-----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, EqexrBqQhZpaMQPyU/5qzU9EUWytn4MN8cUWSQ5IUXfBs4EOOYbFvZ/ZiLJHS5fr LJgy2VSc4o0WLK5lE4d+YQ== 0000950109-96-002393.txt : 19960429 0000950109-96-002393.hdr.sgml : 19960429 ACCESSION NUMBER: 0000950109-96-002393 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960426 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/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-02697 FILM NUMBER: 96551833 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-04893 FILM NUMBER: 96551834 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/A 1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 1996 SECURITIES ACT FILE NO. 333-2697 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.1 [X] POST-EFFECTIVE AMENDMENT NO. AND/OR [_] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] AMENDMENT NO. 26 (CHECK APPROPRIATE BOX OR BOXES) [X] --------------- 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(3)
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (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. (3) Previously paid. --------------- 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 Reg- istrant......................... 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 ITEMS IN PART B OF FORM N-2 OF ADDITIONAL 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 Poli- cies............................ 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 ARE 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 26, 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 25, 1996 was $20.52 and the last reported sale price of a share of the Fund's Common Stock on the NYSE on that date was $24.00. 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 35 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. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROCEEDS TO PRICE TO PUBLIC SALES LOAD(1) 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 $265,000, including $75,000 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 May , 1996. ----------- KLEINWORT BENSON NORTH AMERICA INC. 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$27.20 = US$1.00, as quoted in the Taipei Foreign Exchange Market on April 25, 1996. No representation is made that the NT$ 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 25, 1996 was 538,531 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 EXPENSES..... The Fund pays the Adviser a basic 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 REINVESTMENT....... The Fund intends to distribute to 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 2 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. UNDERWRITERS............ The Shares are being offered by a group of Underwriters led by Kleinwort Benson North America Inc. Asian Capital Partners Limited has acted as financial adviser to the Fund in connection with this offering. See "Underwriting." RISK FACTORS AND SPECIAL CONSIDERATIONS......... Investing in securities of ROC 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 3 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 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 25, 1996, the exchange rate was NT$27.20 = US$1. See 4 "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 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 from 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 5 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. 6 FEE TABLE SHAREHOLDER TRANSACTION EXPENSES Sales load (as a percentage of offering price).................. 5.00% 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)........... 1.50% Other expenses(1)............................................... 0.49% Administration fees(3)........................................ 0.07% Other operating expenses...................................... 0.42% Total annual expenses............................................. 1.99%
- -------- * 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............. $70 $110 $153 $272
The Example set forth above assumes reinvestment of all dividends and distributions at net asset value and an expense ratio of 1.99%. 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." 7 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.
SIX EIGHT MONTHS MONTHS ENDED YEARS ENDED AUGUST 31, ENDED FEBRUARY 29, ------------------------------------------------- AUGUST 31, 1996 1995 1994 1993 1992 1991 ------------ -------- -------- -------- -------- ---------- SELECTED PER SHARE DATA Net asset value, beginning of period... $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51 -------- -------- -------- -------- -------- -------- Income From Investment Operations Net investment income (loss)............... (0.06)** (0.19) (0.24) 0.20 0.06 (0.10) Net realized and unrealized gain (loss) on investments.......... (0.56) (7.27) 14.20 (1.70) (0.20) 1.84 -------- -------- -------- -------- -------- -------- Total from investment operations........... (0.62) (7.46) 13.96 (1.50) (0.14) 1.74 -------- -------- -------- -------- -------- -------- Less Distributions From net investment income............... (0.03) -- (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.... (0.03) (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................ $ 17.63 $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 ======== ======== ======== ======== ======== ======== Market value, end of period................ $ 21.13 $ 21.63 $ 31.88 $ 20.13 $ 17.88 $ 24.13 ======== ======== ======== ======== ======== ======== Total Return++ Per share market value................. (2.2)% (12.0)% 59.2 % 13.3% (25.9)% 17.7 % RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (000 omitted).. $261,405 $271,095 $363,723 $145,190 $158,168 $124,974 Ratio of expenses to average net assets.... 1.82 %+++ 2.43 %+++ 2.49 %+++ 2.67%+++ 2.94 %+++ 3.47 %* Ratio of net investment income (loss) to average net assets.... (0.69)%* (0.78)% (1.01)% 1.05% 0.29 % (0.79)%* Portfolio turnover rate.................. 53 % 159 % 267 % 163% 129 % 298 %* Annual commission rate***............... $ 0.002 -- -- -- -- -- 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 % Annual commission rate***............... -- -- -- --
- -------- * Annualized ** Investment income per share reflects a regular dividend from China Steel Corp. of $0.05 per share. *** For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for trades on which commissions are charged. + 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. 8 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 22.21 19.63 10.87 % 3.69 % November 30, 1995........ 23 1/2 19 7/8 19.81 17.96 18.63 % 10.66 % February 29, 1996........ 23 5/8 20 18.93 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 25, 1996 were $24.00, $20.52 and 16.96%, respectively. As of April 25, 1996, the Fund had 14,826,714 shares of Common Stock outstanding and the net assets of the Fund were $304,244,171. 9 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 25, 1996, the value of the Fund's net assets was approximately $304,244,171. As of April 25, 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. 10 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." 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 11 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. 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 25, 1996, the exchange rate was NT$27.20 = 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 12 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 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. 13 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--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. 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, ROC companies have invested approximately US$8.7 billion 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 14 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 for the one-year period ended December 31, 1989, the Fund was exempt from 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. 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." 15 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 16 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. 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. For the six months ended February 29, 1996, the Fund's portfolio turnover rate (excluding short-term investments) was 53%. 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. 17 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 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 18 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 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 19 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 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 20 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. 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 21 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 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$238,000). The following table sets forth certain information regarding the TSE Index for the periods indicated: TSE INDEX (1966 = 100)
NUMBER TOTAL OF LISTED NUMBER TRADING COMPANIES OF LISTED VALUE INDEX INDEX PERIOD- YEAR IN INDEX COMPANIES (NT$ BILLION) HIGH LOW END - ---- --------- --------- ------------- --------- -------- -------- 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............. 333 347 10,151.5 7,051.49 4,503.37 5,173.73
- -------- Source: 1994 TSE Statistical Data; TSE Monthly Review, January 1996. 22 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$2,796.3 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 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 23 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. 24 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$111.7 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 25 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 6.1%. 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 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 remained consistent over the past several years. Investment was 23.68%, 22.91% and 23.04% 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 26 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 6.30% in real terms, with inflation averaging 3.89%. Within these same two years, the service sector grew faster than the manufacturing sector, and accounted for 60.17% 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. 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 3.9%, 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 27 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. 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 25, 1996, the spot buying rate was NT$27.16 per US$1.00 and the spot selling rate was NT$27.26 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 representative, Kleinwort Benson North America Inc. (the "Representative"), 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. ..................... --------- Total.................................................. 1,033,485 =========
The Representative has 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 Representative. In addition, the Fund has agreed to pay $75,000 to the Underwriters as reimbursement for certain expenses. Investors must pay for any Shares purchased in this offering on or before May , 1996. 28 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, all stabilization transactions, if any, shall be conducted at the direction of the Representative. Asian Capital Partners Limited has acted as financial adviser to the Fund in connection with this offering. 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 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 180 days from the date of this Prospectus, it will not, without the prior written consent of the Representative 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 North America Inc. is 200 Park Avenue, New York, New York 10166. 29 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 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. 30 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. 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 31 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 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, 32 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 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 33 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. 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. 34 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Investment Objective and Policies...................................... SAI-2 Investment Limitations................................................. SAI-2 Management of the Fund................................................. SAI-4 Foreign Investment and Exchange Controls in the ROC.................... SAI-7 ROC Government Supervision and Regulation of the Management Contract and the Adviser....................................................... SAI-9 The Securities Market of the ROC....................................... SAI-10 The Republic of China.................................................. SAI-14 Estimated Expenses..................................................... SAI-27 Portfolio Transactions and Brokerage................................... SAI-27 Net Asset Value........................................................ SAI-28 Taxation............................................................... SAI-28 Official Documents..................................................... SAI-33 Financial Statements................................................... F-1
35 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN- TATIONS 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 SUPPLE- MENTED 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 OF- FERED 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 SO- LICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SO- LICITATION 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................................................................ 7 Financial Highlights..................................................... 8 Market and Net Asset Value Information................................... 9 The Fund................................................................. 10 Use of Proceeds.......................................................... 10 Risk Factors and Special Considerations.................................. 11 Investment Objective and Policies........................................ 16 Management of the Fund................................................... 17 The Securities Market of the ROC......................................... 22 The Republic of China.................................................... 25 Underwriting............................................................. 28 Dividends and Distributions; Dividend Reinvestment and Cash Purchase Plan.................................................................... 30 Taxation................................................................. 31 Common Stock............................................................. 33 Transfer Agent, Dividend Paying Agent and Registrar...................... 33 Custodians............................................................... 33 Experts.................................................................. 34 Legal Matters............................................................ 34 Additional Information................................................... 34 Table of Contents of Statement of Additional Information................. 35
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,033,485 SHARES THE TAIWAN FUND, INC. COMMON STOCK --------------- PROSPECTUS --------------- KLEINWORT BENSON NORTH AMERICA INC. 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 26, 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-4 Foreign Investment and Exchange Controls in the ROC.................... SAI-7 ROC Government Supervision and Regulation of the Management Contract and the Adviser....................................................... SAI-9 The Securities Market of the ROC....................................... SAI-10 The Republic of China.................................................. SAI-14 Estimated Expenses..................................................... SAI-27 Portfolio Transactions and Brokerage................................... SAI-27 Net Asset Value........................................................ SAI-28 Taxation............................................................... SAI-28 Official Documents..................................................... SAI-33 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 Policies" 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. SAI-2 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. 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. SAI-3 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 125 Nanking East Road President (1993-present); Chairman, China Securities Section 5 Investment Trust Corporation (1992-1993); Taipei, Taiwan, ROC President, China Securities Investment Trust Corporation (1985-1992); Chairman, Far East Asia Transport (1995-present); Ex- ecutive Director, Merrill Lynch Interna- tional, Inc. (1986-1990); Executive Vice President, International Investment Trust Co., Ltd. (1983-1986); Director, China Steel Corporation (1993- present); Direc- tor, MITAC International Corp. (1993-pres- ent) Harvey H.W. Chang(1)*... Director 44 Chairman, China Securities Investment Trust 99 Tun Hwa South Road Corporation (1993-present); President, Section 2 China Development Corporation (1992-1993); Taipei, Taiwan, ROC President, Grand Cathay Securities Corpora- tion (1989-1992) Joe O. Rogers........... Director 47 Partner, PHH Fantus Consulting (May 1993- 2018 Gunnell Farms present); Partner, Alcalde, Rousselot & Fay Drive (1992-May 1993); Director, The China Fund, Vienna, VA 22181 Inc. (1992-present); President, Rogers In- USA ternational Inc. (1986-present); President, Middendorf Rogers Martin Group Inc. (1987- 1989); U.S. Executive Director, Asian De- velopment Bank (1984-1986); Executive Di- rector, Republican Conference, U.S. House of Representatives (1981-1984) Jack C. Tang(1)......... Director 68 Director, Pacific Rim Investments Ltd. Suite 1601, Tower 1 (1991-present); Chairman and Chief Execu- China Hong Kong City 33 tive Officer, Tristate Holdings Limited Canton Road (1987-present); Director, Mid Pacific Air Tsim Sha Tsui Corporation (1986-present); Chairman, South Kowloon, Hong Kong Sea Development Co. 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)
SAI-4
POSITION NAME AND ADDRESS WITH FUND AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS ---------------- ------------- --- ----------------------------------------------- Shao-Yu Wang(1)......... Director 72 Chairman, Taiwan Styrene Monomer Corpora- 8th Floor tion (1979-present); Chairman, America Cal- 6 Roosevelt Road ifornia Bank (1980-present); Director, Section 1 American California Bank (1980-present); Taipei, Taiwan, ROC Chairman of the Board, Soochow University (1987-present); Director, Asia Polymer Cor- poration; Director, CTCI Corporation; Di- rector, Taiwan Synthetic Rubber Corpora- tion; Director, Oriental Union Chemical Corp. David Dean.............. Director 70 Adviser of the Chiang-Ching-Kuo Foundation 8361 B. Greensboro (1990-present); Director, The American In- Drive stitute in Taiwan (1979-1989) McLean, Virginia 22102 USA Lawrence F. Weber.......... Director 63 Consultant, UBS Asset Management (N.Y.) 156 Ide Road (1993-present); Director, East Williamstown, Massachusetts Asia/Australia, UBS Asset Management (N.Y.) 01267 USA (1991-present); Managing Director, Asia-Pa- cific, 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-pres- Section 2 ent); Senior Vice President, China Securi- Taipei, Taiwan, ROC ties Investment Trust Corporation (1993- 1995); Assistant Vice President, China Se- curities Investment Trust Corporation (1988-1993) Laurence E. Cranch*........ Assistant 48 Member of Rogers & Wells (1980-present), 200 Park Avenue Secretary U.S. 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 25, 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. SAI-5 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 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. SAI-6 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 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 SAI-7 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 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 SAI-8 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 governmental 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 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-9 (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 SAI-10 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 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 83.1% of the total listed company trading volume was in the First Category, approximately 16.6% was in the Second Category and approximately 0.3% 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 SAI-11 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. 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, 333 companies are included in the index. The index formula is: Index = (PtxOt) where: Pt = Stock Price for the Day ------- Qt = Number of shares issued (PoxQt) 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$881.5 billion in government bonds since 1991 with proceeds to be used to fund a portion of the Six-Year National Development Plan (the "Six Year Plan"). SAI-12 The following table sets forth information with respect to bond issues for the periods indicated: BONDS
CORPORATE ALL BONDS(1) GOVERNMENT BONDS BONDS(2) ---------------- ---------------- ---------------- TOTAL ISSUED ISSUED ISSUED NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT OF (NT$ OF (NT$ OF (NT$ ISSUES MILLIONS) ISSUES MILLIONS) ISSUES MILLIONS) ------ --------- ------ --------- ------ --------- 1990......................... 46 177,739 25 169,063 21 8,676 1991......................... 50 339,779 26 327,642 24 12,137 1992......................... 62 530,252 30 513,597 32 16,655 1993......................... 62 700,009 33 687,486 29 12,523 1994......................... 57 794,962 33 786,791 24 8,171 1995......................... 56 868,023 38 860,950 18 7,073
- -------- 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 0.11% 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. 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 SAI-13 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 277.8% 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 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. SAI-14 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. 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 SAI-15 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 6.30% in real terms, with inflation averaging 3.89%. Within these same two years, the service sector grew faster than the manufacturing sector, and accounted for 60.17% 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-16 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 1995 ------ ------ ------ ------ ------ ------ (NT$ BILLION) Gross National Product at Current Market Prices........ 4,412 4,928 5,441 5,971 6,454 6,982 Private Consumption........... 2,359 2,635 2,989 3,346 3,772 4,109 Government Consumption........ 740 837 908 940 960 998 Fixed Capital Formation....... 966 1,067 1,240 1,391 1,460 1,591 Increase in Inventory......... 29 54 89 87 61 51 Exports of Goods and Services..................... 2,014 2,281 2,313 2,599 2,812 3,375 Less: Imports of Goods and Services..................... (1,799) (2,062) (2,204) (2,488) (2,691) (3,216) Expenditures on Gross Domestic Product...................... 4,307 4,811 5,338 5,875 6,376 6,908 Net Factor Income from Abroad....................... 105 117 103 96 78 75 Percentage Increase of GNP over Previous Year at Current Prices....................... 9.5% 11.7% 10.4% 9.7% 8.1% 8.2% Real GNP Growth Rate.......... 5.5% 7.6% 6.2% 6.0% 6.1% 6.1%
- -------- Source: Derived from data published in Council for Economic Planning and Development, Industry of Free China, Vol. LXXX, V, No. 3, March 1996. 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 1995 ------ ------ ------ ------ ------ ------ Private Consumption..... 53.46% 53.48% 54.93% 56.04% 58.45% 58.85% Government Consumption.. 16.77 16.98 16.69 15.74 14.89 14.29 Fixed Capital Forma- tion................... 21.88 21.64 22.79 23.29 22.63 22.79 Increase in Inventory... 0.65 1.09 1.64 1.46 0.95 0.73 Exports................. 45.64 46.28 42.56 43.53 43.58 48.34 Less: Imports........... (40.78) (41.85) (40.51) (41.67) (41.70) (46.06) Net Factor Income From Abroad................. 2.38 2.38 1.90 1.61 1.21 1.07 ------ ------ ------ ------ ------ ------ Total................... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ====== ====== Exports Less Imports.... 4.86% 4.43% 2.05% 1.86% 1.88% 2.28%
- -------- Source: Council for Economic Planning and Development, Industry of Free China, Vol. LXXX, V, No. 3, March 1996. 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 3.9%, respectively. Such increases have not been fully reflected in all sectors of the SAI-17 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-18 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 SAI-19 "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." 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. - -------- /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-20 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 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$3.9 billion. Taiwan traditionally has had a positive balance of trade which is reduced by a deficit on invisible transactions (e.g., shipping and other transportation, travel and investment income). The impact of the capital account has varied in recent years as it made a positive contribution to the overall balance in 1980-1983 but was a negative factor from 1984 through 1989 when there were substantial deficits in the long-term capital account due primarily to drawings on long-term loans and substantial repayments and prepayments of principal. This trend continued through 1995. SAI-21 BALANCE OF PAYMENTS (US$ MILLIONS)
1990 1991 1992 1993 1994 1995 ------- ------- ------- ------- ------- ------- Current Account Balance.. $10,769 $12,015 $ 8,154 $ 6,714 $ 6,154 $ 5,006 Trade Balance............ 14,928 15,754 12,767 11,587 11,984 13,582 Invisible Trade Balance.. (3,424) (3,488) (4,406) (3,891) (4,473) (5,724) Unrequited Transfers..... (735) (251) (207) (982) (1,357) (2,852) Long Term Capital........ (6,601) (2,827) (3,458) (2,600) (1,960) (2,502) Direct Investment........ (3,913) (583) (990) (1,534) (1,085) (1,106) Other.................... (2,688) (2,244) (2,468) (1,066) (875) (1,396) Basic Balance............ 4,168 9,188 4,696 4,114 4,194 2,504 Short Term Capital....... 8,549 600 (3,450) (2,062) 563 (6,772) Errors and Omissions..... 463 (129) 121 (511) (135) 337 Overall Balance.......... (3,918) 9,659 1,367 1,541 4,622 (3,931) Counterpart Items........ -- -- -- 6 -- -- Change in Net Foreign Assets of the Banking System.......... 3,918 (9,659) (1,367) (1,541) (4,622) 3,931
