10-K 1 g10k-26977.txt 10-K

----------------------------------------------------------------------------------------------------- Dear Stockholders ----------------------------------------------------------------------------------------------------- The net asset value per share (NAV) of The The early rally proved short-lived, however, R.O.C. Taiwan Fund declined 6.6% in 2001, as negative factors already present in the compared to the 17.1% gain of the Taiwan first quarter adversely affected the market Stock Exchange Index (TAIEX). During the over the next two quarters. By early year, the New Taiwan dollar depreciated 6.0% October, the TAIEX had fallen nearly 44% against the U.S. dollar. from the mid-February high to the year's low. Chief among the causes for concern to investors was the weakening economy. With In a year marked by big surges and exports declining at double-digit rates each long-lasting slumps, Taiwan's market was month after March, industrial production buffeted by economic recession at home and slowed and unemployment rose to record-high abroad as well as man-made and natural levels. catastrophes. The TAIEX was still able to finish 2001 as one of the world's best The economy's slide into recession was performers. reflected in poor results for listed companies. Exceptions included notebook Supported by heavy trading and the U.S. computer producers and a few makers of PC Federal Reserve's surprise interest-rate cut components, which benefited as the world's in early January, Taiwan's market got off to major computer brand owners increasingly a fast start and rose almost 29% by outsourced production to Taiwan. But the mid-February to the year's high. Domestic continuing fall in capital spending on investors flush with Chinese New Year technology in the U.S., the largest export bonuses helped fuel the rally. Funds from market for Taiwan's technology products, abroad added to liquidity: foreign took its toll on most others. Perhaps institutions were net buyers of more than hardest hit were those in the semiconductor US$2 billion worth of stock in the first industry. Losses at memory-chip makers month and a half of the new year. Taiwan's mounted as the price of major products fell central bank had also adopted a loose below production costs. Foundries monetary policy, acting even before the Fed (semiconductor manufacturers doing contract to lower interest rates and making three work for other chipmakers and designers) more cuts in the first quarter. Investor suffered from order cancellations and saw optimism got a further boost when the first production drop well below half of full U.S. interest-rate reduction was followed by capacity. a double-digit January gain of the Nasdaq, which is closely watched in Taiwan as an Investor expectations during the summer that indicator for its own technology-heavy both the economy and stock market had hit market. bottom proved premature as catastrophic events in September unfolded. First came the Political developments played a role in the terrorist attacks in the U.S., which rally as well. After an acrimonious period temporarily disrupted Taiwan's trade and the previous year, tensions between Taiwan's raised longer-term concerns about the impact ruling and opposition political parties on the American economy. Less than a week eased somewhat. The opposition-dominated after the attacks, a typhoon hit Taiwan and legislature passed, after a month-long caused widespread damage to its delay, the government's annual budget. The transportation system. improved political climate also brought about resumption of a nuclear power plant's The fourth-quarter surge of U.S. stocks, construction that had been halted by the especially the 30% Nasdaq rise, and a new government as a result of a political wave of heavy buying by foreign institutions dispute in late 2000. helped

