of a purchase agreement (the "Purchase Agreement") among the Underwriters, the Fund and the Adviser, to purchase from the Fund the number of Shares set forth opposite their names in the following table. The Underwriters are committed to purchase all such Shares if any are purchased. Under certain circumstances, the commitments of non-defaulting Underwriters may be increased as set forth in the Purchase Agreement.
NAME OF UNDERWRITER NUMBER OF SHARES ------------------- ---------------- Kleinwort Benson North America Inc..................... Asian Capital Partners Limited......................... --------- Total............................................. 1,033,485 =========
The Representatives have advised the Fund that the Underwriters propose initially to offer the Shares to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per Share and that the Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per Share to certain other dealers. After the initial public offering, the public offering price, concession and reallowance may be changed by the Representatives. In addition, the Fund has agreed to pay $ to the Underwriters as reimbursement for certain expenses. Investors must pay for any Shares purchased in this offering on or before , 1996. The Fund has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 155,023 additional Shares at the same price per Share as the initial 1,033,485 Shares to be purchased by the Underwriters solely to cover over-allotments. In the event that the Underwriters exercise their option, each Underwriter will be obligated, subject to certain conditions, to purchase the number of additional Shares proportionate to its initial commitment. In the Purchase Agreement, the Fund and the Adviser have agreed, jointly and severally, to indemnify the Underwriters against certain liabilities, including liabilities under the U.S. Securities Act of 1933. Under the Agreement Among Underwriters, Kleinwort Benson will exercise the authority of the Representatives with respect to stabilization activities, in each case, after consultation with Asian Capital Partners Limited ("ACP"). All stabilization transactions, if any, shall, following such consultation, be 25 conducted at the direction of and subject to the control of Kleinwort Benson. In addition, with respect to matter which may be subject to U.S. securities laws, ACP shall consult with, and to the extent required by such laws, act through Kleinwort Benson, which is a U.S. registered broker-dealer. Each Underwriter has agreed that it will comply with the applicable provisions of the U.S. Securities Act of 1933, as amended, and the U.S. Securities Exchange Act of 1934, as amended (the "1934 Act"), and the respective rules and regulations of the U.S. Securities and Exchange Commission thereunder, the applicable rules and regulations of the National Association of Securities Dealers, Inc. and the applicable rules of any securities exchange having jurisdiction over the offering. Each Underwriter has represented and agreed that (i) it has not offered or sold, and will not offer or sell, any Shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public within the meaning of the Public Offers of Securities Regulations 1995, (ii) it has complied, and will comply, with all applicable provisions of the Financial Services Act 1986 of Great Britain with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on to any person in the United Kingdom any document received by it in connection with the issue of the Shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 of Great Britain or is a person to whom the document may otherwise lawfully be issued or passed on. Each Underwriter has severally acknowledged and agreed that the Shares have not been and will not be registered under the Securities and Exchange Law of Japan and that it has not offered or sold and will not offer or sell, directly or indirectly, any Shares in Japan or to or for the account of any resident of Japan, except (i) pursuant to an exemption from the registration requirements of the Securities and Exchange Law of Japan; and (ii) in compliance with any other applicable requirements of Japanese law. Pursuant to the Purchase Agreement, the Fund will agree that, for a period of days from the date of this Prospectus, it will not, without the prior written consent of Kleinwort Benson and ACP acting on behalf of the Underwriters (i) directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any shares of Common Stock or securities convertible into or exchangeable into or exercisable for shares of Common Stock, or (ii) permit any of its directors or officers to, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any shares of Common Stock or securities convertible into or exchangeable into or exercisable for shares of Common Stock. The principal business address of Kleinwort Benson is 200 Park Avenue, New York, New York 10166 and the principal business address of ACP is Jardine House, 5th Floor, One Connaught Place, Hong Kong. DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN The Fund intends to distribute to shareholders, at least annually, substantially all of its investment company taxable income including dividends and interest and expects to distribute its net realized capital gains, if any, at least annually. Pursuant to the DRIP Plan, shareholders may elect to have all distributions automatically reinvested by State Street Bank and Trust Company (the "Plan Agent") in Fund shares pursuant to the DRIP Plan. Shareholders who do not participate in the Plan will receive all distributions in cash paid by check in U.S. Dollars mailed directly to the shareholder by State Street Bank and Trust Company, as paying agent. The Plan Agent serves as agent for the shareholders in administering the DRIP Plan. If the directors of the Fund declare an income dividend or a capital gains distribution payable either in the Fund's Common Stock or in cash, as shareholders may have elected, nonparticipants in the DRIP Plan will receive cash and participants in the DRIP Plan will receive Common Stock, to be issued by the Fund. If the market price per share on the valuation date equals or exceeds net asset value per share on that date, the Fund will issue new shares to participants at net asset value or, if the net asset value is less than 95% of the market price on the valuation date, then at 95% of the market price. The valuation date will be the dividend or distribution payment 26 date or, if that date is not a NYSE trading day, the next preceding trading day. If net asset value exceeds the market price of Fund shares at such time, participants in the DRIP Plan will be deemed to have elected to receive shares of stock from the Fund, valued at market price on the valuation date. If the Fund should declare an income dividend or capital gains distribution payable only in cash, the Plan Agent will, as agent for the participants, buy Fund shares in the open market, on the NYSE or elsewhere, for the participants' accounts on, or shortly after, the payment date. Participants in the DRIP Plan have the option of making additional cash payments to the Plan Agent, semiannually, in any amount from $100 to $3,000, for investment in the Fund's common stock. The Plan Agent will use all funds received from participants (as well as any dividends and capital gain distributions received in cash) to purchase Fund shares in the open market on or about February 15 and August 15 of each year. Any voluntary cash payments received more than thirty days prior to these dates will be returned by the Plan Agent, and interest will not be paid on any uninvested cash payments. To avoid unnecessary cash accumulations, and also to allow ample time for receipt and processing by the Plan Agent, it is suggested that participants send in voluntary cash payments to be received by the Plan Agent approximately ten days before February 15 or August 15, as the case may be. A participant may withdraw a voluntary cash payment by written notice, if the notice is received by the Plan Agent not less than forty-eight hours before such payment is to be invested. The Plan Agent maintains all shareholder accounts in the DRIP Plan and furnishes written confirmations of all transactions in the account, including information needed by shareholders for personal and tax records. Shares in the account of each DRIP Plan participant will be held by the Plan Agent in non- certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the DRIP Plan. In the case of shareholders, such as banks, brokers or nominees, which hold shares for others who are the beneficial owners, the Plan Agent will administer the DRIP Plan on the basis of the number of shares certified from time to time by the shareholder as representing the total amount registered in the shareholder's name and held for the account of beneficial owners who are participating in the DRIP Plan. There is no charge to participants for reinvesting dividends or capital gains distributions. The Plan Agent's fees for the handling of the reinvestment of dividends and distributions will be paid by the Fund. However, each participant's account will be charged a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of dividends or capital gains distributions. A participant's account will also be charged brokerage commissions incurred in purchases from voluntary cash payments made by the participant. With respect to purchases from voluntary cash payments, the Plan Agent will charge $0.75 for each such purchase for a participant, plus a pro rata share of the brokerage commissions. Brokerage charges for purchasing small amounts of stock of individual accounts through the DRIP Plan are expected to be less than the usual brokerage charges for such transactions, because the Plan Agent will be purchasing stock for all participants in blocks and prorating the lower commission thus attainable. Participants in the DRIP Plan may withdraw from the DRIP Plan without penalty at any time by written notice to State Street Bank and Trust Company, the Plan Agent. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten days prior to any dividend or distribution record date; otherwise such withdrawal will be effective on the first trading day after the payment date for such dividend or distribution with respect to any subsequent dividend or distribution. Upon any termination, the Plan Agent will deliver to the participant, without charge, stock certificates for all full shares and a cash adjustment at the current market price for any fractional shares held for that participant under the DRIP Plan. The Plan Agent, upon written notice in advance of such termination, will sell part or all of the terminating participant's shares and remit the proceeds to such participant, less a service fee of $2.50 and less brokerage commissions. Shareholders whose securities are held in the name of a brokerage firm, bank, or other nominee, are requested to contact their nominee to arrange for it to participate in the DRIP Plan on their behalf. 27 Shareholders whose securities are held in their own name should contact the Plan Agent at the address indicated below in order to participate in the DRIP Plan. The automatic reinvestment of dividends and distributions will not relieve participants of any income tax, including withholding tax, which may be payable on such dividends or distributions. Experience under the DRIP Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the DRIP Plan as applied to any voluntary cash payments made and any dividend or distribution paid subsequent to notice of the change sent to all shareholders at least 90 days before the record date for such dividend or distribution. The DRIP Plan also may be amended or terminated by the Plan Agent by at least 90 days' written notice to all shareholders. All correspondence concerning the DRIP Plan should be directed to the Plan Agent at State Street Bank and Trust Company, P.O. Box 8200, Boston, Massachusetts 02266 (telephone number: (800) 426-5523). TAXATION ROC INCOME TAXES Under the Income Tax Law of the ROC, dividend and interest income received on assets held under the Management Contract from sources within the ROC will be subject to a 20% withholding tax. Stock dividends are subject to an income tax which is payable on receipt or, in certain cases, on disposal of the stock dividends. In the case of stock dividends which are so taxable, the Custodian will receive the full entitlement without deduction, but the Adviser will be obliged to pay out of cash held under the Management Contract an amount equal to 20% of the par value of the securities received. Since stock dividends are held for the investment account of the Fund, the amount of any such payment will be charged to operations. Securities received as stock dividends are treated for the purposes of the capital gains income tax described below in the same way as other securities held. Transactions in securities are not currently subject to any capital gains tax. In September 1988, the ROC government announced that, beginning on January 1, 1989, a capital gains tax on gains derived from stock transactions would be reimposed. A ruling from the ROC government in 1983 had indicated that investment funds such as the Fund would remain exempt from this tax until December 31, 1990. On January 1, 1990, this capital gains tax was again suspended. On January 4, 1996, the ROC Legislative Yuan passed a bill for the amendment of the ROC Income Tax Law that would have eliminated the exemption from the ROC income tax for gains realized on the sale of ROC securities and imposed a capital gains tax. On January 12, 1996, this amendment was repealed by the Legislative Yuan. The reintroduction of a capital gains tax would require the Legislative Yuan to engage in the full legislative process for the enactment of tax legislation. There can be no assurance that the capital gains tax will not be imposed in the future or that the Fund will continue to be exempt from such tax. Profits on sales of Fund shares effected by non-resident foreigners wholly outside the ROC will not be subject to ROC income tax. Securities Transaction Tax. In general, on any sale of bonds, stocks, debentures and certain other securities, a securities transaction tax is payable by the seller at the rate of 0.3% of the transaction price for stocks and 0.1% of the transaction price for bonds and mutual fund shares. Sales of Fund shares effected outside the ROC will not be subject to the securities transaction tax. U.S. FEDERAL INCOME TAXES The Fund intends to continue to qualify, and elect to be treated, as a regulated investment company under the Code. The Fund intends to distribute substantially all its net investment income and net capital gains each year (thereby avoiding the imposition of Federal income and excise taxes on such distributed income and gain in the Fund). Such distributions will be taxable as ordinary income and long-term capital gains, respectively, to shareholders of the Fund who are subject to tax whether received in shares or in cash. Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a holder's shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming such shares are held as a capital asset). Notwithstanding the above, the Fund may decide to retain all or part 28 of any net capital gains for reinvestment. If the Fund retains for reinvestment or otherwise an amount of such net long-term capital gains, it will be subject to a tax of 35% of the amount retained. The Board of Directors of the Fund will determine at least once a year whether to distribute any net long-term capital gains in excess of net short-term capital losses and capital loss carryovers from prior years. The Fund expects to designate amounts retained as undistributed capital gains in a notice to its shareholders who, if subject to U.S. federal income taxation on long-term capital gains, (a) will be required to include in income for U.S. federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, and (b) will be entitled to credit against their U.S. federal income tax liabilities their proportionate shares of the tax paid by the Fund on the undistributed amount and to claim refunds to the extent that their credits exceed their liabilities. For U.S. federal income tax purposes, the basis of shares owned by a shareholder of the Fund will be increased by an amount equal to 65% of the amount of undistributed capital gains included in the shareholder's income. As set forth above under "ROC Income Taxes," it is expected that dividends and interest earned by the Fund from ROC resident issuers will be subject to a 20% ROC withholding tax, which, in the case of stock dividends, will be paid by the Adviser out of assets held under the Management Contract. If the Fund qualifies as a regulated investment company, if certain distribution requirements are satisfied, and if more than 50% of the value of the Fund's assets at the close of the taxable year consists of stocks or securities of foreign corporations, the Fund may elect, for U.S. federal income tax purposes, to treat any such ROC withholding taxes that can be treated as income taxes under U.S. income tax principles as paid by its shareholders. The Fund has qualified for and has made this election in the past and intends to again make this election. As a consequence, the amount of such ROC withholding taxes will be included in the income of the Fund's shareholders and reported to the U.S. Internal Revenue Service for such shareholders and each such shareholder may be entitled to credit its portion of these amounts against its U.S. federal income tax liability, if any, or to deduct its portion from its U.S. taxable income, if any. The amount of ROC income taxes that may be credited against a shareholder's United States tax liability in any particular year generally cannot exceed an amount equal to the shareholder's United States federal income tax liability multiplied by the percentage of its taxable income that consists of foreign source taxable income, and the amount creditable is subject to a further limitation discussed below based on the category of foreign source income for which credit is claimed. For this purpose, the Fund expects that the capital gains it distributes to its shareholders, whether as dividends or capital gains distributions, will not be treated as foreign source taxable income. Under the Code, the foreign tax credit limitation must be applied separately to certain categories of foreign source income including foreign source "passive income." For this purpose, foreign source "passive income" includes dividends, interest, certain capital gains and certain foreign currency gains. As a consequence, although certain shareholders may be able to carryback or carryforward foreign tax credits, certain shareholders may not be able to claim a foreign tax credit for the full amount (or possibly any) of their proportionate share of ROC income taxes paid by the Fund. Each shareholder will be notified within 60 days after the close of the Fund's taxable year whether, pursuant to the election described above, the foreign taxes paid by the Fund will be treated as paid by its shareholders for that year and, if so, such notification will designate (i) such shareholder's portion of the foreign taxes paid to such country and (ii) the portion of the Fund's dividends and distributions that represents income derived from sources within such country. After the end of each taxable year, the Fund will notify shareholders of the Federal income tax status of any distributions, or deemed distributions, made by the Fund during such year. For a further discussion of certain income tax consequences to the Fund and to shareholders of the Fund, see "Taxation-- U.S. Federal Income Taxes" in the SAI. COMMON STOCK The authorized capital stock of the Fund is 20,000,000 shares of Common Stock, par value $0.01 per share, of which, as of the date hereof, 14,826,714 shares have been issued and are outstanding. Each share has equal rights in respect of the assets or dividends and each of the Shares offered hereby, when issued, will be fully paid and non-assessable. The Fund does not have any current plans to make additional offerings of its shares, except that additional shares may be issued under the DRIP Plan. Offerings of additional shares, if made, will require approval of the Fund's Board of Directors and the CSEC. Any such additional offerings would also be subject to the requirements of the 1940 Act, including the requirement that shares may not be sold at a price below the 29 then current net asset value of the Fund's shares (exclusive of any underwriting commission or discount) except in connection with an offering to existing shareholders or with the consent of the holders of a majority of the Fund's shares. The Fund may in the future issue additional shares at a price below market value subject to the foregoing, and without shareholder approval. Shareholders are entitled to one vote per share and do not have cumulative voting rights. Thus, holders of more than 50% of the shares voting for the election of directors have the power to elect 100% of the directors, and, if such event should occur, the holders of less than 50% of the shares voting for directors would not be able to elect any person or persons to the Board of Directors. TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR State Street Bank and Trust Company acts as the Fund's dividend paying agent and as transfer agent and registrar for the Fund's Common Stock. The principal business address of State Street Bank and Trust Company is 225 Franklin Street, Boston, Massachusetts 02110. CUSTODIANS The International Commercial Bank of China (the "Custodian") has been retained pursuant to the Management Contract to act as Custodian of all the cash and securities held under the Management Contract. Such cash and securities will be held for the Fund at the Custodian's Taipei branch. The principal business address of the Custodian is 100 Chi-lin Road, Taipei 10424, Taiwan, ROC. State Street Bank and Trust Company acts as the custodian for the Fund's U.S. Dollar-denominated securities held in the United States. The principal business address of State Street Bank and Trust Company is 225 Franklin Street, Boston, Massachusetts 02110. EXPERTS The financial statements and financial highlights for the fiscal year ended August 31, 1995 included in the SAI have been audited by Coopers & Lybrand L.L.P., independent accountants, as indicated in their report with respect thereto, and have been included in reliance upon the authority of said firm as experts in auditing and accounting in giving said report. The principal business address of Coopers & Lybrand L.L.P. is One Post Office Square, Boston, Massachusetts 02109. LEGAL MATTERS Legal matters in connection with this offering will be passed on for the Fund by Rogers & Wells, 200 Park Avenue, New York, New York 10166, and for the Underwriters by Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022. With respect to all matters of ROC law, counsel for the Fund and counsel for the Underwriters will rely on Lee and Li, 201 Tun Hwa N. Road, 7th Floor, Taipei, Taiwan, ROC. Certain of the officers and directors of the Fund, as indicated under the caption entitled "Management of the Fund" in the SAI, are neither citizens nor residents of the United States. Consequently, it may be difficult for investors to effect service of process within the United States upon such persons or to realize against them upon judgments of courts in the United States predicated upon civil liability under the U.S. federal securities laws. The Fund has been advised by its ROC counsel that there is doubt as to whether ROC courts will enforce liabilities predicated solely upon United States securities laws, whether or not such liabilities are based upon judgments of courts in the United States. The books and records of the Fund will be maintained at the Fund's principal address in the United States and will be subject to inspection by the U.S. Securities and Exchange Commission. 