- -------- Source: Derived from data published in Financial Statistics Monthly, February 1996, 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 25, 1996, the spot buying rate was NT$27.16 per US$1.00 and the spot selling rate was NT$27.26 per US$1.00. SAI-22 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. 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 SAI-23 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. 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 SAI-24 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. 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 REVENUE AND EXPENDITURES
TOTAL TOTAL SURPLUS REVENUE EXPENDITURES (DEFICIT) ------- ------------ --------- (NT$ BILLION) 1990............................................. 1,097.4 1,267.7 (170.3) 1991............................................. 1,134.6 1,513.3 (378.7) 1992............................................. 1,348.1 1,642.8 (294.7) 1993............................................. 1,480.6 1,779.9 (299.3) 1994............................................. 1,559.9 1,922.9 (363.0) 1995............................................. 1,543.9 1,249.3 (294.6)
- -------- Source: Quarterly National Economic Trends, Taiwan Area, The Republic of China, February 1996. 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 SAI-25 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 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. SAI-26 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 $6,600,000, 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 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 SAI-27 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. 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 SAI-28 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. 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. SAI-29 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. 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 SAI-30 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 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 SAI-31 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 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. SAI-32 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-33 INDEX TO FINANCIAL STATEMENTS Portfolio of Investments as of August 31, 1995........................... F-2 Statement of Assets and Liabilities as of August 31, 1995................ F-4 Statement of Operations for the fiscal year ended August 31, 1995........ F-4 Statement of Changes in Net Assets for the fiscal years ended August 31, 1994 and 1995........................................................... F-5 Financial Highlights..................................................... F-6 Notes to Financial Statements............................................ F-7 Report of Independent Accountants dated October 17, 1995................. F-10 Portfolio of Investments as of February 29, 1996 (unaudited)............. F-11 Statement of Assets and Liabilities as of February 29, 1996 (unaudited).. F-14 Statement of Operations for the six-month period ended February 29, 1996 (unaudited)............................................................. F-14 Statement of Changes in Net Assets for the six-month periods ended Febru- ary 28, 1995 and February 29, 1996 (unaudited)....................................... F-15 Financial Highlights (unaudited)......................................... F-16 Notes to Financial Statements (unaudited)................................ F-17
F-1 - -------------------------------------------------------------------------------- The Taiwan Fund, Inc. Investments/August 31, 1995 (Showing Percentage of Total Value of Investment in Securities) - --------------------------------------------------------------------------------
US$ Value Shares (Note 1) ------ -------- COMMON STOCKS - 90.2% BASIC INDUSTRIES - 19.6 Chemicals - 5.5% Asia Chemical Corp........................ 2,925,325 $ 2,659,580 China Petrochemical Development Corp (a).. 9,000,000 5,956,797 China Synthetic Rubber.................... 2,406,814 3,632,365 Everlight Chemical Industry Corp. (a)..... 550 450 Oriental Union Chemical (a)............... 1,780,800 1,813,310 Taiwan Synthetic Rubber Corp. (a)......... 604,800 763,203 ----------- 14,825,705 ----------- Drugs & Health Care - 0.8% Yung Shin Pharmaceuticals................. 1,115,300 2,048,245 ----------- Iron & Steel - 4.7% China Steel Corp.......................... 16,561,000 12,647,502 Feng Hsing Iron & Steel................... 91,000 96,632 ----------- 12,744,134 ----------- Metals & Mining - 1.8% Walsin Lihwa Corp......................... 4,282,565 4,890,266 ----------- Paper & Forest Products - 0.4% Chung Hwa Pulp (a)........................ 565,000 723,253 Yuen Foong Yu Manufacturing............... 575,000 476,762 ----------- 1,200,015 ----------- Plastics - 6.4% Formosa Plastic........................... 4,547,980 7,393,072 Nan Ya Plastics Corp...................... 5,635,334 9,529,531 Sun Yad Plastic Co. Ltd. (a).............. 634,800 443,238 ----------- 17,365,841 ----------- TOTAL BASIC INDUSTRIES.................... 53,074,206 ----------- CONSTRUCTION & REAL ESTATE - 6.3% Building Materials - 6.3% Asia Cement............................... 3,881,900 6,310,311 Chia Hsin Cement.......................... 50,000 37,275 Continental Construction.................. 460,000 490,145 Gold Sun Development & Construction (a)... 575,096 376,454 Taiwan Cement Corp........................ 180,008 226,499 Taiwan Glass.............................. 5,090,000 9,347,771 Universal Cement.......................... 128,800 102,111 ----------- 16,890,566 ----------- US$ Value Shares (Note 1) ------ -------- DURABLES - 17.5% Automobiles, Tires & Accessories - 3.6% Cheng Shin Rubber Industrial Co. (a)...... 3,705,792 $ 4,164,266 China Motor Co............................ 2,147,000 3,021,634 Giant Manufacturing....................... 985,000 1,393,429 Kenda Rubber Industrial Co. (a)........... 1,062,500 1,081,897 9,661,226 ----------- Consumer Electronics - 5.8% Sampo Corp................................ 4,887,696 4,088,189 Tatung Co................................. 4,011,151 7,512,338 Teco Electric & Machinery Co.............. 2,294,332 4,055,005 ----------- 15,655,532 ----------- Electrical Equipment - 0.1% China Electric Manufacturing Co. (a)...... 368,000 355,982 ----------- Textiles & Apparel - 8.0% Far East Textile.......................... 4,103,000 4,148,062 Formosa Chemical & Fibre.................. 155,445 145,846 Formosa Taffeta Co. Ltd................... 114,202 82,647 Hualon Teijran (a)........................ 10,300,000 7,191,796 Nien Hsing Textile Co. Ltd. (a)........... 1,079,000 1,137,937 Shinkong Synthetic Fibers (a)............. 6,590,000 6,638,410 Tainan Spinning Co. (a)................... 2,599,000 2,136,061 ----------- 21,480,759 ----------- TOTAL DURABLES............................ 47,153,499 ----------- FINANCE - 5.8% Banks - 3.1% Chang Hwa Bank............................ 682,500 2,246,209 China Bills Finance Corp. (a)............. 500,000 560,041 Chung Hsing Bills (a)..................... 500,000 592,770 First Commercial Bank.................... 702,000 2,323,151 Hwa Nan Commercial Bank Ltd............... 810,000 2,710,015 8,432,186 ----------- Insurance - 2.7% Cathay Life Insurance Co. Ltd............. 924,000 3,998,691 Shin Kong Life Insurance Co............... 1,360,000 3,239,508 ----------- 7,238,199 TOTAL FINANCE............................. 15,670,385 -----------
6 The accompanying notes are an integral part of the financial statements. F-2 - -------------------------------------------------------------------------------- Investments/August 31, 1995 (continued) - --------------------------------------------------------------------------------
US$ Value Shares (Note 1) ------ -------- Common Stocks - continued TECHNOLOGY - 31.7% Computers & Business Equipment - 10.1% Acer, Inc. (a)............................ 7,008,838 $14,146,138 D Link Corp. (a).......................... 2,233,000 3,573,060 Delta Electronics Inc. (a)................ 4,306,467 5,528,340 Silitek................................... 4,100,000 3,995,927 ----------- 27,243,465 ----------- Electronics - 21.6% Advanced Semiconductor Engineering Inc. (a)................................ 2,440,972 4,704,761 Compeq Manufacturing Co., Inc............. 4,614,780 11,328,011 Hon Hai Precision (a)..................... 1,080,800 2,751,327 Liton Electronics......................... 3,504,048 4,587,451 Siliconware Precision Industry (a)........ 2,198,987 5,517,860 Taiwan Mask Corp. (a)..................... 711,250 1,629,528 Taiwan Semiconductor Manufacturing Co. (a)................................. 5,540,000 21,255,000 United Micro Electronics Corp............. 2,250,000 6,054,986 Yageo Corp. (a)........................... 214,891 421,998 58,250,922 ----------- TOTAL TECHNOLOGY.......................... 85,494,387 ----------- TRANSPORTATION - 9.3% Shipping - 9.3% Evergreen Marine.......................... 3,675,000 5,332,479 Sincere Navigation (a).................... 2,805,000 2,835,806 U Ming Marine............................. 5,786,150 5,786,571 Uniglory Marine (a)....................... 1,339,000 1,855,259 Yang Ming Marine.......................... 9,000,000 9,393,410 ----------- 25,203,525 ----------- TOTAL COMMON STOCK (Identified Cost -- $278,785,977)....... 243,486,568 ----------- Principal Amount NT$ --- Certificates of Deposit - 1.0% Far Eastern International Bank: 7.25%, 9/06/95.......................... 25,000,000 909,157 7.25%, 9/08/95.......................... 50,312,818 1,829,690 ----------- TOTAL CERTIFICATES OF DEPOSIT (Identified Cost -- $2,738,648)......... 2,738,847 ----------- Principal US$ Amount Value NT$ (Note 1) --- -------- COMMERCIAL PAPER - 8.4% Da Tong Plastic 7.25%, 9/08/95............ 9,822,862 $ 357,220 Far Eastern Textile 7.25%, 9/07/95........ 99,578,100 3,621,285 Formosan Rubber Group 6.85%, 9/18/95 (b)............................. 398,496,538 14,491,837 Kong Lien Enterprise 7.00%, 9/04/95....... 14,940,611 543,334 Taiwan Security Company Limited 6.75%, 9/05/95 (b)...................... 99,868,375 3,631,841 ----------- TOTAL COMMERCIAL PAPER (Identified Cost -- $22,650,464)........ 22,645,517 ----------- Maturity Amount US$ --- REPURCHASE AGREEMENT - 0.4% With State Street Bank and Trust Company at 4.50%, dated 8/28/95, due 9/5/95 (collateralized by U.S. Treasury Notes 5.875%, 7/31/97, market value $1,221,191)............................. 1,197,196 1,196,000 ------------ TOTAL INVESTMENTS -- 100% (COST -- $305,371,089).................. $270,066,932 ------------ Legend: NT$ - New Taiwan dollar US$ - United States dollar
(a) Non-income producing (No cash dividends paid during preceding 12 months) (b) Certificates of Deposit and Commercial Paper that are traded through Bills Finance Corporations must be guaranteed by either a bank, a trust company or a Bills Finance Corporation. Since there is no recognized credit rating system in the Republic of China, the guarantee may not be comparable to a guarantee issued by a U.S. institution. Income Tax Information: At August 31, 1995, the aggregate cost of investment securities for income tax purposes was $308,644,925. Net unrealized depreciation aggregated $38,577,993, of which $5,176,234 related to appreciated investment securities and $43,754,227 related to depreciated investment securities. 7 The accompanying notes are an integral part of the financial statements. F-3 - -------------------------------------------------------------------------------- Financial Statements - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES August 31, 1995 Assets Investment in securities, at value (including repurchase agreement of $1,196,000) (cost $305,371,089) (Notes 1 and 2) - See accompanying schedule $ 270,066,932 Cash 114,652 Receivables for investments sold 3,027,409 Dividends receivable 14,547 Interest receivable 12,495 Prepaid expenses 36,321 ------------- Total assets 273,272,356 Liabilities Due to custodian $ 19,787 Payable for investments purchased 1,465,384 Accrued management fee 323,281 Taiwan withholding tax payable (Note 1) 199,559 Other payables and accrued expenses 169,063 ------------- Total liabilities 2,177,074 ------------- Net Assets $ 271,095,282 ============= Net Assets consist of (Note 1): Paid in capital $ 300,314,132 Accumulated undistributed net realized gain (loss) on investments and foreign currency 6,076,549 Net unrealized appreciation (depreciation) on: Investment securities (35,304,157) Assets and liabilities denominated in foreign currencies 8,758 ------------- Net Assets $ 271,095,282 ============= Net Asset Value per share ($271,095,282 / 14,826,357 shares outstanding) $ 18.28 =============
STATEMENT OF OPERATIONS Year Ended August 31, 1995 Investment Income Dividends................................. $ 2,956,400 Interest.................................. 2,889,497 ------------- 5,845,897 Less: Taiwan withholding tax (Note 1)..... (1,053,761) Total Income............................ 4,792,136 ------------- Expenses Management fee (Note 3) Basic fee............................... $ 4,329,674 Performance adjustment.................. 202,418 Taiwan stock dividend tax (Note 1)........ 1,178,276 Custodian fees and expenses............... 578,448 Accounting fees and expenses (Note 3)..... 198,119 Legal..................................... 149,616 Audit..................................... 94,808 Directors' compensation................... 89,782 Delaware franchise tax.................... 73,797 Insurance fees............................ 57,374 Reports to shareholders................... 50,880 Transfer agent fees....................... 17,952 Miscellaneous............................. 16,081 ------------- Total expenses.......................... 7,037,225 ------------- Net investment income (loss).............. (2,245,089) ------------- Realized and Unrealized Gain (Loss) on Investments (Note 1) Net realized gain (loss) on: Investment securities................... 16,179,330 Foreign currency transactions........... 3,019,693 19,199,023 ------------- Change in net unrealized appreciation (depreciation) on: Investment securities................. (104,283,595) Assets and liabilities denominated in foreign currencies............... 14,526 (104,269,069) ------------- ------------- Net gain (loss)........................... (85,070,046) ------------- Net increase (decrease) in net assets resulting from operations............... $ (87,315,135) =============
8 The accompanying notes are an integral part of the financial statements. F-4 - -------------------------------------------------------------------------------- Financial Statements (continued) - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended August 31, August 31, 1995 1994 ------------- ------------- Increase (Decrease) in Net Assets Operations Net investment income (loss)................. $ (2,245,089) $ (2,459,191) Net realized gain (loss) on investments and foreign currency transactions............ 19,199,023 63,659,598 Change in net unrealized appreciation (depreciation) on investments and foreign currency translations........................ (104,269,069) 82,706,928 ------------- ------------ Net increase (decrease) in net assets resulting from operations.................... (87,315,135) 143,907,335 ------------- ------------ Distributions to shareholders From net investment income................... -- (1,176,939) In excess of net investment income........... -- (93,460) From net realized gains...................... (66,261,035) -- In excess of net realized gains.............. (2,399,848) -- ------------- ------------ Total distributions to shareholders.......... (68,660,883) (1,270,399) Share transactions Net proceeds from sales of shares (Note 4)... 62,858,255 75,884,091 Reinvestment of distributions................ 490,170 11,501 ------------- ------------ Net increase (decrease) in net assets resulting from share transactions............ 63,348,425 75,895,592 ------------- ------------ Total increase (decrease) in net assets...... (92,627,593) 218,532,528 Net Assets Beginning of period.......................... 363,722,875 145,190,347 ------------- ------------ End of period................................ $ 271,095,282 $363,722,875 ============= ============ Other Information Shares Sold (Note 4)................................ 3,530,085 3,236,180 Issued in reinvestment of distributions...... 21,907 384 ------------- ------------ Net increase (decrease)........................ 3,551,992 3,236,564 ============= ============
9 The accompanying notes are an integral part of the financial statements. F-5 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS+
Eight Months Years Ended Years Ended August 31, Ended December 31, --------------------------------------------- August 31 ---------------------- 1995 1994 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- ---- ---- Selected Per Share Data Net asset value, beginning of period..... $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51 $ 22.35 $ 22.23 -------- -------- -------- -------- -------- -------- -------- Income from Investment Operations Net investment income (loss)........... (0.19) (0.24) 0.20 0.06 (0.10) 0.56 (0.24) Net realized and unrealized gain (loss) on investments................ (7.27) 14.20 (1.70) (0.20) 1.84 (6.16) 15.06 -------- -------- -------- -------- -------- -------- -------- Total from investment operations....... (7.46) 13.96 (1.50) (0.14) 1.74 (5.60) 14.82 -------- -------- -------- -------- -------- -------- -------- Less Distributions From net investment income............. -- (0.14) (0.12) -- -- (0.53) -- In excess of net investment income..... -- (0.01) -- -- -- -- -- From net realized gains................ (5.88) -- -- -- -- (1.16) (14.75) In excess of net realized gains........ (0.21) -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Total distributions.................... (6.09) (0.15) (0.12) -- -- (1.69) (14.75) -------- -------- -------- -------- -------- -------- -------- Antidilution/(Dilution) resulting from additional offering of shares at market and reinvestment of dividends at market.............................. (0.40) 0.44 -- 0.46 2.07 2.03 0.05 Offering expenses........................ (0.03) (0.05) -- (0.31) (0.65) (0.58) -- -------- -------- -------- -------- -------- -------- -------- Net asset value, end of period........... $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51 $ 22.35 ======== ======== ======== ======== ======== ======== ======== Market value, end of period.............. $ 21.63 $ 31.88 $ 20.13 $ 17.88 $ 24.13 $ 20.50 $ 49.75 ======== ======== ======== ======== ======== ======== ======== Total return ++ Per-share market value................... (12.0)% 59.2% 13.3% (25.9)% 17.7% (55.7)% 103.4% Ratios and Supplemental Data Net assets, end of period (000 omitted).. $271,095 $363,723 $145,190 $158,168 $124,974 $ 69,597 $ 66,914 Ratio of expenses to average net assets.. 2.43%+++ 2.49%+++ 2.67%+++ 2.94%+++ 3.47%* 2.34% 2.11% Ratio of net investment income (loss) to average net assets.................. (0.78)% (1.01)% 1.05% 0.29% (0.79)%* 2.80% (0.69)% Portfolio turnover rate.................. 159% 267% 163% 129% 298%* 226% 169%
* 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 taxes paid 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. 10 F-6 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1. Significant Accounting Policies. The Taiwan Fund, Inc. (the "Fund"), a Delaware corporation, is registered under the Investment Company Act of 1940, as amended (the Act), as a diversified closed-end management investment company. The Fund is not permitted to invest directly in the securities of Republic of China (ROC) companies. Therefore, it invests through a contractual securities investment trust fund arrangement. This arrangement was established by means of the Securities Investment Trust, Investment Management and Custodian Contract (Management Contract) among China Securities Investment Trust Corporation (Adviser), the International Commercial Bank of China (Custodian) and the Fund. Under the Management Contract the Adviser manages and invests the assets of the Fund and the Custodian holds the assets. The Fund is the sole beneficiary of the assets held under the Management Contract and, as required by ROC regulations, its interest in the assets is evidenced by units of beneficial interest. Effective July, 1995, the Fund is now treated as a Qualified Foreign Institutional Investor (QFII) which limits the Fund's ownership of a company's shares to no more than 7.5% of such shares. In addition, all QFIIs together can not own more than 15% of a company's shares. All funds managed by China Securities Investment Trust Company (CSITC), the Fund's investment adviser, are limited in the aggregate to 10% ownership of a company's shares. The policies described below are consistently followed by the Fund in the preparation of its financial statements in conformity with U.S. generally accepted accounting principles. Security Valuation. All securities for which market quotations are readily available are valued at the last sales price prior to the time of determination of the Fund's net asset value per share or, if there 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 are valued at the mean between the current bid and asked prices or, if no quotations are available, are valued as determined in good faith by the Board of Directors of the Fund. In certain instances where the price determined above may not represent fair market value, the value is determined in such manner as the Board may prescribe. Short-term investments, having a maturity of 60 days or less are valued at cost which approximates market value, with accrued interest or discount earned included in interest receivable. Foreign Currency Translation. The financial accounting records of the Fund are maintained in U.S. dollars. Investment securities, other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current exchange rate. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the exchange rate on the dates of the transactions. Reported net realized gains and losses on foreign currency transactions represent net gains and losses from disposition of foreign currencies, currency gains and losses realized between the trade dates and settlement dates of security transactions, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included in realized and unrealized gain or loss on investments in securities. Taxes. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes all of its investment company taxable income and net realized capital gains for its fiscal year. In addition to federal income tax for which the Fund is liable on undistributed amounts, the Fund is subject to federal excise tax on undistributed investment company taxable income and net realized capital gains. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." The Fund is organized in Delaware and as such is required to pay Delaware an annual franchise tax. Also, the Fund is currently subject to a Taiwan security transaction tax of 0.3% on equities and 0.1% on corporate bonds and mutual fund shares of the transaction amount. The Fund's functional currency for tax reporting purposes is the New Taiwan dollar. 11 F-7 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Investment Income. Dividend income is recorded on the ex-dividend date, except where the ex-dividend date may have passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Dividends are typically declared by Taiwanese companies in the Fund's third fiscal quarter of each year. As a result, the Fund receives substantially less dividend income in the first half of its year. Interest income, which includes accretion of original discount, is accrued as earned. Dividend and interest income generated in Taiwan is subject to a 20% withholding tax. Stock dividends received (except those which have resulted from capitalization of capital surplus) are taxable at 20% of the par value of the stock dividends received. Distributions to Shareholders. The distributable income from the assets held under the Management Contract, which is limited to cash dividends and interest income received, may be distributed to the Fund only once in each year at the Fund's discretion and is recorded on the ex-dividend date. Realized capital gains and stock dividends may also be distributed to the Fund. Within the above limitations the Fund will, under current ROC regulations, be able to remit out of the ROC the proceeds of income and capital gains distributions, unit redemptions and other distributions of assets held under the Management Contract. The Fund distributes to shareholders at least annually, substantially all of its taxable ordinary income and expects to distribute its taxable net realized gains. Certain foreign currency gains (losses) are taxable as ordinary income and, therefore, increase (decrease) taxable ordinary income available for distribution. Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"), shareholders may elect to have all distributions automatically reinvested in Fund shares. (See page 15 for a summary of the Plan.) Shareholders who do not participate in the Plan will receive all distributions in cash paid by check in U.S. dollars. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency transactions and losses deferred due to wash sales and excise tax regulations. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Security Transactions. Security transactions are accounted for as of the trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. Purchases and Sales of Securities. Purchases and sales of securities, other than short-term securities, aggregated $420,325,659 and $401,006,285, respectively. 3. Fees and Other Transactions with Affiliates Management Fee. As the Fund's investment adviser, CSITC receives a fee that is computed daily at an annual rate of 1.50% of the Fund's average net assets. The basic fee is subject to a performance adjustment (up to a maximum of plus/minus .50%) based on the Fund's investment performance as compared to the Taiwan Stock Exchange Index over a rolling 36-month period. For the year ended August 31, 1995, the management fee was equivalent to an annual rate of 1.56% of average net assets. Administration Fees. State Street Bank and Trust Company ("State Street") provides, or arranges for the provision of certain administrative and accounting services for the Fund, including maintaining the books and records of the Fund, and preparing certain reports and other documents required by federal and/or state laws and regulations. For these services, the Fund pays State Street a fee at the 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. 12 F-8 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4. Fund Shares. At August 31, 1995, there were 20,000,000 shares of $0.01 par value capital stock authorized, of which 14,826,357 were issued and outstanding. On January 31, 1995, the Fund issued 21,907 shares of its common stock, valued at $490,170, to shareholders participating in the Fund's Dividend Reinvestment and Cash Purchase Plan. On July 27, 1995, the Fund completed a rights offering by issuing 3,530,085 shares of its common stock. Proceeds to the Fund, after deducting solicitation and financial advisory fees of $2,467,529 and offering expenses of $475,000, amounted to $62,858,255. 5. Quarterly Results of Operations (Unaudited).