lift the Taiwan market out of the doldrums. aggressively in December, the action was The Taiwan central bank also lowered tardy and only made up some of the lost interest rates three more times (for a total ground. of 12 cuts since December 2000) during the last quarter. And signs of a turnaround for We are projecting that the economy in the many technology companies lent fundamental new year will swing upward. In fact, the support for the end-of-year rally. The course of Taiwan's recovery in certain improving outlook was most evident for the industries could well be a "leading semiconductor industry. Taiwan's foundries indicator" for the U.S. economy. American reported stepped up production levels and companies can be expected to replenish forecast better financial results. inventories, depleted over the last year or Meanwhile, memory-chip prices started to so, by turning to Taiwan producers of a wide rise for the first time in more than a year. range of products as the outsourcing trend The TAIEX responded with gains that continues. This turnaround may already have accelerated each month, climaxing with started in certain industries. Bulging December's 25% rise. That came after the orders received by some of Taiwan's ruling party won a surprise victory in technology companies should presage a strong December 1 elections that made it the performance in the first quarter despite it dominant party in the legislature and raised being the traditional slow season. hopes that the government could act decisively to effect economic recovery. Whether the full-scale U.S. rebound comes in the third or fourth quarter, Taiwan's Those hopes arose against the background turnaround should come earlier. The wide that, as recessionary conditions spread diversity of views on the timing of this throughout most of the developed world and recovery could be reflected in considerable foreign demand plummeted, Taiwan's economy market volatility during the year. Still, had its worst performance on record. most analysts have been revising upward Merchandise exports, equivalent to about 40% their Taiwan economic forecasts. Given our of gross national product, declined 17% on own positive outlook, we intend to remain the year. Under the impact of the poor fully invested and overweight in technology economic conditions and continuing transfer companies, which account for more than half of manufacturing to China, private of Taiwan's total stock market investment also suffered a double-digit capitalization. We especially favor makers drop. And the long period of falling share of TFT-LCD (flat-panel) monitors, prices and rising unemployment led to a motherboards and notebook computers as well sharp reduction in private consumption as semiconductor foundries and IC design growth, which just barely remained in houses. positive territory. We estimate that the economy contracted about 2% in 2001. For the We are grateful for your support and look new year, Taiwan's economy should pick up forward to reviewing our market outlook and gradually and achieve growth of 2.1% as portfolio strategy with you in future recovery takes hold in the U.S. reports. Surprised by the powerful wave of liquidity Respectfully submitted, in the final months of the year, the Fund had a disappointing 2001. Only after /s/ Michael Ding Taiwan's liquidity-driven rally was well ----------------------- underway did it become clear we were in the Michael Ding midst of a global phenomenon. And even President though we moved January 25, 2002

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------------------------------------------------------------------------------------------------------------ PORTFOLIO HIGHLIGHTS Year Ended December 31, 2001 ------------------------------------------------------------------------------------------------------------ --------------------------------------------------- ----------------------------------------------------- Ten Largest Holdings Industry Diversification --------------------------------------------------- ----------------------------------------------------- Percent of Percent of Company Net Assets Net Assets -------------------------- ---------- -------------------------- ---------- Hon Hai Precision Industry Co., Ltd. 5.79% Semiconductors 19.84% --------------------------------------------------- --------------------------------------------------- Taipei Bank 5.62 Computers & Office Equipment 12.97 --------------------------------------------------- --------------------------------------------------- United Microelectronics Corp. 5.20 Electronics 9.64 --------------------------------------------------- --------------------------------------------------- Cathay Financial Holding Co., Ltd. 5.03 Communications Equipment 9.40 --------------------------------------------------- --------------------------------------------------- Sonix Technology Co., Ltd. 4.62 Banking 9.23 --------------------------------------------------- --------------------------------------------------- Synnex Technology International Corp. 4.25 Other Financials 7.30 --------------------------------------------------- --------------------------------------------------- Chunghwa Telecom Co., Ltd. 4.20 Telephone Services 6.72 --------------------------------------------------- --------------------------------------------------- Wintek Corp. 4.20 Retailing 4.25 --------------------------------------------------- --------------------------------------------------- Amtran Technology Co., Ltd. 4.10 Computer Services & Software 3.47 --------------------------------------------------- --------------------------------------------------- Macronix International Co., Ltd. 3.47 Food 2.06 --------------------------------------------------- --------------------------------------------------- 3