30 ADDITIONAL INFORMATION The Fund has filed with the U.S. Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement under the Securities Act of 1933, as amended, with respect to the Shares offered hereby. Further information concerning the Shares and the Fund may be found in the Registration Statement, of which this Prospectus and the SAI constitute a part. The Registration Statement may be inspected without charge at the Commission's office in Washington, D.C., and copies of all or any part thereof may be obtained from such office after payment of the fees prescribed by the Commission. The Fund is subject to the informational requirements of the 1934 Act, and the 1940 Act, and in accordance therewith files reports and other information with the Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, Washington, D.C. 20549 and the Commission's regional offices at Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports and other information concerning the Fund may also be inspected at the offices of the Commission. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Investment Objective and Policies....................................................... SAI-2 Investment Limitations.................................................................. SAI-2 Management of the Fund.................................................................. SAI-3 Foreign Investment and Exchange Controls in the ROC..................................... SAI-6 ROC Government Supervision and Regulation of the Management Contract and the Adviser.... SAI-8 The Securities Market of the ROC........................................................ SAI-9 The Republic of China...................................................................SAI-13 Estimated Expenses......................................................................SAI-24 Portfolio Transactions and Brokerage....................................................SAI-25 Net Asset Value.........................................................................SAI-25 Taxation................................................................................SAI-26 Official Documents......................................................................SAI-30 Financial Statements.................................................................... F-1
31 ================================================================================ NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE FUND OR THE ADVISER SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. TABLE OF CONTENTS
PAGE ---- Prospectus Summary......................................... 2 Fee Table.................................................. 6 Financial Highlights....................................... 7 Market and Net Asset Value Information..................... 8 The Fund................................................... 9 Use of Proceeds............................................ 9 Risk Factors and Special Considerations.................... 9 Investment Objective and Policies.......................... 14 Management of the Fund..................................... 15 The Securities Market of the ROC........................... 19 The Republic of China...................................... 22 Underwriting............................................... 25 Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan...................... 26 Taxation................................................... 28 Common Stock............................................... 29 Transfer Agent, Dividend Paying Agent and Registrar............................................ 30 Custodians................................................. 30 Experts.................................................... 30 Legal Matters.............................................. 30 Additional Information..................................... 31 Table of Contents of Statement of Additional Information................................... 31
1,033,485 Shares The Taiwan Fund, Inc. Common Stock ------------ PROSPECTUS ------------ Dresdner Bank - Kleinwort Benson Asian Capital Partners ____________, 1996 ================================================================================ Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Statement of Additional Information shall not constitute a prospectus. Subject to Completion dated April 19, 1996 THE TAIWAN FUND, INC. STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") is not a prospectus and should be read in conjunction with the Prospectus, dated __________, 1996 (the "Prospectus"). This SAI does not include all information that a prospective investor should consider before purchasing shares of The Taiwan Fund, Inc. (the "Fund") and investors should obtain and read the Prospectus prior to purchasing shares. A copy of the Prospectus may be obtained without charge by calling the Fund's Shareholder Servicing Agent, Corporate Investors Communications, Inc. at (800) 636-9242. This SAI incorporates by reference the entire Prospectus. Capitalized terms used herein and not otherwise defined shall have the same meanings as provided in the Prospectus. The date of this SAI is ___________, 1996. TABLE OF CONTENTS Investment Objective and Policies....................................................................SAI-2 Investment Limitations...............................................................................SAI-2 Management of the Fund...............................................................................SAI-3 Foreign Investment and Exchange Controls in the ROC..................................................SAI-6 ROC Government Supervision and Regulation of the Management Contract and the Adviser.................SAI-8 The Securities Market of the ROC.....................................................................SAI-9 The Republic of China...............................................................................SAI-13 Estimated Expenses..................................................................................SAI-24 Portfolio Transactions and Brokerage................................................................SAI-25 Net Asset Value.....................................................................................SAI-25 Taxation............................................................................................SAI-26 Official Documents..................................................................................SAI-30 Financial Statements...................................................................................F-1
INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to seek long-term capital appreciation through investment primarily in equity securities listed on the Taiwan Stock Exchange (the "TSE") in the Republic of China (the "ROC"). There can be no assurance that the Fund's investment objective will be achieved. See "Investment Objective and Polices" in the Prospectus. INVESTMENT LIMITATIONS The following investment limitations are fundamental policies of the Fund and may not be changed without the approval of the holders of a majority of the Fund's outstanding voting securities and the consent of the ROC Securities and Exchange Commission (the "CSEC"). The same investment limitations are set out in the Management Contract (as defined below), except that the Management Contract does not contain the provisions in paragraph 4 below permitting borrowing by the Fund in the United States because the Management Contract relates only to the Fund's investment activities in Taiwan and such borrowing transactions are not permitted in Taiwan. See "Investment Objective and Policies" in the Prospectus and "Foreign Investment and Exchange Controls in the ROC" herein. If a percentage restriction on investment or use of assets set forth below is adhered to at the time a transaction is effected, later changes in percentage resulting from changing values will not be considered a violation of such restriction. Also, if the Fund receives from an issuer of ROC securities held by the Fund subscription rights to purchase securities of that ROC issuer, and if the Fund exercises such subscription rights at a time when the Fund's portfolio holdings of securities of that issuer (or that issuer's industry) would otherwise exceed the limits set forth in clauses (i), (ii), (iii) or (iv) of paragraph 1 below (or would, as a result of such exercise, exceed such limits), it will not constitute a violation if, prior to receipt of securities upon exercise of such rights, and after announcement of such rights, the Fund has sold at least as many shares of the same class and value as it would receive on exercise of such rights. 1. The Fund will not purchase any security (other than obligations of the U.S. government or its agencies or instrumentalities) if as a result: (i) as to 75% of the Fund's total assets, more than 5% of the Fund's total assets (taken at current value) would then be invested in the securities of a single issuer, (ii) as to the remaining 25% of the Fund's total assets, more than 10% of the Fund's total assets (taken at current value) would then be invested in securities of a single issuer (except that the Fund may invest not more than 25% of its total assets in obligations of the ROC government or its agencies or instrumentalities), (iii) more than 10% of the voting equity securities (at the time of such purchase) of any one issuer would be owned by the Fund, and (iv) more than 25% of the Fund's total assets (taken at current value) would be invested in a single industry. 2. The Fund will not purchase any equity securities which, at the date purchase is made, are not listed and traded on the TSE. 3. The Fund will not purchase partnership interests. 4. The Fund will not borrow money or pledge its assets, except that the Fund may borrow from a bank in the United States for temporary or emergency purposes in amounts not exceeding 5% (taken at the lower of cost or current value) of its total assets (not including the amount borrowed), and may also pledge its assets held in the United States to secure such borrowings. 5. The Fund will not purchase securities on margin, except for short- term credits as may be necessary for clearance of transactions. 6. The Fund will not make short sales of securities or maintain a short position. 7. The Fund will not buy or sell commodities or commodity contracts or real estate or interests in real estate. 8. The Fund will not act as an underwriter of securities of other issuers. 9. The Fund will not make loans, including loans of cash or portfolio securities, to any person; for purposes of this investment restriction, the term "loans" shall not include the purchase of a portion of an issue of publicly distributed bonds, debentures or other securities. SAI-2 10. The Fund will not purchase securities issued by any issuer which owns, whether directly or indirectly or in concert with another person, more than 5% of the equity securities (whether voting or non-voting) of the Adviser or which takes a significant role in the management of the Adviser. 11. The Fund may not issue senior securities. 12. The Fund will not purchase beneficiary certificates representing interests in other ROC securities investment trust funds or effect any transaction in securities with another ROC securities investment trust fund managed by the Adviser. In addition to the foregoing investment limitations, investments by the Fund are subject to the limitations imposed by the Investment Company Act of 1940, as amended (the "1940 Act"), including certain more restrictive limitations on transactions between the Fund and its affiliates. Also, investments by the Fund are subject to applicable ROC law and regulations. See "ROC Government Supervision and Regulation of the Management Contract and the Adviser." Pursuant to the recently amended Trust Fund Regulations (as defined herein), securities investment trust funds (including the Fund) may subscribe for shares which are listed or to be listed on the TSE or the Over-the-Counter ("OTC") market in an underwritten offering as well as listed beneficiary certificates which are issued by other fund managers, each subject to certain investment limitations. The ability of the Fund to subscribe for shares to be listed on the TSE or the OTC market would require an amendment to the Management Contract and the investment limitation set forth in paragraph 2 above. The ability of the Fund to subscribe for listed beneficiary certificates which are issued by other fund managers would require an amendment to the Management Contract and the investment limitation set forth in paragraph 12 above and would be subject to further restrictions set forth under the 1940 Act. The inability of the Fund to purchase securities in such offerings is not expected to have a material adverse effect on the Fund's acquisition of portfolio securities because such offerings do not occur frequently and are generally over-subscribed with the result that individual purchasers are given limited allocations. The Fund's board of directors at a meeting held on December 1, 1995, approved amendments to the Fund's investment limitations set forth in paragraphs 2 and 7 above to permit the Fund to subscribe for shares which are listed or to be listed on the TSE in an underwritten offering and to engage in currency hedging transactions, respectively, each subject to shareholder approval. The board of directors expects to submit the proposed amendments at the next annual shareholders' meeting to be held in 1997. There can be no assurance that the shareholders will vote to approve such proposal. MANAGEMENT OF THE FUND DIRECTORS AND OFFICERS The names of the directors and principal officers of the Fund are set forth below, together with their positions and their principal occupations during the past five years and, in the case of the directors, their positions with certain other international organizations and publicly held companies.
POSITION NAME AND ADDRESS WITH FUND AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - ---------------- --------- --- ----------------------------------------------- Benny T. Hu(1)*............... Director and 48 President, China Development Corporation (1993- 125 Nanking East Road President present); Chairman, China Securities Investment Section 5 Trust Corporation (1992-1993); President, China Taipei, Taiwan, ROC Securities Investment Trust Corporation (1985- 1992); Chairman, Far East Asia Transport (1995- present); Executive Director, Merrill Lynch International, Inc. (1986-1990); Executive Vice President, International Investment Trust Co., Ltd. (1983-1986); Director, China Steel Corporation (1993- present); Director, MITAC International Corp. (1993-present)
SAI-3
POSITION NAME AND ADDRESS WITH FUND AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - ---------------- --------- --- ----------------------------------------------- Harvey H.W. Chang(1)*.......... Director 44 Chairman, China Securities Investment Trust 99 Tun Hwa South Road Corporation (1993-present); President, China Section 2 Development Corporation (1992-1993); President, Taipei, Taiwan, ROC Grand Cathay Securities Corporation (1989-1992) Joe O. Rogers.................. Director 47 Partner, PHH Fantus Consulting (May 1993- 2018 Gunnell Farms Drive present); Partner, Alcalde, Rousselot & Fay Vienna, VA 22181 (1992-May 1993); Director, The China Fund, Inc. USA (1992-present); President, Rogers International Inc. (1986-present); President, Middendorf Rogers Martin Group Inc. (1987-1989); U.S. Executive Director, Asian Development Bank (1984-1986); Executive Director, Republican Conference, U.S. House of Representatives (1981-1984) Jack C. Tang(1)................ Director 68 Director, Pacific Rim Investments Ltd. (1991- Suite 1601, Tower 1 present); Chairman and Chief Executive Officer, China Hong Kong City Tristate Holdings Limited (1987-present); 33 Canton Road Director, Mid Pacific Air Corporation (1986- Tsim Sha Tsui present); Chairman, South Sea Development Co. Kowloon, Hong Kong Ltd. (March-September 1992); Chairman and Managing Director, South Sea Textile Manufacturing Co., Ltd. (1971-1992); Director, The Hong Kong and Shanghai Banking Corporation (1984-1991); Chairman, Pacific Rim Investments Ltd. (1989-1991) Shao-Yu Wang(1)................ Director 72 Chairman, Taiwan Styrene Monomer Corporation 8th Floor (1979-present); Chairman, America California 6 Roosevelt Road Bank (1980-present); Director, American Section 1 California Bank (1980-present); Chairman of the Taipei, Taiwan, ROC Board, Soochow University (1987-present); Director, Asia Polymer Corporation; Director, CTCI Corporation; Director, Taiwan Synthetic Rubber Corporation; Director, Oriental Union Chemical Corp. David Dean..................... Director 70 Adviser of the Chiang-Ching-Kuo Foundation 8361 B. Greensboro Drive (1990-present); Director, The American Institute McLean, Virginia 22102 in Taiwan (1979-1989) USA Lawrence F. Weber.............. Director 62 Consultant, UBS Asset Management (N.Y.) 950 Park Avenue (1993-present); Consultant, Union Bank of New York, New York 10028 Switzerland (N.Y.) (1993-present); Director, East USA Asia/Australia, UBS Asset Management (N.Y.) (1991-present); Managing Director, Asia-Pacific, Chase Investors Management (1983-1991) Gloria Wang*................... Treasurer and 41 Executive Vice President, China Securities 99 Tun Hwa South Road Secretary Investment Trust Corporation (1995-present); Section 2 Senior Vice President, China Securities Taipei, Taiwan, ROC Investment Trust Corporation (1993-1995); Assistant Vice President, China Securities Investment Trust Corporation (1988-1993)
SAI-4
POSITION NAME AND ADDRESS WITH FUND AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - ---------------- --------- --- ----------------------------------------------- Laurence E. Cranch*............ Assistant 48 Member of Rogers & Wells (1980-present), U.S. 200 Park Avenue Secretary Counsel to the Fund New York, New York 10166 USA
____________________ * Interested person of the Fund (as defined in the 1940 Act). Mr. Chang and Ms. Wang are deemed to be interested persons because of their affiliation with the Adviser. Mr. Hu is deemed to be an interested person because of his affiliation with controlling shareholders of the Adviser. Mr. Cranch is deemed to be an interested person because of his affiliation with the Fund's U.S. legal counsel. (1) An officer or director who is neither a citizen nor a resident of the United States. See "Legal Matters" in the Prospectus. At April __, 1996, none of the directors and officers of the Fund owned any shares of the Fund's Common Stock, except for Mr. Joe O. Rogers, who owned less than 1% of the outstanding shares. The officers of the Fund and the Portfolio Manager (as defined in the Prospectus) conduct and supervise the daily business operations of the Fund, while the directors review such actions and decide on general policy. The Fund pays to each of its directors who is not an affiliated person of the Adviser, in addition to certain out-of-pocket expenses, an annual fee of $7,500, plus $750 for each directors' meeting and committee meeting attended in person. For the year ended August 31, 1995, such fees and expenses aggregated $89,782. The following table sets forth the aggregate compensation from the Fund paid to each director during the fiscal year ended August 31, 1995. The Adviser and its affiliates do not advise any other U.S. registered investment companies and therefore the Fund is not considered part of a Fund complex.