Net Increase (Decrease) in Net Assets Investment Net Investment Net Gain (Loss) Resulting Income Income (Loss) on Investments from Operations -------------------- -------------------- -------------------- ------------------- Per Per Per Per Total Share Total Share Total Share Total Share ----- ----- ----- ----- ----- ----- ----- ----- 1995 For the quarters ended: November 30, 1994 $1,532,687 $0.17 $ (297,059) $(0.03) $(33,857,011) $(3.00) $(34,154,070) $(3.03) February 28, 1995 855,573 0.09 (371,616) (0.03) 4,489,450 0.39 4,117,834 0.36 May 31, 1995 1,210,163 0.11 (132,518) (0.01) (8,254,262) (0.73) (8,386,780) (0.74) August 31, 1995 1,193,713 0.09 (1,443,896) (0.12) (47,448,223) (3.93) (48,892,119) (4.05) 1994 For the quarters ended: November 30, 1993 $ 441,764 $0.05 $ (166,793) $(0.02) $ 17,775,492 $ 2.21 $ 17,608,699 $ 2.19 February 28, 1994 308,979 0.03 (1,474,695) (0.15) 28,097,283 3.09 26,622,588 2.94 May 31, 1994 1,660,975 0.15 219,482 0.02 14,817,418 1.31 15,036,900 1.33 August 31, 1994 1,195,876 0.18 (1,037,185) (0.09) 85,676,333 7.59 84,639,148 7.50 1993 For the quarters ended: November 30, 1992 $1,507,260 $0.19 $ 446,355 $ 0.06 $ (2,575,302) $(0.32) $ (2,128,947) $(0.26) February 28, 1993 1,290,702 0.16 356,074 0.04 5,140,218 0.64 5,496,292 0.68 May 31, 1993 1,644,255 0.20 550,079 0.07 (779,494) (0.10) (229,415) (0.03) August 31, 1993 1,316,185 0.16 269,869 0.03 (15,429,363) (1.92) (15,159,494) (1.89)
13 F-9 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of The Taiwan Fund, Inc.: We have audited the accompanying statement of assets and liabilities of The Taiwan Fund, Inc., including the schedule of portfolio investments, as of August 31, 1995, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the four years in the period then ended, the eight month period ended August 31, 1991 and for each of the two years in the period ended December 31, 1990. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 1995 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of The Taiwan Fund, Inc., as of August 31, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended, the eight month period ended August 31, 1991 and for each of the two years in the period ended December 31, 1990 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Boston, Massachusetts October 17, 1995 F-10 Investments/February 29, 1996 (Unaudited) - --------------------------------------------------------------------------------
US$ Value Shares (Note 1) ------ -------- COMMON STOCK - 97.7% BASIC INDUSTRIES - 24.1% Chemicals - 5.6% Asia Chemical Corp............................. 1,808,325 $ 2,216,181 China Petrochemical Development Corp. (a)......................... 9,000,000 6,513,201 Oriental Union Chemical (a).................... 1,882,800 2,218,442 Taita Chemical Co. Ltd......................... 956,000 1,216,816 Union Petrochemical............................ 2,019,000 2,400,949 ----------- 14,565,589 Drugs & Health Care - 1.0% Yung Shin Pharmaceuticals...................... 1,115,300 2,453,838 Iron & Steel - 9.3% China Steel Corp............................... 17,561,000 12,900,291 Chun Yuan Steel................................ 2,904,000 2,397,294 Kao Hsing Chang Iron & Steel(a)................ 3,456,000 2,563,910 Mayer Steel Pipe Co. Ltd.(a)................... 1,282,000 1,062,972 OrnaTube Enterprises (a)....................... 3,878,000 2,369,278 Ton Yi Industrial Corp. (a).................... 2,606,000 3,117,950 ----------- 24,411,695 Metals & Mining - 0.4% Walsin Lihwa Corp.............................. 1,282,565 1,091,426 Paper & Forest Products - 1.9% Cheng Loong Co. Ltd. (a)....................... 4,045,000 2,927,322 Yuen Foong Yu Paper Manufacturing.............. 2,477,000 2,125,871 5,053,193 ----------- Plastics - 5.9% Formosa Plastic................................ 4,345,980 6,337,690 Grand Pacific Petrochemical.................... 3,000,000 3,545,712 Nan Ya Plastics Corp........................... 1,581,334 2,329,043 Sun Yad Plastic Co. Ltd.(a).................... 273,800 185,202 Taiwan Styrene Monomer (a)..................... 2,000,000 3,083,861 ----------- 15,481,508 ----------- TOTAL BASIC INDUSTRIES......................... 63,057,249 ----------- CONSTRUCTION & REAL ESTATE - 10.8% Building Materials - 10.8% Asia Cement.................................... 3,881,900 6,126,790 Cathay Construction............................ 2,850,000 3,503,164 Gold Sun Development & Construction (a)........ 4,115,099 2,888,261 Hsing Ta Cement (a)............................ 581,000 735,283 Lucky Cement Corp.............................. 1,695,000 1,799,913 Pacific Construction (a)....................... 2,000,000 1,345,552 Taiwan Glass................................... 5,090,000 10,180,740 Tung Ho Steel (a).............................. 2,100,000 1,756,491 ----------- 28,336,194 DURABLES - 19.5% Automobiles, Tires & Accessories - 7.9% Cheng Shin Rubber Industrial Co.(a)............ 6,046,792 6,772,900 China Motor Co................................. 4,131,000 5,723,729 Ensure Co. (a)................................. 907,000 831,202 Giant Manufacturing............................ 2,589,000 3,540,127 Yue Loong Motor (a)............................ 4,972,000 3,742,832 ----------- 20,610,790 ----------- Consumer Electronics - 2.7% Sampo Corp..................................... 5,387,696 4,545,587 Tatung Co...................................... 1,499,827 2,683,522 ----------- 7,229,109 ----------- Textiles & Apparel - 8.9% Far East Textile............................... 3,052,000 2,552,767 Formosa Chemical & Fibre....................... 7,238,000 6,080,362 Formosa Taffeta Co. Ltd........................ 2,000,000 1,549,204 Hualon Teijran (a)............................. 8,000,000 4,713,070 Nien Hsing Textile Co. Ltd.(a)................. 2,618,000 3,198,953 Ruentex Industries............................. 1,500,000 845,516 Shinkong Synthetic Fibers(a)................... 4,708,000 3,390,007 Tainan Spinning Co. (a)........................ 1,599,000 1,029,249 ----------- 23,359,128 TOTAL DURABLES................................. 51,199,027 ----------- FINANCE - 19.3% Banks - 13.8% Chang Hwa Bank................................. 682,500 2,432,359 China Bills Finance Corp. (a).................. 5,500,000 6,540,476 Chung Hsing Bills (a).......................... 5,650,000 6,451,742 First Commercial Bank.......................... 702,000 2,552,913 Fuh Hwa Securities............................. 4,500,000 7,282,348 Hwa Nan Commercial Bank Ltd.................... 810,000 2,444,905 ICBC........................................... 2,000,000 5,200,378
6 The accompanying notes are an integral part of the financial statements. F-11 Investments/February 29, 1996 (Unaudited)(continued) - --------------------------------------------------------------------------------
US$ Value Shares (Note 1) ------ -------- Common Stock - Continued FINANCE - Continued Banks - Continued International Bills Finance Corp.(a)............ 5,000,000 $ 3,327,515 36,232,636 ------------ Insurance - 5.5% Cathay Life Insurance Co. Ltd................... 2,424,000 10,490,072 Shin Kong Life Insurance Co..................... 1,760,000 3,904,284 ------------ 14,394,356 ------------ TOTAL FINANCE................................... 50,626,992 NONDURABLES - 0.8% Foods - 0.8% AGV Products Corp.(a)........................... 1,117,000 816,485 Great Wall Enterprises(a)....................... 1,000,000 618,227 Ve Wong......................................... 800,000 651,684 ------------ 2,086,396 TECHNOLOGY - 20.1% Computers & Business Equipment - 5.8% Acer, Inc.(a)................................... 2,919,838 6,211,744 D Link Corp.(a)................................. 2,512,000 4,476,253 Delta Electronics Inc.(a)....................... 2,306,467 3,170,574 Silitek......................................... 1,100,000 1,224,089 ------------ 15,082,660 Electronics - 14.3% Advanced Semiconductor Engineering, Inc.(a)..... 4,155,972 9,899,490 Compeq Manufacturing Co., Inc................... 2,679,780 5,993,398 Hou Hai Precision(a)............................ 588,349 1,048,407 Liton Electronics............................... 1,734,048 2,364,783 Mosel Vitelic Inc.(a)........................... 995,000 2,370,081 Opto Tech Corporation(a)........................ 1,000,000 927,340 Siliconware Precision Industry(a)............... 2,198,987 5,357,922 Taiwan Mask Corp.(a)............................ 1,829,240 3,924,837 Taiwan Semiconductor Manufacturing Co.(a)....... 1,940,000 5,467,670 ------------ 37,353,928 TOTAL TECHNOLOGY................................ 52,436,588 TRANSPORTATION - 3.1% Shipping - 3.1% Sincere Navigation(a)........................... 1,505,000 1,340,916 U Ming Marine................................... 1,786,150 1,630,386 Yang Ming Marine................................ 5,000,000 5,109,463 ------------ 8,080,765 ------------ TOTAL COMMON STOCK......... (Identified Cost -- $276,705,950)............... 255,823,211 ------------ Principal Amount NT$ Certificates of Deposit - 0.1% Dah An Commercial Bank 7.95%, 3/18/96(b)........ 10,232,470 372,117 (Identified Cost - $372,428) ------------ Commercial Paper - 1.7% Chan Ki Construction 7.95%, 3/12/96(b).......... 59,584,125 2,166,853 Golden Old Cock/Feedmeal 5.40%, 3/27/96(b)...... 49,802,012 1,811,114 Hosu Construction 5.40%, 3/28/96(b)............. 9,958,789 362,164 ------------ TOTAL COMMERCIAL PAPER..... (Identified Cost -- $4,342,025)................. 4,340,131 ------------ Time Deposits - 0.3% Chinfon Bank 6.50%, 3/23/96..................... 25,085,835 912,279 (Identified Cost -- $918,861) ------------ Maturity Amount US$ Repurchase Agreement - 0.2% With State Street Bank and Trust Company at 2.000%, dated 2/26/96, due 3/4/96 (collateralized by U.S. Treasury Notes 5.875%, 5/31/96, market value $614,492)...... 602,234 602,000 ------------ TOTAL INVESTMENTS -- 100% (COST -- $282,941,264).......................... $262,049,738 ============
7 The accompanying notes are an integral part of the financial statements. F-12 Investments/February 29, 1996 (Unaudited)(continued) - -------------------------------------------------------------------------------- Legend: NT$ - New Taiwan dollar US$ - United States dollar (a) Non-income producing (No cash dividends paid during preceding 12 months) (b) Certificates of Deposit and Commercial Paper that are traded through Bills Finance Corporations must be guaranteed by a major bank. Since there is no recognized credit rating system in the Republic of China, the guarantee may not be comparable to a guarantee issued by a U.S. institution. Income Tax Information: At February 29, 1996, the aggregate cost of investment securities for income tax purposes was $286,215,100. Net unrealized depreciation aggregated $24,165,362, of which $5,942,562 related to appreciated investment securities and $30,107,924 related to depreciated investment securities. 8 The accompanying notes are an integral part of the financial statements. F-13 FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES February 29, 1996 (Unaudited) Assets Investment in securities, at value (including repurchase agreement of $602,000) (cost $282,941,264) (Notes 1 and 2) - See accompanying schedule..................................... $ 262,049,738 Cash............................................................ 49,265 Cash in New Taiwan dollars (cost $318,233)...................... 318,174 Receivables for investments sold................................ 4,503,226 Interest receivable............................................. 28,210 Prepaid expenses................................................ 7,005 ------------- Total assets.................................................. 266,955,618 ------------- Liabilities Payable for investments purchased............................... $ 4,790,297 Accrued management fee.......................................... 371,198 Taiwan withholding tax payable (Note 1)......................... 5,615 Other payables and accrued expenses............................. 383,686 ------------ Total liabilities............................................. 5,550,796 ------------- Net Assets...................................................... $ 261,404,822 ============= Net Assets consist of (Note 1): Paid in capital................................................. $ 300,321,349 Accumulated net investment income (loss)........................ (1,305,507) Accumulated undistributed net realized gain (loss) on investments and foreign currency.................... (16,719,570) Net unrealized appreciation (depreciation) on: Investment securities......................................... (20,891,526) Assets and liabilities denominated in foreign currencies...... 76 ------------- Net Assets...................................................... $ 261,404,822 ============= Net Asset Value, per share ($261,404,822/14,826,714 shares outstanding).................. $17.63
STATEMENT OF OPERATIONS Six Months Ended February 29, 1996 (Unaudited)
Investment Income Dividends....................................................... $ 1,304,802 Interest........................................................ 597,794 ------------- 1,902,596 Less: Taiwan withholding tax (Note 1)........................... (359,587) ------------- Total Income.................................................. 1,543,009 Expenses Management fee (Note 3).... Basic fee..................................................... $ 2,036,144 Performance adjustment........................................ (444,795) Custodian fees and expenses..................................... 271,497 Legal........................................................... 176,027 Accounting fees and expenses (Note 3)........................... 114,178 Taiwan stock dividend tax (Note 1).............................. 96,869 Reports to shareholders......................................... 68,237 Audit........................................................... 45,267 Directors compensation.......................................... 43,976 Delaware franchise tax.......................................... 28,492 Insurance fees.................................................. 21,137 Miscellaneous................................................... 11,852 Transfer agent fees............................................. 8,976 ------------ Total expenses.............................................. 2,477,857 ------------- Net investment income (loss).................................... (934,848) ------------- Realized and Unrealized Gain (Loss) on Investments (Notes 1 and 3) Net realized gain (loss) on: Investment securities......................................... (18,722,466) Foreign currency transactions................................. (4,073,653) (22,796,119) Change in net unrealized appreciation (depreciation) on: Investment securities......................................... 14,412,631 Assets and liabilities denominated in foreign currencies.......................................... (8,682) 14,403,949 ------------ ------------- Net gain (loss)............................................... (8,392,170) ------------- Net increase (decrease) in net assets resulting from operations..................................... $ (9,327,018) =============
9 The accompanying notes are an integral part of the financial statements. F-14 FINANCIAL STATEMENTS(continued) - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended February 29, 1996 Year Ended (Unaudited) August 31, 1995 ----------- --------------- Increase (Decrease) in Net Assets Operations Net investment income (loss)...................................................... $ (934,848) $ (2,245,089) Net realized gain (loss) on investments........................................... (22,796,119) 19,199,023 Change in net unrealized appreciation (depreciation) on investments and foreign currency transactions............................................... 14,403,949 (104,269,069) ------------- --------------- Net increase (decrease) in net assets resulting from operations................... (9,327,018) (87,315,135) ------------- --------------- Distributions to shareholders From net investment income........................................................ (370,659) - From net realized gains........................................................... - (66,261,035) In excess of net realized gains................................................... - (2,399,848) ------------- --------------- Total distributions to shareholders............................................... (370,659) (68,660,883) ------------- --------------- Share transactions Net proceeds from sales of shares (Note 4)........................................ - 62,858,255 Reinvestment of distributions from net investment income.......................... 7,217 490,170 ------------- --------------- Net increase (decrease) in net assets resulting from share transactions........... 7,217 63,348,425 ------------- --------------- Total increase (decrease) in net assets......................................... (9,690,460) (92,627,593) Net Assets Beginning of period............................................................... 271,095,282 363,722,875 ------------- --------------- End of period (including accumulated net investment loss of $1,305,507 and $0 respectively)............................................................. $261,404,822 $ 271,095,282 ============= =============== Other Information Shares Sold (Note 4)..................................................................... - 3,530,085 Issued in reinvestment of distributions from net investment income................ 357 21,907 ------------- --------------- Net increase (decrease)........................................................... 357 3,551,992 ============= ===============
10 The accompanying notes are an integral part of the financial statements. F-15 - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS + Six Months Eight Ended Months February 29, Years Ended August 31, Ended Year Ended 1996 --------------------------------------- August 31 December 31, (Unaudited) 1995 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- Selected Per Share Data Net asset value, beginning of period............... $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51 $ 22.35 -------- -------- ------- -------- -------- -------- -------- Income from Investment Operations Net investment income (loss)..................... (0.06)** (0.19) (0.24) 0.20 0.06 (0.10) 0.56 Net realized and unrealized gain (loss) on investments................................... (0.56) (7.27) 14.20 (1.70) (0.20) 1.84 (6.16) -------- -------- ------- -------- -------- -------- -------- Total from investment operations................. (0.62) (7.46) 13.96 (1.50) (0.14) 1.74 (5.60) -------- -------- ------- -------- -------- -------- -------- Less Distributions From net investment income....................... (0.03) -- (0.14) (0.12) -- -- (0.53) In excess of net investment income............... -- -- (0.01) -- -- -- -- From net realized gains.......................... -- (5.88) -- -- -- -- (1.16) In excess of net realized gains.................. -- (0.21) -- -- -- -- -- -------- -------- ------- -------- -------- -------- -------- Total distributions.............................. (0.03) (6.09) (0.15) (0.12) -- -- (1.69) -------- -------- ------- -------- -------- -------- -------- Antidilution/(Dilution) resulting from additional offering of shares at market and reinvestment of dividends at market.............................. -- (0.40) 0.44 -- 0.46 2.07 2.03 Offering expenses.................................. -- (0.03) (0.05) -- (0.31) (0.65) (0.58) -------- -------- ------- -------- -------- -------- -------- Net asset value, end of period..................... $ 17.63 $ 18.28 $ 32.26 $ 18.06 $ 19.68 $ 19.67 $ 16.51 ======== ======== ======= ======== ======== ======== ======== Market value, end of period........................ $ 21.13 $ 21.63 $ 31.88 $ 20.13 $ 17.88 $ 24.13 $ 20.50 ======== ======== ======= ======== ======== ======== ======== Total return ++ Per-share market value............................. (2.2)% (12.0)% 59.2% 13.3% (25.9)% 17.7% (55.7)% Ratios and Supplemental Data Net assets, end of period (000 omitted)............ $261,405 $271,095 $363,723 $145,190 $158,168 $124,974 $ 69,597 Ratio of expenses to average net assets............ 1.82%*+++ 2.43%+++ 2.49%+++ 2.67%+++ 2.94%+++ 3.47%* 2.34% Ratio of net investment income (loss) to average net assets....................................... (0.69)%* (0.78)% (1.01)% 1.05% 0.29% (0.79)%* 2.80% Portfolio turnover rate............................ 53% 159% 267% 163% 129% 298%* 226% Average commission rate***......................... $0.002 -- -- -- -- -- --
* Annualized ** Investment Income per share reflects a regular dividend from China Steel Corp. of $0.05 per share. *** For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for trades on which commissions are charged. + 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 taxes paid were excluded from the Fund's expense ratio, the expense ratio would have been 1.75% for the six months ended February 29, 1996 and 2.02%, 2.28%, 2.49% and 2.71%, for the years ended August 31, 1995, 1994, 1993 and 1992, respectively. 11 F-16 NOTES TO FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- 1. Significant Accounting Policies. The Taiwan Fund, Inc. (the "Fund"), a Delaware corporation, is registered under the Investment Company Act of 1940, as amended (the Act), as a diversified closed-end management investment company. The Fund is not permitted to invest directly in the securities of Republic of China (ROC) companies. Therefore, it invests through a contractual securities investment trust fund arrangement. This arrangement was established by means of the Securities Investment Trust, Investment Management and Custodian Contract (Management Contract) among China Securities Investment Trust Corporation (Adviser), the International Commercial Bank of China (Custodian) and the Fund. Under the Management Contract the Adviser manages and invests the assets of the Fund and the Custodian holds the assets. The Fund is the sole beneficiary of the assets held under the Management Contract and, as required by ROC regulations, its interest in the assets is evidenced by units of beneficial interest. Effective July, 1995, the Fund is treated as a Qualified Foreign Institutional Investor (QFII) which limits the Fund's ownership of a company's shares to no more than 7.5% of such shares. In addition, all QFIIs together can not own more than 15% of a company's shares. Effective March 3, 1996, all QFIIs together can not own more than 20% of a company's shares. All Funds managed by China Securities Investment Trust Company (CSITC) are limited in aggregate to 10% ownership of a company's shares. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The policies described below are consistently followed by the Fund in the preparation of its financial statements in conformity with U.S. generally accepted accounting principles. Security Valuation. All securities for which market quotations are readily available are valued at the last sales price prior to the time of determination of the Fund's net asset value per share or, if there 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 are valued at the mean between the current bid and asked prices or, if no quotations are available, are valued as determined in good faith by the Board of Directors of the Fund. In certain instances where the price determined above may not represent fair market value, the value is determined in such manner as the Board may prescribe. Short-term investments, having a maturity of 60 days or less are valued at cost which approximates market value, with accrued interest or discount earned included in interest receivable. Foreign Currency Translation. The financial accounting records of the Fund are maintained in U.S. dollars. Investment securities, other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current exchange rate. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the exchange rate on the dates of the transactions. Reported net realized gains and losses on foreign currency transactions represent net gains and losses from disposition of foreign currencies, currency gains and losses realized between the trade dates and settlement dates of security transactions, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included in realized and unrealized gain or loss on investments in securities. Taxes. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes all of its investment company taxable income and net realized capital gains for its fiscal year. In addition to federal income tax for which the Fund is liable on undistributed amounts, the Fund is subject to federal excise tax on undistributed investment company taxable income and net realized capital gains. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." The Fund is organized in Delaware and as such is required to pay Delaware an annual franchise tax. Also, the Fund is currently subject to a Taiwan security transaction tax of 0.3% 12 F-17 NOTES TO FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- on equities and 0.1% on corporate bonds and mutual fund shares of the transaction amount. The Fund's functional currency for tax reporting purposes is the New Taiwan dollar. Investment Income. Dividend income is recorded on the ex-dividend date, except where the ex-dividend date may have passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Dividends are typically declared by Taiwanese companies in the Fund's third fiscal quarter of each year. As a result, the Fund receives substantially less dividend income in the first half of its year. Interest income, which includes accretion of original discount, is accrued as earned. Dividend and interest income generated in Taiwan is subject to a 20% withholding tax. Stock dividends received (except those which have resulted from capitalization of capital surplus) are taxable at 20% of the par value of the stock dividends received. Distributions to Shareholders. The distributable income from the assets held under the Management Contract, which is limited to cash dividends and interest income received, may be distributed to the Fund only once in each year at the Fund's discretion and is recorded on the ex-dividend date. Realized capital gains and stock dividends may also be distributed to the Fund. Within the above limitations the Fund will, under current ROC regulations, be able to remit out of the ROC the proceeds of income and capital gains distributions, unit redemptions and other distributions of assets held under the Management Contract. The Fund distributes to shareholders at least annually, substantially all of its taxable ordinary income and expects to distribute its taxable net realized gains. Certain foreign currency gains (losses) are taxable as ordinary income and, therefore, increase (decrease) taxable ordinary income available for distribution. Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"), shareholders may elect to have all distributions automatically reinvested in Fund shares. (See page 16 for a summary of the Plan.) Shareholders who do not participate in the Plan will receive all distributions in cash paid by check in U.S. dollars. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency transactions and losses deferred due to wash sales and excise tax regulations. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Security Transactions. Security transactions are accounted for as of the trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. Purchases and Sales of Securities. Purchases and sales of securities, other than short-term securities, aggregated $155,597,099 and $135,103,429, respectively. 3. Fees and Other Transactions with Affiliates Management Fee. As the Fund's investment adviser, CSITC receives a fee that is computed daily at an annual rate of 1.50% of the Fund's average net assets. The basic fee is subject to a performance adjustment (up to a maximum of +.50%) based on the Fund's investment performance as compared to the Taiwan Stock Exchange Index over a rolling 36-month period. For the six month period ended February 29, 1996, the management fee was equivalent to an annual rate of 1.17% of average net assets. Directors Fees. No director, officer or employee of the Investment Manager or its' affiliates will receive any compensation from the Fund for serving as an officer or director of the Fund. The Fund pays each of its directors who is not a director, officer or employee of the Investment Manager an annual fee of $7,500 plus $750 for each Board of Directors' meeting or Audit Committee meeting attended. In addition, the Fund will reimburse each of the directors for travel and out-of-pocket expenses incurred in connection with Board of Directors' meetings. Administration Fees. State Street Bank and Trust Company ("State Street") provides, or arranges for the provision of certain administrative and accounting services for the Fund, including 13 F-18 NOTES TO FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- maintaining the books and records of the Fund, and preparing certain reports and other documents required by federal and/or state laws and regulations. For these services, the Fund pays State Street a fee at the 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. 4. Fund Shares. At February 29, 1996, there were 20,000,000 shares of $0.01 par value capital stock authorized, of which 14,826,714 were issued and outstanding. On January 31, 1996, the Fund issued 357 shares of its common stock, valued at $7,217, to shareholders participating in the Fund's Dividend Reinvestment and Cash Purchase Plan. 14 F-19 - -------------------------------------------------------------------------------- 5. Quarterly Results of Operations (Unaudited).