---------------------------------------------------------------------------------------------------------- THE R.O.C. TAIWAN FUND Consolidated Schedule of Investments / December 31, 2001 ---------------------------------------------------------------------------------------------------------- COMMON STOCKS-- 92.98% Number of % of Market Value Shares Description Net Assets (U.S. Dollars) --------- ----------- ---------- ------------- Automobile-- 0.63% ---------------------------------------------------------------------------------------------------------- 2,412,268 Yulon Motor Co., Ltd ............................ 0.63 1,120,738 ------------- 1,120,738 Banking -- 9.23% ---------------------------------------------------------------------------------------------------------- 3,000,000 * Chinatrust Commercial Bank....................... 1.02 1,795,690 13,271,910 Taipei Bank...................................... 5.62 9,911,186 11,000,000 * Bank Sinopac..................................... 2.59 4,577,585 ------------ 16,284,461 Other Financials -- 7.30% ---------------------------------------------------------------------------------------------------------- 5,462,379 Cathay Financial Holding Co., Ltd................ 5.03 8,874,575 5,832,000 * Yuan Ta Securities Co., Ltd. .................... 2.27 4,006,134 ------------ 12,880,709 Communications Equipment-- 9.40% ---------------------------------------------------------------------------------------------------------- 10,152,500 * Wintek Corporation. ............................. 4.20 7,408,049 1,000,000 * Ambit Microsystems Corp.......................... 2.60 4,588,986 1,875,000 AboCom Systems, Inc.............................. 2.60 4,596,112 ------------ 16,593,147 Computer Services and Software-- 3.47% ---------------------------------------------------------------------------------------------------------- 1,937,500 Cradle Technology Corp........................... 3.47 6,129,932 ------------ 6,129,932 Computers & Office Equipment-- 12.97% ---------------------------------------------------------------------------------------------------------- 2,000,000 * Compal Electronics Inc........................... 1.43 2,519,667 989,000 * Quanta Computer Inc.............................. 1.82 3,213,602 5,000,000 * AU Optronics Corp................................ 3.02 5,330,065 5,000,000 * Chunghwa Picture Tubes, Ltd ..................... 2.60 4,588,986 4,000,000 * Amtran Technology Co., Ltd....................... 4.10 7,239,767 ------------ 22,892,087 Electrical & Machinery-- 0.00% ---------------------------------------------------------------------------------------------------------- 61 Teco Electric & Machinery Co., Ltd .............. 0.00 19 ------------ 19 Electronics-- 9.64% ---------------------------------------------------------------------------------------------------------- 2,240,000 Hon Hai Precision Industry Co., Ltd ............. 5.79 10,215,483 500 Asustek Computer Inc ............................ 0.00 2,180 1,000,000 * Realtek Semiconductor Corp ...................... 2.76 4,874,017 391,000 Glotech Industrial Corp ......................... 0.08 143,209 902,000 Sinbon Electronics Co., Ltd ..................... 1.01 1,786,826 ------------ 17,021,715

See accompanying notes to consolidated financial statements. 4

Schedule of Investments (Cont'd.) Number of % of Market Value Shares Description Net Assets (U.S. Dollars) --------- ----------- ---------- ------------- Food-- 2.06% ---------------------------------------------------------------------------------------------------------- 10,000,000 * Uni-President Enterprise Corp ................... 2.06 3,634,135 ------------ 3,634,135 Plastics-- 1.36% ---------------------------------------------------------------------------------------------------------- 2,625,774 Formosa Plastics Corp ........................... 1.36 2,402,444 1,074 Nan Ya Plastics Corp ............................ 0.00 820 ------------ 2,403,264 Retailing-- 4.25% ---------------------------------------------------------------------------------------------------------- 5,646,250 Synnex Technology International Corp ............ 4.25 7,499,580 ------------ 7,499,580 Semiconductors-- 19.84% ---------------------------------------------------------------------------------------------------------- 6,319,250 * United Microelectronics Corp .................... 5.20 9,186,004 1,500,000 * Taiwan Semiconductor Manufacturing Co., Ltd ..... 2.12 3,741,022 8,000,000 * Macronix International Co., Ltd ................. 3.47 6,133,850 5,000,000 Winbond Electronics Corp ........................ 2.05 3,619,884 250,400 Mediatek Inc, ................................... 2.38 4,196,648 2,000,000 * Sonix Technology Co., Ltd ....................... 4.62 8,151,864 ------------ 35,029,272 Steel & Other Metals-- 0.04% ---------------------------------------------------------------------------------------------------------- 190,860 China Steel Corp ................................ 0.04 74,257 ------------ 74,257 Telephone Services-- 6.72% ---------------------------------------------------------------------------------------------------------- 5,000,000 * Chunghwa Telecom Co. Ltd ........................ 4.20 7,410,786 3,343,830 * Taiwan Cellular Corp ............................ 2.52 4,460,473 ------------ 11,871,259 Textiles-- 0.40% ---------------------------------------------------------------------------------------------------------- 1,898,000 * Far Eastern Textile Ltd ......................... 0.40 703,284 ------------ 703,284 Transportation-- 0.57% ---------------------------------------------------------------------------------------------------------- 4,517,000 Yang Ming Marine Transport Corp ................. 0.57 997,798 ------------ 997,798 Others-- 5.10% ---------------------------------------------------------------------------------------------------------- 3,180,000 Ability Nagase Co., Inc ......................... 1.29 2,284,118 800,000 * Stark Technology Inc ............................ 1.73 3,044,123 2,200,000 * Taiwan Secom Co., Ltd ........................... 1.21 2,125,755 4,741,170 Kang Na Hsiung Enterprise Co., Ltd .............. 0.87 1,540,569 ------------ 8,994,565 ------------ TOTAL COMMON STOCKS (COST $162,519,261) 164,130,222 * Non-income producing: these stocks did not pay a cash dividend during the year. See accompanying notes to consolidated financial statements. 5