AGGREGATE COMPENSATION NAME OF DIRECTOR FROM THE FUND(1) - ---------------- ---------------- Benny T. Hu*...................................................................... _ Harvey H.W. Chang*................................................................ _ Joe O. Rogers..................................................................... $12,000 Jack C. Tang...................................................................... $ 9,000 Shao-Yu Wang...................................................................... $10,500 David Dean........................................................................ $12,750 Lawrence Weber.................................................................... $ 6,750 Glen Moreno**..................................................................... $ 5,250
(1) Includes all compensation paid to directors by the Fund. The Fund's directors do not receive any pension or retirement benefits as compensation for their service as directors of the Fund. * Mr. Hu and Mr. Chang, who are affiliated with the Adviser and are therefore "interested persons" of the Fund, do not receive any compensation from the Fund for their service as directors. ** Mr. Moreno did not stand for re-election as director of the Fund at the 1995 annual stockholder meeting in February 1995. The Fund's Board of Directors has an Executive Committee which may exercise the powers of the Board to conduct the current and ordinary business of the Fund while the Board is not in session. The current members of the Executive Committee are Messrs. Chang, Rogers and Wang. The Fund's Board of Directors also has an Audit Committee which is responsible for reviewing financial and accounting matters. The current members of the Audit Committee are Messrs. Dean, Rogers, Tang, Wang and Weber. The Certificate of Incorporation of the Fund contains a provision permitted under the Delaware General Corporation Law which by its terms eliminates the personal liability of the Fund's directors to the Fund or its stockholders for monetary damages for breach of fiduciary duty as a director, subject to certain qualifications described below. The Certificate of Incorporation and the By-Laws of the Fund provide that the Fund will indemnify directors, officers, employees or agents of the Fund to the full extent permitted by the Delaware General Corporation Law, which permits indemnification of such persons against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Fund if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests SAI-5 of the Fund. However, nothing in the Certificate of Incorporation or By-Laws of the Fund protects or indemnifies a director for any breach of the director's duty of loyalty to the Fund or its stockholders, or for any liability for willful or negligent violation of certain provisions of law governing payment of dividends and purchase or redemption of stock, or for any liability for a transaction from which the director obtained an improper personal benefit. Also, nothing in the Certificate of Incorporation or the By-Laws of the Fund protects or indemnifies a director, officer, employee or agent against any liability to which he would otherwise be subject by reason of acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or protects or indemnifies a director or officer of the Fund against any liability to the Fund or its stockholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE ROC In 1983, the ROC government enacted legislation and adopted regulations to make foreign investment in the securities market of the ROC possible through the means of authorized and regulated investment funds established in Taiwan. The ROC government has taken further steps to liberalize restrictions on foreign investment in Taiwan. As described below, regulations and guidelines were adopted in 1990 which, in limited circumstances, permit direct portfolio investment in ROC securities by certain foreign qualified institutional investors. As another significant step to open the securities market to foreign participation, the Executive Yuan amended regulations on March 1, 1996, generally permitting non-resident institutional and individual foreign investors ("General Foreign Investors") to make direct investments in the ROC securities market. Under Section 18 of the ROC Securities and Exchange Law, the Executive Yuan (or Cabinet) of the ROC government adopted Regulations for Administration of Securities Investment Trust Fund Enterprises, effective May 26, 1983 (the "Adviser Regulations"), which set out the requirements to be satisfied by an investment management company seeking to establish investment funds in Taiwan, and Regulations Governing the Management of Securities Investment Trust Funds, effective August 10, 1983, as amended (the "Trust Fund Regulations"), which set out the requirements to be satisfied with respect to the establishment of investment funds through which non-ROC persons may invest in securities issued by ROC companies. The Adviser conducts its operations pursuant to the Adviser Regulations, and the Fund acquires its investments through a contractual securities investment trust fund arrangement established under and in conformity with the Trust Fund Regulations. As required by the Trust Fund Regulations, this arrangement has been established by means of the Management Contract pursuant to which the Adviser agrees to manage and invest the assets of the Fund and the Custodian agrees to hold the assets being managed under the Management Contract. The Fund is the sole beneficiary of the assets held under the Management Contract and, in order to comply with the Trust Fund Regulations, the Fund's interest in the assets is evidenced by Units. The Units are represented by one or more beneficiary certificates which are issued by the Adviser and such certificate(s) are acquired by the Fund at the time the proceeds of an offering are remitted to the Custodian. Although the Trust Fund Regulations contemplate that the assets of the Fund will be held in a securities investment trust fund established under ROC law, this trust fund does not have a separate legal existence and the rights of the Fund with respect to those assets are based on the contractual agreements contained in the Management Contract and the provisions of the Trust Fund Regulations relating thereto. The Adviser Regulations, Trust Fund Regulations and Regulations Governing Securities Investment by Overseas Chinese and Foreign Investors and Procedures for Remittances (together, the "Regulations") and the Management Contract require that all income realized and received with respect to the assets held under the Management Contract for each year be distributed to the Fund once each calendar year before the end of March of the following year. Such annual distributions, net of taxes, may be converted into U.S. dollars and remitted out of the ROC in accordance with the foreign exchange regulations. Such distributions are effected by transfer to an account maintained by the Fund with its U.S. custodian bank. Pursuant to the terms of the Management Contract, the Fund has essentially the same legal and economic rights in the assets held under the Management Contract as it would have if it owned those assets directly and had entered into separate investment advisory and custodian agreements with the Adviser and the Custodian, respectively. The ROC government has adopted a general policy of liberalizing restrictions on investment by foreigners in ROC securities and has developed guidelines for such liberalization. As part of this process, the CSEC adopted regulations in March 1989 which permit foreign insurance companies with branches in Taiwan SAI-6 to invest (to a limited degree) in listed equity securities of ROC companies. Since 1989, the CSEC has approved a series of overseas corporate convertible bonds issued by ROC listed companies in offerings to non-ROC persons and, in December 1994, the CSEC promulgated regulations to permit companies whose securities are traded on the over-the-counter market to issue overseas corporate convertible bonds to non-ROC persons. The terms and conditions of such overseas corporate bonds provide that such bonds may be converted into capital stock of the issuer in certain limited circumstances to the extent permitted by ROC law. In December 1994, the CSEC approved the proposal to permit overseas corporate convertible bonds of ROC issuers to be converted (subject to the terms and conditions of the bonds) into shares of ROC issuers, provided that such shares are deposited with a depositary under a depositary receipt facility sponsored by the relevant ROC issuer and the converting bondholders receive only depositary receipts in respect of such shares and not the underlying shares of the relevant ROC issuer. In July 1995, the ROC government amended this regulation to allow the direct conversion (subject to the terms and conditions of the bonds) of overseas convertible bonds to common shares of the ROC issuer. In addition, on December 28, 1990, the Executive Yuan approved guidelines which allow direct investment in ROC securities by certain qualified foreign institutional investors. The criteria (as most recently amended in 1996) set forth by the CSEC pursuant to the guidelines define qualified foreign institutional investors as: (i) banks which rank among the top 1,000 banks in the non-communist world having experience in international financial, securities or trust business; (ii) insurance companies which have existed for more than three years and hold securities assets of at least US$300 million; (iii) fund management institutions which have existed for more than three years and manage securities assets of at least US$200 million; (iv) offshore fund management institutions which are more than 50% owned by a ROC securities investment trust enterprise; provided that the funds to be used to invest in ROC securities do not come from (a) the ROC, (b) funds owned by such offshore fund management institutions or (c) mainland China; (v) general securities firms which have a net worth of at least US$100 million and experience in international securities investments; (vi) offshore subsidiary securities firms which are more than 50% owned by a ROC securities firm or other securities firms which are 100% owned by such offshore subsidiary securities firms; (vii) offshore subsidiary securities firms which are 100% owned by a ROC securities firm or other securities firms which are more than 51% owned by such offshore subsidiary securities firms; (viii) foreign government-owned investment institutions; (ix) pension funds which have been set up for two years; (x) mutual funds, unit trusts or investment trusts which have been established for three years and have assets of at least US$200 million; and (xi) other institutional investors approved by the CSEC. Qualified foreign institutional investors who wish to invest directly in the ROC securities markets are required to apply for and receive an investment permit from the CSEC. Qualified foreign institutional investors who receive a permit may invest up to a maximum of US$400 million (except as may otherwise be approved by the ROC government) and are required to remit the full amount into the ROC within six months of receiving their investment permit. Under such guidelines, a single foreign investor is limited to holding a maximum of 7.5% of a company's stock and aggregate foreign holdings acquired through the stock market cannot exceed 20% of the company's issued shares. Pursuant to revised regulations which were adopted in 1995, the Fund became subject to the restrictions imposed on the percentage of both individual foreign ownership and total SAI-7 foreign ownership in any one company under these guidelines. The Fund believes that the imposition of these limitations has not had a material adverse effect on its operations. Qualified foreign institutional investors are also required to submit to the Central Bank and the CSEC every month a report of trading activities and status of assets under custody. Capital which is remitted out of the ROC may be remitted back into the ROC within three months after the outward remittance without obtaining CSEC approval. The liberalization allowing direct investment by qualified foreign institutional investors has led to the creation of a number of offshore funds which invest in the ROC securities markets. As of December 31, 1995, 133 qualified foreign institutional investors had been approved by the CSEC to invest up to an aggregate of approximately $10 billion in Taiwan. In April of 1992, the CSEC promulgated regulations permitting ROC listed companies, upon approval by the CSEC, to sponsor the issue and sale to foreigners of depositary receipts evidencing shares of such companies. In December 1994, the CSEC revised these regulations to permit companies whose securities are traded on the over-the-counter market to sponsor the issue and sale to foreigners of depositary receipts evidencing shares of such companies. See "The Securities Market of the ROC -- Regulatory Environment" in the Prospectus. In October 1993, the Central Bank announced that, under certain circumstances, ROC companies would be allowed to repatriate up to $3 billion raised abroad from issues of global depositary receipts and overseas corporate bonds. With the exception of qualified foreign institutional investors, under existing ROC laws and regulations relating to foreign investment, General Foreign Investors may invest in the shares of TSE-listed companies or companies whose shares are traded on the OTC market up to a limit of US$20 million (in the case of institutional investors) and US$5 million (in the case of individual investors) without obtaining any ROC regulatory approvals. However, General Foreign Investors (both institutional and individual) can only remit outside and into ROC foreign currency of up to US$100,000 or its equivalent for each remittance without the Central Bank's approval. Foreign investors (other than qualified foreign institutional investors, General Foreign Investors, investors in overseas convertible bonds and depositary receipts) who wish to make direct investments in the shares of ROC companies are required to submit a Foreign Investment Approval ("FIA") application to the Investment Commission of the Ministry of Economic Affairs or other government authority. The Investment Commission or such other government authority reviews each FIA application and approves or disapproves each application after consultation with other government agencies (such as the Central Bank and the CSEC). Under current law, any non-ROC person possessing an FIA may repatriate (i) annual net profits governmental agencies (such as the Central Bank and the CSEC). Under current and interests attributable to an approved investment, and (ii) proceeds from the sale of the stock dividends attributable to such investment. Capital and capital gains attributable to such investment may be repatriated only after the expiration of a one-year waiting period after approvals of the Investment Commission or other authorities have been obtained. For a detailed discussion on exchange controls, see "The Republic of China - -- Foreign Exchange -- Exchange Controls." ROC GOVERNMENT SUPERVISION AND REGULATION OF THE MANAGEMENT CONTRACT AND THE ADVISER The securities industry in the ROC is principally regulated by the Securities and Exchange Law of the ROC, which is administered by the CSEC. Pursuant to the ROC Securities and Exchange Law, the Executive Yuan of the ROC government adopted the Adviser Regulations and Trust Fund Regulations in 1983 and, as provided in the Regulations, the substantive responsibility for supervising the activities of the Adviser and the Custodian in relation to the assets held and invested under the Management Contract rests with the CSEC. Pursuant to the Regulations and/or the terms of the Management Contract: (a) the CSEC may from time to time require that a portion of the assets of the Fund be held in liquid assets (cash, deposits with financial institutions, short-term ROC government Treasury bills, negotiable certificates of deposit, commercial paper and bankers' acceptances), all as specified by the CSEC (currently the CSEC does not impose any limit on the Fund's liquid assets); (b) the CSEC's approval is required for, inter alia, any change in the constitution of the Adviser, any termination or resumption of its business, its dissolution or merger and the transfer by or to it of any material assets or business; SAI-8 (c) changes in the directors, the chairman, the chief executive officer and other managerial personnel of the Adviser must be reported to the CSEC; (d) the Adviser is prohibited from dealing in listed securities for its own account and from holding or having an interest in securities issued by the investment trust fund established under the Management Contract or securities issued by any investment trust fund in the ROC in which the Adviser has an interest; (e) the approval of the CSEC is required if any director, supervisor, managerial personnel or shareholder holding more than 5% of the issued capital shares of the Adviser wishes to deal in any securities at the time being held under the Management Contract or which the Adviser has decided to purchase pursuant to the Management Contract; (f) no person materially interested (as specified in the Regulations) in an issuing company may participate in any decision by the Adviser to invest in the securities of that company for the benefit of the Fund; (g) neither the Adviser nor any of its directors, supervisors or managers may be a director, supervisor or manager of a company in which the assets held under the Management Contract are invested; (h) the CSEC must approve the selection under the Management Contract of any successor adviser or custodian of the Fund, and may in certain circumstances require the appointment of a new adviser or custodian for the Fund; (i) the CSEC has wide powers to require the submission of financial and business information from the Adviser and its associates and the Custodian and also has investigatory powers; and (j) the CSEC was required to approve the terms of the Management Contract and retains the right to approve any changes in the Management Contract. The CSEC's regulatory authority over the Adviser and the Custodian and with respect to the Management Contract may be exercised without regard to any vote or approval by the shareholders of the Fund and the only recourse the Fund would have regarding action taken by the CSEC of which the Fund or its shareholders did not approve (such as the appointment of a new adviser or new custodian for the Fund or the imposition of an amendment to the Management Contract) would be to cause the termination of the Management Contract and the liquidation and distribution to the Fund of the assets held under the Management Contract. THE SECURITIES MARKET OF THE ROC THE PRIMARY MARKET TSE-listed companies are not required to obtain prior approval from the CSEC for capital increases, other than distribution of dividends. Instead, companies seeking a capital increase, other than distribution of dividends, are required to file a prospectus and other required documents, such as underwriters' evaluation reports and legal opinions, with the CSEC and fulfill a 15-day waiting period during which time additional information or clarification may be requested. Equity Issues Equity issues are effected by underwritten public and/or private offerings made in conjunction with the issuer's listing on the TSE or in conjunction with cash and rights offerings. In addition, companies frequently make free share distributions to existing shareholders. A discussion of ROC law and regulations applicable to the Fund's ability to purchase certain securities is set forth under "Investment Limitations." In conjunction with an issuer's listing on the TSE, the issuer may be required by the TSE to sell a specified percentage of its outstanding shares under certain circumstances. The basis of price determination must be filed with the CSEC prior to the public offering. The listing process begins with a written application to the TSE and CSEC, followed by review by the TSE of the company's financial reports and general condition, approval by the TSE and, finally, approval by the CSEC. Distribution of shares by the underwriter may be effected by (i) a public offering, (ii) an auction and a public offering or (iii) a quotation and a public offering, all of which are intended to ensure a broad SAI-9 distribution of shares. The underwriting commission for both stocks and bonds is subject to a maximum of 5% in the case of underwriting on a firm commitment or stand-by basis and 2% in the case of underwriting on a best efforts basis. Commissions are now generally around 0.5%. A prospectus is required to be delivered to investors and must contain audited financial statements and an operational report for the most recent fiscal year, capital and share data, a description of the issuer's general condition, and a statement of business plans for the coming years and of the issuer's general prospects. In order to reduce volatility in trading of newly listed shares, the TSE may require an undertaking by each of the issuer's directors, supervisors and 10% shareholders to deliver half of such person's holdings to the central depository for two years following the listing and not to sell more than 20% of each such person's holdings within any six-month period after that two-year period. However, directors, supervisors, 5% shareholders and shareholders whose capital contribution is in the form of patent rights or know-how of Third Category companies (as described fully below) are required to make the above- referenced undertakings. The ROC Securities and Exchange Law enables the CSEC to set standards of shareholder diversification requiring issuers intending to issue new shares to offer a portion of the new shares to the general public, despite the general rule that existing shareholders and employees have preemptive rights in new offerings of shares. The following table sets forth data for new issues of equities on the TSE for the periods indicated: EQUITIES