Net Increase (Decrease) in Net Assets Investment Net Investment Net Gain (Loss) Resulting Income Income (Loss) on Investments from Operations -------------- ------------------- ------------------ ------------------- Per Per Per Per Total Share Total Share Total Share Total Share ----- ----- ----- ----- 1996 For the quarters ended: November 30, 1995........ $1,051,957 $0.07 $ (368,985) $(0.02) $ (8,279,100) $(0.55) $ (8,648,085) $(0.57) February 29, 1996........ 491,052 0.03 (565,863) (0.04) (113,070) (0.01) (678,933) (0.05) 1995 For the quarters ended: November 30, 1994........ $1,532,687 $0.17 $ (297,059) $(0.03) $(33,857,011) $(3.00) $(34,154,070) $(3.03) February 28, 1995........ 855,573 0.09 (371,616) (0.03) 4,489,450 0.39 4,117,834 0.36 May 31, 1995............. 1,210,163 0.11 (132,518) (0.01) (8,254,262) (0.73) (8,386,780) (0.74) August 31, 1995.......... 1,193,713 0.09 (1,443,896) (0.12) (47,448,223) (3.93) (48,892,119) (4.05) 1994 For the quarters ended: November 30, 1993........ $ 441,764 $0.05 $ (166,793) $(0.02) $ 17,775,492 $ 2.21 $ 17,608,699 $ 2.19 February 28, 1994........ 308,979 0.03 (1,474,695) (0.15) 28,097,283 3.09 26,622,588 2.94 May 31, 1994............. 1,660,975 0.15 219,482 0.02 14,817,418 1.31 15,036,900 1.33 August 31, 1994.......... 1,195,876 0.18 (1,037,185) (0.09) 85,676,333 7.59 84,639,148 7.50 1993 For the quarters ended: November 30, 1992........ $1,507,260 $0.19 $ 446,355 $ 0.06 $ (2,575,302) $(0.32) $ (2,128,947) $(0.26) February 28, 1993........ 1,290,702 0.16 356,074 0.04 5,140,218 0.64 5,496,292 0.68 May 31, 1993............. 1,644,255 0.20 550,079 0.07 (779,494) (0.10) (229,415) (0.03) August 31, 1993.......... 1,316,185 0.16 269,869 0.03 (15,429,363) (1.92) (15,159,494) (1.89)
F-20 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 (previously filed as Exhibit 1 to Pre-Effective Amendment No. 3 to Registrant's Registration Statement on Form N-2 (File 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 certificate for Common Stock (previously filed as Exhibit 4 to Amendment No. 8 to 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 Plan of the Registrant (previously filed as Exhibit 10(E) 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")) (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 Amendment No. 5) C-1 (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 - -------- * Filed herewith. ITEM 25. MARKETING ARRANGEMENTS See Exhibit 2(h) of this Registration Statement. C-2 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........... 3,375 New York Stock Exchange additional listing fee.................. 7,000 Printing (other than stock certificates)........................ 25,000 Fees and expenses of qualification under state securities laws (including fees of counsel).................................... 20,000 Accounting fees and expenses.................................... 15,000 Legal fees and expenses......................................... 107,000 Underwriters expense reimbursement.............................. 75,000 Miscellaneous................................................... 2,711 ------- Total......................................................... 265,000 =======
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT None. ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF APRIL 19, 1996)
TITLE OF CLASS NUMBER OF RECORD HOLDERS -------------- ------------------------ Common Stock, $0.01 par value per share 736
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 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 C-3 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 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-4 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 26TH DAY OF APRIL, 1996. The Taiwan Fund, Inc. By: /s/ Benny T. Hu --------------------------------- Benny T. Hu, President 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 April 26, 1996 - ------------------------------------- President BENNY T. HU (Principal Executive Officer * Director April 26, 1996 - ------------------------------------- HARVEY H.W. CHANG * Director April 26, 1996 - ------------------------------------- JOE O. ROGERS * Director April 26, 1996 - ------------------------------------- JACK C. TANG Director - ------------------------------------- S. Y. WANG * Director April 26, 1996 - ------------------------------------- DAVID DEAN * Director April 26, 1996 - ------------------------------------- LAWRENCE F. WEBER * Treasurer and April 26, 1996 - ------------------------------------- Secretary GLORIA WANG (Principal Financial and Accounting Officer)
*By: /s/ Benny T. Hu ------------------------ Benny T. Hu, Attorney-in-Fact C-5 EXHIBITS (a) --Restated Certificate of Incorporation (previously filed as Exhibit 1 to Pre-Effective Amendment No. 3 to Registrant's Registration Statement on Form N-2 (File 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 certificate for Common Stock (previously filed as Exhibit 4 to Amendment No. 8 to 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 Plan of the Registrant (previously filed as Exhibit 10(E) 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")) (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 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 - -------- * Filed herewith. 1 S&S DRAFT APRIL 26, 1996 THE TAIWAN FUND, INC. (a Delaware corporation) _________ Shares of Common Stock PURCHASE AGREEMENT ------------------ Dated: ________, 1996 TABLE OF CONTENTS
PAGE NO. -------- Section 1. Representations and Warranties.................................. 3 Section 2. Sale and Delivery to the Underwriters; Closing.................. 8 Section 3. Certain Covenants of the Company and the Adviser................ 9 Section 4. Payment of Expenses............................................. 12 Section 5. Conditions of Underwriters' Obligations......................... 13 Section 6. Conditions to Purchase of Option Shares......................... 24 Section 7. Indemnification................................................. 25 Section 8. Contribution.................................................... 27 Section 9. Representations, Warranties and Agreements to Survive Delivery.. 28 Section 10. Termination of Agreement....................................... 28 Section 11. Default by One or More of the Underwriters..................... 28 Section 12. Default by the Company......................................... 29 Section 13. Notices........................................................ 29 Section 14. Parties........................................................ 30 Section 15. Representation of Underwriters................................. 30 Section 16. Governing Law and Time......................................... 30 Section 17. Counterparts................................................... 30 Section 18. Appointment of Agent for Service............................... 30
Schedule A Schedule B i THE TAIWAN FUND, INC. (a Delaware corporation) _________ Shares of Common Stock PURCHASE AGREEMENT ------------------ _______, 1996 KLEINWORT BENSON NORTH AMERICA INC. As Representative of the several Underwriters 200 Park Avenue, 25th Floor New York, New York U.S.A. Dear Sirs: The Taiwan Fund, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the underwriters named in Schedule A attached hereto (collectively, the "Underwriters"), for whom you are acting as a representative (the "Representative"), _________ authorized but unissued shares of the Company's Common Stock, par value $0.01 per share (shares of which class of stock of the Company are hereinafter referred to as "Common Stock"). Such shares of Common Stock are to be sold to each Underwriter, acting severally and not jointly, in such amounts as are set forth in Schedule A opposite the name of such Underwriter. The Company also grants to the Underwriters, severally and not jointly, the option described in Section 2 hereof to purchase all or any part of _______ additional shares of Common Stock to cover over-allotments. The aforesaid _________ shares of Common Stock (the "Initial Shares"), together with all or any part of the _______ additional shares of Common Stock subject to the option described in Section 2 (the "Option Shares"), are collectively herein called the "Shares". The Shares are more fully described in the Prospectus referred to below. The Company, China Securities Investment Trust Corporation, a Republic of China ("ROC") corporation (the "Adviser"), and The International Commercial Bank of China, a bank organized under ROC law (the "Custodian"), have formed a securities investment trust fund (the "Trust Fund") under and in conformity with the 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 Taiwan companies. As required by the Trust Fund Regulations, this arrangement has been established by means of a Securities Investment Trust-Investment Management and Custodian Contract dated December 16, 1986 (the "Management Contract") among the Adviser, the Custodian and the Company pursuant to which the Adviser agrees to manage and invest the assets of the Company and the Custodian agrees to hold the assets being managed under the Management Contract. The Company is the sole beneficiary of the assets held under the Management Contract. The Company's interest in the assets is evidenced by units of beneficial interest (the "Units"). The Units are represented by one or more beneficiary certificates which were issued by the Adviser and acquired by the Company in Taipei, Taiwan. After the proceeds of this offering are remitted to the Custodian, the existing beneficiary certificate or certificates (representing Units of the previous offerings) will be cancelled and one new beneficiary certificate representing the Units for this offering and the previous offerings will be issued. The Company has entered into an Investment Advisory and Management Agreement relating to U.S. dollar assets with the Adviser (the "U.S. Advisory Agreement") and an administration agreement with State Street Bank and Trust Company (the "Administration Agreement"), all as more fully described in the Prospectus, as defined below. You have advised us that you and the other Underwriters, acting severally and not jointly, desire to purchase the Initial Shares and, if the Underwriters so elect, the Option Shares and that you have been authorized by the other Underwriters to execute this Agreement on their behalf. The Company understands that the Underwriters propose to make a public offering of the Shares as soon as you deem advisable after the Registration Statement referred to below becomes effective. The Company has prepared and filed with the Commission a registration statement on Form N-2 (File No. 333-2697), as amended, covering the registration of the Shares under the Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act (which represents the Company's Amendment No. [_____] under the 1940 Act), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (A) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and Rule 497(h) of the 1933 Act Regulations ("Rule 497(h)") or (B) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 497(h). The information included in such prospectus or in such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (i) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (ii) pursuant to paragraph (b) of Rule 434 is referred to as "Rule 434 Information". Each prospectus used before such registration 2 statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus". Such registration statement, including the exhibits thereto, schedules thereto, if any, at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement". Any Registration Statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement", and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final prospectus filed in accordance with Rule 497(h) is herein called the "Prospectus". If Rule 434 is relied on, the term "Prospectus" shall refer to the preliminary prospectus dated _____, 1996 together with the Term Sheet and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). Section 1. Representations and Warranties. (a) The Company and the ------------------------------ Adviser, jointly and severally, represent and warrant to, and agree with, each of the Underwriters as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof that: (i) The Company has filed with the Securities and Exchange Commission (the "Commission") all statements and other documents required for registration as a closed-end diversified management investment company under the provisions of the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder (the "1940 Act Regulations") and such registration has been effected. There are no proceedings with respect to the Company pursuant to Section 8(e) of the 1940 Act. (ii) When the Registration Statement and any Rule 462(b) Registration Statement and any post-effective amendments thereto become effective, and at the Closing Time referred to below (and, if any Option Shares are purchased, up to the Date of Delivery referred to below), (A) the Registration Statement, any Rule 462(b) Registration Statement and any amendments and supplements thereto comply and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and the 1940 Act and the 1940 Act Regulations; (B) neither the Registration Statement, any Rule 462(b) Registration Statement, nor any amendment or supplement thereto contains or will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and (C) neither the Prospectus nor any amendment or supplement thereto, at the time the Prospectus or any such amendment or supplement was issued, included or will include an untrue statement of a material fact 3 or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectus shall not be "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective. The representations and warranties in this section do not apply to statements or omissions made in reliance upon and in conformity with information furnished in writing or confirmed in writing to the Company by or on behalf of any Underwriter through you expressly for use in the Registration Statement or the Prospectus. (iii) Coopers & Lybrand, who are reporting upon the audited financial statements and schedules included in the Registration Statement, are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) This Agreement has been duly authorized, executed and delivered by each of the Company and the Adviser. (v) The financial statements included in the Registration Statement present fairly the financial position, the results of operations and changes in net assets of the Company as of the dates and for the periods indicated. Such financial statements have been prepared in conformity with generally accepted accounting principles applied in the United States and such accounting principles have been applied on a consistent basis throughout the periods involved. The schedule of investments included in the Registration Statement presents fairly the information required to be stated therein. The selected per share financial information included in the Prospectus presents fairly the information shown therein and has been compiled on a basis consistent with that of the audited financial statements of the Company included in the Registration Statement. (vi) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with the corporate power and authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary. (vii) The Company has no subsidiaries. (viii) The Company is not in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any indenture, mortgage, loan agreement, note, lease or other material agreement or instrument to which it is a party or by which it or any of its properties may be bound or to which any of its properties may be subject; and the execution and 4 delivery of this Agreement, the issuance and delivery of the Shares, the consummation of the transactions contemplated herein and in the Registration Statement and compliance with the terms of this Agreement have been duly authorized by all necessary corporate action and do not and will not result in any violation of the charter or by-laws of the Company and do not and will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company under, the Management Contract, any indenture, mortgage, loan agreement, note, lease or other material agreement or instrument to which the Company is a party or by which it may be bound or to which any of its properties may be subject, or any existing applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its properties. (ix) The Company had, at the date indicated, a duly authorized and outstanding capitalization as set forth in the Prospectus under the caption "Common Stock"; the Shares conform in all material respects to the description thereof contained in the Prospectus and such description conforms in all material respects to the rights set forth in the instruments defining the same. (x) All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non- assessable; no holder thereof is or will be subject to personal liability by reason of being such a holder; and none of the outstanding shares of capital stock was issued in violation of the preemptive rights of any stockholder of the Company. The Shares to be sold by the Company pursuant to this Agreement have been duly authorized and, when issued and paid for in accordance with this Agreement, will be validly issued, fully paid and non-assessable and will have equal rights with each other share of Common Stock in respect of the assets and dividends of the Company; no holder thereof will be subject to personal liability by reason of being such a holder; such Shares are not subject to the preemptive or other similar rights of any holder of any securities of the Company; and all corporate action required to be taken for the authorization, issuance, sale and delivery of such Shares has been validly and sufficiently taken. (xi) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein or contemplated thereby, there has not been (A) any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business, (B) any transaction entered into by the Company, other than in the ordinary course of business, that is material to the Company or (C) any dividend or distribution of any kind declared, paid or made by the Company on its capital stock. 5 (xii) No authorization, approval, consent or license of any court (domestic or foreign) or of any government or governmental instrumentality (other than under the 1933 Act, the 1940 Act, the securities or blue sky laws of the various states of the United States of America and the securities laws of any jurisdiction outside the United States in which Shares are offered and sold by the Underwriters pursuant to this Agreement), is legally required for the valid authorization, issuance, sale and delivery of the Shares. (xiii) There are no contracts or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed, or both, as required. (xiv) The Company has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Common Stock. (xv) There are no actions, suits or proceedings or investigations before or by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of the Company or the Adviser, threatened, (x) which are against or could affect the Company or the Trust Fund, or (y) which question the validity of this Agreement or the Management Contract. (xvi) The Shares are approved for listing on the New York Stock Exchange upon notice of issuance. (xvii) The Company owns, possesses or has obtained all material governmental licenses, permits, certificates, consents, orders, approvals and other authorizations necessary to own or lease, as the case may be, and to carry on its business as contemplated in the Prospectus, and the Company has not received any notice of proceedings relating to revocation or modification of any such licenses, permits, certificates, consents, orders, approvals or authorizations. (xviii) The Management Contract duly creates a securities investment trust fund which complies with the Trust Fund Regulations and all other applicable laws of Taiwan; the Company is the sole beneficiary of the Trust Fund and as such is entitled to all rights and privileges accorded beneficiaries of a securities investment trust fund established under Taiwan law and, without the consent or other action of the Company, no other person is entitled to exercise the rights and privileges of a beneficiary under the Management Contract as described in the Prospectus. The relationship between and among the Company, the Trust Fund, the Adviser and the Custodian and the rights and privileges of the Company with respect to the Trust Fund under the Management Contract, or arising out of such relationship, conform in all material respects to the descriptions thereof in the Prospectus and have been approved by all Taiwan government authorities whose approval is required in 6 conformity with Taiwan law. Under existing laws the assets held in the Trust Fund are not subject to attachment or other legal process in Taiwan, except to satisfy obligations which must be satisfied with assets held in the Trust Fund. The Management Contract, the U.S. Advisory Agreement and the Administration Agreement each conform in all material respects to the description thereof in the Prospectus. The Management Contract and the U.S. Advisory Agreement comply with all the terms and conditions of the 1940 Act, and each of the Management Contract, the U.S. Advisory Agreement and the Administration Agreement has been duly authorized, executed and delivered by the Company, is in full force and effect and is the legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and general principles of equity, and neither the Company nor, to the Company's knowledge, any other party to any such agreement is in default thereunder and, to the knowledge of the Company, no event has occurred which with the passage of time or the giving of notice would constitute a default thereunder. (xix) The Company intends to, and will, direct the investment of the proceeds of the offering described in the Prospectus and conduct all other investments in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986 ("Subchapter M of the Code") during the fiscal quarter in which the Closing Time occurs and, thereafter, the Company will manage its affairs so as to continue to qualify as a regulated investment company under Subchapter M of the Code. (xx) The Company intends to, and will, direct the investment of the proceeds of the offering described in the Prospectus and conduct all other investments in compliance with the limitations set forth in the Company's bylaws and U.S. and Taiwan laws. The Adviser will ensure that the investments it recommends will comply with the limitations set forth in the Management Contract and all applicable U.S. or Taiwan laws. (xxi) No taxes or charges of any kind are or will be payable in or to Taiwan, or any political subdivision thereof, by the Underwriters (except to the extent that any of the Underwriters may do business in Taiwan) with respect to this Agreement or the purchase and sale of the Shares hereunder, and the Company will indemnify and hold each of the Underwriters harmless against any and all liabilities with respect to any such Taiwan tax or charge. (xxii) The Adviser has been duly incorporated and is validly existing as a corporation under the laws of Taiwan with the corporate power and authority to carry on the business conducted by it as described in the Prospectus. 