---------------------------------------------------------------------------------------------------------- THE R.O.C. TAIWAN FUND Consolidated Schedule of Investments (continued) ---------------------------------------------------------------------------------------------------------- BONDS --2.13% % of Market Value Net Assets (U.S. Dollars) ---------- -------------- Convertible Corporate Bonds - 2.13% ---------------------------------------------------------------------------------------------------------- Par Value --------- 2,069,319 AU Optronics Corp., 2.00%, Due 11/18/08 ......... 2.13 3,747,125 ------------ TOTAL BONDS (COST $2,773,059) ............................................. 3,747,125 ------------ SHORT-TERM INVESTMENT-- 1.93% Commercial Paper-- 1.93% ---------------------------------------------------------------------------------------------------------- Principal Amount Issuer (Guarantor) --------- ------------------ 570,076 General Motors Asia Corporation Taiwan (Citibank, N.A.), 2.25%, Due 01/03/02 ........... 0.32 569,990 2,850,302 McDonald's Restaurant (Taiwan) Co., Ltd (Standard Chartered Bank), 2.18%, Due 01/08/02 .. 1.61 2,849,114 ------------ Total short-term investments (AMORTIZED COST $3,419,104) ................... 3,419,104 ------------ TOTAL INVESTMENTS IN SECURITIES AT MARKET VALUE (COST $168,711,424) ............................... 97.04 171,296,451 OTHER ASSETS (LESS LIABILITIES) ............................................ 2.96 5,229,684 ------------ NET ASSETS ................................................................. 100.00 $176,526,135 ====== ============

See accompanying notes to consolidated financial statements. 6

---------------------------------------------------------------------------------------------------------- THE R.O.C. TAIWAN FUND Consolidated Statement of Assets and Liabilities December 31, 2001 (Expressed in US Dollars) ---------------------------------------------------------------------------------------------------------- Assets Investments in securities at market value (Notes 2B, 3 and 6): Common stocks (cost-- $162,519,261) ........................................... $164,130,222 Short-term investments (amortized cost-- $3,419,104) .......................... 3,419,104 Convertible corporate bonds (cost-- $2,773,059) ............................... 3,747,125 ------------ Total investments in securities at market value (cost-- $168,711,424) ......... 171,296,451 Cash ................................................................................... 2,966,908 Receivable from investment securities sold ............................................. 2,586,308 Prepaid expense ........................................................................ 31,530 Other receivables ...................................................................... 6,061 ------------ Total assets .................................................................. 176,887,258 ------------ Liabilities Management fee payable (Note 4) ........................................................ 188,813 Custodian fee payable (Note 5) ......................................................... 20,980 Accrued Republic of China taxes (Note 2G) .............................................. 1,380 Other payables ......................................................................... 149,950 ------------ Total liabilities ............................................................. 361,123 ------------ Net assets ............................................................................. $176,526,135 ============ Components of net assets (Note 2) Par value of shares of beneficial interest (Note 7) .................................... 326,990 Additional paid-in capital ............................................................. 310,002,684 Accumulated net investment loss ........................................................ 3,642,926 Accumulated realized loss on investments ............................................... (94,021,411) Unrealized appreciation on investments (Note 6) ........................................ 2,585,027 Cumulative translation adjustment (Note 2E) ............................................ (46,010,081) ------------ Net assets ............................................................................. $176,526,135 ============ Net asset value per share (32,698,976 shares, par value $0.01 issued and outstanding) .. $ 5.40 ============ See accompanying notes to consolidated financial statements. 7