INITIAL RIGHTS OFFERINGS FREE SHARES TOTAL TSE AVERAGE OFFERINGS BY LISTED COMPANIES DISTRIBUTIONS RAISED DAILY TRADING VALUE YEAR (NT$ MILLION) (NT$ MILLION) (NT$ MILLION) (NT$ MILLION) (NT$ MILLION) - ------ ------------- -------------------- -------------- ------------- -------------------- 1990.. 19,047.2 12,757.9 64,316.6 96,121.7 67,727.0 1991.. 40,079.4 13,583.2 57,512.2 111,174.8 33,855.7 1992.. 34,958.4 14,927.0 69,548.9 119,434.3 20,834.8 1993.. 45,796.0 19,623.0 82,347.0 147,766.0 31,230.1 1994.. 51,531.0 31,668.0 111,063.0 194,262.0 65,776.6 1995.. 50,838.0 33,767.0 164,529.0 249,134.0 35,494.9
_________________ Source: 1990 through 1995 CSEC Statistics, CSEC. Of the 347 companies listed on the TSE as of December 31, 1995, 212 were in the First Category, 132 were in the Second Category and three were in the Third Category. In 1995, approximately 84.4% of the total listed company trading volume was in the First Category, approximately 15.1% was in the Second Category and approximately 0.5% was in the Third Category. For a company to be listed as a First Category company, it must have been established for at least five fiscal years and have paid-in capital of at least NT$600 million for the latest two fiscal years. To ensure broad distribution of shares, there must be at least 2,000 shareholders. At least 10 million shares (or 20% of total outstanding shares) must be held by at least 1,000 smaller shareholders with holdings of 1,000 to 50,000 shares each. In addition, the ratio of net worth (before distribution of dividends) to total assets for the most recent fiscal year (except for certain limited exceptions) must exceed 33% and each of the company's pretax net income and operating income must be positive for the past three fiscal years and have either (1) exceeded 10% of paid-in capital for the past two years, (2) been not less than NT$120 million and exceeded 6% of paid-in capital for the past two years or (3) the test in (1) is met in one of the past two years and the test in (2) is met in the other. Requirements for listing as a Second Category company are less stringent. The Second Category company must have been established for at least five fiscal years. The paid-in capital requirement is only NT$300 million for the two most recent fiscal years. Although the requirement is the same with respect to the number of publicly-held shares by smaller shareholders (10 million shares or 20% of total outstanding shares), the number of shareholders can be less (1,000 instead of 2,000) and only 500 smaller shareholders are required. There is no net worth/total asset test for a Second Category company and the income tests require taxable net income and operating income to be positive for the most recent fiscal year and have either (1) exceeded 10% of paid-in capital for the past year or (2) been not less than 6% for each of the past two years or averaged not less than 6% for the past two years, with the most recent year greater than the previous year. SAI-10 Certain of the above-mentioned requirements for listing as First Category and Second Category companies may be different for companies in certain limited industries. Furthermore, the TSE has established a Third Category which has special, less stringent requirements designed to encourage the listing of "high- tech" or technological-related enterprises. Currently, there are no foreign companies listed on the TSE. The TSE has a Weighted Stock Price Index which is comparable to the Standard & Poor's Index in the United States and the TSE Index insofar as it takes a wide selection of listed shares and weights them according to the number of shares outstanding. It is compiled using the "Paasche Formula" by dividing the market value by the base day's total market value for the index shares. As of December 31, 1995, companies are included in the index. The index formula is: Index = (PtxQt) where: Pt = Stock Price for the Day ------- (PoxQt) Qt = Number of shares issued Po = Stock Price of the base day Bond Issues. Under amended rules issued by the CSEC in May 1995, no prior CSEC approval is required for the issue of fixed income and convertible bonds in the domestic market, unless such bonds are offered and sold in a private placement. An issuer of fixed income bonds offered and sold pursuant to a public offering is required to file a prospectus and other required documents with the CSEC and the TSE and fulfill a 15-day waiting period during which additional information or clarification may be requested. Under the CSEC rules, at least 60% of convertible bond offerings must be sold in an underwritten public offering, provided that the aggregate amount of the public offering must be no less than NT$500 million. Convertible bond offerings must be sold entirely in an underwritten public offering if amount raised is less than NT$500 million. There is no such restriction on fixed income bond offerings which may be sold entirely to prearranged investor groups. Government bonds may only be issued on an auction basis to primary dealers who make bids either for their own accounts or on behalf of their customers. State enterprises are subject to less stringent disclosure requirements in the offering prospectus. The Ministry of Finance and the Central Bank have issued over NT$881.5 billion in government bonds since 1991 with proceeds to be used to fund a portion of the Six-Year National Development Plan (the "Six Year Plan"). The following table sets forth information with respect to bond issues for the periods indicated: BONDS
CORPORATE ALL BONDS(1) GOVERNMENT BONDS BONDS(2) ------------------ ----------------- ----------------- TOTAL ISSUED ISSUED ISSUED NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT OF (NT$ OF (NT$ OF (NT$ ISSUES MILLIONS) ISSUES MILLIONS) ISSUES MILLIONS) ------- --------- ------ --------- ------ --------- 1990 ............... 47 215,238 25 169,063 20 40,797 1991 ............... 51 386,088 26 327,642 22 46,846 1992 ............... 59 598,110 31 533,597 23 46,007 1993 ............... 55 742,996 35 707,741 20 35,255 1994 ............... 51 809,068 34 787,108 17 21,960 1995 ............... 64 902,610 38 860,950 26 41,660
_________________ Source: 1995 CSEC Statistics, CSEC. (1) Excludes Treasury bills. (2) Includes bonds issued by government-owned corporations. Turnover in the listed bond market in the ROC is small in terms of trading volume. In 1995, bond trading represented about 0.02% of total trading volume for stocks and bonds on the TSE. Private corporations have shown a strong preference for bank loans as a source of debt funding, and until recently, the ROC government has generally not been required to turn to the bond market to finance deficits. In recent years, the ROC government has frequently issued bonds to finance its deficits. The scope of the listed bond market is further limited by the fact that bonds can be issued and traded outside the TSE and bonds issued by the ROC government are typically purchased by financial institutions which generally hold them to maturity to meet reserve requirements. SAI-11 In order to meet the funding needs of the Six-Year Plan, the Ministry of Finance has expanded the number of institutions qualified to trade bonds and is considering adopting measures for establishing a centralized bond transaction and information system. Other Instruments The instruments traded in the ROC securities market have primarily been limited to common stock and bonds. TSE-listed companies have also engaged in offerings of domestic convertible securities and preference shares. In addition, listed beneficiary certificates, which are certificates which represent the shares of closed-end funds, may be listed on the TSE, subject to CSEC and TSE approval. Continued development of additional types of instruments, such as Taiwanese depositary receipts, is anticipated. In particular, the CSEC is considering the establishment of a domestic futures market which may include, among other things, futures contracts on the TSE Index. There can be no assurance that this will occur and if so, what impact it will have on the Fund or the ROC securities market. In recent years, TSE-listed companies have also engaged in offerings of convertible securities and global depositary receipts which are not listed on the TSE. THE SECONDARY MARKET Trading in the secondary market is dominated by individual investors and is marked by a high turnover rate on the TSE, a function of the short-term, speculative nature of the market, and illegal margin lending and manipulative practices such as "wash sales" (the buying and selling of stocks on the same day solely to generate activity). The turnover rate is significantly lower for bonds, which represent a rather small portion of total market capitalization. In 1995, the average turnover rate for stocks and bonds (total value of bonds traded on TSE/total value of TSE-listed bonds) was 376.8% and 0.11%, respectively. TRADING AND SETTLEMENT PROCEDURES In order to reduce market volatility, the TSE has placed limits on large volume transactions and on the range of daily price movements. Complex restrictions are imposed on transactions which include 500 trading lots or more. Currently, fluctuations in price are restricted to 7% above and below the previous day's closing price (or the most recent closing price or reference price set by the TSE rules if the previous day's closing price is not available due to lack of trading activity) in the case of stocks and 5% in the case of bonds. All stock certificates have a par value of NT$10, and board lot size is uniformly 1,000 shares. The minimum trading unit for bonds is NT$100,000. There is no regulation for the denomination of bonds except for convertible bonds, which are required to be in denominations of NT$100,000. The TSE has effected the computerization of all First, Second and Third Category stock transactions. Delivery and settlement are handled by the computerized TSE Clearing Department. Sales of stock by brokers and traders are offset by purchases of the same issue on the same day so that only net balances of stock are delivered and only net balances of cash are computed and paid. In 1989, the TSE introduced a securities centralized depositary system operated by Taiwan Securities Central Depository Co., Ltd. There are three types of settlement: (i) "regular" settlement made in cash with share certificate delivery through the TSE Clearing Department on the second business day following the transaction day; (ii) "cash" settlement made by cash with share certificate delivery through the TSE Clearing Department on the same day of the transaction and (iii) "specified day" settlement, which although permitted, is not currently used. Listed shares designated by the CSEC as full delivery shares may be purchased only by advance payment of the purchase price and only upon advance delivery of share certificates. Full delivery shares are non-marginable. Such designation by the CSEC is generally made with respect to shares of financially troubled companies. On December 31, 1995, there were eight full delivery stocks. Since February 1995, all settlements on TSE transactions must be effected by electronic or wire transfer of payment against book-entry for delivery of securities. Currently, brokerage commissions for transactions of stocks and convertible bonds listed on the TSE are 0.1425% and 0.125%, respectively. The TSE takes 10% of the commissions earned by brokerage firms on SAI-12 stock transactions. A securities transaction tax of 0.3% of the transaction price for stocks and 0.1% for bonds and mutual funds shares is levied on the seller. THE REPUBLIC OF CHINA GENERAL INFORMATION Location, Area and Population Taiwan is located approximately 90 miles east of the Chinese mainland, 650 miles south of Japan, 340 miles northeast of Hong Kong and 200 miles north of the Philippines. Owing to its geographical position, Taiwan plays a significant role in trade, transportation and tourism in East Asia. The island is 240 miles in length and 80 miles in width. In addition to the island of Taiwan, there are over 77 offshore islands currently under the effective control of the ROC. The total area of the ROC is approximately 13,900 square miles, which is approximately the same as that of the Netherlands. Taiwan's total population as of December 31, 1995 was estimated at 21.3 million. The literacy rate is approximately 94%. The bulk of the population is composed of Chinese descendants of early migrants from the mainland and mainland Chinese who migrated from the mainland in 1949 and their descendants. Chinese persons make up approximately 98% of the population, with the remaining 2% of the population consisting primarily of aboriginal natives of the island. Population density is among the highest in the world with an average of approximately 1,498 people per square mile. The largest cities are Taipei, in the north, with over 2.7 million people, and Kaohsiung, in the south, with over 1.4 million people. Mandarin is the official language, while Fukien and Hakka dialects are also widely spoken. Political History The ROC was established in 1912 by Dr. Sun Yat-Sen and his Kuomintang (Nationalist Party) (the "KMT") on mainland China after the overthrow of the Ching Dynasty in 1911. The ROC government remained on the mainland until December 1949 when General Chiang Kai-Shek, who was elected president of the ROC by the National Assembly in 1948, moved the seat to Taipei. Since that time, the ROC has continued to maintain that it is the sole legitimate government of all of China (i.e., Taiwan and all of mainland China and Mongolia). The People's Republic of China (the "PRC") also asserts sovereignty over all of China, including Taiwan. The KMT is the dominant political party in the ROC and as of December 31, 1995 controlled approximately 55% of the 334 seats in the National Assembly and approximately 53% of the 167 seats in the Legislative Yuan. The current President, Lee Teng-Hui, assumed the Presidency in January 1988 and was elected Chairman of the KMT in July 1988. He is the first native-born Taiwanese to hold either the office of President or Chairman of the KMT. President Lee was re-elected in March 1996 for a four-year term of office. Under the leadership of President Lee, the KMT has increased the pace of political liberalization in the ROC, in accordance with a ten-year political liberalization program introduced by President Lee's predecessor in 1986. The program provides, among other things, for the gradual increase in the number of generally elected parliamentary seats and the recognition of opposition political parties. The Democratic Progress Party has emerged as a significant opposition party in parliamentary and other national elections. In addition, the Chinese New Party was formed in 1993 by disaffected members of the KMT. Foreign Relations The ROC maintains formal diplomatic relations with 31 countries, including the Vatican. In addition, it has active trade and financial relations with most major economic powers and maintains trade missions in locations around the world. Taiwan remains a member of the Asian Development Bank, but is not a member of the United Nations and various other international organizations. The ROC government has applied to rejoin the General Agreement on Tariffs and Trade ("GATT"), from which it withdrew in 1950. In September 1992, in accordance with a GATT resolution to establish a committee to examine the Taiwan application for readmission, Taiwan was permitted to become a GATT observer during the examination. Taiwan is currently seeking to become a member of the World Trade Organization, the successor organization to GATT. The ROC joined the Asia- Pacific Economic Cooperation group ("APEC") in November 1991, together with Hong Kong and the PRC. SAI-13 Although the United States terminated diplomatic relations with the ROC in 1978, the United States maintains close commercial, cultural and other relations with the ROC and is committed to assisting the ROC in maintaining its self- defense capability. In April 1979, the U.S. Congress enacted the Taiwan Relations Act (the "Act") to govern the future U.S. relationship with Taiwan and an unofficial entity, the American Institute in Taiwan, was established to handle U.S. interests in Taiwan. The Act affirmed as national policies the preservation and promotion of close commercial and cultural ties with Taiwan and the continuing supply to Taiwan of arms of a defensive character. Under the Act, all non-military treaties then in effect between the U.S. and the ROC were affirmed. In addition, the Act provided that, in spite of the absence of diplomatic relations, U.S. laws with respect to Taiwan would continue to be applied in the same manner as such laws were applied prior to January 1, 1979. The Act also provided that the United States would make available such defense articles and defense services in such quantity as necessary to enable Taiwan to maintain a sufficient self-defense capability. The quantity