7 (xxiii) The Adviser is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"), and each is not prohibited by any provision of the Investment Advisers Act, or the rules and regulations promulgated thereunder, or the 1940 Act or the 1940 Act Regulations, from acting as the adviser to the Company as contemplated by the Prospectus. (xxiv) The Administration Agreement is in full force and effect and is the legal, valid and binding obligation of the Company and State Street Bank and Trust Company. (b) Any certificate signed by an officer of the Company or the Adviser and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by the Company and the Adviser to each Underwriter as to the matters covered thereby. Section 2. Sale and Delivery to the Underwriters; Closing. (a) On ---------------------------------------------- the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company, at the purchase price per share set forth in Schedule B, the number of Initial Shares set forth opposite the name of such Underwriter in Schedule A, plus any additional number of Initial Shares as such Underwriter may be obligated to purchase pursuant to Section 11 hereof. (b) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional [___] Option Shares at the purchase price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Shares, but not payable on the Option Shares. The option hereby granted will expire 30 days after the date hereof and may be exercised only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Shares upon notice by you to the Company setting forth the number of Option Shares as to which the several Underwriters are then exercising the option, and the time and date of payment and delivery thereof. Such time and date of delivery (a "Date of Delivery") shall be determined by you but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the Option Shares, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Shares then being purchased which the number of Initial Shares set forth in Schedule A opposite the name of such Underwriter bears to the total number of Initial Shares, subject in each case to such adjustments as you, in your discretion, shall make to eliminate any sales or purchases of fractional shares. For purposes of this Agreement, "business day" shall mean any day on which the New York Stock Exchange is open and trading of securities is thereon permitted. 8 (c) Payment of the purchase price for, and delivery of certificates for, the Initial Shares to be purchased by the Underwriters shall be made at the offices of Rogers & Wells, 200 Park Avenue, New York, New York 10166, or at such other place as shall be agreed upon by the Company and you, at 10:00 A.M. (New York City time) on the third (fourth if pricing occurs after 4:30 P.M. (New York City time) on any given day) business day after the date hereof (unless postponed pursuant to Section 11 or 12), or at such other time not more than ten full business days thereafter as you and the Company shall determine (such date and time of payment and delivery being herein called the "Closing Time"). Such payment shall be reduced by the amount of any reimbursement due the Underwriters pursuant to Section 4(h). In addition, in the event that all or any part of the Option Shares are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Shares to be purchased shall be made at the offices of Rogers & Wells set forth above, or at such other place as the Company and you shall determine, on the Date of Delivery as specified in the notice from you to the Company. Payment shall be made to the Company by wire transfer of same-day funds to the Company against delivery to you for the respective accounts of the several Underwriters of certificates for the Shares to be purchased by them. (d) Certificates for the Initial Shares and Option Shares to be purchased by the Underwriters shall be in such denominations and registered in such names as you may request in writing at least two full business days before the Closing Time or the Date of Delivery, as the case may be. The certificates for the Initial Shares and Option Shares will be made available in New York City for examination and packaging by you not later than 10:00 A.M. (New York City time) on the business day prior to the Closing Time or the Date of Delivery, as the case may be. (e) It is understood that each Underwriter has authorized you, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Shares it has agreed to purchase. You, individually and not as Representative, may (but shall not be obligated to) make payment of the purchase price for the Initial Shares or the Option Shares to be purchased by any Underwriter whose check or checks shall not have been received by the Closing Time or the Date of Delivery, as the case may be. Section 3. Certain Covenants of the Company and the Adviser. The ------------------------------------------------ Company and the Adviser, jointly and severally, covenant with each Underwriter as follows: (a) The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify you immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement, shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of 9 any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes, and (v) of the institution of any proceedings with respect to the Company pursuant to Section 8(e) of the 1940 Act. The Company will promptly effect the filings necessary pursuant to Rule 497(h) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 497(h) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) The Company will give you notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish you with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which you or counsel for the Underwriters shall reasonably object. (c) The Company has furnished or will furnish to the Representative a signed copy of the Registration Statement as originally filed and of all amendments thereto, whether filed before or after the Registration Statement becomes effective, copies of all exhibits and documents filed therewith and a signed copy of all consents and certificates of experts, and has furnished or will furnish to you, for each other Underwriter, one conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits). If applicable, the copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) The Company will deliver to each Underwriter, without charge, from time to time until the effective date of the Registration Statement, as many copies of each preliminary prospectus as such Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will deliver to each Underwriter, without charge, as soon as the Registration Statement shall have become effective and thereafter from time to time as requested during the period when any prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectus (as supplemented or amended) as such Underwriter may reasonably request; and in case any Underwriter is required to deliver a Prospectus in connection with sales of any of the Shares at any time nine months or more after the effective date of the Registration Statement upon 10 such Underwriter's request through you, but at the expense of such Underwriter, the Company will prepare and deliver to such Underwriter as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the 1933 Act. (e) The Company will comply to the best of its ability with the 1933 Act and the 1933 Act Regulations, the 1940 Act and the 1940 Act Regulations and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Shares any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or counsel for the Company, to amend the Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of either such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such untrue statement or omission or to make the Registration Statement or the Prospectus comply with such requirements. (f) The Company will use its best efforts, in cooperation with the Underwriters, to qualify the Shares for offering and sale under the applicable securities laws of such states of the United States of America and other jurisdictions as you may designate and to maintain such qualifications in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be -------- ------- obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject; and provided, further, that, as of the date hereof, no action has -------- ------- been taken by the Company in any jurisdiction outside the United States to permit the offering and sale of the Shares or the distribution of the Prospectus or any amendment or supplement thereto or any other offering material in any such jurisdiction where action for that purpose is required. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. (g) The Company will make generally available to its security holders as soon as practicable, but not later than 60 days after the close of the period covered 11 thereby, an earnings statement of the Company (in form complying with the provisions of Rule 158 of the 1933 Act Regulations), covering a period of 12 months beginning after the effective date of the Registration Statement but not later than the first day of the Company's fiscal quarter next following such effective date. (h) The Company will use the net proceeds received by it from the sale of the Shares in the manner specified in the Prospectus under the caption "Use of Proceeds". (i) For a period of five years after the Closing Time, the Company will furnish to you and, upon request, to any Underwriter, copies of all annual reports, quarterly reports and current reports filed with the Commission on such forms as may be designated by the Commission, and such other documents, reports and information as shall be furnished by the Company to its stockholders generally. (j) For a period of 180 days from the date hereof, the Company will not, without the prior written consent of Kleinwort Benson Limited and Asian Capital Partners Limited acting on behalf of the Underwriters, 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 Common Stock, other than to the Underwriters pursuant to this Agreement and except for the issuance and sale of Common Stock pursuant to the Company's Dividend Reinvestment Plan. (k) The Company will use its best efforts to maintain its qualification as a regulated investment company under Subchapter M of the Code. Section 4. Payment of Expenses. The Company will pay and bear all ------------------- costs and expenses incident to the performance of its obligations under this Agreement, including (a) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits), as originally filed and as amended, the preliminary prospectuses and the Prospectus and any amendments or supplements thereto, (b) the preparation, printing and distribution of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreements (if any), the Blue Sky Survey and the Underwriters' Questionnaire, (c) the preparation, printing and delivery of the certificates for the Shares to the Underwriters, including stock transfer taxes, capital duties and stamp taxes, if any, payable upon the sale, issuance or delivery to the Underwriters of the Shares, (d) the fees and disbursements of the Company's counsel (including Messrs. Rogers & Wells and Lee and Li) and accountants, (e) the qualification of the Shares under the applicable securities laws in accordance with Section 3(f) and any filing for review of the offering with the National Association of Securities Dealers, Inc., and any other regulatory authority, including filing fees and fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the Blue Sky Survey, (f) the cost of furnishing to the several Underwriters copies of the Registration Statement as originally filed and all amendments thereto, whether filed before or 12 after the Registration Statement becomes effective, the preliminary prospectuses and the Prospectus and any amendments and supplements thereto and any Term Sheets, (g) the fees and expenses incurred in connection with the listing of the Shares on the New York Stock Exchange, including the listing fees of the New York Stock Exchange and the preparation, printing and the filing fees with respect to the distribution of documents relating thereto and (h) an aggregate of $75,000 toward reimbursement in part of the costs and expenses of the Underwriters. If this Agreement is terminated by you in accordance with the provisions of Section 5, 10(a)(i) or 12, the Company shall reimburse the Underwriters for all their out-of-pocket expenses, including the fees and disbursements of counsel for the Underwriters. Section 5. Conditions of Underwriters' Obligations. The obligations --------------------------------------- of the several Underwriters to purchase and pay for the Shares that they have respectively agreed to purchase hereunder (including any Option Shares as to which the option granted in Section 2 has been exercised and the Date of Delivery determined by you is the same as the Closing Time) are subject (i) to the accuracy of the representations and warranties of the Company and the Adviser contained herein or in certificates of the Company's or the Adviser's officers delivered pursuant to the provisions hereof; (ii) to the performance by the Company and the Adviser of their obligations hereunder; and (iii) to the following further conditions: (a) The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 497(h) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 497(h). At the Closing Time no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose, or under Section 8(e) of the 1940 Act, shall have been instituted or shall be pending or, to your knowledge or the knowledge of the Company or the Adviser, shall be contemplated by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the satisfaction of counsel for the Underwriters. (b) At the Closing Time, you shall have received a signed opinion of Messrs. Rogers & Wells, counsel for the Company, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other 13 Underwriters, in form and substance satisfactory to counsel for the Underwriters, to the effect that: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with the corporate power and authority under such laws to own, lease and operate its properties and conduct its business as described in the Prospectus. (ii) The Company is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary. (iii) The Shares to be sold by the Company pursuant to this Agreement have been duly authorized and, when issued and paid for in accordance with this Agreement, will be validly issued, fully paid and non-assessable; no holder thereof is or will be subject to personal liability by reason of being such a holder; such Shares are not subject to the preemptive rights of any stockholder of the Company; and all corporate action required to be taken for the authorization, issuance, sale and delivery of such Shares has been validly and sufficiently taken. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the heading "Common Stock". (v) The Shares conform in all material respects to the description thereof contained in the Prospectus under the heading "Common Stock". (vi) No authorization, approval, consent or license of any court or governmental regulatory body or authority in the United States (other than under the 1933 Act, the 1940 Act and the securities or blue sky laws of the various states of the United States of America and the securities laws of any jurisdiction in which Shares are offered and sold by the Underwriters) is required for the valid authorization, issuance, sale and delivery of the Shares. The Company is registered as a closed-end diversified management investment company under the provisions of the 1940 Act and the 1940 Act Regulations; the Company owns, possesses or has obtained all other material governmental licenses, permits, consents, orders, approvals and other authorizations, including exemptive or other orders of the Commission, necessary in the United States to make the public offering and consummate the sale of the Shares pursuant to this Agreement and to conduct its business as contemplated in the Prospectus. 14 (vii) Such counsel does not know of any statutes or regulations, or any pending or threatened legal or governmental proceedings, required to be described in the Prospectus that are not described as required, nor of any contracts or documents of a character required to be described or referred to in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described, referred to or filed, or both, as required. (viii) The descriptions in the Prospectus of the U.S. statutes, regulations, legal or governmental proceedings, and the contracts and other documents therein described ate accurate in all material respects and fairly summarize the information required to be shown. (ix) The statements made in the Prospectus under "Taxation -- U.S. Federal Income Taxation" and "Common Stock", to the extent that they constitute matters of law or legal conclusions, have been reviewed by such counsel and fairly present the information disclosed therein in all material respects. (x) To the best knowledge of such counsel, no default exists in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, loan agreement, note, lease or other agreement or instrument governed under the laws of the United States or the State of New York that is described or referred to in the Registration Statement or the Prospectus or filed as an exhibit to the Registration Statement. (xi) The execution and delivery of this Agreement, the issuance and delivery of the Shares, the consummation by the Company of the transactions contemplated in this Agreement and in the Registration Statement and compliance by the Company with the terms of this Agreement do not and will not result in any violation of the charter or by-laws of the Company and do not and will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company, under (A) any indenture or any other material agreement or instrument known to such counsel to which the Company is a party or by which it may be bound or to which any of its properties may be subject, (B) any existing applicable United States or New York law, rule or regulation (other than the securities or blue sky laws of the various states of the United States of America and the securities laws of any jurisdiction in which Shares are offered and sold by the Underwriters pursuant to this Agreement, as to which such counsel need express no opinion), or (C) any judgment, order or decree known to such counsel of any federal, state or local government, 15 governmental instrumentality or court in the United States having jurisdiction over the Company or any of its properties. (xii) The provisions of the certificate of incorporation and by-laws of the Company, this Agreement and the Management Contract do not conflict with the requirements of the 1940 Act. This Agreement and the Management Contract have been duly authorized, executed and delivered by the Company and are legal, valid and binding agreements of the Company enforceable against the Company in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and general principles of equity and except further, as the enforceability of the indemnification and contribution provisions contained in this Agreement may be limited under federal and state securities laws. (xiii) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 497(h) has been made in the manner and within the time period required by Rule 497(h); and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose, or under Section 8(e) of the 1940 Act, have been instituted or are pending or threatened by the Commission. (xiv) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectus, and each amendment or supplement to the Registration Statement and Prospectus as of their respective effective or issue dates (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act, the 1940 Act, the 1933 Act Regulations and the 1940 Act Regulations. (xv) Such counsel has participated in the preparation of the Registration Statement, any Rule 462(b) Registration Statement, the Prospectus and any amendments on supplements thereto and no facts have come to the attention of such counsel to lead them to believe (A) that the Registration Statement any Rule 462(b) Registration Statement or any amendment thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time the Registration Statement any Rule 462(b) Registration Statement or any post-effective amendments thereto became 16 effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or (B) that the Prospectus or any amendment or supplement thereto (except for the financial statements and other financial or statistical data included therein or omitted therefrom, as to which such counsel need express no opinion), at the time any such amended or supplemented Prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (xvi) The Management Contract and the U.S. Advisory Agreement comply with the requirements of the 1940 Act and the Investment Advisers Act, and each of the Management Contract, the U.S. Advisory Agreement and the Administration Agreement has been duly authorized, executed and delivered by the Company, is in full force and effect and is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and general principles of equity. (xvii) The Company does not require any tax or other rulings to enable it to qualify under Subchapter M of the Code. (xviii) The Adviser is duly registered as an investment adviser under the Investment Advisers Act, and is not prohibited by any provision of the Investment Advisers Act, or the rules and regulations promulgated thereunder, or the 1940 Act or the 1940 Act Regulations, from acting as the investment adviser with respect to the Company as contemplated by the Prospectus. Such opinion shall be to such further effect with respect to other legal matters relating to this Agreement and the sale of the Shares pursuant to this Agreement as counsel for the Underwriters may reasonably request. In giving such opinion, such counsel may rely, as to all matters governed by the law of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate law of the State of Delaware, upon opinions of other counsel who shall be counsel satisfactory to counsel for the Underwriters, in which case the foregoing opinion shall state that they believe you and they are entitled to so rely. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and certificates of public officials. (c) At the Closing Time, you shall have received the favorable opinion, dated as of Closing Time, of Lee and Li, Taiwan counsel to the Company and the 17 Adviser, in form and substance satisfactory to counsel for the Underwriters, to the effect that, under existing Taiwan laws and regulations: (i) The Management Contract duly creates a securities investment trust fund which complies with the Trust Fund Regulations and all other applicable laws of Taiwan; the Company is the sole beneficiary of the Trust Fund and as such is entitled to all rights and privileges accorded beneficiaries of a securities investment trust fund under Taiwan law, and without the consent or other action of the Company, no other person may exercise or be entitled to the rights and privileges of a beneficiary of the Trust Fund under the Management Contract as described in the Prospectus. (ii) The ownership of the Adviser, the Management Contract, the relationship between and among the Company, the Adviser, the Trust Fund, and the Custodian, and the rights and privileges of the Company and the Trust Fund under such instruments or arising out of such relationship, conform in all material respects to the descriptions thereof in the Prospectus, and no authorizations, approvals or consents by any Taiwan government authorities are required with respect to any of the foregoing except such authorizations, approvals or consents as have been obtained, all of which are in full force and effect, except that the remittance of the net proceeds of the offering into the ROC and the conversion thereof into New Taiwan Dollars will require the making of an application to the Central Bank of China and the issuance by the Central Bank of China of a permit for such remittance/conversion; provided, that the issuance of such a permit for remittance/conversion is a formality only, and such permit will be issued as a routine matter without special review. (iii) The assets held in the Trust Fund are not subject to attachment or other legal process in Taiwan, except to satisfy obligations which must be satisfied with assets held in the Trust Fund. (iv) Such counsel do not believe that the Registration Statement, any Rule 462(b) Registration Statement and any post- effective amendments thereto, at the respective times each became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any amendments or supplements thereto at the time the Prospectus or any such amendment or supplement was issued and at the Closing Time, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of circumstances under which they were made, not misleading. 