---------------------------------------------------------------------------------------------------------- THE R.O.C. TAIWAN FUND Consolidated Statement of Operations For the Year ended December 31, 2001 (Expressed in US Dollars) ---------------------------------------------------------------------------------------------------------- INVESTMENT INCOME (NOTE 2C) Dividends .................................................................... $ 2,793,712 Interest ..................................................................... 714,883 ------------ 3,508,595 REPUBLIC OF CHINA TAXES (NOTE 2G) ..................................................... 1,756,177 ------------ 1,752,418 ------------ EXPENSES Management fee (Note 4) ...................................................... 2,336,808 Custodian fee (Note 5) ....................................................... 259,898 Professional fees ............................................................ 445,772 Administrative fee ........................................................... 92,000 Insurance expenses ........................................................... 67,900 Trustee fees ................................................................. 73,000 Transfer agent fee ........................................................... 48,903 Other expenses ............................................................... 196,430 ------------ 3,520,711 ------------ Net investment loss ................................................................... (1,768,293) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES (NOTES 2 AND 6) Net realized gain (loss) on: investments (excluding short-term investments) ........................... (66,780,104) foreign currency transactions ............................................ 121,434 ------------ net realized loss on investments and foreign currency transactions ....... (66,658,670) Net increase (decrease) in unrealized appreciation on: investments (excluding short-term investments) ........................... 68,725,588 translation of assets and liabilities in foreign currencies .............. (12,711,118) ------------ Net realized and unrealized loss from investments and foreign currencies ..... (10,644,200) ------------ Net decrease in net assets resulting from operations ......................... $(12,412,493) ============ See accompanying notes to consolidated financial statements. 8

---------------------------------------------------------------------------------------------------------- THE R.O.C. TAIWAN FUND Consolidated Statement of Changes in Net Assets For the Years ended December 31, 2001 and 2000 (Expressed in US Dollars) ---------------------------------------------------------------------------------------------------------- 2001 2000 -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Net investment loss ............................................... $ (1,768,293) $ (3,512,341) Net realized loss on investments and foreign currency transactions ......................................... (66,658,670) (2,864,711) Net increase (decrease) in unrealized appreciation on investments ................................................ 68,725,588 (113,558,157) Net decrease in unrealized appreciation on translation of assets and liabilities in foreign currencies ... (12,711,118) (13,548,838) -------------- -------------- Net decrease in net assets resulting from operations ............................................ (12,412,493) (133,484,047) -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2F) Net realized gain on investments -- (12,098,621) -------------- -------------- Total distributions -- (12,098,621) -------------- -------------- Decrease in net assets (12,412,493) (145,582,668) Net assets, beginning of year 188,938,628 334,521,296 -------------- -------------- Net assets, end of year $ 176,526,135 $ 188,938,628 ============== ============== See accompanying notes to consolidated financial statements. 9

--------------------------------------------------------------------------------------------------------------------------------- THE R.O.C. TAIWAN FUND Consolidated Financial Highlights (Expressed in US Dollars) --------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, ----------------------------------------------------------------- 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year ............... 5.78 10.23 7.53 9.58 11.67 Net investment loss .............................. (0.05) (0.11) (0.11) (0.11) (0.16) Net realized and unrealized gain (loss) on investments and foreign currency transactions ................... 0.06 (3.56) 2.58 (1.73) 3.20 Net increase (decrease) in unrealized appreciation on translation of foreign currencies ...................... (0.39) (0.41) 0.23 0.08 (1.88) ---------- ---------- ---------- ---------- ---------- Total from investment operations (0.38) (4.08) 2.70 (1.76) 1.16 NET EFFECT OF SHARE TRANSACTIONS .......................... -- -- -- -- 0.09 DISTRIBUTIONS TO SHAREHOLDERS FROM: Capital .......................................... -- -- -- (0.13) -- Net investment income ............................ -- -- -- (0.07) (0.39) Net realized gain on investments ................. -- (0.37) -- (0.09) (2.95) ---------- ---------- ---------- ---------- ---------- Total distributions* .................... -- (0.37) -- (0.29) (3.34) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF YEAR .............................. 5.40 5.78 10.23 7.53 9.58 ========== ========== ========== ========== ========== PER SHARE MARKET PRICE, END OF YEAR ....................... 4.75 4.56 8.44 6.19 8.13 TOTAL INVESTMENT RETURN (%): Based on the Trust's market price ................ 4.17 (41.71) 36.35 (20.31) 10.55 Based on the Trust's net asset value ............. (6.57) (39.94) 35.86 (18.42) 9.41 RATIOS AND SUPPLEMENTAL DATA: Net assets, end of year (in thousands) ........... 176,526 188,939 334,521 246,348 313,344 Ratio of expenses to average net assets (%) ...... 2.01 1.67 1.81 1.77 1.51 Ratio of net investment loss to average net assets (%) .......................... (1.01) (1.09) (1.35) (1.28) (1.13) Portfolio turnover ratio (%) ..................... 173 165 191 133 106