and quality of arms sales is determined periodically by the U.S. President and the U.S. Congress based on their judgment of Taiwan's needs. Under the Act, the President is also required to inform Congress of any threat to Taiwan's security or its social or economic system, and the President and Congress are required to determine appropriate U.S. action in response to any such threat. Trade relations between the United States and the ROC have not been adversely impacted by the change in diplomatic status. Until recently, the United States was Taiwan's largest trading partner. The United States and the ROC continue to conduct periodic talks on trade relations. Government Organization The ROC government is organized into five branches or "Yuans": the Executive Yuan, the Legislative Yuan, the Judicial Yuan, the Examination Yuan and the Control Yuan. The ROC Executive Yuan is broadly involved in the formulation and implementation of economic policy. There is also the National Assembly, an elected body whose main function is the promulgation and amendment of the constitution. The ROC government is headed by the President, who is also commander-in- chief of the armed forces and is partially entrusted with the exercise of emergency powers, and the Executive Yuan or cabinet is headed by the Premier. Prior to March 1996, the President and Vice President were elected by the National Assembly to six-year terms. As of March 23, 1996, the President and Vice President are elected by the public rather than by the National Assembly for a four-year term. The President, in turn, appoints the Premier with the consent of the majority of the Legislative Yuan (the sitting legislative body) and also appoints the Deputy Premier and cabinet ministers on the recommendation of the Premier. The Legislative Yuan is the ROC's sitting legislative body and is responsible for the enactment of all national laws. The judicial system is administered by the Judicial Yuan, with judicial review powers vested in the Council of Grand Justices. The Control Yuan is responsible for auditing of government accounts and investigating and impeaching government officials. The Examination Yuan is empowered to examine and select governmental officials and establish pay scales and other terms of employment for the civil service. In addition to the ROC central government, a separate provincial government, headed by a Provincial Governor, exercises strictly local government functions. On December 3, 1994, the first gubernatorial election and Taipei and Kaohsiung mayoral elections were held. RECENT ECONOMIC DEVELOPMENTS For a discussion of recent economic developments in the ROC, see "The Republic of China--Recent Economic Developments" in the Prospectus. DOMESTIC ECONOMY Economic Planning Economic planning has been an important part of Taiwan's economic success. Beginning in 1953, the ROC government has instituted a series of economic plans which have provided a framework for government policies and have helped to adapt Taiwan's economy to changes in the domestic and international economic environment. The current Four-Year Plan, which is the eleventh such plan, covers the period from 1993 to 1997. In 1994 and 1995 economic growth averaged 6.44% in real terms, with inflation averaging 3.85%. Within these same two years, the service sector grew faster than the manufacturing sector, and accounted for 60.11% of GDP in 1995. One intent of the Plan is to make domestic demand the primary engine of growth in Taiwan's economy while limiting the contribution of foreign demand to growth of GDP. SAI-14 Gross National Product GNP Growth. Although GNP growth has varied from a low of 1.16% in 1974 to a high of 13.59% in 1978, it has never been negative. The following table summarizes Taiwan's Gross National Product for the periods indicated with the annual percentage changes of GNP in current price terms and real terms:
1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- (NT$ BILLION) Gross National Product at Current Market Prices............. 4,412 4,928 5,441 5,971 6,454 Private Consumption................ 2,359 2,635 2,989 3,346 3,772 Government Consumption............. 740 837 908 940 960 Fixed Capital Formation............ 966 1,067 1,240 1,391 1,460 Increase in Inventory.............. 29 54 89 87 61 Exports of Goods and Services.......................... 2,014 2,281 2,313 2,599 2,812 Less: Imports of Goods and Services.......................... (1,799) (2,062) (2,204) (2,488) (2,691) Expenditures on Gross Domestic Product.................. 4,307 4,811 5,338 5,875 6,376 Net Factor Income from Abroad............................ 105 117 103 96 78 Percentage Increase of GNP over Previous Year at Current Prices.................... 9.5% 11.7% 10.4% 9.7% 8.1% Real GNP Growth Rate............... 5.5% 7.6% 6.2% 6.0% 6.1%
_____________________ Source: Derived from data published in Council for Economic Planning and Development, Industry of Free China, Vol. LXXX, IV, No. 6, December 1995. Composition of GNP. The major components of GNP are private consumption and exports. The decline of fixed capital formation as a percentage of GNP in the mid-1980s has been reversed through a combination of public sector capital expenditures, increased foreign investment and increased domestic investment stimulated by export demand. Although the gap between exports and imports as percentages of GNP has narrowed in recent years, the historic gap has led to large trade surpluses, particularly with the United States. COMPOSITION OF GROSS NATIONAL PRODUCT
(PERCENTAGE SHARES) ------------------- 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- Private Consumption............ 53.46% 53.48% 54.93% 56.04% 58.45% Government Consumption......... 16.77 16.98 16.69 15.74 14.89 Fixed Capital Formation........ 21.88 21.64 22.79 23.29 22.63 Increase in Inventory.......... 0.65 1.09 1.64 1.46 0.95 Exports........................ 45.64 46.28 42.56 43.53 43.58 Less: Imports.................. (40.78) (41.85) (40.51) (41.67) (41.70) Net Factor Income From Abroad................... 2.38 2.38 1.90 1.61 1.21 ------ ------ ------ ------ ------ Total.......................... 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ====== Exports Less Imports........... 4.86% 4.43% 2.05% 1.86% 1.88%
_____________________ Source: Council for Economic Planning and Development, Industry of Free China, Vol. LXXX, IV, No. 6, December 1995. SAI-15 Prices and Wages From 1982 to 1988, the ROC experienced relatively modest inflation, with an average annual rise in the consumer price index of approximately 1%. Taiwan's average annual rates of inflation in 1993, 1994 and 1995, were 2.9%, 4.1% and 4.6%, respectively. Such increases have not been fully reflected in all sectors of the economy. For example, the wholesale price index fell in 1988 and 1990 although the consumer price index rose in the same periods. Average monthly employee earnings in the manufacturing sector have generally outpaced inflation. Between 1977 and 1995, the average monthly employee earnings index in manufacturing grew faster than the consumer price index. The rapid growth in wages reflects high demand for labor as evidenced by the low unemployment rates in Taiwan. The table that follows shows the movement in the indices for wholesale prices, consumer prices and average monthly employee earnings in manufacturing for the periods indicated:
MANUFACTURER WHOLESALE PRICES CONSUMER PRICES EMPLOYEE EARNINGS ------------------------------------- ------------------------------------ ----------------------------------- INDEX % CHANGE INDEX % CHANGE INDEX % CHANGE ---------------- ------------------- ---------------- ------------------ ---------------- ----------------- 1990 ............ 99.8 (0.6) 96.50 4.12 90.11 13.3 1991 ............ 100.0 0.2 100.00 3.63 100.00 11.0 1992 ............ 96.3 (3.7) 104.47 4.47 110.23 10.2 1993 ............ 98.8 2.5 107.54 2.94 117.82 6.9 1994 ............ 100.9 2.2 111.94 4.09 125.58 6.6 1995 ............ 108.3 7.4 116.06 3.68 N/A N/A
_____________________ Source: Derived from data published in Taiwan Statistical Data Book, CEPD 1995; Commodity - Price Statistics monthly in Taiwan Area of ROC, January 1996, No. 301. N/A : Not available Employment and Labor Force Taiwan's labor force has been an important factor in the country's economic success. It is young, well educated and highly productive. Statistics from 1995 indicate that 84.1% of the labor force is under 50 years of age, 54.1% of the total labor force had at least a junior high school education and a high- school or vocational school education and 20.1% had received junior college, college or graduate school education. Labor productivity in the manufacturing sector increased 3.7% in 1994 and 6.8% in 1995. Wage levels for Taiwan's workers have also increased in recent years as living standards and skill levels rise. The resultant overall increase in labor costs increases the differential between Taiwan and its lower-cost competitors among the less-developed nations of Asia. Recognizing the imperatives of the more competitive Asian economy, the ROC government is seeking to develop Taiwan into a regional hub for high-end manufacturing, sea and air transportation, finance, telecommunications and media. Taiwan is seeking to develop further as a service-oriented economy rather than a labor-intensive manufacturing-oriented one. One result of the movement of industrial capacity offshore has been the reduction of the labor shortage in manufacturing. Industrial Structure and Industrial Production Several of Taiwan's key industrial sectors, including the electronic, machinery and textile sectors, have been dominated by small, family-owned companies. These characteristics have provided Taiwan's manufacturing sector with great flexibility and enabled it to respond quickly to changes in the world economic environment. However, increased labor costs and the resulting emphasis on high technology and skill-intensive industries may seriously impair the ability of Taiwan's small and medium sized firms to compete with large corporate conglomerates such as South Korea's chaebol. Over the last several years a large number of small and medium-sized labor intensive businesses have shifted their operations to lower wage areas such as the PRC and Southeast Asian countries. As a policy response to this potential structural deficiency, ROC planners have tried to foster links between large enterprises that produce intermediate or component products and smaller manufacturers of downstream products. This concept has been used in a number of areas, including the plastic, textile, automotive and machinery industries. SAI-16 In June 1993, President Lee Teng-Hui ordered the immediate implementation of an economic stimulus package designed to achieve an annual economic growth rate of 6% to 10% and a yearly increase of 10% to 15% in domestic investments by private sectors over the next three years. Pursuant to the economic stimulus package, the government will take certain steps to stimulate interest in domestic investment, including the provision of low-cost land and financing to local industries, tax exemptions, liberalization of financial regulations, expanded imports of semi-finished products from, and promotion of scientific and technological exchanges with, the PRC. Government Participation in the Economy The economic activities of the ROC government have been a significant factor in the growth of the economy. The government provides traditional government services including national defense, postal service, education, infrastructure for transportation and communications and public housing. In addition, the government influences the level of economic activity through Four- Year Plans, control of a number of key industrial enterprises and commercial banks and sponsorship of major construction projects, like the Six-Year Plan, which contribute to overall capital investment. In 1994, the government controlled 100% of utility production, 48.02% of mining production, and 10.50% of all manufacturing production. The current Four-Year Plan calls for a continued reduction in public sector industrial ownership in order to eliminate inefficient government enterprises. Although no specific timetable has been announced, the ROC government has stated its intention to sell shares in more than 20 government-owned enterprises to the public. The government sold a portion of its shares in China Steel Corporation to the public in 1989 and 1991 and sold 360 million shares in the form of GDRs for US$330 million in 1992. In 1994, the ROC government resumed its privatization program and sold shares of five government-owned enterprises to the public for an estimated amount of NT$50 billion. The government has also announced its intention to sell to investors a portion of its holdings in four of the 13 government-owned commercial banks with the intention of reducing the government's total shareholding position in these banks to below 51%. Foreign Investment Foreign investment in Taiwan has played an important role in the development of the nation's economy and has received extensive encouragement by the government, especially in the export and technology transfer sectors. Aggregate foreign investment from 1952 through December 1995 totalled US$22.3 billion, with US$19.4 billion invested by non-Chinese foreign nationals and US$2.9 billion invested by overseas Chinese, principally Hong Kong residents. This money was largely invested in the electronic and electric product industry (26%), chemicals (14.4%) and the services industry (exclusive of banking and insurance) (10.8%). In 1995, foreign investment in the ROC totalled US$2.9 billion, an increase of 79.4% from 1994. Of this amount, over 94.2% came from non-Chinese foreign investors with the remainder coming from overseas Chinese, principally in Hong Kong. In the past, inadequate protection of intellectual property rights has acted as a disincentive to foreign investment, but progress has been made in recent years in improving the legal framework and strengthening enforcement. Changes include the promulgation in 1985 of a revised Copyright Law, which offers copyright protection for software and strengthens penalties for infringement, and a revised Trademark Law, with tougher enforcement provisions. In addition, amendments have been proposed to the Patent Law which would extend protection to chemicals, pharmaceuticals and electronics. In April 1993, Taiwan was placed on the United States' "priority watch list" for possible trade sanctions under Section 301 of the Trade Act of 1974, as amended. The United States Trade Representative publishes the "priority watch list" each year to identify nations that deny adequate and effective intellectual property rights ("IPR") protection to U.S. interests. After being placed on this "priority watch list," Taiwan quickly passed a series of legislation revising its IPR laws. Following a comprehensive review of Taiwan's progress in IPR protection, the United States removed Taiwan from the "Special 301 priority watch list" and placed Taiwan on the United States' general "watch list." The general "watch list" includes nations that warrant special attention because they maintain intellectual property practices or barriers to market access that are of particular concern to U.S. interests. For a more detailed discussion on certain restrictions on investments by foreigners in securities issued by ROC companies, see "Foreign Investment and Exchange Controls in the ROC." SAI-17 Environment Taiwan's natural environment has suffered significant damage due to growth policies that ignored the social cost of pollution. In recent years, the public has become increasingly sensitive to the problem and is demanding corrective action. Environmental concerns have delayed or forced the cancellation of several major public-works projects, including construction of a new nuclear power plant, and have produced substantial delays in obtaining required approvals for a number of major new industrial facilities. A cabinet-level Environment Protection Administration was established in 1987 and has placed a high priority on the enforcement and strengthening of environmental laws. Environmental concerns may become a significant impediment to industrial expansion. FOREIGN TRADE AND BALANCE OF PAYMENTS Foreign Trade/1/ Foreign trade accounts for a major percentage of Taiwan's economic activity. Taiwan's growth has, to a significant degree, been export driven and in recent years, nearly 50% of the country's GNP has been derived from the export sector. Imports are also critical for Taiwan as it is dependent on foreign sources for over 90% of its energy needs and key raw materials and capital equipment used in its export industries. In addition, heightened domestic demand for consumer items has contributed to an increase in imports as a percentage of GDP. In recent years, Taiwan's trade balance has been consistently positive; the highest surplus of US$18 billion was recorded in 1988. In 1994 and 1995, the trade surplus was US$7.7 billion and US$8.1 billion, respectively. As a result of high overall balance of payments surpluses, Taiwan has experienced a dramatic increase in foreign exchange reserves. Starting in 1991, however, this trend slowed down largely because of capital outflow and a decreasing trade surplus. See "Balance of Payments" and "Foreign Exchange." The United States is the largest export market with a 23.7% share of Taiwan's total exports in 1995. Hong Kong and Japan are the next largest markets with shares of 23.4% and 11.8%, respectively. From 1990 to 1995, Taiwan's total exports to Hong Kong increased by 205.3%. Taiwan's increasing dependence on Hong Kong reflects the growing importance of the PRC markets to the ROC. Taiwan's main imports are machinery, minerals (including crude oil), basic metal products and chemicals. Taiwan's main import sources are Japan (29.2% in 1995) and the United States (20.1% in 1995). The intensification of protectionist sentiments in the U.S. and other of Taiwan's major trading partners in recent years has highlighted the island's dependency on key export markets and has led to efforts by the ROC government to diversify Taiwan's trading partners away from the United States. For example, in February 1995 Hong Kong became Taiwan's largest trading partner. United States--Taiwan Trade Relations Until recently, the United States was Taiwan's largest trading partner in every year since 1961. Taiwan has had a trade surplus with the United States in every year since 1968. In 1987, the U.S./ROC trade gap reached a record high of US$16.0 billion, the U.S.'s second largest bilateral trade deficit behind Japan. The surplus shrank to US$10.4 billion in 1988 as a result of a strong increase in imports, increased to US$12.0 billion in 1989 and subsequently decreased to US$9.1 billion in 1990. In 1995, the surplus stood at US$5.64 billion. The persistent trade surplus with the United States has been a major problem affecting U.S./ROC relations. The U.S. government has held a series of consultations with the ROC government on trade matters and has taken a number of concrete steps designed to deal with specific trade issues. The United States has also __________________________ /1/ All statistics used in this SAI relating to Taiwan's external trade are based on data compiled by the ROC authorities. Statistics on U.S./ROC trade compiled by the U.S Department of Commerce differ from those compiled by ROC agencies due, in part, to the fact that the U.S. statistics calculate U.S. imports from Taiwan on a customs valuation basis