18 (v) No authorizations, approvals or consents from governmental authorities in Taiwan are necessary for the issuance and sale of the Shares by the Company or for the execution, delivery and performance of this Agreement except for the approval of the ROC Securities and Exchange Commission and of the Central Bank of China which approvals have been obtained and are in full force and effect. (vi) To the best of the knowledge of such counsel, there are no Taiwan statutes, regulations or legal or governmental proceedings materially affecting the operation of the Trust Fund, the Adviser, the Custodian or the Company as contemplated by the Prospectus, except such as are described in the Prospectus. (vii) To the best of the knowledge of such counsel, there are no contracts, indentures, mortgages, loan agreements, notes, leases or other instruments affecting the Trust Fund, the Adviser or the Company other than those described or referred to in the Registration Statement or filed as exhibits thereto. (viii) The information in the Prospectus, to the extent that it describes matters of Taiwan law or Taiwan legal conclusions, has been reviewed by them and is correct. (ix) No taxes or charges of any kind are or will be payable in or to Taiwan, or any political subdivision thereof, by the Underwriters with respect to this Agreement or the purchase and sale of the Shares hereunder so long as such Shares are not marketed in Taiwan. (x) The Adviser has been duly organized and is validly existing under the laws of Taiwan with all necessary power and authority to carry on its business as described in the Prospectus. (xi) The Management Contract has been duly authorized, executed and delivered on behalf of the Adviser and the Custodian, respectively, and is the legal, valid, binding and enforceable obligation of the Adviser, the Company and the Custodian, respectively, and the U.S. Advisory Agreement, has been duly authorized, executed and delivered on behalf of the Adviser and each is the legal, valid, binding and enforceable obligation of the Adviser, except that their enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting generally the enforcement of creditors' rights; and neither the execution and delivery of such agreements nor the performance by the Adviser of its obligations thereunder will conflict with, or result in any breach of any of the terms and provisions of, or constitute, with or without the giving of notice or lapse of time or both, 19 a default under any agreement or instrument known to such counsel to which the Adviser is a party or by which the Adviser is bound, or the articles of incorporation of the Adviser, or any Taiwan law, order, rule or regulation applicable to the Adviser of any Taiwan jurisdiction, court, regulatory body, administrative agency or other governmental body in Taiwan having jurisdiction over the Adviser of its properties or operations. (xii) To the best of the knowledge of such counsel there are no actions, investigations or other proceedings in Taiwan of any nature pending, commenced or threatened, as the case may be, which question the validity of this Agreement or the Management Contract. (xiii) Any final and conclusive judgment of a court of the United States or the State of New York rendered in a suit, action or proceeding against the Company arising out of this Agreement and any order given by any such court in respect of any such judgment, is enforceable, subject to compliance with the requirements set forth in Section 402 of the Code of Civil Procedures of the ROC, against the Company by courts of the ROC (xiv) No restrictions are imposed by, and no approvals are required from, any governmental authority of the ROC on or for the redemption of Units or the repatriation of the assets of the Company (including the proceeds of the redeemed Units), whether or not such redemption or repatriation is made pursuant to a foreign court order or judgment enforceable in the ROC, except that, in the event that the amount to be repatriated exceeds the annual remittance limitation (currently the U.S. dollar equivalent of $5,000,000) or the limitation imposed on the amount of each remittance/conversion (currently the U.S. dollar equivalent of $1,000,000 or its equivalent, subject to a ten-day waiting period and the possible suspension of such rights pending the approval of the Central Bank), the prior approval of the Central Bank of China is required for such repatriation. (d) At the Closing Time, you shall have received a certificate from a duly authorized officer of State Street Bank and Trust Company certifying that the Administration Agreement is in full force and effect and is the legal, valid, binding and enforceable obligation of the corporation. (e) At the Closing Time, you shall have received the favorable opinion of Shearman & Sterling, counsel for the Underwriters, dated as of the Closing Time, together with signed or reproduced copies of such opinion for each of the other Underwriters, to the effect that the opinions delivered pursuant to Sections 5(b) and 5(c) appear on their face to be appropriately responsive to the requirements of this Agreement except, specifying the same, to the extent waived by you, and with respect to the incorporation and legal existence of the Company, the Shares, this Agreement, 20 the Registration Statement, the Rule 462(b) Registration Statement, the Prospectus and such other related matters as you may require. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the corporate law of the State of Delaware, upon the opinions of counsel satisfactory to you. In giving such opinion, such counsel may rely specifically on the opinion of Messrs. Lee and Li. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company, and certificates of public officials. (f) At the Closing Time, (i) the Registration Statement, the Rule 462(b) Registration Statement and the Prospectus, and any post-effective amendments or supplements thereto, shall contain all statements that are required to be stated therein under the 1933 Act and the 1933 Act Regulations, the 1940 Act and the 1940 Act Regulations and in all material respects shall conform to the requirements of the 1933 Act and the 1933 Act Regulations, the 1940 Act and the 1940 Act Regulations, and neither the Registration Statement nor the Prospectus, nor any post-effective amendments or supplements thereto, shall contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and if Rule 434 has been relied upon the prospectus was not "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective; (ii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company or the Adviser whether or not arising in the ordinary course of business; (iii) no action, suit or proceeding at law or in equity shall be pending or, to the knowledge of the Company or the Adviser, threatened against or affecting the Company or the Adviser, that would be required to be set forth in the Prospectus and no proceedings shall be pending or, to the knowledge of the Company or the Adviser, threatened against or affecting the Company or the Adviser, before or by any federal, state, foreign or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding could materially adversely affect the consummation of the transactions contemplated in this Agreement or the Registration Statement or the condition (financial or otherwise), earnings, business affairs or business prospects of the Company or the Adviser, except that the foregoing shall not relate to the issuer of any security in which the Company may have invested other than as set forth in the Prospectus; (iv) not more than 10% of the assets of the Company shall be subject to any existing mortgage, pledge, lien, encumbrance, claim or equity; (v) neither the Company nor the Adviser (in connection with any obligation relating to the transactions contemplated by the Prospectus and this Agreement) shall be in default in the performance or observance of any material contract to which it is a party; (vi) no-stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or the 1940 Act and no proceedings 21 therefor shall have been instituted or threatened by the Commission; (vii) no proceedings shall have been instituted or threatened by the Commission which would adversely affect the Company's standing as a registered investment company under the 1940 Act or the Adviser's standing as a registered investment adviser under the Advisers Act; (viii) the Company shall have complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time; and (ix) the other representations and warranties of the Company and the Adviser set forth in Section 1(a) shall be accurate as though expressly made at and as of the Closing Time. At the Closing Time, you shall have received a certificate of the President and the Treasurer of the Company and the President of the Adviser, dated as of the Closing Time, to such effect. (g) At the time that this Agreement is executed by the Company, you shall have received from Coopers & Lybrand a letter, dated such date, in form and substance satisfactory to you, together with signed or reproduced copies of such letter for each of the other Underwriters, confirming that they are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations, and stating in effect that: (i) in their opinion, the audited financial statements and the summary per share financial information included in the Registration Statement and Prospectus comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published 1933 Act Regulations and the 1940 Act and the rules and regulations thereunder; (ii) on the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the latest available unaudited interim financial statements and quarterly reports of the Company, a reading of the minutes of all meetings of the stockholders and directors of the Company and any committees of the Company's Board of Directors since January 1, 1996, inquiries of certain officials of the Company responsible for financial and accounting matters and such other inquiries and procedures as may he specified in such letter, nothing came to their attention that caused them to believe that at the date of the latest available unaudited interim financial statements or quarterly reports of the Company and at a specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock of the Company or any decrease in the net assets of the Company or any increase in (or incurrence of) long term or short term debt of the Company, in each case, as compared with amounts shown in the latest statement of assets and liabilities included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; 22 (iii) based upon the procedures set forth in clause (ii) above, a reading of the Summary Per Share Financial Information included in the Registration Statement and a reading of the financial statements from which certain of such data were derived, nothing has come to their attention that gives them reason to believe that the Summary Per Share Financial Information included in the Registration Statement does not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations, or that the information set forth therein is not fairly stated in relation to the financial statements from which it was derived or that the financial statements not included in the Registration Statement from which certain of such data were derived are not in conformity with generally accepted accounting principles applied on a basis consistent with that of the audited financial statements included in the Registration Statement; and (iv) in addition to the procedures referred to in clause (ii) above, they have performed other specified procedures, not constituting an audit, with respect to certain amounts, percentages, numerical data and financial information appearing in the Registration Statement, which have previously been specified by you and which shall be specified in such letter, and have compared certain of such items with, and have found such items to be in agreement with, the accounting and financial records of the Company. (h) At the Closing Time, you shall have received from Coopers & Lybrand a letter, in form and substance satisfactory to you and dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to Section 5(a), except that the specified date referred to shall be a date not more than five days prior to the Closing Time. (i) At the Closing Time, you shall have received written copies (with English translations) of all such authorizations, approvals or consents from such governmental authorities in Taiwan whose consent is necessary to permit the consummation of the transactions contemplated by this Agreement and referred to in the Prospectus. (j) At the Closing Time, counsel for the Underwriters shall have been furnished with all such documents, certificates and opinions as they may request for the purpose of enabling them to pass upon the issuance and sale of the Shares as contemplated in this Agreement and the matters referred to in this Section 5 and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company and the Adviser, the performance of any of the covenants of the Company and the Adviser, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company at or prior to the Closing Time in connection with the authorization, issuance and sale of the Shares 23 as contemplated in this Agreement shall be satisfactory in form and substance to you and to counsel for the Underwriters. (k) The Shares shall have been duly authorized for listing by the New York Stock Exchange on the date hereof, subject only to official notice of issuance thereof. If any of the conditions specified in this Section 5 shall not have been fulfilled when and as required by this Agreement to be fulfilled, this Agreement may be terminated by you on notice to the Company at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4 herein. Notwithstanding any such termination, the provisions of Sections 7, 8 and 9 herein shall remain in effect. Section 6. Conditions to Purchase of Option Shares. In the event --------------------------------------- that the Underwriters exercise their option granted in Section 2 to purchase all or any part of the Option Shares and the Date of Delivery determined by you pursuant to Section 2 is later than the Closing Time, the obligations of the several Underwriters to purchase and pay for the Option Shares that they have respectively agreed to purchase pursuant to this Agreement shall be subject to the accuracy of the representations and warranties of the Company and the Adviser herein contained, to the performance by the Company and the Adviser of their respective obligations hereunder and to the following further conditions: (a) The Registration Statement shall remain effective at the Date of Delivery, and at the Date of Delivery no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose, or under Section 8(e) of the 1940 Act, shall have been instituted or shall be pending or, to your knowledge or to the knowledge of the Company or the Adviser, shall be contemplated by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the satisfaction of counsel for the Underwriters. (b) At the Date of Delivery, the provisions of Sections 5(f)(i) through 5(f)(ix) shall have been complied with at and as of the Date of Delivery and, at the Date of Delivery, you shall have received certificates of the President and the Treasurer of the Company, and a certificate from the President of the Adviser dated as of the Date of Delivery, to such effect. (c) At the Date of Delivery, you shall have received the favorable opinions of Messrs. Rogers & Wells, Messrs. Lee and Li, and such other certificates as may be required by Section 5(d), together with signed or reproduced copies of such opinions and certificates for each of the other Underwriters, in each case, in form and substance satisfactory to counsel for the Underwriters, dated as of the Date of 24 Delivery, relating to the Option Shares and otherwise to the same effect as the opinions and certificates required by Sections 5(b), 5(c) and 5(d), respectively. (d) At the Date of Delivery, you shall have received the favorable opinion of Shearman & Sterling, counsel for the Underwriters, dated as of the Date of Delivery, relating to the Option Shares and otherwise to the same effect as the opinion required by Section 5(e). (e) At the Date of Delivery, you shall have received a letter from Coopers & Lybrand, in form and substance satisfactory to you and dated as of the Date of Delivery, to the effect that they reaffirm the statements made in the letter furnished pursuant to Section 5(h), except that the specified date referred to shall be a date not more than five days prior to the Date of Delivery. (f) At the Date of Delivery, counsel for the Underwriters shall have been furnished with all such documents, certificates and opinions as they may request for the purpose of enabling them to pass upon the issuance and sale of the Option Shares as contemplated in this Agreement and the matters referred to in Section 6(d) and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company or the Adviser, the performance of any of the covenants of the Company or the Adviser, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company at or prior to the Date of Delivery in connection with the authorization, issuance and sale of the Option Shares as contemplated in this Agreement shall be satisfactory in form and substance to you and to counsel for the Underwriters. Section 7. Indemnification. (a) The Company and the Adviser agree, --------------- jointly and severally, to indemnify and hold harmless each Underwriter, its directors, officers, employees and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act and Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of an untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; 25 (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including fees and disbursements of counsel chosen by you), reasonably incurred in investigating, preparing or defending against any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that this indemnity does not apply to any loss, liability, - -------- ------- claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information furnished in writing or confirmed in writing to the Company by any Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (b) Each Underwriter severally agrees to indemnify and hold harmless the Adviser and the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act and Section 20 of the 1934 Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 7(a), as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with information furnished in writing or confirmed in writing to the Company by or on behalf of such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may he sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability that it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel 26 for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. (d) The Company and the Adviser agree to indemnify each Underwriter against any loss incurred by the Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act and Section 20 of the 1934 Act, and each Underwriter severally agrees to indemnify the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act and Section 20 of the 1934 Act, as a result of any judgment being given in connection with this Agreement, the Prospectus or the Registration Statement for which indemnification is provided pursuant to this Section 7 and such judgment or order being paid in a currency (the "Judgment Currency") other than United States dollars, as a result of any variation as between (i) the rate of exchange at which United States dollars are converted into the Judgment Currency for the purpose of such judgment or order, and (ii) the rate of exchange at which the indemnified party is able to purchase United States dollars, with the amount of the Judgment Currency actually received by the indemnified party. The foregoing indemnity shall constitute a separate and independent obligation of the Company, the Adviser and the Underwriters and shall continue in full force and effect notwithstanding any such judgment or order as aforesaid. The term "rate of exchange" shall include any premiums and costs of exchange payable in connection with the purchase of, or conversion into, the relevant currency. Section 8. Contribution. In order to provide for just and equitable ------------ contribution in circumstances under which the indemnity provided for in Section 7 is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Company, the Adviser and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity incurred by the Company, and the Adviser and one or more of the Underwriters, as incurred, in such proportions that (a) the Underwriters are responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectus bears to the initial public offering price appearing thereon and (b) the Company and the Adviser are jointly and severally responsible for the balance; provided, however, that no person guilty of -------- ------- fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act and Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. 27 Section 9. Representations, Warranties and Agreements to Survive ----------------------------------------------------- Delivery. The representations, warranties, indemnities, agreements and other - -------- statements of the Adviser, the Company or their respective officers set forth in or made pursuant to this Agreement will remain operative and in full force and effect regardless of any investigation made by or on behalf of the Adviser, the Company, or any Underwriter or controlling person thereof and will survive delivery of and payment for the Shares. Section 10. Termination of Agreement. (a) You may terminate this ------------------------ Agreement by notice to the Company at any time at or prior to the Closing Time (i) if there has been, since the date of this Agreement or since the respective dates as of which information is given in the Registration Statement, any material adverse change in the condition (financial or otherwise), earnings, business affairs or business prospects of the Company, the Adviser or the sub- advisers whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets of the United States, Europe or Asia, any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which is such as to make it, in your judgment, impracticable to market the Shares or enforce contracts for the sale of the Shares, or (iii) if trading in any securities of the Company has been suspended by the Commission or the New York Stock Exchange, or if trading generally on the New York Stock Exchange or in the over-the-counter market has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by such exchange or by order of the Commission or any other governmental authority, or (iv) if a banking moratorium has been declared by either United Kingdom, United States or New York authorities, or (v) if there has occurred any change or any development involving a prospective change in national or international political, financial or economic conditions or foreign exchange markets or currency exchange rates or exchange controls or national or international equity markets which, in the opinion of the Underwriters, is likely to have a material adverse effect on the market for the Common Stock. (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party, except to the extent provided in Section 4 hereof. Notwithstanding any such termination, the provisions of Sections 7, 8 and 9 shall remain in effect. (c) This Agreement may also terminate pursuant to the provisions of Section 2, with the effect stated in such Section. Section 11. Default by One or More of the Underwriters. If one or ------------------------------------------ more of the Underwriters shall fail at the Closing Time to purchase the Initial Shares that it or they are obligated to purchase pursuant to this Agreement (the "Defaulted Shares"), you shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Shares in such amounts as may be agreed upon and upon the terms set forth 28 in this Agreement; if, however, you have not completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Shares does not exceed 10% of the total number of Initial Shares, the non-defaulting Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective Initial Share underwriting obligation proportions bear to the aggregate of the underwriting obligation proportions of all non-defaulting Underwriters, or (b) if the number of Defaulted Shares exceeds 10% of the total number of Initial Shares, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default that does not result in a termination of this Agreement, either you or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement or the Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 11. Section 12. Default by the Company. If the Company shall fail at the ---------------------- Closing Time to sell and deliver the number of Shares which it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non-defaulting party. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default and the Company shall remain responsible for all expenses specified in Section 4 hereof. Section 13. Notices. All notices and other communications under this ------- Agreement shall be in writing and shall be deemed to have been duly given if delivered, mailed or transmitted by any standard form of telecommunication (notices transmitted by telecopier to be promptly confirmed in writing). Notices to you or the Underwriters shall be directed to you c/o Kleinwort Benson Limited at P.O. Box 560, 20 Fenchurch Street, London EC3P 3DB, England (telecopier no.: 011-44-171-626-1057), attention of Corporate Finance -- Asian Desk, with a copy attention of Syndicate Desk (telecopier: 011-44-171-929-7945) and to Klenwort Benson North America Inc., attention Corporate Finance -- Asian Desk (telecopier no: [ ]) and a further copy to Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022 (telecopier no.: 212 848 7179), attention of Antonia E. Stolper, Esq.; notices to the Company or the Adviser shall be directed to either of them at 99 Tun Hwa South Road, 24th Floor, Sec. 2, Taipei, Taiwan, Republic of China (telecopier no: 886-2-325-5748), attention of Harvey Chang, with a copy to Rogers & Wells, 200 Park Avenue, New York, New York 10166 (telecopier no: 212-878-8375), attention Laurence E. Cranch, Esq. 29 Section 14. Parties. This Agreement is made solely for the benefit ------- of the several Underwriters, the Company and the Adviser, and to the extent expressed, any person controlling the Company, the Adviser or any of the Underwriters, and the directors of the Company, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns and, subject to the provisions of Section 11, no other person shall acquire or have any right under or by virtue of this Agreement; provided, however, no officer, director or employee of the Company shall have - -------- ------- any personal liability for any default of the Company under this Agreement. The term "successors and assigns" shall not include any purchaser, as such purchaser, from any of the several Underwriters of the Shares. All of the obligations of the Underwriters hereunder are several and not joint. Section 15. Representation of Underwriters. You will act for the ------------------------------ several Underwriters in connection with this offering, and any action under or in respect of this Agreement taken by you as Representative will be binding upon all the Underwriters. Section 16. Governing Law and Time. This Agreement shall be governed ---------------------- by the laws of the State of New York without regard to conflicts of law principles. Specified times of the day refer to New York City time. Section 17. Counterparts. This Agreement may be executed in one or ------------ more counterparts and, when a counterpart has been executed by each party, all such counterparts taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. Section 18. Appointment of Agent for Service. Each of the Company -------------------------------- and the Adviser irrevocably submits to the jurisdiction of any United States or State court in the City, County and State of New York, United States of America, in any suit or proceeding based on or arising under this Agreement and irrevocably agrees that all claims in respect of such suit or proceeding may be determined in any such court. Each of the Company and the Adviser irrevocably and fully waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. Each of the Company and the Adviser hereby irrevocably designates and appoints Rogers & Wells in the City, County and State of New York, United States of America, as the authorized agent of the Company and the Adviser, respectively, upon whom process may be served in any such suit or proceeding, it being understood that the designation and appointment of Rogers & Wells as such authorized agent shall become effective immediately without any further action on the part of the Company or the Adviser, as the case may be. Each of the Company and the Adviser represents to each Underwriter that it has notified Rogers & Wells of such designation and appointment and that Rogers & Wells has accepted the same in writing. Each of the Company and the Adviser hereby irrevocably authorizes and directs Rogers & Wells to accept such service. Each of the Company and the Adviser further agrees that service of process upon Rogers & Wells and written notice of said service to the Company or the Adviser, as the case may be, mailed 30 by first class mail or delivered to Rogers & Wells at its principal office, attention Laurence E. Cranch, shall be deemed in every respect effective service of process upon the Company or the Adviser, as the case may be, in any such suit or proceeding. Nothing herein shall affect the right of any Underwriter or any person controlling any Underwriter to serve process in any other manner permitted by law. Each of the Company and the Adviser agrees that a final action in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other lawful manner. If either the Company or the Adviser has or may hereafter acquire immunity from jurisdiction or legal process with respect to itself or its property, the Company and the Adviser, respectively, hereby irrevocably waives such immunity in respect of its obligations hereunder. 