* See Note 2F for information concerning the Trust's distribution policy. See accompanying notes to consolidated financial statements. 10

---------------------------------------------------------------------------------------------------------- THE R.O.C. TAIWAN FUND Notes to Consolidated Financial Statements / December 31, 2001 (Expressed in US Dollars) ---------------------------------------------------------------------------------------------------------- Note 1-- Organization and Acquisition of The C -- Security transactions and investment Taiwan (R.O.C.) Fund income -- Security transactions are recorded ----------------------------------------------- on the date the transactions are entered The R.O.C. Taiwan Fund (the "Trust") is a into (the trade date). Dividend income is Massachusetts business trust formed in July recorded on the ex-dividend date, and 1988 and registered with the U.S. Securities interest income is recorded on the accrual and Exchange Commission as a diversified, basis as it is earned. closed-end management investment company under the Investment Company Act of 1940. D -- Realized gains and losses -- Realized gains and losses on security transactions The Trust was formed in connection with the are determined for financial reporting reorganization (the "Reorganization") of The purposes using the average cost method for Taiwan (R.O.C.) Fund (the "Fund"). The Fund, the cost of investments. For federal income which commenced operations in October 1983, tax purposes, realized gains and losses on was established under the laws of the security transactions are determined using Republic of China as an open-end contractual the first-in-first-out method. For the investment fund pursuant to an investment fiscal year ended December 31, 2001, the contract between International Investment Trust generated a net capital loss of Trust Company Limited ("IIT") and Central $89,141,756, which includes a post October Trust of China, as custodian. Pursuant to 1, 2000 net capital loss of $26,651,342. the Reorganization, which was completed in This loss may be used to offset any future May 1989, the Trust acquired the entire capital gains generated by the Trust and, if beneficial interest in the assets unused, will expire on December 31, 2009. constituting the Fund. E -- Foreign currency Note 2 -- Summary of Significant Accounting translation--Substantially all of the Policies Trust's income is earned, and its expenses ----------------------------------------------- are largely paid, in New Taiwan Dollars A -- Basis of presentation and principles of ("NT$"). The cost and market value of consolidation -- The accompanying financial securities, currency holdings and other statements of the Trust have been prepared assets and liabilities which are denominated in accordance with accounting principles in NT$ are reported in the accompanying generally accepted in the United States of consolidated financial statements after America. The consolidated financial translation into United States Dollars based statements include the accounts of the Trust on the closing market rate for United States and the Fund. All significant inter-company Dollars in Taiwan at the end of the period. transactions and balances have been At December 31, 2001, this rate was eliminated in consolidation. approximately NT$35.084 to $1.00. Investment income and expenses are translated at an B --Valuation of investments-- Common stocks average exchange rate for the period. and convertible corporate bonds represent Currency translation gains or losses are securities that are traded on the Taiwan reported as a separate component of changes Stock Exchange or the Taiwan in net assets resulting from operations. over-the-counter market. Such securities are valued at the closing market price, or, if The Trust does not separately record that not quoted at the end of the period, portion of the results of operations generally at the last quoted closing market resulting from changes in foreign exchange price. Short-term investments are valued at rates on investments from the fluctuations amortized cost, which approximates market arising from changes in market prices of value. Under this method, the difference securities held. Such fluctuations are between the cost of each security and its included with the net realized and value at maturity is accrued into income on unrealized gain or loss from investments. a straight-line basis over the days to maturity. 11