while the ROC statistics calculate them on an FOB basis. SAI-18 sought significant reductions in Taiwan tariffs, relaxation of non-tariff barriers, increased access to the Taiwan market for U.S. service industries, better protection of intellectual property rights and, in 1994, an appreciation of the NT Dollar against the U.S. Dollar. In 1989, Taiwan, together with South Korea, Hong Kong and Singapore, was dropped from the Generalized System of Preferences ("GSP"). The GSP gives developing countries duty-free access to the U.S. market and, on average, provides a 5% tariff reduction on the products covered. Taiwan had been the largest beneficiary of GSP with US$3.42 billion of goods qualifying in 1988. The ROC government has attempted to ease trade tensions with the United States both by promoting the purchase of U.S. goods through a "Buy American" campaign and in efforts to create more open markets. The ROC has liberalized the importation of U.S. wine, tobacco and beer and restricted textile and machine tool exports to the U.S. In addition, the government has liberalized access for foreign firms in the securities, insurance, banking and motion picture distribution sectors, agreed to eliminate export performance requirements for foreign companies producing automobiles in Taiwan, and opened its markets to U.S. soda ash exports. The ROC government has also eliminated the discrimination in its harbor tax, thereby reducing the burden on imports and changed its customs valuation system to conform with the GATT Customs Valuation Code, thereby eliminating artificial price lists which increased tariffs on certain imported products. In 1989, the ROC Government further reduced the commodity tax, which affects imports as well as domestically produced items and a tentative agreement with the United States on the mutual protection of copyrights was reached. Balance of Payments As a result of the increase in world oil prices in 1978-1979, Taiwan incurred a current account deficit of US$913 million in 1980, and an overall balance of payments deficit for that year of US$319 million. Since that time, the country's overall balance of payments situation has steadily improved. Record high surpluses were recorded in 1987 for the trade balance (US$20.3 billion), the current account balance (US$18.0 billion) and the overall balance (US$19.3 billion). In 1995, the trade balance stood at US$8.1 billion; the current account balance was US$5.0 billion; and the overall balance was a deficit of US$3.9 billion. Taiwan traditionally has had a positive balance of trade which is reduced by a deficit on invisible transactions (e.g., shipping and other transportation, travel and investment income). The impact of the capital account has varied in recent years as it made a positive contribution to the overall balance in 1980- 1983 but was a negative factor from 1984 through 1989 when there were substantial deficits in the long-term capital account due primarily to drawings on long-term loans and substantial repayments and prepayments of principal. This trend continued through 1995. SAI-19 BALANCE OF PAYMENTS (US$ MILLIONS)
1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- Current Account Balance........ $10,769 $12,015 $ 8,154 $ 6,714 $ 5,967 Trade Balance.................. 14,928 15,754 12,767 11,587 11,959 Invisible Trade Balance........ (3,424) (3,488) (4,406) (3,891) (4,635) Unrequited Transfers........... (735) (251) (207) (982) (1,357) Long Term Capital.............. (6,402) (2,647) (3,844) (2,456) (1,084) Direct Investment.............. (3,913) (583) (990) (1,534) (1,085) Other.......................... (2,489) (2,064) (2,854) (922) 1 Basic Balance.................. 4,367 9,368 4,310 4,258 4,883 Short Term Capital............. (4,150) (2,084) (4,880) (2,295) 215 Errors and Omissions........... 463 (129) (72) (511) (398) Overall Balance................ 680 7,155 (642) 1,452 4,700 Counterpart Items.............. -- -- 3 6 6 Change in Net Foreign Assets of the Banking System........................ (680) (7,155) 639 (1,458) (4,706)
____________________ Source: Derived from data published in Financial Statistics Monthly, February 1995, Central Bank. FOREIGN EXCHANGE Currency The Central Bank has in the past attempted to maintain stability in the market by intervening to purchase or sell foreign exchange so as to avoid large and sudden fluctuations and to maintain an exchange rate which it deems compatible with the ROC's economic policy. It is now less active in managing currency levels, partly due to requests from U.S. trade negotiators made in 1989. Most of the foreign exchange dealings are spot transactions (delivery within the next business day). Over 90% of the dealings are in U.S. Dollars although dealing also takes place in other currencies. See "Banking System and Monetary Policy--Monetary Policy." SPOT EXCHANGE RATES YEAR-END (IN TAIPEI, TAIWAN)
BUYING SELLING ---------- ----------- (NT$ PER US$) 1990................................. 27.11 27.11 1991................................. 25.70 25.80 1992................................. 25.37 25.47 1993................................. 26.62 26.72 1994................................. 26.16 26.26 1995................................. 27.22 27.32
____________________ Source: Derived from data published in Taiwan Statistical Data Book, 1994 CEPD and Monthly Statistics of the Republic of China, Directorate-General of Budget, Accounting and Statistics, October 1994 and Financial Statistics Monthly, February 1996. On April __, 1996, the spot buying rate was NT$ per US$1.00 and the spot selling rate was NT$ per US$1.00. Exchange Controls The provisions of the Statute Governing Foreign Exchange of 1960, as amended, provide that all foreign exchange transactions must be executed by banks duly authorized by the Ministry of Finance and the Central Bank. As of December 31, 1995, 34 ROC banks and 38 foreign banks with branches in Taiwan are authorized to engage in foreign exchange transactions. SAI-20 The government has liberalized exchange control by, among other things: (i) permitting ROC companies and resident individuals to remit, without foreign exchange approval, outside and into the ROC up to US$20 million (or its equivalent in specified foreign currency) and US$5 million (or its equivalent in specified foreign currency), respectively, each calendar year; (ii) permitting individuals and institutions to convert their NT Dollar funds into foreign currency and invest them in certain foreign securities; (iii) permitting individuals and institutions to open, with appointed banks, foreign exchange demand deposit accounts and time deposit accounts evidenced by non-negotiable certificates; (iv) requiring importers and exporters only to file reports with respect to any foreign exchange that occurs in their trades with counterparts abroad with the Central Bank instead of obtaining prior approval; and (v) subject to certain restrictions, permitting non-ROC companies and individuals to open NT dollar bank accounts. BANKING SYSTEM AND MONETARY POLICY Despite Taiwan's relatively high savings rate of 26% in 1995, Taiwan's banking and financial system remains underdeveloped relative to its economy. Government-owned banks play a major role in the banking sector. However, 18 new private banks have been established (including two which were changed from trust investment companies) since government deregulation. Bank financing has been traditionally short-term in nature and longer-term financing has been hindered by the lack of a well developed capital market and strict government regulation of capital issues. In addition, many companies--especially smaller companies with limited direct access to the banking system--have relied on an informal unorganized money market outside the banking system as a source of finance even though rates tend to be higher than those charged by the banks. The government is currently reforming the financial system and has implemented some of the recommendations of the Economic Reform Committee relating to the banking industry. These recommendations call for general loosening of the tight government control over the financial markets by deregulating interest rates, minimizing state interference with the day-to-day operation of the state owned banks, permitting an expansion of foreign branch bank business, improving the interbank market and facilitating the merger of financial institutions. Measures instituted to date include: efforts to develop a formal, short-term money market; deregulation of interest rates; increased freedom for ROC nationals to place some of their savings in foreign portfolio investments, liberalization of foreign exchange controls and the passage of an amendment to the Banking Law which has enabled both foreign and domestic banks to engage in a wider range of activities. Central Bank of China The Central Bank was established in 1935 pursuant to the Central Bank of China Act. The Central Bank is responsible for formulating and implementing monetary policy and supervising all financial institutions in the country. It also holds the nation's foreign exchange reserves, issues the national currency and acts as fiscal agent of the government and custodian of government funds. Banking and Financial Institutions A wide variety of financial organizations operate in the ROC under the supervision of the Ministry of Finance including domestic and foreign banks, credit cooperative associations, trust investment companies, post offices and postal agencies, life insurance companies, property and casualty insurance companies, bills finance companies and securities finance institutions. Both local and foreign banks are chartered under the provisions of the Banking Law, as amended. With the exception of a few specialized banks, all banks generally engage in a full range of operations and are members of the Clearing House supervised by the Central Bank. SAI-21 Under the Banking Law, banks are granted wide latitude to engage in a range of business including securities investment, underwriting, trading in securities for their own account, or for their customers, managing bond and debenture issues and discounting bills and notes, in addition to other normal banking business. The Banking Law also provides for various types of specialized banking institutions such as commercial banks, savings banks, export-import banks, banks which extend credit to medium- and small-sized enterprises and citizens or district banks. The postal savings system (post offices and postal agencies) has been the fastest growing segment of the banking industry. From 1961 through 1995 deposits in the system grew from 3% to about 11.7% of the total. Credit co-operative associations are also significant, although their growth rate has not been as fast as the postal savings system. At December 31, 1995, deposits in credit co-operative associations constituted approximately 12.5% of all deposits. The International Commercial Bank of China ("ICBC") is Taiwan's leading foreign exchange bank. It maintains 51 offices in Taiwan and a number of foreign branches and representative offices. See "Custodians" in the Prospectus. The Export-Import Bank of China Act of 1979 established the government- owned Export-Import Bank of the ROC and transformed the government-owned Chiaotung Bank into a development bank. The Export-Import Bank of the ROC specializes in trade banking with the main objective of promoting the ROC's exports, while the Chiaotung Bank concentrates on financing investment in manufacturing, mining and transportation industries. It has close working relationships with the CEPD, the Industrial Development Bureau of the Ministry of Economic Affairs and other government bodies. In 1974, the government established the Medium and Small Business Credit Guarantee Fund to provide medium and small business credit guarantees for bank loans. In 1975, the government established eight medium-sized banks throughout the country to assist in financing medium and small businesses. As of the end of 1995, about 9.48% of all financial institutions' deposits were held by these banks. The Banking Law authorizes the activities of trust investment companies to manage trust funds and trust properties or, as an investment broker, to invest in capital markets and to undertake underwriting and trading of securities for their own account or for customers. The government first allowed trust investment companies to open in 1971, with the primary purpose of permitting overseas Chinese financial groups to develop long-term loan and capital markets in Taiwan. As of the end of 1995, there were 5 trust investment companies operating in the ROC. On July 11, 1989, the Legislative Yuan passed an amendment to the Banking Law which permits the establishment of privately-owned banking institutions and permits banks to set their own interest rates. The related regulations have been formulated by the Executive Yuan. The amendment stated for the first time which actions will be deemed as acceptance of deposits and by limiting such actions, thereby made the country's numerous underground investment companies illegal. Following the enactment of this amendment, 15 new private banks were approved in 1991. Two additional new commercial banks were approved in 1992 and 1994. At present, there are 38 foreign banks operating in the ROC from the United States, the Netherlands, Thailand, Japan, the United Kingdom, Germany, Singapore, France, Spain, Australia and Canada. While there has been some recent liberalization of the treatment of foreign banks in Taiwan, their activities are still strictly limited by law and they operate at a competitive disadvantage relative to Taiwan's domestic banks. In early January 1987, the restriction limiting foreign banks to taking time deposits of a maturity of six months or less was eliminated. In addition, a regulation permitting qualified foreign banks to conduct trust business in Taiwan was adopted in April 1990. Monetary Policy The Central Bank is responsible for developing and implementing monetary policy and controlling the money supply. The major methods it uses to implement policy include: adjusting deposit reserve ratios; engaging in open market operations; setting the rediscount rate; acting as lender of last resort and adjusting bank holdings of foreign currency to influence their reserve positions. SAI-22 The rate of growth of the money supply as measured by M1B was approximately 15% in 1993, 12% in 1994, and 0.79% in 1995. The sharp increases in M1B through 1993 resulted from large-scale injection of reserves which the Central Bank effected through its constant purchases of U.S. Dollars on the local foreign exchange market in order to control the appreciation of the NT Dollar against the U.S. Dollar. The Central Bank relies on these purchases to absorb excess foreign currency generated by the mounting trade surplus and speculative currency inflows. At the same time, the Central Bank attempts to reduce the excess liquidity in the domestic money supply caused by these purchases by issuing treasury bills, time deposit certificates and savings notes. PUBLIC FINANCE AND TAXATION Revenues and Expenditures The government policy on fiscal matters has traditionally been conservative. The ROC government has experienced deficits and for the next several years may continue to experience deficits in connection with the National Health Project. The major sources of 1995 revenue were taxes (62%), surpluses from public enterprises and utilities (6%) and proceeds from issues of public debt (6%). The primary areas of expenditure in 1995 were national defense and foreign affairs and general administration (32.2%), social security and pension (24.5%), education, science and culture (13.9%) and economic development (7.1%). GOVERNMENT REAL NET REVENUE AND EXPENDITURES
REAL NET REAL NET SURPLUS REVENUE EXPENDITURES (DEFICIT) -------------- ---------------- --------------- (NT$ BILLION) 1990 .......................................... 1,092.4 1,097.5 (5.1) 1991 .......................................... 1,049.9 1,275.6 (225.7) 1992 .......................................... 1,257.6 1,561.9 (304.3) 1993 .......................................... 1,416.3 1,756.3 (340.0) 1994 .......................................... 1,359.5 1,614.5 (255.0)
_________________________ Source: Yearbook of Financial Statistics of the ROC, 1994, Department of Statistics, Ministry of Finance. Taxation The tax system in Taiwan includes corporate and personal income taxes, business taxes, customs duties, and harbor taxes, commodity taxes, land taxes and stamp and securities transfer taxes. In the spring of 1986, the government introduced a value-added tax which replaced, in part, the previous commodity and business tax. See "Value-Added Tax" below. For more information regarding ROC taxation of the Fund, see "Taxation -- ROC Income Taxes" herein. Corporate Income Tax. Taiwan resident corporations are taxed on worldwide net income at a maximum rate of 25%. Certain approved deductions are allowed. Non-resident companies doing business in Taiwan are taxed on all Taiwan source income either at the applicable rates for resident corporations or at prescribed withholding rates. Interest, royalties, and certain service fees paid to non-residents are subject to a 20% withholding tax. Personal Income Tax. Residents and non-residents are taxed on all income derived from sources within Taiwan. Residents are taxed at a progressive rate ranging from 6% to 40%. Non-residents are taxed at a flat rate of 20% for income other than (i) gains realized from the sale of property which are taxed at the rate of 35% for foreign individuals and 25% for foreign corporations and (ii) stock or cash dividends which are taxed SAI-23 at the rate of 35% for foreign individuals and 25% for foreign corporations (or 20% if certain governmental approval relating to foreign investment is obtained). Residents may take deductions for insurance payments, medical expenses, property taxes and charitable donations, or apply a standard deduction in lieu of the itemized deductions. Non-resident taxpayers are ineligible for deductions. Value-Added Tax. Under the value-added tax ("VAT") system, a 5% tax is levied on the value added to many types of goods and services at each stage of production and distribution. The sale of a number of types of goods and services are "zero rated" which means that the final seller can recover all the VAT he paid on his purchase of goods and services and that the price paid by the final consumer will not reflect any VAT incurred on prior stages. Zero rated goods and services include exports and services relating to exports. Estate and Gift Tax. Estate and gift tax is payable on, inter alia, any estate within the ROC or of a deceased non-resident ROC national regularly domiciled outside the ROC or of a foreign national and on any donated property within the ROC donated by any such person, and is accordingly a tax payable by reference to individuals. Estate tax is payable at rates ranging from 2% of the first NT$300,000 to 60% of amounts over NT$160 million. Gift tax is payable at rates ranging from 4% of the first NT$300,000 to 60% of amounts over NT$150 million. Capital Gains Tax. During certain periods in the past, capital gains derived from stock transactions have been subject to tax in the ROC. The latest imposition of this tax was for the one-year period ended December 31, 1989. Since January 1, 1990, the capital gains tax has been suspended. On January 4, 1996, the ROC Legislative Yuan passed a bill for the amendment of the ROC Income Tax Law that would have eliminated the exemption from the ROC income tax for gains realized on the sale of ROC securities and imposed a capital gains tax. On January 12, 1996, this amendment was repealed by the Legislative Yuan. The reintroduction of a capital gains tax would require the Legislative Yuan to engage in the full legislative process for the enactment of tax legislation and it cannot be predicted when or whether the Legislative Yuan will engage in such full legislative process. External Debt Since 1985, Taiwan's outstanding external debt has been reduced from US$5.2 billion to US$563.3 million in 1994. The following table gives total and disbursed external public debt outstanding for the periods indicated: EXTERNAL PUBLIC DEBT OUTSTANDING
DISBURSED TOTAL CHANGE ONLY CHANGE (US$ MILLION) (%) (US$ MILLION) (%) --------------- --------- --------------- --------- 1990 ........................................ 1,208.7 (18.7) 898.1 (21.6) 1991 ........................................ 998.7 (17.4) 713.5 (20.6) 1992 ........................................ 688.0 (31.1) 455.4 (36.2) 1993 ........................................ 598.7 (13.0) 395.4 (13.2) 1994 ........................................ 563.3 (5.9) 360.4 (8.9)