31 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument will become a binding agreement among the Company, the Adviser and the several Underwriters in accordance with its terms. Very truly yours, THE TAIWAN FUND, INC. By: _______________________ Name: Title: CHINA SECURITIES INVESTMENT TRUST CORPORATION By: _______________________ Name: Title: Confirmed and accepted as of the date first above written: KLEINWORT BENSON NORTH AMERICA INC. By: KLEINWORT BENSON NORTH AMERICA INC. By: ________________________ Name: Title: For themselves and as Representative of the - ------------------------------------------- other Underwriters named in Schedule A -------------------------------------- 32 SCHEDULE A Number of Initial Underwriter Shares to be Purchased - ----------- ---------------------- Kleinwort Benson North America Inc. SCHEDULE B [___] Shares of Common Stock (Par Value $.01 Per Share) 1. The initial public offering price per share for the Shares, determined as provided in said Section 2, shall be $[___]. 2. The purchase price per share for the Shares, determined as provided in Section 2, to be paid by the several Underwriters shall be $[____], being an amount equal to the initial public offering price set forth above less $[____] per Share; provided that the purchase price per share for any Option Shares purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Shares but not payable on the Option Shares. S&S DRAFT 4/26/96 THE TAIWAN FUND, INC. (a Delaware corporation) [1,033,485] Shares of Common Stock (Par Value $.01 Per Share) AGREEMENT AMONG UNDERWRITERS ---------------------------- [May__ ], 1996 KLEINWORT BENSON NORTH AMERICA INC. 200 Park Avenue, 25th Floor New York, New York U.S.A. Dear Sirs: We agree with you as follows with respect to the purchase and public offering of the shares of Common Stock (such class of equity securities being hereinafter referred to as the "Common Stock") of The Taiwan Fund, Inc., a Delaware corporation (the "Company"): Section 1. Purchase Agreement; Authority of Representative. We ----------------------------------------------- understand that you and other Underwriters, including ourselves, for whom you are acting as Representative, propose to enter into a purchase agreement (the "Purchase Agreement"), in substantially the form attached hereto, pursuant to which each of the Underwriters, severally and not jointly, will agree to purchase the number of shares of Common Stock set forth opposite its name in Schedule A thereto (such total number of shares of Common Stock being hereinafter referred to as the "Initial Shares"). We authorize you to execute and deliver the Purchase Agreement referred to therein on our behalf in such form as you determine. We will purchase, at the price determined in accordance with Section 2 of the Purchase 2 Agreement, the number of Initial Shares set forth opposite our name in Schedule A to the Purchase Agreement (plus such additional Initial Shares as may be required pursuant to Section 11 thereof, in the event of default by one or more of the Underwriters). We will further purchase, at the price determined in accordance with Section 2 of the Purchase Agreement, our pro rata portion (based as nearly as practicable upon the ratio which our commitment to purchase the Initial Shares bears to the total number of Initial Shares) of up to an additional 155,023 shares, in the aggregate, of Common Stock (the "Option Shares") pursuant to the over-allotment option of the Underwriters contained in Section 2 of the Purchase Agreement, it being understood that the over-allotment option will be exercised only to cover over-allotments actually made by you in connection with the offering and distribution of the Initial Shares. The Initial Shares and all or any part of the Option Shares are collectively herein referred to as the "Shares". We will be bound by all other terms of the Purchase Agreement as executed. We understand that changes may be made in those who are to be Underwriters, and in the number of Initial Shares to be purchased by them, but the number of Initial Shares to be purchased by us pursuant to the Purchase Agreement, including the maximum number of Option Shares, which we may become obligated to purchase by reason of the exercise of any over-allotment option provided in the Purchase Agreement, shall not be changed without our consent, except as provided in the Purchase Agreement. As Representative of the Underwriters, you are authorized to take such action as you deem necessary or advisable to carry out this Agreement and the Purchase Agreement, and the purchase, sale and distribution of the Shares and to agree to any waiver or modification of any provision of the Purchase Agreement. To the extent applicable, you are authorized to determine (i) the number of Option Shares, if any, to be purchased by you and us pursuant to the over- allotment option and (ii) with respect to offerings priced in accordance with Rule 430A ("Rule 430A") of the 1933 Act Regulations (as defined below), the initial Public Offering Price (as defined below) and the price at which the Shares are to be purchased in accordance with the Purchase Agreement. The term "underwriting obligation", as used in this Agreement with respect to any Underwriter, shall refer to the number of Shares, including any Option Shares (plus such additional Shares as may be required by the Purchase Agreement in the event of a default by one or more of the Underwriters) that such Underwriter is obligated to purchase pursuant to the provisions of the Purchase Agreement. Section 2. Registration Statement and Prospectus. We have been ------------------------------------- furnished with copies of the registration statement on Form N-2 (Registration No. 333-2697) relating to the Shares filed with the U.S. Securities and Exchange Commission (the "Commission") pursuant to the U.S. Securities Act of 1933, as amended (the "1933 Act") and the U.S. Investment Company Act of 1940, as amended (the "1940 Act") (which represents Amendment No. [ ] to the Company's Registration Statement under the 1940 Act), 3 including the related preliminary prospectus or prospectuses filed to the date hereof. We understand that either (A) if the Company has elected to rely upon Rule 430A of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations"), a prospectus will be prepared and filed in accordance with the provisions of Rule 430A and Rule 497(h) of the 1933 Act Regulations, or (B) if the Company has elected to rely on Rule 434 of the 1933 Act Regulations, a term sheet (a "Term Sheet") will be prepared and filed in accordance with the provisions of Rule 434 and Rule 497(h). The information included in such prospectus or such Term Sheet, as the case may be, that was omitted from such registration statement at the time it becomes effective but that is deemed to be part of such registration statement at the time it becomes effective, pursuant to Rule 430A(b) is referred to herein as the "Rule 430A Information", or pursuant to Rule 434(b) is referred to as "Rule 434 Information". Each prospectus used before the time such registration statement becomes effective, and any prospectus that omits, as applicable, the Rule 430A Information or the Rule 434 Information that is used after such effectiveness and prior to the execution and delivery of the Purchase Agreement is herein called a "preliminary prospectus". Such registration statement, including the exhibits thereto, schedules thereto, at the time it becomes effective and also including, if applicable, the Rule 430A Information and the Rule 434 Information, is herein called the "Registration Statement". Any Registration Statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement", and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final prospectus filed in accordance with Rule 497(h) is herein called the "Prospectus". If Rule 434 is relied on, the term "Prospectus" shall refer to the preliminary prospectus dated April 19, 1996 together with the Term Sheet and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). Section 3. Public Offering. The sale of the Shares to the public --------------- shall commence as soon as you deem advisable after the Registration Statement becomes effective. We will not sell any Shares until they are released by you for that purpose. When notified by you that the Shares are released for sale, we will offer to the public, at the initial Public Offering Price set forth in the Prospectus, such of the Shares to be purchased by us as are not reserved for our account for sale to Selected Dealers and others pursuant to Section 5. The initial public advertisement with respect to the Shares may appear on such date and in such countries as you shall determine, and shall include the names of such of the Underwriters as you may determine. We consent to the use of our name in such advertisement. Any Underwriter may advertise with our consent and at its own expense. Any such advertisement shall comply with all applicable laws. 4 Section 4. Definitions. As used herein, the following terms shall ----------- have the following meanings: "Dealer Price" shall mean an amount per Share equal to the Public Offering Price per Share less the Reallowance per Share. "Management Fee" shall mean an amount per Share equal to 20% of the Underwriters' Discount. "Public Offering Price" shall mean the price per Share determined in accordance with Section 2 of the Purchase Agreement. "Reallowance" shall mean an amount per Share (representing a portion of the Selling Concession) to be determined by the Representative not in excess of 13.3% of the Selling Concession. "Selling Concession" shall mean a selling concession per Share equal to 60% of the Underwriters' Discount. "Underwriters' Discount" for each Share shall mean an amount per Share equal to 5% of the initial Public Offering Price per Share. "Underwriters' Purchase Price" shall mean an amount per Share equal to the initial Public Offering Price per Share less the Underwriters' Discount per Share. "Underwriting Commission" shall mean an amount per Share equal to 20% of the Underwriters' Discount. The Representative will advise us by telex or telecopier, promptly after determination thereof, of the amount of each of the Public Offering Price, the Underwriters' Purchase Price, the Underwriters' Discount (broken down as to Management Fee, Underwriting Commission and Selling Concession) and the Reallowance. It is understood that each of the Underwriters' Discount, the Management Fee, the Underwriting Commission and the Selling Concession shall be rounded to the nearest cent (with one-half cent rounded upward) with such adjustments thereto as are necessary to insure that the sum of the Management Fee, the Underwriting Commission and the Selling Concession for each Share shall be equal to 100% of the Underwriters' Discount for each Share. After the initial public offering, the Public Offering Price, the Selling Concession and the Reallowance may be changed by the Representative by notice to the Underwriters, and we agree to be bound by any such change. 5 Section 5. Offering to Selected Dealers and Others; Management of ------------------------------------------------------ Offering. We authorize you, for our account, to reserve for sale and to sell to - -------- dealers ("Selected Dealers"), among whom any of the Underwriters may be included, such number of Shares to be purchased by us as you shall determine. Reservations for sales to Selected Dealers for our account need not be in proportion to our underwriting obligation, but, except as provided in Section 13 below, sales of Shares reserved for our account for sale to Selected Dealers shall be made as nearly as practicable in the ratio that the number of Shares reserved for our account bears to the aggregate number of Shares reserved for the account of all Underwriters, as calculated from day to day. Sales to Selected Dealers may be made under the form of the Selected Dealer Agreement attached hereto, or otherwise. The price to Selected Dealers initially shall be the Public Offering Price less the Selling Concession. Selected Dealers shall be actually engaged in the investment banking or securities business and shall be either members in good standing of the National Association of Securities Dealers, Inc. (the "NASD") or dealers with their principal place of business located outside the United States, its territories and other areas subject to its jurisdiction and who are not registered under the U.S. Securities Exchange Act of 1934, as amended (the "1934 Act") who agree to make no sales within the United States, its territories or other areas subject to its jurisdiction or to persons who are citizens thereof or residents therein. Each Selected Dealer shall agree to comply with the provisions of Section 24 of Article III of the Rules of Fair Practice of the NASD, and each foreign Selected Dealer who is not a member of the NASD also shall agree to comply with the NASD's interpretation with respect to free-riding and withholding, to comply, as though it were a member of the NASD, with the provisions of Sections 8 and 36 of Article III of such Rules of Fair Practice, and to comply with Section 25 of Article III thereof as that Section applies to a non-member foreign dealer. With your consent, the Underwriters may allow, and Selected Dealers may reallow, a discount of not in excess of the Reallowance on sales to other dealers who meet the above NASD requirements. Upon your request, we will advise you of the identity of any dealer to whom we allow such a discount and any Underwriter or Selected Dealer from whom we receive such a discount. Except as provided below in Section 13, we also authorize you, for our account, to reserve for sale and to sell to others, including institutions and retail purchasers, at the Public Offering Price, Shares to be purchased by us. Except for such sales that are designated by a purchaser to be for the account of a particular Underwriter, such reservations and sales shall, except as provided below in Section 13, be as nearly as practicable in proportion to our underwriting obligation, unless you agree to a smaller or larger proportion at our request. At or before the time the Shares are released for sale, you shall notify us of the number of Shares that has not been reserved for our account for sale to Selected Dealers and others and that is to be retained by us for direct sale. 6 We will from time to time, upon your request, report to you the number of Shares retained by us for direct sale that remains unsold and, upon your request, deliver to you for our account, or sell to you for the account of one or more of the Underwriters, such number of Shares as you may designate at the Public Offering Price less an amount determined by you not in excess of the Selling Concession. You may also repurchase Shares from other Underwriters and Selected Dealers, for the account of one or more of the Underwriters, at prices determined by you not in excess of the Public Offering Price less the Selling Concession. You may from time to time deliver to any Underwriter, for carrying purposes or for sale by such Underwriter, any of the Shares then reserved for sale to, but not purchased and paid for by, Selected Dealers or others as above provided, but to the extent that Shares are so delivered by you for sale by such Underwriter, the number of Shares then reserved for the account of such Underwriter shall be correspondingly reduced. Shares delivered for carrying purposes only shall be redelivered to you upon demand. The Underwriters and Selected Dealers may, with your consent, purchase Shares from and sell Shares to each other at the Public Offering Price less a concession not in excess of the Selling Concession. Section 6. Repurchase of Shares Not Effectively Placed. In ------------------------------------------- recognition of the importance of distributing the Shares to bona fide investors, we agree to repurchase from you on demand any Shares sold by us, except through you, that are purchased by you in the open market or otherwise during a period terminating as provided in Section 16, at a price equal to the cost of such purchase, including commissions, and transfer and other taxes, if any, on redelivery. The certificates delivered to us need not be the identical certificates delivered to you in respect of the Shares purchased. In lieu of requiring repurchase, you may, in your discretion, sell such Shares for our account at such prices, upon such terms and to such persons, including any of the other Underwriters, as you may determine, charging the amount of any loss and expense, or crediting the amount of any net profit, resulting from such sale, to our account, or charge our account with an amount determined by you not in excess of the Selling Concession. Section 7. Stabilization and Over-Allotment. In order to facilitate -------------------------------- the distribution of the Shares, we authorize you, in your discretion, to purchase and sell shares of Common Stock of the Company in the open market whether in the United States or on other securities exchanges or otherwise, for long or short account, at such prices as you may determine. We also authorize you, in arranging for sales to Selected Dealers or others, to over-allot. You may liquidate any long position or cover any short position incurred pursuant to this Section at such prices as you may determine. Except as provided below in Section 13, such purchases and sales (including over-allotments) shall be made for the accounts of the Underwriters as nearly as practicable in proportion to their respective 7 underwriting obligations. If you have purchased shares of Common Stock for stabilizing purposes prior to the execution of this Agreement, such purchases shall be treated as having been made pursuant to the foregoing authorization. At the close of business on any day, our net commitment, either for long or short account, resulting from such purchases or sales (including over- allotments), shall not exceed 15% of the number of Initial Shares to be purchased by us pursuant to the Purchase Agreement, except that such percentage may be increased with the approval of a majority in interest of the Underwriters. Except as provided below in Section 13, we will take up at cost on demand any shares of Common Stock so purchased for our account and deliver on demand any shares of Common Stock so sold or over-allotted for our account, and you may, as provided in Section 17, charge our account with, or we will pay to you on demand, the amount of any losses or expenses incurred for our account pursuant to this Section; it being understood that any such purchases or sales made by the you pursuant to this Section 7 and the related losses and expenses, if any, incurred by you shall be charged or credited, as the case may be, to the account of the several Underwriters and that you are hereby authorized to, allocate such purchases and sales among the several Underwriters in the proportions provided in this Section 7 and, in connection therewith, to charge the respective accounts of the Underwriters with any related losses or expenses so incurred (or demand payment therefor as herein provided). In the event of default by any Underwriter in respect of its obligations under this Section, each non-defaulting Underwriter shall assume its share of the obligations of such defaulting Underwriter in the proportion that its underwriting obligation bears to the underwriting obligations of all non-defaulting Underwriters, without relieving such defaulting Underwriter of its liability hereunder. If you effect any stabilizing purchase pursuant to this Section, you will promptly notify us of the date and time of the first stabilizing purchase and the date and time when stabilizing was terminated. You shall prepare and maintain such records regarding stabilizing purchases as are required to be maintained by any of you as manager or by any Underwriter not as manager pursuant to Rule 17a-2 under the 1934 Act. Section 8. Open Market Transactions. We will not bid for or purchase ------------------------ for any account in which we have a beneficial interest, or attempt to induce any person to purchase, any shares of Common Stock, and will otherwise comply with the provisions of Rule 10b-6 under the 1934 Act; provided, however, that the foregoing shall not prohibit (i) offers to sell or the solicitation of offers to buy the Shares being distributed, (ii) brokerage transactions not involving solicitation of customers' orders, and (iii) transactions made with your written consent or otherwise permitted under this Agreement. Section 9. Payment and Delivery. At or before 9:00 A.M., New York -------------------- City time, on the date of closing with respect to the Initial Shares, or the Date of Delivery with respect to the Option Shares, as the case may be, as determined in the Purchase Agreement or on such other respective dates as you may advise, we will pay to you, through the 8 facilities of The Depository Trust Company ("DTC") payable to the DTC account notified to us in writing for the benefit of Kleinwort Benson North America Inc. or to such other account as you may advise us in writing, an amount in New York Clearing House funds equal to the initial Public Offering Price less the Selling Concession in respect of the number of Initial Shares or Option Shares, as the case may be, to be purchased by us pursuant to the Purchase Agreement. We authorize you for our account to make payment of the purchase price for the Initial Shares or Option Shares, as the case may be, to be purchased by us against delivery to you of such Shares, and the difference between the purchase price of the Initial Shares or the Option Shares, as the case may be, to be purchased by us pursuant to the Purchase Agreement and the amount of our funds delivered to you therefor shall be credited to our account. You, individually and not as Representative, may, but shall not be obligated to, make payment of the purchase price for the Initial Shares or the Option Shares, as the case may be, to be purchased by any Underwriter whose funds shall not have been received by the Closing Time or the Date of Delivery, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any obligations hereunder or under the Purchase Agreement. If we are a member of DTC, you are authorized to make appropriate arrangements for payment for and delivery of our Shares through its facilities or, if we are not a member, settlement may be made through a correspondent that is a member pursuant to our timely instructions to you. Delivery to us of Shares retained by us for direct sale shall be made by you as soon as practicable after your receipt of the Shares. Upon termination of the provisions of this Agreement referred to in Section 16, you shall deliver to us any Shares reserved for our account for sale to Selected Dealers and others which remain unsold at that time. Upon receiving payment for Shares sold for our account to Selected Dealers and others, you shall remit to us an amount equal to the amount paid by us to you in respect of such Shares and credit or charge our account with the difference, if any, between such amount and the price at which such Shares were sold. Section 10. Management Compensation. As compensation for your ----------------------- services in the management of the offering, we will pay you an amount equal to 50% of the Management Fee for each Share to be purchased by us pursuant to the Purchase Agreement, and we authorize Kleinwort Benson to charge our account for the Management Fee for each Share included in our underwriting obligations. Section 11. Authority to Borrow. We authorize you to advance your ------------------- own funds for our account, charging current interest rates, or to arrange loans for our account or the account of the Underwriters, as you may deem necessary or advisable, for the purchase, carrying, sale and distribution of the Shares. You may execute and deliver any notes or 9 other instruments required in connection therewith and may hold or pledge as security therefor all or any part of the Shares that we or such Underwriters have agreed to purchase. The obligations of the Underwriters under loans arranged on their behalf shall be several in proportion to their respective participations in such loans, and not joint. Any lender is authorized to accept your instructions as to the disposition of the proceeds of any such loans. You shall credit each Underwriter with the proceeds of any loans made for its account. Section 12. Legal Qualifications and Sales Restrictions. You shall ------------------------------------------- inform us, upon request, of the states and other jurisdictions of the United States in which it is believed that the Shares are qualified for sale under, or are exempt from the requirements of, their respective securities laws. No action has been taken by the Company that would, or is intended to, permit a public offering of the Shares in any other country or jurisdiction where any such action for that purpose is required. You assume no responsibility with respect to our right to sell Shares in any jurisdiction. We will take, at our own expense, such action, if any, as may be necessary to comply with the laws of each non-United States jurisdiction in which we propose to offer Shares; and we will not directly or indirectly purchase, offer, sell or deliver any Shares or have in our possession or distribute or publish the Prospectus or any other offering material in or from any