F -- Distributions to shareholders -- It is NOTE 3 -- INVESTMENT CONSIDERATIONS the Trust's policy to distribute all ------------------------------------------------ ordinary income and net capital gains, Because the Trust concentrates its calculated in accordance with U.S. federal investments in publicly traded equity and income tax regulations. Such calculations debt securities issued by R.O.C. may differ from those based on generally corporations, its portfolio involves accepted accounting principles. Permanent considerations not typically associated with book and tax differences primarily relate to investing in U.S. securities. In addition, the treatment of the Trust's gains from the the Trust is more susceptible to factors disposition of passive foreign investment adversely affecting the R.O.C. economy than company shares as well as net operating a fund not concentrated in these issuers to losses for U.S. federal income tax purposes. the same extent. Since the Trust's Temporary book and tax differences are investment securities are primarily primarily due to differing treatments for denominated in New Taiwan Dollars, changes certain foreign currency losses and wash in the relationship of the New Taiwan Dollar sale loss deferrals. to the U.S. Dollar may also significantly affect the value of the investments and the G -- Taxes -- The Trust intends to continue earnings of the Trust. to elect and to continue to qualify as a regulated investment company under the NOTE 4 -- INVESTMENT MANAGEMENT Internal Revenue Code of 1986, as amended ------------------------------------------------ (the "Code"). If the Trust complies with all Pursuant to an investment contract (the of the applicable requirements of the Code, "Investment Contract"), IIT (the "Manager"), it will not be subject to U.S. federal an R.O.C. corporation, is responsible, among income and excise taxes provided that it other things, for investing and managing the distributes all of its investment company assets of the Trust and administering the taxable income and net capital gains to its Trust's affairs. Through December 31, 2001, shareholders. the Trust paid the Manager a fee in NT$, which is accrued daily and paid monthly in The Republic of China ("R.O.C.") levies a arrears, at the annual rate of 1.35% of the tax at the rate of 20% on cash dividends and net asset value ("NAV") with respect to interest received by the Trust on Trust assets held in Taiwan under the investments in R.O.C. securities. In Investment Contract up to NT$6 billion, addition, a 20% tax is levied based on the 1.15% of such NAV in excess of NT$6 billion par value of stock dividends (except those up to NT$8 billion, 0.95% of such NAV in which have resulted from capitalization of excess of NT$8 billion up to NT$10 billion, capital surplus) received by the Trust. and 0.75% of such NAV in excess of NT$10 billion. Realized gains on securities transactions are not subject to income tax in the R.O.C.; NOTE 5 -- CUSTODIAN instead, a securities transaction tax of ------------------------------------------------ 0.3% of the market value of stocks sold or Pursuant to the Investment Contract, the transferred, and 0.1% of the market value of Central Trust of China ("CTC") serves as bonds and beneficial certificates sold or custodian of the assets of the Trust held in transferred, is levied. Proceeds from sales the R.O.C. CTC owns 7.74% of the outstanding of investments are net of securities capital stock of IIT. Through December 31, transaction tax paid of $702,990 for the 2001, the Trust paid CTC a monthly fee in twelve months ended December 31, 2001. NT$ at the annual rate of 0.15% of the NAV with respect to Trust assets held in Taiwan under the Investment Contract up to NT$6 H -- Use of estimates -- The preparation of billion, 0.13% of such NAV in excess of NT$6 financial statements in conformity with billion up to NT$8 billion, 0.11% of such accounting principles generally accepted in NAV in excess of NT$8 billion up to NT$10 the United States of America requires billion, and 0.09% of such NAV in excess of management to make estimates and assumptions NT$10 billion, subject to a minimum annual that affect the amounts reported in the fee of NT$2.4 million. consolidated financial statements, consolidated financial highlights and the accompanying notes. Actual results could differ from those estimates.