____________________ Source: Balance of Payments, March 1995, Central Bank. Taiwan's debt service requirements are low compared with other countries in the region. Since 1974, the external debt ratio has not risen higher than 4.7%. ESTIMATED EXPENSES On the basis of the anticipated size of the Fund immediately following the offering and the actual expenses of the Fund since the commencement of operations in December 1986, the Adviser estimates that the Fund's normal operating expenses for its fiscal year ending August 31, 1996 will be approximately $ , excluding any performance adjustment relating to the Adviser's fee. While the foregoing estimate has been made in good faith on the basis of information as to current prices available to the Adviser, including estimates SAI-24 furnished by the Fund's agents, there can be no assurance, given the nature of the Fund, that actual operating expenses for fiscal 1996 will not be substantially more or less than such estimate. For the fiscal years ended August 31, 1993, 1994 and 1995 the operating expenses of the Fund, exclusive of amortization of organizational expenses, amounted to $4,136,025, $6,066,785 and $7,037,225, respectively. The Fund's estimated annual operating expenses are higher than the annual normal operating expenses of most other U.S. investment companies of comparable size investing in the securities of U.S. issuers. This results from the fact that (i) the advisory fees (reflecting the specialized nature of the Fund, the nature of the advisory effort involved and the need for outside research services) are higher than advisory fees paid by a number of other investment companies, (ii) many other registered U.S. investment companies do not pay fees to administrators in addition to fees paid to investment advisers, and (iii) the fees charged by certain of the Fund's agents are higher (reflecting communications and other costs associated with an investment company investing in the ROC, rather than in the United States) than fees charged by such agents for services to a more typical investment company investing in the United States. PORTFOLIO TRANSACTIONS AND BROKERAGE In portfolio transactions involving equity securities, the Adviser places orders on behalf of the Fund directly with brokers except that the purchase of shares in rights offerings is made directly from the issuer. In portfolio transactions involving debt securities, the Adviser may place orders on behalf of the Fund directly with brokers, bills companies or other institutions or may make purchases directly from the issuer. The primary objective of the Adviser in placing orders for the purchase and sale of securities for the Fund's portfolio is to obtain the most favorable net results, taking into account such factors as price, commission, size of order, difficulty of execution and skill required of the broker/dealer. Brokerage commissions are fixed under the rules of the TSE. See "The Securities Market of the ROC -- Trading and Settlement Procedures." For the fiscal years ended August 31, 1993, 1994 and 1995, the Fund paid $391,657, $570,427 and $1,165,753, respectively, in brokerage commissions. NET ASSET VALUE Net asset value is determined on each business day in Taiwan (defined to be a day on which the TSE is open for trading) by dividing the value of the net assets of the Fund (the value of its assets less its liabilities, exclusive of capital stock and surplus) by the total number of shares of Common Stock outstanding. In valuing the Fund's assets, all securities for which market quotations are readily available are valued at the last sales price prior to the time of determination, or, if there was no sales price 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). Securities which are traded over-the-counter, if bid and asked quotations are available, are valued at the mean between the current bid and asked prices, or, if such quotations are not available, are valued as determined in good faith by the Board of Directors of the Fund. In instances where the price determined above is deemed not to represent fair market value (for example, if the price of a security listed on the TSE is fixed by reason of a limit on the daily price change, and the Fund's officers determine that, because of unusual and material changes affecting the issuer, the quoted price does not reflect the value of the security), the price 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 cost with accrued interest or discount earned thereon included in interest receivable. All other securities and assets are taken at fair value as determined in good faith by the Board of Directors although the actual calculation may be done by others. Any assets or liabilities initially expressed in terms of NT Dollars will be translated into U.S. Dollars at the closing rate of NT Dollars against U.S. Dollars quoted in the Taipei Foreign Exchange Market. The Fund's currently outstanding shares of Common Stock are, and the Shares, subject to notice of issuance, will be, listed on the New York Stock Exchange. See "Financial Highlights" and "Market and Net Asset Value Information" in the Prospectus for information as to the relationship between the market price and net asset value per share of Common Stock. SAI-25 TAXATION ROC INCOME TAXES The following discussion of the anticipated material ROC tax consequences of this offering and the purchase, ownership and disposition of the Shares is based on the advice of Lee & Li, ROC counsel to the Fund. Under the Income Tax Law of the ROC, dividend and interest income received on assets held under the Management Contract from sources within the ROC will be subject to a 20% withholding tax. Stock dividends are subject to an income tax which is payable on receipt or, in certain cases, on disposal of the stock dividends. In the case of stock dividends which are so taxable, the Custodian will receive the full entitlement without deduction, but the Adviser will be obliged to pay out of cash held under the Management Contract an amount equal to 20% of the par value of the securities received. Since stock dividends are held for the investment account of the Fund, the amount of any such payment will be charged to operations. Securities received as stock dividends are treated for the purposes of the capital gains tax described below in the same way as other securities held. Transactions in securities are not currently subject to any capital gains tax. In September 1988, the ROC government announced that, beginning on January 1, 1989, a capital gains tax on gains derived from stock transactions would be reimposed. A ruling from the ROC government in 1983 had indicated that investment funds such as the Fund would remain exempt from this tax until December 31, 1990. On January 1, 1990, this capital gains tax was again suspended. On January 4, 1996, the ROC Legislative Yuan passed a bill for the amendment of the ROC Income Tax Law that would have eliminated the exemption from the ROC income tax for gains realized on the sale of ROC securities and imposed a capital gains tax. On January 12, 1996, this amendment was repealed by the Legislative Yuan. The reintroduction of a capital gains tax would require the Legislative Yuan to engage in the full legislative process for the enactment of tax legislation. There can be no assurance that the capital gains tax will not be imposed in the future or that the Fund will continue to be exempt from such tax. Profits on sales of Fund shares effected by non-resident foreigners wholly outside the ROC will not be subject to ROC income tax. Securities Transaction Tax. In general, on any sale of bonds, stocks, debentures and certain other securities, a securities transaction tax is payable by the seller at the rate of 0.3% of the transaction price for stocks and 0.1% of the transaction price for bonds and mutual fund shares. Sales of Fund shares effected outside the ROC will not be subject to the securities transaction tax. U.S. FEDERAL INCOME TAXES The Fund intends to continue to elect to qualify as a regulated investment company under the Code. To so qualify, the Fund must, among other things: (a) derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities, foreign currencies or other income (including, but not limited to, gains from options, futures contracts or forward contracts) derived with respect to the Fund's business of investing in stocks, securities or currencies; (b) derive less than 30% of its gross income from the sale or other disposition of the following assets held for less than three months: (i) stock or securities, (ii) options, futures or forward contracts (other than options, futures or forward contracts on foreign currencies), or (iii) foreign currencies (or options, futures or forward contracts on foreign currencies) which are not directly related to the Fund's principal business of investing in stocks or securities (or options and futures with respect to stocks or securities); and (c) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the value of the Fund's total assets is represented by cash and cash items, U.S. government securities, securities of other regulated investment companies, and other securities, with such other securities limited in respect of any one issuer to an amount not greater in value than 5% of the Fund's total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's total assets is invested in the securities (other than U.S. government securities or securities of other regulated investment companies) of any one issuer or of any two or more issuers that the Fund controls and that are determined to be engaged in the same business or similar or related businesses. The Fund expects that all of its gains from the sale or other disposition of foreign currencies will be derived with respect to its business of investing in stocks, securities or currencies. SAI-26 As a regulated investment company, the Fund will not be subject to U.S. federal income tax on its investment company taxable income that it distributes to its shareholders, provided that at least 90% of its investment company taxable income for the taxable year is distributed to its shareholders; however, even if the Fund were so to distribute at least 90% of its investment company taxable income, the Fund would be subject to tax on its income and capital gains to the extent that it does not distribute to its shareholders an amount equal to such income and gain. Investment company taxable income includes dividends, interest and net short-term capital gains in excess of net long-term capital losses, but does not include net long-term capital gains in excess of net short- term capital losses. The Fund intends to distribute annually to its shareholders substantially all of its investment company taxable income. If the Fund fails to satisfy the 90% distribution requirement or fails to qualify as a regulated investment company in any taxable year, it will be subject to tax in such year on all of its taxable income, whether or not the Fund makes any distributions to its shareholders. Dividend distributions of investment company taxable income are taxable to a U.S. shareholder as ordinary income to the extent of the Fund's current and accumulated earnings and profits, whether paid in cash or in shares. Since the Fund will not invest in the stock of domestic corporations, the corporate shareholders of the Fund will not be entitled to the deduction for dividends received by corporations. As a regulated investment company, the Fund also will not be subject to U.S. federal income tax on its net long-term capital gains in excess of net short-term capital losses and capital loss carryovers from the prior eight years, if any, that it distributes to its shareholders. If the Fund retains for reinvestment or otherwise an amount of such net long-term capital gains, it will be subject to a tax of 35% of the amount retained. The Board of Directors of the Fund will determine at least once a year whether to distribute any net long-term capital gains in excess of net short-term capital losses and capital loss carryovers from prior years. The Fund expects to designate amounts retained as undistributed capital gains in a notice to its shareholders who, if subject to U.S. federal income taxation on long-term capital gains, (a) will be required to include in income for U.S. federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, and (b) will be entitled to credit against their U.S. federal income tax liabilities their proportionate shares of the tax paid by the Fund on the undistributed amount and to claim refunds to the extent that their credits exceed their liabilities. For U.S. federal income tax purposes, the basis of shares owned by a shareholder of the Fund will be increased by an amount equal to 65% of the amount of undistributed capital gains included in the shareholder's income. Distributions of net long-term capital gains, if any, by the Fund are taxable to its shareholders as long-term capital gains regardless of how long the shareholder has held the Fund's shares, and are not eligible for the dividends received deduction. Under the Code net long-term capital gains will be taxed at a rate no greater than 28% for individuals and 35% for corporations. Shareholders will be notified annually as to the U.S. federal income tax status of their dividends, distributions and any deemed distributions. Shareholders receiving dividends or distributions in the form of additional shares pursuant to the Plan should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the shareholders receiving cash dividends or distributions will receive and should have a cost basis in the shares received equal to such amount. If the net asset value of shares is reduced below a shareholder's cost as a result of a distribution by the Fund, the distribution may be taxable even though it, in effect, represents a return of invested capital. Investors considering buying shares just prior to a distribution should be aware that, although the price of shares purchased at that time may reflect the amount of the forthcoming distribution, those who purchase just prior to the record date for a distribution will receive a distribution which may be taxable to them. The amount of capital gains realized and distributed (which from an investment standpoint may represent a partial return of capital rather than income) in any given year will be the result of action taken for the best investment of the principal of the Fund, and may therefore vary from year to year. If the Fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends are included in the Fund's gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect to such dividends (i.e., the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date the Fund acquired such stock, either of which date may be earlier than the date the dividend is received. Accordingly, in order to satisfy its income distribution requirements, the Fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case. SAI-27 Under the Code, in a year in which the Fund qualifies as a regulated investment company, the Fund may be subject to a 4% excise tax on a portion of its undistributed income. To avoid the tax, the Fund must distribute annually at least 98% of its adjusted taxable ordinary income (not taking into account capital gain net income) for the calendar year and at least 98% of its capital gain net income for the 12-month period ending, as a general rule, on October 31 of the calendar year. For this purpose, any income or gain retained by the Fund that is subject to corporate income tax will be treated as having been distributed at year end. In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under distribution or over distribution, as the case may be, in the previous year. For a distribution to qualify under the foregoing test, the distribution generally must be declared and paid during the year. Any dividend declared by the Fund in October, November or December of any year and payable to shareholders of record on a specified date in such a month shall be deemed to have been paid by the Fund and received by each shareholder on December 31 of such year, provided that such dividend is actually paid by the Fund during January of the following year. Accordingly, such distributions will be taxable to shareholders in the year the distributions are declared and become payable, rather than the year in which the distributions are received by the shareholders. For backup withholding purposes, the Fund may be required to withhold and remit to the U.S. Treasury 31% of reportable payments (which may include dividends, capital gain distributions, and redemptions) to certain shareholders. A shareholder, however, may generally avoid becoming subject to this requirement by filing an appropriate form certifying under penalties of perjury that such shareholder's taxpayer identification number is correct and that it is not subject to backup withholding, or is exempt from backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from payments made to Shareholders may be credited against such Shareholder's federal income tax liability. Upon the sale or exchange of his or her shares, a shareholder will realize a taxable gain or loss in an amount equal to the difference between the amount realized and his or her basis in the shares. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder's hands, and will be long-term if the shareholder's holding period for the shares is more than 12 months and otherwise will be short-term. Any loss realized on a sale or exchange will be disallowed to the extent that the shares disposed of are replaced (including replacement through the reinvesting of dividends and capital gains distributions in the Fund) within a period of 61 days beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on the sale of Fund shares held by the shareholder for six months or less will be treated for federal income tax purposes as a long-term capital loss to the extent of any distributions of long-term capital gains received by the shareholder with respect to such shares. If the Fund purchases shares in certain foreign passive investment entities described in the Code as passive foreign investment companies ("PFIC"), the Fund will be subject to U.S. federal income tax on a portion of any "excess distribution" (the Fund's ratable share of distributions in any year that exceeds 125% of the average annual distribution received by the Fund in the three preceding years or the Fund's holding period, if shorter, and any gain from the disposition of such shares) even if such income is distributed as a taxable dividend by the Fund to its shareholders. Additional charges in the nature of interest may be imposed on the Fund in respect of deferred taxes arising from such "excess distributions." If the Fund were to invest in a PFIC and elect to treat the PFIC as a "qualified electing fund" under the Code (and if the PFIC were to comply with certain reporting requirements), in lieu of the foregoing requirements the Fund would be required to include in income each year its pro rata share of the PFIC's ordinary earnings and net realized capital gains, whether or not such amounts were actually distributed to the Fund. The Fund does not intend, however, to invest in PFICs. FOREIGN TAX CREDITS As set forth above under "ROC Income Taxes," it is expected that dividends and interest earned by the Fund from ROC resident issuers will be subject to a 20% ROC withholding tax, which, in the case of stock dividends, will be paid by the Adviser out of assets held under the Management Contract. If the Fund qualifies as a regulated investment company, if certain distribution requirements are satisfied, and if more than 50% of the value of the Fund's assets at the close of the taxable year consists of stocks or securities of foreign corporations, the Fund may elect, for U.S. federal income tax purposes, to treat any such ROC withholding taxes that can be treated as income taxes under U.S. income tax principles as paid by its shareholders. The SAI-28 Fund has qualified for and has made this election in the past and intends again to make this election. As a consequence, the amount of such ROC withholding taxes will be included in the income of the Fund's shareholders and reported to the U.S. Internal Revenue Service for such shareholders and each such shareholder may be entitled to credit its portion of these amounts against its U.S. federal income tax due, if any, or to deduct its portion from its U.S. taxable income, if any. The amount of ROC income taxes that may be credited against a shareholder's United States federal income tax liability in any particular year generally cannot exceed an amount equal to the shareholder's United States federal income tax liability multiplied by the percentage of its taxable income that consists of foreign source taxable income, and the amount creditable is subject to a further limitation discussed below based on the category of foreign income for which the credit is claimed. For this purpose, the Fund expects that the capital gains it distributes to its shareholders, whether as dividends or capital gains distributions, will not be treated as foreign source taxable income. Under the Code, the foreign tax credit limitation must be applied separately to certain categories of foreign source income including foreign source "passive income." For this purpose, foreign source "passive income" includes dividends, interest, certain capital gains and certain foreign currency gains. (For certain taxpayers, dividends from the Fund may be classified as "financial services" income and the limitation may be applied separately to that category of income.) As a consequence, although certain shareholders may be able to carryback or carryforward foreign tax credits, certain shareholders may not be able to claim a foreign tax credit for the full amount (or possibly any) of their proportionate share of ROC income taxes paid by the Fund. Each shareholder will be notified within 60 days after the close of the Fund's taxable year whether, pursuant to the election described above, the foreign taxes paid by the Fund will be treated as paid by its shareholders for that year and, if so, such notification will designate (i) such shareholder's portion of the foreign taxes paid to such country and (ii) the portion of the Fund's dividends and distributions that represents income derived from sources within such country. NON-U.S. SHAREHOLDERS Taxation of a shareholder who, as to the U.S., is a nonresident alien individual, foreign trust or estate, foreign corporation or foreign partnership (a "foreign shareholder") depends, in part, on whether the shareholder's income from the Fund is "effectively connected" with a U.S. trade or business carried on by the shareholder. If the income from the Fund is not effectively connected with a U.S. trade or business carried on by the shareholder, dividends of investment company taxable income will be subject to U.S. withholding tax of 30%, unless reduced pursuant to an applicable income tax treaty. In addition, distributions of net long-term capital gains, amounts retained by the Fund which are designated as undistributed capital gains, if any, and gain realized upon the sale of shares of the Fund by a foreign shareholder who is a nonresident alien individual ordinarily will be subject to U.S. federal income tax at a rate of 30% if such individual is physically present in the U.S. for more than 182 days during the taxable year and, in the case of gain realized upon the sale of Fund shares, if (i) such gain is attributable to an office or other fixed place of business in the United States maintained by such non-resident alien individual or (ii) such nonresident alien individual has a tax home in the United States and such gain is not attributable to an office or fixed place of business located outside the United States. Furthermore, foreign shareholders may be subject to the 30% U.S. withholding tax (or lower treaty rate) on their income resulting from the Fund's election (described above) to "pass through" amounts of foreign taxes paid by the Fund, but may not be able to claim a credit or deduction with respect to the additional U.S. withholding tax attributable to such election. If dividends or distributions from the Fund are effectively connected with a U.S. trade or business carried on by a foreign shareholder, dividends of investment company taxable income, distributions of net long-term capital gains, allocations of designated undistributed capital gains and any gains realized upon the sale of shares of the Fund will be subject to U.S. federal income tax in the same manner and at the graduated income tax rates applicable to U.S. citizens or domestic corporations. If the income or gain from the Fund is effectively connected with a U.S. trade or business carried on by a foreign shareholder that is a corporation, then such shareholder may also be subject to the 30% branch profits tax. Whether a foreign shareholder is engaged in trade or business in the U.S. is a factual question. With respect to securities trading activities, a foreign shareholder who is not a dealer in securities is not considered to be engaged in trade or business in the U.S. by virtue of his securities trading activities if certain conditions are met. Foreign shareholders should SAI-29 consult their tax advisers to determine whether they are engaged in trade or business in the U.S. and, if they are, whether the income or gain derived from the Shares is effectively connected therewith. The tax consequences to a foreign shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described above. Foreign shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Fund. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS A SUMMARY INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. IN VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH SHAREHOLDER IS ADVISED TO CONSULT HIS OWN TAX ADVISER WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO HIM OF THIS OFFERING AND/OR PARTICIPATION IN THE FUND, INCLUDING THE EFFECT AND APPLICABILITY OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS. OFFICIAL DOCUMENTS All of the documents, except ROC company annual reports, referred to herein as the source of statistical information are public official documents of the ROC, its ministries, the Central Bank or the TSE. SAI-30 THE TAIWAN FUND, INC. PART C -- OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (1) FINANCIAL STATEMENTS (i) - Portfolio of Investments as of August 31, 1995 (ii) - Statement of Assets and Liabilities as of August 31, 1995 (iii) - Statement of Operations for the fiscal year ended August 31, 1995 (iv) - Statement of Changes in Net Assets for the fiscal years ended August 31, 1994 and 1995 (v) - Financial Highlights for the fiscal years ended August 31, 1992-1995, the eight-month period ended August 31, 1991 and the fiscal years ended December 31, 1989-1990 (vi) - Notes to Financial Statements for the fiscal year ended August 31, 1995 (vii) - Report of Independent Accountants dated October 17, 1995 (viii) - Portfolio of Investments as of February 29, 1996 (unaudited) (ix) - Statement of Assets and Liabilities as of February 29, 1996 (unaudited) (x) - Statement of Operations for the six-month period ended February 29, 1996 (unaudited) (xi) - Statement of Changes in Net Assets for the six-month periods ended February 28, 1995 and February 29, 1996 (unaudited) (xii) - Financial Highlights for the six-month period ended February 29, 1996 (unaudited), fiscal years ended August 31, 1992- 1995, the eight-month period ended August 31, 1991 and the fiscal years ended December 31, 1989-1990 (xiii) - Notes to Financial Statements for the six-month period ended February 29, 1996 (unaudited) (2) EXHIBITS (a) - Restated Certificate of Incorporation Amendment No. 3 to Registrant's (previously filed as Exhibit 1 to Registration Statement on Form N-2 (File Pre-Effective No. 33-9522) filed with the Securities and Exchange Commission on December 12, 1986 ("Pre-Effective Amendment No. 3")) (b) - Amended and Restated By-laws (previously filed as Exhibit 2 to Pre-Effective Amendment No. 3) (c) - Not applicable (d)(1) - Specimen certificates for Common Stock (previously filed as Exhibit 10(E) to Registrant's Registrant's Registration Statement on Form N-2 (File No. 811-4893) filed with the Securities and Exchange Commission on May 1, 1989). (e) - Dividend Reinvestment and Cash Purchase Exhibit 10(E) Plan of the Registrant (previously filed as to Registrant's Registration Statement on Form N-2 (File No. 33-21789) filed with the Securities and Exchange Commission on April 27, 1988 ("Amendment No. 5")) C-1 (f) - Not applicable (g)(1) - Securities Investment Trust Investment Management and Custodian Contract dated December 16, 1986 among Registrant, China Securities Investment Trust Corporation and The International Commercial Bank of China (previously filed as Exhibit 6(A) to (1) Amendment No. 5) (2) - Investment Advisory and Management Agreement Relating to U.S. Dollar Assets dated as of December 16, 1986 between Registrant and China Securities Investment Trust Corporation (previously filed as Exhibit 6(B) to Amendment No. 5) (h)(1) - Form of Underwriting Agreement* (2) - Form of Agreement among Underwriters* (3) - Form of Selected Dealer Agreement* (i) - Not applicable (j)(1) - See Exhibit (g)(1) (2) - Custodian Agreement Relating to U.S. Dollar Assets dated December 16, 1986 between Registrant and State Street Bank and Trust Company (previously filed as Exhibit 9(B) to Amendment No. 5) (k)(1) - Registrar, Transfer Agency and Service Agreement dated December 16, 1986 between Registrant and State Street Bank and Trust Company (previously filed as Exhibit 10(D) to Amendment No. 5) (2) - Administration Agreement dated April 1, 1994 between State Street Bank and Trust Company and the Registrant (previously filed as Exhibit k(2) to Pre-Effective No. 1 to Registrant's Registration Statement on Form N-2 (File No. 33-92378) filed with the Securities and Exchange Commission on June 19, 1995 ("Pre-Effective Amendment No. 1") (3) - Accounting Services Agreement dated April 1, 1994 between State Street Bank and Trust Company and the Registrant (previously filed as Exhibit k(3) to Pre-Effective Amendment No. 1) (l) - Opinion and consent of Rogers & Wells* (m) - Not applicable (n)(1) - Opinion and consent of Lee & Li* (2) - Consent of Coopers & Lybrand L.L.P.* (o) - Not applicable (p) - See Exhibit (g)(1) (q) - Not applicable ____________________ * To be filed by amendment. C-2 ITEM 25. MARKETING ARRANGEMENTS See Exhibit 2(h) of this Registration Statement. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses expected to be incurred in connection with the offering described in this Registration Statement. Securities and Exchange Commission Registration fees............................. $9,914 National Association of Securities Dealers, Inc. fees............................ * New York Stock Exchange additional listing fee................................... * Printing (other than stock certificates)......................................... * Fees and expenses of qualification under state securities laws (including fees of counsel)..................................................... * Accounting fees and expenses..................................................... * Legal fees and expenses.......................................................... * Underwriters expense reimbursement............................................... * Miscellaneous.................................................................... * ---------- Total..................................................................... * ========== _________________
*To be completed by amendment. ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT None. ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF APRIL __, 1996) Title of Class Number of Record Holders -------------- ------------------------ Common Stock, $0.01 par value per share ITEM 29. INDEMNIFICATION (a) In accordance with the indemnification provisions of the Delaware General Corporation Law, Paragraph 3.2 of Registrant's Certificate of Incorporation provides that no director or officer of Registrant will have any personal liability to Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director except (i) for any breach of the director's duty of loyalty to Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, as amended, or (iv) for any transaction from which the director obtained an improper personal benefit. Paragraph 7.3 of Registrant's Certificate of Incorporation further provides that each director and each officer of Registrant shall be indemnified by Registrant to the full extent permitted under the Delaware General Corporation Law and all other applicable laws of the State of Delaware, subject to the provisions and rules and regulations of the Investment Company Act of 1940, as amended (the "1940 Act"). Article VI of Registrant's By- Laws further provides that each officer, director, employee or agent of Registrant shall be indemnified by Registrant to the full extent permitted by Section 145 of the Delaware General Corporation Law and all other applicable laws of the State of Delaware, subject to the requirements of the 1940 Act, and the rules and regulations thereunder. In addition, the Underwriting Agreement, filed as Exhibit 2(h)(1) to this Registration Statement, provides for indemnification of the Underwriters by Registrant in certain circumstances. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "1933 Act") may be permitted to directors, officers and controlling persons of Registrant, pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public C-3 policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. (b) The Securities Investment Trust -- Investment Management and Custodian Contract among Registrant, China Securities Investment Trust Corporation and The International Commercial Bank of China, filed as Exhibit 6(A) to Amendment No. 5, provides for indemnification of the Adviser and the Custodian by the Registrant in certain circumstances. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER The description of the business of the Adviser is set forth under the caption "Management of the Fund--The Adviser" in the Prospectus forming part of this Registration Statement. The Adviser does not have any other business of a substantial nature. Information as to the directors and officers of each of the Adviser is included in the Adviser's Form ADV (File No. 801-28464) and is incorporated herein by reference thereto. ITEM 31. LOCATION OF ACCOUNTS AND RECORDS The accounts and records of the Registrant required by Section 31(a) under the 1940 Act and the rules promulgated thereunder are maintained at the office of State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. ITEM 32. MANAGEMENT SERVICES Not applicable. ITEM 33. UNDERTAKINGS (a) Registrant undertakes to suspend the offering of its shares of Common Stock covered hereby until it amends its Prospectus if: (1) subsequent to the effective date of this Registration Statement, the net asset value declines more than 10% from its net asset value per share as of the effective date of this Registration Statement; or (2) the net asset value increases to an amount greater than its net proceeds as stated in the Prospectus. (b) Registrant hereby undertakes: (1) that for purposes of determining any liability under the 1933 Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 497(h) under the 1933 Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; (2) that for purposes of determining any liability under the 1933 Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement C-4 relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information. C-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, and the U.S. Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Taipei, Taiwan on the 19th day of April, 1996. THE TAIWAN FUND, INC. By/s/Benny T. Hu --------------------------------------- Benny T. Hu, President KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Benny T. Hu and Gloria Wang, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all Amendments (including pre-effective and post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/Benny T. Hu Director and President (Principal April 19, 1996 - --------------------------------- Benny T. Hu Executive Officer /s/Harvey H.W. Chang Director April 19, 1996 - --------------------------------- Harvey H.W. Chang /s/Joe O. Rogers Director April 19, 1996 - --------------------------------- Joe O. Rogers /s/Jack C. Tang Director April 19, 1996 - --------------------------------- Jack C. Tang Director - --------------------------------- S. Y. Wang /s/David Dean Director April 19, 1996 - --------------------------------- David Dean April 19, 1996 /s/Lawrence F. Weber Director - --------------------------------- Lawrence F. Weber April 19, 1996 /s/Gloria Wang Treasurer and Secretary - --------------------------------- Gloria Wang (Principal Financial and Accounting Officer)
C-6 EX-27.1 2 FINANCIAL DATA SCHEDULE
6 6-MOS AUG-31-1996 FEB-29-1996 282,941,264 262,049,738 4,531,436 374,444 0 266,955,618 4,790,297 0 760,499 5,550,796 0 300,321,349 14,826,714 14,826,357 (1,305,507) 0 (16,719,570) 0 (20,891,450) 261,404,822 1,304,802 597,794 0 2,837,444 (934,848) (22,796,119) (14,403,949) (9,327,018) 0 (370,659) 0 0 0 0 7,217 (9,960,460) 0 0 0 0 1,591,349 0 2,837,444 273,488,078 18.28 (0.06) (0.56) (0.03) 0 0 17.63 1.82 0 0
EX-27.2 3 FINANCIAL DATA SCHEDULE
6 12-MOS AUG-31-1995 AUG-31-1995 305,371,089 270,066,932 3,045,451 150,973 0 273,272,356 1,465,384 0 711,690 2,177,074 0 300,314,132 0 0 0 0 6,076,549 0 (35,295,399) 271,095,282 2,956,400 2,889,497 0 8,090,986 (2,245,089) 19,199,023 (104,269,069) (87,315,135) 0 0 (68,660,883) 0 3,530,085 0 21,907 (92,627,593) 0 0 0 0 4,532,092 0 8,090,986 289,663,986 32.26 (0.19) (7.27) 0 (6.09) 0 18.28 2.43 0 0
-----END PRIVACY-ENHANCED MESSAGE-----