country or jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations and that will not impose any obligations on the Company or the other Underwriters, and all offers, sales and deliveries of Shares and distributions of the Prospectus or other offering material by us will be made at our own expense. With respect to any offers and sales made by us of the Shares and our participation otherwise in the public offering of the Shares, we will comply with the applicable provisions of the 1933 Act and the 1934 Act, and the respective rules and regulations thereunder, the applicable rules and regulations of the NASD and the applicable rules of any securities exchange having jurisdiction over the offering. We acknowledge that we are not authorized to make any representation or give any information in connection with the offer and sale of the Shares other than as contained in the Prospectus or any amendment or supplement thereto. We represent and agree that (i) we have 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) we have compiled, 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 10 Kingdom, and (iii) we have only issued or passed on, and will only issue or pass on in the United Kingdom any document received by us in connection with the issuance 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 1955 of Great Britain or is a person to whom the document may otherwise lawfully be issued or passed on. You are authorized to file with the Department of State of the State of New York a Further State Notice with respect to the Shares, if necessary. Section 13. Membership in National Association of Securities Dealers, --------------------------------------------------------- Inc.; Foreign Underwriters; Bank Affiliations. We understand that each of you - --------------------------------------------- is actually engaged in the investment banking or securities business and is either (i) a member in good standing of the NASD or (ii) a dealer not registered under the 1934 Act, with its principal place of business located outside the United States, its territories or other areas subject to its jurisdiction who has agreed to make no sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein (except that you may, unless otherwise provided herein, participate in sales to Selected Dealers and others under Section 5 of this Agreement). We confirm that we are actually engaged in the investment banking or securities business and are either (i) a member in good standing of the NASD or (ii) a dealer not registered under the 1934 Act, with our principal place of business located outside the United States, its territories or other areas subject to its jurisdiction who hereby agrees to make no sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein (except that we may, unless otherwise provided herein, participate in sales to Selected Dealers and others under Section 5 of this Agreement). Each Underwriter hereby agrees to comply with Section 24 of Article III of the Rules of Fair Practice of the NASD, and if such Underwriter is a foreign dealer and not a member of the NASD, such Underwriter also hereby agrees to comply with the NASD's interpretation with respect to free-riding and withholding, to comply, as though such Underwriter were a member of the NASD, with the provisions of Sections 8 and 36 of Article III of such Rules of Fair Practice, and to comply with Section 25 of Article III thereof as that Section applies to a non-member foreign dealer. We understand that, notwithstanding anything to the contrary herein, if an Underwriter is subject to the restriction on underwriting, sale or distribution of securities contained in the United States Bank Holding Company Act, International Banking Act or Glass-Steagall Act, such Underwriter will not be permitted to participate in any aspect of the purchase, sale and distribution of the Shares that you determine is or may be precluded by any of such laws, including participation in sales to certain Selected Dealers and others under Section 5 of this Agreement. 11 Section 14. Distribution of Prospectuses. We are familiar with Rule ---------------------------- 15c2-8 under the 1934 Act, relating to the distribution of preliminary and final prospectuses, and we confirm that we have complied and will comply therewith. You shall cause to be made available to us, to the extent made available to you by the Company, such number of copies of the Prospectus as we may reasonably request for purposes contemplated by the 1933 Act, the 1934 Act, and the respective rules and regulations thereunder. Section 15. Net Capital. We confirm that the incurrence by us of our ----------- obligations hereunder and under the Purchase Agreement will not place us in violation of the net capital requirements of Rule 15c3-1 under the 1934 Act. Section 16. Termination. All limitations in this Agreement on the ----------- price at which Shares may be sold, the period of time referred to in Section 6, the authority granted by the first sentence of Section 7, and the restrictions contained in Section 8 shall terminate at the close of business on the 45th day after the Shares are released for sale to the public or at such earlier time as you may advise. You may terminate any or all of such provisions at any time prior thereto by notice to the Underwriters. All other provisions of this Agreement shall remain in effect. Section 17. Expenses and Settlement. You may charge our account with ----------------------- any transfer taxes on sales of Shares made for our account and with our proportionate share (based upon our underwriting obligation) of all other expenses incurred by you under this Agreement or otherwise in connection with the purchase, carrying, sale or distribution of the Shares. Such expenses shall include payment of up to $25,000 to you for your stabilization services rendered in connection with Section 7. The respective accounts of the Underwriters shall be settled as promptly as practicable after the termination of all the provisions of this Agreement referred to in Section 16, but you may reserve such amount as you deem advisable for additional expenses. All settlements shall be made in United States dollars. Your determination of the amount to be paid to or by us shall be conclusive. You may at any time make partial distributions of credit balances or call for payment of debit balances. Any of our funds in your hands may be held with your general funds without accountability for interest. Notwithstanding any settlement, we will remain liable for any taxes on transfers for our account and for our proportionate share (based upon our underwriting obligation) of all expenses and liabilities that may be incurred by or for the accounts of the Underwriters. Section 18. Indemnification. We will indemnify and hold harmless --------------- each other Underwriter, its directors, officers, employees and each person, if any, who controls such Underwriter within the meaning of Section 15 of the 1933 Act and Section 20 of the 1934 Act, (i) from and against all losses, claims, damages and liabilities arising from any breach by us of any of the provisions of this Agreement and (ii) to the extent that and upon the terms upon which we agree to indemnify and hold harmless the Company, the Advisor and other specified persons as set forth in the Purchase Agreement. 12 Section 19. Claims Against Underwriters. In the event that at any --------------------------- time any person other than an Underwriter asserts a claim (including any commenced or threatened investigation or proceeding by any governmental agency or body) against one or more of the Underwriters or against you as Representative of the Underwriters arising out of an alleged untrue statement or omission in the Registration Statement (or any amendment thereto) or in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or relating to any transaction contemplated by this Agreement, we authorize you to make such investigation, to retain such counsel for the Underwriters and to take such action in the defense of such claim as you may deem necessary or advisable. You may settle such claim with the approval of a majority in interest of the Underwriters. We will pay our proportionate share (based upon our underwriting obligation) of all expenses incurred by you (including the fees and expenses of counsel for the Underwriters) in investigating and defending against such claim and our proportionate share of the aggregate liability incurred by all Underwriters in respect of such claim (after deducting any contribution or indemnification obtained pursuant to the Purchase Agreement, or otherwise, from persons other than Underwriters), whether such liability is the result of a judgment against one or more of the Underwriters or the result of any such settlement. Any Underwriter may retain separate counsel at its own expense. A claim against or liability incurred by a person who controls an Underwriter shall be deemed to have been made against or incurred by such Underwriter. In the event of default by any Underwriter in respect of its obligations under this Section, the non-defaulting Underwriters shall be obligated to pay the full amount thereof in the proportions that their respective underwriting obligations bear to the underwriting obligations of all non-defaulting Underwriters without relieving such defaulting Underwriter of its liability hereunder. Section 20. Legal Responsibility. As Representative of the -------------------- Underwriters, you shall have no liability to us, except for your lack of good faith and for obligations assumed by you in this Agreement and except that we do not waive any rights that we may have under the 1933 Act or the 1934 Act or the respective rules and regulations thereunder. No obligations not expressly assumed by you in this Agreement shall be implied herefrom. Nothing herein contained shall constitute the Underwriters an association, or partners, with you, or with each other, or, except as otherwise provided herein or in the Purchase Agreement, render any Underwriter liable for the obligations of any other Underwriter; and the rights, obligations and liabilities of the Underwriters are several in accordance with their respective underwriting obligations, and not joint. If the Underwriters are deemed to constitute a partnership for federal income tax purposes, we elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as amended, and agree not to take any position inconsistent with such election, and you are authorized, in your discretion, to 13 execute on behalf of the Underwriters such evidence of such election as may be required by the Internal Revenue Service. Section 21. Notices. Any notice from you shall be deemed to have ------- been duly given if mailed or transmitted by any standard form of written telecommunication, including, but not limited to, by telecopier or telex, to us at our address appearing in our Underwriters' Questionnaire. 14 Section 22. Governing Law. This Agreement shall be governed by the ------------- law of the State of New York. Very truly yours, ____________________________________________ Attorney-in-fact for each of the several Underwriters named in Schedule A to the Purchase Agreement Confirmed as of the date first above written: KLEINWORT BENSON NORTH AMERICA INC. By: KLEINWORT BENSON NORTH AMERICA INC. By: ______________________ Title: THE TAIWAN FUND, INC. (a Delaware corporation) Shares of Common Stock (Par Value $0.01 Per Share) SELECTED DEALER AGREEMENT ------------------------- Name and Address of Dealer: ___________________________ ___________________________ ___________________________ ___________________________ Dear Sirs: In connection with the public offering underwritten by a group of Underwriters represented by us of __________ shares (the "Shares") of Common Stock, par value $0.01 (such class of equity securities being hereinafter referred to as the "Common Stock") of The Taiwan Fund, Inc., a Delaware corporation (the "Company"), you may be offered the opportunity to purchase a portion of the Shares, as principal, at a discount from the public offering price representing a selling concession or reallowance granted as consideration for services rendered by you in the distribution of such Shares. We request that you agree to the following terms and provisions, and make the following representations, which, together with any additional terms and provisions set forth in any wire or letter sent to you in connection with a particular offering, will govern all such purchases of securities and the reoffering thereof by you. 1. All offers of Shares made to you are made subject to prior sale of the Shares, when, as and if such Shares are delivered to and accepted by the Underwriters and subject to the approval of legal matters by their counsel. In such cases, any order from you for Shares will be strictly subject to confirmation and we reserve the right in our uncontrolled discretion to reject any order in whole or in part. Upon release by us, you may reoffer such Shares at the public offering price fixed by us. With our consent, you may sell Shares to other dealers meeting the requirements set forth in Section 2 hereof and, in connection therewith, may allow a discount, not in excess of the reallowance fixed by us, provided that in making such sales you comply with the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (the "NASD"). Upon our request, you will advise us of the identify of any dealer to whom you allow such a discount and any Underwriter or dealer from whom you receive such a discount. After the Shares are released for sale to the public, we may vary the public offering price and other selling terms. 2 2. You represent that you are a dealer actually engaged in the investment banking or securities business and that you are either (i) a member in good standing of the NASD or (ii) a dealer with its principal place of business located outside the United States, its territories or other areas subject to its jurisdiction and not registered under the U.S. Securities Exchange Act of 1934 (a "non-member foreign dealer"). If you are a non-member foreign dealer, you agree to make no sales of securities within the United States, its territories or other areas subject to its jurisdiction or to persons who are citizens thereof or residents therein and, in making any sales, to comply with the NASD's interpretation with respect to free-riding and withholding. In accepting a selling concession or reallowance and in allowing a discount to any other person, you agree to comply with the provisions of Section 24 of Article III of the Rules of Fair Practice of the NASD, and, in addition, if you are a non-member foreign dealer, you agree to comply, as though you were a member of the NASD, with the provisions of Sections 8 and 36 of Article III of such Rules of Fair Practice and to comply with Section 25 of Article III thereof as that Section applies to a non-member foreign dealer. You represent that you are fully familiar with the above provisions of the Rules of Fair Practice of the NASD. 3. Public advertisement of the Shares may be made by us after the public offering date. You may advertise with our consent and at your own expense. Any such advertisement shall comply with all applicable law. Additional copies of the prospectus relating to the Shares will be supplied in reasonable quantities upon request. 4. The Shares have been registered under the U.S. Securities Act of 1933 (the "1933 Act") and the offering of the Shares has been registered under the U.S. Investment Company Act of 1940. In offering and selling the Shares, you are not authorized to give any information or make any representation other than as contained in the prospectus relating thereto or any amendment or supplement thereto. You confirm that you are familiar with Rule 15c2-8 under the U.S. Securities Exchange Act of 1934 (the "1934 Act") and the policies of the U.S. Securities and Exchange Commission relating to the distribution of preliminary and final prospectuses, and you agree that you will comply therewith. We will make available to you, to the extent made available to us by the Company, such number of copies of the prospectus as you may reasonably request. 5. Payment for securities purchased by you is to be made at the public offering price less the concession allowed to you, on such date as we may advise, in same-day funds payable through the facilities of The Depository Trust Company ("DTC") to the DTC account notified to you in writing for the benefit of Kleinwort Benson North America Inc. or payable to such other account as we may advise you in writing, against delivery of the securities to be purchased by you. If you are a member of DTC, we shall have authority to make appropriate arrangements for payment for and delivery of your Shares through its facilities or, if you are not a member, settlement may be made through a correspondent that is a member pursuant to your timely instructions to us. 3 6. In the event that, prior to the termination of this Section as provided in Section 15, we purchase in the open market or otherwise any Shares delivered to you, you agree to repay to us, in United States dollars, for the accounts of the Underwriters the amount of the concession allowed to you plus brokerage commissions and any transfer taxes paid in connection with such purchase. 7. At any time prior to the termination of this Section as provided in Section 15, you will, upon our request as representatives of the Underwriters, report to us the number of Shares purchased by you under this Agreement which then remains unsold and will, upon our request, sell to us for the account of one or more of the Underwriters such number of such unsold Shares as we may designate, at the public offering price less an amount to be determined by us not in excess of the concession allowed to you. 8. Until the earlier of our notification to you of the completion of the distribution of the Shares or termination of the restrictions contained in this Section pursuant to Section 15, you will not bid for or purchase for any account in which you have a beneficial interest, or attempt to induce any person to purchase, any shares of Common Stock, any warrants to purchase shares of Common Stock or any other right to purchase any such shares of Common Stock; provided, however, that the foregoing shall not prohibit (i) offers to sell or the solicitation of offers to buy the Shares being distributed, (ii) brokerage transactions not involving solicitation of customers' orders, and (iii) transactions made with our written consent or otherwise permitted under this Agreement. You represent that you have not made and agree that you will not make bids or purchases for the purpose of creating actual, or apparent, active trading in or raising the price of the Shares. 9. We will inform you, upon request, of the states and other jurisdictions of the United States in which it is believed that the Shares are qualified for sale under, or are exempt from the requirements of, their respective securities laws. No action has been taken by the Company that would, or is intended to, permit a public offering of the Shares in any other country or jurisdiction where any such action for that purpose is required. We assume no responsibility with respect to your right to sell Shares in any jurisdiction. You will take, at your own expense, such action, if any, as may be necessary to comply with the laws of each non-United States jurisdiction in which you propose to offer Shares; and you will not directly or indirectly purchase, offer, sell or deliver any Shares or have in your possession or distribute or publish the prospectus or any other offering material in or from any country or jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations and that will not impose any obligations on the Company or the Underwriters, and all offers, sales and deliveries of Shares and distributions of the prospectus or other offering material by you will be made at your own expense. We shall have authority to file with the Department of State of the State of New York a Further State Notice with respect to the Shares, if necessary. 4 10. You agree that with respect to any offers and sales made by you of the Shares and your participation otherwise in the public offering of the Shares, you will comply with the applicable provisions of the 1933 Act and the 1934 Act and the respective rules and regulations of the Securities and Exchange Commission thereunder, the applicable rules and regulations of the NASD and the applicable rules of any securities exchange having jurisdiction over the offering. 11. You have represented and agreed that (i) you have 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 principle 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) you have complied, and will comply, with all applicable provisions of the Financial Services Act 1986 of Great Britain with respect to anything done by you in relation to the Shares in, from or otherwise involving the United Kingdom, and (iii) you have only issued or passes on and will only issue or pass on in the United Kingdom any document received by you 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. 12. You agree to indemnify and hold harmless the Company, each Underwriter and each person controlling the Company or any Underwriter from and against any and all losses, claims, damages and liabilities arising from any breach by you of any of the provisions of this Agreement. 13. We shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to the offering of the Shares. Neither we nor any Underwriter shall be under any liability to you except for our lack of good faith and for obligations assumed by us in this Agreement, except that you do not waive any rights that you may have under the 1933 Act or the 1934 Act or the respective rules and regulations thereunder. 14. Any notice from us shall be deemed to have been duly given if mailed or transmitted by any standard form of written telecommunication to you at the address specified above or at such other address as you shall specify to us in writing. 15. The price restrictions contained in Paragraph 1 hereof, the provisions of Sections 6 and 7 hereof and the restrictions contained in Section 11 hereof shall terminated at the close of business on the 45th day after the Shares are released for sale to the public or at such earlier time as we may advise. We may terminate any or all of such provisions at 5 any time prior thereto by notice to you. All other provisions of this Agreement shall remain in effect. 16. This Agreement shall be governed by the law of the State of New York. Please confirm you agreement hereto by signing the enclosed duplicate copy hereof in the place provided below and returning such signed duplicate copy to us addressed c/o Kleinwort Benson North America Inc. 200 Park Avenue, New York, New York 10166, Attention: Equity Syndicate Desk. Upon receipt thereof, this instruction and such signed duplicate copy will evidence the agreement between us. Very truly yours, KLEINWORT BENSON NORTH AMERICA INC. By:__________________________ Confirmed and accepted as of the ___ day of _________, 1993 _________________________________________ Name of Dealer _________________________________________ Authorized Officer or Partner (if not Officer or Partner, attach copy of Instrument of Authorization) 26, April 1996 The Taiwan Fund, Inc. c/o State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 Ladies and Gentlemen: We have acted as counsel for The Taiwan Fund, Inc., a Delaware corporation (the "Fund"), in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended, of a Registration Statement on Form N-2 (the "Registration Statement") relating to the proposed offering by the Fund of up to 1,188,508 shares of Common Stock of the Fund, par value $0.01 per share (the "Shares"). In rendering the opinions expressed herein, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, documents, certificates and other instruments as we have deemed necessary or appropriate. Based upon the foregoing, and on such examinations of law as we have deemed necessary, we are of the opinion that: 1. The Fund has been duly incorporated and is validly existing in good standing under the laws of the State of Delaware. 2. When the Shares have been offered and sold as contemplated in the Registration Statement and in accordance with the terms of the Purchase Agreement filed as an Exhibit to the Registration Statement, the shares will be legally issued, fully paid and nonassessable. The Taiwan Fund, Inc. 2 26 April 1996 We consent to the filing of this opinion with the Securities and Exchange Commission as an Exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in the form of prospectus contained therein. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the 1933 Act or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Rogers & Wells April 26, 1996 Ref. No. 96-0503 T12470/14 The Taiwan Fund, Inc. 225 Franklin Street Boston, Massachusetts 02110 U. S. A. Re: The Taiwan Fund, Inc. SEC Reg. No. 333-2697 --------------------- Gentlemen: We have acted as the Republic of China ("ROC") counsel to The Taiwan Fund, Inc. in connection with the preparation and filing of a registration statement on Form N-2 (the "Registration Statement") relating to the offering of up to 1,188,508 shares of common stock. As such counsel, it is our opinion that the conclusions based on ROC tax law expressed under the heading "Taxation - ROC Income Taxes" in the Prospectus contained in the Registration Statement and in the Statement of Additional Information contained in the Registration Statement are true and correct. We consent to the use of this letter as an exhibit to the Registration Statement and to the reference to us in the Prospectus under the section captioned "Legal Matters". In giving our consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the Rules and Regulations of the Securities and Exchange Commission thereunder. Sincerely yours, LEE AND LI By /s/ Paul S.P. Hsu -------------------------------- Paul S.P. Hsu CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of The Taiwan Fund, Inc.: We consent to the inclusion in Post-Effective Amendment No. 1 to the Registration Statement of The Taiwan Fund, Inc., on Form N-2 (File No. 333-2697) of our report dated October 17, 1995 on our audit of the financial statements and financial highlights of the Fund for the year ended August 31, 1995 which are included in the Registration Statement. We also consent to the references to our Firm under the captions "Financial Highlights" and "Experts" in the Prospectus. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Boston, Massachusetts April 26, 1996 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
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