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Note 6 -- Investments in Securities ------------------------------------------------ ------------------------------------------------ The Fund and its predecessor, The Taiwan Purchases and proceeds from sales, excluding (R.O.C.) Fund, have been certified as short-term investments, for the twelve distributing funds by the Board of Inland months ended December 31, 2001, included Revenue of the United Kingdom for the period approximately $267,501,674 for stock and from their inception to December 31, 2000. bond purchases and approximately The Fund intends to apply for such status $301,085,442 for stock and bond sales, for succeeding accounting periods. respectively. ------------------------------------------------ At December 31, 2001, the cost of investments, including bonds and short-term ------------------------------------------------ investments, for U.S. federal income tax Michael Ding has been portfolio manager of purposes was approximately $166,556,740. At the Fund since July 1999, its President December 31, 2001, the net unrealized since September 1999 and a trustee since appreciation on investments for financial June 2001. He had been the Fund's deputy reporting and tax purposes equaled manager since March 1999. Mr. Ding is also $4,739,711. the President and Chief Investment Officer of International Investment Trust Co. (IIT), Note 7 -- Shares of Beneficial Interest the Fund's investment manager. He has worked ------------------------------------------------ for the past three years at IIT, where he The Trust's "Declaration of Trust" permits was previously senior vice president. Mr. the Trustees to issue an unlimited number of Ding served as chief economist and head of shares of beneficial interest or additional research at Citicorp International classes of other securities. The shares have Securities Ltd. in Taipei from 1996 to 1999 a par value of $0.01, and no other classes and as head of research and information for of securities are outstanding at present. At the greater China region at McKinsey & Co. December 31, 2001, 32,698,976 shares were from 1994 to 1996. outstanding. ------------------------------------------------ 13

KPMG [LOGO] Independent Auditors' Report ---------------------------- The Trustees and Shareholders of The R.O.C. Taiwan Fund: We have audited the accompanying consolidated statement of assets and liabilities of The R.O.C. Taiwan Fund, a Massachusetts business trust (the "Trust"), including the consolidated schedule of investments, as of December 31, 2001, and the related consolidated statement of operations for the year then ended, the consolidated statements of changes in net assets for each of the years in the two-year period then ended, and the consolidated financial highlights for each of the years in the five-year period then ended. These consolidated financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 consolidated financial statements and financial highlights. Our procedures included the physical examination of short-term investments owned as of December 31, 2001, and confirmation of securities owned as of December 31, 2001, by correspondence with the custodian and brokers. As to securities sold but not delivered, we performed other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements and consolidated financial highlights referred to above present fairly, in all material respects, the financial position of The R.O.C. Taiwan Fund as of December 31, 2001, 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 five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG -------- KPMG Taipei, Taiwan January 14, 2002 14

---------------------------------------------------------------------------------------------------------- THE R.O.C. TAIWAN FUND www.roctaiwanfund.com ---------------------------------------------------------------------------------------------------------- MANAGER: International Investment Trust Company Limited 17th Floor 167 Fuhsing North Road Taipei, Taiwan, Republic of China -------------------------- Telephone: 886-2-2713-7702 T H E Fax: 886-2-2717-3077 -------------------------- R.O.C OFFICERS AND TRUSTEES: -------------------------- Theodore S. S. Cheng, Chairman and Trustee TAIWAN FUND Michael Ding, President and Trustee -------------------------- Edward B. Collins, Trustee and Audit Committee Member David N. Laux, Trustee and Audit Committee Member Annual Report Alfred F. Miossi, Trustee and Audit Committee Member December 31, 2001 Robert P. Parker, Trustee and Audit Committee Member Peggy Chen, Chief Financial Officer, Treasurer, and Secretary CUSTODIAN: Central Trust of China 49 Wuchang Street, Sec. 1 Taipei, Taiwan Republic of China TRANSFER AGENT, PAYING AND PLAN AGENT: State Street Bank and Trust Co. P.O. Box 8200 Boston, Massachusetts 02266-8200 U.S.A. Telephone: 1-800-426-5523 U.S. ADMINISTRATOR: Citigate Dewe Rogerson Inc. 1440 Broadway, 16th Floor New York, NY 10018 U.S.A. Telephone: (212) 688-6840 U.S. LEGAL COUNSEL: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, NY 10019-6064 Telephone: (212) 373-3000 For information on the Fund, including the NAV, please call toll free 1-800-343-9567.